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

                                    FORM 10-Q

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

                 For the quarterly period ended March 31, 2008.

                                       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  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 MAY 14, 2008 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

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

          Consolidated Balance Sheets as of March 31, 2008 (unaudited)
          and December 31, 2007 ...............................................3

          Consolidated Statements of Operations for the Three Months
          Ended March 31, 2008 and 2007 (unaudited)............................4

          Consolidated Statement of Stockholders Equity for the
          Three Months Ended March 31, 2008 (unaudited)........................5

          Consolidated Statements of Cash Flows for the
          Three Months Ended March 31, 2008 and 2007 (unaudited)...............6

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

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...........................................19

Item 3.   Quantitative and Qualitative Disclosures about Market Risk..........28

Item 4.   Controls and Procedures.............................................28


PART II   OTHER INFORMATION

Item 1.   Legal Proceedings...................................................29

Item 1A.  Risk Factors .......................................................29

Item 6.   Exhibits ...........................................................30


                                       2
<PAGE>


                            TALON INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                  March 31, 2008   December 31,
                                                    (Unaudited)        2007
                                                   ------------    ------------
Assets
Current Assets:
   Cash and cash equivalents ...................   $  1,774,819    $  2,918,858
   Marketable Securities .......................        380,000       1,040,000
   Accounts receivable, net ....................      4,939,373       3,504,351
   Inventories, net ............................      2,866,212       2,487,427
   Prepaid expenses and other current assets ...        359,587         945,566
                                                   ------------    ------------
Total current assets ...........................     10,319,991      10,896,202

Property and equipment, net ....................      5,039,564       5,210,446
Fixed assets held for sale .....................        700,000         700,000
Due from related parties .......................        637,255         625,454
Other intangible assets, net ...................      4,110,751       4,110,751
Other assets ...................................        545,048         551,054
                                                   ------------    ------------
Total assets ...................................   $ 21,352,609    $ 22,093,907
                                                   ============    ============


Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable .............................   $  7,958,249    $  6,603,929
  Accrued legal costs ..........................        161,757         498,846
  Other accrued expenses .......................      2,739,076       2,646,662
  Demand notes payable to related parties ......         85,176          85,176
  Current portion of capital lease obligations .        290,071         323,317
  Current portion of notes payable .............        281,631         299,108
                                                   ------------    ------------
Total current liabilities ......................     11,515,960      10,457,038

Capital lease obligations, less current portion         118,227         189,705
Notes payable, less current portion ............        793,007         848,484
Revolver note payable ..........................      4,507,806       3,807,806
Term note payable, net of discount .............      7,393,282       7,424,573
Other long term liabilities ....................         83,651          83,651
                                                   ------------    ------------
Total liabilities ..............................     24,411,933      22,811,257
                                                   ------------    ------------

Commitments and contingencies (Note 11)

Stockholders' Equity:
   Preferred stock Series A, $0.001 par value;
     250,000 shares authorized; no shares issued
     or outstanding ............................           --              --
   Common stock, $0.001 par value, 100,000,000
     shares authorized; 20,291,433 shares issued
     and outstanding at March 31, 2008 and
     at December 31, 2007 ......................         20,291          20,291
  Additional paid-in capital ...................     54,655,511      54,510,161
  Accumulated deficit ..........................    (57,130,990)    (55,292,246)
  Accumulated other comprehensive (loss) income        (604,136)         44,444
                                                   ------------    ------------
Total stockholders' deficit ....................     (3,059,324)       (717,350)
                                                   ------------    ------------
Total liabilities and stockholders' equity .....   $ 21,352,609    $ 22,093,907
                                                   ============    ============


     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>


                            TALON INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                   Three Months Ended March 31,
                                                 ------------------------------

                                                     2008              2007
                                                 ------------      ------------

Net sales ..................................     $  9,985,489      $  9,090,117

Cost of goods sold .........................        7,227,524         6,386,502
                                                 ------------      ------------
Gross profit ...............................        2,757,965         2,703,615

Selling expenses ...........................          719,963           706,235
General and administrative expenses ........        3,348,236         2,611,042
                                                 ------------      ------------
Total operating expenses ...................        4,068,199         3,317,277
                                                 ------------      ------------
Loss from operations .......................       (1,310,234)         (613,662)

Interest expense, net ......................          549,514           181,682
                                                 ------------      ------------
Loss before income taxes ...................       (1,859,748)         (795,344)
Provision (benefit) for income taxes .......          (21,004)             --
                                                 ------------      ------------
Net loss ...................................     $ (1,838,744)     $   (795,344)
                                                 ============      ============

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

Weighted average number of common
   shares outstanding:
     Basic .................................       20,291,433        18,533,100
                                                 ============      ============
     Diluted ...............................       20,291,433        18,533,100
                                                 ============      ============


     See accompanying notes to condensed consolidated financial statements.


                                       4
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

<CAPTION>
                                                                          Preferred Stock
                                            Common Stock                     Series A
                                     ---------------------------   ---------------------------
                                        Shares         Amount         Shares         Amount
                                     ------------   ------------   ------------   ------------
<S>                                    <C>          <C>                    <C>    <C>
BALANCE, JANUARY 1, 2008 .........     20,291,433   $     20,291           --     $       --

   Stock based compensation ......           --             --             --             --

   Accumulated other comprehensive
     income: foreign currency
     translation .................           --             --             --             --

   Net loss ......................           --             --                            --
                                     ------------   ------------   ------------   ------------
BALANCE, MARCH 31, 2008 ..........     20,291,433   $     20,291           --     $       --
                                     ============   ============   ============   ============


<CAPTION>
                                                                    Accumulated
                                      Additional                       Other            Total
                                       Paid-In      Accumulated    Comprehensive    Stockholders'
                                       Capital       (Deficit)         Income          Equity
                                     ------------   ------------    ------------    ------------
<S>                                  <C>            <C>             <C>             <C>
BALANCE, JANUARY 1, 2008 .........   $ 54,510,161   $(55,292,246)   $     44,444    $   (717,350)

   Stock based compensation ......        145,350           --              --           145,350

   Accumulated other comprehensive
     income: foreign currency
     translation .................           --             --          (648,580)       (648,580)

   Net loss ......................           --             --        (1,838,744)     (1,838,744)
                                     ------------   ------------    ------------    ------------
BALANCE, MARCH 31, 2008 ..........   $ 54,655,511   $(57,130,990)   $   (604,136)   $ (3,059,324)
                                     ============   ============    ============    ============
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                       5
<PAGE>


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

<CAPTION>
                                                                  Three Months Ended March 31,
                                                                  ----------------------------
                                                                      2008            2007
                                                                  ------------    ------------
<S>                                                               <C>             <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
    Net loss ..................................................   $ (1,838,744)   $   (795,344)
Adjustments to reconcile net loss to net cash from
  operating activities:
    Depreciation and amortization .............................        268,874         377,215
    Amortization of deferred financing costs and debt discounts        245,712            --
    Increase in allowance for doubtful accounts ...............            829           7,500
    Increase (decrease) in inventory valuation reserves .......           --          (159,796)
    Stock based compensation ..................................        145,350          65,000
    Changes in operating assets and liabilities:
       Receivables, including related party ...................     (1,435,851)       (243,227)
       Inventories ............................................       (378,785)        432,685
       Recoverable legal costs ................................           --        (3,195,767)
       Prepaid expenses and other current assets ..............        585,979          74,829
       Other assets ...........................................        (44,102)         10,016
       Accounts payable and accrued expenses ..................      1,333,038       1,182,174
       Accrued legal expenses .................................       (337,089)      3,090,442
                                                                  ------------    ------------
    Net cash provided by (used by) operating activities .......     (1,454,789)        845,727
                                                                  ------------    ------------

Cash flows from investing activities:
    Acquisition of property and equipment .....................        (97,992)       (356,195)
                                                                  ------------    ------------
    Net cash used by investing activities .....................        (97,992)       (356,195)
                                                                  ------------    ------------

Cash flows from financing activities:
    Collection of notes receivable ............................           --           331,656
    Proceeds from exercise of stock options ...................           --            42,750
    Proceeds from revolver ....................................        700,000            --
    Repayment of term note ....................................       (125,000)           --
    Repayment of capital leases ...............................       (104,724)       (105,756)
    Repayment of notes payable ................................        (72,954)       (420,758)
                                                                  ------------    ------------
    Net cash provided by (used by) financing activities .......        397,322        (152,108)
                                                                  ------------    ------------

Net increase (decrease) in cash ...............................     (1,155,459)        337,424
Net effect of foreign currency exchange translation on cash ...         11,420            --
Cash at beginning of period ...................................      2,918,858       2,934,673
                                                                  ------------    ------------

Cash at end of period .........................................   $  1,774,819    $  3,272,097
                                                                  ============    ============

Supplemental disclosures of cash flow information:
   Cash received (paid) during the period for:
      Interest paid ...........................................   $   (320,880)   $   (221,574)
      Interest received .......................................   $      5,637    $     75,820
      Income taxes refunds ....................................   $     17,892    $       --
    Non-cash financing activity:
      Deferred financing cost .................................   $    (38,307)   $       --
      Effect of foreign currency translation on net assets ....   $     (9,532)   $       --
</TABLE>


     See accompanying notes to condensed 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, 2007. The balance sheet as of December 31, 2007 has been
derived from the audited financial  statements as of that date but omits certain
information and footnotes  required for complete financial  statements.  On July
27,  2007,  the  Company  changed its name from  Tag-It  Pacific,  Inc. to Talon
International, Inc.


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 (and amendments thereto)
for the year ended  December 31, 2007,  and should be read in  conjunction  with
these unaudited condensed  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 DOUBTFUL ACCOUNTS

        We are required to make judgments as to the  collectability  of accounts
receivable based on established aging policy,  historical  experience and future
expectations.  The  allowance  for  doubtful  accounts  represents  amounts  for
customer  trade  accounts  receivable  that are  estimated  to be  partially  or
entirely  uncollectible.  These  allowances  are  used  to  reduce  gross  trade
receivables to their net realizable  value. We record these  allowances based on
estimates related to the following  factors:  (i) customer specific  allowances;
(ii) amounts based upon an aging schedule;  and (iii) an estimated amount, based
on our historical  experience,  for issues not yet identified.  Bad debt expense
for the three months ended March 31, 2008 is $700, compared to recoveries of bad
debts of $10,400 for the three months ended March 31, 2007.

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.
Amortization  expense for these assets for the three months ended March 31, 2008
and 2007 was $0 and $30,600, respectively.


                                       7
<PAGE>


CLASSIFICATION OF EXPENSES

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

         SELLING EXPENSES - Selling expenses  primarily include royalty expense,
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  months  ended  March  31,  2008 and 2007  were  $42,100  and
$178,400, 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 months ended March 31, 2008 and 2007  totaled  $567,000 and  $316,700,
respectively.  Interest income consists of earnings from outstanding amounts due
to the Company under notes and other interest bearing receivables. For the three
months ended March 31, 2008 and 2007, the Company  recorded  interest  income of
$17,400 and $92,000 respectively.

         Cash paid for  interest  charges for the three  months  ended March 31,
2008 and 2007 amounted to $320,900 and $221,600, respectively. Interest payments
received  during the three months  ended March 31, 2008 and 2007 totaled  $5,600
and $57,300, respectively.

SHIPPING AND HANDLING COSTS

         In  accordance   with  Emerging   Issues  Task  Force  ("EITF")  00-01,
ACCOUNTING  FOR  SHIPPING  AND  HANDLING  FEES AND COSTS,  the  Company  records
shipping and handling  costs billed to customers as a component of revenue,  and
shipping and  handling  cost  incurred by the Company for  outbound  freight are
recorded as a component of cost of sales.  Total  shipping  and  handling  costs
included as a component of revenue for the three months ended March 31, 2008 and
2007 were $51,000 and $60,900,  respectively.  Total shipping and handling costs
included as a component  of cost of sales for the three  months  ended March 31,
2008 and 2007 were $284,500 and $179,100, respectively.

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  (loss) income was a
cumulative foreign currency translation  adjustment gain of $11,400 at March 31,
2008 and of $44,400 at December 31, 2007.


                                       8
<PAGE>


COMPREHENSIVE INCOME

         Comprehensive  income  consists  of net  income,  unrealized  gains and
losses on marketable securities,  and foreign currency translation  adjustments.
Comprehensive  income and its  components  for the three  months ended March 31,
2008 and 2007 is as follows:

                                                Three Months Ended
                                                     March 31,
                                            --------------------------
                                                2008           2007
                                            -----------    -----------

         Net loss .......................   $(1,838,744)   $  (795,344)
         Other comprehensive income:
         Available-for-sale securities ..      (660,000)          --
         Foreign currency translation ...        11,420           --
                                            -----------    -----------
         Total comprehensive loss .......   $(2,419,865)   $  (795,344)
                                            ===========    ===========

         The  available-for-sale  securities  adjustment  represents  unrealized
losses due to temporary  market  declines  related to our marketable  securities
that were received in exchange for the Azteca note receivable  discussed in Note
5. These marketable securities are classified as available-for-sale  securities.
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  for the  periods
presented.  The foreign translation  adjustment for the three months ended March
31, 2007 was insignificant as we commenced our foreign operations in early 2007.

RECLASSIFICATIONS

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


NOTE 3.           LOSS PER SHARE

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2008:              LOSS          SHARES       PER SHARE
------------------------------------------   -----------    -----------   -----------
<S>                                          <C>             <C>          <C>
Basic loss per share:
Loss available to common stockholders ....   $(1,838,744)    20,291,433   $     (0.09)

Effect of Dilutive Securities:
Options ..................................          --
Warrants .................................          --
                                             -----------    -----------   -----------
Loss available to common stockholders ....   $(1,838,744)    20,291,433   $     (0.09)
                                             ===========    ===========   ===========

THREE MONTHS ENDED MARCH 31, 2007:
------------------------------------------
Basic loss per share:
Loss available to common stockholders ....   $  (795,344)    18,533,100   $     (0.04)

Effect of Dilutive Securities:
Options ..................................          --
Warrants .................................          --
                                             -----------    -----------   -----------
Loss available to common stockholders ....   $  (795,344)    18,533,100   $     (0.04)
                                             ===========    ===========   ===========
</TABLE>


                                       9
<PAGE>


        Warrants to purchase  3,163,813  shares of common stock  exercisable  at
between  $3.65 and $5.06,  and  options to purchase  4,462,235  shares of common
stock  exercisable at between $0.37 and $5.23,  were  outstanding  for the three
months ended March 31, 2008, but were not included in the computation of diluted
loss per share  because  the  effect of  exercise  or  conversion  would have an
antidilutive effect on loss per share.

        Warrants to purchase  1,093,813  shares of common stock  exercisable  at
between  $3.65 and $5.06,  and  options to purchase  4,703,135  shares of common
stock  exercisable at between $0.37 and $5.23,  convertible  debt of $12,500,000
convertible  at  $3.65  per  share  and  other   convertible  debt  of  $500,000
convertible at $4.50 per share were outstanding for the three months ended March
31,  2007,  but were not included in the  computation  of diluted loss per share
because the effect of exercise or conversion  would have an antidilutive  effect
on loss per share.


NOTE 4.           MARKETABLE SECURITIES

         The Company  finalized  an  arrangement  between the Company and Azteca
Production  International,  Inc.  ("Azteca"),  a  former  distributor  of  Talon
products,  on December  31,  2007.  The  agreement  called for Azteca to deliver
2,000,000  shares  of  unrestricted  common  stock of a value of  $1,040,000  in
exchange for cancellation of the Azteca Note Receivable  discussed in Note 5. On
January 30, 2008,  the Company was notified  that  unrestricted  shares had been
delivered  by Azteca and that the  Company  could  begin  trading  these  shares
selling no more than 10,000 shares a week in accordance with the agreement.  The
portfolio of  marketable  securities is stated at the lower of cost or market at
the balance sheet date and consists of common stocks.  No realized or unrealized
gains or losses  were  recognized  during  the year  ended  December  31,  2007.
Unrealized losses of $660,000 were recognized in other comprehensive  income for
the three months ended March 31, 2008.  The value of the common stock on May 12,
2008 had increased  $480,000 to $860,000,  as compared to the value on March 31,
2008.


NOTE 5.           ACCOUNTS AND NOTE RECEIVABLE

         At March 31, 2007 a note  receivable from Azteca was outstanding in the
amount of $2,467,800.  The note receivable was payable to the Company in monthly
installments  over thirty-one  months beginning March 1, 2006. The payments were
$50,000 per month for the first 5 months, and then ranged from $133,000-$267,000
per month until paid in full, but no later than July 1, 2008.

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

         Accounts  receivable  are  included  on the  accompanying  consolidated
balance sheet net of an allowance for doubtful accounts. The total allowance for
doubtful  accounts  at March 31,  2008 and  December  31,  2007 was  $91,000 and
$140,420, respectively.


                                       10
<PAGE>


NOTE 6.           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.   We  use  estimates  to  record  these  reserves.
Slow-moving  inventory  is reviewed by category  and may be  partially  or fully
reserved for depending on the type of product and the length of time the product
has been included in inventory.  Reserve adjustments are made for the difference
between the cost of the inventory and the estimated  market value, if lower, and
charged to  operations  in the period in which the facts that give rise to these
adjustments  become known.  Market value of inventory is estimated  based on the
impact of market trends,  an evaluation of economic  conditions and the value of
current orders relating to the future sales of this type of inventory.

         Inventories consist of the following:

                                              March 31,    December 31,
                                                2008           2007
                                            ------------   ------------

         Finished goods .................   $  3,543,500   $  3,506,400
         Less reserves ..................        677,300      1,019,000
                                            ------------   ------------
         Total inventories ..............   $  2,866,200   $  2,487,400
                                            ============   ============


NOTE 7.  FIXED ASSETS

         Fixed  assets  held for sale  consists of the North  Carolina  land and
manufacturing  facility  that was closed in connection  with the Company's  2005
restructuring  plan.  The carrying  value of these assets at both March 31, 2008
and December 31, 2007 was $700,000. The assets are financed with a mortgage note
payable with $684,000  outstanding at March 31, 2008 and $690,000 outstanding at
December 31, 2007.

         Management  has the authority and has committed to sell the asset,  the
asset is listed for sale with a  commercial  real  estate  agent who is actively
marketing  the  property,  the  sale of the  asset is  probable  and the sale is
expected to be completed within one year.

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

         The Company has evaluated the idle  equipment  for  impairment  and has
determined that an impairment does not exist at March 31, 2008. If future events
occur that  adversely  affect the idle  equipment  the  Company  will  record an
impairment.


NOTE 8. DEBT FACILITY

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


                                       11
<PAGE>


prime  rate plus  2.0%.  The term loan  bears  interest  at 8.5%  annually  with
quarterly interest payments and repayment in full at maturity.  Borrowings under
both credit facilities are secured by all of the assets of the Company.

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

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

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

         On April 3, 2008 the Company  executed a further  amendment to its loan
agreement  with Bluefin  Capital.  The  amendment  included a redefining  of the
EBITDA  covenants,  and the redemption of the common stock  warrants  previously
issued to Bluefin  Capital in  exchange  for the  issuance  by the Company of an
additional  note payable to Bluefin Capital for $1.0 million at an interest rate
of 8.5%.  The Company will record a reduction to equity and an increase to notes
payable  for the fair value of the  warrants.  The  difference  between the fair
value  of the  warrants  of  $221,723  and the face  value  of the note  will be
accreted over the life of the note.  The note will incur interest at 8.5% on the
principal  amount  of $1.0  million  and the  quarterly  accretion  will also be
reflected as interest  expense.  Both the  principal  amount of the note and all
accrued  interest  are due and  payable on June 30,  2010.  The  Company  paid a
one-time  fee of  $145,000  to secure  the  amendment  of a waiver for the first
quarter of fiscal year 2008.  The  Company's  borrowing  base was also  modified
increasing  the  allowable  portion of inventory  held by third party vendors to
$1.0 million with no more than $500,000 held at any one vendor and by increasing
the percentage of accounts  receivable to be included in the borrowing base from
75% to 85%. As of March 31,  2008,  the Company had  outstanding  borrowings  of
$9,375,000 under the term note, and $4,507,800 under the revolving credit note.

         Interest  expense  related  to  the  Revolving  Credit  and  Term  Loan
Agreement for the three months ended March 31, 2008 was $531,000, which includes
$246,000 in amortization of discounts and deferred financing costs.


                                       12
<PAGE>


NOTE 9.           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 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.  There were no options granted to
employees during the three months ended March 31, 2008.

         There were no options  granted  during the three months ended March 31,
2007 under the 1997 Stock Plan.  During the three months ended March 31, 2007, a
consultant  exercised  options to acquire  75,000 shares of common  stock.  Cash
received upon exercise was $42,750 or $0.57 per share.  At the time of exercise,
the total intrinsic value of the options exercised was approximately $72,000 (or
$0.96 per share). Because the option exercised was a non-qualified stock option,
the Company received a tax deduction for the intrinsic value amount.

         As of March  31,  2008,  the  Company  had  approximately  $246,000  of
unamortized  stock-based  compensation  expense  related  to  options  issued to
employees  and  directors,  which will be recognized  over the weighted  average
period of 4.2 years.  This expected expense will change if any stock options are
granted or cancelled prior to the respective  reporting  periods or if there are
any  changes  required  to  be  made  for  estimated  forfeitures.   Share-based
compensation costs associated with the implementation of FAS 123(R) was $127,000
which included $67,000 from severance for two former officers of the Company.

         The following  table  summarizes  the activity in the  Company's  share
based plans during the three months ended March 31, 2008.

                                                                       Weighted
                                                                        Average
                                                         Number of     Exercise
                                                          Shares         Price
                                                        ----------    ----------
EMPLOYEES AND DIRECTORS
Options and warrants outstanding - January 1, 2008 ..    4,598,235    $     1.46
     Granted ........................................         --            --
     Exercised ......................................         --            --
     Cancelled ......................................     (211,000)   $     0.72
                                                        ----------    ----------
Options and warrants outstanding - March 31, 2008 ...    4,387,235    $     1.49
                                                        ==========    ==========

NON-EMPLOYEES
Options and warrants outstanding - January 1, 2008 ..    3,238,813    $     2.00
     Granted ........................................         --            --
     Exercised ......................................         --            --
     Cancelled ......................................         --            --
                                                        ----------    ----------
Options and warrants outstanding - March 31, 2008 ...    3,238,813    $     2.00
                                                        ==========    ==========


                                       13
<PAGE>


         Included  in the  Non-Employees  options  and  warrants  are  1,500,000
warrants  that  were  redeemed  from  Bluefin  Capital  on  April  3,  2008,  in
conjunction  with the amendment to the  Company's  loan  agreement  with Bluefin
Capital.  On April 22,  2008,  directors  of the Company were granted a total of
360,000 stock options at an exercise price of $0.34 per share.


NOTE 10.          INCOME TAXES

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

         As a result of the  implementation of FIN 48, the Company recognized an
increase in liabilities for unrecognized tax benefits of approximately $245,800,
which was  accounted  for as an  increase  in the  January  1, 2007  accumulated
deficit.

         The Company  recognizes  interest  accrued related to unrecognized  tax
benefits in interest expense and penalties in income tax expense.  For the three
months  ended  March 31,  2008,  the Company  recognized  accrued  interest  for
unrecognized  tax  benefits of  approximately  $3,900.  There was no interest or
penalties   recognized  during  the  three  months  ended  March  31,  2007  for
unrecognized tax benefits. At March 31, 2008 and March 31, 2007, the Company had
approximately  $49,800 and $33,800 accrued in interest and penalties  associated
with the unrecognized tax liabilities.


NOTE 11.          CONTINGENCIES AND GUARANTEES

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

         On April 16, 2004 we filed suit against  Pro-Fit  Holdings,  Limited in
the U.S. District Court for the Central District of California - TAG-IT PACIFIC,
INC. V. PRO-FIT  HOLDINGS,  LIMITED,  CV 04-2694 LGB (RCx) -- asserting  various
contractual and tort claims relating to our exclusive  license and  intellectual
property agreement with Pro-Fit,  seeking declaratory relief,  injunctive relief
and damages.  It is our position  that the  agreement  with Pro-Fit gives us the


                                       14
<PAGE>


exclusive  rights in certain  geographic  areas to  Pro-Fit's  stretch and rigid
waistband  technology.  On June 5, 2006 the Court  denied our motion for partial
summary  judgment,  but did not find that we breached our agreement with Pro-Fit
and a trial is  required  to  determine  issues  concerning  our  activities  in
Columbia and whether other actions by Pro-Fit  constituted an  unwillingness  or
inability to fill orders. The Court also held that Pro-Fit was not "unwilling or
unable" to fulfill  orders by refusing to fill orders with goods produced in the
United States.  The action is still pending in the United States District Court.
The action is presently  stayed pending  resolution or trial of an earlier filed
action  between  Pro-Fit  Holdings  and their  attorneys  who have sued  Pro-Fit
Holdings and have obtained a judgment. In the past, we had derived a significant
amount of revenue from the sale of products  incorporating the stretch waistband
technology and our business, results of operations and financial condition could
be materially  adversely affected if the dispute with Pro-Fit is not resolved in
a manner favorable to us. Additionally,  we have incurred significant legal fees
in this  litigation,  and unless the case is settled,  we will continue to incur
additional legal fees in increasing amounts as the case accelerates to trial.

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

         In November  2002, the FASB issued FIN No. 45  "Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  including  Indirect  Guarantees of
Indebtedness of Others - 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 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.


                                       15
<PAGE>


NOTE  12.         NEW ACCOUNTING PRONOUNCEMENTS

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

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

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


NOTE 13.          SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

         The Company  specializes in the  distribution of a full range of zipper
and trim items to manufacturers of fashion apparel, specialty retailers and mass
merchandisers.  There is not enough  difference  between  the types of  products
developed  and  distributed  by  the  Company  to  account  for  these  products
separately  or to justify  segmented  reporting  by product  type.  The  Company
believes  that  revenue  and  cost of  sales by each  major  product  class is a
valuable business measurement.  The net revenues, cost of sales and gross profit
for the three primary product groups are as follows:


                                       16
<PAGE>


                                            Three Months Ended
                                              March 31, 2008:
                         ------------------------------------------------------
                            Talon         Trim          Tekfit     Consolidated
                         -----------   -----------   -----------   ------------

Sales ................   $ 5,611,900   $ 4,365,800   $     7,800    $ 9,985,500
Cost of sales ........     4,482,800     2,735,300         9,400      7,227,500
                         -----------   -----------   -----------    -----------
Gross profit ..........    1,129,100     1,630,500        (1,600)     2,758,000
                         -----------   -----------   -----------    -----------
Operating expenses
(not segregated by
division) ............                                                4,068,200
                                                                    -----------
Loss from operations .                                              $(1,310,200)
                                                                    ===========

                                            Three Months Ended
                                              March 31, 2008:
                         ------------------------------------------------------
                            Talon         Trim          Tekfit     Consolidated
                         -----------   -----------   -----------   ------------

Sales .................  $ 4,726,300    $ 3,984,100   $   379,700   $ 9,090,100
Cost of sales .........    3,477,000      2,670,600       238,900     6,386,500
                         -----------    -----------   -----------   -----------
Gross profit ..........    1,249,300      1,313,500       140,800     2,703,600
                         -----------    -----------   -----------   -----------
Operating expenses
(not segregated by
division) .............                                               3,317,300
                                                                    -----------
Loss from operations ..                                             $  (613,700)
                                                                    ===========

         The Company distributes its products  internationally and has reporting
requirements  based on  geographic  regions.  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
and revenues are attributed to countries based on customer  delivery  locations,
as follows:

                                                        Three Months Ended
                Country                                      March 31,
                                                 -------------------------------
SALES                                               2008                  2007
                                                 ----------           ----------

United States ........................           $  657,500           $  842,500
Hong Kong ............................            3,655,300            3,562,900
China ................................            1,915,600            1,619,600
India ................................              709,100              482,300
Bangladesh ...........................              733,600              630,300
Other ................................            2,314,400            1,952,500
                                                 ----------           ----------
Total ................................           $9,985,500           $9,090,100
                                                 ==========           ==========


                                       17
<PAGE>


                                                     March 31,      December 31,
                                                       2008             2007
                                                   ------------     ------------
LONG-LIVED ASSETS:
     United States ...........................     $  8,571,500     $  8,778,400
     Hong Kong ...............................          565,300          556,900
     Dominican Republic ......................          530,900          558,200
     China ...................................          165,900          109,800
     Other ...................................           16,700           17,900
                                                   ------------     ------------
Total ........................................     $  9,850,300     $ 10,021,200
                                                   ============     ============


NOTE 14.          SUBSEQUENT EVENT

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


                                       18
<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 and Tekfit. We
operate the business globally under three product groups.

         We have increased and plan to continue to increase our global expansion
of Talon  zippers  through the  establishment  of a network of Talon  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.  These  products were  previously  produced by several
manufacturers  for one  single  brand.  In  October  2006 our  exclusive  supply
contract with this brand expired. Our efforts to expand this product offering to
other  customers  have been limited by a licensing  dispute.  As described  more
fully in this report  under  Contingencies  and  Guarantees  (see Note 11 to our
Unaudited  Condensed  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


                                       19
<PAGE>


condition could be materially  adversely affected if our dispute with Pro-Fit is
not resolved in a manner favorable to us.

RESULTS OF OPERATIONS

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

                                                           THREE MONTHS ENDED
                                                                 MARCH 31,
                                                          --------------------
                                                            2008         2007
                                                          -------      -------
Net Sales ............................................      100.0%       100.0%
Cost of goods sold ...................................       72.4         70.3
                                                          -------      -------
Gross profit .........................................       27.6         29.7
Selling expenses .....................................        7.2          7.8
General and administrative expenses ..................       33.5         28.6
Interest & taxes .....................................        5.3          2.0
                                                          -------      -------
Net income (loss) ....................................      (18.4)%       (8.7)%
                                                          =======      =======


         SALES

         For the three months ended March 31, 2008 and 2007, sales by geographic
region based on the location of the customer as a percentage of sales:

                                                    THREE MONTHS ENDED
                                                         MARCH 31,
                                                   -------------------
                                                     2008        2007
                                                   -------     -------

         United States ........................        6.6%        9.3%
         Hong Kong ............................       36.6        39.2
         China ................................       19.2        17.8
         India ................................        7.1         5.3
         Bangladesh ...........................        7.3         6.9
         Other ................................       23.2        21.5
                                                   -------     -------
              Total ...........................      100.0%      100.0%
                                                   =======     =======


         Sales for the three months ended March 31, 2008 were $10.0 million,  an
increase of $0.9 million or 9.8% from the same period in 2007.  The net increase
reflects  the  increase  in sales of our Talon and Trim  products.  Talon  sales
increased  $0.9  million  or 18.7%  from the same  period in 2007 and Trim sales
increased  $0.4  million or 9.6% from the same period in 2007.  The  increase in
Talon and Trim sales were  offset by a decline in Tekfit  sales of $0.4  million
from the same period in 2007. The decline in sales of Tekfit  products  resulted
from slower than expected  expansion of this product offering to other customers
following  the  termination  in October 2006 of an  exclusive  contract for this
product.

         GROSS PROFIT

         Gross  profit  for the  three  months  ended  March  31,  2008 was $2.8
million,  as compared to $2.7 million for the same period in 2007.  The increase
in gross  profit for the three  months  ended  March 31, 2008 as compared to the
same  period  in 2007 was  principally  attributable  to  higher  overall  sales
volumes,  decreased  obsolescence  costs and related inventory  write-offs,  and
decreased freight and duty costs; offset by a lower direct margin resulting from
a change in the mix in sales by product group, higher manufacturing and assembly
overhead costs, and other cost of sales charges.


                                       20
<PAGE>


         A brief recap of the change in gross  profit for the three months ended
March 31, 2008 as compared with the same periods in 2007 is as follows:

                                                       (Amounts in thousands)
                                                         Three Months Ended
                                                               March 31,
                                                         ------------------
                                                          Amount      %(1)
                                                         -------    -------
         Gross profit increase as a result of:
         Higher volumes ..............................   $   310       11.5
         Decreased obsolescence & inventory costs ....        36        1.3
         Decreased freight and duty costs ............         8        0.3
         Higher manufacturing & assembly costs .......       (10)      (0.4)
         Other cost of sales charges .................       (77)      (2.8)
         Product margin ..............................      (213)      (7.9)
                                                         -------    -------
         Gross profit increase .......................   $    54        2.0
                                                         =======    =======

(1) Represents the percentage change in the 2008 period, as compared to the same
period in 2007.


         SELLING EXPENSES

         Selling  expenses  for the three  months ended March 31, 2008 were $0.7
million,  or 7.2% of sales, as compared to $0.7 million,  or 7.1% of sales,  for
the same period in 2007. Selling costs remained  relatively flat compared to the
same period in 2007. Costs associated with additional sales employees  increased
approximately  $116,000 and travel  increased  $34,000 due to increased  foreign
operations.  The  increases  were offset by reduced  marketing  and  advertising
expenses  of  approximately  $94,000  and lower  commissions  of $38,000  due to
changes in management and commission agreements.

         GENERAL AND ADMINISTRATIVE EXPENSES

         General and  administrative  expenses  for the three months ended March
31, 2008 were $3.3 million, or 33.5% of sales, as compared with $2.6 million, or
26.1% of sales,  for the same  period in 2007.  The  increase in the general and
administrative  expenses as a percentage of sales is  principally  the result of
increased  salaries,  travel,  professional  services,  production  samples  and
travel. The net increase in general and administrative costs of $726,000 results
from  increased  salaries and  benefits of $552,000  due  primarily to severance
accruals of $657,000,  increased stock-based compensation of $67,000 also due to
severance,  increased  travel of $57,000 due to  increased  foreign  operations,
increased  facilities  expense of $75,000 due to new facilities in Hong Kong and
China, and increased  professional fees of $53,000 due to an increase in the use
of  temporary  employees.  These  increases  were offset by lower legal costs of
$84,000 and lower audit costs of $133,000.

         During  the  three  months   ended  March  31,  2008  the   share-based
compensation costs associated with the implementation of FAS 123(R) was $127,000
(which  included  $80,000 from  severance) as compared with $65,000 for the same
period  in  2007.  For the  three  months  ended  March  31,  2008  general  and
administrative  expenses included $1,000 in bad debt expense,  and for the three
months  ended March 31, 2007  general and  administrative  expenses  were net of
$10,000 in net bad debt recoveries.


                                       21
<PAGE>


         INTEREST EXPENSE AND INTEREST INCOME

         Interest expense  increased by  approximately  $293,000 to $678,000 for
the three months  ended March 31,  2008,  as compared to the same period in 2007
due to increased  borrowings  under certain notes and our revolver  facility and
due to the amortization of deferred financing costs and debt discounts.

         Interest  income for the three months ended March 31, 2008 decreased by
approximately  $62,000 to $30,000 due  primarily to the  reduction of the Azteca
note receivable.

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

                                                  THREE MONTHS ENDED
                                                       MARCH 31,
                                                ----------------------
                                                   2008         2007
                                                ---------    ---------

         Interest expense ...................   $ 323,300    $ 196,100
         Amortization of deferred financing
           costs & debt discounts ...........     243,700       77,600
                                                ---------    ---------
             Interest expense ...............     567,000      273,700
         Interest income ....................     (17,400)     (92,000)
                                                ---------    ---------
         Interest expense, net ..............   $ 549,600    $ 181,700
                                                =========    =========


         INCOME TAXES

         There was an income tax benefit of $21,000 for the three  months  ended
March 31, 2008 due to the operating  losses  incurred in our foreign  operations
where we will be able to utilize operating loss  carry-forwards to offset future
taxable  income.  There was no  provision  for income taxes for the three months
ended 2007 due to the operating  losses incurred and no benefit for income taxes
has been recorded since there was not  sufficient  evidence to determine that we
would be able to utilize our net operating loss  carry-forwards to offset future
taxable income.

LIQUIDITY AND CAPITAL RESOURCES

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

                                                March 31,     December 31,
                                                  2008            2007
                                              ------------    ------------
         Cash and cash equivalents ........   $      1,775    $      2,919
         Total assets .....................         21,353          22,094
         Current liabilities ..............         11,516          10,457
         Non-current liabilities ..........         12,896          12,354
         Stockholders' deficit ............         (3,059)           (717)


         CASH AND CASH EQUIVALENTS

         Cash and cash equivalents  decreased by $1,155,000 at March 31, 2008 as
compared  to  December  31,  2007,  principally  due to cash  used by  operating
activities  and  cash  used in  investing  activities,  net of cash  flows  from
financing activities.


                                       22
<PAGE>


         Cash used by operating  activities is our primary  recurring source and
use of funds, and was approximately  $1,455,000 for the three months ended March
31, 2008. The cash provided by (used by) operating  activities  during the three
months resulted principally from (in thousands):

         Net loss before non-cash expenses .................   $  (1,178)
         Inventory increases, net of reserves ..............        (379)
         Receivable increases, net of reserves .............      (1,436)
         Increase in accounts payable and accrued expense ..       1,333
         Other .............................................         205
                                                               ---------
                                                               $   1,455
                                                               =========


         Net cash used in investing  activities for the three months ended March
31, 2008 was $98,000 as compared to $356,000  for the three  months  ended March
31,  2007.  These  expenditures  were  principally   associated  with  leasehold
improvements in new facilities and office equipment for new employees.  The cash
used in the first quarter of 2007 represents capital  expenditures for leasehold
improvements in new facilities, office equipment for new employees, improvements
in our technology systems and a marketing website acquisition.

         Net cash  provided by financing  activities  for the three months ended
March 31, 2008 was  approximately  $397,000 and  primarily  reflects  borrowings
against our available  revolver  line of credit,  net of repayment of borrowings
under  capital  leases and notes  payable.  For the three months ended March 31,
2007 the cash used in financing  activities was $152,000 and primarily  reflects
the  repayment of  borrowings  under capital  leases and notes  payable,  net of
collections  under our note  receivable  and funds  raised from the  exercise of
stock options.

         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. During the period covered by this report,  the revolving credit portion of
the  facility  permited  borrowings  based upon a formula  including  75% of our
eligible  receivables  and 55% of eligible  inventory,  and provides for monthly
interest  payments at the prime rate plus 2.0%.  The term loan bears interest at
8.5%  annually  with  quarterly  interest  payments  and  repayment  in  full at
maturity.  Borrowings  under both  credit  facilities  are secured by all of our
assets.  There was $492,000 and  $879,000 in available  borrowings  at March 31,
2008 and December 31, 2007, respectively.

         On April 3, 2008,  we executed an amendment  to the existing  revolving
credit and term loan agreement with Bluefin Capital.  The amendment provided for
an amendment of the EBITDA and other financial covenants,  and the redemption of
the stock  warrants  previously  issued to Bluefin  Capital in exchange  for the
issuance of an additional note payable to Bluefin Capital for $1.0 million at an
interest  rate of 8.5%.  We will record a reduction to equity and an increase to
notes  payable  for the fair  value of the  warrants  redeemed.  The  difference
between the fair value of the  warrants  of  $221,723  and the face value of the
note will be accreted over the life of the note. The note will incur interest at
8.5% on the principal  amount of $1.0 million and the quarterly  accretion  will
also be  reflected  as interest  expense.  The  additional  note and all accrued
interest under the note are due and payable on June 30, 2010. Our borrowing base
was also modified  increasing  the allowable  portion of inventory held by third
party  vendors to $1.0 million with no more than $500,000 held at any one vendor
and by increasing  the  percentage of accounts  receivable to be included in the
borrowing base 75% to 85%. As of March 31, 2008, we had  outstanding  borrowings
of $9.4 million under the term note, and $4.5 million under the revolving credit
note.

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


                                       23
<PAGE>


operating capital requirements and to achieve our debt service requirements, and
that our  existing  cash and cash  equivalents  will be  sufficient  to fund our
expansion and capital requirements.

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

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

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


CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following summarizes our contractual  obligations at March 31, 2008
and the effects such obligations are expected to have on liquidity and cash flow
in future periods:

<TABLE>
<CAPTION>
                                                   Payments Due by Period
                            -------------------------------------------------------------------
                                            Less than       1-3           4-5          After
 Contractual Obligations       Total         1 Year        Years         Years        5 Years
-------------------------   -----------   -----------   -----------   -----------   -----------
<S>                         <C>           <C>           <C>           <C>           <C>
Demand notes payable to
  related parties (1) ...   $   214,900   $   214,900   $      --     $      --     $      --
Capital lease obligations   $   443,700   $   315,700   $   128,000   $      --     $      --
Operating leases ........   $ 1,192,700   $   554,200   $   638,500   $      --     $      --
Revolver and term note ..   $16,560,000   $ 1,134,300   $15,425,700   $      --     $      --
Other notes payable .....   $ 1,231,800   $   343,500   $   888,300   $      --     $      --
                            -----------   -----------   -----------   -----------   -----------
     Total Obligations ..   $19,643,100   $ 2,562,600   $17,080,500   $      --     $      --
                            ===========   ===========   ===========   ===========   ===========
</TABLE>

(1)      The majority of notes payable to related parties are due on demand with
         the  remainder  due and payable on the fifteenth day following the date
         of delivery of written demand for payment, and include accrued interest
         payable through March 31, 2008.

         At March 31,  2008 and  2007,  we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often


                                       24
<PAGE>


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

         Colin Dyne, a director and significant  stockholder of the Company,  is
also a significant  shareholder in People's  Liberation,  Inc.  During the three
months  ended March 31, 2008 and 2007,  we had sales of $111,500  and  $141,800,
respectively,  to subsidiaries of People's  Liberation,  Inc. At March 31, 2008,
accounts  receivable  included  $105,900  outstanding  from People's  Liberation
subsidiaries.  At  December  31,  2007,  accounts  receivable  of  $44,000  were
outstanding from subsidiaries of People's Liberation, Inc.

         Due from  related  parties  at March 31,  2008 and  December  31,  2007
includes $637,300 and $625,500,  respectively,  of unsecured notes, advances and
accrued  interest  receivable  from  Colin  Dyne.  The notes and  advances  bear
interest  at 7.5% and are due on  demand.  During  2007 and 2008  certain  notes
payable due to Mr. Dyne were used to satisfy notes receivable from Mr. Dyne.

         Demand notes payable to related parties  includes notes and advances to
Mark Dyne,  the  Chairman of the Board of Directors of the Company or to parties
related to or affiliated  with Mark Dyne. The balance of Demand notes payable to
related parties at March 31, 2008 and at December 31, 2007 was $85,200.

         Jonathan Burstein, a former director of the Company, purchases products
from the Company through an entity operated by his spouse.  For the three months
ended March 31, 2008 and 2007, sales to this entity were $100. At March 31, 2008
and   December  31,  2007,   accounts   receivable   included  $0  and  $28,700,
respectively,  due from this entity.  On October 25, 2007, Mr. Burstein resigned
as a director of the Company.

         In  December,  2007,  we recorded a onetime  charge for the  consulting
contract with Mr.  Burstein in connection  with his resignation as a director of
the Company. We continue to make payments on this contract and in March 31, 2008
consulting fees of $48,500 were paid under the terms of his contract. Consulting
fees of $73,400  were paid for  services  provided by Jonathan  Burstein for the
three months ended March 31, 2007.

         Consulting  fees paid to  Diversified  Investments,  a company owned by
Mark Dyne,  amounted  to $37,500 for the three  months  ended March 31, 2008 and
2007.

         Consulting fees of $75,000 and $68,750 were paid for services  provided
by Colin Dyne for the three months ended March 31, 2008 and 2007.

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:


                                       25
<PAGE>


         o        Accounts  receivable  balances  are  evaluated  on a continual
                  basis   and   allowances   are   provided   for    potentially
                  uncollectible  accounts based on management's  estimate of the
                  collectibility   of  customer   accounts.   If  the  financial
                  condition of a customer were to  deteriorate,  resulting in an
                  impairment  of its  ability to make  payments,  an  additional
                  allowance may be required.  Allowance  adjustments are charged
                  to  operations in the period in which the facts that give rise
                  to the adjustments become known. During the three months ended
                  March 31, 2008, we had  additional  provisions for bad debt of
                  $24,800  (with  recoveries  of $24,100)  for the three  months
                  ended March 31,  2008,  and we had net  recoveries  of $10,400
                  (with  provisions  of $9,200) for the three months ended March
                  31, 2007.

         o        Inventories are stated at the lower of cost (determined  using
                  the  first-in,  first-out  basis,) or market value and are all
                  substantially  finished goods. The costs of inventory  include
                  the purchase  price,  inbound  freight and duties,  conversion
                  costs and certain allocated production overhead.  Inventory is
                  evaluated  on a continual  basis and reserve  adjustments  are
                  made based on management's  estimate of future sales value, if
                  any, of  specific  inventory  items.  Inventory  reserves  are
                  recorded  for  damaged,   obsolete,   excess  and  slow-moving
                  inventory.   We  use  estimates  to  record  these   reserves.
                  Slow-moving  inventory  is  reviewed  by  category  and may be
                  partially  or  fully  reserved  for  depending  on the type of
                  product and the length of time the  product has been  included
                  in inventory.  Reserve adjustments are made for the difference
                  between the cost of the  inventory  and the  estimated  market
                  value,  if lower,  and charged to  operations in the period in
                  which the facts  that  give rise to these  adjustments  become
                  known.  Market value of  inventory  is estimated  based on the
                  impact of market trends, an evaluation of economic  conditions
                  and the value of current  orders  relating to the future sales
                  of  this  type  of  inventory.  Provisions  for  reserves  for
                  inventory  valuation for the three months ended March 31, 2008
                  and 2007 were $0.

         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.

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


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<PAGE>


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

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

         o        Upon approval of a restructuring plan by management, we record
                  restructuring  reserves  for  certain  costs  associated  with
                  facility  closures and business  reorganization  activities as
                  they are incurred or when they become  probable and estimable.
                  Such  costs are  recorded  as a current  liability.  We record
                  restructuring reserves in compliance with SFAS 146 "Accounting
                  for  Costs  Associated  with  Exit  or  Disposal  Activities",
                  resulting in the recognition of employee severance and related
                  termination  benefits  for  recurring  arrangements  when they
                  became  probable and  estimable  and on the accrual  basis for
                  one-time   benefit   arrangements.   We  record   other  costs
                  associated with exit activities as they are incurred. Employee
                  severance  and  termination  benefits are  estimates  based on
                  agreements  with the relevant union  representatives  or plans
                  adopted by us that are  applicable to employees not affiliated
                  with unions.  These costs are not associated  with nor do they
                  benefit continuing  activities.  Inherent in the estimation of
                  these  costs  are  assessments  related  to  the  most  likely
                  expected outcome of the significant  actions to accomplish the
                  restructuring.  Changing  business  conditions  may affect the
                  assumptions  related  to the  timing  and  extent of  facility
                  closure  activities.  We review  the  status of  restructuring
                  activities on a quarterly  basis and, if  appropriate,  record
                  changes based on updated estimates.

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


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<PAGE>


accordingly,  we will apply SFAS 141(R) for acquisitions  effected subsequent to
the date of adoption.

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

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


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.


ITEM 4.  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 David A. Hunter,  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.  Hunter  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.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         During the first quarter ended March 31, 2008, there were no changes in
our internal control over financial accounting that has materially affected,  or
is reasonably likely to materially  affect,  our internal control over financial
reporting.


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<PAGE>


                                    PART II
                               OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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


         On April 16, 2004 we filed suit against  Pro-Fit  Holdings,  Limited in
the U.S. District Court for the Central District of California - TAG-IT PACIFIC,
INC. V. PRO-FIT  HOLDINGS,  LIMITED,  CV 04-2694 LGB (RCx) -- asserting  various
contractual and tort claims relating to our exclusive  license and  intellectual
property agreement with Pro-Fit,  seeking declaratory relief,  injunctive relief
and damages.  It is our position  that the  agreement  with Pro-Fit gives us the
exclusive  rights in certain  geographic  areas to  Pro-Fit's  stretch and rigid
waistband  technology.  On June 5, 2006 the Court  denied our motion for partial
summary  judgment,  but did not find that we breached our agreement with Pro-Fit
and a trial is  required  to  determine  issues  concerning  our  activities  in
Columbia and whether other actions by Pro-Fit  constituted an  unwillingness  or
inability to fill orders. The Court also held that Pro-Fit was not "unwilling or
unable" to fulfill  orders by refusing to fill orders with goods produced in the
United States.  The action is still pending in the United States District Court.
The action is presently  stayed pending  resolution or trial of an earlier filed
action  between  Pro-Fit  Holdings  and their  attorneys  who have sued  Pro-Fit
Holdings and have obtained a judgment. In the past, we had derived a significant
amount of revenue from the sale of products  incorporating the stretch waistband
technology and our business, results of operations and financial condition could
be materially  adversely affected if the dispute with Pro-Fit is not resolved in
a manner favorable to us. Additionally,  we have incurred significant legal fees
in this  litigation,  and unless the case is settled,  we will continue to incur
additional legal fees in increasing amounts as the case accelerates to trial.

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


ITEM 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, 2007.  No material  change to such risk
factors has occurred during the three months ended March 31, 2008.


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<PAGE>


ITEM 6.  EXHIBITS

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

10.21.3           Amendment No. 3 to Revolving  Credit and Term Loan  Agreement,
                  dated as of March 31, 2008, between Talon International,  Inc.
                  and Bluefin Capital, LLC.

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

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

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


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<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:  May 15, 2008                   /S/ LONNIE D. SCHNELL
                                       -----------------------------------------
                                       Lonnie D. Schnell
                                       Chief Executive Officer & Chief Financial
                                       Officer


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