Edgar Filing: TALON INTERNATIONAL, INC.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q

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

For the quarterly period ended March 31, 2008.

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

Commission file number 1-13669

TALON INTERNATIONAL, INC.
(Exact Name of Issuer as Specified in its Charter)

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

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

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

Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days.

Yes [X] No [ ]

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

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

Smaller reporting company [X]

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

AT MAY 14, 2008 THE ISSUER HAD 20,291,433 SHARES OF COMMON STOCK, $.001
PAR VALUE, ISSUED AND OUTSTANDING.

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TALON INTERNATIONAL, INC.
INDEX TO FORM 10-Q

PART I FINANCIAL INFORMATION

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

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

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

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

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

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

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

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

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

PART II OTHER INFORMATION

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

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

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

TALON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

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

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

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

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

Commitments and contingencies (Note 11)

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

See accompanying notes to condensed consolidated financial statements.

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

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

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

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

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

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

Interest expense, net ...................... 549,514 181,682
------------ ------------
Loss before income taxes ................... (1,859,748) (795,344)
Provision (benefit) for income taxes ....... (21,004) --
------------ ------------
Net loss ................................... $ (1,838,744) $ (795,344)
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Basic loss per share ....................... $ (0.09) $ (0.04)
============ ============
Diluted loss per share ..................... $ (0.09) $ (0.04)
============ ============

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

See accompanying notes to condensed consolidated financial statements.

TALON INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)

Preferred Stock
Common Stock Series A
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------

BALANCE, JANUARY 1, 2008 ......... 20,291,433 $ 20,291 -- $ --

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

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

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

Accumulated
Additional Other Total
Paid-In Accumulated Comprehensive Stockholders'
Capital (Deficit) Income Equity
------------ ------------ ------------ ------------

BALANCE, JANUARY 1, 2008 ......... $ 54,510,161 $(55,292,246) $ 44,444 $ (717,350)

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

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

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

See accompanying notes to condensed consolidated financial statements.

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

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

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

Cash flows from investing activities:
Acquisition of property and equipment ..................... (97,992) (356,195)
------------ ------------
Net cash used by investing activities ..................... (97,992) (356,195)
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Cash flows from financing activities:
Collection of notes receivable ............................ -- 331,656
Proceeds from exercise of stock options ................... -- 42,750
Proceeds from revolver .................................... 700,000 --
Repayment of term note .................................... (125,000) --
Repayment of capital leases ............................... (104,724) (105,756)
Repayment of notes payable ................................ (72,954) (420,758)
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Net cash provided by (used by) financing activities ....... 397,322 (152,108)
------------ ------------

Net increase (decrease) in cash ............................... (1,155,459) 337,424
Net effect of foreign currency exchange translation on cash ... 11,420 --
Cash at beginning of period ................................... 2,918,858 2,934,673
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Cash at end of period ......................................... $ 1,774,819 $ 3,272,097
============ ============

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

See accompanying notes to condensed consolidated financial statements.

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

NOTE 1. PRESENTATION OF INTERIM INFORMATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The accompanying unaudited consolidated financial statements reflect
all adjustments that, in the opinion of the management of Talon International,
Inc. and its consolidated subsidiaries (collectively, the "Company"), are
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of the Company included in the Company's Form 10-K for the
year ended December 31, 2007. The balance sheet as of December 31, 2007 has been
derived from the audited financial statements as of that date but omits certain
information and footnotes required for complete financial statements. On July
27, 2007, the Company changed its name from Tag-It Pacific, Inc. to Talon
International, Inc.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A complete description of the Company's Significant Accounting Policies
is included in the Company's Annual Report on Form 10-K (and amendments thereto)
for the year ended December 31, 2007, and should be read in conjunction with
these unaudited condensed consolidated financial statements. The Significant
Accounting Policies noted below are only those policies that have changed
materially or have supplemental information included for the periods presented
here.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

INTANGIBLE ASSETS

Intangible assets consist of our trade name and exclusive license and
intellectual property rights. Intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead are tested for impairment at least annually in accordance with the
provisions of Financial Accounting Standards Board ("FASB") Statement No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. Intangible assets with estimable useful
lives are amortized over their respective estimated useful lives, which average
5 years, and reviewed for impairment in accordance with the provisions of FASB
Statement No. 144, ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.
Amortization expense for these assets for the three months ended March 31, 2008
and 2007 was $0 and $30,600, respectively.

CLASSIFICATION OF EXPENSES

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

SELLING EXPENSES - Selling expenses primarily include royalty expense,
sales salaries and commissions, travel and entertainment, marketing and other
sales related costs. Marketing and advertising efforts are expensed as incurred
and for the three months ended March 31, 2008 and 2007 were $42,100 and
$178,400, respectively.

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

INTEREST EXPENSE, NET - Interest expense reflects the cost of borrowing
and amortization of deferred financing costs and discounts. Interest expense for
the three months ended March 31, 2008 and 2007 totaled $567,000 and $316,700,
respectively. Interest income consists of earnings from outstanding amounts due
to the Company under notes and other interest bearing receivables. For the three
months ended March 31, 2008 and 2007, the Company recorded interest income of
$17,400 and $92,000 respectively.

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

SHIPPING AND HANDLING COSTS

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

FOREIGN CURRENCY TRANSLATION

The Company has operations and holds assets in various foreign
countries. The local currency is the functional currency for our subsidiaries in
China and India. Assets and liabilities are translated at end-of-period exchange
rates while revenues and expenses are translated at the average exchange rates
in effect during the period. Equity is translated at historical rates and the
resulting cumulative translation adjustments are included as a component of
accumulated other comprehensive income (loss) until the translation adjustments
are realized. Included in other accumulated comprehensive (loss) income was a
cumulative foreign currency translation adjustment gain of $11,400 at March 31,
2008 and of $44,400 at December 31, 2007.

COMPREHENSIVE INCOME

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

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

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

The available-for-sale securities adjustment represents unrealized
losses due to temporary market declines related to our marketable securities
that were received in exchange for the Azteca note receivable discussed in Note
5. These marketable securities are classified as available-for-sale securities.
The foreign currency translation adjustment represents the net currency
translation adjustment gains and losses related to our China and India
subsidiaries, which have not been reflected in net income for the periods
presented. The foreign translation adjustment for the three months ended March
31, 2007 was insignificant as we commenced our foreign operations in early 2007.

RECLASSIFICATIONS

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

NOTE 3. LOSS PER SHARE

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

THREE MONTHS ENDED MARCH 31, 2008: LOSS SHARES PER SHARE
------------------------------------------ ----------- ----------- -----------

Basic loss per share:
Loss available to common stockholders .... $(1,838,744) 20,291,433 $ (0.09)

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

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

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

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

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

NOTE 4. MARKETABLE SECURITIES

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

NOTE 5. ACCOUNTS AND NOTE RECEIVABLE

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

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

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

NOTE 6. INVENTORIES

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

Inventories consist of the following:

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

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

NOTE 7. FIXED ASSETS

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

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

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

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

NOTE 8. DEBT FACILITY

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

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

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

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

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

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

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

NOTE 9. STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees and directors
in accordance with Statement of Financial Accounting Standards No. 123 revised,
Share-Based Payment ("SFAS 123(R)"), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors based on estimated fair values. Options issued to
consultants are accounted for in accordance with the provisions of EITF No.
96-18, "Accounting for Equity Instruments that are Issued to Others than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".

On July 31, 2007, at the Company's annual meeting of stockholders, the
2007 Stock Plan was approved which replaced the 1997 Stock Plan. The 2007 Stock
Plan authorizes up to 2,600,000 shares of common stock for issuance pursuant to
awards granted to individuals under the plan. There were no options granted to
employees during the three months ended March 31, 2008.

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

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

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

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

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

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

NOTE 10. INCOME TAXES

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

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

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

NOTE 11. CONTINGENCIES AND GUARANTEES

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

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

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

In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statements No. 5, 57 and 107
and rescission of FIN 34." The following is a summary of the Company's
agreements that it has determined are within the scope of FIN 45:

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

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

NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

NOTE 13. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

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

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

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

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

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

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

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

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

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

NOTE 14. SUBSEQUENT EVENT

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

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

FORWARD LOOKING STATEMENTS

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

OVERVIEW

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

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

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

Our Trim business focus is as an outsourced product development,
sourcing and sampling department for the most demanding brands and retailers. We
believe that trim design differentiation among brands and retailers has become a
critical marketing tool for our customers. By assisting our customers in the
development, design and sourcing of trim, we expect to achieve higher margins
for our trim products, create long-term relationships with our customers, grow
our sales to a particular customer by supplying trim for a larger proportion of
their brands, and better differentiate our trim sales and services from those of
our competitors.

Our Tekfit services provide manufacturers with the patented technology,
manufacturing know-how and materials required to produce garments incorporating
an expandable waistband. These products were previously produced by several
manufacturers for one single brand. In October 2006 our exclusive supply
contract with this brand expired. Our efforts to expand this product offering to
other customers have been limited by a licensing dispute. As described more
fully in this report under Contingencies and Guarantees (see Note 11 to our
Unaudited Condensed Consolidated Financial Statements), we are presently in
litigation with Pro-Fit Holdings Limited regarding our exclusively licensed
rights to sell or sublicense stretch waistbands manufactured under Pro-Fit's
patented technology. Our growth prospects, results of operations and financial

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

RESULTS OF OPERATIONS

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

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

SALES

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

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

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

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

GROSS PROFIT

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

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

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

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

SELLING EXPENSES

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

GENERAL AND ADMINISTRATIVE EXPENSES

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

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

INTEREST EXPENSE AND INTEREST INCOME

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

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

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

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

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

INCOME TAXES

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

CASH AND CASH EQUIVALENTS

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

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

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

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

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

On June 27, 2007, we entered into a Revolving Credit and Term Loan
Agreement with Bluefin Capital, LLC that provides for a $5.0 million revolving
credit loan and a $9.5 million term loan for a three year period ending June 30,
2010. During the period covered by this report, the revolving credit portion of
the facility permited borrowings based upon a formula including 75% of our
eligible receivables and 55% of eligible inventory, and provides for monthly
interest payments at the prime rate plus 2.0%. The term loan bears interest at
8.5% annually with quarterly interest payments and repayment in full at
maturity. Borrowings under both credit facilities are secured by all of our
assets. There was $492,000 and $879,000 in available borrowings at March 31,
2008 and December 31, 2007, respectively.

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

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

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

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

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

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

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

Payments Due by Period
-------------------------------------------------------------------
Less than 1-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
------------------------- ----------- ----------- ----------- ----------- -----------

Demand notes payable to
related parties (1) ... $ 214,900 $ 214,900 $ -- $ -- $ --
Capital lease obligations $ 443,700 $ 315,700 $ 128,000 $ -- $ --
Operating leases ........ $ 1,192,700 $ 554,200 $ 638,500 $ -- $ --
Revolver and term note .. $16,560,000 $ 1,134,300 $15,425,700 $ -- $ --
Other notes payable ..... $ 1,231,800 $ 343,500 $ 888,300 $ -- $ --
----------- ----------- ----------- ----------- -----------
Total Obligations .. $19,643,100 $ 2,562,600 $17,080,500 $ -- $ --
=========== =========== =========== =========== ===========

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

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

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

RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

o We record deferred tax assets arising from temporary timing
differences between recorded net income and taxable net income
when and if we believe that future earnings will be sufficient
to realize the tax benefit. For those jurisdictions where the
expiration date of tax benefit carry-forwards or the projected
taxable earnings indicate that realization is not likely, a
valuation allowance is provided. If we determine that we may
not realize all of our deferred tax assets in the future, we
will make an adjustment to the carrying value of the deferred
tax asset, which would be reflected as an income tax expense.
Conversely, if we determine that we will realize a deferred
tax asset, which currently has a valuation allowance, we would
be required to reverse the valuation allowance, which would be
reflected as an income tax benefit. We believe that our
estimate of deferred tax assets and determination to record a
valuation allowance against such assets are critical
accounting estimates because they are subject to, among other
things, an estimate of future taxable income, which is
susceptible to change and dependent upon events that may or
may not occur, and because the impact of recording a valuation
allowance may be material to the assets reported on the
balance sheet and results of operations.

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

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

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

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

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

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

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

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

ITEM 1A. RISK FACTORS

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

ITEM 6. EXHIBITS

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

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

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

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

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

SIGNATURES

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

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