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

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

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 2009.

                                       OR

[_]      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 Issuer as Specified in its Charter)

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

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

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


         Indicate  by check  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   whether  the   registrant   has   submitted
electronically  and posted on its corporate Web site, if any, every  Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (ss.232.405 of this chapter) during the preceding 12 months (or such shorter
period that the registrant was required to submit and post such files).

                              Yes [ ]   No [ ]

         Indicate by check mark whether the  registrant  is a large  accelerated
filer, an accelerated  filer, a  non-accelerated  filer, or a smaller  reporting
company.  See definitions of "large accelerated filer,"  "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

         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 August 13, 2009 the issuer had  20,291,433  shares of Common  Stock,
$.001 par value, issued and outstanding.


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


<PAGE>


                            TALON INTERNATIONAL, INC.
                               INDEX TO FORM 10-Q



PART I   FINANCIAL INFORMATION                                              PAGE
                                                                            ----

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

         Consolidated Balance Sheets as of June 30, 2009 (Unaudited)
            and December 31, 2008 .............................................3

         Consolidated Statements of Operations for the Three Months
            and the Six Months Ended June 30, 2009 and 2008 (Unaudited)........4

         Consolidated Statements of Cash Flows for the
            Six Months Ended June 30, 2009 and 2008 (Unaudited)................5

         Notes to the Consolidated Financial Statements........................7

Item 2.  Management's Discussion and Analysis of Financial Condition and
            Results of Operations.............................................23

Item 3.  Quantitative and Qualitative Disclosures about Market Risk...........33

Item 4T. Controls and Procedures..............................................33


PART II  OTHER INFORMATION

Item 1.  Legal Proceedings....................................................34

Item 1A. Risk Factors ........................................................35

Item 6.  Exhibits ............................................................35


                                       2
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                                 June 30,      December 31,
                                                                                   2009            2008
                                                                               ------------    ------------
                                                                               (Unaudited)
<S>                                                                            <C>             <C>
Assets
Current Assets:
   Cash and cash equivalents ...............................................   $  2,215,007    $  2,399,717
   Accounts receivable, net ................................................      5,409,918       3,856,613
   Inventories, net ........................................................      1,935,198       1,669,149
   Prepaid expenses and other current assets ...............................        651,744         473,955
                                                                               ------------    ------------
Total current assets .......................................................     10,211,867       8,399,434

Property and equipment, net ................................................      2,144,479       2,084,244
Fixed assets held for sale .................................................        407,009         407,655
Due from related parties ...................................................        200,000         200,000
Intangible assets, net .....................................................      4,110,751       4,110,751
Other assets ...............................................................        288,761         400,494
                                                                               ------------    ------------
Total assets ...............................................................   $ 17,362,867    $ 15,602,578
                                                                               ============    ============

Liabilities and Stockholders' Deficit
Current liabilities:
  Accounts payable .........................................................   $  8,930,217    $  7,674,768
  Accrued legal costs ......................................................        540,679         383,075
  Other accrued expenses ...................................................      2,465,014       2,292,681
  Revolver note payable ....................................................      4,990,483            --
  Term note payable, net of discounts ......................................      9,112,891            --
  Demand notes payable to related parties ..................................        225,810         222,264
  Current portion of capital lease obligations .............................         95,014         182,444
  Current portion of notes payable .........................................         46,427         144,064
                                                                               ------------    ------------
Total current liabilities ..................................................     26,406,535      10,899,296

Capital lease obligations, net of current portion ..........................          8,704           1,910
Revolver note payable, net of current portion ..............................           --         4,638,988
Term notes payable, net of discounts and current portion ...................           --         8,067,428
Other long term liabilities ................................................        718,925         756,888
                                                                               ------------    ------------
Total liabilities ..........................................................     27,134,164      24,364,510
                                                                               ------------    ------------

Commitments and contingencies (Note 13)

Stockholders' Deficit:
   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 June 30, 2009 and December 31, 2008 ..         20,291          20,291
  Additional paid-in capital ...............................................     54,859,305      54,769,072
  Accumulated deficit ......................................................    (64,754,705)    (63,651,032)
  Accumulated other comprehensive income ...................................        103,812          99,737
                                                                               ------------    ------------
Total stockholders' deficit ................................................     (9,771,297)     (8,761,932)
                                                                               ------------    ------------
Total liabilities and stockholders' deficit ................................   $ 17,362,867    $ 15,602,578
                                                                               ============    ============
</TABLE>

           See accompanying notes to consolidated financial statements


                                       3
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<CAPTION>
                                                                Three Months                    Six Months
                                                               Ended June 30,                 Ended June 30,
                                                        ---------------------------    ----------------------------
                                                            2009           2008            2009            2008
                                                        ------------   ------------    ------------    ------------
<S>                                                     <C>            <C>             <C>             <C>
Net sales ...........................................   $ 12,583,765   $ 17,020,629    $ 19,099,519    $ 27,006,118
Cost of goods sold ..................................      9,022,318     12,119,725      13,553,905      19,347,249
                                                        ------------   ------------    ------------    ------------
   Gross profit .....................................      3,561,447      4,900,904       5,545,614       7,658,869

Selling expenses ....................................        531,365        767,865       1,046,909       1,487,828
General and administrative expenses .................      2,198,037      3,082,164       4,201,830       6,430,400
                                                        ------------   ------------    ------------    ------------
   Total operating expenses .........................      2,729,402      3,850,029       5,248,739       7,918,228

Income (loss) from operations .......................        832,045      1,050,875         296,875       (259,359)
Interest expense, net ...............................        661,087        643,130       1,298,038       1,192,644
                                                        ------------   ------------    ------------    ------------
Income (loss) before provision for (benefit from)
   income taxes .....................................        170,958        407,745      (1,001,163)     (1,452,003)
Provision for (benefit from) income taxes ...........         96,103       (190,412)        102,510        (211,416)
                                                        ------------   ------------    ------------    ------------
   Net Income (loss) ................................   $     74,855   $    598,157    $ (1,103,673)   $ (1,240,587)
                                                        ============   ============    ============    ============
Basic income (loss) per share .......................   $       0.01   $       0.03    $      (0.05)   $      (0.06)
                                                        ============   ============    ============    ============
Diluted income (loss) per share .....................   $       0.01   $       0.03    $      (0.05)   $      (0.06)
                                                        ============   ============    ============    ============

Weighted average number of common shares outstanding:
   Basic ............................................     20,291,433     20,291,433      20,291,433      20,291,433
                                                        ============   ============    ============    ============
   Diluted ..........................................     20,291,433     20,291,433      20,291,433      20,291,433
                                                        ============   ============    ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


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

<CAPTION>
                                                                    Six Months Ended June 30,
                                                                  ----------------------------
                                                                      2009            2008
                                                                  ------------    ------------
<S>                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss ....................................................   $ (1,103,673)   $ (1,240,587)
  Adjustments to reconcile net loss to net cash provided
  by (used in) operating activities:
     Depreciation and amortization ............................        363,881         546,844
     Loss on disposal of property and equipment ...............          5,462            --
     Amortization of deferred financing cost and debt discounts        699,340         556,755
     Bad debt expense (recovery) ..............................         77,373          (5,326)
     Decrease in inventory valuation reserves .................           --          (340,312)
     Stock based compensation .................................         90,233         284,433
  Changes in operating assets and liabilities:
     Accounts receivables, including related party ............     (1,632,941)     (3,591,529)
     Inventories ..............................................       (266,046)        154,092
     Prepaid expenses and other current assets ................       (178,697)        370,532
     Other assets .............................................         68,423         (50,012)
     Accrued legal costs ......................................        157,604        (261,181)
     Accounts payable and other accrued expenses ..............      1,662,000       4,767,304
                                                                  ------------    ------------
     Net cash provided by (used in) operating activities ......        (57,041)      1,191,013
                                                                  ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of property and equipment .......................       (419,082)       (132,754)
  Proceeds from sale of equipment .............................          1,822          12,045
                                                                  ------------    ------------
     Net cash used in investing activities ....................       (417,260)       (120,709)
                                                                  ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Revolver note borrowings ....................................        351,495         700,000
  Repayment of revolver note borrowings .......................           --          (500,000)
  Term note borrowings, net of issuance costs .................        125,000            --
  Payments on term note .......................................           --          (125,000)
  Payment of notes payable ....................................        (97,637)       (147,110)
  Payment of capital leases ...................................        (91,130)       (180,157)
                                                                  ------------    ------------
     Net cash provided by (used in) financing activities ......        287,728        (252,267)
                                                                  ------------    ------------
Net effect of foreign currency exchange translation on cash ...          1,863           4,509
                                                                  ------------    ------------
Net increase (reduction) in cash and cash equivalents .........       (184,710)        822,546
Cash and cash equivalents at beginning of period ..............      2,399,717       2,918,858
                                                                  ------------    ------------
Cash and cash equivalents at end of period ....................   $  2,215,007    $  3,741,404
                                                                  ============    ============
</TABLE>

           See accompanying notes to consolidated financial statements


                                       5
<PAGE>


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

<CAPTION>
Supplemental disclosures of cash flow information:
                                                             Six Months Ended June 30,
                                                           ----------------------------
                                                               2009            2008
                                                           ------------    ------------
<S>                                                        <C>             <C>
  Cash received (paid) during the period for:
   Interest paid .......................................   $   (599,705)   $   (671,906)
   Interest received ...................................   $      1,007    $      9,096
   Income tax paid .....................................   $    (30,059)   $    (10,553)
  Non-cash financing activities:
   Note payable issued in modification of loan agreement           --      $  1,000,000
   Debt waiver / modification fee ......................   $    225,210    $    145,000
   Effect of foreign currency translation on net assets    $      4,075    $    113,027
   Capital lease obligation ............................   $     10,494    $       --
</TABLE>

           See accompanying notes to consolidated financial statements


                                       6
<PAGE>


                            TALON INTERNATIONAL, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1.  PRESENTATION OF INTERIM INFORMATION

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States for interim  financial  information  and in  accordance  with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not  include  all  of the  information  and  footnotes  required  by  accounting
principles  generally  accepted  in the  United  States for  complete  financial
statements. The accompanying unaudited consolidated financial statements reflect
all adjustments  that, in the opinion of the management of Talon  International,
Inc.  and its  consolidated  subsidiaries  (collectively,  the  "Company"),  are
considered necessary for a fair presentation of the financial position,  results
of  operations  and  cash  flows  for the  periods  presented.  The  results  of
operations  for such  periods  are not  necessarily  indicative  of the  results
expected  for the full fiscal year or for any future  period.  The  accompanying
financial statements should be read in conjunction with the audited consolidated
financial  statements of the Company included in the Company's Form 10-K for the
year ended December 31, 2008. The balance sheet as of December 31, 2008 has been
derived from the audited financial  statements as of that date but omits certain
information and footnotes required for complete financial statements.

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern,  which  contemplates
the  realization  of assets and the  satisfaction  of  liabilities in the normal
course of business.  The Company has experienced  substantial  recurring  losses
from  operations on declining  revenues and has an accumulated  deficit of $64.8
million as of June 30, 2009.  These  matters,  among others,  raise  substantial
doubt about the Company's ability to continue as a going concern.  The Company's
continuation  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. See Note 3 "Significant Risks and Uncertainties".

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         A complete description of the Company's Significant Accounting Policies
is  included  in the  Company's  Annual  Report on Form 10-K for the year  ended
December  31,  2008,  and should be read in  conjunction  with  these  unaudited
consolidated  financial  statements.  The Significant  Accounting Policies noted
below are only those policies that have changed  materially or have supplemental
information included for the periods presented here.

         ALLOWANCE FOR ACCOUNTS AND NOTES RECEIVABLE DOUBTFUL ACCOUNTS

         The Company is 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. The Company records 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.  Bad debt expense for the three and
six months  ended June 30, 2009 is $72,703 and  $77,373  respectively.  Bad debt
recoveries  for the three and six  months  ended  June 30,  2008 are  $4,021 and
$5,326, respectively.

         FAIR VALUE MEASUREMENTS

         The  Company  has  adopted  SFAS No.  157  which  defines  fair  value,
establishes  a  framework  for  measuring  fair  value  in  generally   accepted
accounting  principles,  and expands  disclosures about fair value measurements.


                                       7
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

SFAS 157 does not require any new fair value measurements, but provides guidance
on how to  measure  fair  value by  providing  a fair  value  hierarchy  used to
classify the source of the  information.  As of June 30, 2009,  the Company held
certain assets and liabilities that are required to be measured at fair value on
a recurring basis. The fair value of these assets and liabilities was determined
using observable criteria and at June 30, 2009 was equal to their stated values,
except the Related  Party Note  Receivable  of $200,000  and the Assets Held for
Sale of $407,000,  both of which used  unobservable  criteria to determine their
value. There were no material  adjustments to the fair value of these assets for
the three or six months ended June 30, 2009.

         INTANGIBLE ASSETS

         Intangible  assets consist of our trade name 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 are tested for impairment at least  annually in accordance  with the
provisions of Financial  Accounting  Standards Board ("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,  and reviewed for impairment in accordance  with the provisions of FASB
Statement No. 144,  ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED  ASSETS.
The exclusive license and intellectual property rights are fully amortized.

         CLASSIFICATION OF EXPENSES

         COSTS OF GOODS SOLD - 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 expense.

         SELLING  EXPENSES - Selling expenses  primarily  include sales salaries
and  commissions,  travel and  entertainment,  marketing and other sales related
costs.  Marketing and  advertising  efforts are expensed as incurred and for the
three and six months ended June 30, 2009 were $2,051 and $29,195,  respectively,
compared  to $10,581  and  $52,696  for the three and six months  ended June 30,
2008, respectively.

         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 and other general corporate expenses.

         INTEREST EXPENSE, NET - Interest expense reflects the cost of borrowing
and amortization of deferred financing costs and discounts. Interest expense for
the three and six months  ended June 30, 2009 totaled  $661,800 and  $1,299,000,
respectively. For the three and six months ended June 30, 2008, interest expense
was $658,000 and $1,225,600,  respectively. Interest income consists of earnings
from  outstanding  amounts  due to the Company  under  notes and other  interest
bearing  receivables.  The Company  recorded  interest income of $700 and $1,000
respectively,  for the three and six months ended June 30, 2009,  as compared to
$15,500 and $32,900 for the same periods in 2008.

         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.  Included  in  other  accumulated  comprehensive  income  were  a
cumulative foreign currency translation  adjustment gain of $103,812 and $99,737
at June 30, 2009 and December 31, 2008, respectively.


                                       8
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         COMPREHENSIVE INCOME (LOSS)

         Comprehensive income consists of net income (loss) and unrealized gains
and  losses  on  marketable   securities   and  foreign   currency   translation
adjustments.  Comprehensive  income (loss) and its  components for the three and
six months ended June 30, 2009 and 2008 is as follows:

<TABLE>
<CAPTION>
                                        Three Months Ended            Six Months Ended
                                             June 30,                     June 30,
                                     -------------------------   --------------------------
                                         2009          2008          2009           2008
                                     -----------   -----------   -----------    -----------
<S>                                  <C>           <C>           <C>            <C>
Net income (loss) ................   $    74,855   $   598,157   $(1,103,673)   $(1,240,587)
Other comprehensive income (loss):
Available for sale securities ....          --         160,000          --         (500,000)
Foreign currency translation .....         7,160       101,607         4,075        113,027
                                     -----------   -----------   -----------    -----------
Total comprehensive income (loss)    $    82,015   $   859,764   $(1,099,598)   $(1,627,560)
                                     ===========   ===========   ===========    ===========
</TABLE>

         The  available-for-sale  securities adjustment  represented  unrealized
losses due to temporary  market  declines  related to our marketable  securities
that were received in exchange for the Azteca note receivable.  These marketable
securities  were  permanently  impaired in the amount of  $1,040,000  during the
third  quarter  of 2008 as  discussed  in Note 6 to the  consolidated  financial
statements.  The foreign  currency  translation  adjustment  represents  the net
currency translation  adjustment gains and losses related to our China and India
subsidiaries, which have not been reflected in net income (loss) for the periods
presented.

         RECLASSIFICATIONS

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

NOTE 3.  SIGNIFICANT RISKS AND UNCERTAINTIES

         The Company's 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 the first six months of fiscal year 2009 and
fiscal year 2008,  the Company  experienced  losses from  operations  and has an
accumulated deficit as of June 30, 2009 of $64,754,705. As of December 31, 2008,
the Company  failed to meet the minimum  EBITDA  requirements  in the  Revolving
Credit and Term Loan Agreement with CVC California, LLC ("CVC") and was required
to pay a fee to waive these requirements at December 31, 2008. Additionally, the
Company did not meet the minimum EBITDA  covenants at March 31, 2009, and it has
also paid a waiver fee to the lender for this  period.  The  company  was not in
default of the covenants at June 30, 2009;  however it is uncertain  whether the
Company will be in compliance with the financial covenants in future quarters.

         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
the  Company was unable to obtain a waiver or modify the  covenants.  Should the
Company  fail to be in  compliance  with these  covenants  for three  successive
quarters and was unable to obtain a waiver or amend these covenants, the Company
may be unable to continue as a going concern.

         The Company's  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 its largest
customers.  Consumer  spending  recently has deteriorated  significantly and may
remain  depressed,  or be subject to further  deterioration  for the foreseeable


                                       9
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

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,  the
Company may not be able to maintain or increase the sales to existing customers,
make sales to new  customers  or maintain  our  earnings  from  operations  as a
percentage of net sales. As a result, the 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 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 4.  NEW ACCOUNTING PRONOUNCEMENTS

         In April 2009, the FASB issued FSP FAS 157-4,  "DETERMINING  FAIR VALUE
WHEN VOLUME AND LEVEL OF ACTIVITY FOR THE ASSET OR LIABILITY HAVE  SIGNIFICANTLY
DECREASED AND IDENTIFYING  TRANSACTIONS  THAT ARE NOT ORDERLY" (FSP 157-4).  FSP
157-4  provides  guidance  on how to  determine  the fair  value of  assets  and
liabilities  when the volume and level of activity for the  asset/liability  has
significantly  decreased.  FSP  157-4  also  provides  guidance  on  identifying
circumstances that indicate a transaction is not orderly. In addition, FSP 157-4
requires  disclosure  in interim and annual  periods of the inputs and valuation
techniques  used to measure fair value and a discussion  of changes in valuation
techniques.  FSP 157-4 was effective  beginning in the second  quarter of fiscal
year  2009.  The  adoption  of FSP 157-4 did not have a  material  impact on the
consolidated financial statements.

         In  April  2009,   the  FASB  issued  FSP  FAS  115-2  and  FAS  124-2,
"RECOGNITION   AND   PRESENTATION  OF   OTHER-THAN-TEMPORARY   Impairment"  (FSP
115-2/124-2).  FSP 115-2/124-2  amends the  requirements for the recognition and
measurement of other-than-temporary impairments for debt securities by modifying
the  pre-existing  "intent and ability"  indicator.  Under FSP  115-2/124-2,  an
other-than-temporary impairment is triggered when there is an intent to sell the
security,  it is more likely than not that the  security  will be required to be
sold before  recovery,  or the  security  is not  expected to recover the entire
amortized cost basis of the security.  Additionally, FSP 115-2/124-2 changes the
presentation of an  other-than-temporary  impairment in the income statement for
those  impairments  involving  credit losses.  The credit loss component will be
recognized in earnings and the remainder of the  impairment  will be recorded in
other  comprehensive  income.  FSP  115-2/124-2  was effective  beginning in the
second quarter of fiscal year 2009. The  implementation  of FSP  115-2/124-2 did
not have a material impact on the consolidated financial statements.

         In April  2009,  the FASB  issued FSP FAS 107-1 and APB 28-1,  "INTERIM
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL  INSTRUMENTS" (FSP 107-1/APB 28-1). FSP
107-1/APB  28-1  requires  interim  disclosures  regarding  the fair  values  of
financial  instruments that are within the scope of FAS 107,  "DISCLOSURES ABOUT
THE FAIR VALUE OF  FINANCIAL  INSTRUMENTS."  Additionally,  FSP  107-1/APB  28-1
requires disclosure of the methods and significant  assumptions used to estimate
the fair value of financial  instruments  on an interim basis as well as changes


                                       10
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

of the methods and  significant  assumptions  from prior periods.  FSP 107-1/APB
28-1 does not change the accounting  treatment for these  financial  instruments
and did not have a material impact on the consolidated financial statements.

         In April 2009,  the FASB  issued FSP SFAS No.  141R-1,  ACCOUNTING  FOR
ASSETS ACQUIRED AND  LIABILITIES  ASSUMED IN A BUSINESS  COMBINATION  THAT ARISE
FROM CONTINGENCIES. FSP SFAS 141R-1 amends the guidance in SFAS 141R relating to
the initial recognition and measurement,  subsequent  measurement and accounting
and  disclosures  of assets and  liabilities  arising  from  contingencies  in a
business  combination.  FSP SFAS 141R is effective  for fiscal  years  beginning
after  December  15,  2008.  The  Company  has  adopted  FSP SFAS 141R as of the
beginning  of  fiscal  2009  and  it  did  not  have a  material  impact  on the
consolidated  financial  statements.  The Company will apply the requirements of
FSP FAS 141R-1 prospectively to any future acquisitions.

          In May 2009,  the FASB issued SFAS No. 165,  SUBSEQUENT  EVENTS ("SFAS
No.  165").  SFAS No. 165  provides  general  standards  of  accounting  for and
disclosure  of  events  that  occur  after the  balance  sheet  date but  before
financial  statements are issued or are available to be issued. SFAS No. 165 was
adopted by the Company in the second quarter of 2009 and did not have a material
impact on the consolidated financial statements. The subsequent events have been
evaluated  through August 14, 2009,  which is the date the financial  statements
were issued.

         In June 2009, the FASB issued SFAS No. 166, ACCOUNTING FOR TRANSFERS OF
FINANCIAL  ASSETS--an  amendment of FASB Statement No. 140 (SFAS No. 166"). SFAS
No. 166 seeks to  improve  the  relevance,  representational  faithfulness,  and
comparability  of  the  information  that a  reporting  entity  provides  in its
financial  statements  about a transfer of  financial  assets;  the effects of a
transfer on its financial position,  financial performance, and cash flows and a
transferor's  continuing  involvement,  if any, in transferred financial assets.
SFAS No. 166 is applicable for annual periods beginning after November 15, 2009.

         The  implementation  of SFAS No. 165 and 166 is not  expected to have a
material impact on the consolidated financial statements.


                                       11
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

NOTE 5.  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>
                                            Income
THREE MONTHS ENDED JUNE 30, 2009:           (loss)         Shares       Per Share
--------------------------------          -----------    -----------   -----------
<S>                                       <C>             <C>          <C>
Basic Income per share:
  Available to common stockholders ....   $    74,855     20,291,433   $      0.01

Effect of Dilutive Securities:
Options ...............................          --             --            --
Warrants ..............................          --             --            --
                                          -----------    -----------   -----------
Income available to common stockholders   $    74,855     20,291,433   $      0.01
                                          ===========    ===========   ===========

THREE MONTHS ENDED JUNE 30, 2008:
--------------------------------
Basic Income per share:
  Available to common stockholders ....   $   598,157     20,291,433   $      0.03

Effect of Dilutive Securities:
Options ...............................          --             --            --
Warrants ..............................          --             --            --
                                          -----------    -----------   -----------
Income available to common stockholders   $   598,157     20,291,433   $      0.03
                                          ===========    ===========   ===========

SIX MONTHS ENDED JUNE 30, 2009:
------------------------------
Basic Loss per share:
  Available to common stockholders ....   $(1,103,673)    20,291,433   $     (0.05)

Effect of Dilutive Securities:
Options ...............................          --             --            --
Warrants ..............................          --             --            --
                                          -----------    -----------   -----------
Loss available to common stockholders .   $(1,103,673)    20,291,433   $     (0.05)
                                          ===========    ===========   ===========

SIX MONTHS ENDED JUNE 30, 2008:
------------------------------
Basic Loss per share:
  Available to common stockholders ....   $(1,240,587)    20,291,433   $     (0.06)

Effect of Dilutive Securities:
Options ...............................          --             --            --
Warrants ..............................          --             --            --
                                          -----------    -----------   -----------
Loss available to common stockholders .   $(1,240,587)    20,291,433   $     (0.06)
                                          ===========    ===========   ===========
</TABLE>


         Warrants to purchase  318,495  shares of common  stock  exercisable  at
$3.65  per  share and  options  to  purchase  5,398,100  shares of common  stock
exercisable  between $0.11 and $5.23 per share,  were  outstanding for the three
and six months ended June 30, 2009, but were not included in the  computation of
diluted  income  (loss) per share because  exercise or conversion  would have an
antidilutive effect on the income (loss) per share.


                                       12
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         Warrants to purchase 891,313 shares of common stock exercisable between
$3.65  and  $4.74 and  options  to  purchase  7,057,235  shares of common  stock
exercisable  between  $0.20 and $5.23,  were  outstanding  for the three and six
months ended June 30, 2008, but were not included in the  computation of diluted
income (loss) per share because the effect of exercise or conversion  would have
an antidilutive effect on income (loss) per share.

NOTE 6.  MARKETABLE SECURITIES

         The  Company   entered  into  an  agreement   with  Azteca   Production
International,   Inc.  ("Azteca"),  a  former  distributor  of  Talon  products,
effective  December 31,  2007,  in  settlement  of an existing  note  receivable
obligation.  The  agreement  called for Azteca to  deliver  2,000,000  shares of
unrestricted  common  stock in a  separate  public  corporation  with a value of
$1,040,000 in exchange for  cancellation  of the note. On January 30, 2008,  the
unrestricted  shares were delivered by Azteca.  In the third quarter of 2008 the
Company determined that this asset had been permanently  impaired and recognized
a  valuation  reserve  for the full value of the  investment  of  $1,040,000  at
September  30,  2008.  An  unrealized  gain of $160,000 and  unrealized  loss of
$500,000 were previously  recognized in other comprehensive income for the three
and six months ended June 30, 2008, respectively.

NOTE 7.  ACCOUNTS AND NOTE RECEIVABLE

         Accounts  receivable  are  included  on the  accompanying  consolidated
balance sheets net of an allowance for doubtful  accounts.  The total  allowance
for  doubtful  accounts at June 30, 2009 and  December 31, 2008 was $189,800 and
$217,300, respectively.

         Due from  related  parties  at June  30,  2009 and  December  31,  2008
includes $699,680 and 674,010,  respectively,  of unsecured notes,  advances and
accrued  interest  receivable from Colin Dyne, a director and stockholder of the
Company.  The Company has a valuation  reserve against this note of $499,680 and
$474,010 at June 30, 2009 and December 31, 2008, respectively.

         In determining the fair value of the Note  Receivable,  the Company has
analyzed the expected  recovery of the note amount and collection period through
anticipated payments from commissions earned on business opportunities presented
to the Company.  The Company  generally pays a commission of approximately 6% of
sales for these business opportunities realized.

NOTE 8.  INVENTORIES

         Inventories  are  stated  at the  lower of cost,  determined  using the
first-in,  first-out  ("FIFO") basis, or market value and are all categorized as
finished  goods.  The costs of  inventory  include the purchase  price,  inbound
freight and duties,  conversion costs and certain allocated  production overhead
costs. Inventory valuation reserves are recorded for damaged,  obsolete,  excess
and slow-moving inventory.  The Company uses 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.


                                       13
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

Inventories consist of the following:

                                            June 30,      December 31,
                                              2009            2008
                                          ------------    ------------

         Finished goods ...............   $  3,099,487    $  2,880,319
         Less reserves ................     (1,164,289)     (1,211,170)
                                          ------------    ------------
         Total inventories ............   $  1,935,198    $  1,669,149
                                          ============    ============

NOTE 9.  FIXED ASSETS HELD FOR SALE

         The  Company  has  machinery  and  equipment   formerly  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 in 2008
to more effectively redeploy or sell the equipment. The Company has analyzed the
cash flow of the potential  sales value of the equipment and determined  that it
is likely that a sale of this equipment will not recover its carrying  value. As
a result,  at December  31, 2008 the Company  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
June 30, 2009 is $349,009.

         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 at December 31, 2008 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 June 30, 2009 is $58,000.

NOTE 10. DEBT FACILITY

         On June 27, 2007, the Company entered into a Revolving  Credit and Term
Loan  Agreement  with  Bluefin  Capital,  LLC that  provides  for a $5.0 million
revolving  credit  loan and a $9.5  million  term loan for a three  year  period
ending June 30,  2010.  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 permitted
borrowings  based  upon  a  formula  including  75% of  the  Company's  eligible
receivables  and 55% of eligible  inventory,  and provided for monthly  interest
payments  at the prime rate  (5.25% at June 30,  2009) 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
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.


                                       14
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         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 to 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 as well as the quarter ended March 31, 2009, and
in connection with such failures,  on March 31, 2009 the Company entered into an
amendment to the 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 failures to satisfy the EBITDA  requirements
for the quarters  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 the Company to sell  equipment that has
been  designated  as  held  for  sale  more  fully  described  in  Note 9 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.


                                       15
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         As of  June  30,  2009,  the  Company  had  outstanding  borrowings  of
$10,725,210 under the term notes (discounted carrying value of $9,112,891),  and
$4,990,483 under the revolving credit note.

         Interest  expense  related  to  the  Revolving  Credit  and  Term  Loan
Agreement  for the three and six months  ended June 30,  2009 was  $652,400  and
$1,275,880,  respectively,  which includes $357,240 and $699,340 in amortization
of discounts and deferred financing costs for the same periods.

         Interest  expense  related  to  the  Revolving  Credit  and  Term  Loan
Agreement  for the three and six months  ended June 30,  2008 was  $622,270  and
$1,150,850,  respectively,  which includes $305,180 and $548,850 in amortization
of discounts and deferred financing costs for the same periods.

NOTE 11. STOCK-BASED COMPENSATION

         The Company accounts for stock-based  awards to employees and directors
in accordance with Statement of Financial  Accounting Standards No. 123 revised,
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.  Options  issued to
consultants  are  accounted for in  accordance  with the  provisions of 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".

         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 by 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 for 2009 and 2008, the Company did not meet  performance
criteria and  accordingly,  there was no accelerated  vesting for these options.
Options  granted  for the three  and six  months  ended  June 30,  2009  totaled
480,000.  For the three and six months  ended June 30, 2008,  2,600,000  options
were granted.

         As of  June  30,  2009,  the  Company  had  approximately  $318,885  of
unamortized  stock-based  compensation  expense  related  to  options  issued to
employees  and  directors,  which will be recognized  over the weighted  average
period of 1.7 years. As of June 30, 2008, unamortized  stock-based  compensation
expense related to options issued to employees and directors was $558,000, which
is being recognized over the weighted average period of approximately 6 years.


                                       16
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         The following  table  summarizes  the activity in the  Company's  share
based plans during the six months ended June 30, 2009.

<TABLE>
<CAPTION>
                                                                       Weighted
                                                                       Average
                                                         Number of     Exercise
                                                          Shares        Price
                                                        ----------    ----------
<S>                                                      <C>          <C>
EMPLOYEES AND DIRECTORS
Options and warrants outstanding - January 1, 2009 ..    7,100,536    $     0.98
     Granted ........................................         --            --
     Exercised ......................................         --            --
     Cancelled ......................................   (2,164,937)   $     0.62
                                                        ----------    ----------
Options and warrants outstanding - March 31, 2009 ...    4,935,599    $     1.14
     Granted ........................................      480,000    $     0.11
     Exercised ......................................         --            --
     Cancelled ......................................      (17,499)   $     0.65
                                                        ----------    ----------
Options and warrants outstanding - June 30, 2009 ....    5,398,100    $     1.20
                                                        ==========    ==========


NON-EMPLOYEES
Options and warrants outstanding - January 1, 2009 ..      318,495    $     3.65
     Granted ........................................         --            --
     Exercised ......................................         --            --
     Cancelled ......................................         --            --
                                                        ----------    ----------
Options and warrants outstanding - March 31, 2009 ...      318,495    $     3.65
     Granted ........................................         --            --
     Exercised ......................................         --            --
     Cancelled ......................................         --            --
                                                        ----------    ----------
Options and warrants outstanding - June 30, 2009 ....      318,495          3.65
                                                        ==========    ==========
</TABLE>

NOTE 12. INCOME TAXES

         The Company accrues interest and penalties  related to unrecognized tax
benefits in interest and penalties  expense.  For the three and six months ended
June  30,  2009 and  2008,  the  Company  accrued  interest  and  penalties  for
unrecognized tax benefits of approximately $4,000 and $8,000,  respectively.  At
June 30, 2009 and December 31, 2008, the Company had  approximately  $69,700 and
$61,800,  respectively,  accrued in interest and penalties  associated  with the
unrecognized tax liabilities.

         Deferred  tax assets were  $150,952  and  $218,000 at June 30, 2009 and
December 31, 2008, respectively, related to the Company's foreign operations and
were  included in other  assets.  Due to prior  operating  losses  incurred,  no
benefit  for  domestic  income  taxes  has  been  recorded  since  there  is not
sufficient  evidence to  determine  that the Company will be able to utilize our
net operating  loss  carryforwards  to offset future taxable  income.  Other tax
liabilities  were $3,005 and $1,450 as of June 30, 2009 and  December  31, 2008,
respectively, and were included in other accrued liabilities.

NOTE 13. COMMITMENTS AND 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


                                       17
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

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  thereafter  certified a class and adopted a schedule for the
case. On July 31, 2009,  the parties  entered into a  stipulation  of settlement
intended to settle the matter and result in its dismissal  with  prejudice.  The
total  settlement  proceeds  of  $5.75  million  are to be  paid  in full by the
Company's  insurers  without any  contribution  from the  Company or  individual
defendants.  The  Court  has  set a  hearing  for  preliminary  approval  of the
settlement on August 17, 2009. If preliminary  approval is given, notice will be
provided to class members and the Court will set a final fairness hearing on the
settlement.  If the settlement is finally  approved,  the case will be dismissed
with  prejudice  per the  terms  of the  settlement.  If the  settlement  is not
approved, the Company will continue to vigorously defend this lawsuit;  however,
in this case,  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 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.  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 the second quarter of 2008, Pro-Fit and certain related companies
were placed into  administration in the United Kingdom and filed petitions under
Chapter  15 of Title 11 of the  United  States  Code.  As a  consequence  of the
chapter 15 filings,  all litigation by us against  Pro-Fit has been stayed.  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 its  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.


                                       18
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         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.

NOTE 14. 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>
                                         Three Months Ended June 30, 2009
                           ---------------------------------------------------------
                              Talon           Trim          Tekfit      Consolidated
                           ------------   ------------   ------------   ------------
<S>                        <C>            <C>            <C>            <C>
Net sales ..............   $  7,696,659   $  4,863,876   $     23,230   $ 12,583,765
Cost of goods sold .....      5,939,552      3,072,342         10,424      9,022,318
                           ------------   ------------   ------------   ------------
Gross profit ...........      1,757,107      1,791,534         12,806      3,561,447
                                          ------------   ------------   ------------
Operating expenses .....                                                   2,729,402
                                                                        ------------
Income from operations .                                                $    832,045
                                                                        ============
</TABLE>


                                       19
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                         Three Months Ended June 30, 2008
                           ---------------------------------------------------------
                              Talon           Trim          Tekfit      Consolidated
                           ------------   ------------   ------------   ------------
<S>                        <C>            <C>            <C>            <C>

Net sales ..............   $ 11,445,062   $  5,539,175   $     36,392   $ 17,020,629
Cost of goods sold .....      8,503,617      3,578,655         37,453     12,119,725
                           ------------   ------------   ------------   ------------
Gross profit (loss) ....      2,941,445      1,960,520         (1,061)     4,900,904
                                          ------------   ------------   ------------
Operating expenses .....                                                   3,850,029
                                                                        ------------
Income from operations .                                                $  1,050,875
                                                                        ============
</TABLE>


<TABLE>
<CAPTION>
                                          Six Months Ended June 30, 2009
                           ---------------------------------------------------------
                              Talon           Trim          Tekfit      Consolidated
                           ------------   ------------   ------------   ------------
<S>                        <C>            <C>            <C>            <C>
Net sales ..............   $ 11,028,352   $  8,034,062   $     37,105   $ 19,099,519
Cost of goods sold .....      8,462,280      5,073,727         17,898     13,553,905
                           ------------   ------------   ------------   ------------
Gross profit ...........      2,566,072      2,960,335         19,207      5,545,614
                                          ------------   ------------   ------------
Operating expenses .....                                                   5,248,739
                                                                        ------------
Income from operations .                                                $    296,875
                                                                        ============
</TABLE>


<TABLE>
<CAPTION>
                                          Six Months Ended June 30, 2008
                           ---------------------------------------------------------
                              Talon           Trim          Tekfit      Consolidated
                           ------------   ------------   ------------   ------------
<S>                        <C>            <C>            <C>            <C>

Net sales ..............   $ 17,056,938    $  9,905,031   $     44,149    $ 27,006,118
Cost of goods sold .....     13,121,221       6,179,212         46,816      19,347,249
                           ------------    ------------   ------------    ------------
Gross profit (loss) ....      3,935,717       3,725,819         (2,667)      7,658,869
                                           ------------   ------------    ------------
Operating expenses .....                                                     7,918,228
                                                                          ------------
Loss from operations ...                                                     (259,359)
                                                                          ============
</TABLE>


                                       20
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

         The Company distributes its products  internationally and has reporting
requirements based on geographic  regions.  Revenues are attributed to countries
based upon  customer  delivery  locations  and the net book value of  long-lived
assets  (consisting  of property and equipment,  intangible  assets and property
held for sale) is attributed  to countries  based on the location of the assets,
as follows:

SALES                       Three Months Ended             Six Months Ended
                                 June 30,                      June 30,
                        --------------------------    --------------------------
Country / Region            2009           2008           2009           2008
                        -----------    -----------    -----------    -----------

United States ......    $   919,777    $ 1,187,600    $ 1,569,610    $ 1,845,100
Hong Kong ..........      3,064,825      4,408,300      5,482,757      8,063,600
China ..............      4,458,898      6,009,500      5,622,462      7,925,100
India ..............        486,631        788,900        826,436      1,498,000
Bangladesh .........        596,128        593,200      1,140,413      1,326,800
Other ..............      3,057,506      4,033,100      4,459,841      6,347,500
                        -----------    -----------    -----------    -----------
Total ..............    $12,583,765    $17,020,600    $19,099,519    $27,006,100
                        ===========    ===========    ===========    ===========


                                                     June 30,       December 31,
                                                       2009             2008
                                                   ------------     ------------
LONG-LIVED ASSETS:
   United States .............................     $  4,770,642     $  4,955,725
   Hong Kong .................................        1,257,996          989,761
   China .....................................          221,731          243,905
   Other .....................................            4,861            5,604
                                                   ------------     ------------
 Total .......................................     $  6,255,230     $  6,194,995
                                                   ============     ============


                                       21
<PAGE>


                            TALON INTERNATIONAL, INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
                                   (UNAUDITED)

NOTE 15. RELATED PARTY TRANSACTIONS

         Colin  Dyne,  a  director  and  stockholder  of the  Company  is also a
director, officer and significant stockholder in People's Liberation,  Inc., the
parent  company of Versatile  Entertainment,  Inc.  and William  Rast  Sourcing.
During the three and six months  ended June 30, 2009 the Company had no sales to
Versatile Entertainment. During the three and six months ended June 30, 2008 the
Company  had  sales  of  $177,770  and  $289,250,   respectively,  to  Versatile
Entertainment.  Accounts  receivable  of $40 and $18,000 were  outstanding  from
Versatile Entertainment at June 30, 2009 and December 31, 2008, respectively.

         During the three and six months  ended June 30,  2009 the  Company  had
sales of $77,500 and $123,690,  respectively,  to William Rast Sourcing.  During
the three and six months  ended June 30,  2008 the  Company had sales of $60,200
and $91,900,  respectively,  to William Rast  Sourcing.  Accounts  receivable of
$67,744 and $51,000 were outstanding from William Rast Sourcing at June 30, 2009
and December 31, 2008, respectively.

         Due from  related  parties  at June  30,  2009 and  December  31,  2008
includes  unsecured  notes,  advances and accrued  interest  receivable,  net of
valuation  reserves of $200,000  from Colin Dyne.  The notes and  advances  bear
interest at 7.5% and are due on demand.

         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  and  interest  expense to related  parties at June 30,  2009 and
December 31, 2008 was $225,800 and 222,000, respectively.

         Freedom Apparel,  an entity owned by the spouse and a relative of Larry
Dyne,  an executive  officer of the Company,  has  purchased  products  from the
Company. For the three and six months ended June 30, 2009 there were no sales to
this  entity.  For the three and six months  ended  June 30,  2008 sales to this
entity were $0 and $100,  respectively.  At June 30, 2009 and December 31, 2008,
accounts  receivable included $34,900 and $35,000,  respectively,  due from this
entity.

         Consulting  fees paid to  Diversified  Investments,  a company owned by
Mark Dyne,  amounted to $37,500  and $75,000 for the three and six months  ended
June 30, 2009,  respectively.  Consulting fees paid for the three and six months
ended June 30, 2008 were  $37,500 and  $75,000,  respectively.  This  consulting
arrangement  terminates  on March 31,  2010.  For the three and six months ended
June 30, 2008  consulting  fees of $75,000 and $150,000 were paid to Colin Dyne,
whose consulting agreement terminated November 30, 2008.


                                       22
<PAGE>


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

         This  report  and  other  documents  we file  with the  Securities  and
Exchange Commission 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.   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  below.  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 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.

OVERVIEW

         The  following  management's  discussion  and  analysis  is intended to
assist the reader in understanding our consolidated  financial statements.  This
management's  discussion and analysis 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  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(R) and
TEKFIT(R). We operate the business globally under three product groups.

         We plan to continue to expand our distribution of TALON zippers through
a  network  of Talon  distribution  and  manufacturing  locations,  distribution
relationships  and joint  ventures.  The  network  of global  manufacturing  and
distribution locations are expected to improve our global footprint and allow us
to more effectively serve apparel brands and manufacturers globally.

         Our  Trim  business  focus  is 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
development,  design 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.

         Our Tekfit services provide manufacturers with the patented technology,
manufacturing  know-how and materials required to produce garments incorporating
an expandable waistband.  Our efforts to promote this product offering have been
limited by a licensing  dispute.  As  described  more fully in this report under
Contingencies and Guarantees (see Note 13 to consolidated financial statements),
we are  presently in  litigation  with Pro-Fit  Holdings  Limited  regarding our
exclusively   licensed   rights  to  sell  or  sublicense   stretch   waistbands
manufactured under Pro-Fit's patented technology. Our growth prospects,  results
of operations and financial  condition have been materially  adversely  affected
due to our dispute with Pro-Fit not being resolved in a manner favorable to us.


                                       23
<PAGE>


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                              Three Months Ended       Six Months Ended
                                                   June 30,                June 30,
                                             --------------------    ---------------------
                                               2009        2008        2009         2008
                                             --------    --------    --------     --------
<S>                                             <C>         <C>         <C>          <C>
Net sales ................................      100.0%      100.0%      100.0%       100.0%
Cost of goods sold .......................       71.7        71.2        71.0         71.6
                                             --------    --------    --------     --------
Gross profit .............................       28.3        28.8        29.0         28.4
Selling expenses .........................        4.2         4.5         5.5          5.5
General and administrative expenses ......       17.5        18.1        22.0         23.9
Interest expense, net and income taxes ...        6.0         2.7         7.3          3.6
                                             --------    --------    --------     --------
Net income (loss) ........................        0.6%        3.5        (5.8)%       (4.6)%
                                             ========    ========    ========     ========
</TABLE>

         SALES

         For the three and six  months  ended June 30,  2009 and 2008,  sales by
geographic region based on the location of the customer as a percentage of sales
were as follows:

                                    Three Months Ended       Six Months Ended
                                         June 30,                June 30,
                                   --------------------    --------------------
             REGION                  2009        2008        2009        2008
                                   --------    --------    --------    --------
United States ..................        7.3%        7.0%        8.2%        6.8%
Hong Kong ......................       24.4%       25.9%       28.7%       29.9%
China ..........................       35.4%       35.3%       29.4%       29.4%
India ..........................        3.9%        4.6%        4.3%        5.5%
Bangladesh .....................        4.7%        3.5%        6.0%        4.9%
Other ..........................       24.3%       23.7%       23.4%       23.5%
                                   --------    --------    --------    --------
                                      100.0%      100.0%      100.0%      100.0%
                                   ========    ========    ========    ========


         Sales for the three  months ended June 30, 2009 were $12.6  million,  a
decrease  of $4.4  million  or  26.1%,  from the same  period  in 2008.  The net
decrease reflects the impact of the global recession on the apparel industry and
the  corresponding  lower  demand for our Talon zipper and trims  products.  The
apparel industry and our customers are expected to be adversely impacted by this
recession for most of 2009, and early 2010,  depending upon the global  economic
trends.

         Sales for the six months  ended June 30,  2009 were  $19.1  million,  a
decrease  of $7.9  million  or  29.3%,  from the same  period  in 2008.  The net
decrease  in sales is due to the impact of the global  recession  on the apparel
industry and the related lower demand for Talon  products.  The decline in sales
in the second  quarter of 2009 as compared to the second quarter of 2008 (26.1%)
was less than the  decline in sales in the first  quarter of 2009 as compared to
the first quarter of 2008 (34.7%),  which suggests a modest sales improvement in
the apparel industry.

         During the three  months  ended June 30,  2009 it was  discovered  that
certain Chinese  factories had  counterfeited  Talon zippers in conjunction with
former  employees  of the  Company,  and sold these  products  to  existing  and
potential  customers.  The  extent of this  counterfeiting  is  currently  under
investigation  and  efforts  are in  process  to  eliminate  and  prosecute  all
offenders.  The full  extent of the  counterfeiting,  its effect on our  current


                                       24
<PAGE>


business operations and the costs to investigate and eliminate this activity are
ongoing  and  are,  as of  yet,  undeterminable,  however  based  upon  evidence
available  we  believe  the impact is not  significant  to our  current  overall
operations.  We will aggressively  combat these efforts worldwide to protect the
Talon brand.

         GROSS PROFIT

         Gross profit for the three months ended June 30, 2009 was $3.6 million,
as compared to $4.9  million for the same period in 2008.  Gross  profit for the
six months ended June 30, 2009 was $5.5 million, as compared to $7.7 million for
the same period in 2008.  The  reduction  in gross  profit for the three and six
months  ended  June  30,  2009 as  compared  to the  same  periods  in 2008  was
principally  attributable to lower overall sales volumes,  partially offset by a
higher  direct  margin  resulting  from a change  in the mix of  product  sales,
decreased freight and duty costs and decreased contract services.

         A recap of the  change in gross  margin  for the  three and six  months
ended June 30, 2009 as compared with the same periods in 2008 is as follows:

<TABLE>
<CAPTION>
                                                        (Amounts in thousands)
                                              Three Months Ended       Six Months Ended
                                                   June 30,                June 30,
                                             --------------------    --------------------
                                              Amount       %(1)       Amount       %(1)
                                             --------    --------    --------    --------
<S>                                          <C>            <C>      <C>            <C>
Gross profit decrease as a result of:
Lower volumes ............................   $ (1,470)      (30.0)   $ (2,662)      (34.8)
Product margin mix .......................        180         3.7         376         4.9
Decreased freight and duty costs .........         60         1.2          59         0.8
Decreased outside services ...............          4         0.1          99         1.3
Overhead and other .......................       (113)       (2.3)         15         0.2
                                             --------    --------    --------    --------
Gross profit decrease ....................   $ (1,339)      (27.3)   $ (2,113)      (27.6)
                                             ========    ========    ========    ========
</TABLE>

----------
(1)      Represents the percentage change in the 2009 period, as compared to the
         same period in 2008.


         SELLING EXPENSES

         Selling  expenses  for the three  months  ended June 30, 2009 were $0.5
million,  or 4.2% of sales, as compared to $0.8 million,  or 4.5% of sales,  for
the same  period  in 2008.  Sales  costs  decreased  in  dollar  terms  and as a
percentage  of sales  primarily  due to a  decrease  in  employees  and  related
employee costs. In addition, other production and marketing costs also decreased
as we continue to closely monitor all spending levels.

         Selling  expenses  for the six  months  ended  June 30,  2009 were $1.0
million,  or 5.5% of sales, as compared to $1.5 million,  or 5.5% of sales,  for
the same period in 2008.  The lower selling  costs  reflect  lower  salaries and
benefits along with lower production  development supplies and samples primarily
associated with reduced sales volumes.

         GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative  expense for the three months ended June 30,
2009 were $2.2 million,  or 17.5% of sales,  as compared  with $3.1 million,  or
18.1% of sales,  for the same period in 2008. The decrease  reflects a reduction
in the size of our  workforce to align with current  sales  levels,  achieved by
reduced  salaries  and  benefit  costs  of  $0.3  million,  reduced  facilities,
maintenance and insurance costs of $0.1 million,  lower professional,  legal and


                                       25
<PAGE>


audit costs of $0.4 million,  and lower  depreciation of $0.2 million mainly due
to idle  equipment,  which we have  classified  as for  sale  and are no  longer
depreciating.

         For the six months  ended June 30,  2009,  general  and  administrative
expenses  were $4.2 million or 22.0% of sales,  as compared with $6.4 million or
23.8% of sales,  for the same period in 2008.  The  general  and  administrative
expenses in 2008 included $0.7 million in compensation  and related costs mainly
associated  with the severance of the former chief  executive  officer and chief
operating officer.  General and administrative expenses for the six months ended
June 30, 2008,  were 21.1% of sales before these charges as compared to the same
period in 2009.  The reduction in the general and  administrative  expenses,  in
addition to the severance charges,  reflects lower salaries and benefit costs of
$0.3 million principally associated with reduced staffing in Asia and the US due
to a reduction in sales  volume,  reduced  facility,  maintenance  and insurance
costs  of $0.2  million  due to a  reduction  in our  leased  facilities,  lower
professional and other outside services of $0.6 million primarily resulting from
the  termination  of a related party  consulting  contract,  lower  depreciation
charges of $0.2 million for idle equipment  which we have classified as for sale
and are no longer  depreciating,  and  lower  stock-based  compensation  of $0.2
million.

         INTEREST EXPENSE AND INTEREST INCOME

         Interest  expense for the three months ended June 30, 2009 increased by
approximately  $3,000  to  $662,000  as  compared  to the same  period  in 2008.
Interest   expense  for  the  six  months  ended  June  30,  2009  increased  by
approximately $73,000 to $1,299,000,  as compared to the same period in 2008 due
to increased  borrowings  under our revolving  credit and term loan facility and
the related amortization of deferred financing costs and debt discounts.

         Interest  income for the three months ended June 30, 2009  decreased by
approximately  $15,000  to  $1,000  due  primarily  to the  reclassification  of
interest on related party notes to the reserve against the note. Interest income
for the six months  ended June 30, 2009  decreased by  approximately  $32,000 to
$1,000 due primarily to the application of valuation  allowances against further
interest accruals on the related party notes.

         A brief  summary of interest  expense and interest  income is presented
below:

<TABLE>
<CAPTION>
                                               Three Months Ended             Six Months Ended
                                                    June 30,                      June 30,
                                           --------------------------    --------------------------
                                               2009           2008           2009           2008
                                           -----------    -----------    -----------    -----------
<S>                                        <C>            <C>            <C>            <C>
Cash interest expense ..................   $   304,587    $   351,026    $   599,705    $   671,906
Amortization of deferred financing costs
   & debt discounts ....................       357,239        307,586        699,340        553,658
                                           -----------    -----------    -----------    -----------
Interest expense .......................       661,826        658,612      1,299,045      1,225,564
Interest income ........................          (739)       (15,482)        (1,007)       (32,920)
                                           -----------    -----------    -----------    -----------
Interest expense, net ..................   $   661,087    $   643,130    $ 1,298,038    $ 1,192,644
                                           ===========    ===========    ===========    ===========
</TABLE>


         INCOME TAXES

         Income tax provisions (benefit) for the three and six months ended June
30, 2009  reflected a tax  provision of $96,103 and $102,510,  respectively.  In
addition,  income tax  provisions  (benefit)  for the three and six months ended
June 30, 2008  reflected a tax benefit of $190,412 and  $211,416,  respectively.
The net tax  provision  for the three months  ended June 30, 2009 is  associated
with domestic state income taxes,  foreign  withholding  taxes from our domestic
royalty  charges  to  our  foreign  operations  offset  by  a  tax  benefit  for
carry-forward  losses in our  foreign  office.  The net tax  benefit  in 2008 is
associated with foreign income taxes from taxable losses and earnings within our
Asian facilities.


                                       26
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

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

                                                     June 30,      December 31,
                                                       2009            2008
                                                   ------------    ------------
Cash and cash equivalents ......................   $      2,215    $      2,400
Total assets ...................................         17,363          15,603
Current liabilities ............................         26,406          10,899
Long-term debt, net of current liabilities .....            728          13,466
Stockholders' deficit ..........................         (9,771)         (8,762)

         CASH AND CASH EQUIVALENTS

         Cash and cash  equivalents  decreased  by  $185,000 at June 30, 2009 as
compared  to December  31,  2008,  principally  due to lower cash  generated  by
operating  activities and higher cash provided by financing  activities,  net of
increases in capital expenditures.

         Cash provided by operating  activities is our primary  recurring source
of funds,  and for the six months  ended June 30,  2009  reflected  a net use of
$57,000.  The cash used in operating  activities  during the six months resulted
principally from:

Net income before non-cash expenses .........................       $    55,000
Inventory increase, net of reserves .........................          (266,000)
Receivable increases, net of reserves .......................        (1,556,000)
Increase in accounts payable and accrued expense ............         1,820,000
Other reduction in operating capital ........................          (110,000)
                                                                    -----------
Cash used in operating activities ...........................       $   (57,000)
                                                                    ===========

         Net  cash  used  in  operating  activities  reflects  net  income  from
operations  excluding non cash charges,  seasonal inventory  increases offset by
the increased  liability for these purchases to our trade suppliers and seasonal
trade receivables increases.

         Net cash used in investing activities for the six months ended June 30,
2009 was approximately $417,000 as compared to $121,000 for the six months ended
June 30, 2008. The expenditures in the first six months of 2009 were principally
associated  with the  development of our new ERP system that was  implemented in
March 2009.

         Net cash provided by financing activities for the six months ended June
30, 2009 was  approximately  $288,000 and  primarily  reflects the  repayment of
borrowings  under capital leases and notes payable,  net of borrowings under our
revolver  line of  credit.  For the six months  ended June 30,  2008 net cash of
$252,000 was used by financing  activities and primarily  reflects the repayment
of borrowings  under capital leases and notes payable,  net of borrowings  under
our debt facility.

         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
June 30, 2009) plus 2.0%.  The term loan bears  interest at 8.5%  annually  with
quarterly interest payments and repayment in full at maturity.


                                       27
<PAGE>


         Borrowings  under  both  credit  facilities  are  secured by all of our
assets. There was $9,500 and $3,000 in available borrowings at June 30, 2009 and
December 31, 2008, 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 debt 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
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 as well as the quarter ended March 31, 2009, and in connection
with such  failures,  on March 31,  2009 we  entered  into 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  failures to satisfy the EBITDA  requirements  for the  quarters  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 9 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.



                                       28
<PAGE>


         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 equipment 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 June 30, 2009 and  December 31, 2008 was $226,000
and  $222,000,  respectively.  The demand notes of $85,000 bear  interest at 10%
have no scheduled  monthly  payments and are due within  fifteen days  following
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 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 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  with  our  apparel
manufacturing in offshore locations,  our customers (some of which are backed by
U.S. brands and retailers) are  substantially  all foreign based  entities.  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
on-going  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  operating
requirements.  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 markets.  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 do not believe that our cash flows from operating activities will be
sufficient to satisfy the CVC debt facility due at June 30, 2010. Accordingly we
anticipate  that an extension or  modification  of the CVC debt will be required
prior to the due date or it will be necessary for us to raise additional debt or
equity  financing  in order to  satisfy  the CVC debt.  If we  cannot  obtain an
extension or modification of the CVC debt, or raise additional equity or debt to
satisfy this requirement we will default on our credit agreement.

          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 operating plans, expand
into  foreign  markets to promote our Talon  brand trade name,  or meet our debt
obligations  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 3 to the consolidated financial statements.


                                       29
<PAGE>


CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our contractual  obligations at June 30, 2009
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) ..   $   225,800   $   225,800   $      --     $      --     $      --
Capital lease obligations       112,100        98,100        12,300         1,700          --
Operating leases ........       907,000       517,700       389,300          --            --
Revolver and term note ..    16,889,300    16,889,300          --            --            --
Other notes payable .....        46,700        46,700          --            --            --
                            -----------   -----------   -----------   -----------   -----------
     Total Obligations ..   $18,180,900   $17,777,600   $   401,600   $     1,700   $      --
                            ===========   ===========   ===========   ===========   ===========
</TABLE>

----------
(1)      The majority of notes payable to related  parties is due on demand with
         the  remainder  due and payable on the fifteenth day following the date
         of delivery of written demand for payment and includes accrued interest
         payable through June 30, 2009.

         At June 30,  2009 and  2008,  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

         See Note 15 of accompanying notes to consolidated  financial statements
for a discussion of related party transactions.

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.


                                       30
<PAGE>


                 The net bad debt  expenses,  recoveries  and allowances for the
                 three  and six  months  ended  June  30,  2009  and 2008 are as
                 follows:

                                      Three Months Ended     Six Months Ended
                                           June 30,               June 30,
                                     -------------------    -------------------
                                       2009       2008        2009       2008
                                     --------   --------    --------   --------
Bad debt expenses for accounts
  receivable .....................   $ 72,703   $(25,945)   $ 77,373   $ (2,250)
Recoveries .......................       --       21,924        --       (3,076)
Allowance for doubtful accounts. .     89,783     91,000     189,783     91,000
Allowance for doubtful accounts,
  related party ..................    499,680       --       499,680       --


         o        Inventories are stated at the lower of cost,  determined using
                  the first-in,  first-out  ("FIFO")  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.  No inventory reserve  provisions were recorded for
                  the three and six months ended June 30, 2009 and 2008.

         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.


                                       31
<PAGE>


         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. See
                  Note 9 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.

NEW ACCOUNTING PRONOUNCEMENTS

         In April 2009, the FASB issued FSP FAS 157-4,  "DETERMINING  FAIR VALUE
WHEN VOLUME AND LEVEL OF ACTIVITY FOR THE ASSET OR LIABILITY HAVE  SIGNIFICANTLY
DECREASED AND IDENTIFYING  TRANSACTIONS  THAT ARE NOT ORDERLY" (FSP 157-4).  FSP
157-4  provides  guidance  on how to  determine  the fair  value of  assets  and
liabilities  when the volume and level of activity for the  asset/liability  has
significantly  decreased.  FSP  157-4  also  provides  guidance  on  identifying
circumstances that indicate a transaction is not orderly. In addition, FSP 157-4
requires  disclosure  in interim and annual  periods of the inputs and valuation
techniques  used to measure fair value and a discussion  of changes in valuation
techniques.  FSP 157-4 was effective  beginning in the second  quarter of fiscal
year  2009.  The  adoption  of FSP 157-4 did not have a  material  impact on the
consolidated financial statements.

         In  April  2009,   the  FASB  issued  FSP  FAS  115-2  and  FAS  124-2,
"RECOGNITION   AND   PRESENTATION  OF   OTHER-THAN-TEMPORARY   Impairment"  (FSP
115-2/124-2).  FSP 115-2/124-2  amends the  requirements for the recognition and
measurement of other-than-temporary impairments for debt securities by modifying
the  pre-existing  "intent and ability"  indicator.  Under FSP  115-2/124-2,  an
other-than-temporary impairment is triggered when there is an intent to sell the
security,  it is more likely than not that the  security  will be required to be
sold before  recovery,  or the  security  is not  expected to recover the entire
amortized cost basis of the security.  Additionally, FSP 115-2/124-2 changes the
presentation of an  other-than-temporary  impairment in the income statement for
those  impairments  involving  credit losses.  The credit loss component will be
recognized in earnings and the remainder of the  impairment  will be recorded in
other  comprehensive  income.  FSP  115-2/124-2  was effective  beginning in the
second quarter of fiscal year 2009. The  implementation  of FSP  115-2/124-2 did
not have a material impact on the consolidated financial statements.


                                       32
<PAGE>


         In April  2009,  the FASB  issued FSP FAS 107-1 and APB 28-1,  "INTERIM
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL  INSTRUMENTS" (FSP 107-1/APB 28-1). FSP
107-1/APB  28-1  requires  interim  disclosures  regarding  the fair  values  of
financial  instruments that are within the scope of FAS 107,  "DISCLOSURES ABOUT
THE FAIR VALUE OF  FINANCIAL  INSTRUMENTS."  Additionally,  FSP  107-1/APB  28-1
requires disclosure of the methods and significant  assumptions used to estimate
the fair value of financial  instruments  on an interim basis as well as changes
of the methods and  significant  assumptions  from prior periods.  FSP 107-1/APB
28-1 does not change the accounting  treatment for these  financial  instruments
and did not have a material impact on the consolidated financial statements.

         In April 2009,  the FASB  issued FSP SFAS No.  141R-1,  ACCOUNTING  FOR
ASSETS ACQUIRED AND  LIABILITIES  ASSUMED IN A BUSINESS  COMBINATION  THAT ARISE
FROM CONTINGENCIES. FSP SFAS 141R-1 amends the guidance in SFAS 141R relating to
the initial recognition and measurement,  subsequent  measurement and accounting
and  disclosures  of assets and  liabilities  arising  from  contingencies  in a
business  combination.  FSP SFAS 141R is effective  for fiscal  years  beginning
after  December 15, 2008. We adopted FSP SFAS 141R as of the beginning of fiscal
2009  and it did  not  have a  material  impact  on the  consolidated  financial
statements.  We will apply the  requirements of FSP FAS 141R-1  prospectively to
any future acquisitions.

         In May 2009, the FASB issued SFAS No. 165, SUBSEQUENT EVENTS ("SFAS No.
165").  SFAS No. 165 provides general standards of accounting for and disclosure
of  events  that  occur  after  the  balance  sheet  date but  before  financial
statements are issued or are available to be issued. SFAS No. 165 was adopted by
us in the  second  quarter  of 2009 and did not have a  material  impact  on the
consolidated financial statements.

         In June 2009, the FASB issued SFAS No. 166, ACCOUNTING FOR TRANSFERS OF
FINANCIAL  ASSETS--an  amendment of FASB Statement No. 140 (SFAS No. 166"). SFAS
No. 166 seeks to  improve  the  relevance,  representational  faithfulness,  and
comparability  of  the  information  that a  reporting  entity  provides  in its
financial  statements  about a transfer of  financial  assets;  the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor's  continuing  involvement,  if any, in transferred financial assets.
SFAS No. 166 is applicable for annual periods beginning after November 15, 2009.

         The  implementation  of SFAS No. 165 and 166 is not  expected to have a
material impact on the consolidated financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not Applicable

ITEM 4T. 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  officer and
principal  financial  officer and Jim Reeder our principal  accounting  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 and Mr. Reeder concluded
that these  disclosure  controls and procedures  were effective as of the end of
the period covered in this Quarterly Report on Form 10-Q.


                                       33
<PAGE>


CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         During the quarter  ended June 30,  2009,  there were no changes in our
internal control over financial  reporting that has materially  affected,  or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

                                     PART II
                                OTHER INFORMATION

ITEM 1.  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 us, Colin Dyne, Mark Dyne, Ronda Ferguson and August
F. Deluca (collectively,  the "Individual Defendants" and, together with us, the
"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 our financial  situation
and our relationship with certain of our large customers. The action was brought
on behalf of all purchasers of our publicly-traded  securities during the period
from November 13, 2003, to August 12, 2005.  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  thereafter  certified a class
and adopted a schedule for the case. On July 31, 2009, the parties  entered into
a  stipulation  of  settlement  intended  to settle the matter and result in its
dismissal with prejudice.  The total settlement proceeds of $5.75 million are to
be paid in full by our insurers without any  contribution  from us or individual
defendants.  The  Court  has  set a  hearing  for  preliminary  approval  of the
settlement on August 17, 2009. If preliminary  approval is given, notice will be
provided to class members and the Court will set a final fairness hearing on the
settlement.  If the settlement is finally  approved,  the case will be dismissed
with  prejudice  per the  terms  of the  settlement.  If the  settlement  is not
approved,  we will continue to vigorously defend this lawsuit;  however, in this
case,  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
our financial position and results of operations.

         On April 16, 2004, we filed suit against Pro-Fit  Holdings,  Limited in
the U.S. District Court for the Central District of California - TAG-IT PACIFIC,
INC. V. PRO-FIT  HOLDINGS,  LIMITED,  CV 04-2694 LGB (RCx) -- asserting  various
contractual and tort claims relating to our exclusive  license and  intellectual
property agreement with Pro-Fit,  seeking declaratory relief,  injunctive relief
and  damages.  It is our  position  that the  agreement  with  Pro-Fit  gives us
exclusive  rights in certain  geographic  areas to  Pro-Fit's  stretch and rigid
waistband  technology.  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 the second
quarter  of 2008,  Pro-Fit  and  certain  related  companies  were  placed  into
administration  in the United  Kingdom and filed  petitions  under Chapter 15 of
Title 11 of the United States Code. As a consequence  of the chapter 15 filings,
all litigation by us against Pro-Fit has been stayed.


                                       34
<PAGE>


         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.

         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 1A. RISK FACTORS

         Risk factors are contained in Item 1A of our Annual Report on Form 10-K
for the fiscal year ended  December  31, 2008.  No material  change to such risk
factors has occurred during the six months ended June 30, 2009.

ITEM 6.  EXHIBITS

EXHIBIT NO.    DESCRIPTION
-----------    -----------

31.1           Certificate  of  Chief  Executive  Officer  and  Chief  Financial
               Officer  pursuant  to Section  302 of the  Sarbanes-Oxley  Act of
               2002.

32.1           Certificate  of  Chief  Executive  Officer  and  Chief  Financial
               Officer  pursuant  to Section  906 of the  Sarbanes-Oxley  Act of
               2002.


                                       35
<PAGE>


                                   SIGNATURES

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


Dated:   August 14, 2009                 /S/  LONNIE D. SCHNELL
                                         ---------------------------
                                         Lonnie D. Schnell
                                         Chief Executive Officer
                                         and Chief Financial Officer


                                         /S/  JAMES E. REEDER
                                         ---------------------------
                                         James E. Reeder
                                         Chief Accounting Officer


                                       36