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

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

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

                         Commission file number 1-13669

                            TALON INTERNATIONAL, 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:

                                      NONE

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

                          COMMON STOCK, $.001 PAR VALUE

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.

                                 Yes [_] No [X]

Indicate  by check mark if the  registration  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.

                                 Yes [_] No [X]

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 a large  accelerated  filer, an
accelerated  filer or a non-accelerated  filer, or a smaller reporting  company.
See the  definitions  of "large  accelerated  filer,"  "accelerated  filer," and
"smaller reporting company" in Rule 12b-2 of the Exchange Act).

Large accelerated filer [_]   Accelerated filer [_]   Non-accelerated filer [_]

Smaller reporting company [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [_] No [X]

At June 30, 2007 the aggregate market value of the voting and non-voting  common
stock held by  non-affiliates  of the registrant was  $18,202,356.  At April 11,
2008 the issuer had 20,291,433 shares of Common Stock,  $.001 par value,  issued
and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
None.

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                            TALON INTERNATIONAL, INC.
                               INDEX TO FORM 10-K

PART I                                                                      PAGE
------                                                                      ----

Item 1.   Business......................................................       2

Item 1A.  Risk Factors .................................................       8

Item 1B.  Unresolved Staff Comments ....................................      15

Item 2.   Properties....................................................      15

Item 3.   Legal Proceedings.............................................      15

Item 4.   Submission of Matters to a Vote of Security Holders...........      16

PART II
-------

Item 5.   Market for Registrant's Common Equity, Related Stockholder
             Matters and Issuer Purchases of Equity Securities..........      17

Item 6.   Selected Financial Data.......................................      19

Item 7.   Management's Discussion and Analysis of Financial
             Condition and Results of Operations........................      20

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk ...      34

Item 8.   Financial Statements and Supplementary Data...................      35

Item 9.   Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure........................      71

          Item 9A(T).  Controls and Procedures..........................      71

          Item 9B.     Other Information................................      72

PART III
--------

Item 10.  Directors, Executive Officers and Corporate Governance........      72

Item 11.  Executive Compensation........................................      76

Item 12.  Security Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters.................      86

Item 13.  Certain Relationships and Related Transactions and Director
             Independence...............................................      88

Item 14.  Principal Accounting Fees and Services........................      89

PART IV
-------

Item 15.  Exhibits and Financial Statement Schedules....................      91


                                       1
<PAGE>


FORWARD LOOKING STATEMENTS

         This report and other  documents  we file with the SEC contain  forward
looking statements that are based on current expectations,  estimates, forecasts
and projections about us, our future performance,  our business or others on our
behalf, our beliefs and our management's assumptions. In addition, we, or others
on our behalf,  may make forward looking statements in press releases or written
statements, or in our communications and discussions with investors and analysts
in the normal course of business through  meetings,  webcasts,  phone calls, and
conference  calls.  Words such as "expect,"  "anticipate,"  "outlook,"  "could,"
"target," "project," "intend," "plan," "believe," "seek," "estimate,"  "should,"
"may," "assume,"  "continue,"  variations of such words and similar  expressions
are intended to identify such forward looking  statements.  These statements are
not guarantees of future  performance and involve certain risks,  uncertainties,
and assumptions that are difficult to predict. We describe our respective risks,
uncertainties,  and  assumptions  that could  affect  the  outcome or results of
operations  in "Item  1A.  Risk  Factors."  We have  based our  forward  looking
statements on our  management's  beliefs and  assumptions  based on  information
available to our  management at the time the statements are made. We caution you
that actual  outcomes and results may differ  materially from what is expressed,
implied,  or forecast by our forward  looking  statements.  Reference is made in
particular to forward  looking  statements  regarding  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.  Except  as  required  under  the  federal
securities  laws and the rules and  regulations  of the SEC,  we do not have any
intention or obligation to update publicly any forward looking  statements after
the distribution of this report, whether as a result of new information,  future
events, changes in assumptions, or otherwise.


                                     PART I

ITEM 1.       BUSINESS

GENERAL

         Talon   International,   Inc.  specializes  in  the  manufacturing  and
distribution of a full range of apparel  accessories  including zippers and trim
items  to  manufacturers  of  fashion  apparel,  specialty  retailers  and  mass
merchandisers.  We manufacture  and distribute  zippers under our TALON(R) brand
name to  manufacturers  for apparel  brands and retailers such as Levi Strauss &
Co.,  Abercrombie & Fitch,  Wal-Mart,  Kohl's,  The Gap, Juicy  Couture,  and JC
Penney,  among  others.  We also provide full  service  outsourced  trim design,
sourcing  and   management   services  and  supply   specified  trim  items  for
manufacturers of fashion apparel such as Abercrombie & Fitch, Victoria's Secret,
American Eagle,  Motherhood,  Express,  Polo Ralph Lauren and others.  Under our
TEKFIT(R) brand, we develop and sell apparel  components that utilize a patented
technology, including a stretch waistband.

         We were  incorporated  in the State of Delaware in 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. During 2006
we formed two wholly owned subsidiaries of Talon  International,  Inc. (formerly
Tag-It Pacific,  Inc.): Talon Zipper (Shenzhen) Company Ltd. in China, and Talon
International Pvt. Ltd., in India. Our web site is WWW.TAGITPACIFIC.COM. On July
20,  2007 we changed  our  corporate  name from  Tag-It  Pacific,  Inc. to Talon
International,  Inc. Our web site address provided in this Annual Report on Form
10-K is not  intended  to function as a  hyperlink  and the  information  on our
website  is not and  should  not be  considered  part of this  report and is not
incorporated by reference in this document.


                                       2
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BUSINESS SUMMARY

         We operate our business within three product groups,  Talon,  Trim, and
Tekfit.  In our Talon group, we design,  engineer,  test and distribute  zippers
under our TALON  trademark and trade names to apparel brands and  manufacturers.
TALON enjoys brand  recognition in the apparel  industry  worldwide.  TALON is a
100-year-old brand, which is well known for quality and product innovation,  and
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  worldwide.  We  provide  a line  of  high  quality  zippers,
including a specialty  zipper for kids  clothing,  for  distribution  to apparel
manufacturers  in Asia,  Mexico and Central America and have sales and marketing
teams in all of these areas. We have also developed,  and are now  implementing,
joint  manufacturing  arrangements  in various  geographic  international  local
markets to finish and sell zippers under the TALON brand name.  Our  contractors
work  with,  purchase  or  install  equipment  locally  for dying and  producing
finished zippers.  We expect this program to significantly  improve the speed at
which we serve the market and to expand the  geographic  footprint  of our TALON
products. The TALON zipper is promoted both within our trim packages, as well as
a stand-alone product line.

         In our Trim products group, we act as a fully integrated  single-source
supplier,  designer  and  sourcing  agent  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 labels,  buttons,  rivets,
printed marketing material,  polybasic, 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 a one-stop  outsourced service for all trim
related matters.  Our teams work with the apparel designers,  and function as an
extension of their staff.

         If our  customer  is  creating a new pair of cargo pants for their fall
collection,  our Trim products group will  collaborate with them on their design
vision,  then  present  examples of their vision in graphic form for all apparel
accessory  components.  We will design the buttons,  snaps,  hang tags,  labels,
zippers,  zipper pullers and other items.  Once our customer selects the designs
they like, our sourcing and production  teams  coordinate  with our  proprietary
database of manufacturers  worldwide to ensure the best  manufacturing  solution
for the items being produced.  The proper manufacturing and sourcing solution is
a critical part of our service.  Knowing the best facility or supplier to ensure
timely  production,  the proper paper  finishes,  distressing  or other types of
material needs or  manufacturing  techniques to be used is critical.  Because we
perform this function for many different global projects and apparel brands,  we
have a depth and breadth of knowledge in the manufacturing and sourcing that our
customers  cannot  achieve,  and  therefore  offer a  significant  value  to our
customers.  In  addition,  because  we are  consistently  innovating  new items,
manufacturing techniques and finishes, we bring many new, fresh and unique ideas
to our customers.  Once we identify the  appropriate  supply  source,  we create
production  samples of all of our designs and  products,  and review the samples
with our customers so they can make a final decision while looking at the actual
items  that  will  be  used on the  garments.  When  the  customer  selects  the
appropriate  items, we are identified as the  sole-source  trim supplier for the
project,  and our  customer's  factories  are then required to purchase the trim
products from us. Throughout the garment manufacturing  process, we consistently
monitor the timing and accuracy of the production items to ensure the production
items  exactly  match all  samples  when  delivered  to our  customer's  apparel
factories.

         We also serve as a specified  supplier in our zipper and trim  products
for a variety of major  retail brand and  private-label  oriented  companies.  A
specified  supplier  is a supplier  that has been  approved  for its quality and
service by a major retail brand or private-label  company.  Apparel  contractors
manufacturing for the retail brand or private-label  company must purchase their
zipper and trim requirements from a supplier that has been specified. We seek to
expand our services as a supplier of select items for such customers, to being a
preferred or single-source  provider of the entire brand  customer's  authorized
trim and  zipper  requirements.  Our  ability  to offer a full range of trim and
zipper products is attractive to brand name and private-label oriented customers
because it enables the  customer 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 advantage to become the preferred or sole vendor of trim and zipper items for
all apparel manufacturers contracted for production for that brand name.


                                       3
<PAGE>


         Our  teams  of  sales  employees,  representatives,  program  managers,
creative design personnel and global production and distribution coordinators at
our  facilities  located in the United  States,  China,  India and the Caribbean
enable  us to  take  advantage  of  and  address  the  increasingly  complicated
requirements of the large and expanding  demand for complete  apparel  accessory
solutions. We plan to continue to expand operations in Asia, Europe, Central and
South  America  and  the  Caribbean  to  take  advantage  of the  large  apparel
manufacturing markets in these regions.

PRODUCTS

         TALON  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,  India and China and through our agents,  distributors and
affiliates in other international markets.

         We plan to  expand  our  distribution  of  TALON  zippers  through  the
establishment of a network of TALON owned sales,  distribution and manufacturing
locations,  distribution  relationships and joint ventures. The network of these
distributors and manufacturing  joint ventures,  in combination with TALON owned
and  affiliated  facilities  under the TALON  brand,  is expected to improve our
time-to-market  by  eliminating  the typical setup and  build-out  phase for new
manufacturing  capacity  throughout  the world,  and by sourcing,  finishing and
distributing  to apparel  manufacturers  in their  local  markets.  The  branded
apparel zipper market is dominated by one company and we are  positioning  TALON
to be a viable global  alternative  to this  competitor and capture an increased
market share position. We plan to leverage the brand awareness of the TALON name
by branding other products in our line with the TALON name.

         TRIM - We  consider  our high  level  of  customer  service  as a fully
integrated  single-source supplier essential to our success. We combine our high
level of customer service within our TRIM solutions with a history of design and
manufacturing expertise to offer our customers a complete trim solution product.
We believe this full-service  product gives us a competitive edge over companies
that only offer  selected  trim  components  because our full service  solutions
saves our  customers  substantial  time in  ordering,  designing,  sampling  and
managing trim orders from several different suppliers.  Our proprietary tracking
and order  management  systems allow us to seamlessly  supply trim solutions and
products to apparel brands, retailers and manufacturers around the world.

         We  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 may provide our customers the machinery  used to attach
the buttons, rivets and snaps we distribute.

         In  2005  we  marketed  and  supplied   complete  trim  packages  on  a
per-garment  basis  which we  assembled  on behalf of our  customers.  Each trim
package  included all items of trim that a customer needed in the manufacture of
a  particular  item of apparel,  including  thread,  zippers,  labels,  buttons,
rivets,  polybags,  packing  cartons  and  hangers.  We  also  included  printed
marketing  materials such as hang tags,  bar-coded hang tags,  pocket  flashers,
waistband  tickets and size  stickers that were 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 continue to sell the trim
package components separately,  but phased-out the offering as a complete kit in
late 2005 as our cost of labor for the assembly was no longer  competitive,  and
the  market was not  willing to pay the  premium  for  pre-assembly  of the trim
material. In 2005 we also decided to discontinue offering thread as a portion of
our trim  products  and we  negotiated  an  agreement  with our supplier for the
return of substantially  all of the company's thread products.  We instead,  are
sharpening  our focus on the market  opportunity in which we add the most value,
our full-service Trim solutions.


                                       4
<PAGE>


         TEKFIT - We  distribute  a  proprietary  stretch  waistband  under  our
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 sale in
the U.S.  market and for all U.S.  brands for the life of the  patent.  We offer
apparel manufacturers advanced, patented fabric technologies to utilize in their
garments  under the TEKFIT name.  This  technology  allows fabrics to be altered
through the addition of stretch  characteristics  resulting in greatly  improved
fit and comfort. This 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.  Previously,  we supplied Levi Strauss & Co. with TEKFIT waistbands
for their Dockers(R) programs,  under an exclusive supply agreement.  In October
2006 our exclusive contract with this brand expired. With the expiration of this
contract we now have broader access to other customers and we intend to actively
expand this product offering to other brands.

         Our efforts to expand this  product  offering to other  customers  have
also been  limited by a licensing  dispute.  As  described  more fully in Item 3
"Legal  Proceedings"  we are presently in litigation with Pro-Fit related to our
exclusively   licensed   rights  to  sell  or  sublicense   stretch   waistbands
manufactured  under Pro-Fit's patented  technology.  The revenues we derive from
the sale of products  incorporating the stretch waistband technology represented
approximately  2% of our  consolidated  revenue for the year ended  December 31,
2007, and 19% for the years ended December 31, 2006 and 2005.  Accordingly,  the
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, or if we are  unsuccessful in securing new customers to replace the revenues
previously generated by our exclusive sales of this product to Levi.

          The  percentages  of total  revenue  contributed  by each of our three
primary product groups for the last three fiscal years are as follows:

                                                   Year Ended December 31,
                                               --------------------------------
                                                2007         2006         2005
                                               ------       ------       ------
Product Group Net Revenue:
     Talon zipper .....................          52.2%        34.8%        28.7%
     Trim .............................          46.1%        46.1%        52.4%
     Tekfit ...........................           1.7%        19.1%        18.9%


DESIGN AND DEVELOPMENT

         Our in-house creative team produces 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.  In 2006, we
introduced the Talon KidZip which is a specialty  zipper for children's  apparel
engineered to surpass  industry  established  strength and safety  tests,  while
maintaining the fashion image and requirements of today's apparel demands.

         Many  specialty  design  companies  with which we compete  have limited
engineering,  sourcing  or  manufacturing  experience.  These  companies  create
products or 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 design products to function within
the limitations  imposed by the applicable  manufacturing  framework.  Using our
manufacturing  and sourcing  experience,  we ensure delivery of quality products
and we 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.


                                       5
<PAGE>


CUSTOMERS

         We have more than 500  active  customers.  Our  customers  include  the
designated suppliers of well-known apparel manufacturers, such as Levi Strauss &
Co.,  Abercrombie & Fitch,  Juicy  Couture,  Victoria's  Secret,  and Polo Ralph
Lauren,  among others.  Our  customers  also include  contractors  for specialty
retailers  such as  Express  and the Gap and  mass  merchant  retailers  such as
Wal-Mart, Kohl's and Target.

         For the year ended  December  31,  2007,  our three  largest  customers
represented  approximately  9% of our consolidated net sales. For the year ended
December  31,  2006,  no  single  customer  represented  more  than  9%  of  our
consolidated  net  sales;  however  our  three  largest  customers   represented
approximately 18% of our consolidated net sales. For the year ended December 31,
2005,  no single  customer  represented  more than 10% of our  consolidated  net
sales; however, our three largest customers represented approximately 22% of our
consolidated net sales.

         The  results  of our  operations  will  depend  to an  extent  upon the
commercial  success of these customers.  If these customers fail to purchase our
products at anticipated levels, or the relationship  terminates,  it may have an
adverse affect on our 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
our results of  operations.  The  financial  position  and  operations  of these
customers are monitored on an ongoing basis.  United States export sales are not
a significant part of our business.  Backlogs are not considered material in the
industries in which we compete.

SALES AND MARKETING

         We sell our principal products through our own sales force based in Los
Angeles,  California,  various  other  cities in the United  States,  Hong Kong,
China, India, Taiwan and the Dominican Republic. We also employ customer service
representatives  who are assigned to key customers and provide in-house customer
service  support.  Our 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.

SOURCING AND ASSEMBLY

         We have  developed  expertise in  identifying  high quality  materials,
competitive  prices and approved vendors for particular  products and 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  products  are  available  from  numerous  sources  and are in adequate
supply. We purchase products from several qualified material suppliers.

         We create most product artwork and any necessary dies and molds used to
design and manufacture our products.  All other products that we design and sell
are produced by third party vendors or under our direct  supervision  or through
joint manufacturing arrangements. We are confident in our ability to secure high
quality 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.

         Principally  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 trim programs,  services  customers located in Asia and the
Pacific Rim and sources products for our Los Angeles based operations.


                                       6
<PAGE>


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  "Talon",  "Tag-It",  "Managed Trim  Solution" and
"TekFit". We also rely on our Exclusive License and Intellectual Property Rights
agreement  with Pro-Fit 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 for all U.S. brands,
for an  indefinite  term that  extends for the  duration of the patent and trade
secrets  licensed  under the  agreement.  We are  presently in  litigation  with
Pro-Fit  relating to our rights under the  agreement,  as  described  more fully
elsewhere in this report.

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 customers,  we
may be required  to  purchase  inventories  based upon  projections  made by our
customers.  In these cases we may carry a  substantial  amount of  inventory  on
their behalf. We attempt to manage this risk by obtaining  customer  commitments
to purchase any excess inventories.  These buyback  arrangements provide that 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.  While
these  agreements  provide us some  advantage in the  negotiated  disposition of
these  inventories,  we cannot be assured that our customers will complete these
agreements or that we can enforce these agreements  without adversely  affecting
our business operations.

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,  Universal Button,
Inc., Avery Dennison  Corporation and Scovill Fasteners,  Inc. have greater name
recognition,   longer  operating  histories  and  greater  financial  and  other
resources.

         Because  of  our   integrated   materials   procurement   and  assembly
capabilities and our full-service trim solutions, 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.


                                       7
<PAGE>


SEGMENT INFORMATION

         We operate  primarily in one industry  segment,  the  distribution of a
full  range of apparel  zipper and trim  products  to  manufacturers  of fashion
apparel, specialty retailers and mass merchandisers.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

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

         A summary of our domestic and  international  net sales and  long-lived
assets is set forth in Item 8 of this  Annual  Report on Form  10-K,  Note 14 of
Notes to the Consolidated Financial Statements.

         We are subject to certain risks  referred to in Item 1A, "Risk Factors"
and  Item  3,  "Legal   Proceedings",   including   those   normally   attending
international and domestic operations,  such as changes in economic or political
conditions, currency fluctuations,  foreign tax claims or assessments,  exchange
control  regulations  and the effect of  international  relations  and  domestic
affairs of foreign countries on the conduct of business, legal proceedings,  and
the availability and pricing of raw materials.

EMPLOYEES

         As of December 31, 2007, we had approximately  219 full-time  employees
including 36 in the United  States,  85 employees in Hong Kong,  77 employees in
China, 7 in Indonesia,  6 in India, 4 in The Dominican Republic,  2 in Taiwan, 1
in Thailand and 1 in Vietnam. Our labor forces are non-union. We believe that we
have satisfactory employee and labor relations.

CORPORATE GOVERNANCE AND INFORMATION RELATED TO SEC FILINGS

         Our  Annual  Reports  on Form  10-K,  Quarterly  Reports  on Form 10-Q,
Current  Reports on Form 8-K and  amendments  to those  reports  filed with,  or
furnished to, the Securities and Exchange Commission ("SEC") pursuant to Section
13(a) or 15(d) of the  Securities  Exchange  Act of 1934 are  available  free of
charge through our web site,  WWW.TAGITPACIFIC.COM  (in the "Investor Relations"
section,  as  soon as  reasonably  practical  after  electronic  filing  with or
furnishing of such  material to the SEC). We make  available at the Web site our
(i) shareholder communications policies, (ii) Code of Ethical Conduct, (iii) the
charters of the Audit and Nominating  Committees of our Board of Directors,  and
(iv) Employee  Complaint  Procedures for Accounting and Auditing Matters.  These
materials are also available free of charge in print to stockholders who request
them by writing to: Investor Relations, Talon International, Inc., 21900 Burbank
Boulevard, Suite 270, Woodland Hills, CA 91367. Our web site address provided in
this Annual  Report on Form 10-K is not intended to function as a hyperlink  and
the information on our web site is not and should not be considered part of this
report and is not incorporated by reference in this document.


ITEM 1A.      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.


                                       8
<PAGE>


OUR GROWTH AND OPERATING RESULTS COULD BE MATERIALLY,  ADVERSELY  AFFECTED IF WE
ARE  UNSUCCESSFUL  IN RESOLVING A DISPUTE THAT NOW EXISTS  REGARDING  OUR RIGHTS
UNDER OUR EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY AGREEMENT WITH PRO-FIT.

         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.  We are in litigation with Pro-Fit  regarding our rights.
See Item 3, "Legal Proceedings" for discussion of this litigation.  In the past,
we had  derived 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 reach a  settlement  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 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.

IF CUSTOMERS DEFAULT ON INVENTORY PURCHASE  COMMITMENTS WITH US, WE WILL BE LEFT
HOLDING NON-SALABLE INVENTORY.

         We hold significant  inventories for specific customer programs,  which
the  customers  have  committed to purchase.  If any customer  defaults on these
commitments,  or insists on markdowns,  we may incur a charge in connection with
our holding significant  amounts of non-salable  inventory and this would have a
negative impact on our operations and cash flow.

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 may
experience financial  difficulties that 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.


                                       9
<PAGE>


         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.

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 could be
adversely affected.  In the past,  following periods of volatility in the market
price of a company's  securities,  securities class action  litigation has often
been  instituted  against such a company.  In October  2005, a securities  class
action  lawsuit  was filed  against us. See Item 3,  "Legal  Proceedings"  for a
detailed description of this lawsuit.

THE  OUTCOME  OF  LITIGATION  IN WHICH WE HAVE  BEEN  NAMED  AS A  DEFENDANT  IS
UNPREDICTABLE  AND AN ADVERSE  DECISION IN ANY SUCH MATTER COULD HAVE A MATERIAL
ADVERSE AFFECT ON OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS.

         We are defendants in a number of litigation  matters.  These claims may
divert  financial  and  management  resources  that would  otherwise  be used to
benefit our operations. Although we believe that we have meritorious defenses to
the claims made in each and all of the litigation  matters to which we have been
named a party, and intend to contest each lawsuit vigorously,  no assurances can
be given that the results of these  matters  will be favorable to us. An adverse
resolution of any of these lawsuits could have a material  adverse affect on our
financial position and results of operations.

         We maintain product  liability and director and officer  insurance that
we regard as reasonably adequate to protect us from potential claims; however we
cannot  assure you that it will be adequate to cover any  losses.  Further,  the
costs  of  insurance  have  increased  dramatically  in  recent  years,  and the
availability of coverage has decreased.  As a result,  we cannot assure you that
we will be able to maintain  our current  levels of  insurance  at a  reasonable
cost, or at all.


                                       10
<PAGE>


IF WE ARE UNABLE TO SATISFY THE  FINANCIAL  COVENANTS IN OUR DEBT  AGREEMENTS IN
FUTURE PERIODS, THE LENDER COULD DECLARE THE DEBT OBLIGATIONS IN DEFAULT,  WHICH
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY, BUSINESS AND OPERATIONS.

         Our  revolving   credit  and  term  loan  agreement   requires  certain
covenants, including a minimum level of EBITDA beginning with period ending June
30,  2008,  as  discussed  in  Note 7 of the  Notes  to  Consolidated  Financial
Statements.  In the event that we fail to satisfy the minimum EBITDA requirement
for three consecutive quarters,  the credit agreement will be in default and the
full amount of our outstanding  obligations  will become due. In anticipation of
us not being able to meet the  required  covenants  due to various  reasons,  we
either  negotiate for changes in the relative  covenants or an advance waiver or
would have to reclassify the relevant debt as current. However, our expectations
of future operating  results and continued  compliance with other debt covenants
cannot be assured and our lender's actions are not controllable by us. If we are
in default under the loan  agreement,  all amounts due under the loan  agreement
can be declared  immediately  due and payable and,  unless we are able to secure
alternative  financing  to repay the lender in full,  the lender  would have the
right  to  exercise  its  remedies   including   enforcement   of  its  lien  on
substantially all of our assets.  Further,  if the debt is placed in default, we
would be required to reduce our expenses,  including by  curtailing  operations,
and to  raise  capital  through  the  sale of  assets,  issuance  of  equity  or
otherwise,  any of which could have a material  adverse  effect on our financial
condition and results of operations.

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
worldwide  operations with the information  systems of our principal  offices in
California.  Our failure to do so could result in lost revenues, delay financial
reporting or adverse effects on the information reported.

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. The loss of the services of 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:


                                       11
<PAGE>


         o        Foreign trade disruptions;

         o        Import restrictions;

         o        Labor disruptions;

         o        Embargoes;

         o        Government intervention;

         o        Natural disasters; or

         o        Regional pandemics.

INTERNET-BASED  SYSTEMS THAT WE RELY UPON FOR OUR ORDER  TRACKING AND MANAGEMENT
SYSTEMS MAY  EXPERIENCE  DISRUPTIONS  AND AS A RESULT WE MAY LOSE  REVENUES  AND
CUSTOMERS.

         To the  extent  that we fail to  adequately  update  and  maintain  the
hardware and software  implementing our integrated systems, our customers may be
delayed or  interrupted  due to defects in our hardware or our source  code.  In
addition,  since our  software  is  Internet-based,  interruptions  in  Internet
service  generally  can  negatively  impact our  ability  to use our  systems to
monitor and manage various aspects of our customer's 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  have greater name  recognition,
longer operating histories and 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 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.


                                       12
<PAGE>


COUNTERFEIT  PRODUCTS ARE NOT UNCOMMON IN THE APPAREL INDUSTRY AND OUR CUSTOMERS
MAY MAKE  CLAIMS  AGAINST US FOR  PRODUCTS  WE HAVE NOT  PRODUCED  AND WE MAY BE
ADVERSELY IMPACTED BY THESE FALSE CLAIMS.

         Counterfeiting  of valuable  trade names is  commonplace in the apparel
industry and while there are industry organizations and federal laws designed to
protect the brand owner, these counterfeit  products are not always detected and
it can be  difficult  to prove  the  manufacturing  source  of  these  products.
Accordingly,  we may be adversely  affected if counterfeit  products  damage our
relationships  with  customers,  and we incur costs to prove these  products are
counterfeit, to defend ourselves against false claims, or we may have to pay for
false claims.

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        Intellectual property and legal matters;

         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'  value. We may also assume  additional  debt and incur  impairment
losses to our intangible assets if we acquire another company.

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  you  that we will not  encounter  unanticipated
problems or liabilities  relating to the  integration  of an acquired  company's
operations,  nor can we assure you that we will realize the anticipated benefits
of any future acquisitions.

OUR  ACTUAL  TAX   LIABILITIES  MAY  DIFFER  FROM  ESTIMATED  TAX  RESULTING  IN
UNFAVORABLE ADJUSTMENTS TO OUR FUTURE RESULTS.


                                       13
<PAGE>


         The  amount of income  taxes we pay is  subject  to  ongoing  audits by
federal,  state and  foreign tax  authorities.  Our  estimate  of the  potential
outcome of uncertain tax issues is subject to our assessment of relevant  risks,
facts, and  circumstances  existing at that time. Our future results may include
favorable or  unfavorable  adjustments  to our estimated tax  liabilities in the
period the assessments are made or resolved,  which may impact our effective tax
rate and our financial results.

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 11, 2008,  our officers and directors and their  affiliates
beneficially owned  approximately  14.5% of the outstanding shares of our common
stock.  The Dyne family,  which includes Mark Dyne, Colin Dyne, who are also our
directors;  Larry  Dyne,  the  estate  of  Harold  Dyne and  Jonathan  Burstein;
beneficially owned  approximately  13.3% of the outstanding shares of our common
stock at April 11,  2008.  Additionally,  at April 11,  2008 our lender  Bluefin
Capital LLC beneficially  owned  approximately 8.6% of the outstanding shares of
our common stock. As a result,  our lender,  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.  In response to  terrorists'  activities  and threats
aimed at the United States,  transportation,  mail, financial and other services
may  be  slowed  or  stopped  altogether.   Extensive  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  delays.  We may also  experience  delays in receiving  payments  from
payers that have been  affected by the terrorist  activities.  The United States
economy in general may be adversely affected by the terrorist 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.

IF WE ARE UNABLE TO REDEPLOY  OUR  MANUFACTURING  ASSETS TO  SOUTHEAST  ASIA OUR
MANUFACTURING ASSETS VALUE WOULD BE
ADVERSELY AFFECTED.

         Central to our operating strategy was to restructure the business model
from a fully integrated  manufacturing  operation targeted at the South American
marketplace to a supply-chain  model employing  strategically  located  contract
manufacturers  throughout Southeast Asia. The re-deployment of our manufacturing
assets could  require  multiple  facilities  in various  geographical  locations
strategically  located in close proximity to our more  significant and important
customers  throughout  Southeast Asia. If we cannot achieve its plan to redeploy
the assets,  the carrying  value of our assets  would be adversely  affected and
could result in  significant  reductions in the carrying value of the assets and
have an adverse effect on our results of operations.


                                       14
<PAGE>


ITEM 1B.      UNRESOLVED STAFF COMMENTS

         Not applicable.


ITEM 2.       PROPERTIES

         Our  headquarters  are  located in the greater  Los  Angeles  area,  in
Woodland Hills,  California,  where we lease  approximately 8,800 square feet of
administrative and product  development space. In addition to the Woodland Hills
facility,  we lease 120 square feet of office space in New York, New York; 1,400
square feet of office  space in Columbus,  Ohio;  3,400 square feet of warehouse
space in Simi Valley,  California;  17,700  square feet of office and  warehouse
space in Kwun Tong, Hong Kong; 6,600 square feet of office and showroom space in
Shenzhen,  China;  office space square  footage  totaling 5,400 in various other
cities in China;  6,000 square feet of office  space in  Bangalore,  India;  and
4,100 square feet of warehouse space in Santiago,  Dominican Republic. The lease
agreements related to these properties expire at various dates through September
2010.  We also own a building  with  41,650  square  feet of  manufacturing  and
warehouse space in Kings Mountain, North Carolina, which is being held for sale.
We  believe  our  existing  facilities  are  adequate  to meet our needs for the
foreseeable future.


ITEM 3.       LEGAL PROCEEDINGS

         On October 12, 2005, a shareholder  class action  complaint -- HUBERMAN
V.TAG-IT PACIFIC, INC., ET AL., Case No. CV05-7352 R(Ex) -- was filed against us
and certain of our  current  and former  officers  and  directors  in the United
States  District Court for the Central  District of California,  alleging claims
under  Section  10(b) and Section 20 of the  Securities  Exchange Act of 1934. A
lead plaintiff was appointed,  and his amended complaint alleged that defendants
made false and  misleading  statements  about our  financial  situation  and our
relationship  with  certain of our large  customers.  The action was  brought on
behalf of all  purchasers of our  publicly-traded  securities  during the period
from  November  13, 2003 to August 12, 2005.  On February  20,  2007,  the Court
denied  class  certification.  On April 2,  2007 the Court  granted  defendants'
motion for summary  judgment,  and on or about April 5, 2007,  the Court entered
judgment in favor of all defendants. On or about April 30, 2007, plaintiff filed
a notice of appeal,  and his  opening  appellate  brief was filed on October 15,
2007. Our brief was filed on November 28, 2007. We believe that this matter will
be resolved favorably on appeal, or in a later trial or in settlement within the
limits of its  insurance  coverage.  However,  the outcomes of this action or an
estimate of the  potential  losses,  if any,  related to the  lawsuit  cannot be
reasonably predicted, and an adverse resolution of the lawsuit could potentially
have a  material  adverse  effect  on our  financial  position  and  results  of
operations.

         On April 16, 2004 we 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) -- asserting  various
contractual and tort claims relating to our exclusive  license and  intellectual
property agreement with Pro-Fit,  seeking declaratory relief,  injunctive relief
and damages.  It is our position  that the  agreement  with Pro-Fit gives us the
exclusive  rights in certain  geographic  areas to  Pro-Fit's  stretch and rigid
waistband  technology.  On June 5, 2006 the Court  denied our motion for partial
summary  judgment,  but did not find that we breached our agreement with Pro-Fit
and a trial is  required  to  determine  issues  concerning  our  activities  in
Columbia and whether other actions by Pro-Fit  constituted an  unwillingness  or
inability to fill orders. The Court also held that Pro-Fit was not "unwilling or
unable" to fulfill  orders by refusing to fill orders with goods produced in the
United States.  The action is still pending in the United States District Court.
The action is presently  stayed pending  resolution or trial of an earlier filed
action  between  Pro-Fit  Holdings  and their  attorneys  who have sued  Pro-Fit
Holdings and have obtained a judgment. In the past, we had derived a significant
amount of revenue from the sale of products  incorporating the stretch waistband


                                       15
<PAGE>


technology and our business, results of operations and financial condition could
be materially  adversely affected if the 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.

         We  currently  have  pending  a  number  of  other  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 our security  holders during the
fourth quarter of 2007.


                                       16
<PAGE>


                                     PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
              AND ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK

         Our common  stock has been quoted on the OTC  Bulletin  Board under the
symbol "TALN" since December 28, 2007. Our common stock was previously traded on
the American  Stock  Exchange  under the symbol "TAG." The following  table sets
forth the high and low sales  prices for the  Common  Stock as  reported  by the
American   Stock  Exchange  and  the  OTC  Bulletin  Board  during  the  periods
indicated.

                                                        HIGH            LOW
                                                        ----            ---
         YEAR ENDED DECEMBER 31, 2007
              1st Quarter........................     $  2.07        $  1.06
              2nd Quarter........................        1.58           0.66
              3rd Quarter........................        1.14           0.70
              4th Quarter........................        0.82           0.30


         YEAR ENDED DECEMBER 31, 2006
              1st Quarter........................     $  0.84        $  0.33
              2nd Quarter........................        0.81           0.38
              3rd Quarter........................        1.38           0.63
              4th Quarter........................        1.35           0.72


         On April 10,  2008,  the  closing  sales  price of our common  stock as
reported on OTC Bulletin Board was $0.36 per share. As of April 11, 2008,  there
were 22 record holders of our common stock.

DIVIDENDS

         We have never paid  dividends on our common  stock.  We are  restricted
from  paying  dividends  under our senior  secured  credit  facility.  It is our
intention to retain future earnings for use in our business.

PERFORMANCE GRAPH

         The  following  graph sets forth the  percentage  change in  cumulative
total stockholder return of our common stock during the period from December 31,
2002 to December 31, 2007,  compared with the cumulative returns of the American
Stock  Exchange  Market  Value  (U.S.  &  Foreign)  Index and The Dow Jones U.S.
Clothing &  Accessories  Index.  The  comparison  assumes  $100 was  invested on
December 31, 2002 in our common stock and in each of the foregoing indices.  The
stock price performance on the following graph is not necessarily  indicative of
future stock price performance.


                                       17
<PAGE>


                          [PERFORMANCE GRAPH OMITTED]


<TABLE>
<CAPTION>
                                                           Cumulative Total Return
-----------------------------------   -------- ----------- ----------- ----------- ----------- -----------
                                        12/02       12/03       12/04       12/05       12/06       12/07
-----------------------------------   -------- ----------- ----------- ----------- ----------- -----------

<S>                                    <C>         <C>         <C>         <C>         <C>         <C>
TALON INTERNATIONAL, INC.              100.00      123.69      123.97        9.92       28.37       11.16
AMEX COMPOSITE                         100.00      143.18      175.20      215.26      257.04      299.37
DOW JONES US CLOTHING & ACCESSORIES    100.00      125.07      147.77      154.32       191.2      143.93
</TABLE>


         The information under this "Performance  Graph" subheading shall not be
deemed to be "filed" for the purposes of Section 18 of the  Securities  Exchange
Act of 1934, or otherwise subject to the liabilities of such section,  nor shall
such  information or exhibit be deemed  incorporated  by reference in any filing
under  the  Securities  Act of 1933 or the  Exchange  Act,  except  as  shall be
expressly set forth by specific reference in such a filing.


                                       18
<PAGE>


ITEM 6.       SELECTED FINANCIAL DATA

         The following selected financial data is not necessarily  indicative of
our future  financial  position or 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 Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                                (In thousands except per share data)
                                                       2003(1)    2004(1,2)    2005(1)      2006       2007
                                                      --------    --------    --------    --------   --------
<S>                                                   <C>         <C>         <C>         <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue .....................................   $ 64,443    $ 55,109    $ 47,331    $ 48,825   $ 40,530
Income (loss) from operations .....................   $ (5,881)   $(14,482)   $(27,098)   $  1,331   $ (3,171)
Net income (loss) .................................   $ (4,745)   $(17,609)   $(29,538)   $    309   $ (4,922)
Net income (loss) per share - basic ...............   $  (0.46)   $  (1.02)   $  (1.62)   $   0.02   $  (0.24)
Net income (loss) per share - diluted .............   $  (0.46)   $  (1.02)   $  (1.62)   $   0.02   $  (0.24)
Weighted average shares outstanding - basic .......     10,651      17,316      18,226      18,377     20,155
Weighted average shares outstanding - diluted .....     10,651      17,316      18,226      18,956     20,155
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents .........................   $ 14,443    $  5,461    $  2,277    $  2,935   $  2,919
Total assets ......................................   $ 67,770    $ 56,448    $ 30,321    $ 25,694   $ 22,094
Capital lease obligations, line of credit and
   notes payable ..................................   $ 11,759    $ 18,792    $ 16,001    $ 16,214   $ 12,978
Convertible redeemable preferred stock ............   $  2,895    $   --      $   --      $   --     $   --
Stockholders' equity ..............................   $ 43,564    $ 30,195    $    912    $  1,686   $   (717)
Total liabilities and stockholders' equity ........   $ 67,770    $ 56,448    $ 30,321    $ 25,694   $ 22,094
PER SHARE DATA:
Net book value per common share ...................   $   3.79    $   1.66    $   0.05    $   0.09   $  (0.04)
Common shares outstanding .........................     11,508      18,171      18,241      18,466     20,291
</TABLE>

----------
(1)  We incurred  restructuring  costs of $6.4 million,  $0.4 million,  and $7.7
     million  during  the  years  ended  December  31,  2005,   2004  and  2003,
     respectively.

(2)  We incurred net charges of $4.3 million from the  write-off of  obligations
     due from a former  major  customer  and other  fourth  quarter  adjustments
     totaling $9.5 million during the year ended December 31, 2004.


                                       19
<PAGE>


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

         The  following  management's  discussion  and  analysis  is intended to
assist the reader in understanding our consolidated  financial statements.  This
discussion  is provided as a  supplement  to, and should be read in  conjunction
with, our consolidated financial statements and accompanying notes.

         On July 20, 2007,  we changed our corporate  name from Tag-It  Pacific,
Inc.  to  Talon  International,  Inc.  in order to  reflect  our core  marketing
strategy of focusing on growth  opportunities  in the global  zipper market with
our Talon brand zippers.

         Talon International,  Inc. designs, sells, manufactures and distributes
apparel  zippers,  specialty  waistbands  and various  apparel trim  products to
manufacturers of fashion apparel, specialty retailers and mass merchandisers. We
sell and market these products under various  branded names  including TALON and
TEKFIT. We operate the business globally under three product groups.

         We plan to increase our global  expansion of TALON zippers  through the
establishment of a network of Talon owned sales,  distribution and manufacturing
locations,  distribution  relationships and joint ventures. The network of these
distributors and manufacturing  joint ventures,  in combination with TALON owned
and  affiliated  facilities  under the TALON  brand,  is expected to improve our
time-to-market  by  eliminating  the typical setup and  build-out  phase for new
manufacturing  capacity  throughout  the world,  and by sourcing,  finishing and
distributing to apparel manufacturers in their local markets.

         We have structured our trim business to focus as an outsourced  product
development,  sourcing and sampling department for the most demanding brands and
retailers.  We  believe  that  trim  design  differentiation  among  brands  and
retailers has become a critical  marketing tool for our customers.  By assisting
our  customers in the design,  development,  sampling  and sourcing of trim,  we
expect  to  achieve  higher  margins  for our trim  products,  create  long-term
relationships  with our  customers,  grow our sales to a particular  customer by
supplying trim for a larger proportion of their brands, and better differentiate
our  trim  sales  and  services  from  those  of our  competitors.  We  plan  to
aggressively  expand our trim  business  globally,  so we may  better  serve our
apparel  factory  customers  in the field,  in  addition to our brand and retail
customer. We believe we can lead the industry in trim sourcing by having both an
intimate  relationship  with  our  brand  and  retail  customers,  and  having a
distributed  service  organization  to serve our factory  customers  (those that
manufacture for the apparel brand and retailers) globally.

         Our TEKFIT services provide manufacturers with the patented technology,
manufacturing  know-how and materials required to produce pants incorporating an
expandable  waistband.  These  products  were  previously  produced  by  several
manufacturers  for one  single  brand.  In  October  2006 our  exclusive  supply
contract with this brand expired.

         Our efforts to expand this  product  offering to other  customers  have
also been limited by a licensing dispute. As described more fully in this report
under Item 3. "Legal  Proceedings",  we are presently in litigation with Pro-Fit
Holdings  Limited  related  to  our  exclusively  licensed  rights  to  sell  or
sublicense stretch waistbands  manufactured under Pro-Fit's patented technology.
This  impacted  2007 Tekfit sales and resulted in a $8.6 million or 93% decrease
from 2006 sales.

         The  revenues  we derive from the sale of  products  incorporating  the
stretch waistband technology,  represented  approximately 2% of our consolidated
revenues for the year ended December 31, 2007 and 19% of  consolidated  revenues
for the years ended December 31, 2006 and 2005; accordingly our growth prospects
could be  materially  adversely  affected  if our  dispute  with  Pro-Fit is not
resolved in a manner  favorable to us, or if we are unsuccessful in securing new
customers to replace the revenues previously generated by the single brand.


                                       20
<PAGE>


         In an effort to better  align our  organizational  and cost  structures
with its future  growth  opportunities,  in August  2005 our Board of  Directors
adopted a restructuring  plan that was  substantially  completed by December 31,
2005.  The plan included  restructuring  our global  operations  by  eliminating
redundancies in our Hong Kong operation,  closing our facilities in Mexico,  and
closing our North Carolina  manufacturing  facility.  We have also refocused our
sales  efforts on higher  margin  products,  which may result in lower net sales
initially as we focus on  acquiring  high  quality  customers,  and decrease our
customer concentration.  As a result of this restructuring,  we now operate with
fewer  employees  and will have  lower  associated  operating  and  distribution
expenses.

RESULTS OF OPERATIONS

      NET SALES

         For the years ended December 31, 2007,  2006, and 2005,  total sales by
geographic region based on customer delivery locations were as follows:

                                                Year Ended December 31,
                                     -------------------------------------------
                                         2007            2006            2005
                                     -----------     -----------     -----------
Sales:
     United States .............     $ 3,692,468     $ 4,223,052     $ 7,052,196
     Hong Kong .................      14,178,421      13,650,419       7,901,079
     Dominican Republic ........         700,868       8,966,828         150,793
     China .....................      11,159,726       6,063,416       7,091,034
     India .....................       2,187,684       1,205,486         809,972
     Bangladesh ................       1,924,943       2,070,349         798,699
     Mexico ....................         783,762       2,476,313      12,945,861
     Other .....................       5,901,683      10,169,139      10,581,542
                                     -----------     -----------     -----------
Total ..........................     $40,529,555     $48,825,002     $47,331,176
                                     ===========     ===========     ===========


         The net revenues for the three primary product groups are as follows:

                                                Year Ended December 31,
                                     -------------------------------------------
                                         2007            2006            2005
                                     -----------     -----------     -----------
Product Group Net Revenue:
     Talon zipper ..............     $21,159,595     $17,005,203     $13,593,479
     Trim ......................      18,688,698      22,502,947      24,788,397
     Tekfit ....................         681,262       9,316,852       8,949,300
                                     -----------     -----------     -----------
                                     $40,529,555     $48,825,002     $47,331,176
                                     ===========     ===========     ===========


         Sales are influenced by a number of factors,  including demand, pricing
strategies,  foreign  exchange  effects,  new product  launches and indications,
competitive  products,  product supply, and acquisitions.  See Item 1 "Business"
for a discussion of our principal products.

         The net decrease of sales in 2007 was  primarily  due to lower sales of
waistband  products  as a result of the  expiration  in  October  of 2006 of our
exclusive  contract for these products  ($8.6  million);  reduced  operations in
Mexico as production shifted from this area to Asia and we closed our operations
in 2005 and 2006;  and lower trim sales due to fewer and smaller  programs  with
our customers  ($3.8  million).  Talon zipper sales  continued to increase as we


                                       21
<PAGE>


expanded our  operations  throughout  China and southeast  Asia ($4.1  million);
partially offsetting the declines from the Mexico and the Latin American regions
for the  Trim  products  and  resulting  in a net gain in  Talon  product  sales
overall.

         Sales  in  2006  increased  modestly  from  2005 as a net  result  of a
substantial  decline within selected  markets offset by large increases in other
geographical  markets.  Sales,  principally  of Trim  products,  to customers in
Mexico  declined  sharply in 2006 from 2005 ($6.0 million) as the industry shift
of apparel  production  from Latin America to Asia continued from 2005, from the
discontinuance of approximately $4.0 million in sales of products from 2005, and
as we completed the closure of our assembly and distribution  operations  within
Mexico.  Total Trim product sales declined by approximately $2.3 million in 2006
as compared to 2005 as a consequence of the reductions  from Mexico and the U.S.
described  above offset by increased  sales in Asia and the  Dominican  Republic
resulting mainly from the shift in industry  trends.  Sales of TALON products to
customers  within  the U.S.  also  declined  significantly  (approximately  $3.6
million) as a result of the industry shift of apparel production and as a result
of our closure of our manufacturing  facility in North Carolina during the third
quarter of 2005.  The decline of Talon  product sales from the North and Central
American regions was substantially  offset by the shifting of this production to
manufacturers  within Asia,  and our expansion of operations  with  customers in
this region,  resulting in a net increase in Talon  product  sales for 2006 over
2005 of approximately $3.4 million. Additionally,  expanded demand by our former
exclusive  customer  for the TEKFIT  waistband  also  resulted in an increase of
approximately  $0.4  million  in 2006 over  2005 in our  sales to the  Dominican
Republic,  where the principal  manufacturers  of this product are located,  and
sales of Trim products into this region  increased as key customer sales shifted
out of the Mexico marketplace to this region.  Sales within "other  geographical
regions" also reflect the worldwide shifting of apparel production to Asia.

         The net  decrease of sales in 2005 was  primarily  due to a decrease in
sales to our customers in Mexico of Trim products and, to a lesser extent, TALON
zippers,  resulting  from the industry  shift of apparel  production  from Latin
America to Asia, and due to our restructuring in the third quarter of 2005 which
disrupted  sales in the Mexico  regions as we prepared for a shift of operations
to  Asia.  Sales  in Asia of our  Trim  products  and  Talon  zippers  increased
significantly  during 2005 partially offsetting the declines from the Mexico and
the Latin American  regions for the Trim products and resulting in a net gain in
Talon product sales  overall.  We responded to these market changes in 2005 with
the implementation of a restructuring plan that included reducing our operations
in Mexico and  focusing  our efforts on the market in Asia.  Sales of our TEKFIT
waistband  decreased in 2005 because of lower demand from our exclusive customer
for this product. During 2005, we continued our plan to decrease reliance on two
significant customers in Mexico. These two customers  contributed  approximately
$7.7 million or 16.3% of revenues for the year ended December 31, 2005.


                                       22
<PAGE>


      COST OF GOODS SOLD AND SELECTED OPERATING EXPENSES

         The  following  table  summarizes  cost  of  goods  sold  and  selected
operating  expenses  for the years  ended  December  31,  2007,  2006,  and 2005
(amounts in thousands):

<TABLE>
<CAPTION>
                                              2007       CHANGE        2006        CHANGE        2005
                                            --------    --------     --------     --------     --------

<S>                                         <C>             <C>      <C>              <C>      <C>
Sales ...................................   $ 40,530         (17)%   $ 48,825            3%    $ 47,331

Cost of goods sold ......................     28,423         (17)%     34,356          (27)%     47,070
    % of sales ..........................         70%                      70%                       99%

Selling expenses ........................      3,126          12%       2,778           (5)%      2,929
    % of sales ..........................          8%                       6%                        6%

General and administrative expense ......     10,877           1%      10,873          (32)%     16,098
    % of sales ..........................         27%                      22%                       34%

Bad debt expense (recoveries) ...........        187        (136)%       (513)        (109)%      5,858
    % of sales ..........................          0%                      (1)%                      12%

Reserve for impairment of note receivable      1,088         100%        --           --           --
    % of sales ..........................          3%

Restructuring Charges ...................       --          --           --           (100)%      2,474
    % of sales ..........................                                                             5%
</TABLE>


      COST OF GOODS SOLD

         Cost of goods sold for the year ended December 31, 2007,  declined $5.9
million or 17% from 2006  primarily a result of the 17%  decrease in sales.  The
reduction in cost of goods sold from 2006 was principally  attributable to lower
overall sales volumes and lower direct margin resulting from a change in the mix
in sales by product  group,  partially  offset by reduced  distribution  charges
since more products are now sourced and delivered  within the same  marketplace,
reduced   manufacturing   and  assembly   overhead  costs  and  lower  inventory
obsolescence  and management  charges as inventory  levels have been reduced and
turns accelerated.

         Cost of goods sold for the year ended  December 31, 2006 declined $12.7
million or 27% from 2005 as the result of a number of the actions we implemented
in connection with our 2005 restructuring  plan, and as a result of our focus on
higher margin  product sales and  continued  efforts to reduce costs  worldwide.
Cost of goods sold in 2006 declined by  approximately  $4.8 million (10.3%) from
2005 as a result of higher direct  margins on products  sold;  by  approximately
$1.9 million  (4.0%) from lower freight & duty charges as a result of relocating
our  operations  closer to our  customers  in Asia;  by a reduction in inventory
adjustments and obsolescence of $1.6 million (3.5%) due primarily to inventories
located at our Mexico production operations;  by the elimination of $3.4 million
(7.3%) in  restructuring  charges  incurred in 2005; and by  approximately  $1.8
million (3.8%) from reductions in manufacturing and overhead charges as a result
of reduced employee  related costs and operating  expenses of our North Carolina
and Mexico operations;  offset by increases of approximately $0.8 million (1.8%)
on higher sales volumes.


                                       23
<PAGE>


         Cost of goods sold  increased  for the year  ended  December  31,  2005
included a $3.4 million  (7.7%)  write-down of inventory in connection  with our
2005 restructuring plan, and an increase in our inventory  obsolescence  reserve
of $2.1 million (4.7%), including $0.5 million in the fourth quarter of 2005.

      SELLING EXPENSES

         Selling  expenses for the year ended  December 31, 2007  increased $0.4
million or 12.0% from 2006 as a result of the increased  number of sales offices
and employees within Asia and their associated  compensation ($0.4 million), and
facilities,  travel and  administrative  costs ($0.4  million),  offset by lower
marketing  costs ($0.1  million) and lower  royalty  fees on waistband  products
($0.3 million).

         Selling  expense for the year ended  December 31, 2006  decreased  $0.2
million or 5.0% from 2005 as a result of lower travel and entertainment costs of
$0.3 million;  lower legal costs of $0.3 million; and other employee benefit and
administrative  cost  reductions  of  approximately  $0.1  million;   offset  by
increases in sales  commissions  of  approximately  $0.3  million and  increased
spending for sales and marketing programs of $0.2 million.

         Selling  expenses  increased  $0.3  million  or 1.0% for the year ended
December 31, 2005 because we were unable to reduce expenses in direct proportion
to the decrease in sales.

      GENERAL AND ADMINISTRATIVE EXPENSES

         General and  administrative  expenses  for the year ended  December 31,
2007 of $10.9  million  remained  relatively  unchanged  from 2006.  General and
administrative  expenses  were  effected by a $0.2  million  increase  from 2006
attributable to increased  employee costs due to the continued  expansion within
Asia and  increased  professional  and  audit  fees of $0.9  million;  offset by
reduced legal costs of $0.6 million,  $0.1 million  decrease in insurance costs,
and $0.4 million  reduction in management  incentive  bonuses,  commissions  and
stock-based   compensation.   Included  in  professional  and  audit  fees  were
non-recurring  charges of $0.6 million related to existing consulting  contracts
with two former directors of the Company.

         General and  administrative  expenses  for the year ended  December 31,
2006  decreased  $5.2 million or 32% from 2005.  The decrease was  primarily the
result of the $0.5  million  write-off  of goodwill  primarily  associated  with
closed  operations,  reductions in legal costs by $1.9 million  principally as a
reduction of our costs associated with the ProFit litigation, lower employee and
benefit costs by $1.9 million from reduced employment  levels,  reduced facility
costs of $0.6 million,  and reductions in other  administrative and travel costs
of $1.4 million,  offset by approximately $0.7 million in increased professional
and audit fees as we changed auditors and utilized more professional consultants
in lieu of full time regular employee,  and stock based compensation  expense of
$0.4 million associated with the implementation of SFAS 123(R).

         Included  in general  and  administrative  expenses  for the year ended
December 31, 2005 were legal  expenses of  approximately  $3.5  million  related
primarily to the Pro-Fit  litigation,  and an  impairment  charge to goodwill of
$0.5 million incurred in connection with the 2005 restructuring  plan; offset by
reductions of approximately $1.0 million associated with lower employment levels
and related costs in connection with the restructuring plan.

      BAD DEBT EXPENSE (RECOVERIES)

         Bad debt expense for the year ended December 31, 2007 increased by $0.6
million as a result of $0.1 million in bad debt  provisions  in 2007 compared to
bad debt recoveries of $0.5 million in 2006.

         Bad debt expense for the year ended  December 31, 2006  reflected a net
recovery of $0.5  million as compared to bad debt  expenses of $5.9  million for
the year ended  December 31, 2005.  The bad debt  recoveries  in 2006  represent
collections  of accounts  written-off in prior years as  uncollectible,  and the
2005 expense is primarily  related to outstanding  unsettled  receivables from a
former customer.


                                       24
<PAGE>


      IMPAIRMENT OF NOTE RECEIVABLE

         Operating  expense in 2007  included  $1.1  million in bad debt reserve
provisions  associated  with the note  receivable  due the  Company  from Azteca
Production  International,  Inc. See Notes 2 and 3 of the Consolidated Financial
Statements.

      RESTRUCTURING CHARGES

         Restructuring costs in 2005 were the result of the adoption of our 2005
restructuring  plan.  Restructuring  costs recorded in the third quarter of 2005
were $6.2 million.  Additional costs of $0.2 million were incurred in the fourth
quarter of 2005. Total  restructuring costs of $6.4 million were recorded in the
Consolidated  Statement of  Operations  for the year ended  December 31, 2005 as
follows (in millions):

         Cost of goods sold                              $3.4
         Operating expenses:
            General & administrative expenses             0.5
            Restructuring charges                         2.5
                                                     ---------
         Total restructuring costs                       $6.4
                                                     =========

      INTEREST EXPENSE AND INTEREST INCOME

        Interest  expense  for  the  year  ended  December  31,  2007  increased
approximately  $0.6 million or 41.6% to $1.9  million  from $1.4 million  during
2006 as a result of higher average debt levels in 2007 compared to 2006. For the
year ended  December 31, 2007 interest  expense  included  $725,000 in amortized
deferred  financing  charges and higher costs on our  revolving  credit and term
notes as compared to our previous secured convertible notes payable.  During the
third  quarter  2007,  we charged  off  approximately  $111,000  in  unamortized
deferred  financing costs and discounts  related to and in conjunction  with the
early payment of the secured convertible promissory notes in July 2007. Interest
income for the year ended December 31, 2007 of $242,000 decreased  approximately
$126,000 or 34.2% from $368,000 during 2006 related primarily to the elimination
of the  note  receivable  discussed  in  Note 3 to  the  consolidated  financial
statements.

         Net expense for the year ended December 31, 2006 decreased from 2005 by
approximately $0.4 million  principally as a result of interest earnings in 2006
from the note receivable.

         Included in interest  expense for the year ended  December 31, 2005 was
the $0.8 million 6.5%  mortgage  note payable to First  National Bank dated June
2004,  and the $0.9 million 6.5%  equipment  note payable to First National Bank
dated November 2004 which were  outstanding for the entire year in 2005 compared
to a partial year in 2004; partially offset by the repayment of a remaining $1.4
million due  pursuant to a note payable and a reduction in amounts due to factor
in 2005.

      INCOME TAXES

         The  provision  for income  taxes was $0.1  million  for the year ended
December 31, 2007.  Income tax  provisions  for the year ended December 31, 2007
principally  include income tax provisions  from  operations in China and India;
offset by an income tax benefit from net  operating  loss  carryforward  in Hong
Kong.

         Income tax provisions for the year ended December 31, 2006  principally
include a royalty tax from the Inland Revenue Department in Hong Kong applicable
to 2005,  net of an estimated  tax benefit for 2006  foreign  losses and minimum
federal and state filing fees.


                                       25
<PAGE>


         The  provision  for income  taxes for the year ended  December 31, 2005
principally  reflects the  elimination  of the net deferred tax asset in 2005 of
$1.0 million,  and estimated foreign taxes. Based on the Company's net operating
losses,  there is not  sufficient  evidence to determine  that it is more likely
than not that the Company will be able to utilize its net  operating  loss carry
forwards to offset future taxable income.

LIQUIDITY AND CAPITAL RESOURCES

     The  following  table  summarizes   selected  financial  data  (amounts  in
thousands):

                                                    DECEMBER 31,    DECEMBER 31,
                                                        2007            2006
                                                    ------------    ------------
Cash and cash equivalents .......................   $      2,919    $      2,935
Total assets ....................................         22,094          25,694
Current debt ....................................         10,457          22,471
Non-current debt ................................         12,354           1,536
Stockholders' equity ............................           (717)          1,686


      CASH AND CASH EQUIVALENTS

         Our cash is held with financial institutions.  Substantially all of the
balances  at  December  31,  2007 and 2006 are in  excess of  federally  insured
limits.  As of December 31, 2007 there was no  restricted  cash. At December 31,
2006 we had restricted cash balances of $50,000 related to cash collateral for a
letter of credit with Wells Fargo Bank.

      FINANCING ARRANGEMENTS

         On June 27,  2007,  we entered  into a  Revolving  Credit and Term Loan
Agreement with Bluefin Capital,  LLC that provides for a $5.0 million  revolving
credit loan and a $9.5 million term loan for a three year period ending June 30,
2010. The revolving credit portion of the facility permits borrowings based upon
a  formula  including  75% of  our  eligible  receivables  and  55% of  eligible
inventory,  and  provides for monthly  interest  payments at the prime rate plus
2.0%.  The term loan bears  interest at 8.5%  annually with  quarterly  interest
payments  and  repayment  in full at  maturity.  Borrowings  under  both  credit
facilities  are  secured by all our  assets.  There was  $879,000  in  available
borrowings  at December  31,  2007.  See Note 18 of the  Consolidated  Financial
Statements for an amendment to the borrowing base formula.

         On April 3, 2008,  we  executed  a further  amendment  to the  existing
revolving  credit and term loan  agreement with Bluefin  Capital.  The amendment
provided for an amendment of the EBITDA and other financial  covenants,  and the
redemption  of the stock  warrants  previously  issued  to  Bluefin  Capital  in
exchange for the issuance of an additional  note payable to Bluefin  Capital for
$1.0 million at an interest  rate of 8.5%.  We will record a reduction to equity
and an increase to notes  payable for the fair value of the  warrants  redeemed.
The  difference  between the fair value of the warrants of $221,723 and the face
value of the note  will be  accreted  over the life of the  note.  The note will
incur interest at 8.5% on the principal amount of $1.0 million and the quarterly
accretion will also be reflected as interest  expense.  The additional  note and
all accrued interest under the note are due and payable on June 30, 2010.

         We  financed  building,  land and  equipment  purchases  through  notes
payable  and  capital  lease  obligations  expiring  through  June  2011.  These
obligations  bear interest at rates of 6.5% and 6.6% per annum,  and under these
obligations, we are required to make monthly payments of principal and interest.

         The outstanding  balance of our demand notes payable to related parties
at December 31, 2007 and 2006 was $85,000 and $665,000, respectively. The demand
notes totaling  $85,000 bear interest at various rates between  0%-10%,  have no
scheduled monthly payments, and are due within fifteen days from demand.


                                       26
<PAGE>


      CASH FLOWS

         The  following  table  summarizes  our cash flow activity for the years
ended December 31, 2007, 2006, and 2005 (amounts in thousands):

<TABLE>
<CAPTION>
                                                         2007        2006        2005
                                                       --------    --------    --------
<S>                                                    <C>         <C>         <C>
Net cash provided by operating activities ..........   $  2,137    $  1,794    $  1,112
Net cash used in investing activities ..............       (725)       (345)     (1,454)
Net cash used in financing activities ..............     (1,433)       (791)     (2,841)
Net increase (decrease) in cash and cash equivalents        (16)        657      (3,183)
</TABLE>


     OPERATING ACTIVITIES

         Cash  and  cash  equivalents  for the  year  ended  December  31,  2007
decreased by $0.1 million from December 31, 2006  principally  arising from cash
generated by operating activities,  net of payments on notes payable and capital
leases.

         Cash  provided by  operating  activities  was $2.1 million for the year
ended December 31, 2007. The cash generated by operating  activities during 2007
resulted  primarily  from  reductions  in  accounts  receivable  net of  applied
reserves  of $3.3  million;  $0.6  million in  reductions  in  inventory  net of
reserves  applied;  $0.6  million in  collections  on the note  receivable;  and
increases in accounts  payable of $2.1  million;  net of  reductions  in prepaid
assets and other  assets of  approximately  $0.5  million.  Included  in the net
reserves was the write-off of the Azteca note and  subsequent  payment in shares
as discussed in Note 2 to the Consolidated Financial Statements.

         Cash  and  cash  equivalents  for the  year  ended  December  31,  2006
increased by $0.7 million from December 31, 2005  principally  arising from cash
generated by operating activities,  net of payments on notes payable and capital
leases.

         Cash  provided by  operating  activities  was $1.8 million for the year
ended December 31, 2006. The cash generated by operating  activities during 2006
resulted primarily from net earnings (before non-cash expenses) of approximately
$2.3 million;  reductions in inventory net of applied  reserves of $2.5 million;
$1.0 million in reductions in accounts  receivable net of reserves applied;  and
approximately  $0.6  million  in  collections  on the  note  receivable;  net of
reductions in accounts  payable of $2.6 million;  repayments on notes payable of
$0.9 million and  reductions in other  liabilities,  net of  approximately  $1.2
million. The note receivable  collections are associated with unsettled accounts
receivable  from a former  customer  converted  into a note  receivable in early
2006.  The  repayments  on the notes  payable are  principally  associated  with
previously  accrued legal expenses converted into a note payable in May of 2006.
Payments on the note payable are made from  collections  received  from the note
receivable which is pledged to the note payable.  These notes are  non-recurring
settlements  associated  primarily  with sales and expenses  from 2005 and prior
transactions.

         The net  decrease  in  inventory  of $2.5  million  for the year  ended
December 31, 2006 reflects our efforts to dispose of and lower slower-moving and
obsolete  inventory  components.  The cost of net inventories  eliminated during
2006 was $8.6 million, and reserves applicable to this inventory of $6.1 million
were  applied  to these  dispositions.  Accounts  receivable  for the year ended
December  31, 2006  declined by $2.1  million  primarily as a result of improved
collections and faster turns of accounts  receivable,  and by approximately $0.7
million in accounts  written-off.  Accounts receivable reserves declined by $1.1
million from the write-off of uncollectible  accounts and by approximately  $0.4
million  from  the  collection  of  accounts  reserved  for in prior  years.  In
addition,  during 2006  collections  of accounts  written-off in prior years was
$0.5 million.


                                       27
<PAGE>


         The increase in cash provided by operating  activities  during the year
ended  December 31, 2005 resulted  from,  among other  changes,  a $10.6 million
decrease in accounts  receivable,  including  the  collection  of a $4.5 million
receivable from one customer;  a $3 million increase in accounts payable; a $2.8
million decrease in inventories; a $2.1 million increase in accrued legal costs;
substantially offset by a net loss of $29.5 million.

         At December  31,  2005,  accounts  receivable  from Azteca  Productions
International  ("Azteca"), a significant customer, was approximately $10,968,000
less a reserve of  $7,528,000,  totaling  $3,440,000,  net. In February 2006, we
accepted  a note  agreement  from  Azteca  which  provided  for  total  payments
including  principal  and  interest  of $4.0  million  in  exchange  for the net
outstanding  accounts receivable balance.  The balance of the note receivable at
December 31, 2005 of $3,440,000 reflects a $560,000 charge to discount the note,
using a 10.5%  discount  rate,  to its net present  value.  The Azteca  accounts
receivable,  net at  December  31,  2005 was  reclassified  on the  accompanying
consolidated  balance  sheets to note  receivable  to  reflect  this  subsequent
settlement.

      INVESTING ACTIVITIES

         Net cash used in investing  activities  for the year ended December 31,
2007 and  2006  consisted  of  capital  expenditures  of $0.7  million  and $0.3
million,  respectively,  for leasehold  improvements,  office  equipment for new
employees,  improvements  in our  technology  systems  and a  marketing  website
acquisition.

      FINANCING ACTIVITIES

         Net cash used in financing  activities  for the year ended December 31,
2007 was $1.4 million.  During 2007,  $13.8 million (net of issuance  costs) was
provided by the issuance of common stock and warrants, and by borrowings under a
new debt facility (see Note 7)  designated  to pay off our  previously  existing
convertible  promissory  notes and to  provide  funds  for  future  growth.  The
proceeds  from this debt  facility were used to pay the $12.5 million of secured
convertible  promissory  notes, and $1.0 million was used to pay a related party
note of $0.6 million and associated accrued interest. Approximately $1.2 million
was used  primarily  for the repayment of  borrowings  under capital  leases and
notes payable and $0.5 million in initial  borrowings  under the revolving  note
were repaid.

         Net cash used in financing  activities for the years ended December 31,
2006 and  2005  reflects  the  repayment  of notes  payable  and  capital  lease
obligations.  In 2005 cash  used in  financing  activities  also  included,  the
repayment of borrowings under a bank line of credit partially offset by proceeds
from the exercise of stock options and warrants.

         On June 27,  2007 we  entered  into a  revolving  credit  and term loan
agreement with Bluefin Capital,  LLC that provides for a $5.0 million  revolving
credit loan and a $9.5 million term loan for a three year period ending June 30,
2010. The revolving credit portion of the facility permits borrowings based upon
a  formula  including  75% of  our  eligible  receivables  and  55% of  eligible
inventory,  and  provides for monthly  interest  payments at the prime rate plus
2.0%.  The term loan bears  interest at 8.5%  annually with  quarterly  interest
payments  and  repayment  in full at  maturity.  Borrowings  under  both  credit
facilities  are  secured  by all of our  assets.  Under the terms of the  credit
agreement we are required to meet certain cash flow and coverage  ratios,  among
other  restrictions  including a restriction from declaring or paying a dividend
prior to repayment of all the obligations.  The financial covenants require that
we to  maintain  at the end of each  fiscal  quarter  beginning  June  30,  2008
"EBITDA" (as defined in the Agreement) for the preceding four quarters in excess
of our principal and interest payments for the same four-quarter  period. In the
event that we fail to satisfy the minimum EBITDA requirement for two consecutive
quarters,  the credit  agreement  will be in default  and the full amount of the
notes outstanding will become due. On November 19, 2007 the Company entered into
an agreement with Bluefin Capital,  LLC to modify this financial covenant and to
extend until June 30, 2008 (with a further  extension to March 31, 2009 provided
certain  conditions  are met by June 30  2008)  the  application  of the  EBITDA
covenant  in exchange  for  additional  common  stock of the Company and a price
adjustment to the lenders  outstanding  warrants  issued in connection  with the
loan agreement.  As of December 31, 2008, we had outstanding  borrowings of $9.5
million under the term note, and $3.8 million under the revolving credit note.


                                       28
<PAGE>


         In connection  with the revolving  credit and term loan  agreement,  we
issued  1,500,000 shares of common stock to the lender for $0.001 per share, and
issued  2,100,000  warrants for the purchase of common stock.  The warrants were
exercisable  over a five-year  period and 700,000  warrants were  exercisable at
$0.95 per share;  700,000  warrants  were  exercisable  at $1.05 per share;  and
700,000  warrants were  exercisable at $1.14 per share.  The relative fair value
($2,374,169,  which  includes a  reduction  for  financing  costs) of the equity
issued with this debt facility was allocated to paid-in-capital and reflected as
a debt  discount  to the face value of the term note.  This  discount  was to be
amortized over the term of the note and  recognized as additional  interest cost
as  amortized.  Costs  associated  with the debt  facility  included  debt fees,
commitment fees, registration fees, and legal and professional fees of $486,000.
The costs  allocable to the debt  instruments  are  reflected in other assets as
deferred financing costs and are being amortized over the term of the notes.

         On November 19, 2007, we completed an amendment to the revolving credit
and term loan agreement and issued an additional  250,000 shares of common stock
to the lender for $0.001 per share. The exercisable price for 2,100,000 warrants
issued for the  purchase of common  stock was  amended to an  exercise  price of
$0.75 per share.  The new  relative  fair value  ($2,402,936,  which  includes a
reduction for financing  costs) of the equity issued with this debt facility was
allocated to paid-in-capital  and reflected as a debt discount to the face value
of the term note.  This  discount was to be amortized  over the term of the note
and recognized as additional interest cost as amortized.

         On April 3, 2008,  we  executed  a further  amendment  to the  existing
revolving  credit and term loan  agreement with Bluefin  Capital.  The amendment
provided for an amendment of the EBITDA and other financial  covenants,  and the
redemption  of the stock  warrants  previously  issued  to  Bluefin  Capital  in
exchange for the issuance of an additional  note payable to Bluefin  Capital for
$1.0 million at an interest  rate of 8.5%.  We will record a reduction to equity
and an increase to notes  payable for the fair value of the  warrants  redeemed.
The  difference  between the fair value of the warrants of $221,723 and the face
value of the note  will be  accreted  over the life of the  note.  The note will
incur interest at 8.5% on the principal amount of $1.0 million and the quarterly
accretion will also be reflected as interest  expense.  The additional  note and
all accrued interest under the note are due and payable on June 30, 2010.

         We  believe  that  our  existing  cash and  cash  equivalents,  and our
anticipated cash flows from our operating  activities will be sufficient to fund
our minimum working capital and capital expenditure needs as well as provide for
our scheduled  debt service  requirements  for at least the next twelve  months.
This  conclusion  is based on the belief that our  operating  assets,  strategic
plan,  operating  expectations and operating  expense structure will provide for
sufficient  profitability  from operations  before non-cash  charges to fund our
operating capital requirements and to achieve our debt service requirements, and
that our  existing  cash and cash  equivalents  will be  sufficient  to fund our
expansion and capital requirements.

         We  have  historically   satisfied  our  working  capital  requirements
primarily through cash flows generated from operations. As we continue to expand
globally in response to the industry trend to outsource apparel manufacturing to
offshore  locations,  our  foreign  customers,  some of which are backed by U.S.
brands and retailers,  are increasing.  Our revolving  credit facility  provides
limited financing secured by our accounts receivable,  and our current borrowing
capability  may not provide the level of  financing we need to continue in or to
expand  into  additional   foreign  markets.   We  are  continuing  to  evaluate
non-traditional  financing  of our  foreign  assets and equity  transactions  to
provide capital needed to fund our expansion and operations.

         If we experience  greater than anticipated  reductions in sales, we may
need to raise additional capital, or further reduce the scope of our business in
order to fully  satisfy  our future  short-term  liquidity  requirements.  If we
cannot raise additional  capital or reduce the scope of our business in response
to a substantial decline in sales, we may default on our credit agreement.


                                       29
<PAGE>


         The extent of our future long-term 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  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
trade name, 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,
2007 and the effects such obligations are expected to have on liquidity and cash
flow in future periods:

<TABLE>
<CAPTION>
                                                     Payments Due by Period
                             -------------------------------------------------------------------
                                            Less than        1-3           4-5          After
  Contractual Obligations       Total         1 Year        Years         Years        5 Years
--------------------------   -----------   -----------   -----------   -----------   -----------
<S>                          <C>           <C>           <C>           <C>           <C>
Demand notes payable to
   to related parties (1)    $   213,100   $   213,100   $      --     $      --     $      --
Capital lease obligations    $   561,800   $   363,200   $   198,600   $      --     $      --
Operating leases .........   $ 1,244,700   $   576,600   $   668,100   $      --     $      --
Revolver & Term Note .....   $16,207,100   $ 1,159,700   $15,047,400   $      --     $      --
Other notes payable ......   $ 1,379,000   $   421,700   $   957,300   $      --     $      --
                             -----------   -----------   -----------   -----------   -----------
     Total Obligations ...   $19,605,700   $ 2,734,300   $16,871,400   $      --     $      --
                             ===========   ===========   ===========   ===========   ===========
</TABLE>

----------
(1)      The majority of 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, and include accrued interest
         payable through December 31, 2007.


         At December 31, 2007 and 2006, 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

         For a description of  transactions to which we were or will be a party,
and in which any director,  executive officer, or shareholder of more than 5% of
our  common  stock or any  member of their  immediate  family had or will have a
direct or indirect material  interest,  see Item 13, "Certain  Relationships and
Related Transactions and Director Independence," of this Report.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         The  preparation of financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions for the reporting  period and as of
the financial statement date. 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


                                       30
<PAGE>


the carrying values of assets and liabilities that are not readily apparent from
other sources.  These estimates and assumptions  affect the reported  amounts of
assets  and  liabilities,  the  disclosure  of  contingent  liabilities  and the
reported amounts of revenue and expense.  Actual results could differ from those
estimates.

         Critical  accounting  policies  are  those  that are  important  to the
portrayal of our financial  condition and results,  and which require us to make
difficult,  subjective and/or complex judgments.  Critical  accounting  policies
cover  accounting  matters  that are  inherently  uncertain  because  the future
resolution  of such  matters is  unknown.  We  believe  the  following  critical
accounting policies affect our more significant  judgments and estimates used in
the preparation of our consolidated financial statements:

         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.  During  the  year  ended
                  December  31, 2007,  bad debt  expense was $0.2 million  (with
                  provisions of $0.2 million),  net recoveries were $0.5 million
                  (with  provisions of $0.2 million) for the year ended December
                  31, 2006, and bad debt expense for the year ended December 31,
                  2005  was  $12.5  million.  The bad debt  expense  in 2005 was
                  primarily  associated with specific  receivables from a former
                  customer.  The 2005 accounts with the customer were settled in
                  early  2006  with the  acceptance  of a note  receivable  at a
                  substantial discount and with the full write-off of the second
                  customer  accounts  where  most  all  collection  efforts  had
                  failed.  During 2006 accounts  receivable  delinquencies  were
                  substantially  eliminated  lowering  the risk  for  additional
                  material  write-offs.  The note  receivable  accepted from the
                  former  customer in early 2006 represents a continuing risk of
                  collection and its performance is evaluated each quarter.

         o        Inventories are stated at the lower of cost,  determined using
                  the  first-in,  first-out  basis,  or market value and are all
                  substantially  finished goods. The costs of inventory  include
                  the purchase  price,  inbound  freight and duties,  conversion
                  costs  and  certain  allocated   production   overhead  costs.
                  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.  Inventory
                  reserves  are  recorded  for  damaged,  obsolete,  excess  and
                  slow-moving  inventory.  We  use  estimates  to  record  these
                  reserves.  Slow-moving  inventory  is reviewed by category and
                  may be partially or fully  reserved for  depending on the type
                  of  product  and the  length  of time  the  product  has  been
                  included in inventory.  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 these  adjustments
                  become known.  Market value of inventory is estimated based on
                  the  impact  of  market  trends,  an  evaluation  of  economic
                  conditions  and the value of current  orders  relating  to the
                  future  sales  of  this  type  of  inventory.  Provisions  for
                  reserves for inventory  valuation for the years ended December
                  31,  2007,  2006 and 2005 and 2004,  were $0.1  million,  $0.6
                  million and $2.5  million,  respectively.  The increase in the
                  provision  during 2005 was primarily  related to the remaining
                  inventory we owned at our operations in Mexico. The closure of
                  our  manufacturing  operations and from the exit of operations
                  in Mexico as part of the 2005 restructuring plan substantially
                  eliminates our  acquisition or production of inventory that is
                  not directly associated with a customer's order.  Accordingly,
                  the  risk of  future  inventory  obsolescence  adjustments  is
                  substantially  reduced in 2006.  The  provisions  recorded  in
                  prior  years  are  considered   adequate  to  dispose  of  the
                  remaining inventories without further adjustment.

         o        We record  deferred tax assets arising from  temporary  timing
                  differences between recorded net income and taxable net income
                  when and if we believe that future earnings will be sufficient
                  to realize the tax benefit.  For those jurisdictions where the


                                       31
<PAGE>


                  expiration date of tax benefit carry-forwards or the projected
                  taxable  earnings  indicate that  realization is not likely, a
                  valuation  allowance is provided.  If we determine that we may
                  not realize all 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.  We  believe  that our
                  estimate of deferred tax assets and  determination to record a
                  valuation   allowance   against   such  assets  are   critical
                  accounting  estimates because they are subject to, among other
                  things,  an  estimate  of  future  taxable  income,  which  is
                  susceptible  to change and  dependent  upon events that may or
                  may not occur, and because the impact of recording a valuation
                  allowance  may be  material  to  the  assets  reported  on the
                  balance  sheet  and  results  of  operations.   See  Notes  to
                  consolidated financial statements, Note 12, "Income Taxes".

         o        We record  impairment  charges  when the  carrying  amounts of
                  long-lived  assets  are  determined  not  to  be  recoverable.
                  Impairment is measured by assessing the usefulness of an asset
                  or by  comparing  the  carrying  value of an asset to its fair
                  value. Fair value is typically  determined using quoted market
                  prices,  if available,  or an estimate of undiscounted  future
                  cash flows  expected  to result  from the use of the asset and
                  its eventual  disposition.  The amount of  impairment  loss is
                  calculated  as the excess of the carrying  value over the fair
                  value.  Changes in market  conditions and management  strategy
                  have historically caused us to reassess the carrying amount of
                  our long-lived  assets.  Long-lived  assets are evaluated on a
                  continual basis and impairment adjustments are made based upon
                  management's  valuations.  As part of our  2005  restructuring
                  plan,  certain  long-lived  assets,  primarily  machinery  and
                  equipment,   were   impaired   and   their   values   adjusted
                  accordingly.   The   long-lived   assets  are  planned  to  be
                  re-deployed  through   manufacturing   arrangements  with  our
                  principal  suppliers  in Asia.  The fair value of these assets
                  will  be  affected  by  our  ability  to  secure   appropriate
                  manufacturing  arrangements  and to utilize the  equipment  to
                  meet  future  production  requirements.  If we are  unable  to
                  secure   favorable   arrangements  or  to  secure   sufficient
                  production  through  these  operations  the fair value of this
                  equipment may be impaired.

         o        Sales  are   recognized   when   persuasive   evidence  of  an
                  arrangement exists, product delivery has occurred,  pricing is
                  fixed or determinable,  and collection is reasonably  assured.
                  Sales  resulting  from  customer   buy-back   agreements,   or
                  associated  inventory storage arrangements are recognized upon
                  delivery  of the  products  to the  customer,  the  customer's
                  designated  manufacturer,  or upon notice from the customer to
                  destroy  or  dispose  of  the  goods.  Sales,  provisions  for
                  estimated  sales  returns,  and the cost of products  sold are
                  recorded  at the time title  transfers  to  customers.  Actual
                  product  returns are charged  against  estimated  sales return
                  allowances.

         o        Upon approval of a restructuring plan by management, we record
                  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.  We record
                  restructuring reserves in compliance with SFAS 146 "Accounting
                  for  Costs  Associated  with  Exit  or  Disposal  Activities",
                  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.   We  record   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 us 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.  We review  the  status of  restructuring
                  activities on a quarterly basis and, if  appropriate,  records
                  changes  based  on  updated  estimates.  See  Note  11,  "2005
                  Restructuring Costs".


                                       32
<PAGE>


         o        We are  currently  involved  in various  lawsuits,  claims and
                  inquiries,  most of which  are  routine  to the  nature of the
                  business,  and in accordance with SFAS No. 5,  "Accounting for
                  Contingencies."  We  accrue  estimates  of  the  probable  and
                  estimable  losses  for the  resolution  of these  claims.  The
                  ultimate  resolution  of these  claims could affect our future
                  results of operations for any  particular  quarterly or annual
                  period  should our exposure be materially  different  from our
                  earlier estimates or should  liabilities be incurred that were
                  not previously accrued.

NEW ACCOUNTING PRONOUNCEMENTS

         In September  2006, the Financial  Accounting  Standards Board ("FASB")
issued SFAS No. 157, FAIR VALUE  MEASUREMENTS  ("SFAS 157"),  which defines fair
value, provides a framework for measuring fair value and expands the disclosures
required  for fair  value  measurements.  SFAS  157  applies  to all  accounting
pronouncements that require fair value measurements; it does not require any new
fair value  measurements.  For fiscal years  beginning  after November 15, 2007,
companies  will be  required  to  implement  SFAS 157 for  financial  assets and
liabilities, as well as for any other assets and liabilities that are carried at
fair value on a recurring basis in financial statements.  The FASB did, however,
provide a one-year  deferral for the  implementation  of Statement 157 for other
nonfinancial  assets  and  liabilities.  An  exposure  draft  will be issued for
comment in the near future on this partial deferral.  Accordingly, we will adopt
SFAS 157 for financial assets and liabilities commencing in the first quarter of
2008.  We are  currently  assessing  the  potential  impact  of SFAS  157 on our
consolidated financial statements.

         In February  2007,  the FASB issued SFAS No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL  ASSETS AND LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT
NO. 115 ("SFAS  159") . SFAS 159 permits  entities to choose to measure  certain
financial  assets and  liabilities at fair value.  Unrealized  gains and losses,
arising  subsequent to adoption are reported in earnings.  SFAS 159 is effective
for fiscal years  beginning  after November 15, 2007 and,  accordingly,  we have
adopted SFAS 159 in the first quarter of 2008.  We are  currently  assessing the
impact of SFAS 159 on our consolidated financial statements.

         In December 2007, the SEC issued SAB No. 110, CERTAIN  ASSUMPTIONS USED
IN VALUATION  METHODS - EXPECTED TERM ("SAB 110").  According to SAB 110,  under
certain  circumstances the SEC staff will continue to accept beyond December 31,
2007 the use of the simplified method in developing an estimate of expected term
of share options that possess  certain  characteristics  in accordance with SFAS
123(R) beyond  December 31, 2007.  We have adopted SAB 110 effective  January 1,
2008 and continue to use the  simplified  method in developing the expected term
used for our valuation of stock-based compensation.

         In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations   ("SFAS   141(R)").   SFAS  141(R)   establishes   principles  and
requirements  for how the acquiror of a business (a)  recognizes and measures in
its financial  statements the  identifiable  assets  acquired,  the  liabilities
assumed,  and any  noncontrolling  interest in the acquiree;  (b) recognizes and
measures in its  financial  statements  the  goodwill  acquired in the  business
combination  or a  gain  from  a  bargain  purchase;  and  (c)  determines  what
information to disclose to enable users of the financial  statements to evaluate
the nature and  financial  effects of the business  combination.  SFAS 141(R) is
effective  for  fiscal  years  beginning  on or after  December  15,  2008  and,
accordingly,  we will apply SFAS 141(R) for acquisitions  effected subsequent to
the date of adoption.

       In December 2007, the FASB issued SFAS No. 160, NONCONTROLLING  INTERESTS
IN  CONSOLIDATED  FINANCIAL  STATEMENTS--AN  AMENDMENT  OF  ACCOUNTING  RESEARCH
BULLETIN NO. 51 ("SFAS  160").  SFAS 160  establishes  accounting  and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income  attributable to the parent and to
the  noncontrolling  interest,  changes in a parent's ownership interest and the
valuation of retained  noncontrolling  equity  investments  when a subsidiary is
deconsolidated.  SFAS 160 also establishes disclosure  requirements that clearly
identify and  distinguish  between the interests of the parent and the interests
of the noncontrolling  owners.  SFAS 160 is effective beginning January 1, 2009.
We are currently  assessing the potential impact of SFAS 160 on our consolidated
financial statements.


                                       33
<PAGE>


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.  We are  exposed to
market risk for fluctuations in the foreign currency  exchange rates for certain
product purchases that are denominated in Hong Kong dollars and Chinese Yuan. We
do not intend to purchase  additional  contracts to hedge the exchange  exposure
for future product purchases.  There were no hedging contracts outstanding as of
December 31, 2007. 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  dollars  in  various  bank  accounts  and  we do  not  believe  we  have
significant market risk exposure with regard to our investments. At December 31,
2007,  the  Revolving  Credit Note of $3.8 million was subject to interest  rate
fluctuations.  A one percentage point increase in interest rates would result in
an  annualized  increase to  interest  expense of  approximately  $38,000 on our
variable rate borrowings.


                                       34
<PAGE>


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                TABLE OF CONTENTS
                                                                            PAGE
                                                                            ----

Report of Independent Registered Public Accounting Firm.............          36
Consolidated Balance Sheets.........................................          37
Consolidated Statements of Operations...............................          38
Consolidated Statements of Stockholders' Equity and Convertible
   Redeemable Preferred Stock.......................................          39
Consolidated Statements of Cash Flows...............................          40
Notes to Consolidated Financial Statements..........................          42


                                       35
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Talon International, Inc.
Woodland Hills, California

We have audited the consolidated balance sheets of Talon International, Inc. and
subsidiaries  as of  December  31, 2007 and 2006,  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, 2007. Our audits also included the financial statement schedules of
Talon International,  Inc., listed in Item 15(a). These financial statements and
financial   statement   schedules  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 the standards of the Public  Company
Accounting Oversight Board (United States). 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  provided  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 Talon International,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations  and their cash flows for each of the three years in the period ended
December  31,  2007,  in  conformity  with U.S.  generally  accepted  accounting
principles.  Also, in our opinion,  the related financial  statement  schedules,
when  considered  in relation to the basic  consolidated  financial  statements,
taken as a whole,  present fairly in all material  respects the  information set
forth therein.

We were not engaged to examine management's assertion about the effectiveness of
Talon  International,  Inc.'s  internal  control over financial  reporting as of
December 31, 2007 included in the accompanying  Management's  Report on Internal
Control Over Financial  Reporting and accordingly,  we do not express an opinion
thereon.

As discussed in Note 1 to the consolidated financial statements, the Company has
adopted  the   provisions  of  Statement  of  Financial   Accounting   Standards
Interpretation  No.  48,  "Accounting  for  Uncertainty  in  Income  Taxes  - an
Interpretation of FASB Statement No. 109" on January 1, 2007.


/s/ Singer Lewak Greenbaum & Goldstein LLP
------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 11, 2008


                                       36
<PAGE>


                            TALON INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS


                                                   December 31,    December 31,
                                                       2007            2006
                                                   ------------    ------------

Assets
Current Assets:
   Cash and cash equivalents ...................   $  2,918,858    $  2,934,673
   Marketable Securities available for sale ....      1,040,000            --
   Accounts receivable .........................      3,504,351       4,664,766
   Note receivable .............................           --         1,378,491
   Inventories, net ............................      2,487,427       3,051,220
   Prepaid expenses and other current assets ...        945,566         541,034
                                                   ------------    ------------
Total current assets ...........................     10,896,202      12,570,184

Property and equipment, net ....................      5,210,446       5,623,040
Fixed Assets held for sale .....................        700,000         826,904
Note receivable, less current portion ..........           --         1,420,969
Due from related parties .......................        625,454         675,137
Other intangible assets, net ...................      4,110,751       4,139,625
Other assets ...................................        551,054         437,569
                                                   ------------    ------------
Total assets ...................................   $ 22,093,907    $ 25,693,428
                                                   ============    ============


Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable .............................   $  6,603,929    $  4,006,241
  Accrued legal costs ..........................        498,846         427,917
  Other accrued expenses .......................      2,646,662       3,359,267
  Demand notes payable to related parties ......         85,176         664,970
  Current portion of capital lease obligations .        323,317         432,728
  Current portion of notes payable .............        299,108       1,107,207
  Current portion of secured convertible
     promissory notes ..........................           --        12,472,622
                                                   ------------    ------------
Total current liabilities ......................     10,457,038      22,470,952

Capital lease obligations, less current portion         189,705         474,733
Notes payable, less current portion ............        848,484       1,061,514
Revolver note payable ..........................      3,807,806            --
Term note payable, net of discount of
   $2,075,500 ..................................      7,424,573            --
Other long term liabilities ....................         83,651            --
Total liabilities ..............................     22,811,257      24,007,199
                                                   ------------    ------------

Commitments and contingencies (Note 13)

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, 100,000,000
      shares authorized; 20,291,433 shares
      issued and outstanding at December 31,
      2007; 18,466,433 at December 31, 2006 ....         20,291          18,466
   Additional paid-in capital ..................     54,510,161      51,792,502
   Accumulated deficit .........................    (55,292,246)    (50,124,739)
   Accumulated other comprehensive income-
       foreign currency ........................         44,444            --
                                                   ------------    ------------
Total stockholders' equity (deficit) ...........       (717,350)      1,686,229
                                                   ------------    ------------

Total liabilities and stockholders' equity .....   $ 22,093,907    $ 25,693,428
                                                   ============    ============


                             See accompanying notes.


                                       37
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                               Year Ended      Year Ended      Year Ended
                                              December 31,    December 31,    December 31,
                                                  2007            2006            2005
                                              ------------    ------------    ------------
<S>                                           <C>             <C>             <C>
Net sales .................................   $ 40,529,555    $ 48,825,002    $ 47,331,176
Cost of goods sold ........................     28,422,820      34,356,034      47,070,381
                                              ------------    ------------    ------------
Gross profit ..............................     12,106,735      14,468,968         260,795

Selling expenses ..........................      3,125,634       2,777,772       2,928,659
General and administrative expenses .......     10,877,374      10,872,887      16,098,363
Bad debt expense (recoveries) .............        186,753        (513,347)      5,857,946
Reserve for impairment of note
   receivable .............................      1,087,653            --              --
Restructuring charges .....................           --              --         2,474,281
                                              ------------    ------------    ------------
Total operating expenses ..................     15,277,414      13,137,312      27,359,249

Income(loss) from operations ..............     (3,170,679)      1,331,656     (27,098,454)
Interest expense, net .....................      1,680,079         988,453       1,379,786
                                              ------------    ------------    ------------

Income(loss) before income taxes ..........     (4,850,758)        343,203     (28,478,240)
Provision for income taxes ................         70,949          33,900       1,059,479
                                              ------------    ------------    ------------

Net income (loss) .........................   $ (4,921,707)   $    309,303    $(29,537,719)
                                              ============    ============    ============

Basic income(loss) per share ..............   $      (0.24)   $       0.02    $      (1.62)
                                              ============    ============    ============
Diluted income( loss) per share ...........   $      (0.24)   $       0.02    $      (1.62)
                                              ============    ============    ============


Basic weighted average shares outstanding .     20,155,563      18,377,484      18,225,851
                                              ============    ============    ============
Diluted weighted average shares outstanding     20,155,563      18,955,796      18,225,851
                                              ============    ============    ============
</TABLE>


                             See accompanying notes.


                                       38
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
                     CONVERTIBLE REDEEMABLE PREFERRED STOCK
                  YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005


<CAPTION>
                                                                   Preferred Stock
                                       Common Stock                   Series A
                               ---------------------------  ----------------------------
                                  Shares         Amount         Shares         Amount
                               ------------   ------------   ------------   ------------

<S>                              <C>          <C>                    <C>    <C>
BALANCE, JANUARY 1, 2005 ...     18,171,301   $     18,173           --     $       --
   Common stock issued upon
     exercise of options and
     warrants ..............         69,744             68           --             --
   Net loss ................           --             --                            --
                               ------------   ------------   ------------   ------------
BALANCE, DECEMBER 31, 2005 .     18,241,045         18,241           --             --
   Common stock issued for
     services ..............        225,388            225           --             --
Stock based compensation ...        362,120           --
   Net loss ................           --             --             --             --
                               ------------   ------------   ------------   ------------
BALANCE, DECEMBER 31, 2006 .     18,466,433         18,466           --             --
   Common stock issued upon
     exercise of options ...         75,000             75           --             --
   Common stock warrants
     issued in private
     placement transaction .      1,750,000          1,750           --             --
   Stock based compensation            --             --             --             --
   Other comprehensive
     income-foreign currency
     translation ...........           --             --             --             --
Adoption of Fin 48 .........           --             --             --             --
   Net loss ................           --             --             --             --

BALANCE, DECEMBER 31, 2007 .     20,291,433   $     20,291           --     $       --
                               ============   ============   ============   ============


<CAPTION>
                                Additional       Other          Retained
                                 Paid-In     Comprehensive      Earnings
                                 Capital         Income         (Deficit)        Total
                               ------------   ------------    ------------    ------------

<S>                            <C>            <C>              <C>            <C>
BALANCE, JANUARY 1, 2005 ...   $ 51,073,402   $       --       (20,896,333)   $ 30,195,242
   Common stock issued upon
     exercise of options and
     warrants ..............        254,476           --              --           254,544
   Net loss ................           --             --       (29,537,709)    (29,537,70)
                               ------------   ------------    ------------    ------------
BALANCE, DECEMBER 31, 2005 .     51,327,878           --       (50,434,042)        912,077
   Common stock issued for
     services ..............        102,504           --              --           102,729
Stock based compensation ...                                          --           362,120
   Net loss ................           --             --           309,303         309,303
                               ------------   ------------    ------------    ------------
BALANCE, DECEMBER 31, 2006 .     51,792,502           --       (50,124,739)      1,686,229
   Common stock issued upon
     exercise of options ...         42,671           --              --            42,746
   Common stock warrants
     issued in private
     placement transaction .      2,429,988           --              --         2,431,738
   Stock based compensation         245,000           --              --           245,000
   Other comprehensive
     income-foreign currency
     translation ...........           --           44,444            --            44,444
Adoption of Fin 48 .........           --             --          (245,800)       (245,800)
   Net loss ................           --             --        (4,921,707)     (4,921,707)

BALANCE, DECEMBER 31, 2007 .   $ 54,510,161   $     44,444    $(55,292,246)   $   (717,350)
                               ============   ============    ============    ============
</TABLE>


                              See accompanying note


                                       39
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                   Year Ended      Year Ended      Year Ended
                                                                  December 31,    December 31,    December 31,
                                                                      2007            2006            2005
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) ..........................................   $ (4,921,707)   $    309,303    $(29,537,709)
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization ............................      1,168,434       1,523,225       1,931,990
     Amortization of deferred financing cost and debt discounts        736,042            --              --
     Decrease in deferred income taxes ........................           --              --         1,000,000
     Common stock and warrants issued for services ............           --            32,729            --
     Stock based compensation .................................        245,000         362,120
     Increase(decrease) in allowance for doubtful accounts ....       (935,501)     (1,117,500)      2,630,759
     Increase(decrease) in inventory valuation reserve ........        (68,988)     (6,064,000)        940,973
     Asset impairment .........................................        126,904            --              --
     Asset impairment due to restructuring ....................           --              --         2,343,531
     Impairment of goodwill ...................................           --              --           450,000
     Disposal of assets .......................................         58,076         129,179            --
   Changes in operating assets and liabilities:
     Accounts receivable ......................................      3,258,569       2,086,076      10,666,295
     Note receivable collections ..............................        596,491         640,539            --
     Inventories ..............................................        632,781       8,585,879       2,791,747
     Prepaid expenses and other current assets ................       (404,532)         77,543       1,880,443
     Other assets .............................................       (118,499)       (140,217)        314,998
     Accounts payable .........................................      2,070,784      (2,587,985)      2,986,302
     Accrued legal costs ......................................         70,929        (442,194)      2,113,197
     Other accrued expenses ...................................       (377,565)       (733,767)        671,348
     Repayment of notes payable converted from accounts payable           --          (867,297)           --
     Income taxes payable .....................................           --              (480)        (71,589)
                                                                  ------------    ------------    ------------
   Net cash provided by (used in) operating activities ........      2,137,218       1,793,153       1,112,285
                                                                  ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of equipment ............................           --             2,500            --
   Acquisition of property and equipment ......................       (725,498)       (347,188)     (1,453,848)
                                                                  ------------    ------------    ------------
   Net cash used in investing activities ......................       (725,498)       (344,688)     (1,453,848)
                                                                  ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from secured convertible promissory notes .........           --           254,544
   Proceeds from exercise of stock options and warrants .......           --              --          (614,506)
   Payment of capital lease obligations .......................       (452,232)       (604,351)       (906,765)
   Payments on notes payable ..................................           --          (186,838)     (1,574,975)
   Repayment of notes payable .................................     (1,187,882)           --              --
   Repayment of related party note payable ....................       (579,794)           --              --
   Proceeds from revolver credit facility .....................      4,307,806            --              --
   Proceeds from stock options and warrants ...................         42,746            --              --
   Proceeds from term note ....................................      7,041,852            --              --
   Proceeds from note .........................................        166,753            --              --
   Proceeds from related party note ...........................        125,000            --              --
   Payment of financing term note .............................       (449,840)           --              --
   Proceeds for equity financing, net of offering costs .......      2,463,017            --              --
   Proceeds from cost-equity financing ........................         89,868            --              --
   Repayment of revolver ......................................       (500,000)           --              --
   Repayment of convertible note ..............................    (12,500,000)           --              --
                                                                  ------------    ------------    ------------
   Net cash (used in) provided by financing activities ........     (1,432,706)       (791,189)     (2,841,702)
                                                                  ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents ..........        (20,986)        657,276      (3,183,265)
Net effect of foreign currency exchange translation on cash ...          5,171            --              --
                                                                  ------------    ------------    ------------
Cash and cash equivalents, beginning of year ..................      2,934,673       2,277,397       5,460,662
                                                                  ------------    ------------    ------------
Cash and cash equivalents, end of year ........................   $  2,918,858    $  2,934,673    $  2,277,397
                                                                  ============    ============    ============
</TABLE>


                             See accompanying notes.


                                       40
<PAGE>


<TABLE>
<CAPTION>
TALON INTERNATIONAL, INC.                                           Year Ended      Year Ended      Year Ended
Consolidated Statements of Cash Flows                              December 31,    December 31,    December 31,
                                                                       2007            2006            2005
                                                                   ------------    ------------    ------------
<S>                                                                <C>             <C>             <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash received (paid) during the year for:
     Interest paid .............................................   $ (1,166,333)   $   (975,609)   $ (1,264,539)
     Interest received .........................................   $    182,263    $    320,232    $     42,516
     Income taxes paid .........................................   $    (90,530)   $    (33,900)   $    (64,064)
     Income taxes received .....................................   $       --      $       --      $     39,571
   Non-cash financing activity:
     Capital lease obligation ..................................   $     57,793    $     64,432    $    273,376
     Deferred financing cost ...................................   $    217,302    $       --      $       --
     Effect of foreign currency translation on net assets ......   $     10,728    $       --      $       --
     Accounts receivable, net converted to notes receivable ....   $       --      $       --      $  3,440,000
     Trade payable & accrued legal, converted to notes payable..   $       --      $  1,775,000    $       --
</TABLE>


                             See accompanying notes.


                                       41
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

         Talon  International,  Inc. (the  "Company") is an apparel company that
specializes  in the  distribution  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,  a specified
supplier  of trim  items to owners  of  specific  brands,  brand  licensees  and
retailers,  a manufacturer and distributor of zippers under the TALON brand name
and  a  distributor  of  stretch   waistbands  that  utilize  licensed  patented
technology under the TEKFIT brand name.

ORGANIZATION AND BASIS OF PRESENTATION

         Talon  International,  Inc.  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 (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
January  2000,  the  Company  formed  Tag-It  Pacific   Limited,   a  Hong  Kong
corporation, and in April 2000, the Company formed Talon International,  Inc., a
Delaware  corporation.  During 2006 we formed two wholly owned  subsidiaries  of
Tag-It Pacific,  Inc.; Talon Zipper (Shenzhen)  Company Ltd. in China, and Talon
International  Pvt.  Ltd.,  in India.  All newly  formed  corporations  are 100%
wholly-owned Subsidiaries of Talon International,  Inc. Logistica en Avios, S.A.
de C.V. was an affiliated entity over which the Company exercised  control,  and
as such, is accounted for in the same manner as a wholly-owned subsidiary.

         On July 20, 2007,  the Company  changed its corporate  name from Tag-It
Pacific, Inc. to Talon International, Inc.

         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,  if  material,  and
transaction gains and losses, if any, are recorded in the consolidated statement
of income in the period incurred.  During 2007, 2006 and 2005,  foreign currency
translation and transaction gains and losses were not material. The Company does
not engage in hedging activities with respect to exchange rate risk.

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.


                                       42
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. The Company had
approximately $2.7 million and $2.9 million at financial  institutions in excess
of federally insured limits at December 31, 2007 and 2006.

MARKETABLE SECURITIES

         The portfolio of  marketable  securities is stated at the lower of cost
or market at the balance sheet date and consists of common  stocks.  The Company
accounts for its  investments,  which are all  available  for sales  securities,
under the provisions of Statement of Financial  Accounting  Standards ( "SFAS" )
115, "Accounting for Certain Investments in Debt and Securities". Realized gains
or losses are determined on the specific identification method and are reflected
in income. Unrealized losses are recorded directly in other comprehensive income
except those unrealized losses that are deemed to be other than temporary, which
losses  are  reflected  in  income.  See  Note 2 of the  Consolidated  Financial
Statements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

         We are required to make judgments as to the  collectibility of accounts
receivable based on established aging policy,  historical  experience and future
expectations.  The allowances  for doubtful  accounts  represent  allowances for
customer  trade  accounts  receivable  that are  estimated  to be  partially  or
entirely  uncollectible.  These  allowances  are  used  to  reduce  gross  trade
receivables to their net realizable  value. We record these  allowances based on
estimates related to the following  factors:  (i) customer specific  allowances;
(ii) amounts based upon an aging schedule;  and (iii) an estimated amount, based
on our historical experience,  for issues not yet identified.  See Note 3 of the
Consolidated Financial Statements.

INVENTORIES

         Inventories  are  stated  at the  lower of cost,  determined  using the
first-in,  first-out basis, or market value and are all  substantially  finished
goods.  The costs of inventory  include the purchase price,  inbound freight and
duties,  conversion  costs and  certain  allocated  production  overhead  costs.
Inventory  reserves are recorded for damaged,  obsolete,  excess and slow-moving
inventory.  We use estimates to record these reserves.  Slow-moving inventory is
reviewed by category and may be partially or fully reserved for depending on the
type of  product  and the  length  of time  the  product  has been  included  in
inventory.  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 these  adjustments
become  known.  Market value of  inventory  is estimated  based on the impact of
market  trends,  an evaluation of economic  conditions  and the value of current
orders relating to the future sales of this type of inventory.

         Inventories consist of the following:
                                                      Year Ended December 31,
                                                 -------------------------------
                                                    2007                 2006
                                                 ----------           ----------

Finished goods .......................           $3,506,439           $4,293,220
Less reserves ........................            1,019,012            1,242,000
                                                 ----------           ----------
Total inventories ....................           $2,487,427           $3,051,220
                                                 ==========           ==========


                                       43
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT AND FIXED ASSETS HELD FOR SALE

         Property and equipment are recorded at historical cost. Maintenance and
repairs are  expensed as  incurred.  Upon  retirement  or other  disposition  of
property  and  equipment,  the  related  cost and  accumulated  depreciation  or
amortization  are removed from the accounts and any gains or losses are included
in results of operations.

         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.

         Dies, and molds            3 months to 1 years

         Idle equipment             5 to 10 years


         Property and equipment consist of the following:

                                                       Year Ended December 31,
                                                     ---------------------------
                                                         2007            2006
                                                     -----------     -----------

Furniture and fixtures .........................     $   600,491     $   582,832
Machinery and equipment ........................       1,694,921       1,682,296
Computer equipment .............................       4,137,834       3,422,058
Leasehold improvements .........................         248,129         214,807
Dies, and molds ................................         106,273         106,273
Idle equipment .................................       4,198,880       4,434,980
                                                     -----------     -----------

                                                      10,986,528      10,443,246
Accumulated depreciation and amortization ......       5,776,082       4,820,206
                                                     -----------     -----------

Net property and equipment .....................     $ 5,210,446     $ 5,623,040
                                                     ===========     ===========


         Depreciation  expense for the years ended  December 31, 2007,  2006 and
2005 was $1,136,000, $1,090,000, and $1,499,000, respectively.

         During the year ended  December 31, 2007, the Company  wrote-off  fixed
assets  with a net book of value of  $54,000  related  to scrap  dies and molds.
During the year ended December 31, 2005, the Company wrote-off fixed assets with
a net book value of $2,036,000 in connection with the 2005 restructuring plan.

         Idle  equipment is  principally  machinery and  equipment  used for the
production of zipper chain and the assembly of finished zippers.  This equipment
was originally  associated with the production and assembly  facilities in North
Carolina and in Mexico,  and was  temporarily  rendered idle with the closing of
these  operations in connection  with the 2005  Restructuring  Plan. The Company
intends  to  redeploy  this  equipment  during the next year  within  production
operations being  established in Asia and India.  The equipment  continues to be
depreciated based upon its estimated useful lives.


                                       44
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The Company has evaluated the idle  equipment  for  impairment  and has
determined  that an  impairment  does not exist at December 31, 2007.  If future
events occur that adversely affect the idle equipment the Company will record an
impairment.

         Fixed  assets  held for sale  consists of the North  Carolina  land and
manufacturing  facility.  Management has the authority and has committed to sell
the asset;  the asset is listed for sale with a commercial real estate agent who
is actively  marketing the  property;  the sale of the asset is probable and the
sale  is  expected  to  be  completed  within  one  year.  See  Note  11,  "2005
Restructuring  Plan".  This asset held for sale is financed  by a mortgage  note
with a balance of  $690,000 at December  31, 2007 and  $713,000 at December  31,
2006.

OTHER INTANGIBLE ASSETS

         Intangible  assets  consist of  tradename  and  exclusive  license  and
intellectual property rights.  Intangible assets acquired in a purchase business
combination and determined to have an indefinite  useful life are not amortized,
but instead  tested for  impairment  at least  annually in  accordance  with the
provisions of FASB  Statement  No. 142,  Goodwill and Other  Intangible  Assets.
Intangible   assets  with  estimable  useful  lives  are  amortized  over  their
respective  estimated  useful lives,  which average 5 years,  to their estimated
residual  values,  and reviewed for impairment in accordance with FASB Statement
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

         At December 31, 2007, the Company evaluated its Other Intangible Assets
and determined  that there was no impairment of these assets and made no changes
to the net carrying  amount of Tradename  for the years ended  December 31, 2007
and 2006.  Amortization  expense related to exclusive  license and  intellectual
property  rights of $115,500 were recorded for each of the years ended  December
31, 2006 and 2005.  During the first quarter of 2007, the exclusive  license and
intellectual  property became fully  amortized.  For the year ended December 31,
2007, amortization expense of $29,000 was recorded.

         Other  intangible  assets  as of  December  31,  2007  and  2006 are as
follows:

                                                      Year Ended December 31,
                                                   ----------------------------
                                                       2007             2006
                                                   -----------      -----------

Other Intangible Assets:
  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 ...................        (577,500)        (548,625)
                                                   -----------      -----------
      Exclusive license and intellectual
         property rights, net ................               0           28,875
                                                   -----------      -----------
  Other intangible assets, net ...............     $ 4,110,750      $ 4,139,625
                                                   ===========      ===========


IMPAIRMENT OF LONG-LIVED ASSETS

         We record  impairment  charges when the carrying  amounts of long-lived
assets are determined not to be recoverable. Impairment is measured by assessing
the usefulness of an asset or by comparing the carrying value of an asset to its
fair value.  Fair value is typically  determined using quoted market prices,  if
available,  or an estimate of undiscounted  future cash flows expected to result
from the use of the asset and its eventual disposition. The amount of impairment
loss is  calculated  as the excess of the  carrying  value over the fair  value.
Changes in market conditions and management strategy have historically caused us
to reassess the carrying amount of our long-lived assets.


                                       45
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          During the year ended  December  31,  2007,  the  Company  recorded an
impairment on the building held for sale of $127,000 reducing the carrying value
of the building to $700,000. No impairment was recorded in 2006. During the year
ended  December 31,  2005,  the Company  recorded  asset  impairment  charges in
connection with its 2005 Restructuring Plan (See Note 11).

INCOME TAXES

         Income taxes are accounted  for under the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and tax benefit carry-forwards. Deferred tax liabilities and assets at the
end of each period are determined  using enacted tax rates.  The Company records
deferred tax assets arising from temporary timing  differences  between recorded
net income and taxable net income  when and if we believe  that future  earnings
will be sufficient to realize the tax benefit. For those jurisdictions where the
expiration date of tax benefit  carry-forwards or the projected taxable earnings
indicate that realization is not likely, a valuation allowance is provided.

         The provisions of SFAS No. 109,  "Accounting for Income Taxes," require
the  establishment of a valuation  allowance when, based on currently  available
information and other factors,  it is more likely than not that all or a portion
of a deferred  tax asset will not be  realized.  SFAS No. 109  provides  that an
important factor in determining whether a deferred tax asset will be realized is
whether there has been sufficient income in recent years and whether  sufficient
income is expected in future years in order to utilize the deferred tax asset.

         The Company  believes  that its  estimate  of  deferred  tax assets and
determination to record a valuation  allowance  against such assets are critical
accounting  estimates  because  they are subject  to,  among  other  things,  an
estimate of future taxable income,  which is susceptible to change and dependent
upon  events that may or may not occur,  and  because the impact of  recording a
valuation  allowance may be material to the assets reported on the balance sheet
and results of operations.

         On January 1, 2007 the Company  adopted  the  provisions  of  Financial
Accounting Standard Board  Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes- an  interpretation  of FASB  Statement No. 109" ("FIN 48"). FIN 48
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
enterprise's  financial  statements and  prescribes a recognition  threshold and
measurement process for financial statement recognition and measurement of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on the recognition,  classification, interest and penalties, accounting
in  interim  periods,  disclosure  and  transition  associated  with  income tax
liabilities.

         As a result of the  implementation of FIN 48, the Company recognized an
increase in liabilities for unrecognized tax benefits of approximately $246,000,
which was  accounted  for as an  increase  in the  January  1, 2007  accumulated
deficit.


                                       46
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION

         On  January  1,  2006,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  No. 123 (revised  2004),  "Share-Based  Payment,"  ("SFAS
123(R)") which requires the measurement and recognition of compensation  expense
for all  share-based  payment  awards made to employees and  directors  based on
estimated fair values.  SFAS 123(R) supersedes the Company's previous accounting
under Accounting  Principles Board Opinion No. 25,  "Accounting for Stock Issued
to  Employees"  ("APB 25") for periods  beginning in fiscal 2006. In March 2005,
the Securities and Exchange  Commission issued Staff Accounting Bulletin No. 107
("SAB 107")  relating to SFAS 123(R).  The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R).

         The  Company  adopted  SFAS  123(R)  using  the  modified   prospective
transition method,  which requires the application of the accounting standard as
of January 1, 2006. The Company's  financial  statements as of and for the years
ended  December  31,  2006  and 2007  reflect  the  impact  of SFAS  123(R).  In
accordance  with the  modified  prospective  transition  method,  the  Company's
financial statements for prior periods have not been restated to reflect, and do
not include,  the impact of SFAS 123(R).  There was no stock-based  compensation
expense related to employee or director stock options recognized during the year
ended  December 31, 2005.  Options  issued to  consultants  are accounted for in
accordance  with the provisions of Emerging  Issues Task Force (EITF) No. 96-18,
"Accounting for Equity  Instruments That Are Issued to Others Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."

         As a result of adopting  SFAS 123(R) on January 1, 2006,  the Company's
income before  income taxes and net income for the year ended  December 31, 2007
and 2006 are $245,000 and $395,000, respectively, lower than if it had continued
to account for share-based compensation under APB Opinion 25.

         The following  table  illustrates the effect on net income and loss per
share if the Company had applied the fair value  recognition  provisions of SFAS
123(R) to stock-based  awards granted under the Company's  stock option plans in
all periods presented. For purposes of this pro-forma disclosure, the fair value
of the  options  is  estimated  using  the  Black-Scholes-Merton  option-pricing
formula  ("Black-Scholes  model") and  amortized to expense  generally  over the
options' vesting periods.

                                                                       2005
                                                                   ------------
Net loss as reported .......................................       $(29,537,709)
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 method
     for all awards, net of related tax effects ............           (221,167)
                                                                   ------------

Pro forma net loss .........................................       $(29,758,876)
                                                                   ============

Loss per share:
     Basic - as reported ...................................       $      (1.62)
     Basic - pro forma .....................................       $      (1.63)


                                       47
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         SFAS  123(R)   requires   companies  to  estimate  the  fair  value  of
share-based payment awards to employees and directors on the date of grant using
an  option-pricing  model.  The  value  of the  portion  of the  award  that  is
ultimately  expected to vest is recognized as expense over the requisite service
periods in the Company's  Statements  of  Operations.  Stock-based  compensation
expense  recognized in the Statements of Operations for the years ended December
31, 2006 and 2007 included  compensation  expense for share-based payment awards
granted  prior to,  but not yet vested as of  January 1 of the  applicable  year
based on the grant date fair value  estimated in  accordance  with the pro-forma
provisions of SFAS 123(R) and compensation  expense for the share-based  payment
awards  granted  subsequent  to  January  1 based on the grant  date fair  value
estimated in  accordance  with the  provisions of SFAS 123(R).  For  stock-based
awards issued to employees and directors, stock-based compensation is attributed
to expense using the  straight-line  single option  method,  which is consistent
with how the prior-period pro formas were provided. As stock-based  compensation
expense recognized in the Statements of Operations for 2006 and 2007 is based on
awards expected to vest, SFAS 123(R) requires forfeitures to be estimated at the
time of grant  and  revised,  if  necessary,  in  subsequent  periods  if actual
forfeitures  differ from those estimates.  For the years ended December 31, 2006
and  2007,  expected  forfeitures  are  immaterial  and as such the  Company  is
recognizing  forfeitures as they occur.  In the pro-forma  information  provided
under SFAS  123(R) for the periods  prior to 2006,  the  Company  accounted  for
forfeitures as they occurred.

         Prior  to the  adoption  of SFAS  123(R),  the  Company  accounted  for
stock-based  awards to employees and directors  using the intrinsic value method
in accordance with APB Opinion 25. Under the intrinsic value method, the Company
recognized share-based  compensation equal to the award's intrinsic value at the
time of grant over the requisite service periods using the straight-line method.
Forfeitures  were recognized as incurred.  During the year ended  December,  31,
2005, there was no stock-based compensation expense recognized in the Statements
of Operations  for awards issued to employees and directors as the awards had no
intrinsic  value at the time of grant because their exercise  prices equaled the
fair values of the common stock at the time of grant.

         The Company's determination of fair value of share-based payment awards
to employees  and directors on the date of grant uses the  Black-Scholes  model,
which is affected by the Company's stock price as well as assumptions  regarding
a number of complex and subjective  variables.  These variables include, but are
not limited to, the expected  stock price  volatility  over the expected term of
the awards, and actual and projected  employee stock option exercise  behaviors.
The Company  estimates  expected  volatility using historical data. The expected
option term is estimated using the "safe harbor" provisions under SAB 107.

         The Company has elected to adopt the detailed  method  provided in SFAS
123(R) for calculating the beginning  balance of the additional  paid-in capital
pool  ("APIC  pool")  related  to  the  tax  effects  of  employee   stock-based
compensation,  and to  determine  the  subsequent  impact  on the APIC  pool and
Statements of Cash Flows of the tax effects of employee stock-based compensation
awards that are outstanding upon adoption of SFAS 123(R).

FOREIGN CURRENCY TRANSLATION

         The  Company  has  operations  and  holds  assets  in  various  foreign
countries. The local currency is the functional currency for our subsidiaries in
China and India. Assets and liabilities are translated at end-of-period exchange
rates while revenues and expenses are  translated at the average  exchange rates
in effect during the period.  Equity is  translated at historical  rates and the
resulting  cumulative  translation  adjustments  are  included as a component of
accumulated other comprehensive income (loss) until the translation  adjustments
are realized.


                                       48
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

         Included in  comprehensive  income for the year ended December 31, 2007
are  unrealized  gains in foreign  currency  translation  gain of  $44,000.  The
foreign currency translation  adjustment represents the net currency translation
adjustment gains and losses related to our China and India  subsidiaries,  There
were no material other  comprehensive  income items for the years ended December
31, 2007 and 2006.

REVENUE RECOGNITION

         Sales are recognized when persuasive evidence of an arrangement exists,
product delivery has occurred, pricing is fixed or determinable,  and collection
is reasonably  assured.  Sales resulting from customer buy-back  agreements,  or
associated  inventory  storage  arrangements are recognized upon delivery of the
products to the customer, the customer's designated manufacturer, or upon notice
from the  customer  to destroy or dispose of the goods.  Sales,  provisions  for
estimated sales returns,  and the cost of products sold are recorded at the time
title  transfers  to  customers.  Actual  product  returns are  charged  against
estimated sales return allowances.

         Sales rebates and discounts  are common  practice in the  industries in
which the Company operates. Volume, promotional, price, cash and other discounts
and customer incentives are accounted for as a reduction to gross sales. Rebates
and discounts are recorded  based upon  estimates at the time products are sold.
These  estimates are based upon historical  experience for similar  programs and
products. The Company reviews such rebates and discounts on an ongoing basis and
accruals for rebates and  discounts are  adjusted,  if necessary,  as additional
information becomes available.

RECLASSIFICATION

         Certain  reclassifications  have been made to the prior year  financial
statements to conform to 2007 presentation.

CLASSIFICATION OF EXPENSES

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

         SELLING EXPENSE - Selling expenses  primarily  include royalty expense,
sales salaries and commissions,  travel and  entertainment,  marketing and other
sales-related costs.

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


                                       49
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         INTEREST  EXPENSE AND INTEREST INCOME - Interest  expense  reflects the
cost of borrowing and  amortization  of deferred  financing costs and discounts.
Interest  expense  for the years  ended  December  31,  2007,  2006 and 2005 was
$1,922,000,  $1,357,000  and  $1,446,000,   respectively.   Interest  income  of
$242,000,  $368,000 and $66,000 for the years ended December 31, 2007,  2006 and
2005,  respectively,  consists of earnings from  outstanding  amounts due to the
Company under notes and other interest bearing receivables.

SHIPPING AND HANDLING COSTS

         In accordance  with Emerging  Issues Task Force 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 outbound  freight are recorded as a component
of cost of sales.  Total  shipping and handling costs included as a component of
revenue  for the years  ended  December  31,  2007,  2006 and 2005  amounted  to
$235,000, $146,000, and $98,000, respectively. Total shipping and handling costs
included  as a component  of cost of sales for each of these  years  amounted to
$1,105,000, $691,000, and $925,000.

RESTRUCTURING CHARGES

         The Company records restructuring  reserves in compliance with SFAS 146
"Accounting for Costs Associated with Exit or Disposal Activities", resulting in
the  recognition  of employee  severance  and related  termination  benefits for
recurring  arrangements  as they  are  incurred  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.  See Note 11,
"2005 Restructuring Plan".

LITIGATION

         We are currently  involved in various  lawsuits,  claims and inquiries,
most of which are routine to the nature of the business,  and in accordance with
SFAS No. 5, "Accounting for  Contingencies," we accrue estimates of the probable
and estimable losses for the resolution of these claims. The ultimate resolution
of these claims could affect our future results of operations for any particular
quarterly or annual period should our exposure be materially  different from our
earlier  estimates or should  liabilities  be incurred that were not  previously
accrued.

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:  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. NOTES PAYABLE: Fair value approximates carrying
value based upon current market borrowing rates for loans with similar terms and
maturities.


                                       50
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NEW ACCOUNTING PRONOUNCEMENTS

         In  September   2006,   the  FASB  issued  SFAS  No.  157,  FAIR  VALUE
MEASUREMENTS  ("SFAS 157"),  which defines fair value,  provides a framework for
measuring  fair  value and  expands  the  disclosures  required  for fair  value
measurements.  SFAS 157 applies to all  accounting  pronouncements  that require
fair value  measurements;  it does not require any new fair value  measurements.
For fiscal years beginning  after November 15, 2007,  companies will be required
to implement SFAS 157 for financial assets and  liabilities,  as well as for any
other assets and liabilities that are carried at fair value on a recurring basis
in financial statements.  The FASB did, however, provide a one-year deferral for
the  implementation  of  Statement  157  for  other   nonfinancial   assets  and
liabilities.  An exposure draft will be issued for comment in the near future on
this partial deferral.  Accordingly, we will adopt SFAS 157 for financial assets
and  liabilities  commencing  in the first  quarter  of 2008.  We are  currently
assessing  the  potential  impact  of  SFAS  157 on our  consolidated  financial
statements.

        In February  2007,  the FASB issued SFAS No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL  ASSETS AND LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT
NO. 115 ("SFAS  159") . SFAS 159 permits  entities to choose to measure  certain
financial  assets and  liabilities at fair value.  Unrealized  gains and losses,
arising  subsequent to adoption are reported in earnings.  SFAS 159 is effective
for fiscal years  beginning  after November 15, 2007 and,  accordingly,  we will
adopt SFAS 159 in the first  quarter of 2008.  We are  currently  assessing  the
impact of SFAS 159 on our consolidated financial statements.

         In December 2007, the SEC issued SAB No. 110, CERTAIN  ASSUMPTIONS USED
IN VALUATION  METHODS - EXPECTED TERM ("SAB 110").  According to SAB 110,  under
certain  circumstances the SEC staff will continue to accept beyond December 31,
2007 the use of the simplified method in developing an estimate of expected term
of share options that possess  certain  characteristics  in accordance with SFAS
123(R) beyond December 31, 2007. We will adopt SAB 110 effective January 1, 2008
and continue to use the  simplified  method in developing the expected term used
for our valuation of stock-based compensation.

         In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations   ("SFAS   141(R)").   SFAS  141(R)   establishes   principles  and
requirements  for how the acquiror of a business (a)  recognizes and measures in
its financial  statements the  identifiable  assets  acquired,  the  liabilities
assumed,  and any  noncontrolling  interest in the acquiree;  (b) recognizes and
measures in its  financial  statements  the  goodwill  acquired in the  business
combination  or a  gain  from  a  bargain  purchase;  and  (c)  determines  what
information to disclose to enable users of the financial  statements to evaluate
the nature and  financial  effects of the business  combination.  SFAS 141(R) is
effective  for  fiscal  years  beginning  on or after  December  15,  2008  and,
accordingly,  we will apply SFAS 141(R) for acquisitions  effected subsequent to
the date of adoption.

         In  December  2007,  the  FASB  issued  SFAS  No.  160,  NONCONTROLLING
INTERESTS IN  CONSOLIDATED  FINANCIAL  STATEMENTS--AN  AMENDMENT  OF  ACCOUNTING
RESEARCH  BULLETIN NO. 51 ("SFAS  160").  SFAS 160  establishes  accounting  and
reporting  standards for  ownership  interests in  subsidiaries  held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the  noncontrolling  interest,  changes  in a  parent's  ownership
interest and the valuation of retained  noncontrolling equity investments when a
subsidiary is deconsolidated.  SFAS 160 also establishes disclosure requirements
that clearly  identify and  distinguish  between the interests of the parent and
the  interests of the  noncontrolling  owners.  SFAS 160 is effective  beginning
January 1, 2009. We are currently  assessing the potential impact of SFAS 160 on
our consolidated financial statements.


                                       51
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--MARKETABLE SECURITIES

         On  December  31,  2007,  the  Company  obtained  2,000,000  shares  of
unrestricted  common stock with a value of $1,040,000 in exchange for the Azteca
Note  Receivable  discussed in Note 3. Pursuant to  restrictions  on the sale of
these shares on the open market,  the Company is limited to selling no more than
10,000  shares  per day unless the  Company  sells the shares  through a private
sale.  The portfolio of marketable  securities is stated at the lower of cost or
market at the balance sheet date and consists of common  stocks.  No realized or
unrealized  gains or losses were  recognized  during the year ended December 31,
2007. The value of the common stock on April 10, 2008 had decreased  $340,000 to
$700,000.

NOTE 3--ACCOUNTS AND NOTE RECEIVABLE

         At  December  31,  2006  a  note  receivable  from  Azteca  Productions
International,  Inc. ("Azteca") was outstanding in the amount of $2,799,460. The
note was a receivable to be paid in monthly  installments over thirty-one months
beginning  March 1, 2006.  The  payments  were $50,000 per month for the first 5
months, and then ranged from $133,000-$267,000 per month until paid in full, but
no later than July 1, 2008.

         Azteca failed to make the scheduled  note payments due on July 1, 2007,
and all subsequent periods  thereafter,  triggering a default and exhausting all
cure periods under the note,  resulting in the entire note balance being due and
payable.  On  September  10, 2007 after  meeting with and  conducting  extensive
discussions  with  Azteca,  Azteca  failed to  provide  to the  Company  certain
security  interests  as  required  under  the  note to make the  scheduled  note
payments and Azteca further expressed its belief that it would be unable to make
any note payments in the foreseeable future. As a result, in September 2007, the
Company  reflected  a charge of  $2,127,653  to fully  reserve  the  outstanding
balance from Azteca.  In December 2007, an agreement was reached  whereby Azteca
delivered  shares of common  stock in lieu of the note  receivable.  In December
2007, the Company reversed part of the impairment recorded in September 2007 and
reflected income of $1,040,000.

         Accounts  receivable  are  included  on the  accompanying  consolidated
balance sheet net of an allowance for doubtful accounts. The total allowance for
doubtful  accounts  at  December  31,  2007 and 2006  was  $140,420  and$71,500,
respectively.


                                       52
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4--DEMAND NOTES PAYABLE TO RELATED PARTIES

         Demand notes payable to related parties consist of the following:

                                                                  Year Ended
                                                                 December 31,
                                                             -------------------
                                                               2007       2006
                                                             --------   --------

Two notes payable issued from 1995-1998 to parties
   related to or affiliated with directors of the
   Company with  interest rates ranging from 0% to
   10% per annum, due and payable on the fifteenth day
   following delivery of written demand for payment ......   $ 85,176   $ 85,176

Convertible secured note payable issued in October 2000
   to a director of the Company 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

Unsecured notes payable to a director of the Company
   accrue interest at 7% and 8.5% per annum, principal
   and interest due on demand and fifteen days from demand       --       79,795
                                                             --------   --------

                                                             $ 85,176   $664,971
                                                             ========   ========

         Interest expense related to the demand notes payable to related parties
for the years  ended  December  31,  2007,  2006 and 2005  amounted  to $30,568,
$67,753 and $67,753, respectively.  Included in accrued expenses at December 31,
2007 and 2006 was $127,915 and $515,738 of related  accrued  interest.  Interest
paid on the demand notes during the year ended  December 31, 2007 was  $518,546.
There was no interest  paid on the demand notes  during the year ended  December
31, 2006.

NOTE 5--CAPITAL LEASE OBLIGATIONS

         The Company financed equipment  purchases through various capital lease
obligations  expiring  through March 2010.  These  obligations  bear interest at
various rates ranging from 4.6% to 12% per annum. Future minimum annual payments
under these capital lease obligations are as follows:

YEARS ENDING DECEMBER 31,                                               Amount
                                                                      ---------

2008 ......................................................           $ 363,200
2009 ......................................................             196,222
2010 ......................................................               2,378
2011 ......................................................                --
2012 and thereafter .......................................                --
                                                                      ---------

Total payments ............................................             561,800

Less amount representing interest .........................             (48,778)
                                                                      ---------

Balance at December 31, 2007 ..............................             513,022

Less current portion ......................................             323,317
                                                                      ---------

Long-term portion .........................................           $ 189,705
                                                                      =========


                                       53
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         At December 31, 2007,  total property and equipment under capital lease
obligations and related accumulated  depreciation was $3,533,154 and $1,635,697,
respectively.  At December 31, 2006,  total property and equipment under capital
lease  obligations  and related  accumulated  depreciation  was  $3,533,154  and
$1,178,469, respectively.

NOTE 6--NOTES PAYABLE

         Notes payable consist of the following:

                                                         Year Ended December 31,
                                                         -----------------------
                                                            2007         2006
                                                         ----------   ----------
$765,000 note payable to First National Bank dated
   June 3, 2004; interest at 6.5%; payable in
   eighty-four monthly payments of principal and
   interest of $5,746 beginning July 2004;
   twenty-year amortization, all unpaid principal
   and interest due June 3, 2011 (seven years);
   secured by building in North Carolina .............   $  689,651   $  712,950

$880,000 note payable to First National Bank dated
   November 22, 2004; interest at 6.5%; payable in
   sixty monthly payments of principal and interest
   of $17,254 beginning December 2004; all unpaid
   principal and interest due November 22, 2009;
   secured by manufacturing equipment ................      371,863      548,068

$1,650,000 note payable to Hennigan, Bennett &
   Dorman, LLP dated May 31, 2006; interest at 3.0%;
   payable in fourteen monthly payments of principal
   and interest beginning June 2006, of $50,000 for
   the first two payments, and $133,333 for the
   next twelve months thereafter until July 1, 2007;
   secured by the note receivable ....................         --        907,703

$180,000 note payable to Next Trim, LLC dated
   January 22, 2007; interest at 6.5%; payable in
   twenty-four monthly payments of principal and
   interest beginning January 2007, of $7,500 until
   December 2008 .....................................       86,078         --
                                                         ----------   ----------
      Notes Payable ..................................    1,147,592    2,168,721
      Less Current portion ...........................      299,108    1,107,207
                                                         ----------   ----------

Notes payable, net of current portion ................   $  848,484   $1,061,514
                                                         ==========   ==========


         Future  minimum annual  payments under these notes payable  obligations
are as follows:

YEARS ENDING DECEMBER 31,                                               Amount
                                                                      ----------

2008 ..................................................               $  299,108
2009 ..................................................                  210,218
2010 ..................................................                   28,301
2011 ..................................................                  609,965
2012 and thereafter ...................................                     --
                                                                      ----------

Total .................................................               $1,147,592
                                                                      ==========


                                       54
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7--DEBT FACILITY

         On June 27, 2007 the Company  entered into a Revolving  Credit and Term
Loan  Agreement  with  Bluefin  Capital,  LLC that  provides  for a $5.0 million
revolving  credit  loan and a $9.5  million  term loan for a three  year  period
ending June 30, 2010.  The  revolving  credit  portion of the  facility  permits
borrowings based upon a formula including 75% the Company's eligible receivables
and 55% of eligible inventory, and provides for monthly interest payments at the
prime  rate plus  2.0%.  The term loan  bears  interest  at 8.5%  annually  with
quarterly interest payments and repayment in full at maturity.  Borrowings under
both credit facilities are secured by all of the assets of the Company.

         Under the terms of the credit agreement the Company is required to meet
certain  cash flow and coverage  ratios,  among other  restrictions  including a
restriction  from  declaring or paying a dividend  prior to repayment of all the
obligations.  The financial covenants require the Company to maintain at the end
of each fiscal quarter  "EBITDA" (as defined in the Agreement) for the preceding
four quarters in excess of the Company's principal and interest payments for the
same  four-quarter  period.  In the event that the Company  fails to satisfy the
minimum EBITDA  requirement for two consecutive  quarters,  the credit agreement
will be in default and the full amount of the notes outstanding will become due.
For the period ended  September  30, 2007 the Company  believes that this EBITDA
covenant was  satisfied,  but also informed the lender that the Company may fail
to satisfy the EBITDA  covenant  for the  quarters  ending  December 31, 2007 or
March 31, 2008. The Company  requested the lender to amend the loan agreement to
allow for  additional  time to satisfy the  covenant.  On November  19, 2007 the
Company  entered into an  agreement  with  Bluefin  Capital,  LLC to modify this
financial  covenant and to extend until June 30, 2008 (with a further  extension
to March  31,  2009  provided  certain  conditions  are met by June 30 2008) the
application of the EBITDA  covenant in exchange for  additional  common stock of
the Company and a price adjustment to the lenders outstanding warrants issued in
connection with the loan agreement.

         At  closing  on June 27,  2007,  the  proceeds  of the term loan in the
amount of $9.5 million were deposited into a restricted  cash escrow account and
$3.0 million of the borrowings  available  under the revolving  credit note were
reserved  and  held for  payment  of the  Company's  $12.5  million  convertible
promissory  notes  maturing in November  2007.  During  July 2007  waivers  were
obtained from all holders of the convertible promissory notes allowing for early
payment of their notes without penalty,  and as of July 31, 2007 all of the note
holders had been paid in full. At closing the Company also  borrowed  $1,004,306
under the  revolving  credit note and used the proceeds to pay the related party
note payable and accrued interest due to Mark Dyne, Chairman of the Board of the
Company.  Additionally  initial  borrowings under the revolving credit note were
used to pay the loan and legal fees due at closing. As of September 30, 2007 the
Company had borrowed $9.5 million under the term note, and $3,807,806  under the
revolving credit note.

         In connection with the Revolving  Credit and Term Loan  Agreement,  the
Company  issued  1,500,000  shares of common  stock to the lender for $0.001 per
share,  and issued  2,100,000  warrants  for the purchase of common  stock.  The
warrants  were  exercisable  over a five-year  period and 700,000  warrants were
exercisable at $0.95 per share;  700,000  warrants were exercisable at $1.05 per
share;  and 700,000  warrants were  exercisable at $1.14 per share. The relative
fair value  ($2,374,169,  which includes a reduction for financing costs) issued
with this debt facility was allocated to paid-in-capital and reflected as a debt
discount to the face value of the term note.  This  discount was to be amortized
over  the  term of the  note  and  recognized  as  additional  interest  cost as
amortized.   Costs  associated  with  the  debt  facility  included  debt  fees,
commitment fees, registration fees, and legal and professional fees of $486,000.
The costs  allocable to the debt  instruments  are  reflected in other assets as
deferred financing costs and are being amortized over the term of the notes.


                                       55
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        On November  19,  2007,  the Company  completed an amendment on its debt
facility and issued an additional  250,000  shares of common stock to the lender
for $0.001 per share.  The exercisable  price for 2,100,000  warrants issued for
the  purchase  of common  stock was  amended to an  issuable  price of $0.75 per
share. The new relative fair value  ($2,402,936,  which includes a reduction for
financing  costs) of the equity  issued with this debt facility was allocated to
paid-in-capital  and  reflected as a debt discount to the face value of the term
note. This discount was to be amortized over the term of the note and recognized
as  additional  interest  cost as  amortized.  If the  Company  does  not meet a
requirement  to register the common  shares and  warrants by May 15,  2008,  the
Company will incur a penalty of $1,000 per day up to a maximum of $700,000.

         On April 3, 2008 the Company  executed  an  amendment  to the  existing
revolving  credit and term loan  agreement with Bluefin  Capital.  The amendment
provided for an amendment of the EBITDA and other financial  covenants,  and the
redemption  of the stock  warrants  previously  issued  to  Bluefin  Capital  in
exchange for the issuance of an additional  note payable to Bluefin  Capital for
$1.0 million at an interest rate of 8.5%. The Company will record a reduction to
equity and an  increase  to notes  payable  for the fair  value of the  warrants
redeemed.  The difference between the fair value of the warrants of $221,723 and
the face value of the note will be accreted over the life of the note.  The note
will incur  interest  at 8.5% on the  principal  amount of $1.0  million and the
quarterly  accretion will also be reflected as interest expense.  The additional
note and all  accrued  interest  under the note are due and  payable on June 30,
2010.

         Interest  expense  related  to  the  Revolving  Credit  and  Term  Loan
Agreement for the year ended  December 31, 2007 was  $1,008,520,  which includes
$461,102 in amortization of discounts and deferred financing costs.

NOTE 8--STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK

PREFERRED STOCK

STOCKHOLDER'S RIGHTS PLAN

         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.

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


                                       56
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$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
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.

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,  which was  fully  amortized  by the year  ended
December 31, 2007.  The Company is currently in  litigation  with this  supplier
(See Notes 1 and 13).

NOTE 9--STOCK OPTION INCENTIVE PLAN AND WARRANTS

STOCK OPTION INCENTIVE PLAN

         On July 31, 2007, at the Company's annual meeting of stockholders,  the
2007 Stock Plan was approved  which replaced the 1997 Stock Plan. The 2007 Stock
Plan authorizes up to 2,600,000 shares of common stock for issuance  pursuant to
awards  granted to  individuals  under the plan.  At December 31, 2007 no awards
under the 2007 Stock Plan had been granted.

         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.  The Board of Directors,  who  determines  the recipients and
terms of the awards granted,  administers the 1997 Plan. On July 31, 2006 at the
Company's annual meeting of stockholder's  two amendments to the 1997 Stock Plan
were approved  which (1) increased the maximum  number of shares of common stock
that may be issued pursuant to awards granted under the 1997 Plan from 3,077,500
shares to 6,000,000  shares,  and (2)  increased  the number of shares of common
stock that may be issued pursuant to awards granted to any individual  under the
plan in a single year to 50% of the total number of shares  available  under the
plan.

         The Company believes that such awards better align the interests of its
employees with those of its  shareholders.  Option awards are generally  granted
with an exercise  price equal to the market price of the Company's  stock on the
date of the grant for years prior to 2006,  and for the years ending after 2006,
the average market price of the Company's  stock for the five trading days prior
to the date of the  grant;  those  option  awards  generally  vest over  periods
determined  by the Board from  immediate to 4 years of continuous  service,  and
have 10 year contractual terms.

         The  following  table  summarizes  all options  issued to employees and
directors including those issued outside the plan.


                                       57
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The following table summarizes the activity for the periods:

                                                                       Weighted
                                                                        Average
                                                     Number of         Exercise
EMPLOYEE AND DIRECTOR                                 Shares             Price
                                                    ----------        ----------

Options outstanding - January 1, 2005 .......        1,742,000        $     3.53
     Granted ................................          425,000        $     3.22
     Exercised ..............................           (1,250)       $     3.63
     Canceled ...............................         (332,750)       $     3.50
                                                    ----------        ----------
Options outstanding - December 31, 2005 .....        1,833,000        $     3.46
     Granted ................................        3,471,135        $     0.31
     Canceled ...............................         (301,500)       $     3.56
                                                    ----------        ----------
Options outstanding - December 31, 2006 .....        5,002,635        $     1.41
     Granted ................................           46,600        $     1.02
     Exercised ..............................          (75,000)       $     0.57
     Canceled ...............................         (376,000)       $     0.76
                                                    ----------        ----------
Options outstanding - December 31, 2007 .....        4,598,235        $     1.46
                                                    ==========        ==========


      The Company has also issued certain warrants and options to non-employees.
As of  December  31,  2007,  there  were  warrants  issued to acquire a total of
3,163,813 shares of common stock, outstanding to non-employees.  During 2007 the
Company issued  1,750,000 shares of stock to its lender with a fair market value
of $1,637,500.

         The following table summarizes the activity for the periods:

                                                                       Weighted
                                                                        Average
                                                        Number of      Exercise
NON-EMPLOYEES                                            Shares          Price
                                                       ----------     ----------
Options & warrants outstanding - January 1, 2005 ..     1,578,973     $     4.35
     Granted ......................................          --       $     --
     Exercised ....................................       (68,494)    $     3.65
     Canceled .....................................      (133,332)    $     4.54
                                                       ----------     ----------
Options & warrants outstanding - December 31, 2005      1,377,147     $     4.36
     Granted ......................................        75,000     $     0.57
     Exercised ....................................          --       $     --
     Canceled .....................................      (133,334)    $     4.54
                                                       ----------     ----------
Options & warrants outstanding - December 31, 2006      1,318,813     $     4.13
     Granted ......................................     2,100,000     $     0.75
     Canceled .....................................      (180,000)    $     3.63
                                                       ----------     ----------
Options & warrants outstanding - December 31, 2007      3,238,813     $     2.00
                                                       ==========     ==========


         The Company's determination of fair value of share-based payment awards
to employees and directors on the date of grant uses the Black-Scholes model and
the assumptions noted in the following table for the years ended December 31, as
indicated.  Expected  volatilities are based on the historical volatility of the
Company's stock price and other factors.  These variables  include,  but are not
limited to, the expected  stock price  volatility  over the expected term of the
awards, and actual and projected employee stock option exercise  behaviors.  The
expected option term is estimated using the "safe harbor"  provisions  under SAB


                                       58
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

107. The risk free rate for periods within the contractual life of the option is
based on the U.S. Treasury yield in effect at the time of the grant.

                                                  2007        2006        2005
                                                -------     -------     -------
Expected volatility ........................         64%         65%         64%
Expected term in years .....................    6.1 yrs     6.1 yrs     1.2 yrs
Expected dividends .........................       --          --          --
Risk-free rate .............................        4.8%        4.5%        2.0%


         A summary of the option activity under the 1997 Plan as of December 31,
2007, and changes during the year then ended is as follows:

<TABLE>
<CAPTION>
                                                                      Weighted
                                                        Weighted       Average
                                                         Average      Remaining
                                         Number of      Exercise     Contractual      Intrinsic
EMPLOYEE AND DIRECTOR                     Shares         Price       Life (Years)       Value
                                       ------------   ------------   ------------   ------------
<S>                                       <C>         <C>                    <C>    <C>
Outstanding at December 31, 2007 ...      7,837,048   $       1.74           5.44   $     75,405
Vested and Expected to Vest ........      7,783,316   $       1.75           5.42   $     74,176
Exercisable ........................      6,608,782   $       1.95           4.91   $     53,128
</TABLE>


         The  weighted  average  grant-date  fair  value of  options  granted to
employees and directors  during the years ended  December 31, 2007 and 2006 were
$0.33 and $0.31,  respectively.  The total intrinsic value of options  exercised
during  the year  ended  December  31,  2005 was  $1,700.  There were no options
exercised in 2007 and 2006.

<TABLE>
<CAPTION>
                                                                      Weighted
                                                        Weighted       Average
                                                         Average      Remaining
                                         Number of      Exercise     Contractual      Intrinsic
NON-EMPLOYEE OPTIONS & WARRANTS           Shares         Price       Life (Years)       Value
                                       ------------   ------------   ------------   ------------
<S>                                       <C>         <C>                    <C>    <C>
Outstanding at December 31, 2007 ...      3,163,813   $       1.99            4.5   $     31,638
Vested and Expected to Vest ........      3,163,813   $       1.99            4.5   $     31,638
Exercisable ........................      3,163,813   $       1.99            4.5   $     31,638
</TABLE>


                                       59
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The  weighted  average  grant-date  fair value of options and  warrants
granted to  non-employees  during the years ended December 31, 2007 and 2006 was
$0.75 and $0.57, respectively. There were no grants in 2005. The total intrinsic
value of options and warrants exercised during the years ended December 31, 2007
and 2005 was $21,000 and $91,000, respectively.  There were no options exercised
in 2006.  The fair value of the awards  approximates  the  values  expensed  for
pro-forma purposes for these periods.

         As of December  31,  2007,  there was  $398,000  of total  unrecognized
compensation costs related to non-vested share-based  compensation  arrangements
granted,  including  warrants.  This cost is expected to be recognized  over the
weighted-average  period of 2.0 years.  The total  fair  value of shares  vested
during the years ended December 31, 2007, 2006 and 2005 was $245,000,  $236,000,
and $217,000, respectively.

         When options are exercised, the Company's policy is to issue previously
registered,  unissued  shares of common  stock.  As of December  31,  2006,  the
Company had  2,321,977  unissued  shares of common  stock  available in its 1997
Plan. On July 31, 2007, at the Company's  annual  meeting of  stockholders,  the
2007 Stock Plan was approved,  which authorizes up to 2,600,000 shares of common
stock for issuance pursuant to awards granted to individuals under the plan. The
2007 Plan shares have not yet been registered.

NOTE 10--INCOME (LOSS) PER SHARE

         The following is a reconciliation of the numerators and denominators of
the basic and diluted income (loss) per share computations:

<TABLE>
<CAPTION>
                                    December 31, 2007                             December 31, 2006
                       -------------------------------------------    ------------------------------------------
Years ended:               Loss          Shares        Per Share         Income        Shares        Per Share
                        (Numerator)   (Denominator)      Amount        (Numerator)  (Denominator)      Amount
                       ------------    ------------   ------------    ------------   ------------   ------------
<S>                    <C>               <C>          <C>             <C>              <C>          <C>
Basic income (loss):
    Income (loss)
    available
    to common
    stockholders ...   $ (4,921,707)     20,155,563   $      (0.24)   $    309,303     18,377,484   $       0.02

Effect of dilutive
securities:
    Options ........           --              --             --              --          578,312   $       0.00
    Warrants .......           --              --             --              --             --             --
                       ------------    ------------   ------------    ------------   ------------   ------------
Income (loss)
available to common
stockholders .......   $ (4,921,707)     20,155,563   $      (0.24)   $    309,303     18,955,796   $       0.02
                       ============    ============   ============    ============   ============   ============


<CAPTION>
                                    December 31, 2005
                       -------------------------------------------
Years ended:               Loss          Shares         Per Share
                        (Numerator)   (Denominator)      Amount
                       ------------    ------------   ------------
<S>                    <C>               <C>          <C>
Basic income (loss):
    Income (loss)
    available
    to common
    stockholders ...   $(29,537,709)     18,225,851   $      (1.62)

Effect of dilutive
securities:
    Options ........           --              --             --
    Warrants .......           --              --             --
                       ------------    ------------   ------------
Income (loss)
available to common
stockholders .......   $(29,537,709)     18,225,851   $      (1.62)
                       ============    ============   ============
</TABLE>


         Warrants to purchase  3,163,813 shares of common stock at between $0.75
and $5.06 and options to purchase  4,653,235  shares of common  stock at between
$0.37 and $5.23,  per share were  outstanding  for the year ended  December  31,
2007, but were not included in the computation of diluted loss per share because
the effect of exercise or conversion  would have an antidilutive  effect on loss
per share.

         Warrants to purchase  1,243,813 shares of common stock at between $3.50
and $5.06; options to purchase 1,642,500 shares of common stock at between $1.27
and $5.23;  convertible debt of $12,500,000  convertible at $3.65 per share, and
other  convertible  debt  of  $500,000  convertible  at  $4.50  per  share  were
outstanding  for the year ended  December 31, 2006, but were not included in the
computation  of  diluted  loss per  share  because  the  effect of  exercise  or
conversion would have an antidilutive effect on the income per share.


                                       60
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Warrants to purchase  1,377,147 shares of common stock at between $3.50
and $5.06, options to purchase 1,833,000 shares of common stock at between $0.41
and $5.23,  convertible debt of $12,500,000  convertible at $3.65 per share, and
other  convertible  debt  of  $500,000  convertible  at  $4.50  per  share  were
outstanding  for the year ended  December 31, 2005, but were not included in the
computation  of  diluted  loss per  share  because  the  effect of  exercise  or
conversion would have an antidilutive effect on loss per share.

NOTE 11--2005 RESTRUCTURING PLAN

         In an effort to better  align  the  Company's  organizational  and cost
structures  with its future growth  opportunities,  in August 2005 the Company's
Board  of  Directors  adopted  a  restructuring  plan for the  Company  that was
substantially  completed by December 2005. The plan included  restructuring  the
Company's  global  operations  by  eliminating  redundancies  in its  Hong  Kong
operation,  closing its Mexican  facilities,  converting its Guatemala  facility
from a  manufacturing  site to a  distributor,  and closing  its North  Carolina
manufacturing  facility.  The Company also refocused its sales efforts on higher
margin  products,  which  may have  resulted  in lower net  sales  with  certain
customers.  As a result,  the  Company now  operates  with fewer  employees  and
reduced associated  operating and manufacturing  expenses.  The Company recorded
charges in connection  with its  restructuring  plan in accordance with SFAS No.
146 (As  Amended),  "Accounting  for  Costs  Associated  with  Exit or  Disposal
Activities."  In addition,  the  Company's  restructuring  plan  resulted in the
carrying  value  of  certain  long-lived  assets,  primarily  equipment,   being
impaired.  Accordingly,  in 2005 the Company  recorded a charge to recognize the
impairment of these assets in accordance with SFAS No. 144,  "Accounting for the
Impairment or Disposal of Long-Lived Assets.

         The North Carolina manufacturing facility is a long-lived asset that is
classified as "held for sale" because it meets the criteria  listed in Paragraph
30 of SFAS 144.  Management has committed to sell the asset,  and is listing the
property for sale with a commercial real estate agent.  The Company believes the
sale of the asset is probable  and the sale is expected to be  completed  within
one year. The major components of manufacturing  equipment used in this plant to
manufacture  zippers  are not  classified  as held for sale  since  the  Company
intends to re-deploy this equipment in the  manufacture of TALON zippers through
investment or sale of this equipment to its distributors of TALON zippers.  This
equipment is separately identified as idle equipment as a component of "Property
and  equipment"  which are  included in the  accompanying  consolidated  balance
sheets (See Note 1).

         Restructuring  costs  recorded in 2005 were  $6,371,000.  Restructuring
costs include  $3,447,000  of inventory  write-downs,  restructuring  charges of
$2,474,000  consisting of $2,036,000  for the  impairment of long-lived  assets,
primarily  machinery and equipment,  $170,000 of one-time  employee  termination
benefits and other costs of $268,000,  which were fully paid by the end of 2005.
In  addition,  an  impairment  charge to goodwill in the amount of $450,000  was
recorded.  This goodwill was associated with an acquisition  made to benefit the
Central and South American operations.  Since these operations are being exited,
management  concluded that this goodwill was impaired and should be written off.
These  restructuring  costs  were  recorded  in the  Consolidated  Statement  of
Operations  for the year ended December 31, 2005 in the following line items and
amounts:

         Cost of goods sold .....................       $3,447,000
         Operating expenses:
            General & administrative expenses ...          450,000
            Restructuring charges ...............        2,474,000
                                                        ----------
         Total restructuring costs ..............       $6,371,000
                                                        ==========


                                       61
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12--INCOME TAXES

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

                                              Year Ended December 31,
                                  ----------------------------------------------
                                     2007              2006              2005
                                  ----------        ----------        ----------
Current:
     Federal .............        $     --          $   29,900        $   55,479
     State ...............             4,360             4,000             4,000
     Foreign .............            66,589              --                --
                                  ----------        ----------        ----------
                                      70,949            33,900            59,479
Deferred:
     Federal .............              --                --             850,000
     State ...............              --                --             150,000
                                  ----------        ----------        ----------
                                        --                --           1,000,000
                                  ----------        ----------        ----------
                                  $   70,949        $   33,900        $1,059,479
                                  ==========        ==========        ==========

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

                                                     Year Ended December 31,
                                                  ----------------------------
                                                   2007       2006       2005
                                                  ------     ------     ------
Current:
    Federal statutory rate ....................    (34.0)%     34.0%     (34.0)%
    State taxes net of federal benefit ........      1.6        2.3       (5.8)
    Income earned from foreign subsidiaries ...     54.9       18.7        0.2
    Net operating loss valuation allowance
       adjustments ............................     18.4      (71.7)      43.5
    Change in effective state tax rate ........     (0.1)      22.4       --
    Other .....................................    (39.3)       4.2       (0.2)
                                                  ------     ------     ------
                                                     1.5%       9.9%       3.7%
                                                  ======     ======     ======

         Income (loss) before income taxes is as follows:

                                          Year Ended December 31,
                           ----------------------------------------------------
                               2007                2006                2005
                           ------------        ------------        ------------

Domestic ...........       $(11,827,832)       $ (1,341,475)       $(28,724,518)
Foreign ............          6,977,074           1,684,678             246,288
                           ------------        ------------        ------------

                           $ (4,850,758)       $    343,203        $(28,478,230)
                           ============        ============        ============


                                       62
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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,
                                                 ------------------------------
                                                     2007              2006
                                                 ------------      ------------
Net deferred tax asset:

     Net operating loss carry-forwards .....     $ 20,222,679      $ 19,053,346
     Depreciation and amortization
       (liability) .........................         (899,776)         (551,643)
     Bad debt reserve ......................           42,065            17,961
     Related party interest ................          200,093           189,605
     Inventory reserve .....................          265,200           289,813
     AMT credit carryforward ...............           41,089              --
     Other .................................          332,420           225,656
                                                 ------------      ------------
                                                   20,203,770        19,224,738
     Less:  Valuation Allowance ............      (20,162,681)      (19,224,738)
                                                 ------------      ------------
                                                 $     41,089      $       --
                                                 ============      ============


         On January 1, 2007 the Company  adopted  the  provisions  of  Financial
Accounting Standard Board  Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes- an  interpretation  of FASB  Statement No. 109" ("FIN 48"). FIN 48
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
enterprise's  financial  statements and  prescribes a recognition  threshold and
measurement process for financial statement recognition and measurement of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on the recognition,  classification, interest and penalties, accounting
in  interim  periods,  disclosure  and  transition  associated  with  income tax
liabilities.

         As a result of the  implementation of FIN 48, the Company recognized an
increase in liabilities for unrecognized tax benefits of approximately $246,000,
which was  accounted  for as an  increase  in the  January  1, 2007  accumulated
deficit.

         A reconciliation of the FIN 48 adjustments is as follows:

Balance at Jan 1, 2007 ...........................................      $   --
Increase related to positions on items from prior years ..........       212,000
Decrease related to positions on items from prior years ..........          --
Interest and penalty on items from prior years ...................        34,000
Increase related to 2007 .........................................        12,000
                                                                        --------
Total ............................................................      $258,000
                                                                        ========


         At December 31, 2007 and 2006,  Talon  International,  Inc. had Federal
and state net operating loss  carry-forwards (or "NOLs") of approximately  $55.9
million and $53.6 million,  respectively. The Federal NOL is available to offset
future taxable  income through 2025, and the state NOL expires in 2015.  Section
382 of the Internal Revenue Code places a limitation on the realizability of net
operating  losses in future  periods if the ownership of the Company has changed
more than 50% within a three-year  period.  As of December 31, 2007, 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.


                                       63
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Income taxes are accounted  for under the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and tax benefit carry-forwards. Deferred tax liabilities and assets at the
end of each period are determined  using enacted tax rates.  The Company records
deferred tax assets arising from temporary timing  differences  between recorded
net income and taxable net income when and if it believes  that future  earnings
will be sufficient to realize the tax benefit. For those jurisdictions where the
expiration date of tax benefit  carry-forwards or the projected taxable earnings
indicate that realization is not likely, a valuation allowance is provided.

         The provisions of SFAS No. 109,  "Accounting for Income Taxes," require
the  establishment of a valuation  allowance when, based on currently  available
information and other factors,  it is more likely than not that all or a portion
of a deferred  tax asset will not be  realized.  SFAS No. 109  provides  that an
important factor in determining whether a deferred tax asset will be realized is
whether there has been sufficient income in recent years and whether  sufficient
income is expected in future years in order to utilize the deferred tax asset.

         In 2007, the Company  determined,  based upon its cumulative  operating
losses,  that it was more  likely than not that it would not be in a position to
fully  realize all of its deferred tax assets in future years with the exception
of the alternative  minimum tax credit  carryforward of $41,089.  In 2006 and in
prior years, the Company determined, based upon its cumulative operating losses,
that it was more  likely  than not that it would not be in a  position  to fully
realize all of its deferred tax assets in future years. Accordingly, at December
31,  2007 and 2006 the  Company  has  recorded a  valuation  allowance  of $20.2
million and $19.2 million, respectively; which reduces the carrying value of its
net  deferred  tax  assets.  For the year ended  December  31,  2006 the Company
recorded  operating  income and various rate and tax timing  differences and the
value of its net deferred tax assets  declined by $2.2 million.  Accordingly,  a
corresponding  reduction in the valuation allowance was made, which retained the
carrying  value of the  Company's net deferred tax assets at $0. During 2005 the
Company  incurred  additional  operating losses which resulted in an increase in
the  Company's  net deferred tax assets by $11.5  million.  Accordingly,  it was
determined that the valuation  allowance from 2004 be increased by $12.5 million
to $21.4  million,  which  reduced the  carrying  value of its net  deferred tax
assets to $0 at December 31, 2005.

         The Company intends to maintain a valuation  allowance for its deferred
tax assets until sufficient evidence exists to support the reversal or reduction
of the allowance.  At the end of each period, the Company will review supporting
evidence,  including the performance  against sales and income  projections,  to
determine if a release of the  valuation  allowance is  warranted.  If in future
periods it is  determined  that it is more likely than not that the Company will
be able to recognize  all or a greater  portion of its deferred tax assets,  the
Company will at that time reverse or reduce the valuation allowance.

         The Company  believes  that its  estimate  of  deferred  tax assets and
determination to record a valuation  allowance  against such assets are critical
accounting  estimates  because  they are subject  to,  among  other  things,  an
estimate of future taxable income,  which is susceptible to change and dependent
upon  events that may or may not occur,  and  because the impact of  recording a
valuation  allowance may be material to the assets reported on its balance sheet
and results of operations.

         The Company has not provided  withholding of U.S.  federal income taxes
on  undistributed  earnings  of its  foreign  subsidiaries  because  the Company
intends to reinvest those earnings  indefinitely  or any taxes on these earnings
will be offset by the  approximate  credits  for foreign  taxes paid.  It is not
practical to determine the U.S.  federal tax  liability,  if any, which would be
payable if such  earnings were not invested  indefinitely.  At December 31, 2007
and 2006,  undistributed  earnings from our foreign subsidiaries were $6,286,000
and $4,581,000, respectively.


                                       64
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13--COMMITMENTS AND CONTINGENCIES

OPERATING 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 2011.  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  at  December  31,  2007 are as
follows:

         Years Ending December 31,                             Amount
----------------------------------------------------         ----------

         2008 ......................................         $  576,611
         2009 ......................................            412,139
         2010 ......................................            240,527
         2011 ......................................             15,468
                                                             ----------
            Total minimum payments .................         $1,244,745
                                                             ==========

         Total rental  expense for the years ended  December 31, 2007,  2006 and
2005 aggregated $591,312, $640,864, and $750,536, respectively.

PROFIT SHARING PLAN

         In October 1999, the Company  established a 401(k)  profit-sharing plan
for the benefit of eligible employees. The Company may make annual contributions
to the plan as determined by the Board of Directors. Total contributions for the
years ended December 31, 2007, 2006 and 2005 amounted to $25,494,  $22,276,  and
$16,807, respectively.

CONTINGENCIES

         On December 26, 2007, the Company  elected to voluntarily  withdraw the
listing of its common  stock from trading on the American  Stock  Exchange.  The
common  stock began  trading on the OTC  Bulletin  Board  (OTCBB)  under the new
symbol TALN.OB.

         On October 12, 2005, a shareholder  class action  complaint -- HUBERMAN
V.TAG-IT  PACIFIC,  INC., ET al., Case No.  CV05-7352 R(Ex) -- was filed against
the Company and certain of its current and former  officers and directors in the
United States  District Court for the Central  District of California,  alleging
claims  under  Section  10(b) and Section 20 of the  Securities  Exchange Act of
1934. A lead plaintiff was  appointed,  and his amended  complaint  alleged that
defendants made false and misleading  statements  about the Company's  financial
situation and its relationship  with certain of its large customers.  The action
was  brought  on  behalf  of all  purchasers  of the  Company's  publicly-traded
securities  during the period  from  November  13, 2003 to August 12,  2005.  On
February 20, 2007,  the Court denied class  certification.  On April 2, 2007 the
Court granted defendants' motion for summary judgment,  and on or about April 5,
2007, the Court entered  judgment in favor of all defendants.  On or about April
30, 2007,  plaintiff filed a notice of appeal,  and his opening  appellate brief
was filed on October 15,  2007.  The  Company's  brief was filed on November 28,
2007.  The Company  believes  that this matter  will be  resolved  favorably  on
appeal,  or in a later trial or in settlement within the limits of its insurance
coverage.  However,  the outcomes of this action or an estimate of the potential


                                       65
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

losses,  if any, related to the lawsuit cannot be reasonably  predicted,  and an
adverse  resolution of the lawsuit  could  potentially  have a material  adverse
effect on the Company's financial position and results of operations.

         On April 16, 2004 we 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) -- asserting  various
contractual and tort claims relating to our exclusive  license and  intellectual
property agreement with Pro-Fit,  seeking declaratory relief,  injunctive relief
and damages.  It is our position  that the  agreement  with Pro-Fit gives us the
exclusive  rights in certain  geographic  areas to  Pro-Fit's  stretch and rigid
waistband  technology.  On June 5, 2006 the Court  denied our motion for partial
summary  judgment,  but did not find that we breached our agreement with Pro-Fit
and a trial is  required  to  determine  issues  concerning  our  activities  in
Columbia and whether other actions by Pro-Fit  constituted an  unwillingness  or
inability to fill orders. The Court also held that Pro-Fit was not "unwilling or
unable" to fulfill  orders by refusing to fill orders with goods produced in the
United States.  The action is still pending in the United States District Court.
The action is presently  stayed pending  resolution or trial of an earlier filed
action  between  Pro-Fit  Holdings  and their  attorneys  who have sued  Pro-Fit
Holdings and have obtained a judgment. In the past, we had derived a significant
amount of revenue from the sale of products  incorporating the stretch waistband
technology and our business, results of operations and financial condition could
be materially  adversely affected if the 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  currently has pending a number of other claims,  suits and
complaints  that  arise in the  ordinary  course of our  business.  The  Company
believes 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 the Company's  consolidated financial
condition if adversely determined against the Company.

         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


                                       66
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 14--SEGMENT REPORTING AND 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 justify  segmented  reporting  by
product type. The Company believes that revenue by each major product class is a
valuable  business  measurement.  The net revenues for the three primary product
groups are as follows:

                                               Year Ended December 31,
                                     -------------------------------------------
                                         2007            2006            2005
                                     -----------     -----------     -----------
Product Group Net Revenue:
     Talon zipper ..............     $21,159,595     $17,005,203     $13,593,479
     Trim ......................      18,688,698      22,502,947      24,788,397
     Tekfit ....................         681,262       9,316,852       8,949,300
                                     -----------     -----------     -----------
                                     $40,529,555     $48,825,002     $47,331,176
                                     ===========     ===========     ===========


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

                                                Year Ended December 31,
                                     -------------------------------------------
                                         2007            2006            2005
                                     -----------     -----------     -----------
Sales:
     United States .............     $ 3,692,468     $ 4,223,052     $ 7,052,196
     Hong Kong .................      14,178,421      13,650,419       7,901,079
     Dominican Republic ........         700,868       8,966,828         150,793
     China .....................      11,159,726       6,063,416       7,091,034
     India .....................       2,187,684       1,205,486         809,972
     Bangladesh ................       1,924,943       2,070,349         798,699
     Mexico ....................         783,762       2,476,313      12,945,861
     Other .....................       5,901,683      10,169,139      10,581,542
                                     -----------     -----------     -----------
Total ..........................     $40,529,555     $48,825,002     $47,331,176
                                     ===========     ===========     ===========
Long-lived Assets:
     United States .............     $ 8,778,381     $ 9,529,932     $ 9,797,111
     Hong Kong .................         556,864         336,149         222,467
     Dominican Republic ........         558,198         667,238         776,279
     Mexico ....................           1,072           5,198          23,754
     China .....................         109,770          49,488           2,633
     Other .....................          16,912           3,315           1,120

                                     -----------     -----------     -----------
Total ..........................     $10,021,197     $10,591,320     $10,823,364
                                     ===========     ===========     ===========


                                       67
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15--MAJOR CUSTOMERS AND VENDORS

         For the year ended  December  31, 2007,  the  Company's  three  largest
customers  represented  approximately 9% of consolidated net sales. For the year
ended  December 31, 2006,  no single  customer  represented  more than 9% of the
Company's  consolidated net sales; however the Company's three largest customers
represented  approximately  18% of  consolidated  net sales.  For the year ended
December 31, 2005, no single customer  represented more than 10% of consolidated
net  sales;   however,   the  Company's  three  largest  customers   represented
approximately 22% of consolidated net sales.

         Three  vendors,  each  representing  more  than  10% of  the  Company's
purchases,  accounted for approximately  50% of the Company's  purchases for the
year ended December 31, 2007. One vendor accounted for  substantially all of the
Company's  purchases  associated  with its  Tekfit  product  for the year  ended
December  31, 2007.  One major vendor  accounted  for  substantially  all of the
Company's  purchases  associated  with its  Tekfit  product  for the year  ended
December 31, 2006 and represented 24% of the Company's  overall  purchases;  and
three  vendors,  each  representing  more than 10% of the  Company's  purchases,
accounted for  approximately  45% of the Company's  purchases for the year ended
December  31,  2006.  Three  vendors  accounted  for  approximately  39%  of the
Company's purchases for the year ended December 31, 2005

         Included in accounts  payable and accrued expenses at December 31, 2007
and 2006 is $2,239,000 and  $2,682,000 due to these vendors.  Terms are sight to
60 days.

NOTE 16--RELATED PARTY TRANSACTIONS

         Prior to 2004 the  Company  operated an apparel  trim supply  agreement
with  Tarrant  Apparel  Group.  Two  of  Tarrant's   directors  and  significant
shareholders  are  also  shareholders  of  the  Company.   In  2004,   following
negotiations  with  Tarrant  Apparel  Group,  the  Company   determined  that  a
significant   portion  of  the   obligations   due  from  this   customer   were
uncollectible.  Accordingly, included in general and administrative expenses for
2004 are charges of $4.3 million  related  primarily to the  write-down  of this
receivable and leaving a remaining balance receivable from this customer of $4.5
million at December  31, 2004.  An  affiliate  of the  customer  repaid the $4.5
million  receivable  balance over the period from May through December 2005. The
Company  terminated its supply  relationship  with Tarrant in 2004;  however the
Company  continues to conduct  business with Tarrant on a limited  basis.  Total
sales to Tarrant  for the years  ended  December  31,  2007,  2006 and 2005 were
$143,000, $3,000, and $574,000,  respectively. As of December 31, 2005, accounts
receivable,  related party included  $0.05 million due from Tarrant.  No amounts
were due from Tarrant at December 31, 2007 and 2006.

         Colin  Dyne,  a  director  and  stockholder  of the  Company  is also a
director, officer and significant shareholder in People's Liberation,  Inc., the
parent company of Versatile Entertainment, Inc. During 2007 and 2006 the Company
had sales of $241,000 and $147,000,  respectively,  to Versatile  Entertainment.
Accounts  receivable  of $44,000 and $83,400  were  outstanding  from  Versatile
Entertainment at December 31, 2007 and 2006, respectively.

         Due from  related  parties  at  December  31,  2007  and 2006  includes
$625,454 and $675,137,  respectively,  of unsecured notes,  advances and accrued
interest  receivable  from Colin Dyne.  The notes and advances  bear interest at
7.5% and are due on demand.  During 2007 certain  notes  payable due to Mr. Dyne
were offset against and used to satisfy notes receivable from Mr. Dyne.


                                       68
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Demand notes payable to related parties  includes notes and advances to
Mark Dyne,  the  Chairman of the Board of Directors of the Company or to parties
related to or affiliated  with Mark Dyne. The balance of Demand notes payable to
related  parties  at  December  31,  2007  and  2006 was  $85,176  and  664,971,
respectively.  See Note 4 for further  discussion  of these  notes,  and related
accrued interest and interest expense.

         Jonathan Burstein, a former director of the Company, purchases products
from the  Company  through  an  entity  operated  by his  spouse.  For the years
December  31,  2007 and 2006,  sales to this  entity  were  $88,491  and $7,342,
respectively.  At  December  31,  2007 and 2006,  accounts  receivable  included
$28,657 and $2,223, respectively, due from this entity. On October 25, 2007, Mr.
Burstein resigned as a director of the Company.

         Consulting fees of $291,000 were paid for services provided by Jonathan
Burstein for the year ended December 31, 2007. During the fourth quarter of 2007
the Company  decided to terminate the consulting  agreements of Mr. Burstein and
another  consultant.  In  accordance  with SFAS No.  146,  ACCOUNTING  FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("SFAS 146"), the Company calculated
the fair value of monthly  compensation  of the two  contracts  and  recorded an
accrual of $538,000 at December 31, 2007 to reflect the liability for consulting
costs that would continue to be incurred under their remaining terms.

         Consulting  fees paid to  Diversified  Investments,  a company owned by
Mark Dyne,  amounted to $150,000 for each of the years ended  December 31, 2007,
2006 and 2005.

         Consulting  fees of  $304,000  and  $335,000  were  paid  for  services
provided  by Colin  Dyne,  for the  years  ended  December  31,  2007 and  2006,
respectively.

         Brent Cohen and Raymond  Musci,  both members of the Board of Directors
were paid for services  provided  during the year ended December 31, 2005 in the
amount of $24,000, and $21,000, respectively.

NOTE 17--QUARTERLY RESULTS (UNAUDITED)

         Quarterly  results for the years ended  December  31, 2007 and 2006 are
reflected below:

<TABLE>
<CAPTION>
                                           4TH             3RD             2ND            1ST
                                      ------------    ------------    ------------   ------------
<S>                                   <C>             <C>             <C>            <C>
2007
----
Revenue ...........................   $  8,859,322    $  9,013,135    $ 13,566,981   $  9,090,117
Gross profit ......................   $  2,858,913    $  2,526,476    $  4,017,731   $  2,703,615
Operating income (loss) ...........   $   (379,737)   $ (3,055,289)   $    878,009   $   (613,662)
Net Income(loss) ..................   $   (935,025)   $ (3,681,831)   $    490,493   $   (795,344)
Basic income (loss) per share .....   $      (0.05)   $      (0.18)   $       0.03   $      (0.04)
Diluted income (loss) per share ...   $      (0.05)   $      (0.18)   $       0.02   $      (0.04)

2006
----
Revenue ...........................   $ 10,573,755    $ 13,366,944    $ 14,246,087   $ 10,638,216
Gross profit ......................   $  3,350,600    $  4,148,406    $  4,127,237   $  2,842,725
Operating income (loss) ...........   $    248,177    $    630,273    $    895,281   $   (442,275)
Net Income(loss) ..................   $     44,950    $    339,115    $    654,643   $   (729,404)
Basic and diluted income (loss) per
   per share ......................   $       0.00    $       0.02    $       0.04   $      (0.04)
</TABLE>


                                       69
<PAGE>


                            TALON INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         During  2007  and  2006,  the  Company  had  no  material   unusual  or
infrequently  occurring  items or adjustments  that were  recognized  during the
years.

         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.

NOTE 18 - SUBSEQUENT EVENTS

         As noted in Note 2 - Marketable  Securities,  the Company  finalized an
arrangement  between  the Company and Azteca  Production  International,  Inc. a
former  distributor of Talon products on December 31, 2007. The agreement called
for Azteca to deliver 2 million  shares of common stock in a related  company in
exchange  for  cancellation  of an  outstanding  note  from  Azteca  that was in
default. On January 16, 2008, Azteca delivered  restricted shares to the Company
which the Company  returned.  On January 30, 2008, the Company was notified that
unrestricted  shares had been  delivered  by Azteca and that the  Company  could
begin  trading  these shares  selling no more than 2 thousand  shares a day. The
stock price on January  30, 2008 was used to value the shares.  The value of the
common stock on April 10, 2008 had decreased $340,000 to $700,000.

         Effective  January 15, 2008,  Wouter van Biene resigned his position as
the  Company's  Chief  Operating  Officer.  In  connection  with Mr. van Biene's
resignation and in exchange for a full release of claims against the Company, we
have agreed to pay Mr. van Biene  twelve  months of his current  base salary and
provide him twelve  months of  continued  coverage  under our group health plan.
Approximately $0.3 million in severance costs were recognized in January 2008.

         Effective  February 4, 2008, Stephen Forte resigned his position as the
Company's Chief Executive  Officer and as a member of the Board of Directors and
from all positions  with the  Company's  subsidiaries.  In  connection  with Mr.
Forte's resignation,  on February 4, 2008, the Company entered into a Separation
Agreement with Mr. Forte.  The  Separation  Agreement  further  provides for the
payment to Mr. Forte of the same severance benefits he would have received under
his  employment  agreement had the Company  terminated  Mr.  Forte's  employment
without cause. In exchange for his severance,  Mr. Forte has released all claims
against  the  Company.  Approximately  $0.4  million  in  severance  costs  were
recognized in January 2008.

         Also effective  February 4, 2008,  Lonnie D. Schnell,  Chief  Financial
Officer, was appointed Chief Executive Officer to replace Mr. Forte.

         On March 27, 2008 Larry Dyne was appointed  Executive Vice President of
Global Sales and David Hunter was appointed Vice President, Corporate Controller
and Principal Accounting Officer.

         On April 3, 2008 the Company  executed  an  amendment  to the  existing
revolving  credit and term loan  agreement with Bluefin  Capital.  The amendment
provided for an amendment of the EBITDA and other financial  covenants,  and the
redemption  of the stock  warrants  previously  issued  to  Bluefin  Capital  in
exchange for the issuance of an additional  note payable to Bluefin  Capital for
$1.0 million at an interest rate of 8.5%. The Company will record a reduction to
equity and an  increase  to notes  payable  for the fair  value of the  warrants
redeemed.  The difference between the fair value of the warrants of $221,723 and
the face value of the note will be accreted over the life of the note.  The note
will incur  interest  at 8.5% on the  principal  amount of $1.0  million and the
quarterly  accretion will also be reflected as interest expense.  The additional
note and all  accrued  interest  under the note are due and  payable on June 30,
2010. The Company's  borrowing  base was also modified  increasing the allowable
portion of  inventory  held by third party  vendors to $1.0 million with no more
than  $500,000  held at any one  vendor  and by  increasing  the  percentage  of
accounts receivable to be included in the borrowing base 75% to 85%.


                                       70
<PAGE>


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

         None.


ITEM 9A(T).   CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

         We maintain  disclosure  controls and  procedures  that are designed to
ensure that  information  required  to be  disclosed  in our  reports  under the
Securities  Exchange Act of 1934,  as amended,  or the Exchange Act is recorded,
processed,  summarized  and reported,  within the time periods  specified in the
Securities  Exchange  Commission's  rules and forms,  including  to ensure  that
information  required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is accumulated  and  communicated  to our  management,
including our principal executive and principal  financial officers,  or persons
performing similar functions, as appropriate to allow timely decisions regarding
required  disclosure as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act.

         As of the end of the period  covered by this report,  management,  with
the participation of Stephen P. Forte, our former principal  executive  officer,
and  Lonnie  D.  Schnell,  our  principal  financial  officer,  carried  out  an
evaluation of the  effectiveness  of the design and operation of our  disclosure
controls and procedures  (as defined in Rule 13a-15(e)  under the Exchange Act).
Based upon that  evaluation,  Mr.  Forte and Mr.  Schnell  concluded  that these
disclosure  controls and  procedures  were effective as of the end of the period
covered in this Annual Report on Form 10-K.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         Management is responsible for  establishing  and  maintaining  adequate
internal control over financial  reporting for the Company. In order to evaluate
the effectiveness of internal control over financial  reporting,  as required by
Section 404 of the Sarbanes-Oxley Act, the Company's management has conducted an
assessment,  including  testing,  using  the  criteria  in  INTERNAL  CONTROL  -
INTEGRATED FRAMEWORK, issued by the Committee of Sponsoring Organizations of the
Treadway  Commission  (COSO).  Our system of  internal  control  over  financial
reporting is designed to provide reasonable  assurance regarding the reliability
of financial reporting and the preparation of financial  statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent  limitations,  internal  control over  financial  reporting may not
prevent or detect  misstatements.  Further,  projections  of any  evaluation  of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may  deteriorate.  Based on its assessment,  our
management has concluded that control over financial  reporting was effective as
of December 31, 2007.

         This  annual  report  does not  include  an  attestation  report of our
registered  public  accounting  firm regarding  internal  control over financial
reporting.  Management's report was not subject to attestation by our registered
public  accounting  firm  pursuant  to  temporary  rules of the  Securities  and
Exchange  Commission that permit the company to provide only management's report
in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         No change in our internal control over financial  reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the
fourth  quarter of our fiscal year ended  December 31, 2007 that has  materially
affected,  or is reasonably  likely to materially  affect,  our internal control
over financial reporting.


                                       71
<PAGE>


ITEM 9B.      OTHER INFORMATION

         None.


                                    PART III

ITEM 10.      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

         The  following  table sets forth the name,  age and position of each of
our executive officers and directors as of March 17, 2008.

NAME                         AGE       POSITION
----                         ---       --------
Mark  Dyne (1).........       47       Chairman of the Board of Directors
Colin Dyne (1).........       45       Vice Chairman of the Board of Directors
Brent Cohen............       49       Director
Joseph Miller..........       44       Director
Raymond Musci .........       47       Director
William Sweedler.......       41       Director
Lonnie D. Schnell......       58       Chief Executive Officer & Chief Financial
                                         Officer
Larry Dyne.............       35       Executive Vice President, Sales
David A. Hunter........       42       Vice President, Corporate Controller

----------
(1) Colin Dyne and Mark Dyne are brothers.


CLASS II DIRECTORS: TERMS EXPIRING IN 2008

         There are currently three vacancies among the Class II Directors.

CLASS III DIRECTORS: TERMS EXPIRING IN 2009

MARK DYNE                  Mr.  Dyne has  served  as  Chairman  of the  Board of
                           Directors  since 1997. Mr. Dyne  currently  serves as
                           the Chief Executive  Officer and the Managing Partner
                           of Europlay Capital Advisors, LLC, a merchant banking
                           and  advisory  firm.  Mr. Dyne  previously  served as
                           Chairman and Chief  Executive  Officer of Sega Gaming
                           Technology Inc. (USA), a gaming company, and Chairman
                           and Chief  Executive  Officer  of Virgin  Interactive
                           Entertainment   Ltd.,  a   distributor   of  computer
                           software  programs  and video  games based in London,
                           England.  Mr.  Dyne was a  founder  and  director  of
                           Packard Bell NEC Australia  Pty. Ltd., a manufacturer
                           and  distributor  of personal  computers  through the
                           Australian  mass  merchant  channel,  and  he  was  a
                           founder and former director of Sega Ozisoft Pty Ltd.,
                           a leading  distributor of  entertainment  software in
                           both Australia and New Zealand.

                           MEMBER: NOMINATING AND GOVERNANCE COMMITTEES


                                       72
<PAGE>


COLIN DYNE                 Currently,  Mr. Dyne  serves as Vice  Chairman of the
                           Board of Directors.  Mr. Dyne founded  Tag-It,  Inc.,
                           one of our  subsidiaries,  in 1991  with his  father,
                           Harold Dyne.  Mr. Dyne served as our  President  from
                           inception  and as our Chief  Executive  Officer  from
                           1997 to 2005.  Before founding Tag-It,  Inc. in 1991,
                           Mr.  Dyne  worked in  numerous  positions  within the
                           stationery  products  industry,  including owning and
                           operating retail stationery  businesses and servicing
                           the  larger  commercial   products  industry  through
                           contract stationery and printing operations.

RAYMOND MUSCI              Ray Musci has  served as a  Director  of the  Company
                           since June 2005.  Mr.  Musci serves as a Director and
                           President  of MPLC,  Inc.  (OTCBB:MPNC)  , a publicly
                           traded   company   that   develops,   publishes   and
                           distributes   mobile   entertainment   services   and
                           products.  From October 1999 to June 2005,  Mr. Musci
                           served as the President and Chief  Executive  Officer
                           and  a  director  of  BAM!  Entertainment,   Inc.,  a
                           publicly traded company that develops,  publishes and
                           distributes entertainment software products and video
                           games.  Mr. Musci  currently  serves as a director of
                           Brilliant  Digital  Entertainment,  Inc.,  a publicly
                           traded  corporation  (OTCBB:  BDEI). From May 1990 to
                           July 1999, Mr. Musci served as the  President,  Chief
                           Executive  Officer  and as a director  of  Infogrames
                           Entertainment,   Inc.  (formerly  Ocean  of  America,
                           Inc.),  a  company  that   develops,   publishes  and
                           distributes   software   products.   Mr.  Musci  also
                           previously    served   as   a   director   of   Ocean
                           International,  Ltd., the holding company of Ocean of
                           America,  Inc.  and  Ocean  Software,  Ltd.,  and  as
                           Executive Vice President/General Manager of Data East
                           USA,  Inc.,  a  subsidiary  of  Data  East  Corp.,  a
                           Japanese company.

                           MEMBER: AUDIT AND COMPENSATION COMMITTEES

CLASS I DIRECTORS: TERMS EXPIRING IN 2007

JOSEPH MILLER              Mr. Miller has served on the Board of Directors since
                           June  2005.  Since  2003,  he  has  been  a  Managing
                           Director  of  Europlay  Capital   Advisors,   LLC,  a
                           merchant  banking  and  advisory  firm.  From 1998 to
                           2003,  Mr.  Miller  was a Senior  Vice  President  at
                           Houlihan    Lokey   Howard   &   Zukin,   a   leading
                           middle-market investment bank. From 1994 to 1998, Mr.
                           Miller  served  as  the  Vice  President,   Corporate
                           Development for Alliance Communications  Corporation,
                           Canada's leading independent producer and distributor
                           of filmed  entertainment.  Mr. Miller has  bachelor's
                           degree in Economics and Business from the  University
                           of California, Los Angeles

                           MEMBER: AUDIT COMMITTEE

BRENT COHEN                Mr. Cohen has served on the Board of Directors  since
                           1998. Mr. Cohen has served as Chief Executive Officer
                           and a director of Dovebid Inc. since August 2005. Mr.
                           Cohen  served  as  President  and was a member of the
                           Board of  Directors  of First  Advantage  Corporation
                           (formed by the merger of US Search and First American
                           Financial  screening  companies)  from  June  2003 to
                           2005.  Mr.  Cohen  served as  Chairman  of the Board,
                           President  and Chief  Executive  Officer of US Search
                           from  February  2000  until  June  2003.   Mr.  Cohen
                           previously held various management  positions in both
                           the management  consulting  and auditing  practice of
                           Arthur Young & Company (now Ernst & Young). Mr. Cohen
                           holds a  Bachelor  of  Commerce  degree,  a  Graduate
                           Diploma in Accounting  and an MBA from the University


                                       73
<PAGE>


                           of Cape Town in South Africa.  He is also a chartered
                           accountant.

                           MEMBER:   COMPENSATION,   NOMINATING  AND  GOVERNANCE
                           COMMITTEES

WILLIAM SWEEDLER           Mr.  Sweedler  has  served on the Board of  Directors
                           since  2006.  He  is  presently  Chairman  &  CEO  of
                           Windsong   Allegiance   Group,  a  diversified  brand
                           management and operating  company that specializes in
                           the   acquisition,    development,   licensing,   and
                           comprehensive creative management of consumer branded
                           intellectual  property. The company owns and licenses
                           the brands,  Como Sport,  Calvin  Klein Golf,  Joseph
                           Abboud Golf, and PRX. Mr. Sweedler  previously served
                           as  President  & CEO of Joe  Boxer,  a  wholly  owned
                           division of the Iconix Brand Group (NASDAQ:  ICON) of
                           which he was Executive  Vice  President and member of
                           the  Board of  Directors  during  2005 to June  2006.
                           Prior to Mr. Sweedler  joining Iconix Brand Group, he
                           was CEO & President  of Windsong  Allegiance  Apparel
                           Group from 2001 to 2005. The company owned,  managed,
                           and  licensed  the brands Joe  Boxer,  Hathaway,  New
                           Frontier,  Pivot Rules,  Alexander  Julian,  Geoffrey
                           Beene, Ron Chereskin,  and Hawaiian Tropic.  In 1995,
                           Mr.  Sweedler  co-founded,  Windsong,  Inc.,  a  full
                           service  apparel  operating  and  marketing  company.
                           Prior to  Windsong,  he worked as a Regional  Account
                           Manager  at Polo  Ralph  Lauren.  He  graduated  from
                           Babson  College with a B.S. in Finance &  Investments
                           in 1988. He has served as a public director at Iconix
                           Brand  Group and Bank of Westport as well as numerous
                           private organizations.

                           MEMBER: AUDIT AND COMPENSATION COMMITTEES

OTHER EXECUTIVE OFFICERS
LONNIE D. SCHNELL          Mr. Schnell joined the Company in January 2006 as our
                           Chief Financial  Officer,  and was appointed as Chief
                           Executive  Officer  in  February  2008.  Mr.  Schnell
                           served as Vice  President  of  Finance  for  Capstone
                           Turbine Corporation,  a manufacturer of micro-turbine
                           electric  generators  from 2004 until 2005. From 2002
                           to 2004 Mr. Schnell served as Chief Financial Officer
                           of EMSource, LLC, an electronic manufacturing service
                           company.  Prior to  EMSource,  in 2002,  Mr.  Schnell
                           served as Chief Financial  Officer of Vintage Capital
                           Group, a private equity  investment  firm.  From 1999
                           through 2002, Mr.  Schnell served as Chief  Financial
                           Officer  of  Need2Buy,  Inc.  a  business-to-business
                           internet marketplace for electronic  components.  Mr.
                           Schnell has  completed an executive  MBA program with
                           the  Stanford  University  Executive  Institute,  and
                           earned  his  Bachelor  of Science  in  Accounting  at
                           Christian  Brothers  University.  Mr.  Schnell  is  a
                           Certified  Public  Accountant  with experience in the
                           international accounting firm of Ernst & Young LLP.

LARRY DYNE                 Larry Dyne was appointed  Executive Vice President of
                           Sales in  February  2008.  He has been an employee of
                           our  company  since  1992,   and  was  formerly  vice
                           president of product development and global sourcing,
                           as well  as vice  president  of trim  sales.  Through
                           these positions,  Mr. Dyne has established  extensive
                           and  long-term  relationships  with the  world's  top
                           brands and clothing  retailers.  He was also formerly
                           responsible for domestic production for all printing.


                                       74
<PAGE>


DAVID A. HUNTER            David Hunter was appointed Vice President,  Corporate
                           Controller (and as our principal  accounting officer)
                           in February 2008. Mr. Hunter has extensive experience
                           in both  public  and  private  accounting  and joined
                           Talon in December 2007 as the  Corporate  Controller.
                           Prior  to  Talon,   he  served  as  the  director  of
                           accounting  and  financial  reporting for Walt Disney
                           Studios.  Before  Disney,  he served as a manager  of
                           accounting and analysis at WellPoint's  Blue Cross of
                           California division in its individual and small group
                           practice  before  joining  its  financial  operations
                           practice.  He is a certified  public  accountant with
                           experience in the  international  accounting  firm of
                           Deloitte & Touche  LLP,  where he served as a manager
                           in the  audit  and  assurance  practice.  Mr.  Hunter
                           earned  his  Bachelor  of Science  in  Accounting  at
                           California Lutheran University.

AUDIT COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT

         We currently  have a separately  designated  standing  Audit  Committee
established  in  accordance  with Section  3(a)(58)(A)  of the Exchange Act. The
Audit Committee  currently consists of Raymond Musci,  Joseph Miller and William
Sweedler.  The Board of Directors  has further  determined  that Mr. Musci is an
"audit  committee  financial  expert" as such term is defined in Item  401(h) of
Regulation S-K promulgated by the SEC.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  our
executive  officers,  directors,  and persons who own more than ten percent of a
registered  class of our equity  securities  to file  reports of  ownership  and
changes in ownership  with the  Securities  and Exchange  Commission.  Executive
officers,  directors and  greater-than-ten  percent stockholders are required by
Securities and Exchange  Commission  regulations to furnish the Company with all
Section  16(a) forms they file.  Based solely on our review of the copies of the
forms received by us and written  representations from certain reporting persons
that they have complied with the relevant filing requirements,  we believe that,
during  the  year  ended  December  31,  2007,  all of our  executive  officers,
directors and greater-than-ten  percent  shareholders  complied with all Section
16(a) filing  requirements,  except for the following:  (i) three  Statements of
Changes in Beneficial  Ownership on Form 4,  reporting nine  transactions,  were
filed late by Colin Dyne;  (ii) one Annual  Statement  of Changes in  Beneficial
Ownership on Form 5,  reporting  five  transactions,  was filed late by Jonathan
Burstein;  and (iii) one Statement of Change in Beneficial  Ownership on Form 4,
reporting two transactions, was filed late by Bluefin Capital LLC.

CODE OF ETHICS

         We have adopted a Code of Ethical Conduct that applies to our principal
executive officer,  principal financial officer, principal accounting officer or
controller,  or persons performing  similar  functions,  as well as to our other
employees and  directors  generally.  A copy of our Code of Ethical  Conduct was
filed as an exhibit to our Annual Report on Form 10-K.



                                       75
<PAGE>


ITEM 11.      EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

         Talon   International   Inc.'s   executive   compensation   program  is
administered  by the  Compensation  Committee  of our  Board  of  Directors,  or
referred to in this section as the  "Committee."  The  Committee is  responsible
for,  among other  functions:  (1) reviewing and approving  corporate  goals and
objectives relevant to the Chief Executive Officer's compensation and evaluating
the performance of the Chief Executive Officer in light of these corporate goals
and  objectives;  (2)  reviewing  and  making  recommendations  to the  Board of
Directors with respect to the  compensation  of other  executive  officers;  (3)
administering our  incentive-compensation  and equity based plans,  which may be
subject  to the  approval  of the  Board  of  Directors;  and  (4)  negotiating,
reviewing and  recommending  the annual salary,  bonus,  stock options and other
benefits, direct and indirect, of the Chief Executive Officer, and other current
and former  executive  officers.  The Committee also has the authority to select
and/or retain outside  counsel,  compensation and benefits  consultants,  or any
other  consultants  to provide  independent  advice and assistance in connection
with the execution of its responsibilities.

         Our named executive officers for 2007 were as follows:

         o        Stephen P. Forte,  former Chief Executive Officer (resigned as
                  of February 4, 2008);

         o        Wouter van Biene,  former Chief Operating Officer (resigned as
                  of January 15, 2008); and

         o        Lonnie  D.  Schnell,  Chief  Financial  Officer  (named  Chief
                  Executive Officer as of February 4, 2008)

COMPENSATION PHILOSOPHY

         Our  executive  compensation  program  is  designed  to  drive  company
performance to maximize  shareholder value while meeting our needs and the needs
of our employees.  The specific objectives of our executive compensation program
include the following:

         o        ALIGNMENT  -  to  align  the  interests  of   executives   and
                  shareholders through equity-based compensation awards;

         o        RETENTION - to attract,  retain and motivate highly qualified,
                  high  performing  executives to lead our continued  growth and
                  success; and

         o        PERFORMANCE - to provide rewards commensurate with performance
                  by emphasizing  variable  compensation  that is dependant upon
                  the executive's achievements and company performance.

         In  order  to  achieve  these   specific   objectives,   our  executive
compensation program is guided by the following core principles:

         o        Rewards under  incentive  plans are based upon our  short-term
                  and longer-term  financial results and increasing  shareholder
                  value;

         o        Senior executive pay is set at sufficiently competitive levels
                  to attract,  retain and motivate highly  talented  individuals
                  who are necessary for us to achieve our goals,  objectives and
                  overall financial success;


                                       76
<PAGE>


         o        Compensation  of an  executive  is based on such  individual's
                  role,  responsibilities,  performance and  experience,  taking
                  into  account  the  desired  pay   relationships   within  the
                  executive team; and

         o        Our executive compensation program places a strong emphasis on
                  performance-based    variable    pay   to    ensure   a   high
                  pay-for-performance culture. Annual performance of our company
                  and the executive are taken into account in determining annual
                  bonuses that ensures a high pay-for-performance culture.

COMPENSATION ELEMENTS

         We  compensate  senior  executives  through  a variety  of  components,
including base salary,  annual incentives,  equity incentives,  and benefits and
perquisites,  in order to  provide  our  employees  with a  competitive  overall
compensation  package.  The mix and value of these  components are impacted by a
variety of factors,  such as responsibility level,  individual  negotiations and
performance and market practice.  The purpose and key  characteristics  for each
component are described below.

     BASE SALARY

         Base salary  provides  executives  with a steady  income  stream and is
based  upon the  executive's  level of  responsibility,  experience,  individual
performance and contributions to our overall success. Competitive base salaries,
in conjunction with other pay components, enable us to attract and retain highly
talented  executives.  The Committee typically sets base salaries for our senior
executives at market levels.  However, base salaries will vary in practice based
upon an individual's performance, individual experience and negotiations and for
changes in job responsibilities.

     ANNUAL INCENTIVE BONUSES

         Annual incentive bonuses are a variable performance-based  component of
compensation.  The primary  objective of an annual  incentive bonus is to reward
executives  for  achieving  corporate  and  individual  goals  and  to  align  a
meaningful  portion  of total pay  opportunities  for  executives  and other key
employees to the attainment of our company's performance goals. Annual incentive
awards are also used as a means to recognize the  contribution  of our executive
officers to overall financial, operational and strategic success.

     EQUITY INCENTIVES

         Equity   incentives   are  intended  to  align  senior   executive  and
shareholder  interests  by  linking a  meaningful  portion of  executive  pay to
long-term  shareholder  value  creation and financial  success over a multi-year
period.  Equity  incentives  are also provided to our  executives to attract and
enhance the  retention of  executives  and other key employees and to facilitate
stock  ownership  by  our  senior  executives.   The  Committee  also  considers
individual  and  company   performance  when  determining   long-term  incentive
opportunities.

     HEALTH & WELFARE AND 401-K BENEFITS

         The named  executive  officers  participate in a variety of retirement,
health and welfare,  and paid time-off benefits designed to enable us to attract
and retain our  workforce in a competitive  marketplace.  Health and welfare and
paid  time-off  benefits  help  ensure  that we have a  productive  and  focused
workforce.


                                       77
<PAGE>


     SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS

         We do not have a formal plan for  severance or  separation  pay for our
employees,  but we typically  include a severance  provision  in the  employment
agreements  of  our  executive  officers  that  is  triggered  in the  event  of
involuntary termination without cause or in the event of a change in control.

         In  order  to  preserve  the  morale  and  productivity  and  encourage
retention  of our key  executives  in the face of the  disruptive  impact  of an
actual or rumored change in control, we provide a bridge to future employment in
the event that an executive's  job is eliminated as a consequence of a change in
control. This provision is intended to align executive and shareholder interests
by enabling  executives to consider corporate  transactions that are in the best
interests of the shareholders and other constituents  without undue concern over
whether the  transactions  may jeopardize the executive's  own  employment.  Our
employment  agreements with our current named executive  officers provide a lump
sum payment and benefits continuation as a result of an involuntary  termination
without cause or for good reason following a change in control, plus accelerated
vesting of stock or option awards.

     OTHER BENEFITS

         In order to attract and retain highly qualified executives,  we provide
some of our named executive officers,  including our former CEO, with automobile
allowances  that we believe are consistent  with current market  practices.  Our
executives  also  may  participate  in  a  401(k)  plan  under  which  we  match
contributions  for all employees up to 100% of an employee's  contributions to a
maximum of $1,000 and subject to any limitations imposed by ERISA.

OTHER FACTORS AFFECTING COMPENSATION

     ACCOUNTING AND TAX CONSIDERATIONS

         We consider the accounting implications of all aspects of our executive
compensation program. Our executive  compensation program is designed to achieve
the most favorable  accounting (and tax) treatment  possible as long as doing so
does not conflict with the intended plan design or program objectives.

PROCESS FOR SETTING EXECUTIVE COMPENSATION

         When  making  pay  determinations  for named  executive  officers,  the
Committee  considers a variety of factors  including,  among others:  (1) actual
company  performance as compared to  pre-established  goals, (2) overall company
performance  and size  relative  to industry  peers,  (3)  individual  executive
performance  and expected  contribution  to our future  success,  (4) changes in
economic  conditions and the external  marketplace  and (5) in the case of named
executive  officers,  other than Chief Executive Officer,  the recommendation of
our Chief Executive  Officer.  Ultimately,  the Committee uses its judgment when
determining how much to pay our executive officers. The Committee evaluates each
named executive officer's performance during the year against established goals,
leadership   qualities,   business   responsibilities,    current   compensation
arrangements and long-term  potential to enhance shareholder value. The opinions
of outside  consultants  are also  taken into  consideration  in  deciding  what
salary,  bonus,  long-term  incentives  and other benefits and severance to give
each  executive in order to meet our  objectives  stated  above.  The  Committee
considers,  compensation  information from data gathered from annual reports and
proxy  statements  from  companies  that  the  Committee   generally   considers
comparable to our Company;  compensation of other Company employees for internal
pay equity  purposes;  and  levels of other  executive  compensation  plans from
compensation  surveys.  The  Committee  sets  the pay for  the  named  executive
officers and other executives,  by element and in the aggregate,  at levels that
it  believes  are  competitive  and  necessary  to attract  and retain  talented
executives capable of achieving the Company's long-term objectives.


                                       78
<PAGE>


     FACTORS CONSIDERED

         In  administering  the  compensation  program  for  senior  executives,
including named executive officers, the Committee considers the following:

         o        CASH  VERSUS  NON-CASH  COMPENSATION.  The  pay  elements  are
                  cash-based except for the long-term  incentive program,  which
                  is equity-based.  In 2007, the long-term incentive program for
                  the named executive  officers consisted entirely of previously
                  granted   stock   grants  and  option   awards  that  vest  in
                  installments  over a one to four year  period from the date of
                  grant;

         o        PRIOR YEAR'S  COMPENSATION.  The committee considers the prior
                  year's bonuses and long-term  incentive  awards when approving
                  bonus payouts or equity grants;

         o        ADJUSTMENTS  TO  COMPENSATION.  On an  annual  basis,  and  in
                  connection with setting executive  compensation  packages, the
                  Committee reviews our operating income growth, earnings before
                  interest and taxes  growth,  earnings per share  growth,  cash
                  flow  growth,  operating  margin,  revenue  growth,  and total
                  shareholder  return  performance.  In addition,  the Committee
                  considers peer group pay practices, emerging market trends and
                  other  factors.  No  specific  weighing  is  assigned to these
                  factors  nor are  particular  targets  set for any  particular
                  factor.   Total  compensation  from  year  to  year  can  vary
                  significantly  based  on our  and the  individual  executive's
                  performance.   The  base  compensation  of  our  former  Chief
                  Executive   Officer  during  2007  was  $325,000  annually  in
                  accordance with the provisions in his employment contract.

         o        APPLICATION  OF  DISCRETION.  It is our policy and practice to
                  use discretion in  determining  the  appropriate  compensation
                  levels considering performance.

REPORT OF COMPENSATION COMMITTEE

         The Compensation  Committee of our Board of Directors consists of Brent
Cohen,  Raymond  Musci and  William  Sweedler.  The  Compensation  Committee  is
responsible for considering and making recommendations to the Board of Directors
regarding  executive  compensation  and is  responsible  for  administering  the
Company's stock option and executive incentive compensation plans.

         The  Compensation  Committee has reviewed and discussed with management
the Compensation  Discussion and Analysis included in this report.  Based on the
review and discussion with management, the Compensation Committee recommended to
the Board of Directors that the Compensation Discussion and Analysis be included
in the Company's Annual Report on Form 10-K.

         COMPENSATION COMMITTEE
         Brent Cohen
         Raymond Musci
         William Sweedler

         April 11, 2008


                                       79
<PAGE>


EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The  following  table sets forth,  as to each  person  serving as Chief
Executive  Officer and Chief  Financial  Officer during 2007, and the one highly
compensated  executive  officer other than the Chief Executive Officer and Chief
Financial Officer who were serving as executive  officers at the end of the 2007
whose   compensation   exceeded  $100,000   (referred  to  as  "named  executive
officers"), information concerning all compensation earned for services to us in
all capacities for 2007.


<TABLE>
<CAPTION>
                                                                             NON-EQUITY
                                                                             INCENTIVE
                                                         STOCK     OPTION       PLAN        ALL OTHER
NAME AND                                      SALARY     AWARDS    AWARDS   COMPENSATION   COMPENSATION    TOTAL
PRINCIPAL POSITION                    YEAR      ($)      ($)(4)    ($)(4)        ($)          ($)(5)        ($)
---------------------------------   -------   -------   -------   -------   ------------   ------------   -------
<S>                                    <C>    <C>        <C>       <C>            <C>            <C>      <C>
Lonnie D. Schnell (1) ..........       2007   225,000      --       1,917         45,000         11,343   283,260
  Chief Executive Officer and ..       2006   171,346      --      31,998         45,025         24,634   273,003
  Chief Financial Officer

Stephen P. Forte (2) ...........       2007   325,000      --       7,851           --           30,484   363,335
  Former Chief Executive .......       2006   275,000    77,468    73,995         90,050         35,497   552,010
  Officer

Wouter van Biene (3) ...........       2007   225,000      --       1,986           --           11,502   238,488
  Former Chief Operating Officer       2006   180,000      --      27,526         45,025          7,006   259,557
</TABLE>

----------
(1)  Mr. Schnell was appointed Chief  Executive  Officer  effective  February 4,
     2008.

(2)  Mr. Forte resigned as Chief Executive Officer effective February 4, 2008.

(3)  Mr. van Biene resigned as Chief  Operating  Officer  effective  January 15,
     2008.

(4)  The amounts in this column  represent  the dollar  amounts  recognized  for
     financial statement reporting purposes in fiscal 2007 and 2006 with respect
     to stock awards and options granted in the applicable year as well as prior
     fiscal years in accordance with SFAS No. 123(R). Pursuant to SEC rules, the
     amounts  shown  exclude  the  impact of  estimated  forfeitures  related to
     service-based  vesting  conditions.   For  additional  information  on  the
     valuation  assumptions with respect to these grants, refer to Note 9 to our
     Consolidated Financial Statements in this Annual Report on Form 10-K. These
     amounts do not reflect  the actual  value that may be realized by the named
     executive officers which depends on the value of our shares in the future.

(5)  All other compensation consists of the following (amounts in dollars):

                               MR. SCHNELL        MR. FORTE       MR. VAN BIENE
                             ---------------   ---------------   ---------------
                              2007     2006     2007     2006     2007     2006
                             ------   ------   ------   ------   ------   ------
Health & medical
   insurance (a) .........   11,019   12,673    8,202   12,916   11,178    6,925

Life & disability
   insurance (b) .........      324       81    4,282       81      324       81

Automobile allowances ....     --       --     18,000   22,500     --       --

Consulting services (c) ..     --     11,880     --       --       --       --
                             ------   ------   ------   ------   ------   ------

     Total ...............   11,343   24,634   30,484   35,497   11,502    7,006
                             ======   ======   ======   ======   ======   ======

----------
(a)  Includes payments of medical premiums.
(b)  Includes executive and group term life insurance.
(c)  Represents fees for services provided prior to employment.


EXECUTIVE COMPENSATION

         The 2007  compensation  for our former Chief  Executive  Officer was in
accordance with our employment agreement completed with Mr. Forte in March 2006.
The terms and  conditions  established  in this agreement were the result of our
consideration  of our 2005 operating  performance,  our 2005  Restructuring  and
Strategic  Plan  and  current  operating  performance  levels,  as  well  as the
compensation  levels for our previous  CEO,  comparative  industry  compensation
levels,  and negotiations with Mr. Forte. The base compensation was evaluated in
conjunction  with the  long-term  equity  awards and annual bonus  incentives to
establish a compensation  arrangement  providing a substantial incentive for the
achievement  of our  long-term  objectives  and for  adding  shareholder  value.
Accordingly,  the base compensation was established near minimum industry levels
for the same role in  comparable  companies,  and a long-term  equity  option of
900,000  shares  of  common  stock,  representing   approximately  4.9%  of  our
outstanding  shares,  was  established  as an inducement to maximum  performance
achievements and increased  shareholder values. The option grant was established
to vest monthly over a three-year  term,  after a minimum initial term of twelve
months,  to coincide with the  objectives of our Strategic  Plan. In addition to
the long-term equity incentive, a cash incentive, a Management Incentive Program


                                       80
<PAGE>


("MIP"), was established as provided in Mr. Forte's employment agreement setting
aside 15% of the  Company's  earnings  before  interest  and taxes  ("EBIT") for
annual bonus awards to Mr.  Forte and the other senior  executives.  One-half of
this MIP Fund was allocated to Mr. Forte in 2006 and is shown in the table above
as non-equity  incentive plan compensation,  and one-third of the MIP fund is to
be allocated to Mr. Forte in 2007 through 2009.  MIP Funds were not  distributed
in 2007 due the operating  performance of the Company,  however, a discretionary
bonus was  granted to Mr.  Schnell as  approved  by the Board of  Directors.  In
addition,  Mr.  Forte was  provided  a stock  grant of  135,135  shares,  and an
additional  option  grant,  vesting in one year,  for  135,135  shares of common
stock,  in  consideration  of  his  significant  contributions  in  the  initial
development and implementation of the Company's 2005 Restructuring Plan, and the
development of the Company's Strategic Plan.

         Messrs.  van  Biene  and  Schnell  were  employed  early in 2006 at the
recommendation  of Mr. Forte, our former Chief Executive  Officer,  to assist in
the  completion  of the 2005  Restructuring  and Strategic  Plan.  The terms and
conditions  established in their  employment  agreements were also the result of
our consideration of our 2005 operating performance,  our 2005 Restructuring and
Strategic Plan and current operating performance levels, as well as our previous
compensation  levels for similar positions,  comparative  industry  compensation
levels,  and individual  negotiations.  The base  compensation  was evaluated in
conjunction  with the  long-term  equity  awards and annual bonus  incentives to
establish a compensation  arrangement  providing a substantial incentive for the
achievement  of our  long-term  objectives  and for  adding  shareholder  value.
Accordingly,  the base  compensation  for their positions was  established  near
minimum industry levels for the same role in comparable companies, and long-term
equity incentives in the form of grants of options to purchase 325,000 shares to
Mr.  van Biene  and  400,000  shares  to Mr.  Schnell,  were  established  as an
inducement to maximum performance achievements and increased shareholder values.
The  options  vest  monthly  over a  three-year  term for Mr. van  Biene,  and a
four-year term for Mr.  Schnell,  after a minimum initial term of twelve months,
to coincide with the objectives of the Company's Strategic Plan. In addition Mr.
van Biene and Mr. Schnell are  participants in the MIP fund established by us as
described above, pursuant to which we set aside 15% of our EBIT for annual bonus
awards to the CEO and the other  senior  executives  as approved by the Board of
Directors. The payments allocated to Mr. van Biene and Mr. Schnell under the MIP
fund are shown in the summary  compensation  table as non-equity  incentive plan
compensation.

GRANTS OF PLAN-BASED AWARDS IN FISCAL 2007

         There were no stock option grants to named  executive  officers  during
2007.


                                       81
<PAGE>


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2007

         The following  table provides  information  with respect to outstanding
stock  options held by each of the named  executive  officers as of December 31,
2007.

<TABLE>
<CAPTION>
                                               NUMBER OF SECURITIES
                                              UNDERLYING UNEXERCISED
                                                      OPTIONS
                                           ------------------------------         OPTION         OPTION
                                                (#)              (#)             EXERCISE      EXPIRATION
NAME                         GRANT DATE     EXERCISABLE     UNEXERCISABLE        PRICE ($)        DATE
-------------------------   ------------   ------------      ------------      ------------   ------------
<S>                              <C>            <C>            <C>     <C>     <C>               <C>  <C>
Lonnie D. Schnell .......        1/26/06        191,667        208,333 (1)     $       0.59      1/26/2016

Stephen P. Forte ........        1/16/06        135,135           --           $       0.37      1/16/2016
                                 1/16/06        650,000        250,000 (2)     $       0.37      1/16/2016

Wouter van Biene ........         3/1/06        198,611        126,389 (3)     $       0.53       3/1/2016
</TABLE>

----------
   (1) Mr. Schnell's options become exercisable with regard to 100,000 shares on
       January  26, 2007 and then with  respect to 8,333  shares per month until
       fully vested.

   (2) Mr. Forte's  options become  exercisable at 25,000 shares per month until
       fully vested.  Mr. Forte resigned as of February 4, 2008, and the vesting
       of  the  outstanding  options  was  fully  accelerated  pursuant  to  the
       separation   agreement  described  below  under  "Employment   Agreement,
       Termination of Employment and Change of Control Agreements."

   (3) Mr. van Biene's options became  exercisable with regard to 108,333 shares
       on March 1, 2007 and then with  respect to 9,028  shares per month  until
       fully  vested.  Mr. van Biene  resigned  as of January 15,  2008,  and he
       received  12  months  accelerated   vesting  of  outstanding  options  in
       accordance with his separation arrangement.


EMPLOYMENT   AGREEMENTS,   TERMINATION  OF  EMPLOYMENT  AND  CHANGE  OF  CONTROL
ARRANGEMENTS

     EMPLOYMENT AGREEMENTS

         We have entered into the following employment agreements with our named
executive officers.

         LONNIE D. SCHNELL, CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER.
On March 16, 2006, we entered into an employment  agreement with Lonnie Schnell,
pursuant  to which  Mr.  Schnell  serves as our Chief  Financial  Officer  on an
"at-will"  basis.  Pursuant to this offer  letter,  as amended,  Mr.  Schnell is
entitled to receive an annual  base  salary of $185,000  and will be eligible to
receive an annual  incentive  bonus based upon our earnings  before interest and
taxes.  In October  2006,  Mr.  Schnell's  annual base salary was  increased  to
$225,000 as recognition for superior performance and individual contributions to
the  achievement  to  Company  objectives.  In  the  event  that  Mr.  Schnell's
employment is terminated by us without  "cause" (as defined in the agreement) or
due to Mr. Schnell's death or disability, then Mr. Schnell or his estate will be
entitled to receive as severance,  in addition to all accrued salary, (i) salary
continuation  and  continuation  of coverage  under our group  health plan for a
period of twelve  months and (ii) twelve months  acceleration  of vesting of all
outstanding options. In connection with the offer letter and as an inducement to
employment,  we  previously  granted Mr.  Schnell an option to purchase  400,000
shares of our common  stock,  which  vests over a period of four  years.  Upon a
change of control of our company, 50% of Mr. Schnell's then-outstanding unvested
stock options shall vest and the remaining  unvested  options shall vest in full
if Mr.  Schnell  is  terminated,  his  position  or base pay is reduced or he is
required to relocate  within six months  before or twelve  months  following the
change of  control.  As of February  4, 2008,  Mr.  Schnell was also named Chief
Executive Officer.

         STEPHEN FORTE,  FORMER CHIEF EXECUTIVE  OFFICER.  On March 16, 2006, we
entered into an Executive Employment  Agreement with Stephen Forte,  pursuant to
which Mr. Forte served as our Chief Executive Officer. This employment agreement
had a term  continuing  though  December  31,  2008,  which could be extended to


                                       82
<PAGE>


December 31, 2009. Pursuant to this agreement, Mr. Forte received an annual base
salary of $275,000 for 2006 and $325,000  for each  subsequent  year of the term
and was  entitled to receive an annual  incentive  bonus based upon our earnings
before  interest and taxes.  In the event that prior to the end of the term, Mr.
Forte's  employment  was  terminated  by us  "without  cause" (as defined in the
agreement),  by Mr. Forte for "good reason" (as defined in the agreement) or due
to Mr.  Forte's  death or  disability,  then Mr.  Forte or his  estate  would be
entitled to receive,  in addition to all accrued salary,  (i) severance payments
equal to Mr.  Forte's base salary for the remaining term of the agreement or, in
the case of death or  disability,  through  December 31, 2008,  (ii) a pro rated
portion  of the  annual  incentive  bonus for the year in which the  termination
occurred,  (iii) full acceleration of vesting of the options issued to Mr. Forte
pursuant to the agreement and (iv) continued  healthcare  coverage for Mr. Forte
and his dependents for the remaining term of the agreement.

         Effective  February 4, 2008, Stephen Forte resigned his position as our
Chief Executive Officer and as a member of our Board of Directors,  as well from
all positions with our subsidiaries. In connection with Mr. Forte's resignation,
on February 4, 2008, we entered into a Separation  Agreement with Mr. Forte. The
Separation  Agreement  further provides for the payment to Mr. Forte of the same
severance benefits he would have received under his employment  agreement had we
terminated Mr. Forte's  employment without cause. In exchange for his severance,
Mr. Forte has released all claims against us.

         WOUTER VAN BIENE, FORMER CHIEF OPERATING OFFICER. On March 16, 2006, we
entered into an employment  agreement  with Wouter van Biene,  pursuant to which
Mr.  van Biene  serves as our Chief  Operating  Officer on an  "at-will"  basis.
Pursuant  to this offer  letter,  Mr. van Biene is  entitled  to an annual  base
salary of $225,000  and will be eligible  to receive an annual  incentive  bonus
based upon our earnings  before  interest  and taxes.  In the event that Mr. van
Biene's  employment  is  terminated  by us without  "cause"  (as  defined in the
agreement) or due to Mr. van Biene's death or disability,  then Mr. van Biene or
his estate will be entitled to receive as severance,  in addition to all accrued
salary,  (i) salary  continuation  and  continuation of coverage under our group
health  plan for a period of six  months if the  termination  occurs  during the
first year of employment,  a period of twelve months if the  termination  occurs
during the  second  year of  employment  or a period of  eighteen  months if the
termination  occurs after the second year of employment,  and (ii) twelve months
acceleration of vesting of all outstanding options.  Effective January 15, 2008,
Mr. van Biene resigned.  In connection  with Mr. van Biene's  resignation and in
exchange for a full release of claims  against us, we have agreed to pay Mr. van
Biene twelve  months of his current base salary and provide him twelve months of
continued coverage under our group health plan.

     POTENTIAL SEVERANCE PAYMENTS

         As described above, our employment  agreements with Messrs.  Forte, van
Biene  and  Schnell  provided  for  severance  benefits  in the  event  that the
executive's  employment is terminated due to executive's  death or disability or
by the Company without "cause" and, in the case of Mr. Forte, for "good reason."
The  following  table sets forth  severance  payments and benefits that we would
have been obligated to pay to Messrs.  Forte,  van Biene and Schnell  assuming a
triggering  event had occurred under each of their  respective  agreements as of
December 31, 2007:

<TABLE>
<CAPTION>
                                                                                   VALUE OF
                                                                CONTINUATION     ACCELERATION
                                                                 OF HEALTH        OF VESTING          TOTAL
                             CASH SEVERANCE     BONUS VALUE       BENEFITS        OF EQUITY         SEVERANCE
NAME                         PAYMENT ($)(1)         ($)              ($)         AWARDS ($)(2)     BENEFITS ($)
--------------------------   --------------   --------------   --------------   --------------   --------------
<S>                                 <C>                 <C>            <C>              <C>             <C>
Lonnie D. Schnell ........          240,968             --             11,343             --            252,311

Stephen P. Forte .........          310,420             --             12,483           10,000          332,903

Wouter van Biene .........          244,471             --             11,502             --            255,973
</TABLE>


                                       83
<PAGE>


----------
(1)  Includes (i) earned and unpaid base salary through the date of termination,
     (ii) accrued but unpaid vacation and (iii) cash severance payments based on
     the  executive's  salary  payable  in a lump sum or  periodic  payments  as
     provided in the executive's employment agreement.

(2)  Based on the  closing  price of our common  stock on  December  31, 2007 of
     $0.41, as reported by the OTC Bulletin Board.


     POTENTIAL CHANGE IN CONTROL PAYMENTS

         As described above, our employment  agreements with Messrs.  Forte, van
Biene and Schnell  provided for  accelerated  vesting of all or a portion of the
options held by such  executives  upon a change in control.  The following table
sets forth the change in control  benefits that we would have been  obligated to
pay to our named executive officers assuming a change of control had occurred as
of December 31, 2007:

                        VALUE OF ACCELERATION OF VESTING OF EQUITY AWARDS ($)(1)
                        --------------------------------------------------------
                                                          CHANGE IN CONTROL WITH
     NAME                 CHANGE IN CONTROL ONLY (2)      ADDITIONAL TRIGGER (3)
--------------------------------------------------------------------------------

Stephen P. Forte                  10,000                          10,000

Wouter van Biene                    -                               -

Lonnie D. Schnell                   -                               -

----------
(1)  Based on the  closing  price of our common  stock on  December  31, 2007 of
     $0.41, as reported by the OTC Bulletin Board.

(2)  Upon a change in control,  (i) Mr. Forte was entitled to full  acceleration
     of currently outstanding options and (ii) Messrs. van Biene and Schnell are
     each  entitled to  accelerated  vesting with respect to 50% of the unvested
     portion of outstanding options.

(3)  Messrs.  van Biene and Schnell are each  entitled to full  acceleration  of
     vesting of the remaining  unvested portion of all outstanding stock options
     if,  within  in 12  months  following  the  change  in  control:  (i) he is
     terminated  by the  acquirer,  (ii) his  position is reduced to less than a
     general manager position or a vice president level position, (iii) his base
     pay is  reduced  below his  prevailing  base pay  amount at the time of the
     change in control or (iv) he is asked to relocate to an office more than 60
     miles from his office prior to the change in control.


DIRECTOR COMPENSATION

         The general policy of the Board of Directors is that  compensation  for
independent directors should be a mix of cash and equity-based compensation.  We
do not pay  management  directors for Board service in addition to their regular
employee   compensation.   The  full  Board  of   Directors   has  the   primary
responsibility   for  reviewing  and   considering  any  revisions  to  director
compensation.


                                       84
<PAGE>


         The  following  table  details  the  total  compensation  earned by the
company's non-employee directors in 2007.

<TABLE>
<CAPTION>
                           FEES EARNED OR          OPTION            ALL OTHER            TOTAL
NAME                      PAID IN CASH ($)      AWARDS ($)(9)     COMPENSATION ($)         ($)
------------------------ ------------------- ------------------- ------------------ ------------------
<S>                             <C>                  <C>               <C>             <C>
Mark Dyne (1)                    40,000               3,230            100,500           143,730
Colin Dyne (2)                        -               5,650            304,000           309,650
Brent Cohen (3)                  84,583               1,250             14,417           100,250
Joseph Miller (4)                68,975                 600                  -            69,575
Raymond Musci (5)                64,375                 600                  -            64,975
William Sweedler (6)             39,667                 300                  -            39,967
Susan White (7)                  33,417                 600              4,833            38,850
Jonathan Burstein (8)                 -               4,250            290,507           294,757
------------------------ ------------------- ------------------- ------------------ ------------------
   Total                        260,667              16,480            784,607         1,061,754
------------------------ ------------------- ------------------- ------------------ ------------------
</TABLE>

----------
(1)  As of December 31, 2007,  Mr. Mark Dyne held options to purchase a total of
     323,000 shares. The other compensation  consists of consulting and per diem
     fees earned for services rendered.

(2)  As of December 31, 2007, Mr. Colin Dyne held options to purchase a total of
     565,000  shares.  The other  compensation  consists of consulting  fees for
     services rendered.

(3)  As of December  31,  2007,  Mr.  Cohen held  options to purchase a total of
     125,000  shares.  The other  compensation  consists of consulting  fees for
     services rendered.

(4)  As of December  31,  2007,  Mr.  Miller held options to purchase a total of
     60,000 shares.

(5)  As of December  31,  2007,  Mr.  Musci held  options to purchase a total of
     60,000 shares.

(6)  As of December 31, 2007,  Mr.  Sweedler held options to purchase a total of
     30,000 shares.

(7)  As of December  31,  2007,  Ms.  White held  options to purchase a total of
     60,000  shares.  The other  compensation  consists of  consulting  fees for
     services  rendered.  Ms. White  resigned  from the Board of Directors as of
     October 1, 2007.

(8)  As of December 31, 2007,  Mr.  Burstein held options to purchase a total of
     425,000  shares.  The other  compensation  consists of consulting  fees for
     services rendered.  Mr. Burstein resigned from the Board of Directors as of
     October 25, 2007.

(9)  The amounts in this column  represent  the dollar  amounts  recognized  for
     financial  statement  purposes in fiscal 2007 with respect to stock options
     granted in 2007 as well as prior  fiscal  years,  in  accordance  with SFAS
     123(R).  For  additional  information  on the  valuation  assumptions  with
     respect to option grants, including the options granted in 2007, see Note 9
     to the  Consolidated  Financial  Statements  in this Annual  Report on Form
     10-K. These amounts do not reflect the actual value that may be realized by
     the named  executive  officers  which depends on the value of our shares in
     the future.


         Our policy is to pay  non-employee  directors $1,500 for their personal
attendance at any meeting of the Board of Directors,  $1,000 for their  personal
attendance at any committee  meeting,  and $500 for attendance at any telephonic
meeting of the Board of Directors  or of a committee of the Board of  Directors.
We also pay  non-employee  directors  an annual  retainer  of $20,000  for Board
service and an additional retainer of $5,000 for service on each committee.  The
Chairman of the Board receives an annual  retainer of $25,000 for Board service.
We also reimburse  directors for their  reasonable  travel expenses  incurred in
attending board or committee meetings and pay non-employee  directors a per diem
for board services.

         We do not have a formal  policy  with  regard to  option  grants to our
Board of Directors, but we generally follow a practice of granting an option for
30,000  shares of stock upon  initial  appointment  or  election to the Board of
Directors,  and  thereafter  issuing  annual option  grants to all  non-employee
members of 30,000 shares.


                                       85
<PAGE>


         During 2006 and through March 31, 2007 we had a verbal  agreement  with
Mr. Colin Dyne to provide consulting  services following his resignation in 2005
as our Chief  Executive  Officer.  We entered into a written  agreement with Mr.
Dyne  effective  April 1, 2007 that provides for continued  consulting  services
through November 30, 2008 in exchange for a consulting fee of $25,000 per month.

         Effective January 1, 2007, we entered into a consulting  agreement with
Jonathan  Burstein,  previously  a member of the Board of  Directors.  Under the
terms of the consulting  agreement,  Mr. Burstein provides specified  consulting
services to us for a term of up to 24 months. As consideration for the services,
we pay Mr. Burstein an amount of $225,000 per annum plus an additional $3,333.33
per month for the first 18 months of the term of the  agreement.  We also agreed
to provide Mr. Burstein with medical benefits and an automobile  allowance for a
period of 18 months.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Compensation Committee of our Board of Directors currently consists
of Brent Cohen, Raymond Musci and William Sweedler. No current executive officer
of the Company has served as a member of the board of directors or  compensation
committee  of any  entity  for  which a  member  of our  Board of  Directors  or
Compensation Committee has served as an executive officer.


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

EQUITY COMPENSATION PLAN INFORMATION

         The following  table sets forth certain  information as of December 31,
2007 regarding  equity  compensation  plans (including  individual  compensation
arrangements) under which our equity securities are authorized for issuance:

<TABLE>
<CAPTION>
                                                                                     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
                                   -----------------------    --------------------   --------------------
<S>                                       <C>                       <C>                  <C>
Equity compensation plans
approved by security holders.....         3,048,235                 $ 1.99               2,600,000

Equity compensation plans not
approved by security holders.....         4,788,813                 $ 1.48                     -
                                   -----------------------    --------------------   --------------------
   Total.........................         7,837,048                 $ 1.67               2,600,000
                                   =======================    ====================   ====================
</TABLE>


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

         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        102,741   warrants  issued  in  conjunction   with  a  private
                  placement  transaction in 2004,  are  exercisable at $3.65 per
                  share and expire in November 2009.

         o        215,754  warrants issued for services in 2004, are exercisable
                  at $3.65 per share and expire in November 2009.

         o        2,100,000   warrants   issued  in  conjunction   with  private
                  placement  transaction in 2007,  are  exercisable at $0.75 per
                  share and expire in June 2012.


                                       86
<PAGE>


         o        1,625,000  inducement  options issued to employees in 2006 are
                  exercisable at a weighted  average exercise price of $0.46 per
                  share and expire in January and March of 2016.

         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 subdivision or consolidation of shares or the payment
of a stock dividend on common stock.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following  table  presents  information  regarding  the  beneficial
ownership of our common stock as of April 11, 2008:

         o        each person who is known to us to be the  beneficial  owner of
                  more than 5% of our outstanding common stock;

         o        each of our directors;

         o        each of our named executive officers; and

         o        all of our directors and executive officers as a group

         Beneficial  ownership is determined in accordance with the rules of the
Securities and Exchange  Commission that deem shares to be beneficially owned by
any person who has or shares  voting or  investment  power with  respect to such
shares.  Shares of common stock under warrants or options currently  exercisable
or  exercisable  within  60 days of the  date of  this  information  are  deemed
outstanding  for purposes of computing  the  percentage  ownership of the person
holding such  warrants or options but are not deemed  outstanding  for computing
the  percentage  ownership of any other person.  As a result,  the percentage of
outstanding  shares of any person as shown in this  table  does not  necessarily
reflect the person's actual ownership or voting power with respect to the number
of  shares of common  stock  actually  outstanding  at April  11,  2008.  Unless
otherwise  indicated,  the persons named in this table have sole voting and sole
investment power with respect to all shares shown as beneficially owned, subject
to  community  property  laws where  applicable.  As of April 11,  2008,  we had
20,291,433 shares of common stock issued and outstanding.

         The  address of each  person  listed is in our care,  at 21900  Burbank
Boulevard,  Suite 270, Woodland Hills,  California  91367,  unless otherwise set
forth below such person's name.

                                                 NUMBER OF        PERCENT
NAME OF BENEFICIAL OWNER                           SHARES         OF CLASS
--------------------------------------------   ---------------   -----------
DIRECTORS:
Mark Dyne (1)...............................         1,242,001         6.0%
Colin Dyne (2)..............................           747,780         3.6%
Larry Dyne (3)..............................           547,137         2.6%
Lonnie D. Schnell (4).......................           291,667         1.4%
William Sweedler (5)........................           132,000            *
Brent Cohen (6) ............................           125,000            *
Raymond Musci (6)...........................            60,000            *
Joseph M. Miller (6)........................            60,000            *
David A. Hunter.............................                 -            *
Directors and executive officers as a group         3,205,585         14.5%
  (9 persons) (7)  .........................

OTHER 5% HOLDERS:
Bluefin Capital, LLC .......................         1,750,000         8.6%
  105 S. Narcissus Ave., Suite 712
  West Palm Beach, FL  33401


                                       87
<PAGE>


----------
* Less than one percent.

(1)  Includes 323,000 shares of common stock reserved for issuance upon exercise
     of stock  options  which are  currently  exercisable  and 83,334  shares of
     common  stock  reserved for issuance  upon  exercise of warrants  which are
     currently exercisable.  Includes 176,600 shares held by a limited liability
     company of which Mr. Dyne is the manager and a member.

(2)  Includes 565,000 shares of common stock reserved for issuance upon exercise
     of stock options that are currently exercisable.

(3)  Includes 417,537 shares of common stock reserved for issuance upon exercise
     of stock options that are  currently  exercisable.  Also  includes  129,600
     shares of common  stock held by a family  trust which Mr. Larry Dyne may be
     deemed to beneficially own.

(4)  Includes 191,667 shares of common stock reserved for issuance upon exercise
     of stock options that are currently exercisable.

(5)  Includes  30,000 shares of common stock reserved for issuance upon exercise
     of stock options that are currently exercisable.

(6)  Consists of shares of common stock  reserved for issuance upon the exercise
     of the stock options that are currently exercisable.

(7)  Includes  1,772,204  shares of common  stock  reserved  for  issuance  upon
     exercise of stock options which currently are exercisable and 83,334 shares
     of common  stock  reserved  for issuance  upon  exercise of warrants  which
     currently are exercisable.


         The information as to shares  beneficially  owned has been individually
furnished by the  respective  directors,  named  executive  officers,  and other
stockholders  of the company,  or taken from documents filed with the Securities
and Exchange Commission.


ITEM 13.      CERTAIN   RELATIONSHIPS  AND  RELATED  TRANSACTIONS  AND  DIRECTOR
              INDEPENDENCE

REVIEW AND APPROVAL OF RELATED PARTY TRANSACTIONS

         We have adopted a policy that requires Board  approval of  transactions
with  related  persons  as defined by SEC  regulations,  including  any sales or
purchase  transaction,  asset  exchange  transaction,  operating  agreement,  or
advance  or  receivable  transaction  that  could put our  assets  or  operating
performance at risk. All of our directors and executive  officers of the Company
are  required  at all  times,  but not  less  than  annually,  to  disclose  all
relationships  they have  with  companies  or  individuals  that have  conducted
business  with,  or had an interest  in, the  Company.  Our  executive  officers
monitor our operations giving  consideration to the disclosed  relationships and
refer potential  transactions to the Board of Directors for approval.  The Board
of Directors  considers a related party  transaction for its potential  economic
benefit  to the  Company,  to ensure the  transaction  is "arms  length"  and in
accordance with our policies and that it is properly disclosed in our reports to
shareholders.

REPORTABLE RELATED PARTY TRANSACTIONS

         Other than the  employment  arrangements  described  elsewhere  in this
report and the transactions  described  below,  since January 1, 2007, there has
not been, nor is there currently proposed,  any transaction or series of similar
transactions to which we were or will be a party:

         o        in which the amount involved exceeds $120,000; and

         o        in which any  director,  executive  officer,  shareholder  who
                  beneficially owns 5% or more of our common stock or any member
                  of  their  immediate  family  had or  will  have a  direct  or
                  indirect material interest.


                                       88
<PAGE>


         Colin Dyne,  a member of our Board,  is a  significant  shareholder  in
People's Liberation,  Inc., the parent company of Versatile Entertainment,  Inc.
During 2007,  we had sales of $241,000 to Versatile  Entertainment.  At December
31,  2007  accounts  receivable  of  $44,000  were  outstanding  from  Versatile
Entertainment.

         At December  31,  2007,  we had an  aggregate  of $625,454 of unsecured
notes,  advances and accrued interest  receivable due from Colin Dyne. The notes
and advances bear interest at 7.5% and are due on demand.

         We paid  consulting  fees of  $304,000  to Colin Dyne during year ended
December 31, 2007 for consulting  services provided,  and have an agreement with
Mr. Dyne for services through November 30, 2008. See the "Director Compensation"
section in item 11 of this report for a description of this agreement.

         At  December  31,  2007,  we had an  aggregate  of $85,176 in notes and
advances due to Mark Dyne,  the Chairman of our Board of Directors or to parties
related to or  affiliated  with Mark Dyne.  The notes are  payable on demand and
accrue interest at rates ranging from 0% to 10% per annum.

         We paid consulting fees to Diversified Investments,  a company owned by
Mark Dyne, in the amount of $150,000 during the year ended December 31, 2007.

         On January 1, 2007 we entered into an agreement with Jonathan Burstein,
previously  our Executive  Vice President of Operations and formerly a member of
our Board of Directors,  to provide  consulting  services to the Company through
December 31, 2008. We paid Mr.  Burstein  consulting fees of $290,507 during the
year ended  December 31, 2007.  This  agreement  was  terminated  by the Company
during the fourth quarter of 2007.

DIRECTOR INDEPENDENCE

         Because our common  stock is quoted on the OTC Bulletin  Board,  we are
not subject to the listing  requirements  of any  securities  exchange or Nasdaq
regarding the independence of our directors. However, our Board of Directors has
determined that as of December 31, 2007, a majority of our Board of Directors is
comprised of "independent"  directors within the meaning of the applicable rules
for companies listed on The Nasdaq Stock Market.  The Board determined that each
of Brent  Cohen,  Joseph  Miller,  Raymond  Musci,  and  William  Sweedler  were
independent.  The Board has also determined that each of Joseph Miller,  Raymond
Musci and William  Sweedler meet the  independence  requirements for services on
the Audit  Committee  pursuant to the rules for  companies  traded on The NASDAQ
Stock Market.


ITEM 14.      PRINCIPAL ACCOUNTING FEES AND SERVICES

SERVICES PROVIDED BY THE INDEPENDENT AUDITORS

         The audit  committee of our Board of Directors is  responsible  for the
appointment,   compensation,   retention  and  oversight  of  the  work  of  the
independent auditors.

         Singer  Lewak   Greenbaum  &  Goldstein  LLP  ("SLGG")  served  as  our
independent registered public accounting firm for each of the fiscal years ended
December 31, 2006 and 2007.

         AUDIT FEES - The aggregate  fees billed by our  independent  registered
accounting firm for professional  services  rendered for the audit of our annual
financial  statements  and review of our  financial  statements  included in our
Forms 10-Q or services that are normally  provided in connection  with statutory
and  regulatory  filings,  were  $302,000  for fiscal year 2006 and $350,000 for
fiscal year 2007.


                                       89
<PAGE>


         AUDIT-RELATED  FEES - The  aggregate  fees  billed  by our  independent
registered  accounting firm for professional services rendered for assurance and
related services reasonably related to the performance of the audit or review of
our  financial  statements  (other  than those  reported  above) was $66,000 for
fiscal year 2006 and $57,300 for fiscal year 2007.

         TAX FEES - The  aggregate  fees  billed by our  independent  registered
accounting  firm for  professional  services  rendered for tax  compliance,  tax
advice and tax planning were $37,000 for fiscal year 2006 and $33,400 for fiscal
year 2007.

         ALL  OTHER  FEES  -  The  aggregate  fees  billed  by  our  independent
registered  accounting firm for services  rendered to us other than the services
described  above under "Audit  Fees,"  "Audit-Related  Fees" and "Tax Fees" were
$13,000 for fiscal year 2006 and $25,400 for fiscal year 2007.

         The audit committee  approved all of the foregoing services provided by
SLGG.

POLICY REGARDING PRE-APPROVAL OF SERVICES PROVIDED BY THE INDEPENDENT AUDITORS

         The audit  committee has  established a general  policy  requiring it's
pre-approval of all audit services and permissible  non-audit  services provided
by the independent auditors,  along with the associated fees for those services.
For both  types of  pre-approval,  the audit  committee  considers  whether  the
provision of a non-audit  service is consistent  with the SEC's rules on auditor
independence,  including  whether  provision  of the service (1) would  create a
mutual or conflicting interest between the independent auditors and the Company,
(2) would place the  independent  auditors in the  position of auditing  its own
work,  (3)  would  result  in the  independent  auditors  acting  in the role of
management or as an employee of the Company,  or (4) would place the independent
auditors in a position of acting as an advocate for the  Company.  Additionally,
the  audit  committee  considers  whether  the  independent  auditors  are  best
positioned  and qualified to provide the most  effective and efficient  service,
based  on  factors  such  as the  independent  auditors'  familiarity  with  our
business,  personnel,  systems or risk  profile  and  whether  provision  of the
service by the  independent  auditors  would  enhance  our  ability to manage or
control risk or improve audit quality or would otherwise be beneficial to us.


                                       90
<PAGE>


                                     PART IV

ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)      List the following documents filed as a part of this report:

         (1)      FINANCIAL STATEMENTS

         See Index to Financial  Statements  in Item 8 of this Annual  Report on
Form 10-K, which is incorporated herein by reference.

         (2)      FINANCIAL STATEMENT SCHEDULES

         Schedule II - Valuation and  Qualifying  Accounts  Reserves is included
beginning on the following page.

         (3)      EXHIBITS

         See Exhibit Index attached to this Annual Report on Form 10-K, which is
incorporated herein by reference.


                                       91
<PAGE>


SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES


<TABLE>
<CAPTION>
               COLUMN A                     COLUMN B      COLUMN C      COLUMN D      COLUMN E
                                            Balance at                                Balance at
                                           Beginning of                                 End of
              Description                     Year        Additions     Deductions       Year
----------------------------------------   -----------   -----------   -----------   -----------
<S>                                        <C>           <C>           <C>           <C>
2007
----
Allowance for doubtful accounts deducted
   from accounts receivable in the
   balance sheet .......................   $    71,500   $   135,000   $    66,000   $   140,500
Reserve for obsolescence deducted from
   inventories on the balance sheet ....     1,242,000       148,000       368,000     1,022,000
Valuation reserve deducted from Deferred
   tax Assets ..........................    19,225,000       938,000          --      20,163,000
                                           -----------   -----------   -----------   -----------
                                           $20,538,500   $ 1,221,000   $   434,000   $21,325,500
                                           ===========   ===========   ===========   ===========

2006
----
Allowance for doubtful accounts deducted
   from accounts receivable in the
   balance sheet .......................   $ 1,189,000   $   198,000   $ 1,315,500   $    71,500
Reserve for obsolescence deducted from
   inventories on the balance sheet ....     7,306,000       557,000     6,621,000     1,242,000
Valuation reserve deducted from Deferred
   tax Assets ..........................    21,447,000          --       2,222,000    19,225,000
                                           -----------   -----------   -----------   -----------
                                           $29,942,000   $   755,000   $10,158,500   $20,538,500
                                           ===========   ===========   ===========   ===========

2005
----
Allowance for doubtful accounts deducted
   from accounts receivable in the
   balance sheet .......................   $ 6,086,000   $ 4,160,000   $ 9,057,000   $ 1,189,000
Reserve for obsolescence deducted from
   inventories on the balance sheet ....     6,365,000     2,538,000     1,597,000     7,306,000
Valuation reserve deducted from Deferred
   tax Assets ..........................     8,900,000    12,547,000          --      21,447,000
                                           -----------   -----------   -----------   -----------
                                           $21,351,000   $19,245,000   $10,654,000   $29,942,000
                                           ===========   ===========   ===========   ===========
</TABLE>


(1)  Additions to the allowance for doubtful  accounts  include  provisions  for
     uncollectible  accounts.  Bad debt expense  includes (and  additions  above
     exclude) net  recoveries of $712,000 for the year ended  December 31, 2006,
     and net direct  write-offs of $114,000 and  $1,698,000  for the years ended
     December  31,  2007 and  2005,  respectively.  Additions  to the  inventory
     obsolescence reserve include current year provisions. Additionally, in 2005
     there were direct  write-offs  of inventory  of $3.4 million in  connection
     with the  restructuring,  and in 2007 and 2006 there were direct write-offs
     of $0.4 million and $0.2 million, respectively.

(2)  Deductions  from the  allowance  for  doubtful  accounts  includes  amounts
     applied to write-offs,  reversals of prior period provisions,  and, for the
     year ended December 31, 2005,  deductions include $7,528,000 related to the
     conversion of a trade account  receivable to a note receivable.  Deductions
     from the inventory  obsolescence reserve include application of the reserve
     against obsolete, excess, slow-moving or disposed inventory.


                                       92
<PAGE>


                                   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.

                                        TALON INTERNATIONAL, INC.

                                        /S/LONNIE D. SCHNELL
                                        ------------------------------------
                                        By:  Lonnie D. Schnell
                                        Its: Chief Executive Officer & Chief
                                             Financial Officer


                                POWER OF ATTORNEY

         Each person whose  signature  appears  below  constitutes  and appoints
Lonnie  D.  Schnell  and Mark  Dyne,  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/ Lonnie D. Schnell    Chief Executive Officer and Chief      April 15, 2008
---------------------    Financial Officer (Principal
Lonnie D. Schnell        Executive and Financial Officer)


/s/ David A. Hunter      Vice President Corporate Controller    April 15, 2008
---------------------    (Principal Accounting Officer)
David A. Hunter


/s/ Mark Dyne            Chairman of the Board of Directors     April 15, 2008
---------------------
Mark Dyne


/s/ Colin Dyne           Vice Chairman of the Board of          April 15, 2008
---------------------    Directors
Colin Dyne


/s/ Brent Cohen          Director                               April 15, 2008
---------------------
Brent Cohen


/s/ Raymond Musci        Director                               April 15, 2008
---------------------
Raymond Musci


/s/ Joseph Miller        Director                               April 15, 2008
---------------------
Joseph Miller


/s/ William Sweedler     Director                               April 15, 2008
---------------------
William Sweedler


                                       93
<PAGE>


                                  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.

3.1.2         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.

3.1.3         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.

3.1.4         Certificate  of  Amendment  of  Certificate  of  Incorporation  of
              Registrant. Incorporated by reference to Exhibit 3.1.3 to Form 8-K
              filed on August 4, 2006.

3.1.5         Certificate of Ownership and Merger.  Incorporated by reference to
              Exhibit 3.1 to Form 8-K filed on July 20, 2007.

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.

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.

10.5          Promissory  Note,  dated  February  29,  1996,  provided by A.G.S.
              Stationary,  Inc. to Monto  Holdings  Pty.  Ltd.  Incorporated  by
              reference to Exhibit 10.25 of 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.


                                       94
<PAGE>


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

10.7(2)       Amended and Restated 1997 Stock  Incentive  Plan.  Incorporated by
              reference to Exhibit 10.7 to Form 10-Q filed on November 13, 2006.

10.8(2)       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         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.

10.12         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.

10.13         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.

10.14(1)      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.

10.15         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.

10.16         Form of Common  Stock  Purchase  Warrant,  dated as of November 9,
              2004.  Incorporated by reference to Exhibit 10.3 to Form S-3 filed
              on December 9, 2004.

10.17         Common Stock Purchase Warrant dated as of November 9, 2004, issued
              by  the   Registrant  in  favor  of  Sanders  Morris  Harris  Inc.
              Incorporated  by  reference  to Exhibit  10.7 to Form S-3 filed on
              December 9, 2004.

10.18(2)      Employment   offer   letter  dated  March  16,  2006  between  the
              Registrant  and Lonnie D.  Schnell.  Incorporated  by reference to
              Exhibit 10.3 to Form 10-Q filed on May 22, 2006.

10.18.1(2)    Amendment,  dated May 25, 2007, to  employment  offer letter dated
              March 16,  2006  between  the  Registrant  and Lonnie D.  Schnell.
              Incorporated by reference to Exhibit 10.31.2 to Form 10-Q filed on
              August 14, 2007.

10.19(2)      Consulting  Agreement dated January 1, 2007 between the Registrant
              and Jonathan  Burstein.  Incorporated by reference to Exhibit 10.1
              to Form 8-K filed on January 3, 2007.

10.19(2)      Consulting   Agreement   effective   April  1,  2007  between  the
              Registrant  and Colin Dyne.  Incorporated  by reference to Exhibit
              10.34 to Form 10-Q filed on May 15, 2007.


                                       95
<PAGE>


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

10.20(2)      2007 Stock Plan.

10.21         Revolving  Credit and Tern Loan Agreement  dated June 27, 2007, by
              and  between  Tag-It  Pacific,  Inc.  and  Bluefin  Capital,  LLC.
              Incorporated  by reference to Exhibit  10.35 to Form 10-Q filed on
              August 14, 2007.

10.21.1       Amendment  No. 1 to Loan  Agreement  dated July 30,  2007,  by and
              between the Registrant and Bluefin Capital, LLC.

10.21.2       Amendment No. 2 to Loan Agreement  dated November 19, 2007, by and
              between the Registrant and Bluefin Capital,  LLC.  Incorporated by
              reference  to Exhibit  10.35.2 to Form 8-K filed on  November  26,
              2007.

10.22         Guaranty Agreement,  dated June 27, 2007, by Talon  International,
              Inc.,  Tag-It,  Inc.,  A.G.S.  Stationary,  Inc.,  Tag-It  Pacific
              Limited, Tag-It Pacific (HK) Ltd., Tagit de Mexico, S.A. de C. V.,
              Talon Zipper (Shenzhen)  Company,  Ltd., and Talon  International,
              Pvt.  Ltd.  in favor of  Bluefin  Capital,  LLC.  Incorporated  by
              reference to Exhibit 10.36 to Form 10-Q filed on August 14, 2007.

10.23         Collateral  Agreement,  dated June 27,  2007,  by and among Tag-It
              Pacific,  Inc., Talon  International,  Inc., Tag-It,  Inc., A.G.S.
              Stationary,  Inc.,  Tag-It  Pacific  Limited,  Tag-It Pacific (HK)
              Ltd.,  Tagit de Mexico,  S.A. de C. V.,  Talon  Zipper  (Shenzhen)
              Company,  Ltd.,  and Talon  International,  Pvt.  Ltd. in favor of
              Bluefin Capital,  LLC.  Incorporated by reference to Exhibit 10.37
              to Form 10-Q filed on August 14, 2007.

10.24         Registration  Rights  Agreement,  dated  June 27,  2007,  by Talon
              International,  Inc., for the benefit of holders.  Incorporated by
              reference  to Exhibit 4.10 to  Registration  Statement on Form S-3
              filed on August 10, 2007.

10.25         Form of Warrant issued to Bluefin  Capital,  LLC.  Incorporated by
              reference  to Exhibit 4.10 to  Registration  Statement on Form S-3
              filed on August 10, 2007.

10.26         Promissory  Note,  dated June 27, 2007,  executed by Colin Dyne in
              favor of Tag-It Pacific, Inc. Incorporated by reference to Exhibit
              10.40 to Form 10-Q filed on August 14, 2007.

14.1          Code of Ethics.  Incorporated by reference to Exhibit 14.1 to Form
              10-K filed on March 30, 2004.

21.1          Subsidiaries.

23.1          Consent of Singer Lewak Greenbaum & Goldstein LLP.

24.1          Power of Attorney (included on signature page).

31.1          Certificate of Chief Executive Officer and 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.

----------
(1)  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.

(2)  Indicates a management contract or compensatory plan.


                                       96