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

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

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 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 AUGUST 19, 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                                              PAGE
                                                                            ----

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

         Consolidated Balance Sheets as of June 30, 2008 (unaudited)
           and December 31, 2007 ..............................................3

         Consolidated Statements of Operations for the Three Months
           and the Six Months Ended June 30, 2008 and 2007 (unaudited).........4

         Consolidated Statements of Cash Flows for the
           Six Months Ended June 30, 2008 and 2007 (unaudited).................5

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

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk...........32

Item 4.  Controls and Procedures..............................................32


PART II  OTHER INFORMATION

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

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

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


                                       2
<PAGE>


                            TALON INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                    June 30,       December 31,
                                                      2008            2007
                                                  (Unaudited)
                                                 -------------    -------------

Assets
Current Assets:
   Cash and cash equivalents ..................  $   3,741,404    $   2,918,858
   Marketable securities available for sale ...        540,000        1,040,000
   Accounts receivable, net ...................      7,077,382        3,504,351
   Inventories, net ...........................      2,673,647        2,487,427
   Prepaid expenses and other current assets ..        790,749          945,566
                                                 -------------    -------------
Total current assets ..........................     14,823,182       10,896,202

Property and equipment, net ...................      4,809,710        5,210,446
Fixed assets held for sale ....................        687,955          700,000
Due from related parties ......................        649,278          625,454
Other intangible assets, net ..................      4,110,751        4,110,751
Other assets ..................................        190,795          140,782
                                                 -------------    -------------
Total assets ..................................  $  25,271,671    $  21,683,635
                                                 =============    =============

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable ............................  $  11,297,188    $   6,603,929
  Accrued legal costs .........................        237,665          498,846
  Other accrued expenses ......................      2,841,258        2,646,662
  Demand notes payable to related parties .....         85,176           85,176
  Current portion of capital lease obligations         282,796          323,317
  Current portion of notes payable ............        263,869          299,108
                                                 -------------    -------------
Total current liabilities .....................     15,007,952       10,457,038

Capital lease obligations, less current portion         50,069          189,705
Notes payable, less current portion ...........        736,613          848,484
Revolver note payable .........................      4,160,710        3,807,806
Term notes payable, net of discounts of
  $2,933,300 and $2,485,700 ...................      7,441,705        7,014,301
Other long term liabilities ...................         83,651           83,651
                                                 -------------    -------------
Total liabilities .............................     27,480,700       22,400,985
                                                 -------------    -------------

Commitments and contingencies (Note 11)

Stockholders' Equity (Deficit):
  Preferred stock Series A, $0.001 par value;
    250,000 shares authorized; no
    shares issued or outstanding ..............           --               --

  Common stock,  $0.001 par value, 100,000,000
    shares  authorized;  20,291,433 shares
    issued and outstanding at June 30, 2008
    and December 31, 2007 .....................         20,291           20,291
  Additional paid-in capital ..................     54,646,042       54,510,161
  Accumulated deficit .........................    (56,532,833)     (55,292,246)
  Accumulated other comprehensive income (loss)       (342,529)          44,444
                                                 -------------    -------------
Total stockholders' equity (deficit) ..........     (2,209,029)        (717,350)
                                                 -------------    -------------
Total liabilities and stockholders' equity ....  $  25,271,671    $  21,683,635
                                                 =============    =============


           See accompanying notes to consolidated financial statements


                                       3
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<CAPTION>
                                       Three Months Ended June 30,    Six Months Ended June 30,
                                      ----------------------------   ----------------------------

                                          2008            2007           2008            2007
                                      ------------    ------------   ------------    ------------
<S>                                   <C>             <C>            <C>             <C>
Net sales .........................   $ 17,020,629    $ 13,566,981   $ 27,006,118    $ 22,657,099
Cost of goods sold ................     12,119,725       9,484,488     19,347,249      15,827,411
                                      ------------    ------------   ------------    ------------
   Gross profit ...................      4,900,904       4,082,493      7,658,869       6,829,688

Selling expenses ..................        767,865         841,326      1,487,828       1,547,561
General and administrative expenses      3,082,164       2,406,192      6,430,400       5,017,780
                                      ------------    ------------   ------------    ------------
   Total operating expenses .......      3,850,029       3,247,518      7,918,228       6,565,341

Income (loss) from operations .....      1,050,875         834,975       (259,359)        264,347
Interest expense, net .............        643,130         265,858      1,192,644         490,574
                                      ------------    ------------   ------------    ------------
Income (loss) before provision for
  (benefit from) income taxes .....        407,745         569,117     (1,452,003)       (226,227)
Provision for (benefit from) income
  taxes ...........................       (190,412)         78,624       (211,416)         78,624
                                      ------------    ------------   ------------    ------------
   Net Income (loss) ..............   $    598,157    $    490,493   $ (1,240,587)   $   (304,851)
                                      ============    ============   ============    ============
Basic income (loss) per share .....   $       0.03    $       0.03   $      (0.06)   $      (0.02)
                                      ============    ============   ============    ============
Diluted income (loss) per share ...   $       0.03    $       0.02   $      (0.06)   $      (0.02)
                                      ============    ============   ============    ============

Weighted average number of common
  shares outstanding:
   Basic ..........................     20,291,433      18,590,884     20,291,433      18,562,151
                                      ============    ============   ============    ============
   Diluted ........................     20,291,433      20,058,682     20,291,433      18,562,151
                                      ============    ============   ============    ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


<TABLE>
                            TALON INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<CAPTION>
                                                                            Six Months Ended June 30,
                                                                          ----------------------------
                                                                              2008            2007
                                                                          ------------    ------------
<S>                                                                       <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss ............................................................   $ (1,240,587)   $   (304,851)
   Adjustments to reconcile net loss to net cash provided
     by operating activities:
     Depreciation and amortization ....................................        546,844         592,011
     Amortization of deferred financing cost and debt discounts .......        556,755         163,593
     Increase (decrease) in allowance for doubtful accounts ...........         (5,000)         61,500
     Decrease in inventory valuation reserves .........................       (340,312)       (165,280)
     Stock based compensation .........................................        284,433         125,000
   Changes in operating assets and liabilities:
     Receivables, including related party .............................     (3,591,855)     (1,485,273)
     Notes receivable ............ ....................................           --           671,808
     Inventories ......................................................        154,092         661,428
     Recoverable legal costs ..........................................           --        (1,073,640)
     Prepaid expenses and other current assets ........................        370,532        (241,137)
     Other assets .....................................................        (50,012)         35,207
     Accounts payable and accrued expenses ............................      4,767,304       2,638,060
     Accrued legal ....................................................       (261,181)        769,467
     Notes payable ....................................................           --          (791,314)
                                                                          ------------    ------------
        Net cash provided by operating activities .....................      1,191,013       1,656,579
                                                                          ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of property and equipment ............................       (132,754)       (514,812)
     Proceeds from disposition of equipment ...........................         12,045            --
                                                                          ------------    ------------
        Net cash used by investing activities .........................       (120,709)       (514,812)
                                                                          ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from exercise of stock options and warrants .............           --            42,746
     Proceeds from issuance of stock and warrants, net of issuance costs          --         2,313,711
     Revolver note borrowings .........................................        700,000       1,307,806
     Repayment of revolver note borrowings ............................       (500,000)           --
     Term note borrowings, net of issuance costs ......................           --         6,842,789
     Payments on term note ............................................       (125,000)           --
     Payment of demand notes payable to related party .................           --        (1,004,306)
     Payment of notes payable .........................................       (147,110)        (96,047)
     Payment of capital leases ........................................       (180,157)       (160,875)
                                                                          ------------    ------------
        Net cash provided by (used in) financing activities ...........       (252,267)      9,245,824
                                                                          ------------    ------------

Net increase in cash and cash equivalents .............................        818,037      10,387,591
Net effect of foreign currency exchange translation on cash ...........          4,509            --
Cash at beginning of period ...........................................      2,918,858       2,934,673
                                                                          ------------    ------------
Cash and cash equivalents at end of period ............................   $  3,741,404    $ 13,322,264
                                                                          ============    ============


                                       5
<PAGE>


Supplemental disclosures of cash flow information:

    Cash received (paid) during the period for:
        Interest paid .................................................   $   (671,906)   $   (513,414)
        Interest received .............................................   $      9,096    $    153,651
        Income tax paid ...............................................   $     10,553    $     95,056

    Non-cash financing activities:

        Note payable issued in modification of loan ...................   $  1,000,000    $       --
        Debt modification fee .........................................   $    145,000    $       --
        Deferred financing cost .......................................   $       --      $    203,434
        Effect of foreign currency translation on net assets ..........   $    113,027    $       --
        Capital lease obligation ......................................   $       --      $     35,809
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       6
<PAGE>


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

NOTE 1.  PRESENTATION OF INTERIM INFORMATION

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States of America 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 of America 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.

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  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.

INVENTORIES

         Inventories  are  stated  at the  lower of cost,  determined  using the
first-in,  first-out basis, or market value and are all  substantially  finished
goods.  The costs of inventory  include the purchase price,  inbound freight and
duties, conversion costs and certain allocated production overhead. 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.

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 recoveries
for the  three  and six  months  ended  June 30,  2008 are  $4,021  and  $5,326,
respectively.  For the three and six months ended June 30, 2007 bad debt expense
was $52,500  and  $42,100  (net of bad debt  recoveries  of $1,500 and  $19,500,
respectively).


                                       7
<PAGE>


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 and six months  ended June
30, 2008 was $0,  compared to $0 and $30,600 for the three and six months  ended
June 30, 2007,  respectively.  The Company determined that no impairment existed
at June 30, 2008.

REVENUE RECOGNITION

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

         Sales rebates and discounts  are common  practice in the  industries in
which the Company operates. Volume, promotional, price, cash and other discounts
and customer incentives are accounted for as a reduction to gross sales. Rebates
and discounts are recorded  based upon  estimates at the time products are sold.
These  estimates are based upon historical  experience for similar  programs and
products. The Company reviews such rebates and discounts on an ongoing basis and
accruals for rebates and discounts are adjusted, if necessary.  Historically the
volume  of sales  rebates  and  discounts  have been  immaterial  based on gross
revenues and  accordingly  there is no allowance for sales rebates and discounts
on the balance sheet.

CLASSIFICATION OF EXPENSES

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

         SELLING EXPENSES - Selling expenses  primarily include 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 and six months  ended June 30, 2008 were  $10,581 and $52,696,
respectively,  compared  to $51,895  and  $230,306  for the three and six months
ended June 30, 2007, respectively.

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

         INTEREST EXPENSE, NET - Interest expense reflects the cost of borrowing
and amortization of deferred financing costs and discounts. Interest expense for
the three and six months  ended June 30, 2008 totaled  $658,600 and  $1,225,600,
respectively. For the three and six months ended June 30, 2007, interest expense


                                       8
<PAGE>


was $360,200 and $677,000,  respectively.  Interest  income consists of earnings
from  outstanding  amounts  due to the Company  under  notes and other  interest
bearing  receivables  and from earnings on cash balances.  The Company  recorded
interest  income of  $15,500  and  $32,900  respectively,  for the three and six
months  ended June 30,  2008,  as compared to $94,400 and  $186,400 for the same
periods in 2007.

         Cash paid for  interest  charges for the six months ended June 30, 2008
and 2007 amounted to $671,900 and $513,400, respectively. Cash interest payments
received  during the six months ended June 30, 2008 and 2007 totaled  $9,100 and
$153,600, 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  costs  incurred by the Company for outbound  freight are recorded as a
component of cost of goods sold. Total shipping and handling costs included as a
component  of  revenue  for the three and six months  ended  June 30,  2008 were
$56,700 and $107,700,  respectively  ($58,200 and $119,100 for the three and six
months ended June 30, 2007,  respectively).  Total  shipping and handling  costs
incurred as a component of cost of goods sold for the three and six months ended
June 30, 2008 were  $486,110 and $770,641,  respectively  ($286,100 and $465,200
for the three months ended June 30, 2007, 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  income  were  a
cumulative foreign currency translation  adjustment gain of $113,027 at June 30,
2008 and a gain of $44,000 at December 31, 2007.

COMPREHENSIVE INCOME (LOSS)

         Comprehensive  income (loss)  consists of net income (loss) and foreign
currency translation adjustments. Comprehensive income (loss) and its components
for the three and six months ended June 30, 2008 and 2007 is as follows:

<TABLE>
<CAPTION>
                                        Three Months Ended           Six Months Ended
                                             June 30,                    June 30,
                                    -------------------------   --------------------------
                                       2008          2007          2008           2007
                                    -----------   -----------   -----------    -----------
<S>                                 <C>           <C>           <C>            <C>
Net income (loss) ...............   $   598,157   $   490,493   $(1,240,587)   $  (304,851)
Other comprehensive income (loss):
Available for sale securities ...       160,000          --        (500,000)          --
Foreign currency translation ....       101,607          --         113,027           --
                                    -----------   -----------   -----------    -----------
Total comprehensive income (loss)   $   859,764   $   490,493   $(1,627,560)   $  (304,851)
                                    ===========   ===========   ===========    ===========
</TABLE>

         The  available-for-sale  securities  adjustment  represents  unrealized
gains and losses due to temporary  changes in the market  prices  related to our
marketable  securities  that were  received  in  exchange  for the  Azteca  note
receivable  discussed  in  Notes  4  and  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 (loss) for the periods  presented.  The foreign  current  translation
adjustment  for the three  months  ended June 30, 2007 was  insignificant  as we
commenced our foreign operations during the first quarter of 2007.


                                        9
<PAGE>


RECLASSIFICATIONS

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

NOTE 3.  INCOME (LOSS) PER SHARE

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


<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2008:         INCOME (LOSS)        SHARES        PER SHARE
---------------------------------------   -------------    -------------   -------------
<S>                                       <C>                 <C>          <C>
Basic Income per share:
Available to common stockholders ......   $     598,157       20,291,433   $        0.03

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

THREE MONTHS ENDED JUNE 30, 2007:
---------------------------------------
Basic Income per share:
Available to common stockholders ......   $     490,493       18,590,884   $        0.03

Effect of Dilutive Securities:
Options ...............................            --          1,463,278           (0.01)
Warrants ..............................            --              4,520            --
                                          -------------    -------------   -------------
Income available to common stockholders   $     490,493       20,058,682   $        0.02
                                          =============    =============   =============

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

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

SIX MONTHS ENDED JUNE 30, 2007:
---------------------------------------
Basic Loss per share:
Available to common stockholders ......   $    (304,851)      18,562,151   $       (0.02)

Effect of Dilutive Securities:
Options ...............................            --               --              --
Warrants ..............................            --               --              --
                                          -------------    -------------   -------------
Loss available to common stockholders .   $    (304,851)      18,562,151   $       (0.02)
                                          =============    =============   =============
</TABLE>


                                       10
<PAGE>


         Warrants to purchase  891,313  shares of common  stock  exercisable  at
between  $3.65 and $4.74,  and  options to purchase  7,057,235  shares of common
stock exercisable at between $0.20 and $5.23, were outstanding for the three and
six months ended June 30,  2008.  In  connection  with the  Share-Based  Payment
calculation  (see Note 9),  2,239,998 shares were included in the computation of
diluted  income per share for the three month period ended June 30, 2008.  These
shares were not  included in the  computation  of diluted loss per share for the
six months  ended June 30, 2008  because  exercise or  conversion  would have an
antidilutive effect on the income or loss per share.

         Warrants to purchase  3,193,813  shares of common stock  exercisable at
between  $0.95 and $5.06 per share,  options  to  purchase  4,746,735  shares of
common stock  exercisable at between $0.37 and $5.23 per share,  and convertible
debt of $12,500,000  convertible at $3.65 per share,  were  outstanding  for the
three and six months ended June 30, 2007.  In  connection  with the  Share-Based
Payment  calculation  (see  Note  9),  4,880,135  shares  were  included  in the
computation  of diluted  income per share for the three month  period ended June
30, 2007.  These shares were not included in the computation of diluted loss per
share for the six months  ended June 30, 2007  because  exercise  or  conversion
would have an antidilutive effect on the 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 cause to be
delivered  2,000,000  shares of  unrestricted  common stock of a separate public
corporation  with a value of  $1,040,000,  in exchange for  cancellation  of the
Azteca Note  Receivable  discussed in Note 5. On January 30,  2008,  the Company
received  the  unrestricted  common  stock of this  public  corporation  and the
Company could begin trading these shares, selling no more than 10,000 shares per
week in the open market, and without  restriction in private  transactions.  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  gains of $160,000 and unrealized  losses of $500,000 were recognized
in other comprehensive income for the three months and six months ended June 30,
2008,  respectively.  The  value of the  common  stock on  August  19,  2008 had
decreased $180,000 to $360,000, as compared to the value on June 30, 2008.

         The Company has examined the  circumstances of the decline in the value
of the  securities  and considered its objectives and ability to hold the shares
pending a recovery in the market value, as well as the possibility of a recovery
in value.  The  Company  believes  that a recovery  in the  market  value of the
securities is possible and that there is not  sufficient  evidence to warrant an
adjustment for an other than temporary impairment in the securities.

NOTE 5.  ACCOUNTS AND NOTE RECEIVABLE

         Accounts  receivable  are  included  on the  accompanying  consolidated
balance sheet net of an allowance for doubtful accounts. The total allowance for
doubtful   accounts  at  June  30,  2008  and  December  31,  2007  was  $91,000
and$140,420, respectively.

         At  June  30,  2007  a  note   receivable   from   Azteca   Productions
International,  Inc, was  outstanding in the amount of $2,127,653.  The note was
receivable in monthly  installments  over thirty-one  months  beginning March 1,
2006.  The  payments  were  $50,000  per month for the first 5 months,  and then
ranged from  $133,000-$267,000  per month until paid in full,  but no later than
July 1, 2008.

         Azteca failed to make the scheduled  note payments due on July 1, 2007,
and all subsequent periods  thereafter,  triggering a default and exhausting all
cure  periods  under the note,  resulting  in the entire note  balance  becoming
immediately  due and  payable.  On  September  10, 2007 after  meeting  with and
conducting  extensive  discussions  with  Azteca,  they failed to provide to the
Company  certain  security  interests  as  required  under  the note to make the
scheduled note payments and Azteca further expressed its belief that it would be
unable to make any note  payments in the  foreseeable  future.  As a result,  in
September  2007,  the Company  reflected a charge of $2,127,653 to fully reserve
the outstanding  balance from Azteca.  In


                                       11
<PAGE>


December 2007 an agreement was reached whereby Azteca delivered shares of common
stock of a separate public company 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 as the reversal of previously recorded bad debts.
See Note 4 for the status and valuation of the shares received in this exchange.

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:

                                              June 30,     December 31,
                                                2008           2007
                                            ------------   ------------
         Finished goods .................   $  3,352,300   $  3,506,400
         Less reserves ..................        678,700      1,019,000
                                            ------------   ------------
         Total inventories ..............   $  2,673,600   $  2,487,400
                                            ============   ============

NOTE 7.  FIXED ASSETS HELD FOR SALE

         Fixed  assets  held for sale  consist  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 June 30, 2008 was
$688,000 and at December 31, 2007 was  $700,000.  The assets are financed with a
mortgage note payable with $677,422 outstanding at June 30, 2008 and $690,000 at
December 31, 2007. As described in Note 15,  Subsequent  Events, on July 2, 2008
the Company  entered into an agreement to sell the real  property for  $725,000.
Management has the authority and is committed to sell the asset.

NOTE 8.  DEBT FACILITY

         On June 27, 2007 the Company  entered into a Revolving  Credit and Term
Loan Agreement with Bluefin  Capital,  LLC ("Bluefin")  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,  as
amended  permits  borrowings  based upon a formula  including  85% the Company's
eligible  receivables  and 55% of eligible  inventory,  and provides for monthly
interest  payments at the prime rate (5.0% at June 30, 2008) plus 2.0%. The term
loan bears  interest at 8.5%  annually  with  quarterly  interest  payments  and
repayment  in full at  maturity.  Borrowings  under both credit  facilities  are
secured by all of the assets of the Company.


                                       12
<PAGE>


         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 initially 700,000 warrants
were exercisable at $0.95 per share;  700,000 warrants were exercisable at $1.05
per share;  and  700,000  warrants  were  exercisable  at $1.14 per  share.  The
warrants did not require cash settlements. The relative fair value of the equity
($2,374,169,  which  includes a reduction for financing  costs) issued with this
debt facility was allocated to paid-in-capital  and reflected as a debt discount
to the face value of the term note.  This discount is being  amortized  over the
term of the note and recognized as additional interest cost as amortized.  Costs
associated  with  the  debt  facility  included  debt  fees,   commitment  fees,
registration  fees,  and  legal and  professional  fees of  $486,000.  The costs
allocable  to the debt  instruments  are  reflected  in other assets as deferred
financing costs and are being amortized over the term of the notes.

         Under the terms of the credit agreement the Company is required to meet
certain coverage ratios,  among other restrictions  including a restriction from
declaring or paying a dividend  prior to repayment of all the  obligations.  The
initial financial  covenants,  as amended,  require that the Company maintain at
the end of each fiscal quarter  "EBITDA" (as defined in the Agreement) in excess
of the  principal  and  interest  payments  for the same period of not less than
$1.00, and in excess of ratios set out in the agreement for each quarter. In the
event that the Company  fails to satisfy the minimum  EBITDA  requirement  for a
quarter,  a  waiver  fee of 1% of  the  debt  commitment  may be  paid  and  the
requirement  delayed to the next quarter.  If two  consecutive  quarters fail to
meet the minimum  EBITDA the waiver fee  increases  to 2%. If three  consecutive
quarters fail to meet the minimum EBITDA, or the Company does not pay the waiver
fee,  the  credit  agreement  would be in  default  and the  lender  may  demand
immediate repayment of the full amount of the notes outstanding.

         On November  19,  2007 the Company  entered  into an  amendment  of its
agreement with Bluefin to modify the original financial  covenants and to extend
until June 30, 2008 the  application of the original EBITDA covenant in exchange
for additional common stock of the Company and a price adjustment to the lenders
outstanding warrants issued in connection with the loan agreement. In connection
with this  amendment the Company  issued an additional  250,000 shares of common
stock to the lender for $0.001 per share,  and the exercise price for all of the
previously  issued  2,100,000  warrants  for the  purchase  of common  stock was
amended to an exercise price of $0.75 per share.  The new relative fair value of
the equity issued with this debt, including the modifications in this amendment,
which is being amortized over the term of the note is $2,569,800, which includes
a reduction for financing costs.

         On April 3, 2008 the Company executed an amendment to its existing loan
agreement  with  Bluefin.  The  amendment  included a  redefining  of the EBITDA
covenants,  and the surrender of the common stock warrants  previously issued to
Bluefin in  exchange  for the  issuance  by the  Company of an  additional  note
payable to Bluefin for $1.0  million.  The note bears  interest at 8.5% and both
the note and accrued  interest  are payable at  maturity  on June 30,  2010.  In
addition,  the  Company's  borrowing  base was  modified  in this  amendment  by
increasing  the  allowable  portion of inventory  held by third party vendors to
$1.0 million with no more than  $500,000  held at any one vendor and  increasing
the  percentage of accounts  receivable to be included in the borrowing  base to
85%.  The  Company  paid a one-time  modification  fee of $145,000 to secure the
amendment of the agreement.

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


                                       13
<PAGE>


         As of  June  30,  2008,  the  Company  had  outstanding  borrowings  of
$10,375,000 under the term notes (discounted carrying value of $7,441,700),  and
$4,161,000 under the revolving credit note.

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

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

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 Emerging  Issues Task Force
(EITF) No. 96-18,  "ACCOUNTING FOR EQUITY  INSTRUMENTS THAT ARE ISSUED TO OTHERS
THAN  EMPLOYEES  FOR  ACQUIRING,  OR  IN  CONJUNCTION  WITH  SELLING,  GOODS  OR
SERVICES".

         On July 31, 2007, at the Company's annual meeting of stockholders,  the
2007 Stock Plan was  approved.  The 2007 Stock Plan  authorized  up to 2,600,000
shares of common stock for issuance  pursuant to awards  granted to  individuals
under the plan.  During the three  month  period  ended June 30, 2008 there were
2,600,000  shares  granted to executive  employees  and  directors at a weighted
average exercise price of $0.23 per share.  Options granted to certain employees
include certain acceleration features based on Company performance as determined
by the Board of Directors each year. The estimated fair value of options granted
during the three and six months  ended June 30, 2008 was  $452,400.  Assumptions
used to value options  granted to employees were an expected  volatility of 91%,
expected term of 6.08 years, a risk-free  interest rate of  approximately  3.3%,
and an expected dividend yield of zero.  Consistent with SFAS 123(R),  the stock
based  compensation  expense for the employee  options will be  recognized  on a
time-phased  vesting  schedule  through the vesting  date of December  31, 2010,
subject to  acceleration  based upon the  performance  criteria  established for
2008. In evaluating the probable outcome of meeting performance conditions,  the
Company estimates that approximately 100% of the first tranche, or approximately
1/3 of the grants,  will be earned in 2008.  Accordingly,  the  Company  assumed
accelerated  vesting for this tranche and will recognize its fair value as stock
based compensation  during 2008. The Company will assess the probable outcome of
the performance criteria quarterly and adjust the expense accordingly.

         On July 14, 2008, at the Company's  annual meeting of  stockholders,  a
new 2008  Stock  Plan was  approved  by the  stockholders.  The 2008  Stock Plan
authorized  up to  2,500,000  shares of common  stock for  issuance  pursuant to
awards  granted to individuals  under the plan.  The Board of Directors  granted
awards of  310,000  shares  under  this plan to  employees  contingent  upon the
approval of the plan by the California Department of Corporations.

         There were 46,600 options granted to employees during the three and six
months  ended June 30, 2007 at a weighted  average  exercise  price of $1.02 per
share.  The  estimated  fair value of options  granted  during the three and six
months ended June 30, 2007 was $31,700.  Common shares of 1,500,000 and warrants


                                       14
<PAGE>


to acquire 2,100,000 shares of common stock were issued during the three and six
months ended June 30, 2007 to a non-employee in connection with a debt financing
facility  at a  weighted  average  exercise  price of $1.05  per  share  for the
warrants and $0.001 per share for the common shares issued.  The estimated total
fair value of the warrants and shares of common stock  granted  during the three
and six months ended June 30, 2007 was  $2,879,020.  The relative  fair value of
warrants and shares of common stock issued,  less financing  costs, is accounted
for as debt discount  related to the $9.5 million term note entered into in June
2007.  Assumptions  used to value  options  granted to employees  were  expected
volatility  of 69%,  expected  term of 6.1  years,  risk-free  interest  rate of
approximately 5.0%, and an expected dividend yield of zero.  Assumptions used to
value  warrants  granted  to  non-employees  were  expected  volatility  of 78%,
expected term of 5 years  (contractual  life),  risk-free interest rate of 5.0%,
and expected  dividend yield of zero. In January,  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  June  30,  2008,  the  Company  had  approximately  $558,000  of
unamortized  stock-based  compensation  expense  related  to  options  issued to
employees  and  directors,  which will be recognized  over the weighted  average
period of  approximately 6 years. As of June 30, 2007,  unamortized  stock-based
compensation  expense  related to options  issued to employees and directors was
$537,000,  which was recognized  over the weighted  average period of 2.3 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.


                                       15
<PAGE>


         The following  table  summarizes  the activity in the  Company's  share
based plans during the six months ended June 30, 2008.

                                                                       Weighted
                                                                       Average
                                                        Number of      Exercise
                                                         Shares         Price
                                                        ----------    ----------
EMPLOYEES AND DIRECTORS
Options and warrants outstanding - January 1, 2008 ..    4,673,235    $     1.46
     Granted ........................................         --            --
     Exercised ......................................         --            --
     Cancelled ......................................     (211,000)   $      .72
                                                        ----------    ----------
Options and warrants outstanding - March 31, 2008 ...    4,462,235    $     1.49
     Granted ........................................    2,600,000    $     0.23
     Exercised ......................................         --            --
     Cancelled ......................................       (5,000)   $     1.27
                                                        ----------    ----------
Options and warrants outstanding - June 30, 2008 ....    7,057,235    $     1.03
                                                        ==========    ==========

NON-EMPLOYEES
Options and warrants outstanding - January 1, 2008 ..    3,163,813    $     1.97
     Granted ........................................         --            --
     Exercised ......................................         --            --
     Cancelled ......................................         --            --
                                                        ----------    ----------
Options and warrants outstanding - March 31, 2008 ...    3,163,813    $     2.00
     Granted ........................................         --            --
     Exercised ......................................         --            --
     Redeemed .......................................   (2,100,000)         0.75
     Cancelled ......................................     (172,500)   $     5.06
                                                        ----------    ----------
Options and warrants outstanding - June 30, 2008 ....      891,313    $     4.35
                                                        ==========    ==========

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
and six months ended June 30, 2008, the Company  recognized accrued interest for


                                       16
<PAGE>


unrecognized tax benefits of approximately $3,900 and $7,800, respectively.  For
the three and six months  ended June 30,  2007 the  Company  recognized  accrued
interest for unrecognized tax benefits of approximately $4,000. At June 30, 2008
and 2007 the  Company  had  approximately  $53,775  and  $37,875,  respectively,
accrued  in  interest  and  penalties   associated  with  the  unrecognized  tax
liabilities.

NOTE 11. COMMITMENTS AND CONTINGENCIES

         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 the Company  filed suit  against  Pro-Fit  Holdings,
Limited in the U.S.  District  Court for the Central  District of  California  -
Tag-It  Pacific,  Inc. v.  Pro-Fit  Holdings,  Limited,  CV 04-2694 LGB (RCx) --
asserting various  contractual and tort claims relating to our exclusive license
and intellectual  property agreement with Pro-Fit,  seeking  declaratory relief,
injunctive relief and damages.  It is the Company's  position that the agreement
with Pro-Fit gives the Company  exclusive rights in certain  geographic areas to
Pro-Fit's  stretch  and rigid  waistband  technology.  On June 5, 2006 the Court
denied the Company's motion for partial summary judgment,  but did not find that
the  Company  breached  the  agreement  with  Pro-Fit and a trial is required to
determine  issues  concerning  the Company's  activities in Columbia and whether
other  actions by Pro-Fit  constituted  an  unwillingness  or  inability to fill
orders.  The Court  also held that  Pro-Fit  was not  "unwilling  or  unable" to
fulfill  orders by refusing  to fill  orders  with goods  produced in the United
States. The Company also filed a second civil action against Pro-Fit and related
companies  in the  California  Superior  Court  which was  removed to the United
States District Court,  Central District of California.  In April 2008,  Pro-Fit
and certain  related  companies  were placed into  administration  in the United
Kingdom.  On May 21, 2008, the joint  administrators for Pro-Fit and its related
companies filed petitions under Chapter 15 of Title 11 of the United States Code
for Pro-Fit and two related  companies in the United States Bankruptcy Court for
the Central  District of California  seeking  recognition  of the United Kingdom
administration  proceedings and related relief.  As a consequence of the chapter
15 filings by the joint  administrators,  all litigation by the Company  against
Pro-Fit has been stayed. The Company has derived a significant amount of revenue
from the sale of products  incorporating the stretch waistband technology in the
past and the Company's  business,  results of operations and financial condition
could be  materially  adversely  affected  if the  dispute  with  Pro-Fit is not
resolved in a manner  favorable  to the Company.  Additionally,  the Company has
incurred  significant  legal  fees in this  litigation,  and  unless the case is
settled or  resolved,  may continue to incur  additional  legal fees in order to
assert its rights and claims  against  Pro-Fit and any successor to those assets
of Pro-Fit that are subject to the Company's  exclusive license and intellectual
property agreement with Pro-Fit and to defend against any counterclaims.

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


                                       17
<PAGE>


         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.

NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS

         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.

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


                                       18
<PAGE>


NOTE 13. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

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

                                      Three Months Ended June 30, 2008
                          ------------------------------------------------------
                             Talon          Trim         Tekfit     Consolidated
                          -----------   -----------   -----------    -----------
Net sales .............   $11,445,062   $ 5,539,175   $    36,392    $17,020,629
Cost of goods sold ....     8,503,617     3,578,655        37,453     12,119,725
                          -----------   -----------   -----------    -----------
Gross profit (loss) ...     2,941,445     1,960,520        (1,061)     4,900,904
                          -----------   -----------    -----------
Operating expenses (not
segregated by division)                                                3,850,029
                                                                     -----------
Income from operations                                               $ 1,050,875
                                                                     ===========


                                     Three Months Ended June 30, 2007
                           -----------------------------------------------------
                              Talon         Trim          Tekfit    Consolidated
                           -----------   -----------   -----------   -----------
Net sales...............   $ 8,368,160   $ 4,940,404   $   258,417   $13,566,981
Cost of goods sold .....     6,039,210     3,223,992       221,286     9,484,488
                           -----------   -----------   -----------   -----------
Gross profit ...........     2,328,950     1,716,412        37,131     4,082,493
                           -----------   -----------   -----------
Operating expenses (not
segregated by division)                                                3,247,518
                                                                     -----------
Income from operations .                                             $   834,975
                                                                     ===========


                                         Six Months Ended June 30, 2008
                          -----------------------------------------------------
                             Talon          Trim         Tekfit    Consolidated
                          -----------   -----------   -----------   -----------
Net sales .............   $17,056,938   $ 9,905,031   $    44,149   $27,006,118
Cost of goods sold ....    13,121,221     6,179,212        46,816    19,347,249
                          -----------   -----------   -----------   -----------
Gross profit (loss) ...     3,935,717     3,725,819        (2,667)    7,658,869
                          -----------   -----------   -----------
Operating expenses (not
segregated by division)                                               7,918,228
                                                                    -----------
Loss from operations ..                                             $  (259,359)
                                                                    ===========


                                       19
<PAGE>


                                       Six Months Ended June 30, 2007
                           -----------------------------------------------------
                              Talon         Trim         Tekfit     Consolidated
                           -----------   -----------   -----------   -----------
Net sales ..............   $12,986,118   $ 9,032,859   $   638,122   $22,657,099
Cost of goods sold .....     9,509,055     5,858,137       460,219    15,827,411
                           -----------   -----------   -----------   -----------
Gross profit ...........     3,477,063     3,174,722       177,903     6,829,688
                           -----------   -----------   -----------
Operating expenses (not
segregated by division)                                                6,565,341
                                                                     -----------
Income from operations .                                             $   264,347
                                                                     ===========


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

                        Three Months Ended June 30,    Six Months Ended June 30,
                        --------------------------    --------------------------
Country / Region           2008           2007            2008          2007
                        -----------    -----------    -----------    -----------
United States ......    $ 1,187,600    $ 1,048,400    $ 1,845,100    $ 1,890,900
Hong Kong ..........      4,408,300      4,181,300      8,063,600      7,744,200
China ..............      6,009,500      5,151,700      7,925,100      6,771,300
India ..............        788,900        562,700      1,498,000      1,045,000
Bangladesh .........        593,200        325,200      1,326,800        955,500
Other ..............      4,033,100      2,297,700      6,347,500      4,250,200
                        -----------    -----------    -----------    -----------
                        $17,020,600    $13,567,000    $27,006,100    $22,657,100
                        ===========    ===========    ===========    ===========


                                                  June 30,          December 31,
                                                    2008               2007
                                                 -----------        -----------
LONG-LIVED ASSETS:
     United States .....................         $ 8,363,600        $ 8,778,400
     Hong Kong .........................             547,900            556,900
     Dominican Republic ................             503,700            558,200
     China .............................             178,700            109,800
     Other .............................              14,500             17,900
                                                 -----------        -----------
Total ..................................         $ 9,608,400        $10,021,200
                                                 ===========        ===========


                                       20
<PAGE>


NOTE 14. RELATED PARTY TRANSACTIONS

         Todd Kay, a director and  significant  shareholder  of Tarrant  Apparel
Group,  is also a significant  shareholder of the Company.  Sales to Tarrant for
both the three and six months ended June 30, 2008 were $37,550. Sales to Tarrant
for the three  months and six  months  ended June 30,  2007 were  $139,900,  and
$140,000,  respectively.  At June 30, 2008, accounts receivable included $37,550
outstanding  from Tarrant Apparel Group while at December 31, 2007 there were no
amounts due from Tarrant.

         Colin Dyne,  a director  and  stockholder  of the  Company,  is also an
executive officer,  director and significant stockholder in People's Liberation,
Inc.  During  the three and six  months  ended  June 30,  2008,  we had sales of
$177,770 and $289,250,  respectively,  to subsidiaries  of People's  Liberation,
Inc. For the three and six months  ended June 30, 2007,  we had sales of $65,600
and $349,200, respectively, to subsidiaries of People's Liberation, Inc. At June
30, 2008,  accounts  receivable  included $ 173,690  outstanding  from  People's
Liberation  subsidiaries.  At December 31, 2007, accounts receivables of $44,000
were outstanding from subsidiaries of People's Liberation, Inc.

         Due from  related  parties  at June  30,  2008 and  December  31,  2007
includes $ 649,280 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.

         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  June  30,  2008  and at  December  31,  2007  was  $85,200
respectively.

         Jonathan Burstein, a former director of the Company, purchases products
from the Company through an entity operated by his spouse. For the three and six
months  ended June 30,  2008,  sales to this  entity were $ 48,760 and $ 48,860,
respectively.  Sales to this entity for the three and six months  ended June 30,
2007 were $30,000 and $33,600,  respectively.  At June 30, 2008 and December 31,
2007, accounts receivable included $ 48,760 and $28,700,  respectively, due from
this entity.  On October 25, 2007,  Mr.  Burstein  resigned as a director of the
Company.

         Consulting fees of $73,800 and $147,200 were paid for services provided
by Mr.  Burstein for the three and six months  ended June 30,  2007.  During the
fourth  quarter of 2007 the Mr.  Burstein's  services to the Company  terminated
with his  resignation  as a director  of the  Company.  In  December,  2007,  we
recorded a onetime charge for the remainder of the consulting  contract with Mr.
Burstein in recognition of the termination of his services.  We continue to make
payments  under this  contract and  payments of $72,700 and  $145,400  were paid
under the terms of the  contract  for the three and six  months  ended  June 30,
2008, respectively.

         Consulting  fees paid to  Diversified  Investments,  a company owned by
Mark Dyne,  amounted to $37,500  and $75,000 for the three and six months  ended
June 30, 2008,  respectively.  Consulting fees paid for the three and six months
ended June 30, 2007 were $37,500 and $75,000, respectively.

         Consulting fees of $75,000 and $150,000 were paid for services provided
by Colin Dyne for the three and six months  ended June 30,  2008,  respectively.
For the three and six months ended June 30, 2007  consulting fees of $75,000 and
$125,200 were paid to Colin Dyne.

                                       21
<PAGE>


NOTE 15. SUBSEQUENT EVENTS

DISPOSITION OF ASSETS HELD FOR SALE

         As part of its 2005  restructuring  plan, on July 2, 2008,  the Company
entered  into an agreement to sell its  building  including  certain  equipment,
furnishings and fixtures,  located in North Carolina,  for $725,000. The Company
intends  to use  the  proceeds  to  retire  the  mortgage  on this  property  of
approximately  $650,000.  The carrying  value of the  property is $688,000.  The
transaction is expected to close in the fourth quarter of 2008. This transaction
will not have a significant impact on results in that quarter.

ADOPTION OF 2008 STOCK INCENTIVE PLAN

On  July  14,  2008,  at the  Company's  annual  meeting  of  stockholders,  the
stockholders  approved  the 2008  Stock  Plan.  Under the 2008 Stock  Plan,  the
Company may grant  equity-based  awards in the form of stock,  stock options and
stock purchase awards to employees, directors and consultants of the Company and
its  subsidiaries.  The maximum  number of shares  available for grant under the
plan is 2,500,000  shares of common stock. The plan is administered by the Board
of Directors or committees of the Board.


                                       22
<PAGE>


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

FORWARD LOOKING STATEMENTS

         This  report  and  other  documents  we file  with the  Securities  and
Exchange Commission contain forward looking statements that are based on current
expectations,   estimates,  forecasts  and  projections  about  us,  our  future
performance,  our  business  or  others  on our  behalf,  our  beliefs  and  our
management's  assumptions.   These  statements  are  not  guarantees  of  future
performance and involve certain risks,  uncertainties,  and assumptions that are
difficult  to predict.  We describe our  respective  risks,  uncertainties,  and
assumptions  that could affect the outcome or results of  operations  below.  We
have based our  forward  looking  statements  on our  management's  beliefs  and
assumptions  based on  information  available to our  management at the time the
statements are made. We caution you that actual  outcomes and results may differ
materially from what is expressed,  implied,  or forecast by our forward looking
statements.  Reference  is made in  particular  to  forward  looking  statements
regarding projections or estimates concerning our business, including demand for
our products and services,  mix of revenue  streams,  ability to control  and/or
reduce operating expenses, anticipated gross margins and operating results, cost
savings,  product  development  efforts,  general  outlook of our  business  and
industry, international businesses,  competitive position, adequate liquidity to
fund our operations and meet our other cash requirements.

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 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.  Prior to 2007 these products were produced by several
manufacturers  for one  single  brand  and we  derived a  significant  amount of
revenue  and  earnings  from  the sale of  products  incorporating  the  stretch
waistband  technology.  In October 2006 our exclusive  supply contract with this
brand expired and we initiated  efforts to offer this product to other customers
in 2007 and 2008. Our sales and marketing  efforts have produced limited results
in part due to a licensing dispute. As described more fully in this report under
Commitments  and  Contingencies  (see  Note  11 to  the  Unaudited  Consolidated
Financial  Statements),  we are  presently in litigation  with Pro-Fit  Holdings
Limited regarding our exclusively licensed rights to sell or sublicense stretch


                                       23
<PAGE>


waistbands  manufactured  under Pro-Fit's  patented  technology.  Our success in
selling  this  product to other  customers  could be  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     SIX MONTHS ENDED
                                           JUNE 30,             JUNE 30,
                                     -------------------   -------------------
                                       2008       2007       2008       2007
                                     --------   --------   --------   --------
Net sales ..........................    100.0%     100.0%     100.0%     100.0%
Cost of goods sold .................     71.2       70.4       71.6       70.3
                                     --------   --------   --------   --------
Gross profit .......................     28.8       29.6       28.4       29.7
Selling expenses ...................      4.5        6.2        5.7        6.8
General and administrative expenses      15.7       17.3       18.2       21.7
Interest & taxes ...................      3.8        2.5        4.4        2.5
                                     --------   --------   --------   --------
Net income (loss) ..................      4.8%       3.6%       0.1%      (1.3)%
                                     ========   ========   ========   ========

         SALES

         For the three and six  months  ended June 30,  2008 and 2007,  sales by
geographic region based on the location of the customer as a percentage of sales
were as follows:

                                   THREE MONTHS ENDED       SIX MONTHS ENDED
                                         JUNE 30,                 JUNE 30,
                                   --------------------    --------------------
         REGION                      2008        2007        2008        2007
                                   --------    --------    --------    --------
United States ..................        7.0%        7.7%        6.8%        8.3%
Hong Kong ......................       25.9%       30.8%       29.9%       34.2%
China ..........................       35.3%       38.0%       29.4%       29.9%
India ..........................        4.6%        4.1%        5.5%        4.6%
Bangladesh .....................        3.5%        2.4%        4.9%        4.2%
Other ..........................       23.7%       17.0%       23.5%       18.8%
                                   --------    --------    --------    --------
                                      100.0%      100.0%      100.0%      100.0%
                                   ========    ========    ========    ========

         Sales for the three  months  ended June 30, 2008 were $17.0  million or
$3.5  million  (25.4%)  greater  than  sales for the same  period  in 2007.  The
increased  sales were  principally  attributable to higher sales of Talon zipper
products ($3.0 million), in particular to customers  manufacturing  garments for
one brand with whom we obtained  nomination as their principal  supplier in late
2007. Increased sales of Trim products ($0.6 million) resulting from new program
awards from existing and new customers also contributed to the increase,  offset
by lower Tekfit product sales.

         Sales for the six months ended June 30, 2008 were $27.0 million or $4.4
million  (19.2%)  greater  than  sales for the same  period  in 2007.  The sales
increase  reflects  improved  Talon  zipper  sales ($4.1  million or 23.8%) as a
result of new brand  nominations and sales within Southeast Asia,  together with
new and increased  program  sales in the Trim  division  ($0.8 million or 9.7%),
partially  offset by a decline in sales of Tekfit  products  resulting  from the
termination of an exclusive contract for this product.


                                       24
<PAGE>


         GROSS PROFIT

         Gross profit for the three months ended June 30, 2008 was $4.9 million,
as compared to $4.1  million for the same period in 2007.  Gross  profit for the
six months ended June 30, 2008 was $7.7 million, as compared to $6.8 million for
the same  period in 2007.  The  increase  in gross  profit for the three and six
months  ended  June  30,  2008 as  compared  to the  same  periods  in 2007  was
principally  attributable to higher overall sales volumes,  partially  offset by
higher manufacturing costs, increased freight and delivery charges, and customer
accommodations for delayed deliveries.

         A recap of the  change in gross  margin  for the  three and six  months
ended June 30, 2008 as compared with the same periods in 2007 is as follows:

<TABLE>
<CAPTION>
                                                              (Amounts in thousands)
                                                    Three Months Ended        Six Months Ended
                                                         June 30,                June 30,
                                                   --------------------    --------------------
                                                    Amount        %(1)      Amount        %(1)
                                                   --------    --------    --------    --------
<S>                                                <C>             <C>     <C>             <C>
Gross profit increase (decrease) as a result of:
Higher volumes .................................   $  1,144        28.0    $  1,465        21.4
Product margin mix .............................       (188)       (4.6)       (412)       (6.0)
Increased freight and duty costs ...............        (59)       (1.5)        (95)       (1.4)
Increased manufacturing costs ..................        (98)       (2.4)       (176)       (2.6)
Increased (decreased) inventory costs ..........         (5)       (0.1)         32         0.5
Overhead and burden charges ....................         24         0.6          15         0.2
                                                   --------    --------    --------    --------
Gross profit increase (decrease) ...............   $    818        20.0    $    829        12.1
                                                   ========    ========    ========    ========
</TABLE>

(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  June  30,  2008  were
$768,000,  or 4.5% of sales, as compared to $841,000,  or 6.2% of sales, for the
same  period in 2007.  Selling  costs for the  quarter  ended June 30, 2008 were
slightly less than the costs incurred in the same period in 2007 and declined as
a percentage of sales mainly due to the increase in sales volume.  Selling costs
reflected an increase in salaries and benefits ($15,000);  increased  production
supplies and samples  ($37,000);  and  increased  facilities  expense  ($27,000)
primarily  associated  with expanded sales efforts and the higher sales volumes.
The cost increases were offset by cost  reductions in marketing and  advertising
($33,000);  lower bad debt provisions ($47,000);  lower travel and communication
costs ($59,000); and other selling cost reductions ($14,000).

         Selling expense for the six months ended June 30, 2008 were $1,488,000,
or 5.5% of sales,  as compared  to  $1,548,000,  or 6.8% of sales,  for the same
period in 2007.  Selling  costs  reflected  an increase in salaries and benefits
($94,000);  increased  production supplies and samples ($37,000);  and increased
facilities  expense ($40,000)  primarily  associated with expanded sales efforts
and the higher sales volumes.  The cost increases were offset by cost reductions
in marketing and advertising  ($128,000);  lower bad debt provisions  ($48,000);
lower  travel  and  communication  costs  ($25,000);   and  other  selling  cost
reductions ($30,000).

         GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative  expense for the three months ended June 30,
2008 were $3,082,000,  or 18.1% of sales, as compared with $2,406,000,  or 17.7%
of sales, for the same period in 2007. The increase in


                                       25
<PAGE>


general and  administrative  expenses reflects higher salaries and benefit costs
($242,000)  principally associated with increased staffing in Asia in support of
the higher  sales;  and higher  sampling  costs  ($67,000)  associated  with new
programs and  developments.  Increased  facilities and insurance costs ($75,000)
resulting  from new offices and higher  rates;  higher  professional,  legal and
audit  costs  ($168,000)  resulting  from  increased  audits,  SEC  filings  and
modifications  to our debt facility;  and higher  depreciation  and  stock-based
compensation  charges  ($138,000);  net of other cost reductions  ($14,000) also
contributed to the increase in general and  administrative  costs for the period
as compared to the same period in 2007.

         For the six months  ended June 30,  2008,  general  and  administrative
expenses were  $6,430,000,  or 23.8% of sales, as compared with  $5,018,000,  or
22.2% of sales,  for the same period in 2007.  The  general  and  administrative
expenses in 2008 include  $724,000 in one-time  compensation  and related  costs
mainly  associated with the severance of the former chief executive  officer and
chief operating officer.  General and administrative expenses for the six months
ended June 30, 2008, were 21.1% of sales before these charges as compared to the
same period in 2007. The increase in the general and administrative expenses, in
addition to the severance  charges,  reflects  higher salaries and benefit costs
($295,000)  principally associated with increased staffing in Asia in support of
the higher sales;  higher sampling costs ($69,000)  associated with new programs
and developments;  increased  facility and insurance costs ($133,000) due to new
offices and higher rates;  higher depreciation  charges  ($108,000);  and higher
stock based  compensation  charges ($92,000)  associated with new option grants,
net of other cost reductions ($8,000).

         INTEREST EXPENSE AND INTEREST INCOME

         Interest  expense for the three months ended June 30, 2008 increased by
approximately  $334,000  to  $643,130  as  compared  to the same period in 2007.
Interest   expense  for  the  six  months  ended  June  30,  2008  increased  by
approximately  $702,070 to  $1,192,644,  as compared to the same period in 2007.
The increased  interest expense is due partly to increased  borrowings under the
Bluefin term notes and revolver debt facility which carry interest rates of 8.5%
and prime (5.0% at June 30, 2008) +2%, respectively as compared to a 6% interest
rate on the  promissory  notes  outstanding in 2007 (See Note 8 to the unaudited
consolidated financial statements).  The principal increase in interest costs is
attributable to the amortization of deferred  financing costs and debt discounts
associated  with the fair value of equity  components  issued in connection with
the debt facility.

         Interest  income for the three months ended June 30, 2008  decreased by
approximately  $79,000 to $15,482 due  primarily to the  reduction of the Azteca
note receivable.

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

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED             SIX MONTHS ENDED
                                                     JUNE 30,                     JUNE 30,
                                           --------------------------    --------------------------
                                              2008           2007           2008           2007
                                           -----------    -----------    -----------    -----------
<S>                                        <C>            <C>            <C>            <C>
Cash interest expense ..................   $   351,026    $   272,731    $   671,906    $   513,414
Amortization of deferred financing costs
  & debt discounts .....................       307,586         87,550        553,658        163,593
                                           -----------    -----------    -----------    -----------
Interest expense .......................       658,612        360,281      1,225,564        677,007
Interest income ........................       (15,482)       (94,423)       (32,920)      (186,433)
                                           -----------    -----------    -----------    -----------
Interest expense, net ..................   $   643,130    $   265,858    $ 1,192,644    $   490,574
                                           ===========    ===========    ===========    ===========
</TABLE>


                                       26
<PAGE>


         INCOME TAXES

         Income tax  provisions for the three and six months ended June 30, 2008
reflected a tax  benefit of  $190,412  and  $211,416,  respectively.  Income tax
expense for the three and six months  ended June 30, 2007 was  $78,624.  The net
tax benefit in 2008 and expense in 2007 is associated  with foreign income taxes
from  taxable  losses and  earnings  within our Asian  facilities.  Due to prior
operating losses incurred no benefit for domestic income taxes has been recorded
since  there is not  sufficient  evidence to  determine  that we will be able to
utilize our net operating loss carryforwards to offset future taxable income.

LIQUIDITY AND CAPITAL RESOURCES

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

                                                    June 30,       December 31,
                                                      2008             2007
                                                   -----------     ------------
Cash and cash equivalents ......................   $      3,741    $      2,919
Total assets ...................................         25,272          21,684
Current liabilities ............................         15,008          10,457
Long-term debt, less current liabilities .......         12,473          11,944
Stockholders' equity (deficit) .................         (2,209)           (717)

         CASH AND CASH EQUIVALENTS

         Cash and cash  equivalents  increased  by  $822,000 at June 30, 2008 as
  compared to December 31, 2007,  principally due to cash generated by operating
  activities  and lower cash used in financing  activities,  net of increases in
  capital expenditures.

         Cash provided by operating  activities is our primary  recurring source
of funds,  and was  approximately  $1,191,000  for the six months ended June 30,
2008. The cash provided by (used in) operating  activities during the six months
resulted principally from:

Net income before non-cash expenses .........................       $   147,500
Inventory increase, net of reserves .........................          (186,200)
Receivable increases, net of reserves .......................        (3,596,900)
Increase in accounts payable and accrued expense ............         5,179,900
Other increases in operating capital ........................          (353,300)
                                                                    -----------
                                                                    $ 1,191,000
                                                                    ===========

         The cash  provided by  operating  activities  reflects  net income from
operations  excluding  non-cash  charges  of  approximately  $148,000,  but  the
increase in cash provided by operations  principally results from changes in our
operating  capital.  Increases in  receivables  are the result of  substantially
higher sales in the second quarter and the change in outstanding  receivables at
June 30, 2008, the end of our peak sales season,  as compared to our receivables
at  December  31,  2007,  seasonally  one of our lower sales  periods.  Accounts
payable increases reflect similar seasonal  fluctuations as well as the increase
in our  business  volume in 2008 as compared  with 2007.  Accounts  payable also
reflects the benefits of longer negotiated terms with suppliers.

         Net cash used in investing activities for the six months ended June 30,
2008 was  $121,000 as compared  to  $515,000  for the six months  ended June 30,
2007. These  expenditures were principally  associated with the development of a
new ERP  system.  In the  first six  months of 2007 net cash used for  investing
activities represents capital expenditures principally associated with leasehold
improvements in new facilities, office equipment for new employees, improvements
in our technology systems and a marketing website acquisition.


                                       27
<PAGE>


         Net cash used in financing activities for the six months ended June 30,
2008  was  approximately  $252,000  and  primarily  reflects  the  repayment  of
borrowings  under capital leases and notes payable,  net of borrowings under our
revolver  line of  credit.  For the six months  ended June 30,  2007 net cash of
$9,246,000 was generated from  financing  activities and primarily  reflects the
proceeds  provided by the issuance of common  stock and warrants of  $10,507,000
(net of issuance costs) and borrowings under the debt facility for the repayment
of our borrowings under the convertible  promissory notes, a related party note,
capital leases and notes payable, net of collections under our note receivable.

         On June 27,  2007,  we entered  into a  Revolving  Credit and Term Loan
Agreement with Bluefin Capital, LLC ("Bluefin") 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,  as amended,
permits   borrowings  based  upon  a  formula  including  85%  of  our  eligible
receivables  and 55% of eligible  inventory,  and provides for monthly  interest
payments  at the prime  rate (5.0% at June 30,  2008)  plus 2.0%.  The term loan
bears interest at 8.5% annually with quarterly  interest  payments and repayment
in full at maturity.  Borrowings under both credit facilities are secured by all
our assets.  There was $839,300 and $879,000 in available borrowings at June 30,
2008 and December 31, 2007, respectively.

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

         Under the terms of the credit agreement we are required to meet certain
coverage ratios, among other restrictions including a restriction from declaring
or paying a dividend  prior to repayment of all the  obligations.  The financial
covenants,  as  amended,  require  that we to maintain at the end of each fiscal
quarter  "EBITDA" (as defined in the  Agreement)  in excess of our principal and
interest  payments for the same period of not less than $1.00,  and in excess of
ratios set out in the agreement  for each quarter.  In the event that we fail to
satisfy the minimum EBITDA  requirement for a quarter, a waiver fee of 1% of the
debt commitment may be paid and the requirement  delayed to the next quarter. If
two  consecutive  quarters  fail to meet  the  minimum  EBITDA  the  waiver  fee
increases to 2%. If three  consecutive  quarters fail to meet the minimum EBITDA
the credit  agreement  would be in default  and the lender may demand  immediate
payment of the full amount of the notes outstanding.

         On  November  19, 2007 we entered  into an  amendment  with  Bluefin to
modify the original  financial  covenants  and to extend until June 30, 2008 the
application of the original  EBITDA  covenant in exchange for additional  common
stock of the Company and a price adjustment to the lenders outstanding  warrants
issued in connection with the loan agreement.  In connection with this amendment
we issued an additional  250,000 shares of common stock to the lender for $0.001
per  share.  The  exercise  price  for all of the  previously  issued  2,100,000
warrants for the purchase of common stock was amended to $0.75 per share.

         On  April  3,  2008 we  executed  an  amendment  to the  existing  loan
agreement  with  Bluefin.  The  amendment  included a  redefining  of the EBITDA
covenants,  the  surrender of the common  stock  warrants  previously  issued to
Bluefin in exchange  for the  issuance by us, of an  additional  note payable to
Bluefin for $1.0 million.  The note bears interest at 8.5% and both the note and
accrued  interest  are payable at maturity on June 30, 2010.  In  addition,  our
borrowing  base was  modified in this  amendment  by  increasing  the  allowable
portion of  inventory  held by third party  vendors to $1.0 million with no more
than $500,000 held at any one vendor and  increasing  the percentage of accounts
receivable  to be  included  in the  borrowing  base to 85%.  We paid a one-time
modification  fee of $145,000 to secure the  amendment of the  agreement.  As of
June 30, 2008, we had outstanding borrowings of $10,375,000 under the term notes
(discounted  carrying value of $7,441,700),  and $4,161,000  under the revolving
credit note.


                                       28
<PAGE>


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

         We  have  historically   satisfied  our  working  capital  requirements
primarily  through cash flows generated from operations 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.


                                       29
<PAGE>


CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our contractual  obligations at June 30, 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)    $   216,600   $   216,600   $      --     $      --     $      --
Capital lease obligations   $   357,300   $   306,000   $    51,300   $      --     $      --
Operating leases ........   $   961,000   $   529,200   $   431,800   $      --     $      --
Notes payable ...........   $16,881,900   $ 1,173,100   $15,708,800   $      --     $      --
Convertible notes payable   $ 1,140,300   $   321,000   $   819,300   $      --     $      --
                            -----------   -----------   -----------   -----------   -----------
     Total Obligations ..   $19,557,100   $ 2,545,900   $17,011,200   $      --     $      --
                            ===========   ===========   ===========   ===========   ===========
</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 June 30, 2008.

         At June 30,  2008 and  2007,  we did not  have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

RELATED PARTY TRANSACTIONS

         See Note 14 of accompanying notes to consolidated  financial statements
for a discussion of related party transactions.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         The  preparation of financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions for the reporting  period and as of
the financial statement date. We base our estimates on historical experience and
on various  other  assumptions  that are  believed  to be  reasonable  under the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  These estimates and assumptions  affect the reported  amounts of
assets  and  liabilities,  the  disclosure  of  contingent  liabilities  and the
reported amounts of revenue and expense.  Actual results could differ from those
estimates.

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

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


                                       30
<PAGE>


                  June 30, 2008,  bad debt recovery was $4,021 (with  provisions
                  of $91,000), compared to net bad debt expense of $52,500 (with
                  provisions  of  $55,600)  for the same  period  ended June 30,
                  2007.  For the six  months  ended  June  30,  2008,  bad  debt
                  recovery was $5,326 (with provisions of $91,000),  compared to
                  net bad debt expense of $42,100  (with  recoveries  of $19,500
                  and provisions of $64,800) for the same period in 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 and six months  ended June
                  30, 2008 were  $677,336 and  $678,655,  respectively.  For the
                  three and six  months  ended  June 30,  2007,  provisions  for
                  reserve for inventory valuation were $120,700.

         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.  In
                  accordance  with SFAS 144,  ACCOUNTING  FOR THE  IMPAIRMENT OR
                  DISPOSAL  OF  LONG-LIVED  ASSETS,  impairment  is  measured by
                  assessing  the  usefulness  of an  asset or by  comparing  the
                  carrying  value of an asset to its fair  value.  Fair value is
                  typically determined using quoted market prices, if available,
                  or an estimate of  undiscounted  future cash flows expected to
                  result from the use of the asset and its eventual disposition.
                  The amount of  impairment  loss is calculated as the excess of
                  the  carrying  value  over the fair  value.  Changes in market
                  conditions and management strategy have historically caused us
                  to reassess  the  carrying  amount of our  long-lived  assets.
                  Long-lived  assets were  evaluated  during the second  quarter
                  2008 and it was  determined  that the fair value was in excess
                  of  the  carrying   value  and   accordingly,   no  impairment
                  adjustments were made.


                                       31
<PAGE>


         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        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 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.

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

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.


                                       32
<PAGE>


         As of the end of the period  covered by this report,  management,  with
the  participation of Lonnie D. Schnell,  our Chief Executive  Officer and Chief
Financial Officer,  carried out an evaluation of the effectiveness of the design
and  operation of our  disclosure  controls and  procedures  (as defined in Rule
13a-15(e)  under the Exchange  Act).  Based upon that  evaluation,  Mr.  Schnell
concluded that these disclosure controls and procedures were effective as of the
end of the period covered in this Quarterly Report on Form 10-Q.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         During the  quarter  ended  June 30,  2008 there were no changes in our
internal controls over financial  reporting that have materially affected or are
reasonably  likely to materially  affect our internal  controls  over  financial
reporting.


                                       33
<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
exclusive  rights in certain  geographic  areas to  Pro-Fit's  stretch and rigid
waistband  technology.  On June 5, 2006 the Court  denied our motion for partial
summary  judgment,  but did not find that we breached the agreement with Pro-Fit
and a trial is required to determine  issues  concerning  the our  activities in
Columbia and whether other actions by Pro-Fit  constituted an  unwillingness  or
inability to fill orders. The Court also held that Pro-Fit was not "unwilling or
unable" to fulfill  orders by refusing to fill orders with goods produced in the
United States.  We also filed a second civil action against  Pro-Fit and related
companies  in the  California  Superior  Court  which was  removed to the United
States District Court,  Central District of California.  In April 2008,  Pro-Fit
and certain  related  companies  were placed into  administration  in the United
Kingdom.  On May 21, 2008, the joint  administrators for Pro-Fit and its related
companies filed petitions under Chapter 15 of Title 11 of the United States Code
for Pro-Fit and two related  companies in the United States Bankruptcy Court for
the Central  District of California  seeking  recognition  of the United Kingdom
administration  proceedings and related relief.  As a consequence of the chapter
15 filings by the joint administrators, all litigation by us against Pro-Fit has
been stayed.  We have derived a  significant  amount of revenue from the sale of
products  incorporating  the stretch  waistband  technology  in the past and our
business,  results of  operations  and financial  condition  could be materially
adversely  affected  if the  dispute  with  Pro-Fit is not  resolved in a manner
favorable to us.  Additionally,  we have incurred significant legal fees in this
litigation,  and unless the case is settled or  resolved,  may continue to incur
additional  legal fees in order to assert its rights and claims against  Pro-Fit
and any  successor to those assets of Pro-Fit that are subject to our  exclusive
license and intellectual  property  agreement with Pro-Fit and to defend against
any counterclaims.

         We  currently  have  pending  a  number  of  other  claims,  suits  and
complaints  that arise in the ordinary  course of  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.


                                       34
<PAGE>


ITEM 1A. RISK FACTORS

Risk factors are  included in Item 1A of our Annual  Report on Form 10-K for the
fiscal year ended  December 31, 2007.  No material  changes to such risk factors
has occurred during the six months ended June 30, 2008.

ITEM 6.  EXHIBITS

         10.18+   Executive Employment  Agreement,  dated June 18, 2008, between
                  the Registrant and Lonnie  Schnell.  Incorporated by reference
                  to Exhibit  10.1 to  Current  Report on Form 8-K filed on June
                  24, 2008.

         10.27+   Executive Employment  Agreement,  dated June 18, 2008, between
                  the  Registrant and Larry Dyne.  Incorporated  by reference to
                  Exhibit  10.1 to Current  Report on Form 8-K filed on June 24,
                  2008.

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

         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.
------------------
+        Indicates a management contract or compensatory plan


                                       35
<PAGE>


                                   SIGNATURES

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


Dated:   August 19, 2008               TALON INTERNATIONAL, INC.

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


                                       36