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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, 2008

[_]      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, 2008, the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was $4,261,204.

At April 9, 2009 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 ............................................  16

Item 4.       Submission of Matters to a Vote of Security Holders ..........  17

PART II

Item 5.       Market for Registrant's Common Equity, Related Stockholder
                 Matters and Issuer Purchases of Equity Securities .........  18

Item 6.       Selected Financial Data ......................................  20

Item 7.       Management's Discussion and Analysis of Financial
                 Condition and Results of Operations .......................  21

Item 7A.      Quantitative and Qualitative Disclosures about Market Risk ...  33

Item 8.       Financial Statements and Supplementary Data ..................  34

Item 9.       Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure .......................  68

Item 9A(T)    Controls and Procedures ......................................  68

Item 9B.      Other Information ............................................  68

PART III

Item 10.      Directors, Executive Officers and Corporate Governance .......  69

Item 11.      Executive Compensation .......................................  72

Item 12.      Security Ownership of Certain Beneficial Owners and
                 Management and Related Stockholder Matters ................  83

Item 13.      Certain Relationships and Related Transactions and Director
                 Independence ..............................................  84

Item 14.      Principal Accounting Fees and Services .......................  86

PART IV

Item 15.      Exhibits and Financial Statement Schedules ...................  87


                                       1
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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 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.  On July 20, 2007 we changed our corporate
name from Tag-It  Pacific,  Inc. to Talon  International,  Inc.  Our web site is
www.talonzippers.com.  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.


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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, India, Indonesia,  Bangladesh, Mexico and Central America
and have sales and marketing  teams in most of these areas.  We have  developed,
joint  manufacturing  arrangements in various  geographical  international local
markets to  manufacture,  finish and  distribute  zippers  under the TALON brand
name. Our  manufacturing  partners operate to our  specifications  and under our
quality  requirements,  compliance  controls  and our direct  manufacturing  and
quality assurance  supervision,  producing finished zippers for our customers in
their local markets. This operating model allows us 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


                                       3
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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.

         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
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,  Indonesia,  Bangladesh 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  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.

         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.


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         Our efforts to expand this  product  offering to other  customers  have
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  0.4% of our consolidated  revenue for the year ended December 31,
2008, 2% of our  consolidated  revenue for the year ended  December 31, 2007 and
19% for the year ended  December 31, 2006.  We have been  successful in securing
new customers, but these new customers and programs are substantially smaller in
scale.

         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,
                                  --------------------------------
                                   2008         2007         2006
                                  ------       ------       ------
Product Group Net Revenue:
     Talon zipper ............      59.0%        52.2%        34.8%
     Trim ....................      40.6%        46.1%        46.1%
     Tekfit ..................       0.4%         1.7%        19.1%


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.

CUSTOMERS

         We have more than 800  active  customers.  Our  customers  include  the
designated suppliers of well-known apparel manufacturers,  such as Abercrombie &
Fitch, Tom Tailor,  Victoria Secret, Polo Ralph Lauren, American Eagle and Juicy
Couture,  among others.  Our customers  also include  contractors  for specialty
retailers such as Express and mass merchant  retailers such as Wal-Mart,  Kohl's
and Target.

         For the years ended December 31, 2008, 2007 and 2006, our three largest
customers   represented   approximately  8%,  9%  and  18%,   respectively,   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.

         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


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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,  Indonesia,  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.

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.


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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  YKK,  Universal  Button,  Inc.  and  Avery
Dennison  Corporation 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.

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 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 1 and
Note 15 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.


                                       7
<PAGE>


EMPLOYEES

         As of December 31, 2008, we had approximately  167 full-time  employees
including 29 in the United  States,  61 employees in Hong Kong,  72 employees in
China, 1 in India, 3 in the Dominican Republic and 1 in Taiwan. 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.talonzippers.com (in the "Investor" 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.

WE MAY NOT BE ABLE TO SATISFY THE FINANCIAL  COVENANTS IN OUR DEBT AGREEMENTS AT
AND IF WE CANNOT OUR 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 quarterly periods
ending June 30,  2008,  as  discussed  in Note 9 to the  consolidated  financial
statements.  We failed to satisfy the minimum EBITDA requirement for the quarter
ending  December  31,  2008  and  do not  expect  to  meet  the  minimum  EBITDA
requirement for the quarter ending March 31, 2009.  Accordingly we have paid our
lender a fee to waive  these  requirements  for  these  quarters.  If we fail to
satisfy the covenant in three consecutive quarters, the credit agreement will be
in default and can be  declared  immediately  due and payable by the lender.  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 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 and affect our ability to operate as a going concern.  See
Note 2 to the consolidated financial statements regarding going concern and Note
19 to the  consolidated  financial  statements  for subsequent  event  regarding
waiver of current covenant requirements and additional funding by our lender.


                                       8
<PAGE>


THE RECENT U.S. AND GLOBAL FINANCIAL AND ECONOMIC CRISIS COULD NEGATIVELY AFFECT
OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION

         The recent  financial  crisis  affecting the global  banking system and
financial  markets and the going concern threats to financial  institutions have
resulted in a tightening in the credit markets; a low level of liquidity in many
financial markets;  and extreme  volatility in credit,  fixed income, and equity
markets.  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 suppliers. There
can be no  assurance  that we will remain a preferred  supplier 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 and financial condition.

         In  addition,   our  performance  is  subject  to  worldwide   economic
conditions and their impact on levels of consumer  spending that affect not only
the ultimate consumer, but also retailers,  which constitute many of our largest
customers.  Consumer  spending  recently has deteriorated  significantly and may
remain  depressed,  or be subject to further  deterioration  for the foreseeable
future. The worldwide apparel industry is heavily influenced by general economic
cycles.  Purchases of fashion apparel and accessories tend to decline in periods
of recession or uncertainty  regarding future economic prospects,  as disposable
income  declines.  Many  factors  affect the level of  consumer  spending in the
apparel industries,  including,  among others:  prevailing economic  conditions,
levels of employment, salaries and wage rates, energy costs, interest rates, the
availability  of consumer  credit,  taxation and consumer  confidence  in future
economic conditions. During periods of recession or economic uncertainty, we may
not be able to maintain or increase our sales to existing customers,  make sales
to new  customers,  or maintain our earnings from  operations as a percentage of
net sales.  As a result,  our operating  results may be adversely and materially
affected by sustained or further  downward trends in the United States or global
economy.

THE CURRENT GLOBAL CREDIT CRISIS HAS INCREASED OUR CREDIT RISKS WITH VENDORS AND
CUSTOMERS.

         We extend credit to some vendors by supplying them products.  If any of
these vendors are unable to honor their  commitments  to us, due to  bankruptcy,
cessation of operations or otherwise,  we will likely  experience  losses on the
products we provided and lose profit  margins on the unshipped  orders.  Most of
our  customers  are extended  credit terms which are approved by us  internally.
While we have  attempted to cover as much of our credit  risks as possible,  not
all of our risks can be fully  hedged due to the  current  credit  crisis.  Such
exposure may translate  into losses  should there be any adverse  changes to the
financial condition of certain customers.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL OR REFINANCE OUR EXISTING DEBT STRUCTURE
TO MEET OUR CURRENT AND LONG TERM NEEDS.

         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,  represent  substantially  all  of  our  customers.  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 alternatives 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.


                                       9
<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 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.

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, future 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.


                                       10
<PAGE>


BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, WE MAY NOT BE ABLE TO ALWAYS
OBTAIN MATERIALS WHEN WE NEED THEM AND WE MAY LOSE SALES AND CUSTOMERS.

         Lead times for materials we order can vary  significantly and depend on
many factors, including the specific supplier, the contract terms and the demand
for particular  materials at a given time.  From time to time, we may experience
fluctuations in the prices and disruptions in the supply of materials. Shortages
or disruptions in the supply of materials, or our inability to procure materials
from alternate sources at acceptable prices in a timely manner, could lead us to
miss deadlines for orders and lose sales and customers.

OUR PRODUCTS MAY NOT COMPLY WITH VARIOUS INDUSTRY AND  GOVERNMENTAL  REGULATIONS
AND OUR  CUSTOMERS  MAY  INCUR  LOSSES  IN THEIR  PRODUCTS  OR  OPERATIONS  AS A
CONSEQUENCE OF OUR NON-COMPLIANCE.

         Our  products are produced  under  strict  supervision  and controls to
ensure that all materials and  manufacturing  processes comply with the industry
and governmental  regulations  governing the markets in which these products are
sold.  However,  if these  controls  fail to  detect  or  prevent  non-compliant
materials  from entering the  manufacturing  process,  our products  could cause
damages to our  customer's  products or processes and could also result in fines
being incurred.  The possible damages and fines could  significantly  exceed the
value of our  products  and these  risks  may not be  covered  by our  insurance
policies.

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


                                       11
<PAGE>


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.

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 have 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:

         o        Foreign trade disruptions;

         o        Import restrictions;

         o        Labor disruptions;

         o        Embargoes;

         o        Government intervention;

         o        Natural disasters; or

         o        Regional pandemics.


                                       12
<PAGE>


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.

COUNTERFEIT  PRODUCTS ARE NOT UNCOMMON IN THE APPAREL INDUSTRY AND OUR CUSTOMERS
MAY MAKE CLAIMS AGAINST US FOR PRODUCTS WE HAVE NOT PRODUCED ADVERSELY IMPACTING
US 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  and to pay for false
claims.


                                       13
<PAGE>


WE HAVE  EXPERIENCED  AND MAY CONTINUE TO EXPERIENCE  MAJOR  FLUCTUATIONS IN THE
MARKET PRICE FOR OUR COMMON STOCK.

         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.

         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.


                                       14
<PAGE>


INSIDERS OWN A SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD LIMIT OUR
STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS.

         As of March 27, 2009,  our officers and directors and their  affiliates
owned  approximately  16.5% of the outstanding  shares of our common stock.  The
Dyne  family,  which  includes  Mark  Dyne  and  Colin  Dyne,  who are  also our
directors,   and  Larry  Dyne  who  is  also  an  officer;   beneficially  owned
approximately  12.4% of the outstanding  shares of our common stock at March 27,
2009. Additionally, at March 27, 2009, Bluefin Capital, LLC, an affiliate of our
lender,  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, OUR MANUFACTURING ASSETS
VALUE WOULD BE ADVERSELY AFFECTED.

         An important  part of our operating  strategy has been to re-deploy our
former manufacturing  assets into facilities in various  geographical  locations
strategically  located in close proximity to our more  significant and important
customers  throughout Asia. If we cannot redeploy the assets, the carrying value
of the  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. See Note 5 to the consolidated financial statements.

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; 7,000 square feet of warehouse in
Grover, North Carolina;  450 square feet of office in Mt. Holly, North Carolina;
3,400 square feet of warehouse space in Simi Valley,  California;  23,809 square
feet of office and warehouse space in Kwun Tong, Hong Kong; 9,900 square feet of
office and showroom  space in  Shenzhen,  China;  office  space  square  footage
totaling  6,000 in various  other  cities in China;  1,000 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. The building we owned in Kings Mountain,
North Carolina was sold on October 22, 2008. We believe our existing  facilities
are adequate to meet our needs for the foreseeable future.


                                       15
<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

         On October 12, 2005, a shareholder  class action complaint was filed in
the  United  States  District  Court  for the  Central  District  of  California
("District  Court") against the Company,  Colin Dyne, Mark Dyne,  Ronda Ferguson
and August F. Deluca  (collectively,  the "Individual  Defendants" and, together
with the Company, "Defendants"). The action is styled HUBERMAN V.TAG-IT PACIFIC,
INC., ET AL., Case No.  CV05-7352 R(Ex). On January 23, 2006, the District Court
heard competing  motions for  appointment of lead plaintiff.  The District Court
appointed Seth Huberman as the lead plaintiff ("Plaintiff").  On March 13, 2006,
Plaintiff filed an amended complaint. Plaintiff's amended complaint alleged that
defendants made false and misleading  statements  about the Company's  financial
situation and the  Company's  relationship  with certain of the Company's  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.  The  amended  complaint  purports  to  state  claims  under  Section
10(b)/Rule  10b-5 and Section 20(a) of the  Securities  Exchange Act of 1934. On
August 21, 2006, Defendants filed their answer to the amended complaint, denying
the material allegations of wrongdoing. On February 20, 2007, the District Court
denied  class  certification.  On April 2,  2007,  the  District  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 with the United  States Court of Appeals for
the Ninth Circuit ("Ninth  Circuit"),  and his opening appellate brief was filed
on October 15, 2007. Defendants' brief was filed on November 28, 2007. The Ninth
Circuit held oral  arguments on October 23, 2008. On January 16, 2009, the Ninth
Circuit  issued an  unpublished  memorandum,  instructing  the District Court to
certify a class,  reversing the District Court's grant of summary judgment,  and
remanding for further  proceedings  consistent  with its decision.  The District
Court has scheduled a status  conference for May 4, 2009. The Company intends to
vigorously  defend this  lawsuit;  however,  the  outcome of this  lawsuit 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 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
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 the 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.  We also filed a second civil action against  Pro-Fit and related
companies  in the  California  Superior  Court  which was  removed to the United
States District Court,  Central District of California.  In April 2008,  Pro-Fit
and certain  related  companies  were placed into  administration  in the United
Kingdom.  On May 21, 2008, the joint  administrators for Pro-Fit and its related
companies filed petitions under Chapter 15 of Title 11 of the United States Code
for Pro-Fit and two related  companies in the United States Bankruptcy Court for
the Central  District of California  seeking  recognition  of the United Kingdom
administration  proceedings and related relief.  As a consequence of the chapter
15 filings by the joint administrators, all litigation by us against Pro-Fit has
been stayed.  We have derived a  significant  amount of revenue from the sale of
products  incorporating  the stretch  waistband  technology  in the past 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 or  resolved,  may continue to incur
additional  legal fees in order to assert its rights and claims against  Pro-Fit
and any  successor to those assets of Pro-Fit that are subject to our  exclusive
license and intellectual  property  agreement with Pro-Fit and to defend against
any counterclaims.


                                       16
<PAGE>


         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 2008.


                                       17
<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, 2008
              1st Quarter......................    $  0.50        $   0.22
              2nd Quarter......................       0.38            0.19
              3rd Quarter......................       0.29            0.10
              4th Quarter......................       0.25            0.10


         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


         On March  31,  2009 the  closing  sales  price of our  common  stock as
reported on OTC Bulletin Board was $0.10 per share. As of March 31, 2009,  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,
2003 to December 31, 2008,  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, 2003 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.


                                       18
<PAGE>


                  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

                               [GRAPHIC OMITTED]


<TABLE>
<CAPTION>
                                                               Cumulative Total Return
----------------------------------------  -------- ----------- ----------- ----------- ----------- -----------
                                            12/03       12/04       12/05       12/06       12/07       12/08
----------------------------------------  -------- ----------- ----------- ----------- ----------- -----------
<S>                                        <C>         <C>         <C>         <C>         <C>         <C>
Talon International, Inc.                  100.00      100.22        8.02       22.94        9.02        2.45
AMEX Composite                             100.00      124.13      155.00      184.30      217.52      132.72
Dow Jones US Clothing & Accessories        100.00      118.15      123.39      152.94      115.08       69.33
</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.


                                       19
<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)
                                                2008         2007         2006        2005         2004
                                             ---------    ---------    ---------   ---------    ---------
<S>                                          <C>          <C>          <C>         <C>          <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue ............................   $  48,171    $  40,530    $  48,825   $  47,331    $  55,109
Income (loss) from operations (1) ........   $  (5,962)   $  (3,171)   $   1,331   $ (27,098)   $ (14,482)
Net income (loss) ........................   $  (8,359)   $  (4,922)   $     309   $ (29,538)   $ (17,609)
Net income (loss) per share - basic ......   $   (0.41)   $   (0.24)   $    0.02   $   (1.62)   $   (1.02)
Net income (loss) per share - diluted .. .   $   (0.41)   $   (0.24)   $    0.02   $   (1.62)   $   (1.02)
   Weighted average shares outstanding -
   basic .................................      20,291       20,156       18,377      18,226       17,316
   Weighted average shares outstanding -
   diluted ...............................      20,291       20,156       18,956      18,226       17,316
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ................   $   2,400    $   2,919    $   2,935   $   2,277    $   5,461
Total assets .............................   $  15,603    $  21,684    $  25,694   $  30,321    $  56,448
Capital lease obligations, line of
credit and notes payable .................   $  13,316    $  12,696    $  16,214   $  16,001    $  18,792
Stockholders' equity .....................   $  (8,762)   $    (717)   $   1,686   $     912    $  30,195
Total liabilities and stockholders'
equity ...................................   $  15,603    $  21,684    $  25,694   $  30,321    $  56,448
PER SHARE DATA:
Net book value per common share ..........   $   (0.43)   $   (0.04)   $    0.09   $    0.05    $    1.66
Common shares outstanding ................   $  20,291    $  20,291    $  18,466   $  18,241    $  18,171
</TABLE>

(1)      Income  (loss)  from  operations  for each  fiscal  year  includes  the
         following items (in thousands):

<TABLE>
<CAPTION>
                                          2008       2007       2006      2005       2004
                                        -------    -------    -------   -------    -------
<S>                                     <C>        <C>        <C>       <C>        <C>
Restructuring Charges ...............   $  --      $  --      $  --     $(2,924)   $  (414)
Inventory Impairment ................   $  (692)   $  --      $  --     $(3,447)   $(2,700)
Losses from a former customer and
   impairment of related marketable
   securities .......................   $(1,040)   $(1,088)   $  --     $  --      $(9,289)
Executive severance .................   $  (724)   $  --      $  --     $  --      $  --
Related Party Note Impairment .......   $  (474)   $  --      $  --     $  --      $  --
Impairment Charges Idle Equipment and
Building ............................   $(2,430)   $  (127)   $  --     $  --      $  --
</TABLE>


                                       20
<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.

         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  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.   The  revenues  we  derive  from  the  sale  of  products
incorporating the stretch waistband technology represented approximately 0.4% of
our consolidated revenues for the year ended December 31, 2008 and 2% and 19% of
consolidated  revenues  for the years  ended  December  31,  2007 and 2006.  Our
business  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.


                                       21
<PAGE>


RESULTS OF OPERATIONS

         NET SALES

         For the years ended  December 31, 2008,  2007 and 2006,  total sales by
geographic region based on customer delivery locations were as follows:

                                                Year Ended December 31,
                                     -------------------------------------------
                                         2008            2007            2006
                                     -----------     -----------     -----------
Sales:
     United States .............     $ 3,332,257     $ 3,692,468     $ 4,223,052
     Hong Kong .................      15,181,280      14,178,421      13,650,419
     Dominican Republic ........         202,529         700,868       8,966,828
     China .....................      13,614,709      11,159,726       6,063,416
     India .....................       2,536,929       2,187,684       1,205,486
     Bangladesh ................       2,434,382       1,924,943       2,070,349
     Mexico ....................         610,983         783,762       2,476,313
     Other .....................      10,257,911       5,901,683      10,169,139
                                     -----------     -----------     -----------
Total ..........................     $48,170,980     $40,529,555     $48,825,002
                                     ===========     ===========     ===========


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

                                                Year Ended December 31,
                                     -------------------------------------------
                                         2008            2007            2006
                                     -----------     -----------     -----------
Product Group Net Revenue:
     Talon zipper ..............     $28,428,885     $21,159,595     $17,005,203
     Trim ......................      19,537,302      18,688,698      22,502,947
     Tekfit ....................         204,793         681,262       9,316,852
                                     -----------     -----------     -----------
                                     $48,170,980     $40,529,555     $48,825,002
                                     ===========     ===========     ===========


         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 increase of sales in 2008 versus 2007 was  primarily  due to an
increase in Talon zipper sales ($7.3  million or 34.4%) as a result of new brand
nominations  and sales within  Southeast  Asia,  together with new and increased
program sales in the Trim division  ($0.8  million or 4.5%  increase)  partially
offset by a decline in sales of TEKFIT 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 we closed our operations there in 2005 and 2006 and production shifted
from this area to Asia and lower  trim sales due to fewer and  smaller  programs
with our customers ($3.8  million).  Talon zipper sales continued to increase as
we 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.


                                       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, 2008, 2007 and 2006 (amounts
in thousands) and the percentage  change in such operating  expenses as compared
to the previous year:

<TABLE>
<CAPTION>
                                           2008      CHANGE       2007      CHANGE       2006
                                         -------    -------     -------    -------     -------
<S>                                      <C>          <C>       <C>            <C>     <C>
Sales ................................   $48,171         19%    $40,530        (17)%   $48,825
                                         -------    -------     -------    -------     -------
Cost of goods sold ...................    35,554         25%     28,423        (17)%    34,356
    % of sales .......................        74%                    70%                    70%
                                         -------    -------     -------    -------     -------
Selling expenses .....................     3,104         (1)%     3,126         13%      2,778
    % of sales .......................         6%                     8%                     6%
                                         -------    -------     -------    -------     -------
General and administrative expense ...    12,006         10%     10,937          6%     10,360
    % of sales .......................        25%                    27%                    21%
                                         -------    -------     -------    -------     -------
Impairment of note receivable and ....     1,040         (4)%     1,088          0%       --
related loss on marketable securities-
    % of sales .......................         2%                     3%                     0%
                                         -------    -------     -------    -------     -------
Impairment loss on fixed assets ......     2,430      1,813%        127          0%       --
    % of sales .......................         5%                    .3%                     0%
                                         -------    -------     -------    -------     -------
</TABLE>


      COST OF GOODS SOLD

         Cost of goods sold for the year ended  December 31, 2008 increased $7.1
million to 74% of sales versus 70% of sales in the year ended December 31, 2007.
Our  increased  sales  volumes  and a  product  sales  mix  change  to a  higher
proportion  of  lower  margin  Talon  zipper  products  versus  Trim  components
primarily  increased  costs of goods  sold for 2008 by about  $6.2  million.  In
addition,  we also  recorded an  additional  $0.7 million  charge for  inventory
valuation reserves in 2008 versus $0.1 million in 2007 and also experienced $0.3
million in 2008 in increased freight and manufacturing costs.

         Cost of goods sold for the year ended December 31, 2007,  declined $5.9
million or 17% as  compared to the year ended  December  31,  2006,  primarily a
result of the 17% decrease in sales. The reduction in cost of goods sold in 2007
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  were sourced and
delivered  within  the same  marketplace,  reduced  manufacturing  and  assembly
overhead costs, lower inventory valuation reserve charges and management charges
as inventory levels have been reduced and turns accelerated.

      SELLING EXPENSES

         Selling  expenses  for  the  year  ended  December  31,  2008  remained
relatively  unchanged  in dollar  terms as compared to 2007 but  decreased  as a
percentage  of sales by 1.3% to 6.4%.  Our  production  samples  increased as we
targeted new  customers  and programs  within the industry for growth  offset by
lower marketing costs.

         Selling  expenses for the year ended  December 31, 2007  increased $0.4
million or 12.0% as compared 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).


                                       23
<PAGE>


      GENERAL AND ADMINISTRATIVE EXPENSES

         General and  administrative  expenses  for the year ended  December 31,
2008 of $12.0  million  was $1.1  million  higher  than 2007.  The  general  and
administrative expenses in 2008 include $0.7 million in compensation and related
costs mainly associated with the severance of our former chief executive officer
and chief  operating  officer while the 2007  expenses  included $0.9 million of
professional  costs related to consulting  contracts with two former  directors.
Other major factors affecting general and  administrative  expenses in 2008 were
higher  salaries,  benefits,  travel  and  facility  costs of $.3  million  from
expanded   operations  in  Asia  which   supported  the  higher  sales;   higher
depreciation  of $0.2 million  primarily  from idle  equipment;  higher bad debt
expense of $0.4 million  primarily due to the impairment of a related party note
receivable;  higher stock based compensation of $0.2 million associated with new
incentive  option grants and $0.1 million of higher  sampling  costs  associated
with new programs.

         General and  administrative  expenses  for the year ended  December 31,
2007 of $10.9 million  remained  relatively  unchanged  from 2006  excluding bad
expense  (recoveries).  General and  administrative  expenses were affected 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  exiting
consulting  contracts with two former  directors.  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

      IMPAIRMENT OF NOTE RECEIVABLE AND RELATED LOSS ON MARKETABLE SECURITIES

         Loss on  marketable  securities  for the year ended  December  31, 2008
includes  $1.0  million  in a  valuation  reserve  for  the  full  value  of our
investment in marketable  securities that we received in exchange for the Azteca
Production  International,  Inc.  note  receivable.  Operating  expense  in 2007
included $1.1 million in bad debt reserve  provisions  associated  with the note
receivable  due from Azteca  Production  International,  Inc.  See Note 3 to the
consolidated financial statements.

      IMPAIRMENT LOSS ON FIXED ASSETS

         Operating  expenses  for the years  ended  2008 and 2007  include  $2.4
million and $0.1 million,  respectively,  in impairment  valuations  for certain
equipment and building. See Note 5 to the consolidated financial statements.

      INTEREST EXPENSE AND INTEREST INCOME

         Interest  expense  for the  year  ended  December  31,  2008  increased
approximately $0.6 million or 30.1% to $2.5 million, as compared to $1.9 million
in 2007. In 2008, we recorded a full year of interest  expense and  amortization
of deferred financing costs for our revolving credit and term notes, which carry
a higher  cost,  as  compared  to 2007  which  included  only a partial  year of
interest  related to our  revolving  credit and term notes and a partial year of
our previous secured convertible notes payable.  These secured convertible notes
payable were paid off early in the third quarter of 2007.  Interest expense also
included $1.2 million in amortized deferred financing charges,  compared to $0.7
million in 2007,  associated with the fair value of equity  components issued in
connection  with the debt facility.  Interest income for the year ended December
31,  2008  decreased  about  $178,000 to $64,000 as compared to $242,000 in 2007
primarily due to the write-off of the Azteca note receivable.  See Note 3 to the
consolidated financial statements.

         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


                                       24
<PAGE>


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 4 to  the  consolidated  financial
statements.

      INCOME TAXES

         The net tax benefit for income taxes was approximately $40,000 in 2008.
It includes a charge for foreign  withholding  taxes  arising  from our domestic
royalty charges to our foreign operations and domestic state income taxes offset
by a tax benefit from our operating  loss carry forwards in Hong Kong and India.
There is not  sufficient  evidence to determine  that it is more likely than not
that the Company will be able to utilize its domestic net  operating  loss carry
forwards to offset future  taxable  income and as a result,  these losses have a
full valuation reserve against them.

         The  provision  for income  taxes was $0.1  million  for the year ended
December 31, 2007. It principally includes income tax provisions from operations
in China and India;  offset by an income tax  benefit  from net  operating  loss
carry forward 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.

LIQUIDITY AND CAPITAL RESOURCES

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

                                                 DECEMBER 31,      DECEMBER 31,
                                                     2008              2007
                                                 ------------      ------------
Cash and cash equivalents ..............         $      2,400      $      2,919
Total assets ...........................               15,603            21,684
Current liabilities.....................               10,899             9,845
Non-current liabilities ................               13,466            12,556
Stockholders' equity (deficit) .........               (8,762)             (717)


     CASH AND CASH EQUIVALENTS

         Our cash is held with financial institutions.  Substantially all of the
balances  at  December  31,  2008 and 2007 are in  excess of  federally  insured
limits, and there is no restricted cash.

         Cash  and  cash  equivalents  for the  year  ended  December  31,  2008
decreased  by $0.5  million  from  December  31,  2007 due to a decrease in cash
generated by operating  activities,  net of proceeds from the disposition of the
building  in  North  Carolina  and  lower  overall  net cash  used in  financing
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.


                                       25
<PAGE>


     CASH FLOWS

         The  following  table  summarizes  our cash flow activity for the years
ended December 31, 2008, 2007 and 2006 (amounts in thousands):

                                                    2008       2007       2006
                                                  -------    -------    -------
Net cash provided by operating activities .....   $   363    $ 2,137    $ 1,794
Net cash used in investing activities .........      (133)      (725)      (345)
Net cash used in financing activities .........      (779)    (1,433)      (791)
Net increase (decrease) in cash and cash
   equivalents ................................      (549)       (21)       657


     OPERATING ACTIVITIES

         Cash  provided by  operating  activities  was $0.4 million for the year
ended December 31, 2008. The cash generated by operating  activities during 2008
resulted primarily from reductions in inventory net of reserves of $0.8 million,
prepaid  expenses of $0.5  million and an  increase  in  accounts  payables  and
accrued expenses of $1.3 million.

         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  offset by increases 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 3 to the consolidated financial statements.

         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 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.

     INVESTING ACTIVITIES

         Cash  flows from  investing  activities  include  the sale of the North
Carolina  property with proceeds of $0.7 million offset by capital  expenditures
of $0.8 million  primarily for new office space in Asia and  improvements in our
technology systems.

         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.


                                       26
<PAGE>


     FINANCING ACTIVITIES

         Net cash used in financing  activities  for the year ended December 31,
2008 was $0.8  million with $1.2 million in revolver  note  borrowings  and $2.0
million used for  repayment of the  revolver,  term note and other notes payable
and capital lease obligations.

         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 below)  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 reflects the repayment of notes payable and capital lease obligations.

         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. Bluefin Capital subsequently assigned its rights and obligations under the
credit facility  agreements to an affiliate,  CVC California,  LLC ("CVC").  The
revolving credit portion of the facility,  as amended,  permits borrowings based
upon a  formula  including  85% of  eligible  receivables  and  55% of  eligible
inventory and provides for monthly interest payments at the prime rate (5.25% at
December 31, 2008) 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.  There was $3,000 and
$879,000 in  available  borrowings  at December  31, 2008 and December 31, 2007,
respectively.

         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 warrants to purchase  2,100,000 shares of common stock. The warrants were
exercisable  over  a  five-year  period  and  initially  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 warrants
did not  require  cash  settlements.  The  relative  fair  value  of the  equity
($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 is being  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 dbt  instruments are reflected as a reduction to the face value
of the note on the balance sheet.

         On November  19, 2007,  we entered  into an amendment of our  agreement
with the lender to modify the original  financial  covenants and to extend until
June 30, 2008 the application of the original  EBITDA  covenants in exchange for
additional  common  stock  and a price  adjustment  to the  lenders  outstanding
warrants issued in connection  with the loan agreement.  In connection with this
amendment we issued an additional  250,000  shares of common stock to the lender
for $0.001 per share,  and the exercise price for all of the  previously  issued
warrants for the purchase of 2,100,000  shares of common stock was amended to an
exercise  price of $0.75 per share.  The new  relative  fair value of the equity
issued  with  this  debt of  $2,430,000,  including  the  modifications  in this
amendment and a reduction for financing  costs, is being amortized over the term
of the note.

         On April 3, 2008, we executed a further  amendment to our existing loan
agreement.  The amendment included a redefining of the EBITDA covenants, and the
cancellation of the common stock warrants  previously  issued to Bluefin Capital
in exchange  for our  issuance of an  additional  note payable to the lender for
$1.0  million.  The note bears  interest  at 8.5% and both the note and  accrued
interest are payable at maturity on June 30, 2010.  In addition,  our  borrowing
base was  modified in this  amendment by  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 increasing  the percentage of accounts  receivable to
be included in the  borrowing  base to 85%. We incurred a one-time  modification


                                       27
<PAGE>


fee of $145,000 to secure the amendment of the agreement.  The new relative fair
value  of the  equity  issued  with  this  debt  of  $2,542,000,  including  the
modifications  in this amendment and a reduction for financing  costs,  is being
amortized over the term of the note.

         Under the terms of the credit agreement, as amended, we are required to
meet certain coverage ratios,  among other restrictions  including a restriction
from declaring or paying a dividend  prior to repayment of all the  obligations.
The financial covenants, as amended, require that we maintain at the end of each
fiscal quarter "EBITDA" (as defined in the agreement) in excess of the principal
and  interest  payments for the same period of not less than $1.00 and in excess
of ratios set out in the agreement  for each  quarter.  We failed to satisfy the
minimum EBITDA requirement for quarter ended December 31, 2008, and a waiver fee
was accrued and the requirement  delayed to the next quarter.  In the event that
we fail to satisfy the minimum EBITDA requirement for a quarter, a waiver fee of
1% of the debt  commitment may be paid and the  requirement  delayed to the next
quarter. If two consecutive  quarters fail to meet the minimum EBITDA the waiver
fee  increases  to 2%. If three  consecutive  quarters  fail to meet the minimum
EBITDA,  or we do not pay the  waiver  fee,  the  credit  agreement  would be in
default and the lender may demand immediate  repayment of the full amount of the
notes  outstanding,  which if we were  unable to obtain a waiver or amend  these
covenants,  we may be unable to continue as a going  concern,  see Note 2 to our
consolidated financial statements.

         On March 31, 2009 we completed  an amendment to our existing  revolving
credit  and term  loan  agreement  with  CVC.  The  amendment  provided  for the
following: issuance of an additional term note to CVC in the principal amount of
$225,210 in lieu of paying a cash waiver fee in  connection  with our failure to
satisfy the EBITDA  requirements  for the quarter  ended  December  31, 2008 and
March 31, 2009; deferral of the term note quarterly interest payment of $215,000
due April 1, 2009;  a temporary  increase to the  borrowing  base  formulas  and
calculations  under the  revolving  credit  facility;  the  re-lending by CVC of
$125,000 under the term loan portion of credit  facility;  a consent to allow us
to sell equipment that has been designated as held for sale more fully described
in Note 5 to the consolidated  financial statements;  and the granting to CVC of
the right to designate a non-voting observer to attend all meetings of our Board
of Directors.

         We  financed  building,  land and  equipment  purchases  through  notes
payable and capital lease  obligations  expiring through June 2011. The building
and land  mortgage  were fully paid when the property was sold in October  2008.
The  remaining  obligations  bear interest at rates of 6.6% and 12.1% per annum,
and under  these  obligations,  we are  required  to make  monthly  payments  of
principal and interest.

         The outstanding  balance including accrued interest of our demand notes
payable to related  parties  at  December  31,  2008 and 2007 was  $222,000  and
$213,000,  respectively.  The demand notes of $85,000 bear interest at 10%, have
no scheduled monthly payments and are due within fifteen days from demand.

         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  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 and borrowings under our
credit  facility.  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.


                                       28
<PAGE>


         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.

         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,
any of which could have a material adverse effect on our financial condition and
results of operations and affect our ability to operate as a going concern.  See
Note 2 to the consolidated financial statements.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our  contractual  obligations at December 31,
2008 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
   related parties (1) ..   $   222,300   $   222,300   $      --     $      --     $      --
Capital lease obligations       192,900       190,900         2,000          --            --
Operating leases ........       878,200       570,300       304,100         3,800          --
Revolver & Term Note ....    16,702,100     1,125,400    15,576,700          --            --
Other notes payable .....       146,700       146,700          --            --            --
                            -----------   -----------   -----------   -----------   -----------
     Total Obligations ..   $18,142,200   $ 2,255,600   $15,882,800   $     3,800   $      --
                            ===========   ===========   ===========   ===========   ===========
</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, 2008.

         At December 31, 2008 and 2007, 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 certain 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.


                                       29
<PAGE>


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

                  The net bad debt  expenses,  recoveries and allowances for the
                  twelve  months ended  December 31, 2008,  2007 and 2006 are as
                  follows:

<TABLE>
<CAPTION>
                                                    2008         2007         2006
                                                 ----------   ----------   ----------
<S>                                              <C>          <C>          <C>
Net bad debt expenses for accounts receivable    $   74,500   $  186,700   $ (513,300)
Bad debt expense for notes receivable,
   including related party ...................      474,000    1,087,700         --
Recoveries ...................................        3,050       19,500      711,400
Allowance for doubtful accounts ..............      217,300      140,500       71,500
Allowance for doubtful accounts, related party      474,000         --           --
</TABLE>

         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, impaired
                  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.


                                       30
<PAGE>


                  The inventory  reserve  expenses and allowances for the twelve
                  months ended December 31, 2008, 2007 and 2006 are as follows:

                                             Twelve Months Ended December 31,
                                          --------------------------------------
                                             2008          2007          2006
                                          ----------    ----------    ----------

Inventory valuation expense ..........    $  692,000    $  148,000    $  557,000
Allowance for inventory valuation
   reserves ..........................     1,211,000     1,019,000     1,242,000


         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
                  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 Note 12 to the
                  consolidated financial statements.

         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 were evaluated,  and
                  we determined that certain  components of idle equipment would
                  not  either  be  effectively  redeployed  or  would be sold or
                  disposed.   Accordingly,   the  Company  took   $2,430,000  in
                  impairment  charges for the period  ending  December 31, 2008.
                  See Note 5 to the consolidated financial statements.

         o        Sales  are   recognized   when   persuasive   evidence  of  an
                  arrangement exists, product title has passed, 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,  which
                  returns have been insignificant.

         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.


                                       31
<PAGE>


NEW ACCOUNTING PRONOUNCEMENTS

         In December  2008,  FASB issues FASB Staff Position (FSP) 140-4 and FIN
46(R)-8,  Disclosures by Public Entities about Transfers of Financial Assets and
Interests in Variable Interest Entities.  The purpose of this FSP is to promptly
increase  disclosures  by public  entities  and  enterprises  until the  pending
amendments to FASB Statement No. 140,  Accounting for Transfers and Servicing of
Financial  Assets  and  Extinguishments  of  Liabilities,  (FAS  140)  and  FASB
Interpretation  No.  46  (revised  December  2003),  Consolidation  of  Variable
Interest  Entities,  (FIN 46(R)) are finalized and approved by the FASB. The FSP
is effective for reporting  periods  (interim and annual)  ending after December
15,  2008.  We adopted  this FSP for our year ended  December  31,  2008 and the
adoption did not have any impact on our consolidated financial statements.

         In May 2008,  FASB issued FASB Staff Position No. APB 14-1  "Accounting
for Convertible  Debt  Instruments That May Be Turned Into Cash Upon Conversion"
("APB 14-1").  APB 14-1  addresses  that  convertible  debt  instruments  may be
settled  in  cash  upon   conversion   (including   partial  cash   settlement).
Additionally,  APB  14-1  specifies  that  issuers  of such  instruments  should
separately account for the liability and equity components in a manner that will
reflect the entity's  nonconvertible  debt  borrowing rate when interest cost is
recognized in subsequent periods. APB 14-1 is to be applied  retrospectively for
the first  fiscal  year  beginning  on or after  December  15,  2008 and interim
periods  within the fiscal  year.  Early  adoption is not  permitted.  We do not
believe  FASB  Staff  Position  APB 14-1  will  have a  material  impact  on our
consolidated financial statements.

         In May 2008,  the FASB issued SFAS No. 162, THE  HIERARCHY OF GENERALLY
ACCEPTED  ACCOUNTING  PRINCIPLES  (SFAS 162). SFAS 162 identifies the sources of
accounting  principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental  entities that are
presented in conformity with generally accepted accounting  principles (GAAP) in
the United States (the GAAP hierarchy).  SFAS 162 is effective 60 days following
the SEC's approval of the Public Company  Accounting  Oversight Board amendments
to AU  Section  411.  We do not  believe  SFAS 162 will  have any  impact on our
consolidated financial statements.

         In  March  2008,  the  FASB  issued  SFAS No.  161,  DISCLOSURES  ABOUT
DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES - AN AMENDMENT OF FASB STATEMENT
NO. 133 (SFAS 161). SFAS 161 changes the disclosure  requirements for derivative
instruments and hedging  activities.  Entities are required to provide  enhanced
disclosures  about  how and  why an  entity  uses  derivative  instruments,  how
derivative  instruments  and  related  hedged  items  are  accounted  for  under
Statement 133 and its related interpretations and how derivative instruments and
related  hedged  items  affect  an  entity's   financial   position,   financial
performance  and cash flows.  SFAS 161 is effective for fiscal years and interim
periods  beginning after November 15, 2008. We do not believe SFAS 161 will have
a material impact on our consolidated financial statements.

         In February 2008, the FASB issued FASB Staff Position 157-2,  Effective
Date of FASB  Statement No. 157 which delays the effective  date of SFAS No. 157
to  January  1,  2009,  for  the  Company,   for  all  nonfinancial  assets  and
nonfinancial  liabilities,  except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
We believe the  adoption  of the  delayed  items of SFAS No. 157 will not have a
material impact on our consolidated financial statements.

         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.


                                       32
<PAGE>


         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.

         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. It did not have any impact on our
consolidated financial statements.

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  contracts to hedge the  exchange  exposure for future
product  purchases.  There were no hedging contracts  outstanding as of December
31,  2008.  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, 2008, the
Revolving Credit Note of $4.6 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  $46,000 on our  variable  rate
borrowings.


                                       33
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                TABLE OF CONTENTS
                                                                            PAGE
                                                                            ----

Report of Independent Registered Public Accounting Firm...................    35
Consolidated Balance Sheets...............................................    36
Consolidated Statements of Operations.....................................    37
Consolidated Statements of Stockholders' Equity and Convertible
   Redeemable Preferred Stock.............................................    38
Consolidated Statements of Cash Flows.....................................    39
Notes to Consolidated Financial Statements................................    41


                                       34
<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, 2008 and 2007,  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, 2008. 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  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Talon International,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations  and their cash flows for each of the three years in the period ended
December  31,  2008,  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,  presents 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, 2008, included in the accompanying  Management's Report on Internal
Control Over Financial  Reporting and accordingly,  we do not express an opinion
thereon.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial  statements,  for the year ended  December  31,  2008,  the Company
incurred a net loss of $8,356,786.  In addition,  the Company had an accumulated
deficit of $63,651,032 at December 31, 2008.  These  factors,  among others,  as
discussed in Note 2 to the financial  statements,  raise substantial doubt about
the  Company's  ability to continue as a going  concern.  Management's  plans in
regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


                                               /s/ SingerLewak LLP
                                               ---------------------------------
                                               SINGERLEWAK LLP
                                               Los Angeles, California
                                               April 6, 2009


                                       35
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                     December 31,    December 31,
                                                         2008            2007
                                                     ------------    ------------
<S>                                                  <C>             <C>
Assets
Current Assets:
  Cash and cash equivalents ......................   $  2,399,717    $  2,918,858
  Marketable Securities, net of valuation reserves           --         1,040,000
  Accounts Receivable, net .......................      3,856,613       3,504,351
  Inventories, net ...............................      1,669,149       2,487,427
  Prepaid expenses and other current assets ......        473,955         945,566
                                                     ------------    ------------
Total current assets .............................      8,399,434      10,896,202

Property and equipment, net ......................      2,084,244       5,210,446
Fixed Assets held for sale .......................        407,655         700,000
Due from related parties .........................        200,000         625,454
Intangible assets, net ...........................      4,110,751       4,110,751
Other assets .....................................        400,494         140,782
                                                     ------------    ------------

Total assets .....................................   $ 15,602,578    $ 21,683,635
                                                     ============    ============


Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable ...............................   $  7,674,768    $  6,249,618
  Other accrued expenses and legal costs .........      2,675,756       2,759,868
  Demand notes payable to related parties ........        222,264         213,091
  Current portion of capital lease obligations ...        182,444         323,317
  Current portion of notes payable ...............        144,064         299,108
                                                     ------------    ------------
Total current liabilities ........................     10,899,296       9,845,002

Capital lease obligations, less current portion ..          1,910         189,705
Notes payable, less current portion ..............           --           848,484
Revolver note payable ............................      4,638,988       3,807,806
Term note payable, net of discount ...............      8,067,428       7,014,301
Other long term liabilities ......................        756,888         695,687
                                                     ------------    ------------
Total liabilities ................................     24,364,510      22,400,985

Commitments and contingencies (Note 14)

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, 2008 and
    December 31, 2007, respectively ..............         20,291          20,291
  Additional paid-in capital .....................     54,769,072      54,510,161
  Accumulated deficit ............................    (63,651,032)    (55,292,246)
  Accumulated other comprehensive income .........         99,737          44,444
                                                     ------------    ------------
Total stockholders' equity (deficit) .............     (8,761,932)       (717,350)
                                                     ------------    ------------
Total liabilities and stockholders' equity .......   $ 15,602,578    $ 21,683,635
                                                     ============    ============
</TABLE>


                             See accompanying notes.


                                       36
<PAGE>


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

<CAPTION>

                                                        Year Ended December 31,
                                              --------------------------------------------
                                                  2008            2007             2006
                                              ------------    ------------    ------------
<S>                                           <C>             <C>               <C>
Net sales .................................   $ 48,170,980    $ 40,529,555      48,825,002
Cost of goods sold ........................     35,553,857      28,422,820      34,356,034
                                              ------------    ------------    ------------
Gross profit ..............................     12,617,123      12,106,735      14,468,968

Selling expenses ..........................      3,103,529       3,125,634       2,777,772
General and administrative expenses .......     12,005,971      10,937,223      10,359,540

Impairment of marketable securites and
   related note receivable ................      1,040,000       1,087,653            --
Impairment loss on fixed assets ...........      2,429,506         126,904            --
                                              ------------    ------------    ------------
Total operating expenses ..................     18,579,006      15,277,414      13,137,312

Income (loss) from operations .............     (5,961,883)     (3,170,679)      1,331,656
Interest expense, net .....................      2,436,675       1,680,079         988,453
                                              ------------    ------------    ------------

Income (loss) before income taxes .........     (8,398,558)     (4,850,758)        343,203
Provision for (benefit from) income taxes .        (39,772)         70,949          33,900
                                              ------------    ------------    ------------
Net income (loss) .........................   $ (8,358,786)   $ (4,921,707)   $    309,303
                                              ============    ============    ============
Basic income (loss) per share .............   $      (0.41)   $      (0.24)   $       0.02
                                              ============    ============    ============
Diluted income (loss) per share ...........   $      (0.41)   $      (0.24)   $       0.02
                                              ============    ============    ============

Basic weighted average shares outstanding .     20,291,433      20,155,563      18,377,484
                                              ============    ============    ============
Diluted weighted average shares outstanding     20,291,433      20,155,563      18,955,796
                                              ============    ============    ============
</TABLE>


                             See accompanying notes.


                                       37
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006


<CAPTION>
                                                                    Preferred Stock
                                      Common Stock                      Series A
                              ----------------------------    ---------------------------
                                 Shares          Amount          Shares         Amount
                              ------------    ------------    ------------   ------------
<S>                             <C>           <C>                     <C>    <C>
BALANCE, JANUARY 1, 2006 ..     18,241,045    $     18,241            --     $       --
   Common stock  issued for
     services .............        225,388             225            --             --
   Stock based compensation           --              --              --             --
   Net income .............           --              --              --             --
                              ------------    ------------    ------------   ------------
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           --              --              --             --
   Foreign currency
   translation ............           --              --              --             --
   Adoption of FIN 48 .....           --              --              --             --
   Net loss ...............           --              --              --             --
                              ------------    ------------    ------------   ------------
BALANCE, DECEMBER 31, 2007      20,291,433          20,291            --             --
   Warrant fair value
     adjustment ...........           --              --              --             --
   Stock based compensation           --              --              --             --
   Foreign currency
     translation ..........           --              --              --             --
   Net loss ...............           --              --              --             --
                              ------------    ------------    ------------   ------------
BALANCE, DECEMBER 31, 2008      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, 2006 ..   $ 51,327,878   $       --     $(50,434,042)   $    912,077
   Common stock  issued for
     services .............        102,504           --             --           102,729
   Stock based compensation        362,120           --             --           362,120
   Net income .............           --             --          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
   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)
   Warrant fair value
     adjustment ...........       (148,302)          --             --          (148,302)
   Stock based compensation        407,213           --             --           407,213
   Foreign currency
     translation ..........           --           55,293           --            55,293
   Net loss ...............           --             --       (8,358,786)     (8,358,786)
                              ------------   ------------   ------------    ------------
BALANCE, DECEMBER 31, 2008    $ 54,769,072   $     99,737   $(63,651,032)   $ (8,761,932)
                              ============   ============   ============    ============
</TABLE>


                             See accompanying notes


                                       38
<PAGE>


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

<CAPTION>
                                                                   Year Ended      Year Ended      Year Ended
                                                                  December 31,    December 31,    December 31,
                                                                      2008            2007            2006
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) ..........................................   $ (8,358,786)   $ (4,921,707)   $    309,303
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization ............................      1,079,441       1,168,434       1,212,225
     Amortization of deferred financing cost and debt discounts      1,186,837         736,042         311,000
     Common stock and warrants issued for services ............           --              --            32,729
     Stock based compensation .................................        407,213         245,000         362,120
     Additions (recoveries) to allowance for doubtful accounts         548,519       1,274,406        (513,347)
     Additions to inventory valuation reserve .................        692,382         148,000         557,270
     Impairment of marketable securities and fixed assets .....      3,469,506         126,904            --
     Loss from disposal of assets .............................         49,000          58,076         129,179
   Changes in operating assets and liabilities:
     Accounts and notes receivable, including related parties .       (419,891)      1,048,662       1,481,923
     Note receivable collections ..............................           --           596,491         640,539
     Inventories ..............................................        125,896         415,793       1,964,609
     Prepaid expenses and other current assets ................        474,317        (404,532)         77,543
     Other assets .............................................       (249,709)       (118,499)       (140,217)
     Accounts payable .........................................      1,390,674       2,070,784      (3,030,179)
     Other accrued expenses ...................................        (32,191)       (306,636)       (734,247)
     Repayment of notes payable converted from accounts payable           --              --          (867,297)
                                                                  ------------    ------------    ------------
   Net cash provided by (used in) operating activities ........        363,208       2,137,218       1,793,153
                                                                  ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of equipment ............................        686,510            --             2,500
   Acquisition of property and equipment ......................       (819,876)       (725,498)       (347,188)
                                                                  ------------    ------------    ------------
   Net cash used in investing activities ......................       (133,366)       (725,498)       (344,688)
                                                                  ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options and warrants .......           --            42,746            --
   Proceeds from issuance of stock options and warrants, net of
   issuance costs .............................................           --         2,463,017            --
   Revolver note borrowings ...................................      1,200,000       4,307,806            --
   Repayment of revolver note borrowings ......................       (521,722)       (500,000)           --
   Term note borrowings, net of issuance costs ................           --         7,131,720            --
   Payments on term note ......................................       (125,000)       (449,840)           --
   Proceeds from other notes including related party ..........           --           291,753            --
   Payments of demand note payable to related party ...........           --          (579,794)           --
   Payments of notes payable ..................................     (1,003,528)    (13,687,882)       (186,838)
   Payments of capital lease obligations ......................       (328,668)       (452,232)       (604,351)
                                                                  ------------    ------------    ------------
   Net cash (used in) provided by financing activities ........       (778,918)     (1,432,706)       (791,189)
                                                                  ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents ..........       (549,076)        (20,986)        657,276
Net effect of foreign currency exchange translation on cash ...         29,935           5,171            --
                                                                  ------------    ------------    ------------
Cash and cash equivalents, beginning of year ..................      2,918,858       2,934,673       2,277,397
                                                                  ------------    ------------    ------------
Cash and cash equivalents, end of year ........................   $  2,399,717    $  2,918,858    $  2,934,673
                                                                  ============    ============    ============
</TABLE>


                             See accompanying notes.


                                       39
<PAGE>


<TABLE>
<CAPTION>
TALON INTERNATIONAL, INC.                                          Year Ended      Year Ended      Year Ended
Consolidated Statements of Cash Flows                             December 31,    December 31,    December 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                    2008            2007            2006
  Cash received (paid) during the year for:                       ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
    Interest paid .............................................   $ (1,301,790)   $ (1,166,333)   $   (975,609)
    Interest received .........................................   $     15,509    $    182,263    $    320,232
    Income taxes paid .........................................   $   (183,970)        (90,530)        (33,900)
  Non-cash financing activity:
    Notes payable issued in modification of loan agreement ....   $  1,000,000    $       --      $       --
    Debt modification fee .....................................   $    145,000    $       --      $       --
    Deferred financing cost ...................................   $       --      $    217,302    $       --
    Effect of foreign currency translation on net assets ......   $     55,293    $     10,728    $       --
    Notes receivable, converted to marketable securities ......   $  1,040,000    $       --      $       --
    Trade payable & accrued legal, converted to notes payable..   $       --      $       --      $  1,775,000
    Capital lease obligation ..................................   $       --      $     57,793    $     64,432
</TABLE>


                             See accompanying notes.


                                       40
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

         Talon  International,   Inc.  (together  with  its  subsidiaries,   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.

         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  operations  in the period  incurred.  During  2008,  2007 and 2006,  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.
The  accounting  estimates  that  require our most  significant,  difficult  and
subjective judgments include the valuation of marketable equity securities;  the
valuation allowance for accounts receivable,  notes receivable and inventory and
the assessment of  recoverability of long-lived assets and intangible assets and
the recognition and measurement of current and deferred income taxes  (including
the  measurement  of  uncertain  tax  positions).  Actual  results  could differ
materially from our estimates.

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  $0.9 and $2.7  million  at  financial  institutions  in excess of
governmentally insured limits at December 31, 2008 and 2007.


                                       41
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

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 3 to the  consolidated  financial
statements.

ALLOWANCE FOR ACCOUNTS AND NOTES RECEIVABLE DOUBTFUL ACCOUNTS

         We are required to make judgments as to the  collectability of accounts
and notes receivable based on established  aging policy,  historical  experience
and  future  expectations.   The  allowances  for  doubtful  accounts  represent
allowances for customer trade accounts and notes  receivable  that are estimated
to be partially or entirely  uncollectible.  These allowances are used to reduce
gross trade  receivables or note  receivable 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. The total allowance for accounts receivable doubtful accounts at
December  31, 2008 and 2007 was  $217,300 and  $140,500,  respectively,  and for
notes  receivable at December 2008 was $474,000.  See Note 4 to 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,
                                                 -------------------------------
                                                     2008                 2007
                                                 ----------           ----------

Finished goods .......................           $2,880,319           $3,506,439
Less inventory valuation reserves ....            1,211,170            1,019,012
                                                 ----------           ----------
Total inventories ....................           $1,669,149           $2,487,427
                                                 ==========           ==========


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. See Note 5.


                                       42
<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                 1 year

         Idle equipment                 5 to 10 years


         Property and equipment consist of the following:

                                                        Year Ended December 31,
                                                     ---------------------------
                                                         2008            2007
                                                     -----------     -----------

Furniture and fixtures .........................     $   613,924     $   600,491
Machinery and equipment ........................         365,951       1,694,921
Computer equipment .............................       3,654,766       4,137,834
Leasehold improvements .........................         332,270         248,129
Dies and molds .................................         106,273         106,273
Idle equipment .................................            --         4,198,880
                                                     -----------     -----------
                                                       5,073,183      10,986,528
Accumulated depreciation and amortization ......       2,988,939       5,776,082
                                                     -----------     -----------
Net property and equipment .....................     $ 2,084,244     $ 5,210,446
                                                     ===========     ===========

         Depreciation  expense for the years ended  December 31, 2008,  2007 and
2006 was $1,079,000, $1,136,000 and $1,090,000, respectively.

         Fixed Assets held for sale at December 31, 2008 of $407,655 consists of
idle  equipment  which  is  principally  machinery  and  equipment  used for the
production  of zipper chain and the assembly of finished  zippers.  Fixed Assets
held for sale at December  31, 2007 of $700,000  consists of the North  Carolina
land and manufacturing facility that was closed in connection with the Company's
2005 restructuring plan. This property was sold on October 22, 2008 for $725,000
and the related mortgage note against the property was paid in full. See Note 5.


                                       43
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

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, 2008, the Company  evaluated its 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, 2008 and
2007.  Amortization  expense  related  to  exclusive  license  and  intellectual
property  rights of $29,000  and  $115,500  were  recorded  for the years  ended
December 31, 2007 and 2006, respectively.  During the first quarter of 2007, the
exclusive  license and  intellectual  property became fully  amortized,  thus no
amortization expense for intangible assets was recorded for December 31, 2008.

         Other  intangible  assets  as of  December  31,  2008  and  2007 are as
follows:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                                --------------------------
                                                                    2008           2007
                                                                -----------    -----------
<S>                                                             <C>            <C>
Intangible Assets:
  Tradename .................................................   $ 4,110,751    $ 4,110,751
  Accumulated amortization ..................................          --             --
                                                                -----------    -----------
      Tradename, net ........................................     4,110,751      4,110,751

  Exclusive license and intellectual property rights ........       577,500        577,500
  Accumulated amortization ..................................      (577,500)      (577,500)
                                                                -----------    -----------
      Exclusive license and intellectual property rights, net             0              0
                                                                -----------    -----------
  Intangible assets, net ....................................   $ 4,110,751    $ 4,110,751
                                                                ===========    ===========
</TABLE>

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


                                       44
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

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. See Note 13.

STOCK-BASED COMPENSATION

         We have employee equity incentive plans, which are described more fully
in Note 11.  Effective  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.  Accordingly,  we measure share-based  compensation at
the grant date based on the fair value of the award.

         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, 2007 and 2008 reflect the impact of SFAS 123(R).

         Options issued to  consultants,  which are more fully described in Note
11, 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."

         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, 2008, 2007 and 2006 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 2008, 2007
and 2006 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, 2008,  2007 and 2006,  expected  forfeitures  are immaterial and as
such the Company is recognizing forfeitures as they occur.

         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


                                       45
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

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 years ended December 31, 2008
and 2007 are  unrealized  gains in foreign  currency  translation of $99,737 and
$44,444,  respectively.  The foreign currency translation  adjustment represents
the net currency  translation  adjustment  gains and losses related to our China
and India subsidiaries.

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 2008 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.


                                       46
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

         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.

         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,  2008,  2007 and 2006 was
$2,501,000 $1,922,000 and $1,357,000,  respectively. Interest income of $64,000,
$242,000  and $368,000  for the years ended  December  31, 2008,  2007 and 2006,
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 goods sold.

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. See Note 14.

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.

NEW ACCOUNTING PRONOUNCEMENTS

         In December  2008,  FASB issues FASB Staff Position (FSP) 140-4 and FIN
46(R)-8,  Disclosures by Public Entities about Transfers of Financial Assets and
Interests in Variable Interest Entities.  The purpose of this FSP is to promptly
increase  disclosures  by public  entities  and  enterprises  until the  pending
amendments to FASB Statement No. 140,  Accounting for Transfers and Servicing of
Financial  Assets  and  Extinguishments  of  Liabilities,  (FAS  140)  and  FASB
Interpretation  No.  46  (revised  December  2003),  Consolidation  of  Variable
Interest  Entities,  (FIN 46(R)) are finalized and approved by the FASB. The FSP
is effective for reporting  periods  (interim and annual)  ending after December
15,  2008.  We adopted  this FSP for our year ended  December  31,  2008 and the
adoption did not have any impact on our consolidated financial statements.

         On  May  9,  2008,  FASB  issued  FASB  Staff  Position  No.  APB  14-1
"Accounting for Convertible  Debt  Instruments That May Be Turned Into Cash Upon
Conversion"  ("APB 14-1").  APB 14-1 addresses that convertible debt instruments
may be settled in cash upon  conversion  (including  partial  cash  settlement).
Additionally,  APB  14-1  specifies  that  issuers  of such  instruments  should


                                       47
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

separately account for the liability and equity components in a manner that will
reflect the entity's  nonconvertible  debt  borrowing rate when interest cost is
recognized in subsequent periods. APB 14-1 is to be applied  retrospectively for
the first  annual  reporting on or after  December 15, 2008 and interim  periods
within the fiscal year.  Early adoption is not permitted.  We do not believe No.
APB 14-1 will have a material impact on our consolidated financial statements.

         In May 2008,  the FASB issued SFAS No. 162, THE  HIERARCHY OF GENERALLY
ACCEPTED  ACCOUNTING  PRINCIPLES  (SFAS 162). SFAS 162 identifies the sources of
accounting  principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental  entities that are
presented in conformity with generally accepted accounting  principles (GAAP) in
the United States (the GAAP hierarchy).  SFAS 162 is effective 60 days following
the SEC's approval of the Public Company  Accounting  Oversight Board amendments
to AU  Section  411.  We do not  believe  SFAS 162 will  have any  impact on our
consolidated financial statements.

         In  March  2008,  the  FASB  issued  SFAS No.  161,  DISCLOSURES  ABOUT
DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES - AN AMENDMENT OF FASB STATEMENT
NO. 133 (SFAS 161). SFAS 161 changes the disclosure  requirements for derivative
instruments and hedging  activities.  Entities are required to provide  enhanced
disclosures  about  how and  why an  entity  uses  derivative  instruments,  how
derivative  instruments  and  related  hedged  items  are  accounted  for  under
Statement 133 and its related  interpretations,  and how derivative  instruments
and related  hedged  items  affect an  entity's  financial  position,  financial
performance  and cash flows.  SFAS 161 is effective for fiscal years and interim
periods  beginning after November 15, 2008. We do not believe SFAS 161 will have
a material impact on our consolidated financial statements.

         In February 2008, the FASB issued FASB Staff Position 157-2,  Effective
Date of FASB  Statement No. 157 which delays the effective  date of SFAS No. 157
to  January  1,  2009,  for  the  Company,   for  all  nonfinancial  assets  and
nonfinancial  liabilities,  except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
We believe the  adoption  of the  delayed  items of SFAS No. 157 will not have a
material impact on our consolidated financial statements.

         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 acquirer 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.


                                       48
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       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 chose to not report unrealized gains and losses in earnings. See Note 3.

NOTE 2-- SIGNIFICANT RISKS AND UNCERTAINTIES

         Our  consolidated  financial  statements  have been prepared on a going
concern basis of accounting which  contemplates the continuity of operations and
the  realization of assets,  liabilities and commitments in the normal course of
business. During fiscal years 2008 and 2007, the Company experienced losses from
operations  and  has  an  accumulated   deficit  as  of  December  31,  2008  of
$63,651,000.  As of December 31, 2008,  the Company was also in default with the
covenants in the Revolving  Credit and Term Loan Agreement with CVC  California,
LLC ("CVC") and was required to pay a fee to have the lender waive this covenant
at December 31, 2008.  Additionally,  the Company anticipates that it will be in
default of the covenants at March 31, 2009, and it has also paid a waiver fee to
the lender for this  period.  It is uncertain  whether we will be in  compliance
with the financial covenants in future quarters. See Subsequent Event Note 19 to
our consolidated financial statements.  Our consolidated financial statements do
not reflect any adjustments relating to the recoverability and classification of
recorded asset amounts or  classification  of liabilities that would be required
if a default  occurred  and we were  unable  to  obtain a waiver  or modify  the
covenants.  Should we fail to be in  compliance  with these  covenants for three
successive  quarters  and we are  unable  to  obtain  a waiver  or  amend  these
covenants, we may be unable to continue as a going concern.

         Our performance is subject to worldwide  economic  conditions and their
impact  on  levels  of  consumer  spending  that  affect  not only the  ultimate
consumer,  but also retailers,  which constitute many of our largest  customers.
Consumer  spending  recently  has  deteriorated  significantly  and  may  remain
depressed,  or be subject to further  deterioration for the foreseeable  future.
The worldwide apparel industry is heavily influenced by general economic cycles.
Purchases  of  fashion  apparel  and  accessories  tend to decline in periods of
recession or uncertainty  regarding  future  economic  prospects,  as disposable
income  declines.  Many  factors  affect the level of  consumer  spending in the
apparel industries,  including,  among others:  prevailing economic  conditions,
levels of employment, salaries and wage rates, energy costs, interest rates, the
availability  of consumer  credit,  taxation and consumer  confidence  in future
economic conditions. During periods of recession or economic uncertainty, we may
not be able to maintain or increase our sales to existing customers,  make sales
to new  customers,  or maintain our earnings from  operations as a percentage of
net sales.  As a result,  our operating  results may be adversely and materially
affected by sustained or further  downward trends in the United States or global
economy.  The  Company's  ability to continue as a going concern is dependent on
its ability to generate sufficient cash flow to meet its obligations on a timely
basis,  to obtain  additional  financing  as may be required and  ultimately  to
attain profitable operations.

         In  response  to these  conditions,  the  Company  has  taken  steps to
significantly  reduce its operating  costs,  eliminate  employees in response to
lower volumes,  curtail capital and  discretionary  spending to better align the
Company's  organizational  and cost  structures with future Company and industry
expectations  and  uncertainties  and to insure the company will have sufficient
cash  flow to cover  its  operating  needs.  The  Company  has also  implemented
programs to increase sales incentives,  to secure preferred supplier status with
customers and to accelerate cash  collections  from  customers.  There can be no
assurance; however, that the Company will be successful in these matters or that
these steps will be  sufficient  to ensure the  Company can  continue as a going
concern.

NOTE 3-- MARKETABLE SECURITIES AND RELATED 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 receivable in monthly  installments  over thirty-one  months  beginning
March 1,  2006.  The  payments,  after  initial  period  generally  ranged  from
$133,000-$267,000 per month until paid in full, but no later than July 1, 2008.


                                       49
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

         Azteca failed to make the  scheduled  note payments due on July 1, 2007
and all subsequent periods  thereafter,  triggering a default,  resulting in the
entire note balance becoming immediately due and payable. On September 10, 2007,
after meeting with and conducting extensive discussions with Azteca, they 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 note balance from Azteca. In December 2007, an agreement
was reached whereby Azteca delivered shares of common stock of a separate public
corporation in lieu of the note receivable and the Company reversed a portion of
the impairment  recorded in September 2007 and reflected income of $1,040,000 as
a reversal of the previously recorded bad debt. The agreement with Azteca called
for them to deliver 2,000,000 shares of unrestricted  common stock of a separate
public  corporation with a value of $1,040,000,  in exchange for cancellation of
the Azteca  note  receivable.  No realized  or  unrealized  gains or losses were
recognized  during the year ended  December 31, 2007.  On January 30, 2008,  the
Company  received the  unrestricted  common stock of this public company and the
Company could begin trading these shares, selling no more than 10,000 shares per
week in the open market, and without restriction in private transactions.

         On September 30, 2008,  this public  company  issued its second quarter
2008 SEC filing  stating it had no customers,  cash flow, or new orders and that
it was in violation of its  financial  covenants to its lender.  The Company has
concluded that the asset is permanently  impaired and as a result,  recognized a
valuation  reserve  for the  full  value  of the  investment  of  $1,040,000  at
September 30, 2008.

NOTE 4-- NOTE RECEIVABLE RELATED PARTY

         Due from  related  parties  at  December  31,  2008  and 2007  includes
$674,010 and $625,454,  respectively,  of unsecured notes,  advances and accrued
interest  receivable from Colin Dyne, a director and stockholder of the Company.
The economic  decline in the fourth  quarter of 2008 and an expected  payment in
2008 that was not  received,  impacted the time and risk of full  collection  of
this  note,  and as a result,  the  Company  recorded  an  impairment  charge of
$474,010 against this note at December 31, 2008.

NOTE 5-- FIXED ASSETS HELD FOR SALE

         The Company has equipment  for  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
those  operations  in 2005.  The Company  relocated  this  equipment to Asia and
negotiated with manufacturing partners for the redeployment of this equipment in
joint  manufacturing   agreements.   China  importation  fees,  regulations  and
operating  use  restrictions   however  made  this   arrangement   uneconomical.
Accordingly,  the  Company  modified  its  negotiations  to affect a sale of the
equipment  with  certain  use  rights.  The  Company is now in  negotiations  to
potentially  sell this  equipment  to a third  party.  The  decision to sell the
equipment as compared to redeploying it in operations, modified the cash returns
available from the assets.  Accordingly,  the Company  analyzed the cash flow of
the  potential  sales value and  determined  that it was likely that the sale of
this equipment would not recover its carrying  value.  As a result,  the Company
has recorded an impairment  charge of  $2,026,000  for the  difference  from the
estimated  sales value of the equipment  and the previous  carrying  value.  The
adjusted carrying value of the equipment at December 31, 2008 is $350,000.

         The Company  also  determined  that  certain  components  of its Tekfit
equipment,  which is used in the manufacture of the Tekfit  proprietary  stretch
waistband,  will not be  redeployed  as a  consequence  of lower demand for this
product and the affect of the current  economic crisis on the apparel  industry.
As a result the  Company  recorded  an  impairment  charge of  $403,500  for the
equipment  which will not be utilized in  foreseeable  operations.  The adjusted
carrying value of the equipment at December 31, 2008 is $58,000.


                                       50
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

         Property held for sale at December 31, 2007 of $700,000 consists of the
North  Carolina  land and  manufacturing  facility that was closed in connection
with the Company's 2005  restructuring  plan.  This property was sold on October
22, 2008 for  $725,000  and the related  mortgage  note against the property was
paid in full.

NOTE 6-- DEMAND NOTES PAYABLE TO RELATED PARTIES

         Demand notes  payable to related  parties  consist of two notes payable
issued from 1995-1998 to parties  related to or affiliated with directors of the
Company with interest  rates of 10% per annum,  due and payable on the fifteenth
day following delivery of written demand for payment. The outstanding amounts of
these notes payable as of December 31, 2008 and 2007 were $222,264 and $213,100,
respectively.

         Interest expense,  interest accrual and interest amount paid related to
the demand  notes  payable to related  parties for the years ended  December 31,
2008, 2007 and 2006 are as follows:

                                                   YEAR ENDED DECEMBER 31,
                                            ------------------------------------
                                              2008          2007          2006
                                            --------      --------      --------
Interest expense .....................      $  9,173      $ 30,568      $ 67,753
Accrued interest balance .............      $137,088      $127,915      $515,738
Interest paid ........................      $   --        $518,546      $   --

NOTE 7-- CAPITAL LEASE OBLIGATIONS

         The Company financed equipment  purchases through various capital lease
obligations  expiring through February 2010. These  obligations bear interest at
various  rates  ranging  from 6.6% to 12.2% per  annum.  Future  minimum  annual
payments under these capital lease obligations are as follows:

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

2009 ......................................................           $ 190,913
2010 ......................................................               1,947
2011 and thereafter .......................................                --
                                                                      ---------
Total payments ............................................             192,860

Less amount representing interest .........................              (8,506)
                                                                      ---------
Balance at December 31, 2008 ..............................             184,354

Less current portion ......................................             182,444
                                                                      ---------
Long-term portion .........................................           $   1,910
                                                                      =========

         At December 31, 2008,  total property and equipment under capital lease
obligations  and related  accumulated  depreciation  was $840,914 and  $479,742,
respectively.  At December 31, 2007,  total property and equipment under capital
lease  obligations  and related  accumulated  depreciation  was  $1,723,283  and
$666,483, respectively.


                                       51
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8-- NOTES PAYABLE

         Notes payable consist of the following:

                                                    Year Ended December 31,
                                                  ---------------------------
                                                     2008             2007
                                                  ----------       ----------

$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;  paid in full in October 2008 .....     $     --         $  689,651

$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; note payments were accelerated
in October 2008 changing the monthly payments
to  $25,000  and  the  unpaid  principal  and
interest  due from  November 22, 2009 to June
30, 2009; secured by manufacturing  equipment        144,064          371,863

$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                                    144,064        1,147,592
    Less Current portion                             144,064          299,108
                                                  ----------       ----------
Notes payable, net of current portion             $        -       $  848,484
                                                  ==========       ==========


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

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

         2009 ............................................     $  146,709
         2010 and thereafter .............................           --
                                                               ----------
         Total ...........................................     $  146,709
                                                               ==========


NOTE 9 - DEBT FACILITY

         On June 27, 2007, the Company entered into a Revolving  Credit and Term
Loan  Agreement  with  Bluefin  Capital,   LLC  subsequently   assigned  to  CVC
California,  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  permitted  borrowings  based upon a
formula  including 75% the Company's  eligible  receivables  and 55% of eligible
inventory,  and provided for monthly interest  payments at the prime rate (5.25%
at December 31, 2008) 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.

         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 warrants to purchase  2,100,000  shares of common stock.  The
warrants were exercisable over a five-year period and initially 700,000 warrants
were exercisable at $0.95 per share;  700,000 warrants were exercisable at $1.05


                                       52
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

per share;  and  700,000  warrants  were  exercisable  at $1.14 per  share.  The
warrants did not require cash settlements. The relative fair value of the equity
($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 is being  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 as a reduction to the face value
of the note on the balance sheet.

         On November  19,  2007,  the Company  entered  into an amendment of its
agreement to modify the original  financial  covenants  and to extend until June
30, 2008 the  application  of the  original  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. In connection
with this  amendment the Company  issued an additional  250,000 shares of common
stock to the lender for $0.001 per share,  and the exercise price for all of the
previously  issued warrants for the purchase of 2,100,000 shares of common stock
was amended to an exercise price of $0.75 per share. The new relative fair value
of the equity issued with this debt of $2,430,000,  including the  modifications
in this amendment and a reduction for financing  costs,  is being amortized over
the term of the note.

         On April 3,  2008,  the  Company  executed a further  amendment  to its
existing  loan  agreement.  The  amendment  included a redefining  of the EBITDA
covenants,  and the cancellation of the common stock warrants  previously issued
to the lender in exchange for the issuance by the Company of an additional  note
payable to CVC for $1.0  million.  The note bears  interest at 8.5% and both the
note and accrued interest are payable at maturity on June 30, 2010. In addition,
the Company's  borrowing  base was modified in this  amendment by 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  increasing  the  percentage of
accounts  receivable  to be included in the  borrowing  base to 85%. The Company
incurred a one-time  modification fee of $145,000 to secure the amendment of the
agreement.  The new relative  fair value of the equity  issued with this debt of
$2,542,000,  including the  modifications  in this amendment and a reduction for
financing costs, is being amortized over the term of the note.

         In  connection  with this  amendment  the  Company  evaluated  the debt
amendment under EITF 96-19  "Debtor's  Accounting for a Modification or Exchange
or Debt  Instruments".  It was  determined  that the debt  modification  did not
constitute  a material  change as defined by EITF 96-19 and did not  qualify for
treatment as a troubled debt restructuring.  Accordingly, the Company recorded a
reduction  to equity and an increase to notes  payable for the fair value of the
warrants of $260,205 and the difference ($739,795) between the fair value of the
warrants  at the  time of  repurchase  and the  face  value of the note has been
recorded as an  additional  deferred cost and is reflected as a reduction to the
face value of the note on the balance sheet.  This cost is being amortized using
the  interest-method  over the life of the modified notes and is be reflected as
interest expense.

         Under the terms of the credit  agreement,  as  amended,  the Company is
required to meet certain coverage ratios, among other restrictions,  including a
restriction  from  declaring or paying a dividend  prior to repayment of all the
obligations.  The  financial  covenants,  as amended,  require  that the Company
maintain  at the  end  of  each  fiscal  quarter  "EBITDA"  (as  defined  in the
agreement) in excess of the principal and interest  payments for the same period
of not less than $1.00 and in excess of ratios set out in the agreement for each
quarter.  The  Company  failed to satisfy  the minimum  EBITDA  requirement  for
quarter ended December 31, 2008,  and a waiver fee of 1% of the debt  commitment
was accrued and the requirement  delayed to the next quarter. If two consecutive
quarters  fail to meet the minimum  EBITDA,  the waiver fee  increases to 2%. If
three consecutive  quarters fail to meet the minimum EBITDA, or the Company does
not pay the waiver fee, the credit  agreement would be in default and the lender
may demand  immediate  repayment  of the full  amount of the notes  outstanding,
which if we were unable to obtain a waiver or amend these  covenants,  we may be
unable to continue as a going  concern,  see Note 2. See Note 19 for  subsequent
event regarding waiver and amendment of loan covenants.


                                       53
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

         As of December  31, 2008,  the Company had  outstanding  borrowings  of
$10,375,000 under the term notes  (discounted  carrying value of $8,067,428) and
$4,639,000 under the revolving credit note.

         At the initial  closing of the agreement 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.

         Interest  expense  related  to  the  Revolving  Credit  and  Term  Loan
Agreement for the year ended  December 31, 2008 was  $2,370,570,  which includes
$1,186,837 in amortization of discounts and deferred  financing costs.  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 10--STOCKHOLDERS' EQUITY AND 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

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 14).


                                       54
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11--STOCK OPTION INCENTIVE PLAN AND WARRANTS

STOCK OPTION INCENTIVE PLAN

         On July 14, 2008, at the Company's  annual meeting of  stockholders,  a
new 2008  Stock  Plan was  approved  by the  stockholders.  The 2008  Stock Plan
authorizes  up to  2,500,000  shares of common  stock for  issuance  pursuant to
awards granted to individuals under the 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. Options granted to certain employees in 2008 include certain  acceleration
features based on Company  performance as determined the Board of Directors each
year.  Consistent with SFAS 123(R), the stock based compensation expense for the
employee  options are recognized on a time-phased  vesting  schedule through the
vesting  date of  December  31,  2010.  In  calculating  the  outcome of meeting
performance  conditions,  the  Company  did not meet  performance  criteria  and
accordingly, the Company did not use accelerated vesting for these options.

         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
following 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.


                                       55
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                       Weighted
                                                                        Average
                                                         Number of     Exercise
EMPLOYEES AND DIRECTORS                                   Shares         Price
                                                        ----------    ----------

Options outstanding - January 1, 2006 ...............    1,833,000    $     3.46
     Granted ........................................    3,546,135    $     0.32
     Canceled .......................................     (301,500)   $     3.56
                                                        ----------    ----------
Options outstanding - December 31, 2006 .............    5,077,635    $     1.41
     Granted ........................................       46,600    $     1.02
     Exercised ......................................      (75,000)   $     0.57
     Canceled .......................................     (376,000)   $     0.76
                                                        ----------    ----------
Options outstanding - December 31, 2007 .............    4,673,235    $     1.46
     Granted ........................................    2,960,000    $     0.21
     Canceled .......................................     (532,699)   $     0.69
                                                        ----------    ----------
Options outstanding - December 31, 2008 .............    7,100,536    $     0.98
                                                        ==========    ==========


         The aggregate  intrinsic value of stock options  exercised  during 2007
was $72,000,  which is the  difference  between the exercise  price of the stock
versus  the  quoted  price of our  common  stock on the  date the  options  were
exercised. There were no stock options exercised in 2008 and 2006.

         The  Company  has  also  issued   certain   warrants   and  options  to
non-employees.   The  following   table   summarizes   all  options   issued  to
Non-Employees:

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

Options & warrants outstanding - January 1, 2006 ....    1,377,147    $     4.36
     Canceled .......................................     (133,334)   $     4.54
                                                        ----------    ----------
Options & warrants outstanding - December 31, 2006 ..    1,243,813    $     4.13
     Granted ........................................    2,100,000    $     0.75
     Canceled .......................................     (180,000)   $     3.63
                                                        ----------    ----------
Options & warrants outstanding - December 31, 2007 ..    3,163,813    $     1.97
     Canceled .......................................   (2,845,318)   $     0.55
                                                        ----------    ----------
Options & warrants outstanding - December 31, 2008 ..      318,495    $     3.65
                                                        ==========    ==========


         The Company's determination of fair value of share-based payment awards
on the date of grant uses the  Black-Scholes  model and the assumptions noted in
the following table for the years ended December 31. 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 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.


                                       56
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

                                    2008             2007           2006
                                  --------         --------       --------
Expected volatility ...........      95%             64%            65%
Expected term in years ........    6.1 yrs         6.1 yrs        6.1 yrs
Expected dividends ............      --              --             --
Risk-free rate ................     3.5%             4.8%           4.5%


         A summary of our stock option  information  under all Stock Plans as of
December 31, 2008 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, 2008 ........      7,100,536   $       0.98            6.0   $       0.00

Vested and Expected to Vest .............      6,733,009   $       1.02           5.75   $       0.00

Exercisable .............................      4,305,253   $       1.46           4.08   $       0.00
</TABLE>


<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, 2008 .......        318,495   $       3.65            0.9   $       0.00

Vested and Expected to Vest ............        318,495   $       3.65            0.9   $       0.00

Exercisable ............................        318,495   $       3.65            0.9   $       0.00
</TABLE>


         The aggregate intrinsic value of the stock options is calculated as the
difference  between the exercise price of a stock option and the quoted price of
our common  stock at December  31,  2008.  It excludes  stock  options that have
exercise  prices in excess of the quoted  price of our common  stock at December
31, 2008.

         There was $492,000 of total unrecognized  compensation costs related to
non-vested  stock  options and warrants as of December  31,  2008.  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, 2008, 2007
and 2006 was $407,000, $245,000 and $236,000, respectively.

         When options are exercised, the Company's policy is to issue previously
registered,  unissued  shares of common stock.  In July of 2008 and 2007, at the
Company's  annual meetings of  stockholders,  the 2008 and 2007 Stock Plans were
approved,  which authorize up to 2,500,000 and 2,600,000 shares of common stock,
respectively,  for issuance  pursuant to awards granted to individuals under the
plan.


                                       57
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12--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, 2008                             December 31, 2007
                                 -------------------------------------------   ------------------------------------------
                                     Loss          Shares        Per Share         Income        Shares        Per Share
Years ended:                      (Numerator)   (Denominator)      Amount        (Numerator)  (Denominator)      Amount
------------------------------   ------------   ------------   ------------    ------------   ------------   ------------
<S>                              <C>              <C>          <C>               <C>            <C>          <C>
Basic income (loss):
  Income (loss) available
  to common stockholders .....   $ (8,358,786)    20,291,433   $      (0.41)   $ (4,921,707)    20,155,563   $      (0.24)

Effect of dilutive securities:
  Options ....................           --             --             --              --             --             --
  Warrants ...................           --             --             --              --             --             --
                                 ------------   ------------   ------------    ------------   ------------   ------------
Income (loss) available
to common stockholders .......   $ (8,358,786)    20,291,433   $      (0.41)   $ (4,921,707)    20,155,563   $      (0.24)
                                 ============   ============   ============    ============   ============   ============


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

Effect of dilutive securities:
  Options ....................           --         578,312           0.00
  Warrants ...................           --            --             --
                                 ------------   -----------   ------------
Income (loss) available
to common stockholders .......   $    309,303    18,955,796   $       0.02
                                 ============   ===========   ============
</TABLE>


         Warrants  to  purchase  318,495  shares of  common  stock for $3.65 and
options to  purchase  7,100,536  shares of common  stock for  between  $0.18 and
$5.23, per share were outstanding for the year ended December 31, 2008, 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  3,163,813  shares for common  stock for 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 for common  stock for 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.


                                       58
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13--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,
                                   ---------------------------------------------
                                      2008              2007              2006
                                   ---------         ---------         ---------
Current:
      Federal .............        $   3,754         $  40,030         $  29,900
      State ...............           15,306             4,559             4,000
      Foreign .............           51,539           134,442              --
                                   ---------         ---------         ---------
                                      70,599           179,031            33,900
Deferred:
      Federal .............           40,030           (40,030)             --
      State ...............            1,059            (1,059)             --
      Foreign .............         (151,460)          (66,993)             --
                                   ---------         ---------         ---------
                                    (110,371)         (108,082)             --
                                   ---------         ---------         ---------
                                   $ (39,772)        $  70,949         $  33,900
                                   =========         =========         =========


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

                                                   Year Ended December 31,
                                             ----------------------------------
                                               2008         2007         2006
                                             --------     --------     --------
Current:
   Federal statutory rate .................      34.0%        34.0%        34.0%
   State taxes net of federal benefit .....      (0.1)        (1.6)         2.3
   Income earned from foreign subsidiaries       (2.6)       (54.9)        18.7
   Net operating loss valuation allowance .     (33.4)       (18.4)       (71.7)
   Change in effective state tax rate .....      --            0.1         22.4
   Other ..................................       2.6         39.3          4.2
                                             --------     --------     --------
                                                  0.5%        (1.5)%        9.9%
                                             ========     ========     ========


         Income (loss) before income taxes is as follows:

                                          Year Ended December 31,
                           ----------------------------------------------------
                               2008                2007                2006
                           ------------        ------------        ------------

Domestic ...........       $ (6,844,884)       $(11,827,832)       $ (1,341,475)
Foreign ............         (1,513,902)          6,977,074           1,684,678
                           ------------        ------------        ------------
                           $ (8,358,786)       $ (4,850,758)       $    343,203
                           ============        ============        ============


                                       59
<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,
                                                   -----------------------------
                                                       2008            2007
                                                   ------------    ------------
Net deferred tax asset:
       Net operating loss carry-forward ........   $ 22,122,386    $ 20,289,672
       Depreciation and amoritzation (liability)         82,623        (899,776)
       Bad Debt and note receivable allowance ..        195,933          42,065
       Marketable security impairment ..........        399,038            --
       Related part interest ...................        155,210         200,093
       Inventory allowance .....................        171,496         265,200
       Credit carryforwards ....................         95,221          41,089
       Other ...................................        465,048         332,420
                                                   ------------    ------------
                                                     23,686,955      20,270,763
      Less: Valuation allowance ................    (23,468,657)    (20,162,681)
                                                   ------------    ------------
                                                   $    218,298    $    108,082
                                                   ============    ============


         On January 1, 2007 the Company  adopted  the  provisions  of  Financial
Accounting  Standard Board  Interpretation  No. 48 ("FIN 48"),  "Accounting  for
Uncertainty in Income Taxes- an  interpretation  of FASB Statement No. 109". 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:

                                                       Year Ended December 31,
                                                     ---------------------------
                                                       2008               2007
                                                     --------           --------
Beginning Balance ........................           $258,000           $246,000
Interest and penalties ...................             16,000             12,000
                                                     --------           --------
                                                     $274,000           $258,000
                                                     ========           ========


         At December 31, 2008 and 2007,  Talon  International,  Inc. had Federal
net operating loss carry-forwards (or "NOLs") of approximately $60.2 million and
$55.9  million,  respectively  and state NOLs of $24.0 million and $18.1 million
respectively.  The Federal NOL is  available  to offset  future  taxable  income
through  2026,  and the state NOL expires in 2016.  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. The Company had a limitation due to Section 382 during 2004
to 2006;  however,  as of December  31, 2008 we have no  limitation.  Thus,  the
limitation has had no impact on our NOL carry-forwards.


                                       60
<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 2008 and 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 domestic deferred tax assets in future year
with the  exception  of the  alternative  minimum  tax credit  carry-forward  of
$41,089 in 2007.  Accordingly,  at  December  31,  2008 and 2007 the Company has
recorded a valuation allowance of $23.5 and $20.2 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.

         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,  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.

         In 2007,  the Company  included in its  consolidated  U.S.  federal tax
return as a deemed dividend,  $4.6 million or all of the undistributed  earnings
of its foreign subsidiaries as a result of the loan agreement with CVC. See Note
9. At December 31, 2008 undistributed earnings from its foreign subsidiaries are
$0.0.

NOTE 14--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 2013.  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 statement of
operations on a straight-line basis over the related lease term.


                                       61
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

         The future  minimum  lease  commitments  at  December  31,  2008 are as
follows:

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

              2009...................................          $     570,300
              2010...................................                280,500
              2011...................................                 19,600
              2012 and after.........................                  7,800
                                                               -------------
                Total minimum payments...............          $     878,200
                                                               =============

         Total rental  expense for the years ended  December 31, 2008,  2007 and
2006 aggregated $813,373, $591,312 and $640,864, 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,  2008,  2007 and 2006  amounted to $24,061,  $25,494,
$22,276, respectively.

CONTINGENCIES

         On October 12, 2005, a shareholder  class action complaint was filed in
the  United  States  District  Court  for the  Central  District  of  California
("District  Court") against the Company,  Colin Dyne, Mark Dyne,  Ronda Ferguson
and August F. Deluca  (collectively,  the "Individual  Defendants" and, together
with the Company, "Defendants"). The action is styled HUBERMAN V.TAG-IT PACIFIC,
INC., ET AL., Case No.  CV05-7352 R(Ex). On January 23, 2006, the District Court
heard competing  motions for  appointment of lead plaintiff.  The District Court
appointed Seth Huberman as the lead plaintiff ("Plaintiff").  On March 13, 2006,
Plaintiff filed an amended complaint. Plaintiff's amended complaint alleged that
defendants made false and misleading  statements  about the Company's  financial
situation and the  Company's  relationship  with certain of the Company's  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.  The  amended  complaint  purports  to  state  claims  under  Section
10(b)/Rule  10b-5 and Section 20(a) of the  Securities  Exchange Act of 1934. On
August 21, 2006, Defendants filed their answer to the amended complaint, denying
the material allegations of wrongdoing. On February 20, 2007, the District Court
denied  class  certification.  On April 2,  2007,  the  District  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 with the United  States Court of Appeals for
the Ninth Circuit ("Ninth  Circuit"),  and his opening appellate brief was filed
on October 15, 2007. Defendants' brief was filed on November 28, 2007. The Ninth
Circuit held oral  arguments on October 23, 2008. On January 16, 2009, the Ninth
Circuit  issued an  unpublished  memorandum,  instructing  the District Court to
certify a class,  reversing the District Court's grant of summary judgment,  and
remanding for further  proceedings  consistent  with its decision.  The District
Court has scheduled a status  conference for May 4, 2009. The Company intends to
vigorously  defend this  lawsuit;  however,  the  outcome of this  lawsuit 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 the Company's  financial  position and results
of operations.

         On April 16, 2004,  the Company  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  the  Company's
exclusive  license and  intellectual  property  agreement with Pro-Fit,  seeking
declaratory relief,  injunctive relief and damages. It is the Company's position
that the agreement  with Pro-Fit gives the Company  exclusive  rights in certain
geographic areas to Pro-Fit's stretch and rigid waistband technology. On June 5,
2006, the Court denied the Company's  motion for partial summary  judgment,  but
did not find that the Company breached the agreement with Pro-Fit and a trial is


                                       62
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

required to determine issues concerning the Company's 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 Company also filed a second civil action against Pro-Fit and related
companies  in the  California  Superior  Court  which was  removed to the United
States District Court,  Central District of California.  In April 2008,  Pro-Fit
and certain  related  companies  were placed into  administration  in the United
Kingdom.  On May 21, 2008, the joint  administrators for Pro-Fit and its related
companies filed petitions under Chapter 15 of Title 11 of the United States Code
for Pro-Fit and two related  companies in the United States Bankruptcy Court for
the Central  District of California  seeking  recognition  of the United Kingdom
administration  proceedings and related relief.  As a consequence of the chapter
15 filings by the joint  administrators,  all litigation by the Company  against
Pro-Fit has been stayed. The Company has derived a significant amount of revenue
from the sale of products  incorporating the stretch waistband technology in the
past and the Company's  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 the Company.  Additionally,  the Company has
incurred  significant  legal  fees in this  litigation,  and  unless the case is
settled or  resolved,  may continue to incur  additional  legal fees in order to
assert its rights and claims  against  Pro-Fit and any successor to those assets
of Pro-Fit that are subject to the Company's  exclusive license and intellectual
property agreement with Pro-Fit and to defend against any counterclaims.

         The Company  currently has pending a number of other claims,  suits and
complaints  that arise in the ordinary  course of the  Company's  business.  The
Company  believes that it has 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 - an  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 No. 45:

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

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


                                       63
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

         The Company  manufactures and distributes a full range of zipper,  trim
and waistband items to manufacturers of fashion apparel, specialty retailers and
mass  merchandisers.  Our  organization is based on divisions  representing  the
major product lines,  and our operating  decisions use these divisions to assess
performance, allocate resources and make other operating decisions. Within these
product  lines there is not enough  difference  between the types of products to
justify  segmented  reporting by product  type or to account for these  products
separately. The net revenues and operating margins for the three primary product
groups are as follows:

<TABLE>
<CAPTION>
                                           Twelve Months Ended
                                            December 31, 2008
                       ----------------------------------------------------------
                           Talon           Trim          Tekfit      Consolidated
                       ------------    ------------   ------------   ------------
<S>                    <C>             <C>            <C>            <C>
Net sales ..........   $ 28,428,885    $ 19,537,302   $    204,793   $ 48,170,980
Cost of goods sold .     22,783,691      12,666,844        103,056     35,553,591
                       ------------    ------------   ------------   ------------
Gross profit (loss)       5,845,193       6,870,458        101,737     12,617,389
Operating expenses*                                                    18,579,006
                                                                     ------------
Loss from operations                                                 $ (5,961,617)
                                                                     ============
</TABLE>


<TABLE>
<CAPTION>
                                           Twelve Months Ended
                                            December 31, 2007
                       ----------------------------------------------------------
                           Talon           Trim          Tekfit      Consolidated
                       ------------    ------------   ------------   ------------
<S>                    <C>             <C>            <C>            <C>
Net sales ..........   $ 21,159,595    $ 18,688,698   $    681,262   $ 40,529,555
Cost of goods sold .     15,711,171      12,190,803        520,846     28,422,820
                       ------------    ------------   ------------   ------------
Gross profit (loss)       5,448,423       6,497,895        160,416     12,106,735
Operating expenses*                                                    15,277,414
                                                                     ------------
Loss from operations                                                 $ (3,170,679)
                                                                     ============
</TABLE>

*Operating  expenses are not  segregated  by division  and  includes  impairment
reserve losses.


                                       64
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

         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,
                                     -------------------------------------------
                                         2008            2007            2006
                                     -----------     -----------     -----------
Sales:
     United States .............     $ 3,332,257     $ 3,692,468     $ 4,223,052
     Hong Kong .................      15,181,280      14,178,421      13,650,419
     Dominican Republic ........         202,529         700,868       8,966,828
     China .....................      13,614,709      11,159,726       6,063,416
     India .....................       2,536,929       2,187,684       1,205,486
     Bangladesh ................       2,434,382       1,924,943       2,070,349
     Mexico ....................         610,983         783,762       2,476,313
     Other .....................      10,257,911       5,901,683      10,169,139
                                     -----------     -----------     -----------
Total ..........................     $48,170,980     $40,529,555     $48,825,002
                                     ===========     ===========     ===========
Long-lived Assets:
     United States .............     $ 4,955,725     $ 8,778,381     $ 9,529,932
     Hong Kong .................         989,761         556,864         336,149
     Dominican Republic ........            --           558,198         667,238
     Mexico ....................            --             1,072           5,198
     China .....................         243,905         109,770          49,488
     Other .....................           5,604          16,912           3,315
                                     -----------     -----------     -----------
Total ..........................     $ 6,194,995     $10,021,197     $10,591,320
                                     ===========     ===========     ===========

NOTE 16--MAJOR CUSTOMERS AND VENDORS

         For the years ended  December 31, 2008,  2007 and 2006,  the  Company's
three largest customers represented  approximately 8%, 9% and 18%, respectively,
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.

         Five  vendors,   each  representing  more  than  6%  of  the  Company's
purchases,  accounted for approximately  46% of the Company's  purchases for the
year ended December 31, 2008. 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 years ended December 31, 2008 and 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.

         Included in accounts  payable and accrued expenses at December 31, 2008
and 2007 is $3,593,552 and $2,239,000 due to these vendors.

NOTE 17--RELATED PARTY TRANSACTIONS

         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 2008 and 2007 the Company
had sales of $88,000 and  $241,000,  respectively,  to Versatile  Entertainment.
Accounts  receivable  of $18,000 and $44,000  were  outstanding  from  Versatile
Entertainment at December 31, 2008 and 2007, respectively. Colin Dyne also holds
an interest in William Rast Sourcing. During 2008 and 2007 the Company had sales
of $457,000  and  $172,000  respectively,  to William  Rast  Sourcing.  Accounts
receivable of $51,000 and $42,000 were outstanding from William Rast Sourcing at
December 31, 2008 and 2007, respectively.


                                       65
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

         Due from  related  parties  at  December  31,  2008  and 2007  includes
$674,010 and $625,500,  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 2008 based upon  current  economic  and risk
analysis and available information, management extablished a reserve of $474,010
for this  receivable.  During 2007  certain  notes  payable due to Mr. Dyne were
offset against and used to satisfy notes receivable from Mr. Dyne.

         Demand notes payable to related parties  includes notes and advances to
parties  related to or affiliated  with Mark Dyne,  the Chairman of the Board of
Directors  of the Company  and  significant  stockholder.  The balance of Demand
notes  payable to related  parties at December 31, 2008 and 2007 was $85,000 and
$85,000,  respectively.  See Note 6 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,  2008 and 2007,  sales to this entity  were  $70,500 and  $88,500,
respectively.  At  December  31,  2008 and 2007,  accounts  receivable  included
$35,000 and $29,000,  respectively,  due from this entity.  On October 25, 2007,
Mr. Burstein resigned as a director of the Company. During the fourth quarter of
2007 the  Company  terminated  the  consulting  agreement  of Mr.  Burstein.  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  contract  and  recorded an accrual of $263,000 at
December  31,  2007 to reflect the  liability  for  consulting  costs that would
continue to be incurred until November 30, 2008. Consulting fees of $258,000 and
$291,000 were paid for services provided under this contract for the years ended
December 31, 2008 and 2007.

         Consulting  fees paid to  Diversified  Investments,  a company owned by
Mark Dyne,  amounted to $150,000 for each of the years ended  December 31, 2008,
2007 and  2006.  This  consulting  arrangement  terminates  on March  31,  2010.
Consulting  fees of $250,000  and $304,000  were paid for  services  provided by
Colin Dyne,  for the years ended December 31, 2008 and 2007,  respectively.  Mr.
Dyne's consulting agreement ended November 30, 2008.


                                       66
<PAGE>


                           TALON INTERNATIONAL, INC.
                                    NOTES TO
                       CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18--QUARTERLY RESULTS (UNAUDITED)

         Quarterly  results for the years ended  December  31, 2008 and 2007 are
reflected below:

<TABLE>
<CAPTION>
                                       1ST             2ND            3RD             4TH
----------------------------------------------------------------------------------------------
<S>                               <C>             <C>            <C>             <C>
              2008
              ----
Revenue .......................   $  9,985,489    $ 17,020,629   $ 12,772,021    $  8,392,841
Gross profit ..................   $  2,757,965    $  4,900,904   $  3,219,352    $  1,738,902
Operating income (loss) .......   $ (1,310,234)   $  1,050,875   $ (1,716,289)   $ (3,986,235)
Net Income (loss) .............   $ (1,838,744)   $    598,157   $ (2,440,155)   $ (4,678,044)
Basic income (loss) per share .   $      (0.09)   $       0.03   $      (0.12)   $      (0.23)
Diluted income (loss) per share   $      (0.09)   $       0.03   $      (0.12)   $      (0.23)

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

----------------------------------------------------------------------------------------------
</TABLE>


         During  2008,  the Company  had  material  charges of $5.4  million for
impairments of fixed assets,  marketable  securities,  inventory,  severance and
related  party notes  receivable.  During 2007,  the Company had charges of $1.1
million for  impairment  of notes  receivable  from a former  customer and fixed
assets.

         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 19 - SUBSEQUENT EVENT

         On March 31, 2009 we completed  an amendment to our existing  revolving
credit and term loan agreement with CVC California,  LLC. The amendment provided
for the following:  issuance of an additional  term note to CVC in the principal
amount of $225,210 in lieu of paying a cash  waiver fee in  connection  with our
failure to satisfy the EBITDA  requirements  for the quarter ended  December 31,
2008 and March 31, 2009; deferral of the term note quarterly interest payment of
$215,000 due April 1, 2009; a temporary  increase to the borrowing base formulas
and calculations  under the revolving credit facility;  the re-lending by CVC of
$125,000 under the term loan portion of credit  facility;  a consent to allow us
to sell equipment that has been designated as held for sale more fully described
in Note 5 to the consolidated  financial statements;  and the granting to CVC of
the right to designate a non-voting observer to attend all meetings of our Board
of Directors.


                                       67
<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 Lonnie D. Schnell,  our principal  executive and 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.  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  accounting  principles  generally  accepted in the
United  States.  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, 2008.

         This  annual  report  does not  include  an  attestation  report of our
independent  registered public  accounting firm regarding  internal control over
financial  reporting.  Management's report was not subject to attestation by our
independent 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, 2008 that has  materially
affected,  or is reasonably  likely to materially  affect,  our internal control
over financial reporting.

ITEM 9B. OTHER INFORMATION

         None.


                                       68
<PAGE>


                                    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 31, 2009.

NAME                         AGE       POSITION
-----------------------      ---       -----------------------------------------
Mark  Dyne (1).........       48       Chairman of the Board of Directors
Colin Dyne (1).........       46       Vice Chairman of the Board of Directors
Brent Cohen............       50       Director
Joseph Miller..........       45       Director
Raymond Musci .........       48       Director
William Sweedler.......       42       Director
Lonnie D. Schnell......       60       Chief Executive Officer & Chief Financial
                                         Officer
Larry Dyne (1).........       37       Executive Vice President, Sales

(1) Mark Dyne, Colin Dyne and Larry Dyne are brothers.


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

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.  Since May 2007,  Colin Dyne has served
                           as Chief Executive Officer and a director of People's
                           Liberation,   Inc.  (OTCBB:   PPLB),  which  designs,
                           markets and sells  high-end  casual apparel under the
                           brand names "People's Liberation" and "William Rast."
                           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.


                                       69
<PAGE>


CLASS I DIRECTORS: TERMS EXPIRING IN 2010

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 served as Chief Executive Officer and
                           a  director  of  Dovebid  Inc.  from  August  2005 to
                           February  2008. 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
                           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


                                       70
<PAGE>


CLASS II DIRECTORS: TERMS EXPIRING IN 2011

LONNIE D. SCHNELL          Mr. Schnell joined the Company in January 2006 as our
                           Chief  Financial  Officer,  was  appointed  as  Chief
                           Executive  Officer in February 2008 and has served on
                           our Board of Directors  since May 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.

RAYMOND MUSCI              Ray Musci has  served as a  Director  of the  Company
                           since June 2005.  Mr.  Musci serves as a Director and
                           Chief   Operating   Officer  of  New   Motion,   Inc.
                           (NasdaqGM:  NWMO),  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. 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

OTHER EXECUTIVE OFFICER

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.


                                       71
<PAGE>


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,  2008,  all of our  executive  officers,
directors and greater-than-ten  percent  shareholders  complied with all Section
16(a) filing requirements,  except that one Form 4, reporting five transactions,
was filed late by Bluefin  Capital LLC,  ComVest  Capital LLC,  ComVest  Capital
Management LLC, ComVest Group Holdings LLC and Michael Falk.

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 is
filed as an exhibit to our Annual Report on Form 10-K.

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 2008 were as follows:

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

         o        Larry Dyne,  Executive Vice  President of Sales  (appointed in
                  February 2008)

         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)


                                       72
<PAGE>


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;

         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.


                                       73
<PAGE>


     MANAGEMENT INCENTIVE BONUSES

         Management 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. These 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.

     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.


                                       74
<PAGE>


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.

     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 2008, the long-term incentive program for
                  the  named  executive  officers  consisted  entirely  of stock
                  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  2008  was  $275,000  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.


                                       75
<PAGE>


         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 6, 2008


EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The  following  table sets forth,  as to each  person  serving as Chief
Executive  Officer and Chief  Financial  Officer during 2008, and the one highly
compensated  executive  officer other than the Chief Executive Officer and Chief
Financial  Officer at the end of the 2008 whose  compensation  exceeded $100,000
(referred  to  as  "named  executive  officers"),   information  concerning  all
compensation earned for services to us in all capacities for 2008.


<TABLE>
<CAPTION>
                                                                                      NON-EQUITY
                                                          STOCK          OPTION        INCENTIVE      ALL OTHER
NAME AND                                                  AWARDS         AWARDS          PLAN       COMPENSATION
PRINCIPAL POSITION               YEAR      SALARY           (4)            (4)       COMPENSATION        (5)           TOTAL
------------------------------   ----   ------------   ------------   ------------   ------------   ------------   ------------
<S>                              <C>    <C>            <C>            <C>            <C>            <C>            <C>
Lonnie D. Schnell (1)            2008   $    275,000   $       --     $     63,462   $     53,230   $     25,116   $    416,808
   Chief Executive Officer and   2007        225,000           --            1,917         45,000         11,343        283,260
   Chief Financial Officer       2006        171,346           --           31,998         45,025         24,634        273,003
------------------------------   ----   ------------   ------------   ------------   ------------   ------------   ------------
Larry Dyne                       2008        250,000           --           53,818         40,000         15,927        359,745
   Executive Vice President,
   Sales
------------------------------   ----   ------------   ------------   ------------   ------------   ------------   ------------
Stephen P. Forte (2)             2008         31,250           --           83,469           --          297,073        411,792
   Former Chief Executive        2007        325,000           --            7,851           --           30,484        363,335
   Officer                       2006        275,000         77,468         73,995         90,050         35,497        552,010
------------------------------   ----   ------------   ------------   ------------   ------------   ------------   ------------
Wouter van Biene (3)             2008          9,519           --           23,366           --          247,840        280,725
   Former Chief Operating        2007        225,000           --            1,986           --           11,502        238,488
   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 and previously served as Chief Financial Officer.

     (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 2008, 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  11  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.


                                       76
<PAGE>


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

<TABLE>
<CAPTION>
                                            MR. SCHNELL                      MR. FORTE
                                  ------------------------------   ------------------------------
                                    2008       2007       2006       2008       2007       2006
                                  --------   --------   --------   --------   --------   --------
<S>                               <C>        <C>        <C>         <C>       <C>        <C>
Severance .....................   $   --     $   --     $   --      287,645   $   --     $   --
Health & medical insurance (a)      13,793     11,019     12,673      9,374      8,202     12,916
Life & disability insurance (b)        323        324         81         54      4,282         81
Automobile allowances .........     11,000       --         --         --       18,000     22,500
Consulting services (c) .......       --         --       11,880       --         --         --
                                  --------   --------   --------   --------   --------   --------
     Total ....................   $ 25,116   $ 11,343   $ 24,634   $297,073   $ 30,484   $ 35,497
                                  ========   ========   ========   ========   ========   ========


<CAPTION>
                                          MR. VAN BIENE            MR. DYNE
                                  ------------------------------   --------
                                    2008       2007       2006       2008
                                  --------   --------   --------   --------
<S>                               <C>        <C>        <C>        <C>
Severance .....................   $234,952   $   --     $   --     $   --
Health & medical insurance (a)      12,834     11,178      6,925      9,429
Life & disability insurance (b)         54        324         81        323
Automobile allowances .........       --         --         --        6,175
Consulting services (c) .......       --         --         --         --
                                  --------   --------   --------   --------
     Total ....................   $247,840   $ 11,502   $  7,006   $ 15,927
                                  ========   ========   ========   ========
</TABLE>


     (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 2008  compensation for Lonnie Schnell,  our Chief Executive Officer
was in  accordance  with our  employment  agreement  with  him.  The  terms  and
conditions established in this agreement were the result of our consideration of
our current operating  performance levels, 2007 and 2006 operating  performance,
our 2005 Restructuring and Strategic Plan,  compensation levels for our previous
CEO, comparative industry compensation levels and negotiations with Mr. Schnell.
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 4.4% 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  ("MIP"),  was  established  as provided in Mr.
Schnell's  employment  agreement  setting  aside 12% of the  Company's  earnings
before interest,  taxes,  depreciation  and  amortization  ("EBITDA") for annual
bonus  awards to him and the other senior  executives.  The MIP fund is shown in
the table above as non-equity  incentive plan  compensation.  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.

         The 2008  compensation  for Larry Dyne, our Executive  Vice  President,
Sales was in accordance  with our  employment  agreement with him. The terms and
conditions established in this agreement were the result of our consideration of
our current operating  performance levels, 2007 and 2006 operating  performance,
our 2005 Restructuring and Strategic Plan,  compensation levels for our previous
CEO,  comparative  industry  compensation levels and negotiations with Mr. Dyne.
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 700,000  shares of common  stock,
representing approximately 3.4% 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 the MIP,  was  established  as provided  in Mr.  Dyne's  employment  agreement
setting  aside 12% of EBITDA for annual bonus awards to him and the other senior
executives.


                                       77
<PAGE>


         Our employment  agreement with Steve Forte,  our former Chief Executive
Officer,  provided  that 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.

         Our employment letter with Wouter van Biene, our former Chief Operating
Officer,  provided  that  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.

GRANTS OF PLAN-BASED AWARDS IN FISCAL 2008

         The following table provides information about equity-awards granted to
each named executive officer in 2008 under our 2007 and 2008 Stock Plans.

<TABLE>
<CAPTION>
                                                 ALL OTHER       EXERCISE
                                               OPTION AWARDS:    OR BASE
                                                 NUMBER OF       PRICE OF      MARKET      GRANT DATE FAIR
                                                 SECURITIES       OPTION      PRICE ON     VALUE OF OPTION
                        GRANT      APPROVAL      UNDERLYING       AWARDS     GRANT DATE        AWARDS
NAME                   DATE (1)     DATE (1)      OPTIONS (#)    ($/SH) (2)   ($/SH) (2)        ($)(3)
--------------------- ----------- ----------- ---------------- ------------ ------------ ------------------
<S>                    <C>         <C>            <C>             <C>          <C>           <C>
Lonnie D. Schnell      6/25/08     6/18/08        900,000         $0.20        $0.21         $140,806
--------------------- ----------- ----------- ---------------- ------------ ------------ ------------------
Larry Dyne             6/25/08     6/18/08        700,000         $0.20        $0.21         $109,516
--------------------- ----------- ----------- ---------------- ------------ ------------ ------------------
</TABLE>

     (1)  The grant  date of an option  award is the date that the  compensation
          committee  fixes as the date the  recipient is entitled to receive the
          award. The approval date is the date that the  compensation  committee
          approves the award.

     (2)  The exercise  price of option awards  differs from the market price on
          the date of grant.  The exercise  price of options  granted in 2008 is
          equal to the average  closing sales prices of our common stock for the
          five trading days prior to and  including  the grant date, as reported
          on the  OTCBB,  while  the  market  price  on the date of grant is the
          closing price of our common stock on that date.

     (3)  The grant date fair value is  generally  the amount the company  would
          expense in its financial  statements  over the award's service period,
          but does not include a reduction for forfeitures.


                                       78
<PAGE>


         Option awards granted to our executive officers are for a 10 year term.
Each of the option  grants in the table above vest in full on December 31, 2010,
subject to partial earlier vesting  contingent on achievement of certain Company
performance targets for 2008 and 2009. The relevant performance targets were not
achieved for 2008,  and none of the options were vested as of December 31, 2008.
Upon a change of control or involuntary  termination  without cause, the vesting
of all options granted to the named executive officers in 2008 is accelerated to
the date of  termination,  as  described  below  under  "Employment  Agreements,
Termination of Employment and Change of Control Arrangements."

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2008

         The following  table provides  information  with respect to outstanding
stock  options held by each of the named  executive  officers as of December 31,
2008:

<TABLE>
<CAPTION>
                                               NUMBER OF SECURITIES
                                              UNDERLYING UNEXERCISED
                                                      OPTIONS
                                           ------------------------------    OPTION
                                                (#)            (#)          EXERCISE          OPTION
NAME                       GRANT DATE        EXERCISABLE   UNEXERCISABLE    PRICE ($)     EXPIRATION DATE
----------------------- ------------------ -------------- --------------- -------------- ------------------
<S>                         <C>               <C>            <C>               <C>            <C>  <C>
Lonnie D. Schnell            1/26/06          291,667 (1)    108,333 (1)       $0.59           1/26/16
                             6/25/08             --          900,000 (2)       $0.20          06/24/18
----------------------- ------------------ -------------- --------------- -------------- ------------------
Stephen P. Forte             1/16/06          135,135 (3)       --             $0.37          02/15/09
                             1/16/06          900,000 (3)                      $0.37          02/15/09
----------------------- ------------------ -------------- --------------- -------------- ------------------
Wouter van Biene             3/01/06          225,695 (4)       --             $0.53          01/15/09
----------------------- ------------------ -------------- --------------- -------------- ------------------
Larry Dyne                  12/20/99           20,000           --             $4.31          12/19/09
                             2/28/00           15,000           --             $4.62          02/27/10
                             4/10/00           15,000           --             $4.25          04/09/10
                            12/12/00           20,000           --             $3.75          12/11/10
                            11/18/01           15,000           --             $3.64          11/17/11
                            12/31/02           25,000           --             $3.63          12/30/12
                             4/01/03           25,000           --             $3.50          03/31/13
                             4/08/03           45,500           --             $3.70          04/07/13
                             4/18/05           50,000           --             $3.14          04/17/15
                             1/16/06          413,194         11,806 (5)       $0.37          01/15/16
                             6/25/08             --          700,000 (6)       $0.20          06/24/18
----------------------- ------------------ -------------- --------------- -------------- ------------------
</TABLE>

   (1) These options become  exercisable with respect to 8,333 shares each month
       until fully vested.

   (2) These options vest in full on December 31, 2010. The options  provide for
       early  vesting  with  respect to up to 600,000  shares  each based on the
       Company's  performance  as  compared to the Board of  Directors  approved
       budget  for each of 2008 and 2009.  There was no early  vesting  for 2008
       based on upon performance.

   (3) Mr.  Forte  resigned  as of  February  4,  2008,  and the  vesting of his
       outstanding  options was fully  accelerated  pursuant  to his  separation
       agreement.  Mr. Forte's stock options have expired unexercised subsequent
       to December 31, 2008.

   (4) 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.  Mr. van  Biene's  stock  options  have  expired
       unexercised subsequent to December 31, 2008.

   (5) Vests with respect to the remaining shares on January 16, 2009.

   (6) These options vest in full on December 31, 2010. The options  provide for
       early  vesting  with  respect to up to 466,666  shares  each based on the
       Company's  performance  as  compared to the Board of  Directors  approved
       budget  for each of 2008 and 2009.  There was no early  vesting  for 2008
       based on upon performance.


                                       79
<PAGE>


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 June 18, 2008, we entered into an Executive  Employment Agreement with Lonnie
D. Schnell, pursuant to which Mr. Schnell serves as our Chief Executive Officer.
This employment  agreement has a term continuing though December 31, 2010, which
may be extended to December 31, 2011.  Pursuant to this  agreement,  Mr. Schnell
will receive an annual base salary of $275,000  for 2008,  $300,000 for 2009 and
$325,000 for each subsequent year of the term and will be entitled to receive an
annual  incentive  bonus,  which for 2008 will be based upon our earnings before
interest,  taxes,  depreciation and amortization.  Mr. Schnell is entitled to an
auto  allowance  of $1,000 per month.  In the event that prior to the end of the
term, Mr.  Schnell's  employment is terminated by us "without cause" (as defined
in the  agreement),  by  Mr.  Schnell  for  "good  reason"  (as  defined  in the
agreement) or due to Mr.  Schnell's death or disability,  then  conditional upon
his execution of a release of claims, Mr. Schnell or his estate will be entitled
to receive,  in addition to all accrued salary,  (i) severance payments equal to
Mr.  Schnell's  base salary for the  remaining  term of the agreement or, in the
case of death or disability, through December 31, 2010, (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. Schnell pursuant
to the agreement and all other  options held by him and (iv)  continued  medical
coverage  for Mr.  Schnell  and his  dependents  for the  remaining  term of the
agreement. In connection with the employment agreement,  Mr. Schnell was granted
an option to purchase 900,000 shares of our common stock, which vests in full on
December 31, 2010,  subject to earlier vesting if Mr. Schnell meets  performance
criteria  established  by the Board for  fiscal  2008 and  2009.  Mr.  Schnell's
options  will vest in full  upon a change  of  control  of our  company  or upon
termination of Mr. Schnell's employment without cause, for good reason or due to
his death or disability.

         LARRY DYNE,  EXECUTIVE  VICE  PRESIDENT,  SALES.  On June 18, 2008,  we
entered  into an Executive  Employment  Agreement  with Larry Dyne,  pursuant to
which Mr. Dyne will serve as our Executive Vice President of Global Sales.  This
employment  agreement has a term continuing  though December 31, 2010, which may
be extended to December  31,  2011.  Pursuant to this  agreement,  Mr. Dyne will
receive  an annual  base  salary of  $250,000  for 2008,  $275,000  for 2009 and
$300,000 for each subsequent year of the term and will be entitled to receive an
annual  incentive  bonus,  which for 2008 will be based upon our earnings before
interest, taxes, depreciation and amortization.  Mr. Dyne is entitled to an auto
allowance of $950 per month. In the event that prior to the end of the term, Mr.
Dyne's  employment  is  terminated  by us  "without  cause"  (as  defined in the
agreement),  by Mr. Dyne for "good reason" (as defined in the  agreement) or due
to Mr.  Dyne's death or  disability,  then  conditional  upon his execution of a
release of claims,  Mr.  Dyne or his estate  will be  entitled  to  receive,  in
addition to all accrued salary,  (i) severance payments equal to Mr. Dyne's base
salary  for the  remaining  term of the  agreement  or,  in the case of death or
disability,  through  December 31, 2010,  (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.  Dyne  pursuant  to the
agreement and all other options held by him and (iv) continued  medical coverage
for Mr. Dyne and his  dependents  for the remaining  term of the  agreement.  In
connection  with the  employment  agreement,  Mr.  Dyne was granted an option to
purchase 700,000 shares of our common stock, which vests in full on December 31,
2010,  subject  to  earlier  vesting  if Mr.  Dyne  meets  performance  criteria
established  by the Board for fiscal 2008 and 2009. Mr. Dyne's options will vest
in full upon a change of  control  of our  company  or upon  termination  of Mr.
Dyne's  employment  without  cause,  for  good  reason  or due to his  death  or
disability.


                                       80
<PAGE>


     POTENTIAL SEVERANCE PAYMENTS

         As described above,  our employment  agreements with Lonnie Schnell and
Larry Dyne  provided for  severance  benefits in the event that the  executive's
employment is terminated due to executive's death or disability,  by the Company
without  "cause" or by the executive for "good reason." The following table sets
forth  severance  payments and benefits that we would have been obligated to pay
to Messrs.  Schnell and Dyne assuming a triggering event had occurred under each
of their respective agreements as of December 31, 2008:

<TABLE>
<CAPTION>
                                                                                  VALUE OF
                                                           CONTINUATION OF     ACCELERATION OF
                          CASH SEVERANCE     BONUS VALUE   HEALTH BENEFITS    VESTING OF EQUITY    TOTAL SEVERANCE
NAME                      PAYMENT ($)(1)        ($)              ($)           AWARDS ($)(2)         BENEFITS ($)
------------------------ ----------------- -------------- ----------------- ------------------- --------------------
<S>                          <C>                <C>            <C>                    <C>             <C>
Lonnie D. Schnell            654,509            --             27,586                 --              682,095
------------------------ ----------------- -------------- ----------------- ------------------- --------------------
Larry Dyne                   593,872            --             18,858                 --              612,730
------------------------ ----------------- -------------- ----------------- ------------------- --------------------
</TABLE>

     (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, 2008 of
          $0.11, as reported by the OTC Bulletin Board.

      POTENTIAL CHANGE IN CONTROL PAYMENTS

         As described above,  our employment  agreements with Lonnie Schnell and
Larry Dyne  provide for  accelerated  vesting of all or a portion of the options
held by such  executives upon a change in control.  However,  as of December 31,
2008, there were no unvested stock options held by the named executive  officers
that had an exercise  price lower than the closing  price of our common stock on
December 31, 2008 of $0.11 per share,  as reported by the OTC Bulletin Board. As
a result, there would have been no value of the accelerated vesting had a change
in control occurred on December 31, 2008. Currently, there are no other benefits
payable to our named executive officers upon a 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.

         The  following  table  details  the  total  compensation  earned by the
company's non-employee directors in 2008.

<TABLE>
<CAPTION>
                                FEES EARNED
                                  OR PAID        OPTION        ALL OTHER
NAME                              IN CASH      AWARDS (8)    COMPENSATION       TOTAL
----------------------------   ------------   ------------   ------------   ------------
<S>                            <C>            <C>            <C>            <C>
Mark Dyne (1) ..............   $     31,500   $     15,571   $       --     $     47,071
Colin Dyne (2) .............           --           15,571        250,000        265,571
Brent Cohen (3) ............         35,500         15,571           --           51,071
Joseph Miller (4) ..........         32,500         15,571           --           48,071
Raymond Musci (5) ..........         40,000         15,571           --           55,571
William Sweedler (6) .......         39,000         15,571           --           54,571
                               ------------   ------------   ------------   ------------
   Total ...................   $    178,500   $     93,426   $    250,000   $    521,926
                               ============   ============   ============   ============
</TABLE>


     (1)  As of December  31,  2008,  Mr.  Mark Dyne held  options to purchase a
          total of 305,000 shares. The other compensation consists of consulting
          and per diem fees earned for services rendered.


                                       81
<PAGE>


     (2)  As of December  31,  2008,  Mr.  Colin Dyne held options to purchase a
          total of 625,000 shares. The other compensation consists of consulting
          fees for services rendered.

     (3)  As of December 31, 2008, Mr. Cohen held options to purchase a total of
          165,000 shares. The other compensation consists of consulting fees for
          services rendered.

     (4)  As of December 31, 2008,  Mr.  Miller held options to purchase a total
          of 120,000 shares.

     (5)  As of December 31, 2008, Mr. Musci held options to purchase a total of
          120,000 shares.

     (6)  As of December 31, 2008, Mr. Sweedler held options to purchase a total
          of 90,000 shares.

     (7)  The amounts in this column represent the dollar amounts recognized for
          financial  statement  purposes  in fiscal  2008 with  respect to stock
          options  granted in 2008 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 2008, see Note 11 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.

         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.

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.


                                       82
<PAGE>


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,
2008 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.....         5,475,536                 $ 1.14                 2,250,000

Equity compensation plans not
approved by security holders.....         1,943,495                 $ 0.98                      --
                                   -----------------------    --------------------    --------------------
   Total.........................         7,419,031                 $ 1.10                 2,250,000
                                   =======================    ====================    ====================
</TABLE>


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

         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        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 6, 2009:

         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 current 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 6,  2009.  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 6,  2009,  we had
20,291,433 shares of common stock issued and outstanding.


                                       83
<PAGE>


         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) .........................................   1,140,667         5.5%
Colin Dyne (2) ........................................     807,780         3.9%
Larry Dyne (3) ........................................     785,100         3.7%
Lonnie D. Schnell (4) .................................     458,333         2.2%
William Sweedler (5) ..................................     192,000           *
Brent Cohen (6) .......................................     165,000           *
Raymond Musci (6) .....................................     120,000           *
Joseph M. Miller (6) ..................................     120,000           *
Directors and executive officers as
  a group (8 persons) (7) .............................   3,788,880        16.7%

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

     *    Less than 1%.

     (1)  Includes  305,000  shares of common stock  reserved for issuance  upon
          exercise of stock options which are currently  exercisable and 176,600
          shares  held by a limited  liability  company of which Mr. Dyne is the
          manager and a member.

     (2)  Includes  625,000  shares of common stock  reserved for issuance  upon
          exercise of stock options that are currently exercisable.

     (3)  Includes  655,500  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  333,333  shares of common stock  reserved for issuance  upon
          exercise  of stock  options  that are  currently  exercisable  or will
          become exercisable within 60 days.

     (5)  Includes  90,000  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  2,413,833  shares of common stock reserved for issuance upon
          exercise of stock options  which  currently  are  exercisable  or will
          become exercisable within 60 days.

         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 of Directors  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


                                       84
<PAGE>


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, 2008, 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.

         Colin Dyne,  Vice Chairman of our Board of Directors and a stockholder,
is also an executive officer,  director and significant  shareholder of People's
Liberation,  Inc., the parent company of Versatile  Entertainment,  Inc.  During
2008, we had sales of $88,000 to Versatile  Entertainment.  At December 31, 2008
accounts  receivable of $18,000 were outstanding  from Versatile  Entertainment.
Colin Dyne also holds an interest in William Rast  Sourcing.  During 2008 we had
sales of $457,000  to William  Rast  Sourcing.  At  December  31, 2008  accounts
receivable of $51,000 were outstanding from William Rast Sourcing.

         At December 31, 2008, we had $674,010 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.  A reserve was established  against this
note in the amount of $474,010 at December 31, 2008.

         We paid  consulting  fees of  $250,000  to Colin Dyne during year ended
December 31, 2008 for consulting  services  provided.  The consulting  agreement
expired on November 30, 2008. See the "Director Compensation" section in item 11
of this report for a description of this agreement.

         At  December  31,  2008,  we had an  aggregate  of $85,176 in notes and
advances  due to Mark  Dyne,  the  Chairman  of our  Board  of  Directors  and a
significant stockholder,  or to parties related to or affiliated with Mark Dyne.
The notes are payable on demand and accrue interest at 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, 2008.

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, 2008, 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.


                                       85
<PAGE>


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.

         SingerLewak LLP served as our independent  registered public accounting
firm for each of the fiscal years ended December 31, 2008, 2007 and 2006.

         AUDIT FEES - The aggregate  fees billed by our  independent  registered
public  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 $468,000 for fiscal year 2008 and $350,000
for fiscal year 2007.

         AUDIT-RELATED  FEES - The  aggregate  fees  billed  by our  independent
registered  public  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)were $44,000 for fiscal year 2008 and $57,300 for fiscal year 2007.

         TAX FEES - The  aggregate  fees  billed by our  independent  registered
public  accounting firm for professional  services  rendered for tax compliance,
tax advice and tax  planning  were  $44,000 for fiscal year 2008 and $33,400 for
fiscal year 2007.

         ALL OTHER FEES - The aggregate  fees billed by our  independent  public
registered  accounting firm for services  rendered to us other than the services
described  above under "Audit  Fees,"  "Audit-Related  Fees" and "Tax Fees" were
$24,000  for  fiscal  year 2007 and  $25,400  for  fiscal  year  2007  which was
primarily  related  governmental  regulations  not  related  to  our  annual  or
quarterly financial statements.

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

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

         The audit  committee  has  established a general  policy  requiring its
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.


                                       86
<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.


                                       87
<PAGE>


SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
                                            BALANCE AT
                                             BEGINNING                                    BALANCE AT
               DESCRIPTION                    OF YEAR      ADDITIONS      DEDUCTIONS      END OF YEAR
----------------------------------------   ------------   ------------   ------------    ------------
<S>                                        <C>            <C>            <C>             <C>
2008
----
Allowance for doubtful accounts deducted
   from accounts receivable in the
   balance sheet .......................   $    140,500   $     74,500   $     (2,300)   $    217,300
Allowance for doubtful accounts deducted
   from related party in the balance
   sheet ...............................           --          474,000           --           474,000
Reserve for obsolescence deducted from
   inventories on the balance sheet ....      1,019,000        692,000        500,000       1,211,000
Valuation reserve deducted from
   deferred tax assets .................     20,163,000      4,947,000      1,094,000      24,016,000
                                           ------------   ------------   ------------    ------------
                                           $ 21,322,500   $  6,187,500   $  1,591,700    $ 25,918,300
                                           ============   ============   ============    ============

2007
----
Allowance for doubtful accounts deducted
   from accounts receivable in the
   balance sheet .......................   $     71,500   $    135,000   $     66,000    $    140,500
Allowance for doubtful accounts deducted
   from notes receivable in the balance
   sheet ...............................           --        1,088,000      1,088,000            --
Reserve for obsolescence deducted from
   inventories on the balance sheet ....      1,242,000        148,000        371,000       1,019,000
Valuation reserve deducted from
   deferred tax assets .................     19,225,000        938,000           --        20,163,000
                                           ------------   ------------   ------------    ------------
Total ..................................   $ 20,538,500   $  2,309,000   $  1,525,000    $ 21,322,500
                                           ============   ============   ============    ============

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
                                           ------------   ------------   ------------    ------------
Total ..................................   $ 29,942,000   $    755,000   $ 10,158,500    $ 20,538,500
                                           ============   ============   ============    ============
</TABLE>


     (1)  Additions to the allowance for doubtful  accounts  include  provisions
          for uncollectible  accounts.  Bad debt expense includes (and additions
          above  exclude)  net direct  write-offs  of $0.0 and  $114,000 for the
          years  ended  December  31,  2008  and  2007,  respectively,  and  net
          recoveries of $712,000 for the year ended December 31, 2006. Additions
          to the inventory  valuation  reserve include current year  provisions.
          Additionally,  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  include amounts
          applied  to  write-offs  and  reversals  of prior  period  provisions.
          Deductions from the inventory valuation reserve include application of
          the  reserve  against  obsolete,   excess,   slow-moving  or  disposed
          inventory.


                                       88
<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 9, 2009
---------------------    Financial Officer (Principal
Lonnie D. Schnell        Executive and Financial Officer)


/s/ Mark Dyne            Chairman of the Board of Directors     April 9, 2009
---------------------
Mark Dyne


/s/ Colin Dyne           Vice Chairman of the Board of          April 9, 2009
---------------------    Directors
Colin Dyne


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


/s/ Raymond Musci        Director                               April 9, 2009
---------------------
Raymond Musci


/s/ Joseph Miller        Director                               April 9, 2009
---------------------
Joseph Miller


/s/ William Sweedler     Director                               April 9, 2009
---------------------
William Sweedler


                                       89
<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.


                                       90
<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          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.

10.16          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.

10.17 (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.

10.18 (2)      2007 Stock Plan.  Incorporated  by reference to Exhibit  10.20 to
               the Form 10-K filed on April 25, 2008.

10.19          Revolving  Credit and Term 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.

10.19.1        Amendment  No. 1 to Loan  Agreement  dated July 30, 2007,  by and
               between the Registrant and Bluefin Capital,  LLC. Incorporated by
               reference  to  Exhibit  10.20 to the Form 10-K filed on April 25,
               2008.


                                       91
<PAGE>


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

10.19.2        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.

10.19.3        Amendment No. 3 to Loan Agreement  dated as of March 31, 2008, by
               and between the Registrant and Bluefin Capital, LLC. Incorporated
               by  reference  to  Exhibit  10.21.3 to Form 10-Q filed on May 15,
               2008.

10.20          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.

10.21          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.

10.22          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.

10.23          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.

10.24          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.

10.25 (2)      Separation  Agreement,  dated as of  February  4,  2008,  between
               Stephen  Forte  and Talon  International,  Inc.  Incorporated  by
               reference to Exhibit 10.1 to Form 8-K filed on February 6, 2008.

10.26 (2)      Executive  Employment  Agreement,  dated June 18,  2008,  between
               Talon  International,  Inc. and Lonnie  Schnell.  Incorporated by
               reference to Exhibit 10.1 to Form 8-K filed on June 24, 2008.

10.27 (2)      Executive  Employment  Agreement,  dated June 18,  2008,  between
               Talon  International,   Inc.  and  Larry  Dyne.  Incorporated  by
               reference to Exhibit 10.1 to Form 8-K filed on June 24, 2008.

10.28 (2)      Talon International, Inc. 2008 Stock Incentive Plan. Incorporated
               by reference to Exhibit  4.10 to  Registration  Statement on Form
               S-8 filed on July 18, 2008.

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

21.1           Subsidiaries.


                                       92
<PAGE>


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

23.1           Consent of SingerLewak 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.


                                       93