Edgar Filing: TALON INTERNATIONAL, INC.

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

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008

[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission file number 1-13669

TALON INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

21900 BURBANK BLVD., SUITE 270
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Executive Offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.001 PAR VALUE

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

Yes [_] No [X]

Indicate by check mark if the registration is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.

Yes [_] No [X]

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

Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]

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

Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [_]
Smaller reporting company [X]

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

At June 30, 2008, the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was $4,261,204.

At April 9, 2009 the issuer had 20,291,433 shares of Common Stock, $.001 par
value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None.

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TALON INTERNATIONAL, INC.
INDEX TO FORM 10-K

PART I PAGE

Item 1. Business ..................................................... 2

Item 1A. Risk Factors ................................................. 8

Item 1B. Unresolved Staff Comments .................................... 15

Item 2. Properties ................................................... 15

Item 3. Legal Proceedings ............................................ 16

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

PART II

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

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

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

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

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

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

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

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

PART III

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

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

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

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

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

PART IV

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

FORWARD LOOKING STATEMENTS

This report and other documents we file with the SEC contain forward
looking statements that are based on current expectations, estimates, forecasts
and projections about us, our future performance, our business or others on our
behalf, our beliefs and our management's assumptions. In addition, we, or others
on our behalf, may make forward looking statements in press releases or written
statements, or in our communications and discussions with investors and analysts
in the normal course of business through meetings, webcasts, phone calls and
conference calls. Words such as "expect," "anticipate," "outlook," "could,"
"target," "project," "intend," "plan," "believe," "seek," "estimate," "should,"
"may," "assume," "continue," variations of such words and similar expressions
are intended to identify such forward looking statements. These statements are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to predict. We describe our respective risks,
uncertainties and assumptions that could affect the outcome or results of
operations in "Item 1A. Risk Factors." We have based our forward looking
statements on our management's beliefs and assumptions based on information
available to our management at the time the statements are made. We caution you
that actual outcomes and results may differ materially from what is expressed,
implied, or forecast by our forward looking statements. Reference is made in
particular to forward looking statements regarding projections or estimates
concerning our business, including demand for our products and services, mix of
revenue streams, ability to control and/or reduce operating expenses,
anticipated gross margins and operating results, cost savings, product
development efforts, general outlook of our business and industry, international
businesses, competitive position, adequate liquidity to fund our operations and
meet our other cash requirements. Except as required under the federal
securities laws and the rules and regulations of the SEC, we do not have any
intention or obligation to update publicly any forward looking statements after
the distribution of this report, whether as a result of new information, future
events, changes in assumptions, or otherwise.

PART I

ITEM 1. BUSINESS

GENERAL

Talon International, Inc. specializes in the manufacturing and
distribution of a full range of apparel accessories including zippers and trim
items to manufacturers of fashion apparel, specialty retailers and mass
merchandisers. We manufacture and distribute zippers under our TALON(R) brand
name to manufacturers for apparel brands and retailers such as Abercrombie &
Fitch, Wal-Mart, Kohl's, The Gap, Juicy Couture and JC Penney, among others. We
also provide full service outsourced trim design, sourcing and management
services and supply specified trim items for manufacturers of fashion apparel
such as Abercrombie & Fitch, Victoria's Secret, American Eagle, Motherhood,
Express, Polo Ralph Lauren and others. Under our TEKFIT(R) brand, we develop and
sell apparel components that utilize a patented technology, including a stretch
waistband.

We were incorporated in the State of Delaware in 1997. We were formed
to serve as the parent holding company of Tag-It, Inc., a California
corporation, Tag-It Printing & Packaging Ltd., which changed its name in 1999 to
Tag-It Pacific (HK) LTD, a BVI corporation, Tagit de Mexico, S.A. de C.V.,
A.G.S. Stationery, Inc., a California corporation and Pacific Trim & Belt, Inc.,
a California corporation. All of these companies were consolidated under a
parent limited liability company in October 1997. These companies became our
wholly owned subsidiaries immediately prior to the effective date of our initial
public offering in January 1998. In 2000, we formed two wholly owned
subsidiaries of Tag-It Pacific, Inc: Tag-It Pacific Limited, a Hong Kong
corporation and Talon International, Inc., a Delaware corporation. During 2006
we formed two wholly owned subsidiaries of Talon International, Inc. (formerly
Tag-It Pacific, Inc.): Talon Zipper (Shenzhen) Company Ltd. in China and Talon
International Pvt. Ltd., in India. On July 20, 2007 we changed our corporate
name from Tag-It Pacific, Inc. to Talon International, Inc. Our web site is
www.talonzippers.com. Our web site address provided in this Annual Report on
Form 10-K is not intended to function as a hyperlink and the information on our
website is not and should not be considered part of this report and is not
incorporated by reference in this document.

BUSINESS SUMMARY

We operate our business within three product groups, Talon, Trim and
Tekfit. In our Talon group, we design, engineer, test and distribute zippers
under our TALON trademark and trade names to apparel brands and manufacturers.
TALON enjoys brand recognition in the apparel industry worldwide. TALON is a
100-year-old brand, which is well known for quality and product innovation and
was the original pioneer of the formed wire metal zipper for the jeans industry
and is a specified zipper brand for manufacturers in the sportswear and
outerwear markets worldwide. We provide a line of high quality zippers,
including a specialty zipper for kids clothing, for distribution to apparel
manufacturers in Asia, India, Indonesia, Bangladesh, Mexico and Central America
and have sales and marketing teams in most of these areas. We have developed,
joint manufacturing arrangements in various geographical international local
markets to manufacture, finish and distribute zippers under the TALON brand
name. Our manufacturing partners operate to our specifications and under our
quality requirements, compliance controls and our direct manufacturing and
quality assurance supervision, producing finished zippers for our customers in
their local markets. This operating model allows us to significantly improve the
speed at which we serve the market and to expand the geographic footprint of our
TALON products. The Talon zipper is promoted both within our trim packages, as
well as a stand-alone product line.

In our Trim products group, we act as a fully integrated single-source
supplier, designer and sourcing agent of a full range of trim items for
manufacturers of fashion apparel. Our business focuses on servicing all of the
trim requirements of our customers at the manufacturing and retail brand level
of the fashion apparel industry. Trim items include labels, buttons, rivets,
printed marketing material, polybasic, packing cartons and hangers. Trim items
comprise a relatively small part of the cost of most apparel products but
comprise the vast majority of components necessary to fabricate a typical
apparel product. We offer customers a one-stop outsourced service for all trim
related matters. Our teams work with the apparel designers and function as an
extension of their staff.

If our customer is creating a new pair of cargo pants for their fall
collection, our Trim products group will collaborate with them on their design
vision, then present examples of their vision in graphic form for all apparel
accessory components. We will design the buttons, snaps, hang tags, labels,
zippers, zipper pullers and other items. Once our customer selects the designs
they like, our sourcing and production teams coordinate with our proprietary
database of manufacturers worldwide to ensure the best manufacturing solution
for the items being produced. The proper manufacturing and sourcing solution is
a critical part of our service. Knowing the best facility or supplier to ensure
timely production, the proper paper finishes, distressing or other types of
material needs or manufacturing techniques to be used is critical. Because we
perform this function for many different global projects and apparel brands, we
have a depth and breadth of knowledge in the manufacturing and sourcing that our
customers cannot achieve, and therefore offer a significant value to our
customers. In addition, because we are consistently innovating new items,
manufacturing techniques and finishes, we bring many new, fresh and unique ideas
to our customers. Once we identify the appropriate supply source, we create
production samples of all of our designs and products and review the samples
with our customers so they can make a final decision while looking at the actual
items that will be used on the garments. When the customer selects the
appropriate items, we are identified as the sole-source trim supplier for the
project, and our customer's factories are then required to purchase the trim
products from us. Throughout the garment manufacturing process, we consistently
monitor the timing and accuracy of the production items to ensure the production
items exactly match all samples when delivered to our customer's apparel
factories.

We also serve as a specified supplier in our zipper and trim products
for a variety of major retail brand and private-label oriented companies. A
specified supplier is a supplier that has been approved for its quality and
service by a major retail brand or private-label company. Apparel contractors
manufacturing for the retail brand or private-label company must purchase their
zipper and trim requirements from a supplier that has been specified. We seek to
expand our services as a supplier of select items for such customers, to being a
preferred or single-source provider of the entire brand customer's authorized
trim and zipper requirements. Our ability to offer a full range of trim and
zipper products is attractive to brand name and private-label oriented customers
because it enables the customer to address their quality and supply needs for

all of their trim requirements from a single source, avoiding the time and
expense necessary to monitor quality and supply from multiple vendors and
manufacturer sources. Becoming a specified supplier to brand customers gives us
an advantage to become the preferred or sole vendor of trim and zipper items for
all apparel manufacturers contracted for production for that brand name.

Our teams of sales employees, representatives, program managers,
creative design personnel and global production and distribution coordinators at
our facilities located in the United States, China, India and the Caribbean
enable us to take advantage of and address the increasingly complicated
requirements of the large and expanding demand for complete apparel accessory
solutions. We plan to continue to expand operations in Asia, Europe, Central
America and the Caribbean to take advantage of the large apparel manufacturing
markets in these regions.

PRODUCTS

TALON ZIPPERS - We offer a full line of metal and synthetic zippers
bearing the TALON brand name. TALON zippers are used primarily by manufacturers
in the apparel industry and are distributed through our distribution facilities
in the United States, India, Indonesia, Bangladesh and China and through our
agents, distributors and affiliates in other international markets.

We plan to expand our distribution of TALON zippers through the
establishment of a network of TALON owned sales, distribution and manufacturing
locations, distribution relationships and joint ventures. The network of these
distributors and manufacturing joint ventures, in combination with TALON owned
and affiliated facilities under the TALON brand, is expected to improve our
time-to-market by eliminating the typical setup and build-out phase for new
manufacturing capacity throughout the world by sourcing, finishing and
distributing to apparel manufacturers in their local markets. The branded
apparel zipper market is dominated by one company and we are positioning TALON
to be a viable global alternative to this competitor and capture an increased
market share position. We plan to leverage the brand awareness of the TALON name
by branding other products in our line with the TALON name.

TRIM - We consider our high level of customer service as a fully
integrated single-source supplier essential to our success. We combine our high
level of customer service within our TRIM solutions with a history of design and
manufacturing expertise to offer our customers a complete trim solution product.
We believe this full-service product gives us a competitive edge over companies
that only offer selected trim components because our full service solutions
saves our customers substantial time in ordering, designing, sampling and
managing trim orders from several different suppliers. Our proprietary tracking
and order management systems allow us to seamlessly supply trim solutions and
products to apparel brands, retailers and manufacturers around the world.

We produce customized woven, leather, synthetic, embroidered and
novelty labels and tapes, which can be printed on or woven into a wide range of
fabrics and other materials using various types of high-speed equipment. As an
additional service, we may provide our customers the machinery used to attach
the buttons, rivets and snaps we distribute.

TEKFIT - We distribute a proprietary stretch waistband under our
Exclusive License and Intellectual Property Rights agreement with Pro-Fit
Holdings, Limited. The agreement gives us the exclusive rights to sell or
sublicense stretch waistbands manufactured under the patented technology
developed by Pro-Fit for garments manufactured anywhere in the world for sale in
the U.S. market and for all U.S. brands for the life of the patent. We offer
apparel manufacturers advanced, patented fabric technologies to utilize in their
garments under the TEKFIT name. This technology allows fabrics to be altered
through the addition of stretch characteristics resulting in greatly improved
fit and comfort. This technology allows pant manufacturers to build-in a stretch
factor into standard waistbands that does not alter the appearance of the
garment, but will allow the waist to stretch out and back by as much as two
waist sizes. Previously, we supplied Levi Strauss & Co. with TEKFIT waistbands
for their Dockers(R) programs, under an exclusive supply agreement. In October
2006 our exclusive contract with this brand expired. With the expiration of this
contract we now have broader access to other customers, and we intend to
actively expand this product offering to other brands.

Our efforts to expand this product offering to other customers have
been limited by a licensing dispute. As described more fully in Item 3 "Legal
Proceedings" we are presently in litigation with Pro-Fit related to our
exclusively licensed rights to sell or sublicense stretch waistbands
manufactured under Pro-Fit's patented technology. The revenues we derive from
the sale of products incorporating the stretch waistband technology represented
approximately 0.4% of our consolidated revenue for the year ended December 31,
2008, 2% of our consolidated revenue for the year ended December 31, 2007 and
19% for the year ended December 31, 2006. We have been successful in securing
new customers, but these new customers and programs are substantially smaller in
scale.

The percentages of total revenue contributed by each of our three
primary product groups for the last three fiscal years are as follows:

Year Ended December 31,
--------------------------------
2008 2007 2006
------ ------ ------
Product Group Net Revenue:
Talon zipper ............ 59.0% 52.2% 34.8%
Trim .................... 40.6% 46.1% 46.1%
Tekfit .................. 0.4% 1.7% 19.1%

DESIGN AND DEVELOPMENT

Our in-house creative team produces products with innovative technology
and designs that we believe distinguish our products from those of our
competitors. We support our skills and expertise in material procurement and
product-manufacturing coordination with product technology and designs intended
to meet fashion demands, as well as functional and cost parameters. In 2006, we
introduced the Talon KidZip which is a specialty zipper for children's apparel
engineered to surpass industry established strength and safety tests, while
maintaining the fashion image and requirements of today's apparel demands.

Many specialty design companies with which we compete have limited
engineering, sourcing or manufacturing experience. These companies create
products or designs that often cannot be implemented due to difficulties in the
manufacturing process, the expenses of required materials, or a lack of
functionality in the resulting product. We design products to function within
the limitations imposed by the applicable manufacturing framework. Using our
manufacturing and sourcing experience, we ensure delivery of quality products
and we minimize the time-consuming delays that often arise in coordinating the
efforts of independent design houses and manufacturing facilities. By supporting
our material procurement and product manufacturing services with design
services, we believe that we reduce development and production costs and deliver
products to our customers sooner than many of our competitors. Our development
costs are low, most of which are borne by our customers. Our design teams are
based out of our California and Hong Kong facilities.

CUSTOMERS

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

For the years ended December 31, 2008, 2007 and 2006, our three largest
customers represented approximately 8%, 9% and 18%, respectively, of
consolidated net sales. For the year ended December 31, 2006, no single customer
represented more than 9% of the Company's consolidated net sales.

The results of our operations will depend to an extent upon the
commercial success of these customers. If these customers fail to purchase our
products at anticipated levels, or the relationship terminates, it may have an
adverse affect on our results of operations. If the financial condition of these

customers were to deteriorate, resulting in an impairment of their ability to
purchase inventories or repay receivables, it may also have an adverse affect on
our results of operations. The financial position and operations of these
customers are monitored on an ongoing basis. United States export sales are not
a significant part of our business. Backlogs are not considered material in the
industries in which we compete.

SALES AND MARKETING

We sell our principal products through our own sales force based in Los
Angeles, California, various other cities in the United States, Hong Kong,
China, India, Indonesia, Taiwan and the Dominican Republic. We also employ
customer service representatives who are assigned to key customers and provide
in-house customer service support. Our executives have developed relationships
with our major customers at senior levels. These executives actively participate
in marketing and sales functions and the development of our overall marketing
and sales strategies. When we become the outsourcing vendor for a customer's
packaging or trim requirements, we position ourselves as if we are an in-house
department of the customer's trim procurement operation.

SOURCING AND ASSEMBLY

We have developed expertise in identifying high quality materials,
competitive prices and approved vendors for particular products and materials.
This expertise enables us to produce a broad range of packaging and trim
products at various price points. The majority of products that we procure and
distribute are purchased on a finished good basis. Raw materials, including
paper products and metals used to manufacture zippers, used in the assembly of
our Trim products are available from numerous sources and are in adequate
supply. We purchase products from several qualified material suppliers.

We create most product artwork and any necessary dies and molds used to
design and manufacture our products. All other products that we design and sell
are produced by third party vendors or under our direct supervision or through
joint manufacturing arrangements. We are confident in our ability to secure high
quality manufacturing sources. We intend to continue to outsource production to
qualified vendors, particularly with respect to manufacturing activities that
require substantial investment in capital equipment.

Principally through our Hong Kong facility, we distribute TALON
zippers, trim items and apparel packaging and coordinate the manufacture and
distribution of the full range of our products. Our Hong Kong facility supplies
several significant trim programs, services customers located in Asia and the
Pacific Rim and sources products for our Los Angeles based operations.

INTELLECTUAL PROPERTY RIGHTS AND LICENSES

We have trademarks as well as copyrights, software copyrights and trade
names for which we rely on common law protection, including the TALON trademark.
Several of our other trademarks are the subject of applications for federal
trademark protection through registration with the United States Patent and
Trademark Office, including "Talon", "Tag-It", "Managed Trim Solution" and
"Tekfit". We also rely on our Exclusive License and Intellectual Property Rights
agreement with Pro-Fit to sell our TEKFIT Stretch waistbands. The agreement
gives us the exclusive rights to sell or sublicense stretch waistbands
manufactured under the patented technology developed by Pro-Fit for garments
manufactured anywhere in the world for the U.S. market and for all U.S. brands,
for an indefinite term that extends for the duration of the patent and trade
secrets licensed under the agreement. We are presently in litigation with
Pro-Fit relating to our rights under the agreement, as described more fully
elsewhere in this report.

SEASONALITY

We typically experience seasonal fluctuations in sales volume. These
seasonal fluctuations result in sales volume decreases in the first and fourth
quarters of each year due to the seasonal fluctuations experienced by the
majority of our customers. The apparel industry typically experiences higher
sales volume in the second quarter in preparation for back-to-school purchases
and the third quarter in preparation for year-end holiday purchases.

INVENTORIES

In order to meet the rapid delivery requirements of our customers, we
may be required to purchase inventories based upon projections made by our
customers. In these cases we may carry a substantial amount of inventory on
their behalf. We attempt to manage this risk by obtaining customer commitments
to purchase any excess inventories. These buyback arrangements provide that in
the event that inventories remain with us in excess of six to nine months from
our receipt of the goods from our vendors or the termination of production of a
customer's product line related to the inventories, the customer is required to
purchase the inventories from us under normal invoice and selling terms. While
these agreements provide us some advantage in the negotiated disposition of
these inventories, we cannot be assured that our customers will complete these
agreements or that we can enforce these agreements without adversely affecting
our business operations.

COMPETITION

We compete in highly competitive and fragmented industries that include
numerous local and regional companies that provide some or all of the products
we offer. We also compete with United States and international design companies,
distributors and manufacturers of tags, trim, packaging products and zippers.
Some of our competitors, including YKK, Universal Button, Inc. and Avery
Dennison Corporation have greater name recognition, longer operating histories
and greater financial and other resources.

Because of our integrated materials procurement and assembly
capabilities and our full-service trim solutions, we believe that we are able to
effectively compete for our customers' business, particularly where our
customers require coordination of separately sourced production functions. We
believe that to successfully compete in our industry we must offer superior
product pricing, quality, customer service, design capabilities, delivery lead
times and complete supply-chain management. We also believe the TALON brand name
and the quality of our TALON brand zippers will allow us to gain market share in
the zipper industry. The unique stretch quality of our TEKFIT waistbands will
also allow us to compete effectively in the market for waistband components.

SEGMENT INFORMATION

We operate primarily in one industry segment, the distribution of a
full range of apparel zipper and trim products to manufacturers of fashion
apparel, specialty retailers and mass merchandisers.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

We sell the majority of our products for use by U.S. based brands,
retailers and manufacturers. The majority of these customers produce their
products or outsource the production of their products in manufacturing
facilities located outside of the U.S., primarily in Asia, Mexico, the Dominican
Republic and Central America.

A summary of our domestic and international net sales and long-lived
assets is set forth in Item 8 of this Annual Report on Form 10-K, Note 1 and
Note 15 to the consolidated financial statements.

We are subject to certain risks referred to in Item 1A, "Risk Factors"
and Item 3, "Legal Proceedings", including those normally attending
international and domestic operations, such as changes in economic or political
conditions, currency fluctuations, foreign tax claims or assessments, exchange
control regulations and the effect of international relations and domestic
affairs of foreign countries on the conduct of business, legal proceedings, and
the availability and pricing of raw materials.

EMPLOYEES

As of December 31, 2008, we had approximately 167 full-time employees
including 29 in the United States, 61 employees in Hong Kong, 72 employees in
China, 1 in India, 3 in the Dominican Republic and 1 in Taiwan. Our labor forces
are non-union. We believe that we have satisfactory employee and labor
relations.

CORPORATE GOVERNANCE AND INFORMATION RELATED TO SEC FILINGS

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports filed with, or
furnished to, the Securities and Exchange Commission ("SEC") pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of
charge through our web site, www.talonzippers.com (in the "Investor" section, as
soon as reasonably practical after electronic filing with or furnishing of such
material to the SEC). We make available at the Web site our (i) shareholder
communications policies, (ii) Code of Ethical Conduct, (iii) the charters of the
Audit and Nominating Committees of our Board of Directors and (iv) Employee
Complaint Procedures for Accounting and Auditing Matters. These materials are
also available free of charge in print to stockholders who request them by
writing to: Investor Relations, Talon International, Inc., 21900 Burbank
Boulevard, Suite 270, Woodland Hills, CA 91367. Our web site address provided in
this Annual Report on Form 10-K is not intended to function as a hyperlink and
the information on our web site is not and should not be considered part of this
report and is not incorporated by reference in this document.

ITEM 1A. RISK FACTORS

Several of the matters discussed in this document contain
forward-looking statements that involve risks and uncertainties. Factors
associated with the forward-looking statements that could cause actual results
to differ from those projected or forecast are included in the statements below.
In addition to other information contained in this report, readers should
carefully consider the following cautionary statements and risk factors.

WE MAY NOT BE ABLE TO SATISFY THE FINANCIAL COVENANTS IN OUR DEBT AGREEMENTS AT
AND IF WE CANNOT OUR LENDER COULD DECLARE THE DEBT OBLIGATIONS IN DEFAULT, WHICH
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY, BUSINESS AND OPERATIONS

Our revolving credit and term loan agreement requires certain
covenants, including a minimum level of EBITDA beginning with quarterly periods
ending June 30, 2008, as discussed in Note 9 to the consolidated financial
statements. We failed to satisfy the minimum EBITDA requirement for the quarter
ending December 31, 2008 and do not expect to meet the minimum EBITDA
requirement for the quarter ending March 31, 2009. Accordingly we have paid our
lender a fee to waive these requirements for these quarters. If we fail to
satisfy the covenant in three consecutive quarters, the credit agreement will be
in default and can be declared immediately due and payable by the lender. In
anticipation of us not being able to meet the required covenants due to various
reasons, we either negotiate for changes in the relative covenants or an advance
waiver or would have to reclassify the relevant debt as current. However, our
expectations of future operating results and continued compliance with other
debt covenants cannot be assured and our lender's actions are not controllable
by us. If we are in default under the loan agreement, all amounts due under the
loan agreement can be declared immediately due and payable and, unless we are
able to secure alternative financing to repay the lender in full, the lender
would have the right to exercise its remedies including enforcement of its lien
on substantially all of our assets. Further, if the debt is placed in default,
we would be required to reduce our expenses, including curtailing operations and
to raise capital through the sale of assets, issuance of equity or otherwise,
any of which could have a material adverse effect on our financial condition and
results of operations and affect our ability to operate as a going concern. See
Note 2 to the consolidated financial statements regarding going concern and Note
19 to the consolidated financial statements for subsequent event regarding
waiver of current covenant requirements and additional funding by our lender.

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

The recent financial crisis affecting the global banking system and
financial markets and the going concern threats to financial institutions have
resulted in a tightening in the credit markets; a low level of liquidity in many
financial markets; and extreme volatility in credit, fixed income, and equity
markets. Certain apparel manufacturers and retailers, including some of our
customers may experience financial difficulties that increase the risk of
extending credit to such customers. Customers adversely affected by economic
conditions have also attempted to improve their own operating efficiencies by
concentrating their purchasing power among a narrowing group of suppliers. There
can be no assurance that we will remain a preferred supplier to our existing
customers. A decrease in business from or loss of a major customer could have a
material adverse effect on our results of operations and financial condition.

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

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

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

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

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

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

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

OUR GROWTH AND OPERATING RESULTS COULD BE MATERIALLY, ADVERSELY AFFECTED IF WE
ARE UNSUCCESSFUL IN RESOLVING A DISPUTE THAT NOW EXISTS REGARDING OUR RIGHTS
UNDER OUR EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY AGREEMENT WITH PRO-FIT.

Pursuant to our agreement with Pro-Fit Holdings, Limited, we have
exclusive rights in certain geographic areas to Pro-Fit's stretch and rigid
waistband technology. We are in litigation with Pro-Fit regarding our rights.
See Item 3, "Legal Proceedings" for discussion of this litigation. In the past,
we had derived a significant amount of revenues from the sale of products
incorporating the stretch waistband technology. Our business, future results of
operations and financial condition could be materially adversely affected if we
are unable to reach a settlement in a manner acceptable to us and ensuing
litigation is not resolved in a manner favorable to us. Additionally, we have
incurred significant legal fees in this litigation, and unless the case is
settled, we will continue to incur additional legal fees in increasing amounts
as the case accelerates to trial.

IF WE LOSE OUR LARGER CUSTOMERS OR THEY FAIL TO PURCHASE AT ANTICIPATED LEVELS,
OUR SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.

Our results of operations will depend to a significant extent upon the
commercial success of our larger customers. If these customers fail to purchase
our products at anticipated levels, or our relationship with these customers
terminates, it may have an adverse affect on our results because:

o We will lose a primary source of revenue if these customers
choose not to purchase our products or services;

o We may not be able to reduce fixed costs incurred in
developing the relationship with these customers in a timely
manner;

o We may not be able to recoup setup and inventory costs;

o We may be left holding inventory that cannot be sold to other
customers; and

o We may not be able to collect our receivables from them.

IF CUSTOMERS DEFAULT ON INVENTORY PURCHASE COMMITMENTS WITH US, WE WILL BE LEFT
HOLDING NON-SALABLE INVENTORY.

We hold significant inventories for specific customer programs, which
the customers have committed to purchase. If any customer defaults on these
commitments, or insists on markdowns, we may incur a charge in connection with
our holding significant amounts of non-salable inventory and this would have a
negative impact on our operations and cash flow.

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

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

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

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

WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO SIGNIFICANT FLUCTUATIONS IN
OPERATING RESULTS THAT MAY RESULT IN UNEXPECTED REDUCTIONS IN REVENUE AND STOCK
PRICE VOLATILITY.

We operate in an industry that is subject to significant fluctuations
in operating results from quarter to quarter, which may lead to unexpected
reductions in revenues and stock price volatility. Factors that may influence
our quarterly operating results include:

o The volume and timing of customer orders received during the
quarter;

o The timing and magnitude of customers' marketing campaigns;

o The loss or addition of a major customer;

o The availability and pricing of materials for our products;

o The increased expenses incurred in connection with the
introduction of new products;

o Currency fluctuations;

o Delays caused by third parties; and

o Changes in our product mix or in the relative contribution to
sales of our subsidiaries.

Due to these factors, it is possible that in some quarters our
operating results may be below our stockholders' expectations and those of
public market analysts. If this occurs, the price of our common stock could be
adversely affected. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. In October 2005, a securities class
action lawsuit was filed against us. See Item 3, "Legal Proceedings" for a
detailed description of this lawsuit.

THE OUTCOME OF LITIGATION IN WHICH WE HAVE BEEN NAMED AS A DEFENDANT IS
UNPREDICTABLE AND AN ADVERSE DECISION IN ANY SUCH MATTER COULD HAVE A MATERIAL
ADVERSE AFFECT ON OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS.

We are defendants in a number of litigation matters. These claims may
divert financial and management resources that would otherwise be used to
benefit our operations. Although we believe that we have meritorious defenses to
the claims made in each and all of the litigation matters to which we have been
named a party and intend to contest each lawsuit vigorously, no assurances can

be given that the results of these matters will be favorable to us. An adverse
resolution of any of these lawsuits could have a material adverse affect on our
financial position and results of operations.

We maintain product liability and director and officer insurance that
we regard as reasonably adequate to protect us from potential claims; however we
cannot assure you that it will be adequate to cover any losses. Further, the
costs of insurance have increased dramatically in recent years, and the
availability of coverage has decreased. As a result, we cannot assure you that
we will be able to maintain our current levels of insurance at a reasonable
cost, or at all.

OUR CUSTOMERS HAVE CYCLICAL BUYING PATTERNS WHICH MAY CAUSE US TO HAVE PERIODS
OF LOW SALES VOLUME.

Most of our customers are in the apparel industry. The apparel industry
historically has been subject to substantial cyclical variations. Our business
has experienced, and we expect our business to continue to experience,
significant cyclical fluctuations due, in part, to customer buying patterns,
which may result in periods of low sales usually in the first and fourth
quarters of our financial year.

OUR BUSINESS MODEL IS DEPENDENT ON INTEGRATION OF INFORMATION SYSTEMS ON A
GLOBAL BASIS AND, TO THE EXTENT THAT WE FAIL TO MAINTAIN AND SUPPORT OUR
INFORMATION SYSTEMS, IT CAN RESULT IN LOST REVENUES.

We must consolidate and centralize the management of our subsidiaries
and significantly expand and improve our financial and operating controls.
Additionally, we must effectively integrate the information systems of our
worldwide operations with the information systems of our principal offices in
California. Our failure to do so could result in lost revenues, delay financial
reporting or have adverse effects on the information reported.

THE LOSS OF KEY MANAGEMENT AND SALES PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS, INCLUDING OUR ABILITY TO OBTAIN AND SECURE ACCOUNTS AND GENERATE
SALES.

Our success has and will continue to depend to a significant extent
upon key management and sales personnel, many of whom would be difficult to
replace. The loss of the services of key employees could have a material adverse
effect on our business, including our ability to establish and maintain client
relationships. Our future success will depend in large part upon our ability to
attract and retain personnel with a variety of sales, operating and managerial
skills.

IF WE EXPERIENCE DISRUPTIONS AT ANY OF OUR FOREIGN FACILITIES, WE WILL NOT BE
ABLE TO MEET OUR OBLIGATIONS AND MAY LOSE SALES AND CUSTOMERS.

Currently, we do not operate duplicate facilities in different
geographic areas. Therefore, in the event of a regional disruption where we
maintain one or more of our facilities, it is unlikely that we could shift our
operations to a different geographic region and we may have to cease or curtail
our operations. This may cause us to lose sales and customers. The types of
disruptions that may occur include:

o Foreign trade disruptions;

o Import restrictions;

o Labor disruptions;

o Embargoes;

o Government intervention;

o Natural disasters; or

o Regional pandemics.

INTERNET-BASED SYSTEMS THAT WE RELY UPON FOR OUR ORDER TRACKING AND MANAGEMENT
SYSTEMS MAY EXPERIENCE DISRUPTIONS AND AS A RESULT WE MAY LOSE REVENUES AND
CUSTOMERS.

To the extent that we fail to adequately update and maintain the
hardware and software implementing our integrated systems, our customers may be
delayed or interrupted due to defects in our hardware or our source code. In
addition, since our software is Internet-based, interruptions in Internet
service generally can negatively impact our ability to use our systems to
monitor and manage various aspects of our customer's trim needs. Such defects or
interruptions could result in lost revenues and lost customers.

THERE ARE MANY COMPANIES THAT OFFER SOME OR ALL OF THE PRODUCTS AND SERVICES WE
SELL AND IF WE ARE UNABLE TO SUCCESSFULLY COMPETE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.

We compete in highly competitive and fragmented industries with
numerous local and regional companies that provide some or all of the products
and services we offer. We compete with national and international design
companies, distributors and manufacturers of tags, packaging products, zippers
and other trim items. Some of our competitors have greater name recognition,
longer operating histories and greater financial and other resources than we do.

UNAUTHORIZED USE OF OUR PROPRIETARY TECHNOLOGY MAY INCREASE OUR LITIGATION COSTS
AND ADVERSELY AFFECT OUR SALES.

We rely on trademark, trade secret and copyright laws to protect our
designs and other proprietary property worldwide. We cannot be certain that
these laws will be sufficient to protect our property. In particular, the laws
of some countries in which our products are distributed or may be distributed in
the future may not protect our products and intellectual rights to the same
extent as the laws of the United States. If litigation is necessary in the
future to enforce our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of the proprietary rights of others, such
litigation could result in substantial costs and diversion of resources. This
could have a material adverse effect on our operating results and financial
condition. Ultimately, we may be unable, for financial or other reasons, to
enforce our rights under intellectual property laws, which could result in lost
sales.

IF OUR PRODUCTS INFRINGE ANY OTHER PERSON'S PROPRIETARY RIGHTS, WE MAY BE SUED
AND HAVE TO PAY LEGAL EXPENSES AND JUDGMENTS AND REDESIGN OR DISCONTINUE SELLING
OUR PRODUCTS.

From time to time in our industry, third parties allege infringement of
their proprietary rights. Any infringement claims, whether or not meritorious,
could result in costly litigation or require us to enter into royalty or
licensing agreements as a means of settlement. If we are found to have infringed
the proprietary rights of others, we could be required to pay damages, cease
sales of the infringing products and redesign the products or discontinue their
sale. Any of these outcomes, individually or collectively, could have a material
adverse effect on our operating results and financial condition.

COUNTERFEIT PRODUCTS ARE NOT UNCOMMON IN THE APPAREL INDUSTRY AND OUR CUSTOMERS
MAY MAKE CLAIMS AGAINST US FOR PRODUCTS WE HAVE NOT PRODUCED ADVERSELY IMPACTING
US BY THESE FALSE CLAIMS.

Counterfeiting of valuable trade names is commonplace in the apparel
industry and while there are industry organizations and federal laws designed to
protect the brand owner, these counterfeit products are not always detected and
it can be difficult to prove the manufacturing source of these products.
Accordingly, we may be adversely affected if counterfeit products damage our
relationships with customers, and we incur costs to prove these products are
counterfeit, to defend ourselves against false claims and to pay for false
claims.

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

The following factors could cause the market price of our common stock
to decrease, perhaps substantially:

o The failure of our quarterly operating results to meet
expectations of investors or securities analysts;

o Adverse developments in the financial markets, the apparel
industry and the worldwide or regional economies;

o Interest rates;

o Changes in accounting principles;

o Intellectual property and legal matters;

o Sales of common stock by existing shareholders or holders of
options;

o Announcements of key developments by our competitors; and

o The reaction of markets and securities analysts to
announcements and developments involving our company.

IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUME
ADDITIONAL DEBT TO FINANCE FUTURE GROWTH, OUR STOCKHOLDERS' OWNERSHIP COULD BE
DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED.

Our business strategy may include expansion through internal growth, by
acquiring complementary businesses or by establishing strategic relationships
with targeted customers and suppliers. In order to do so or to fund our other
activities, we may issue additional equity securities that could dilute our
stockholders' value. We may also assume additional debt and incur impairment
losses to our intangible assets if we acquire another company.

WE MAY NOT BE ABLE TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS.

We may consider strategic acquisitions as opportunities arise, subject
to the obtaining of any necessary financing. Acquisitions involve numerous
risks, including diversion of our management's attention away from our operating
activities. We cannot assure you that we will not encounter unanticipated
problems or liabilities relating to the integration of an acquired company's
operations, nor can we assure you that we will realize the anticipated benefits
of any future acquisitions.

OUR ACTUAL TAX LIABILITIES MAY DIFFER FROM ESTIMATED TAX RESULTING IN
UNFAVORABLE ADJUSTMENTS TO OUR FUTURE RESULTS.

The amount of income taxes we pay is subject to ongoing audits by
federal, state and foreign tax authorities. Our estimate of the potential
outcome of uncertain tax issues is subject to our assessment of relevant risks,
facts and circumstances existing at that time. Our future results may include
favorable or unfavorable adjustments to our estimated tax liabilities in the
period the assessments are made or resolved, which may impact our effective tax
rate and our financial results.

WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE PRICE OF
OUR COMMON STOCK.

Our stockholders' rights plan, our ability to issue additional shares
of preferred stock and some provisions of our certificate of incorporation and
bylaws and of Delaware law could make it more difficult for a third party to
make an unsolicited takeover attempt of us. These anti-takeover measures may
depress the price of our common stock by making it more difficult for third
parties to acquire us by offering to purchase shares of our stock at a premium
to its market price.

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

As of March 27, 2009, our officers and directors and their affiliates
owned approximately 16.5% of the outstanding shares of our common stock. The
Dyne family, which includes Mark Dyne and Colin Dyne, who are also our
directors, and Larry Dyne who is also an officer; beneficially owned
approximately 12.4% of the outstanding shares of our common stock at March 27,
2009. Additionally, at March 27, 2009, Bluefin Capital, LLC, an affiliate of our
lender, beneficially owned approximately 8.6% of the outstanding shares of our
common stock. As a result, our lender, officers and directors and the Dyne
family are able to exert considerable influence over the outcome of any matters
submitted to a vote of the holders of our common stock, including the election
of our Board of Directors. The voting power of these stockholders could also
discourage others from seeking to acquire control of us through the purchase of
our common stock, which might depress the price of our common stock.

WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED SECURITY
MEASURES IN RESPONSE TO TERRORISM.

Our business depends on the free flow of products and services through
the channels of commerce. In response to terrorists' activities and threats
aimed at the United States, transportation, mail, financial and other services
may be slowed or stopped altogether. Extensive delays or stoppages in
transportation, mail, financial or other services could have a material adverse
effect on our business, results of operations and financial condition.
Furthermore, we may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the activities and
potential delays. We may also experience delays in receiving payments from
payers that have been affected by the terrorist activities. The United States
economy in general may be adversely affected by the terrorist activities and any
economic downturn could adversely impact our results of operations, impair our
ability to raise capital or otherwise adversely affect our ability to grow our
business.

IF WE ARE UNABLE TO REDEPLOY OUR MANUFACTURING ASSETS, OUR MANUFACTURING ASSETS
VALUE WOULD BE ADVERSELY AFFECTED.

An important part of our operating strategy has been to re-deploy our
former manufacturing assets into facilities in various geographical locations
strategically located in close proximity to our more significant and important
customers throughout Asia. If we cannot redeploy the assets, the carrying value
of the assets would be adversely affected and could result in significant
reductions in the carrying value of the assets and have an adverse effect on our
results of operations. See Note 5 to the consolidated financial statements.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our headquarters are located in the greater Los Angeles area, in
Woodland Hills, California, where we lease approximately 8,800 square feet of
administrative and product development space. In addition to the Woodland Hills
facility, we lease 120 square feet of office space in New York, New York; 1,400
square feet of office space in Columbus, Ohio; 7,000 square feet of warehouse in
Grover, North Carolina; 450 square feet of office in Mt. Holly, North Carolina;
3,400 square feet of warehouse space in Simi Valley, California; 23,809 square
feet of office and warehouse space in Kwun Tong, Hong Kong; 9,900 square feet of
office and showroom space in Shenzhen, China; office space square footage
totaling 6,000 in various other cities in China; 1,000 square feet of office
space in Bangalore, India; and 4,100 square feet of warehouse space in Santiago,
Dominican Republic. The lease agreements related to these properties expire at
various dates through September 2010. The building we owned in Kings Mountain,
North Carolina was sold on October 22, 2008. We believe our existing facilities
are adequate to meet our needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

On October 12, 2005, a shareholder class action complaint was filed in
the United States District Court for the Central District of California
("District Court") against the Company, Colin Dyne, Mark Dyne, Ronda Ferguson
and August F. Deluca (collectively, the "Individual Defendants" and, together
with the Company, "Defendants"). The action is styled HUBERMAN V.TAG-IT PACIFIC,
INC., ET AL., Case No. CV05-7352 R(Ex). On January 23, 2006, the District Court
heard competing motions for appointment of lead plaintiff. The District Court
appointed Seth Huberman as the lead plaintiff ("Plaintiff"). On March 13, 2006,
Plaintiff filed an amended complaint. Plaintiff's amended complaint alleged that
defendants made false and misleading statements about the Company's financial
situation and the Company's relationship with certain of the Company's large
customers. The action was brought on behalf of all purchasers of the Company's
publicly-traded securities during the period from November 13, 2003, to August
12, 2005. The amended complaint purports to state claims under Section
10(b)/Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934. On
August 21, 2006, Defendants filed their answer to the amended complaint, denying
the material allegations of wrongdoing. On February 20, 2007, the District Court
denied class certification. On April 2, 2007, the District Court granted
Defendants' motion for summary judgment, and on or about April 5, 2007, the
Court entered judgment in favor of all Defendants. On or about April 30, 2007,
Plaintiff filed a notice of appeal with the United States Court of Appeals for
the Ninth Circuit ("Ninth Circuit"), and his opening appellate brief was filed
on October 15, 2007. Defendants' brief was filed on November 28, 2007. The Ninth
Circuit held oral arguments on October 23, 2008. On January 16, 2009, the Ninth
Circuit issued an unpublished memorandum, instructing the District Court to
certify a class, reversing the District Court's grant of summary judgment, and
remanding for further proceedings consistent with its decision. The District
Court has scheduled a status conference for May 4, 2009. The Company intends to
vigorously defend this lawsuit; however, the outcome of this lawsuit or an
estimate of the potential losses, if any, related to the lawsuit cannot be
reasonably predicted, and an adverse resolution of the lawsuit could potentially
have a material adverse effect on the Company's financial position and results
of operations.

On April 16, 2004, we filed suit against Pro-Fit Holdings, Limited in
the U.S. District Court for the Central District of California - TAG-IT PACIFIC,
INC. V. PRO-FIT HOLDINGS, LIMITED, CV 04-2694 LGB (RCx) -- asserting various
contractual and tort claims relating to our exclusive license and intellectual
property agreement with Pro-Fit, seeking declaratory relief, injunctive relief
and damages. It is our position that the agreement with Pro-Fit gives us
exclusive rights in certain geographic areas to Pro-Fit's stretch and rigid
waistband technology. On June 5, 2006, the Court denied our motion for partial
summary judgment, but did not find that we breached the agreement with Pro-Fit
and a trial is required to determine issues concerning our activities in
Columbia and whether other actions by Pro-Fit constituted an unwillingness or
inability to fill orders. The Court also held that Pro-Fit was not "unwilling or
unable" to fulfill orders by refusing to fill orders with goods produced in the
United States. We also filed a second civil action against Pro-Fit and related
companies in the California Superior Court which was removed to the United
States District Court, Central District of California. In April 2008, Pro-Fit
and certain related companies were placed into administration in the United
Kingdom. On May 21, 2008, the joint administrators for Pro-Fit and its related
companies filed petitions under Chapter 15 of Title 11 of the United States Code
for Pro-Fit and two related companies in the United States Bankruptcy Court for
the Central District of California seeking recognition of the United Kingdom
administration proceedings and related relief. As a consequence of the chapter
15 filings by the joint administrators, all litigation by us against Pro-Fit has
been stayed. We have derived a significant amount of revenue from the sale of
products incorporating the stretch waistband technology in the past and our
business, results of operations and financial condition could be materially
adversely affected if the dispute with Pro-Fit is not resolved in a manner
favorable to us. Additionally, we have incurred significant legal fees in this
litigation, and unless the case is settled or resolved, may continue to incur
additional legal fees in order to assert its rights and claims against Pro-Fit
and any successor to those assets of Pro-Fit that are subject to our exclusive
license and intellectual property agreement with Pro-Fit and to defend against
any counterclaims.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the
fourth quarter of 2008.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK

Our common stock has been quoted on the OTC Bulletin Board under the
symbol "TALN" since December 28, 2007. Our common stock was previously traded on
the American Stock Exchange under the symbol "TAG." The following table sets
forth the high and low sales prices for the Common Stock as reported by the
American Stock Exchange and the OTC Bulletin Board during the periods indicated.

HIGH LOW
------- --------
YEAR ENDED DECEMBER 31, 2008
1st Quarter...................... $ 0.50 $ 0.22
2nd Quarter...................... 0.38 0.19
3rd Quarter...................... 0.29 0.10
4th Quarter...................... 0.25 0.10

YEAR ENDED DECEMBER 31, 2007
1st Quarter...................... $ 2.07 $ 1.06
2nd Quarter...................... 1.58 0.66
3rd Quarter...................... 1.14 0.70
4th Quarter...................... 0.82 0.30

On March 31, 2009 the closing sales price of our common stock as
reported on OTC Bulletin Board was $0.10 per share. As of March 31, 2009, there
were 22 record holders of our common stock.

DIVIDENDS

We have never paid dividends on our common stock. We are restricted
from paying dividends under our senior secured credit facility. It is our
intention to retain future earnings for use in our business.

PERFORMANCE GRAPH

The following graph sets forth the percentage change in cumulative
total stockholder return of our common stock during the period from December 31,
2003 to December 31, 2008, compared with the cumulative returns of the American
Stock Exchange Market Value (U.S. & Foreign) Index and The Dow Jones U.S.
Clothing & Accessories Index. The comparison assumes $100 was invested on
December 31, 2003 in our common stock and in each of the foregoing indices. The
stock price performance on the following graph is not necessarily indicative of
future stock price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

[GRAPHIC OMITTED]

Cumulative Total Return
---------------------------------------- -------- ----------- ----------- ----------- ----------- -----------
12/03 12/04 12/05 12/06 12/07 12/08
---------------------------------------- -------- ----------- ----------- ----------- ----------- -----------

Talon International, Inc. 100.00 100.22 8.02 22.94 9.02 2.45
AMEX Composite 100.00 124.13 155.00 184.30 217.52 132.72
Dow Jones US Clothing & Accessories 100.00 118.15 123.39 152.94 115.08 69.33

The information under this "Performance Graph" subheading shall not be
deemed to be "filed" for the purposes of Section 18 of the Securities Exchange
Act of 1934, or otherwise subject to the liabilities of such section, nor shall
such information or exhibit be deemed incorporated by reference in any filing
under the Securities Act of 1933 or the Exchange Act, except as shall be
expressly set forth by specific reference in such a filing.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data is not necessarily indicative of
our future financial position or results of future operations and should be read
in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included in Item 8, "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K.

YEARS ENDED DECEMBER 31,
(In thousands except per share data)
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------

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

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

2008 2007 2006 2005 2004
------- ------- ------- ------- -------

Restructuring Charges ............... $ -- $ -- $ -- $(2,924) $ (414)
Inventory Impairment ................ $ (692) $ -- $ -- $(3,447) $(2,700)
Losses from a former customer and
impairment of related marketable
securities ....................... $(1,040) $(1,088) $ -- $ -- $(9,289)
Executive severance ................. $ (724) $ -- $ -- $ -- $ --
Related Party Note Impairment ....... $ (474) $ -- $ -- $ -- $ --
Impairment Charges Idle Equipment and
Building ............................ $(2,430) $ (127) $ -- $ -- $ --

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

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

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

We plan to increase our global expansion of TALON zippers through the
establishment of a network of Talon owned sales, distribution and manufacturing
locations, distribution relationships and joint ventures. The network of these
distributors and manufacturing joint ventures, in combination with Talon owned
and affiliated facilities under the TALON brand, is expected to improve our
time-to-market by eliminating the typical setup and build-out phase for new
manufacturing capacity throughout the world by sourcing, finishing and
distributing to apparel manufacturers in their local markets.

We have structured our trim business to focus as an outsourced product
development, sourcing and sampling department for the most demanding brands and
retailers. We believe that trim design differentiation among brands and
retailers has become a critical marketing tool for our customers. By assisting
our customers in the design, development, sampling and sourcing of trim, we
expect to achieve higher margins for our trim products, create long-term
relationships with our customers, grow our sales to a particular customer by
supplying trim for a larger proportion of their brands and better differentiate
our trim sales and services from those of our competitors. We plan to
aggressively expand our trim business globally, so we may better serve our
apparel factory customers in the field, in addition to our brand and retail
customer. We believe we can lead the industry in trim sourcing by having both an
intimate relationship with our brand and retail customers and having a
distributed service organization to serve our factory customers (those that
manufacture for the apparel brand and retailers) globally.

Our TEKFIT services provide manufacturers with the patented technology,
manufacturing know-how and materials required to produce pants incorporating an
expandable waistband. These products were previously produced by several
manufacturers for one single brand. In October 2006 our exclusive supply
contract with this brand expired. Our efforts to expand this product offering to
other customers have also been limited by a licensing dispute. As described more
fully in this report under Item 3. "Legal Proceedings", we are presently in
litigation with Pro-Fit Holdings Limited related to our exclusively licensed
rights to sell or sublicense stretch waistbands manufactured under Pro-Fit's
patented technology. The revenues we derive from the sale of products
incorporating the stretch waistband technology represented approximately 0.4% of
our consolidated revenues for the year ended December 31, 2008 and 2% and 19% of
consolidated revenues for the years ended December 31, 2007 and 2006. Our
business prospects could be materially adversely affected if our dispute with
Pro-Fit is not resolved in a manner favorable to us, or if we are unsuccessful
in securing new customers to replace the revenues previously generated by the
single brand.

RESULTS OF OPERATIONS

NET SALES

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

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

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

Sales are influenced by a number of factors, including demand, pricing
strategies, foreign exchange effects, new product launches and indications,
competitive products, product supply and acquisitions. See Item 1 "Business" for
a discussion of our principal products.

The net increase of sales in 2008 versus 2007 was primarily due to an
increase in Talon zipper sales ($7.3 million or 34.4%) as a result of new brand
nominations and sales within Southeast Asia, together with new and increased
program sales in the Trim division ($0.8 million or 4.5% increase) partially
offset by a decline in sales of TEKFIT products.

The net decrease of sales in 2007 was primarily due to lower sales of
waistband products as a result of the expiration in October of 2006 of our
exclusive contract for these products ($8.6 million), reduced operations in
Mexico as we closed our operations there in 2005 and 2006 and production shifted
from this area to Asia and lower trim sales due to fewer and smaller programs
with our customers ($3.8 million). Talon zipper sales continued to increase as
we expanded our operations throughout China and southeast Asia ($4.1 million),
partially offsetting the declines from the Mexico and the Latin American regions
for the Trim products and resulting in a net gain in Talon product sales
overall.

COST OF GOODS SOLD AND SELECTED OPERATING EXPENSES

The following table summarizes cost of goods sold and selected
operating expenses for the years ended December 31, 2008, 2007 and 2006 (amounts
in thousands) and the percentage change in such operating expenses as compared
to the previous year:

2008 CHANGE 2007 CHANGE 2006
------- ------- ------- ------- -------

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

COST OF GOODS SOLD

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

Cost of goods sold for the year ended December 31, 2007, declined $5.9
million or 17% as compared to the year ended December 31, 2006, primarily a
result of the 17% decrease in sales. The reduction in cost of goods sold in 2007
was principally attributable to lower overall sales volumes and lower direct
margin resulting from a change in the mix in sales by product group, partially
offset by reduced distribution charges since more products were sourced and
delivered within the same marketplace, reduced manufacturing and assembly
overhead costs, lower inventory valuation reserve charges and management charges
as inventory levels have been reduced and turns accelerated.

SELLING EXPENSES

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

Selling expenses for the year ended December 31, 2007 increased $0.4
million or 12.0% as compared 2006 as a result of the increased number of sales
offices and employees within Asia and their associated compensation ($0.4
million) and facilities, travel and administrative costs ($0.4 million), offset
by lower marketing costs ($0.1 million) and lower royalty fees on waistband
products ($0.3 million).

GENERAL AND ADMINISTRATIVE EXPENSES

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

General and administrative expenses for the year ended December 31,
2007 of $10.9 million remained relatively unchanged from 2006 excluding bad
expense (recoveries). General and administrative expenses were affected by a
$0.2 million increase from 2006 attributable to increased employee costs due to
the continued expansion within Asia and increased professional and audit fees of
$0.9 million; offset by reduced legal costs of $0.6 million, $0.1 million
decrease in insurance costs and $0.4 million reduction in management incentive
bonuses, commissions and stock-based compensation. Included in professional and
audit fees were non-recurring charges of $0.6 million related to exiting
consulting contracts with two former directors. Bad debt expense for the year
ended December 31, 2007 increased by $0.6 million as a result of $0.1 million in
bad debt provisions in 2007 compared to bad debt recoveries of $0.5 million in
2006

IMPAIRMENT OF NOTE RECEIVABLE AND RELATED LOSS ON MARKETABLE SECURITIES

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

IMPAIRMENT LOSS ON FIXED ASSETS

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

INTEREST EXPENSE AND INTEREST INCOME

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

Interest expense for the year ended December 31, 2007 increased
approximately $0.6 million or 41.6% to $1.9 million from $1.4 million during
2006 as a result of higher average debt levels in 2007 compared to 2006. For the
year ended December 31, 2007 interest expense included $725,000 in amortized
deferred financing charges and higher costs on our revolving credit and term
notes as compared to our previous secured convertible notes payable. During the
third quarter 2007, we charged off approximately $111,000 in unamortized
deferred financing costs and discounts related to and in conjunction with the

early payment of the secured convertible promissory notes in July 2007. Interest
income for the year ended December 31, 2007 of $242,000 decreased approximately
$126,000 or 34.2% from $368,000 during 2006 related primarily to the elimination
of the note receivable discussed in Note 4 to the consolidated financial
statements.

INCOME TAXES

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

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

Income tax provisions for the year ended December 31, 2006 principally
include a royalty tax from the Inland Revenue Department in Hong Kong applicable
to 2005, net of an estimated tax benefit for 2006 foreign losses and minimum
federal and state filing fees.

LIQUIDITY AND CAPITAL RESOURCES

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

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

CASH AND CASH EQUIVALENTS

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

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

Cash and cash equivalents for the year ended December 31, 2007
decreased by $0.1 million from December 31, 2006 principally arising from cash
generated by operating activities, net of payments on notes payable and capital
leases.

CASH FLOWS

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

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

OPERATING ACTIVITIES

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

Cash provided by operating activities was $2.1 million for the year
ended December 31, 2007. The cash generated by operating activities during 2007
resulted primarily from reductions in accounts receivable net of applied
reserves of $3.3 million, $0.6 million in reductions in inventory net of
reserves applied, $0.6 million in collections on the note receivable and
increases in accounts payable of $2.1 million offset by increases in prepaid
assets and other assets of approximately $0.5 million. Included in the net
reserves was the write-off of the Azteca note and subsequent payment in shares
as discussed in Note 3 to the consolidated financial statements.

Cash provided by operating activities was $1.8 million for the year
ended December 31, 2006. The cash generated by operating activities during 2006
resulted primarily from net earnings (before non-cash expenses) of approximately
$2.3 million; reductions in inventory net of applied reserves of $2.5 million;
$1.0 million in reductions in accounts receivable net of reserves applied; and
approximately $0.6 million in collections on the note receivable; net of
reductions in accounts payable of $2.6 million; repayments on notes payable of
$0.9 million and reductions in other liabilities, net of approximately $1.2
million. The note receivable collections are associated with unsettled accounts
receivable from a former customer converted into a note receivable in early
2006. The repayments on the notes payable are principally associated with
previously accrued legal expenses converted into a note payable in May of 2006.
Payments on the note payable are made from collections received from the note
receivable which is pledged to the note payable. These notes are non-recurring
settlements associated primarily with sales and expenses from 2005 and prior
transactions.

The net decrease in inventory of $2.5 million for the year ended
December 31, 2006 reflects our efforts to dispose of lower slower-moving and
obsolete inventory components. The cost of net inventories eliminated during
2006 was $8.6 million, and reserves applicable to this inventory of $6.1 million
were applied to these dispositions. Accounts receivable for the year ended
December 31, 2006 declined by $2.1 million primarily as a result of improved
collections and faster turns of accounts receivable and by approximately $0.7
million in accounts written-off. Accounts receivable reserves declined by $1.1
million from the write-off of uncollectible accounts and by approximately $0.4
million from the collection of accounts reserved for in prior years. In
addition, during 2006 collections of accounts written-off in prior years was
$0.5 million.

INVESTING ACTIVITIES

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

Net cash used in investing activities for the year ended December 31,
2007 and 2006 consisted of capital expenditures of $0.7 million and $0.3
million, respectively, for leasehold improvements, office equipment for new
employees, improvements in our technology systems and a marketing website
acquisition.

FINANCING ACTIVITIES

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

Net cash used in financing activities for the year ended December 31,
2007 was $1.4 million. During 2007, $13.8 million (net of issuance costs) was
provided by the issuance of common stock and warrants and by borrowings under a
new debt facility (see below) designated to pay off our previously existing
convertible promissory notes and to provide funds for future growth. The
proceeds from this debt facility were used to pay the $12.5 million of secured
convertible promissory notes, and $1.0 million was used to pay a related party
note of $0.6 million and associated accrued interest. Approximately $1.2 million
was used primarily for the repayment of borrowings under capital leases and
notes payable and $0.5 million in initial borrowings under the revolving note
were repaid.

Net cash used in financing activities for the years ended December 31,
2006 reflects the repayment of notes payable and capital lease obligations.

On June 27, 2007, we entered into a Revolving Credit and Term Loan
Agreement with Bluefin Capital, LLC that provides for a $5.0 million revolving
credit loan and a $9.5 million term loan for a three year period ending June 30,
2010. Bluefin Capital subsequently assigned its rights and obligations under the
credit facility agreements to an affiliate, CVC California, LLC ("CVC"). The
revolving credit portion of the facility, as amended, permits borrowings based
upon a formula including 85% of eligible receivables and 55% of eligible
inventory and provides for monthly interest payments at the prime rate (5.25% at
December 31, 2008) plus 2.0%. The term loan bears interest at 8.5% annually with
quarterly interest payments and repayment in full at maturity. Borrowings under
both credit facilities are secured by all of our assets. There was $3,000 and
$879,000 in available borrowings at December 31, 2008 and December 31, 2007,
respectively.

In connection with the Revolving Credit and Term Loan Agreement, we
issued 1,500,000 shares of common stock to the lender for $0.001 per share, and
issued warrants to purchase 2,100,000 shares of common stock. The warrants were
exercisable over a five-year period and initially 700,000 warrants were
exercisable at $0.95 per share; 700,000 warrants were exercisable at $1.05 per
share; and 700,000 warrants were exercisable at $1.14 per share. The warrants
did not require cash settlements. The relative fair value of the equity
($2,374,169, which includes a reduction for financing costs) issued with this
debt facility was allocated to paid-in-capital and reflected as a debt discount
to the face value of the term note. This discount is being amortized over the
term of the note and recognized as additional interest cost as amortized. Costs
associated with the debt facility included debt fees, commitment fees,
registration fees, and legal and professional fees of $486,000. The costs
allocable to the dbt instruments are reflected as a reduction to the face value
of the note on the balance sheet.

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

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

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

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

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

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

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

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

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

The extent of our future long-term capital requirements will depend on
many factors, including our results of operations, future demand for our
products, the size and timing of future acquisitions, our borrowing base
availability limitations related to eligible accounts receivable and inventories
and our expansion into foreign markets. Our need for additional long-term
financing includes the integration and expansion of our operations to exploit
our rights under our Talon trade name, the expansion of our operations in the
Asian, Central and South American and Caribbean markets and the further
development of our waistband technology. If our cash from operations is less
than anticipated or our working capital requirements and capital expenditures
are greater than we expect, we may need to raise additional debt or equity
financing in order to provide for our operations. We are continually evaluating
various financing strategies to be used to expand our business and fund future
growth or acquisitions. There can be no assurance that additional debt or equity
financing will be available on acceptable terms or at all. If we are unable to
secure additional financing, we may not be able to execute our plans for
expansion, including expansion into foreign markets to promote our TALON brand
trade name, and we may need to implement additional cost savings initiatives,
any of which could have a material adverse effect on our financial condition and
results of operations and affect our ability to operate as a going concern. See
Note 2 to the consolidated financial statements.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

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) .. $ 222,300 $ 222,300 $ -- $ -- $ --
Capital lease obligations 192,900 190,900 2,000 -- --
Operating leases ........ 878,200 570,300 304,100 3,800 --
Revolver & Term Note .... 16,702,100 1,125,400 15,576,700 -- --
Other notes payable ..... 146,700 146,700 -- -- --
----------- ----------- ----------- ----------- -----------
Total Obligations .. $18,142,200 $ 2,255,600 $15,882,800 $ 3,800 $ --
=========== =========== =========== =========== ===========

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

At December 31, 2008 and 2007, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.

RELATED PARTY TRANSACTIONS

For a description of certain transactions to which we were or will be a
party, and in which any director, executive officer, or shareholder of more than
5% of our common stock or any member of their immediate family had or will have
a direct or indirect material interest, see Item 13, "Certain Relationships and
Related Transactions and Director Independence," of this Report.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

2008 2007 2006
---------- ---------- ----------

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

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

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

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

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

o We record deferred tax assets arising from temporary timing
differences between recorded net income and taxable net income
when and if we believe that future earnings will be sufficient
to realize the tax benefit. For those jurisdictions where the
expiration date of tax benefit carry-forwards or the projected
taxable earnings indicate that realization is not likely, a
valuation allowance is provided. If we determine that we may
not realize all of our deferred tax assets in the future, we
will make an adjustment to the carrying value of the deferred
tax asset, which would be reflected as an income tax expense.
Conversely, if we determine that we will realize a deferred
tax asset, which currently has a valuation allowance, we would
be required to reverse the valuation allowance, which would be
reflected as an income tax benefit. We believe that our
estimate of deferred tax assets and determination to record a
valuation allowance against such assets are critical
accounting estimates because they are subject to, among other
things, an estimate of future taxable income, which is
susceptible to change and dependent upon events that may or
may not occur, and because the impact of recording a valuation
allowance may be material to the assets reported on the
balance sheet and results of operations. See Note 12 to the
consolidated financial statements.

o We record impairment charges when the carrying amounts of
long-lived assets are determined not to be recoverable.
Impairment is measured by assessing the usefulness of an asset
or by comparing the carrying value of an asset to its fair
value. Fair value is typically determined using quoted market
prices, if available, or an estimate of undiscounted future
cash flows expected to result from the use of the asset and
its eventual disposition. The amount of impairment loss is
calculated as the excess of the carrying value over the fair
value. Changes in market conditions and management strategy
have historically caused us to reassess the carrying amount of
our long-lived assets. Long-lived assets were evaluated, and
we determined that certain components of idle equipment would
not either be effectively redeployed or would be sold or
disposed. Accordingly, the Company took $2,430,000 in
impairment charges for the period ending December 31, 2008.
See Note 5 to the consolidated financial statements.

o Sales are recognized when persuasive evidence of an
arrangement exists, product title has passed, pricing is fixed
or determinable and collection is reasonably assured. Sales
resulting from customer buy-back agreements, or associated
inventory storage arrangements are recognized upon delivery of

the products to the customer, the customer's designated
manufacturer, or upon notice from the customer to destroy or
dispose of the goods. Sales, provisions for estimated sales
returns and the cost of products sold are recorded at the time
title transfers to customers. Actual product returns are
charged against estimated sales return allowances, which
returns have been insignificant.

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

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

In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT
NO. 115 ("SFAS 159") . SFAS 159 permits entities to choose to measure certain
financial assets and liabilities at fair value. Unrealized gains and losses,
arising subsequent to adoption are reported in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007 and, accordingly, we have
adopted SFAS 159 in the first quarter of 2008. It did not have any impact on our
consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

All of our sales are denominated in United States dollars or the
currency of the country in which our products originate. We are exposed to
market risk for fluctuations in the foreign currency exchange rates for certain
product purchases that are denominated in Hong Kong dollars and Chinese Yuan. We
do not intend to purchase contracts to hedge the exchange exposure for future
product purchases. There were no hedging contracts outstanding as of December
31, 2008. Currency fluctuations can increase the price of our products to
foreign customers which can adversely impact the level of our export sales from
time to time. The majority of our cash equivalents are held in United States
dollars in various bank accounts and we do not believe we have significant
market risk exposure with regard to our investments. At December 31, 2008, the
Revolving Credit Note of $4.6 million was subject to interest rate fluctuations.
A one percentage point increase in interest rates would result in an annualized
increase to interest expense of approximately $46,000 on our variable rate
borrowings.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS
PAGE
----

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders Talon International, Inc.
Woodland Hills, California

We have audited the consolidated balance sheets of Talon International, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders' equity and convertible redeemable
preferred stock, and cash flows for each of the three years in the period ended
December 31, 2008. Our audits also included the financial statement schedules of
Talon International, Inc., listed in Item 15(a). These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Talon International,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements,
taken as a whole, presents fairly in all material respects the information set
forth therein.

We were not engaged to examine management's assertion about the effectiveness of
Talon International, Inc.'s internal control over financial reporting as of
December 31, 2008, included in the accompanying Management's Report on Internal
Control Over Financial Reporting and accordingly, we do not express an opinion
thereon.

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

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

TALON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

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

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

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

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

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

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

Commitments and contingencies (Note 14)

Stockholders' Equity:
Preferred stock Series A, $0.001 par value;
250,000 shares authorized; no shares issued
or outstanding ............................... -- --
Common stock, $0.001 par value, 100,000,000
shares authorized; 20,291,433 shares issued
and outstanding at December 31, 2008 and
December 31, 2007, respectively .............. 20,291 20,291
Additional paid-in capital ..................... 54,769,072 54,510,161
Accumulated deficit ............................ (63,651,032) (55,292,246)
Accumulated other comprehensive income ......... 99,737 44,444
------------ ------------
Total stockholders' equity (deficit) ............. (8,761,932) (717,350)
------------ ------------
Total liabilities and stockholders' equity ....... $ 15,602,578 $ 21,683,635
============ ============

See accompanying notes.

TALON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

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

Net sales ................................. $ 48,170,980 $ 40,529,555 48,825,002
Cost of goods sold ........................ 35,553,857 28,422,820 34,356,034
------------ ------------ ------------
Gross profit .............................. 12,617,123 12,106,735 14,468,968

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

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

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

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

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

See accompanying notes.

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

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

BALANCE, JANUARY 1, 2006 .. 18,241,045 $ 18,241 -- $ --
Common stock issued for
services ............. 225,388 225 -- --
Stock based compensation -- -- -- --
Net income ............. -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2006 18,466,433 18,466 -- --
Common stock issued upon
exercise of options .. 75,000 75 -- --
Common stock warrants
issued in private
placement transaction 1,750,000 1,750 -- --
Stock based compensation -- -- -- --
Foreign currency
translation ............ -- -- -- --
Adoption of FIN 48 ..... -- -- -- --
Net loss ............... -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2007 20,291,433 20,291 -- --
Warrant fair value
adjustment ........... -- -- -- --
Stock based compensation -- -- -- --
Foreign currency
translation .......... -- -- -- --
Net loss ............... -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2008 20,291,433 $ 20,291 -- $ --
============ ============ ============ ============

Additional Other Retained
Paid-In Comprehensive Earnings
Capital Income (Deficit) Total
------------ ------------ ------------ ------------

BALANCE, JANUARY 1, 2006 .. $ 51,327,878 $ -- $(50,434,042) $ 912,077
Common stock issued for
services ............. 102,504 -- -- 102,729
Stock based compensation 362,120 -- -- 362,120
Net income ............. -- -- 309,303 309,303
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2006 51,792,502 -- (50,124,739) 1,686,229
Common stock issued upon
exercise of options .. 42,671 -- -- 42,746
Common stock warrants
issued in private
placement transaction 2,429,988 -- -- 2,431,738
Stock based compensation 245,000 -- -- 245,000
Foreign currency
translation ............ -- 44,444 -- 44,444
Adoption of FIN 48 ..... -- -- (245,800) (245,800)
Net loss ............... -- -- (4,921,707) (4,921,707)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2007 54,510,161 44,444 (55,292,246) (717,350)
Warrant fair value
adjustment ........... (148,302) -- -- (148,302)
Stock based compensation 407,213 -- -- 407,213
Foreign currency
translation .......... -- 55,293 -- 55,293
Net loss ............... -- -- (8,358,786) (8,358,786)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2008 $ 54,769,072 $ 99,737 $(63,651,032) $ (8,761,932)
============ ============ ============ ============

See accompanying notes

TALON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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

See accompanying notes.

TALON INTERNATIONAL, INC. Year Ended Year Ended Year Ended
Consolidated Statements of Cash Flows December 31, December 31, December 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2008 2007 2006
Cash received (paid) during the year for: ------------ ------------ ------------

Interest paid ............................................. $ (1,301,790) $ (1,166,333) $ (975,609)
Interest received ......................................... $ 15,509 $ 182,263 $ 320,232
Income taxes paid ......................................... $ (183,970) (90,530) (33,900)
Non-cash financing activity:
Notes payable issued in modification of loan agreement .... $ 1,000,000 $ -- $ --
Debt modification fee ..................................... $ 145,000 $ -- $ --
Deferred financing cost ................................... $ -- $ 217,302 $ --
Effect of foreign currency translation on net assets ...... $ 55,293 $ 10,728 $ --
Notes receivable, converted to marketable securities ...... $ 1,040,000 $ -- $ --
Trade payable & accrued legal, converted to notes payable.. $ -- $ -- $ 1,775,000
Capital lease obligation .................................. $ -- $ 57,793 $ 64,432

See accompanying notes.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Talon International, Inc. (together with its subsidiaries, the
"Company") is an apparel company that specializes in the distribution of trim
items to manufacturers of fashion apparel, specialty retailers and mass
merchandisers. The Company acts as a full service outsourced trim management
department for manufacturers, a specified supplier of trim items to owners of
specific brands, brand licensees and retailers, a manufacturer and distributor
of zippers under the TALON brand name and a distributor of stretch waistbands
that utilize licensed patented technology under the TEKFIT brand name.

ORGANIZATION AND BASIS OF PRESENTATION

Talon International, Inc. is the parent holding company of Tag-It,
Inc., a California corporation, Tag-It Pacific (HK) Ltd., a BVI corporation,
Tag-It de Mexico, S.A. de C.V., A.G.S. Stationery, Inc., a California
corporation (collectively, the "Subsidiaries"), all of which were consolidated
under a parent limited liability company on October 17, 1997 and became
wholly-owned subsidiaries of the Company immediately prior to the effective date
of the Company's initial public offering in January 1998. Immediately prior to
the initial public offering, the outstanding membership units of Tag-It Pacific
LLC were converted to 2,470,001 shares of common stock of the Company. In
January 2000, the Company formed Tag-It Pacific Limited, a Hong Kong
corporation, and in April 2000, the Company formed Talon International, Inc., a
Delaware corporation. During 2006 we formed two wholly owned subsidiaries of
Tag-It Pacific, Inc.; Talon Zipper (Shenzhen) Company Ltd. in China, and Talon
International Pvt. Ltd., in India. All newly formed corporations are 100%
wholly-owned Subsidiaries of Talon International, Inc.

On July 20, 2007, the Company changed its corporate name from Tag-It
Pacific, Inc. to Talon International, Inc.

All significant intercompany accounts and transactions have been
eliminated in consolidation. Assets and liabilities of foreign subsidiaries are
translated at rates of exchange in effect at the close of the period. Revenues
and expenses are translated at the weighted average of exchange rates in effect
during the year. The resulting translation gains and losses are deferred and are
shown as a separate component of stockholders' equity, if material, and
transaction gains and losses, if any, are recorded in the consolidated statement
of operations in the period incurred. During 2008, 2007 and 2006, foreign
currency translation and transaction gains and losses were not material. The
Company does not engage in hedging activities with respect to exchange rate
risk.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
The accounting estimates that require our most significant, difficult and
subjective judgments include the valuation of marketable equity securities; the
valuation allowance for accounts receivable, notes receivable and inventory and
the assessment of recoverability of long-lived assets and intangible assets and
the recognition and measurement of current and deferred income taxes (including
the measurement of uncertain tax positions). Actual results could differ
materially from our estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The Company had
approximately $0.9 and $2.7 million at financial institutions in excess of
governmentally insured limits at December 31, 2008 and 2007.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

MARKETABLE SECURITIES

The portfolio of marketable securities is stated at the lower of cost
or market at the balance sheet date and consists of common stocks. The Company
accounts for its investments, which are all available for sales securities,
under the provisions of Statement of Financial Accounting Standards ("SFAS")
115, "Accounting for Certain Investments in Debt and Securities". Realized gains
or losses are determined on the specific identification method and are reflected
in income. Unrealized losses are recorded directly in other comprehensive income
except those unrealized losses that are deemed to be other than temporary, which
losses are reflected in income. See Note 3 to the consolidated financial
statements.

ALLOWANCE FOR ACCOUNTS AND NOTES RECEIVABLE DOUBTFUL ACCOUNTS

We are required to make judgments as to the collectability of accounts
and notes receivable based on established aging policy, historical experience
and future expectations. The allowances for doubtful accounts represent
allowances for customer trade accounts and notes receivable that are estimated
to be partially or entirely uncollectible. These allowances are used to reduce
gross trade receivables or note receivable to their net realizable value. We
record these allowances based on estimates related to the following factors: (i)
customer specific allowances; (ii) amounts based upon an aging schedule; and
(iii) an estimated amount, based on our historical experience, for issues not
yet identified. The total allowance for accounts receivable doubtful accounts at
December 31, 2008 and 2007 was $217,300 and $140,500, respectively, and for
notes receivable at December 2008 was $474,000. See Note 4 to the consolidated
financial statements.

INVENTORIES

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

Inventories consist of the following:
Year Ended December 31,
-------------------------------
2008 2007
---------- ----------

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

IMPAIRMENT OF LONG-LIVED ASSETS

We record impairment charges when the carrying amounts of long-lived
assets are determined not to be recoverable. Impairment is measured by assessing
the usefulness of an asset or by comparing the carrying value of an asset to its
fair value. Fair value is typically determined using quoted market prices, if
available, or an estimate of undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition. The amount of impairment
loss is calculated as the excess of the carrying value over the fair value.
Changes in market conditions and management strategy have historically caused us
to reassess the carrying amount of our long-lived assets. See Note 5.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT AND FIXED ASSETS HELD FOR SALE

Property and equipment are recorded at historical cost. Maintenance and
repairs are expensed as incurred. Upon retirement or other disposition of
property and equipment, the related cost and accumulated depreciation or
amortization are removed from the accounts and any gains or losses are included
in results of operations.

Depreciation of property and equipment is computed using the
straight-line method based on estimated useful lives as follows:

Furniture and fixtures 5 years

Machinery and equipment 5 to 10 years

Computer equipment 5 years

Leasehold improvements Term of the lease or the estimated life
of the related improvements, whichever
is shorter.

Dies and molds 1 year

Idle equipment 5 to 10 years

Property and equipment consist of the following:

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

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

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

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

INTANGIBLE ASSETS

Intangible assets consist of tradename and exclusive license and
intellectual property rights. Intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets.
Intangible assets with estimable useful lives are amortized over their
respective estimated useful lives, which average 5 years, to their estimated
residual values and reviewed for impairment in accordance with FASB Statement
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

At December 31, 2008, the Company evaluated its Intangible Assets and
determined that there was no impairment of these assets and made no changes to
the net carrying amount of Tradename for the years ended December 31, 2008 and
2007. Amortization expense related to exclusive license and intellectual
property rights of $29,000 and $115,500 were recorded for the years ended
December 31, 2007 and 2006, respectively. During the first quarter of 2007, the
exclusive license and intellectual property became fully amortized, thus no
amortization expense for intangible assets was recorded for December 31, 2008.

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

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

Intangible Assets:
Tradename ................................................. $ 4,110,751 $ 4,110,751
Accumulated amortization .................................. -- --
----------- -----------
Tradename, net ........................................ 4,110,751 4,110,751

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

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and tax benefit carry-forwards. Deferred tax liabilities and assets at the
end of each period are determined using enacted tax rates. The Company records
deferred tax assets arising from temporary timing differences between recorded
net income and taxable net income when and if we believe that future earnings
will be sufficient to realize the tax benefit. For those jurisdictions where the
expiration date of tax benefit carry-forwards or the projected taxable earnings
indicate that realization is not likely, a valuation allowance is provided.

The provisions of SFAS No. 109, "Accounting for Income Taxes," require
the establishment of a valuation allowance when, based on currently available
information and other factors, it is more likely than not that all or a portion
of a deferred tax asset will not be realized. SFAS No. 109 provides that an
important factor in determining whether a deferred tax asset will be realized is
whether there has been sufficient income in recent years and whether sufficient
income is expected in future years in order to utilize the deferred tax asset.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

upon events that may or may not occur, and because the impact of recording a
valuation allowance may be material to the assets reported on the balance sheet
and results of operations.

On January 1, 2007 the Company adopted the provisions of Financial
Accounting Standard Board Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes- an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on the recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition associated with income tax
liabilities. As a result of the implementation of FIN 48, the Company recognized
an increase in liabilities for unrecognized tax benefits of approximately
$246,000, which was accounted for as an increase in the January 1, 2007
accumulated deficit. See Note 13.

STOCK-BASED COMPENSATION

We have employee equity incentive plans, which are described more fully
in Note 11. Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment,"
("SFAS 123(R)") which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and directors based
on estimated fair values. Accordingly, we measure share-based compensation at
the grant date based on the fair value of the award.

The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the accounting standard as
of January 1, 2006. The Company's financial statements as of and for the years
ended December 31, 2006, 2007 and 2008 reflect the impact of SFAS 123(R).

Options issued to consultants, which are more fully described in Note
11, are accounted for in accordance with the provisions of Emerging Issues Task
Force (EITF) No. 96-18, "Accounting for Equity Instruments That Are Issued to
Others Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."

SFAS 123(R) requires companies to estimate the fair value of
share-based payment awards to employees and directors on the date of grant using
an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service
periods in the Company's Statements of Operations. Stock-based compensation
expense recognized in the Statements of Operations for the years ended December
31, 2008, 2007 and 2006 included compensation expense for share-based payment
awards granted prior to, but not yet vested as of January 1 of the applicable
year based on the grant date fair value estimated in accordance with the
pro-forma provisions of SFAS 123(R) and compensation expense for the share-based
payment awards granted subsequent to January 1 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). For
stock-based awards issued to employees and directors, stock-based compensation
is attributed to expense using the straight-line single option method, which is
consistent with how the prior-period pro formas were provided. As stock-based
compensation expense recognized in the Statements of Operations for 2008, 2007
and 2006 is based on awards expected to vest, SFAS 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. For the years ended
December 31, 2008, 2007 and 2006, expected forfeitures are immaterial and as
such the Company is recognizing forfeitures as they occur.

The Company's determination of fair value of share-based payment awards
to employees and directors on the date of grant uses the Black-Scholes model,
which is affected by the Company's stock price as well as assumptions regarding
a number of complex and subjective variables. These variables include, but are

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

not limited to, the expected stock price volatility over the expected term of
the awards and actual and projected employee stock option exercise behaviors.
The Company estimates expected volatility using historical data. The expected
option term is estimated using the "safe harbor" provisions under SAB 107.

FOREIGN CURRENCY TRANSLATION

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

COMPREHENSIVE INCOME

The Company has adopted Statement of Financial Standard No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), issued by the FASB and effective
for financial statements with fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.

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

REVENUE RECOGNITION

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

Sales rebates and discounts are common practice in the industries in
which the Company operates. Volume, promotional, price, cash and other discounts
and customer incentives are accounted for as a reduction to gross sales. Rebates
and discounts are recorded based upon estimates at the time products are sold.
These estimates are based upon historical experience for similar programs and
products. The Company reviews such rebates and discounts on an ongoing basis and
accruals for rebates and discounts are adjusted, if necessary, as additional
information becomes available.

RECLASSIFICATION

Certain reclassifications have been made to the prior year financial
statements to conform to 2008 presentation.

CLASSIFICATION OF EXPENSES

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

SELLING EXPENSE - Selling expenses primarily include royalty expense,
sales salaries and commissions, travel and entertainment, marketing and other
sales-related costs.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

INTEREST EXPENSE AND INTEREST INCOME - Interest expense reflects the
cost of borrowing and amortization of deferred financing costs and discounts.
Interest expense for the years ended December 31, 2008, 2007 and 2006 was
$2,501,000 $1,922,000 and $1,357,000, respectively. Interest income of $64,000,
$242,000 and $368,000 for the years ended December 31, 2008, 2007 and 2006,
respectively, consists of earnings from outstanding amounts due to the Company
under notes and other interest bearing receivables.

SHIPPING AND HANDLING COSTS

In accordance with Emerging Issues Task Force 00-10, Accounting for
Shipping and Handling Fees and Costs, the Company records shipping and handling
costs billed to customers as a component of revenue and shipping and handling
costs incurred by the Company for outbound freight are recorded as a component
of cost of goods sold.

LITIGATION

We are currently involved in various lawsuits, claims and inquiries,
most of which are routine to the nature of the business and in accordance with
SFAS No. 5, "Accounting for Contingencies," we accrue estimates of the probable
and estimable losses for the resolution of these claims. The ultimate resolution
of these claims could affect our future results of operations for any particular
quarterly or annual period should our exposure be materially different from our
earlier estimates or should liabilities be incurred that were not previously
accrued. See Note 14.

FAIR VALUE OF FINANCIAL INFORMATION

The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value. ACCOUNTS RECEIVABLE: Due to the short-term nature of the
receivables, the fair value approximates the carrying value. DUE FROM RELATED
PARTIES AND NOTES PAYABLE TO RELATED PARTIES: Due to the short-term nature and
current market borrowing rates of the loans and notes, the fair value
approximates the carrying value. NOTES PAYABLE: Fair value approximates carrying
value based upon current market borrowing rates for loans with similar terms and
maturities.

NEW ACCOUNTING PRONOUNCEMENTS

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT
NO. 115 ("SFAS 159") . SFAS 159 permits entities to choose to measure certain
financial assets and liabilities at fair value. Unrealized gains and losses,
arising subsequent to adoption are reported in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007 and, accordingly, we have
adopted SFAS 159 in the first quarter of 2008.
We chose to not report unrealized gains and losses in earnings. See Note 3.

NOTE 2-- SIGNIFICANT RISKS AND UNCERTAINTIES

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

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

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

NOTE 3-- MARKETABLE SECURITIES AND RELATED NOTE RECEIVABLE

At December 31, 2006 a note receivable from Azteca Productions
International, Inc. ("Azteca") was outstanding in the amount of $2,799,460. The
note was receivable in monthly installments over thirty-one months beginning
March 1, 2006. The payments, after initial period generally ranged from
$133,000-$267,000 per month until paid in full, but no later than July 1, 2008.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Azteca failed to make the scheduled note payments due on July 1, 2007
and all subsequent periods thereafter, triggering a default, resulting in the
entire note balance becoming immediately due and payable. On September 10, 2007,
after meeting with and conducting extensive discussions with Azteca, they failed
to provide to the Company certain security interests as required under the note
to make the scheduled note payments and Azteca further expressed its belief that
it would be unable to make any note payments in the foreseeable future. As a
result, in September 2007, the Company reflected a charge of $2,127,653 to fully
reserve the outstanding note balance from Azteca. In December 2007, an agreement
was reached whereby Azteca delivered shares of common stock of a separate public
corporation in lieu of the note receivable and the Company reversed a portion of
the impairment recorded in September 2007 and reflected income of $1,040,000 as
a reversal of the previously recorded bad debt. The agreement with Azteca called
for them to deliver 2,000,000 shares of unrestricted common stock of a separate
public corporation with a value of $1,040,000, in exchange for cancellation of
the Azteca note receivable. No realized or unrealized gains or losses were
recognized during the year ended December 31, 2007. On January 30, 2008, the
Company received the unrestricted common stock of this public company and the
Company could begin trading these shares, selling no more than 10,000 shares per
week in the open market, and without restriction in private transactions.

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

NOTE 4-- NOTE RECEIVABLE RELATED PARTY

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

NOTE 5-- FIXED ASSETS HELD FOR SALE

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

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6-- DEMAND NOTES PAYABLE TO RELATED PARTIES

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

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

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

NOTE 7-- CAPITAL LEASE OBLIGATIONS

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

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

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

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

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

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8-- NOTES PAYABLE

Notes payable consist of the following:

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

$765,000 note payable to First National Bank
dated June 3, 2004; interest at 6.5%; payable
in eighty-four monthly payments of principal
and interest of $5,746 beginning July 2004;
twenty-year amortization, all unpaid
principal and interest due June 3, 2011
(seven years); secured by building in North
Carolina; paid in full in October 2008 ..... $ -- $ 689,651

$880,000 note payable to First National Bank
dated November 22, 2004; interest at 6.5%;
payable in sixty monthly payments of
principal and interest of $17,254 beginning
December 2004; note payments were accelerated
in October 2008 changing the monthly payments
to $25,000 and the unpaid principal and
interest due from November 22, 2009 to June
30, 2009; secured by manufacturing equipment 144,064 371,863

$180,000 note payable to Next Trim, LLC dated
January 22, 2007; interest at 6.5%; payable
in twenty-four monthly payments of principal
and interest beginning January 2007, of
$7,500 until December 2008 .................. -- 86,078
---------- ----------
Notes Payable 144,064 1,147,592
Less Current portion 144,064 299,108
---------- ----------
Notes payable, net of current portion $ - $ 848,484
========== ==========

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

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

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

NOTE 9 - DEBT FACILITY

On June 27, 2007, the Company entered into a Revolving Credit and Term
Loan Agreement with Bluefin Capital, LLC subsequently assigned to CVC
California, LLC, that provides for a $5.0 million revolving credit loan and a
$9.5 million term loan for a three year period ending June 30, 2010. The
revolving credit portion of the facility permitted borrowings based upon a
formula including 75% the Company's eligible receivables and 55% of eligible
inventory, and provided for monthly interest payments at the prime rate (5.25%
at December 31, 2008) plus 2.0%. The term loan bears interest at 8.5% annually
with quarterly interest payments and repayment in full at maturity. Borrowings
under both credit facilities are secured by all of the assets of the Company.

In connection with the Revolving Credit and Term Loan Agreement, the
Company issued 1,500,000 shares of common stock to the lender for $0.001 per
share, and issued warrants to purchase 2,100,000 shares of common stock. The
warrants were exercisable over a five-year period and initially 700,000 warrants
were exercisable at $0.95 per share; 700,000 warrants were exercisable at $1.05

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

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

On April 3, 2008, the Company executed a further amendment to its
existing loan agreement. The amendment included a redefining of the EBITDA
covenants, and the cancellation of the common stock warrants previously issued
to the lender in exchange for the issuance by the Company of an additional note
payable to CVC for $1.0 million. The note bears interest at 8.5% and both the
note and accrued interest are payable at maturity on June 30, 2010. In addition,
the Company's borrowing base was modified in this amendment by increasing the
allowable portion of inventory held by third party vendors to $1.0 million with
no more than $500,000 held at any one vendor and increasing the percentage of
accounts receivable to be included in the borrowing base to 85%. The Company
incurred a one-time modification fee of $145,000 to secure the amendment of the
agreement. The new relative fair value of the equity issued with this debt of
$2,542,000, including the modifications in this amendment and a reduction for
financing costs, is being amortized over the term of the note.

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

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

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

Interest expense related to the Revolving Credit and Term Loan
Agreement for the year ended December 31, 2008 was $2,370,570, which includes
$1,186,837 in amortization of discounts and deferred financing costs. Interest
expense related to the Revolving Credit and Term Loan Agreement for the year
ended December 31, 2007 was $1,008,520, which includes $461,102 in amortization
of discounts and deferred financing costs.

NOTE 10--STOCKHOLDERS' EQUITY AND PREFERRED STOCK

PREFERRED STOCK

STOCKHOLDER'S RIGHTS PLAN

In October 1998, the Company adopted a stockholder's rights plan. Under
the rights plan the Company distributed one preferred share purchase right for
each outstanding share of Common Stock outstanding on November 6, 1998. Upon the
occurrence of certain triggering events related to an unsolicited takeover
attempt of the Company, each purchase right not owned by the party or parties
making the unsolicited takeover attempt will entitle its holder to purchase
shares of the Company's Series A Preferred Stock at a value below the then
market value of the Series A Preferred Stock. The rights of holders of the
Common Stock will be subject to, and may be adversely affected by, the rights of
holders of the share purchase rights, the Series A Preferred Stock and any other
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the Company's outstanding voting stock.

COMMON STOCK

EXCLUSIVE LICENSE AND INTELLECTUAL PROPERTY RIGHTS AGREEMENT

On April 2, 2002, the Company entered into an Exclusive License and
Intellectual Property Rights Agreement (the "Agreement") with Pro-Fit Holdings
Limited ("Pro-Fit"). The Agreement gives the Company the exclusive rights to
sell or sublicense waistbands manufactured under patented technology developed
by Pro-Fit for garments manufactured anywhere in the world for the United States
market and all United States brands. In accordance with the Agreement, the
Company issued 150,000 shares of its common stock which were recorded at the
market value of the stock on the date of the Agreement. The shares contain
restrictions related to the transfer of the shares and registration rights. The
Agreement has an indefinite term that extends for the duration of the trade
secrets licensed under the Agreement. The Company has recorded an intangible
asset amounting to $577,500, which was fully amortized by the year ended
December 31, 2007. The Company is currently in litigation with this supplier
(See Notes 1 and 14).

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11--STOCK OPTION INCENTIVE PLAN AND WARRANTS

STOCK OPTION INCENTIVE PLAN

On July 14, 2008, at the Company's annual meeting of stockholders, a
new 2008 Stock Plan was approved by the stockholders. The 2008 Stock Plan
authorizes up to 2,500,000 shares of common stock for issuance pursuant to
awards granted to individuals under the plan. On July 31, 2007, at the Company's
annual meeting of stockholders, the 2007 Stock Plan was approved which replaced
the 1997 Stock Plan. The 2007 Stock Plan authorizes up to 2,600,000 shares of
common stock
for issuance pursuant to awards granted to individuals under the
plan. Options granted to certain employees in 2008 include certain acceleration
features based on Company performance as determined the Board of Directors each
year. Consistent with SFAS 123(R), the stock based compensation expense for the
employee options are recognized on a time-phased vesting schedule through the
vesting date of December 31, 2010. In calculating the outcome of meeting
performance conditions, the Company did not meet performance criteria and
accordingly, the Company did not use accelerated vesting for these options.

On October 1, 1997, the Company adopted the 1997 Stock Incentive Plan
(the "1997 Plan"), which authorized the granting of a variety of stock-based
incentive awards. The Board of Directors, who determines the recipients and
terms of the awards granted, administers the 1997 Plan. On July 31, 2006 at the
Company's annual meeting of stockholder's two amendments to the 1997 Stock Plan
were approved which (1) increased the maximum number of shares of common stock
that may be issued pursuant to awards granted under the 1997 Plan from 3,077,500
shares to 6,000,000 shares, and (2) increased the number of shares of common
stock that may be issued pursuant to awards granted to any individual under the
plan in a single year to 50% of the total number of shares available under the
plan.

The Company believes that such awards better align the interests of its
employees with those of its shareholders. Option awards are generally granted
with an exercise price equal to the market price of the Company's stock on the
date of the grant for years prior to 2006, and for the years ending after 2006,
the average market price of the Company's stock for the five trading days
following the date of the grant. Those option awards generally vest over periods
determined by the Board from immediate to 4 years of continuous service and have
10 year contractual terms.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

The Company's determination of fair value of share-based payment awards
on the date of grant uses the Black-Scholes model and the assumptions noted in
the following table for the years ended December 31. Expected volatilities are
based on the historical volatility of the Company's stock price and other
factors. These variables include, but are not limited to, the expected stock
price volatility over the expected term of the awards and actual and projected
employee stock option exercise behaviors. The expected option term is estimated
using the "safe harbor" provisions under SAB 107. The risk free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield in
effect at the time of the grant.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

A summary of our stock option information under all Stock Plans as of
December 31, 2008 is as follows:

Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual Intrinsic
EMPLOYEE AND DIRECTOR Shares Price Life (Years) Value
------------ ------------ ------------ ------------

Outstanding at December 31, 2008 ........ 7,100,536 $ 0.98 6.0 $ 0.00

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

Exercisable ............................. 4,305,253 $ 1.46 4.08 $ 0.00

Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual Intrinsic
NON-EMPLOYEE OPTIONS & WARRANTS Shares Price Life (Years) Value
------------ ------------ ------------ ------------

Outstanding at December 31, 2008 ....... 318,495 $ 3.65 0.9 $ 0.00

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

Exercisable ............................ 318,495 $ 3.65 0.9 $ 0.00

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

There was $492,000 of total unrecognized compensation costs related to
non-vested stock options and warrants as of December 31, 2008. This cost is
expected to be recognized over the weighted-average period of 2.0 years. The
total fair value of shares vested during the years ended December 31, 2008, 2007
and 2006 was $407,000, $245,000 and $236,000, respectively.

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12--INCOME (LOSS) PER SHARE

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

December 31, 2008 December 31, 2007
------------------------------------------- ------------------------------------------
Loss Shares Per Share Income Shares Per Share
Years ended: (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------ ------------ ------------ ------------ ------------ ------------ ------------

Basic income (loss):
Income (loss) available
to common stockholders ..... $ (8,358,786) 20,291,433 $ (0.41) $ (4,921,707) 20,155,563 $ (0.24)

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

December 31, 2006
-----------------------------------------
Loss Shares Per Share
Years ended: (Numerator) (Denominator) Amount
------------------------------ ------------ ------------ ------------

Basic income (loss):
Income (loss) available
to common stockholders ..... $ 309,303 18,377,484 $ 0.02

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

Warrants to purchase 318,495 shares of common stock for $3.65 and
options to purchase 7,100,536 shares of common stock for between $0.18 and
$5.23, per share were outstanding for the year ended December 31, 2008, but were
not included in the computation of diluted loss per share because the effect of
exercise or conversion would have an antidilutive effect on loss per share.

Warrants to purchase 3,163,813 shares for common stock for between
$0.75 and $5.06 and options to purchase 4,653,235 shares of common stock at
between $0.37 and $5.23, per share were outstanding for the year ended December
31, 2007, but were not included in the computation of diluted loss per share
because the effect of exercise or conversion would have an antidilutive effect
on loss per share.

Warrants to purchase 1,243,813 shares for common stock for between
$3.50 and $5.06; options to purchase 1,642,500 shares of common stock at between
$1.27 and $5.23; convertible debt of $12,500,000 convertible at $3.65 per share
and other convertible debt of $500,000 convertible at $4.50 per share were
outstanding for the year ended December 31, 2006, but were not included in the
computation of diluted loss per share because the effect of exercise or
conversion would have an antidilutive effect on the income per share.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13--INCOME TAXES

The components of the provision (benefit) for income taxes included in
the consolidated statements of operations are as follows:

Year Ended December 31,
---------------------------------------------
2008 2007 2006
--------- --------- ---------
Current:
Federal ............. $ 3,754 $ 40,030 $ 29,900
State ............... 15,306 4,559 4,000
Foreign ............. 51,539 134,442 --
--------- --------- ---------
70,599 179,031 33,900
Deferred:
Federal ............. 40,030 (40,030) --
State ............... 1,059 (1,059) --
Foreign ............. (151,460) (66,993) --
--------- --------- ---------
(110,371) (108,082) --
--------- --------- ---------
$ (39,772) $ 70,949 $ 33,900
========= ========= =========

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

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

Income (loss) before income taxes is as follows:

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

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

The primary components of temporary differences which give rise to the
Company's deferred tax assets and deferred tax liabilities are as follows:

Year Ended December 31,
-----------------------------
2008 2007
------------ ------------
Net deferred tax asset:
Net operating loss carry-forward ........ $ 22,122,386 $ 20,289,672
Depreciation and amoritzation (liability) 82,623 (899,776)
Bad Debt and note receivable allowance .. 195,933 42,065
Marketable security impairment .......... 399,038 --
Related part interest ................... 155,210 200,093
Inventory allowance ..................... 171,496 265,200
Credit carryforwards .................... 95,221 41,089
Other ................................... 465,048 332,420
------------ ------------
23,686,955 20,270,763
Less: Valuation allowance ................ (23,468,657) (20,162,681)
------------ ------------
$ 218,298 $ 108,082
============ ============

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

As a result of the implementation of FIN 48, the Company recognized an
increase in liabilities for unrecognized tax benefits of approximately $246,000,
which was accounted for as an increase in the January 1, 2007 accumulated
deficit.

A reconciliation of the FIN 48 adjustments is as follows:

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

At December 31, 2008 and 2007, Talon International, Inc. had Federal
net operating loss carry-forwards (or "NOLs") of approximately $60.2 million and
$55.9 million, respectively and state NOLs of $24.0 million and $18.1 million
respectively. The Federal NOL is available to offset future taxable income
through 2026, and the state NOL expires in 2016. Section 382 of the Internal
Revenue Code places a limitation on the realizability of net operating losses in
future periods if the ownership of the Company has changed more than 50% within
a three-year period. The Company had a limitation due to Section 382 during 2004
to 2006; however, as of December 31, 2008 we have no limitation. Thus, the
limitation has had no impact on our NOL carry-forwards.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and tax benefit carry-forwards. Deferred tax liabilities and assets at the
end of each period are determined using enacted tax rates. The Company records
deferred tax assets arising from temporary timing differences between recorded
net income and taxable net income when and if it believes that future earnings
will be sufficient to realize the tax benefit. For those jurisdictions where the
expiration date of tax benefit carry-forwards or the projected taxable earnings
indicate that realization is not likely, a valuation allowance is provided.

In 2008 and 2007, the Company determined, based upon its cumulative
operating losses, that it was more likely than not that it would not be in a
position to fully realize all of its domestic deferred tax assets in future year
with the exception of the alternative minimum tax credit carry-forward of
$41,089 in 2007. Accordingly, at December 31, 2008 and 2007 the Company has
recorded a valuation allowance of $23.5 and $20.2 million, respectively; which
reduces the carrying value of its net deferred tax assets. For the year ended
December 31, 2006, the Company recorded operating income and various rate and
tax timing differences and the value of its net deferred tax assets declined by
$2.2 million. Accordingly, a corresponding reduction in the valuation allowance
was made, which retained the carrying value of the Company's net deferred tax
assets at $0.

The Company intends to maintain a valuation allowance for its deferred
tax assets until sufficient evidence exists to support the reversal or reduction
of the allowance. At the end of each period, the Company will review supporting
evidence, including the performance against sales and income projections, to
determine if a release of the valuation allowance is warranted. If in future
periods it is determined that it is more likely than not that the Company will
be able to recognize all or a greater portion of its deferred tax assets, the
Company will at that time reverse or reduce the valuation allowance.

The Company believes that its estimate of deferred tax assets and
determination to record a valuation allowance against such assets are critical
accounting estimates because they are subject to, among other things, an
estimate of future taxable income, which is susceptible to change, dependent
upon events that may or may not occur and because the impact of recording a
valuation allowance may be material to the assets reported on its balance sheet
and results of operations.

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

NOTE 14--COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company is a party to a number of non-cancelable operating lease
agreements involving buildings and equipment, which expire at various dates
through 2013. The Company accounts for its leases in accordance with SFAS No.
13, whereby step provisions, escalation clauses, tenant improvement allowances,
increases based on an existing index or rate, and other lease concessions are
accounted for in the minimum lease payments and are charged to the statement of
operations on a straight-line basis over the related lease term.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Total rental expense for the years ended December 31, 2008, 2007 and
2006 aggregated $813,373, $591,312 and $640,864, respectively.

PROFIT SHARING PLAN

In October 1999, the Company established a 401(k) profit-sharing plan
for the benefit of eligible employees. The Company may make annual contributions
to the plan as determined by the Board of Directors. Total contributions for the
years ended December 31, 2008, 2007 and 2006 amounted to $24,061, $25,494,
$22,276, respectively.

CONTINGENCIES

On April 16, 2004, the Company filed suit against Pro-Fit Holdings,
Limited in the U.S. District Court for the Central District of California -
Tag-It Pacific, Inc. v. Pro-Fit Holdings, Limited, CV 04-2694 LGB (RCx) --
asserting various contractual and tort claims relating to the Company's
exclusive license and intellectual property agreement with Pro-Fit, seeking
declaratory relief, injunctive relief and damages. It is the Company's position
that the agreement with Pro-Fit gives the Company exclusive rights in certain
geographic areas to Pro-Fit's stretch and rigid waistband technology. On June 5,
2006, the Court denied the Company's motion for partial summary judgment, but
did not find that the Company breached the agreement with Pro-Fit and a trial is

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

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

Twelve Months Ended
December 31, 2008
----------------------------------------------------------
Talon Trim Tekfit Consolidated
------------ ------------ ------------ ------------

Net sales .......... $ 28,428,885 $ 19,537,302 $ 204,793 $ 48,170,980
Cost of goods sold . 22,783,691 12,666,844 103,056 35,553,591
------------ ------------ ------------ ------------
Gross profit (loss) 5,845,193 6,870,458 101,737 12,617,389
Operating expenses* 18,579,006
------------
Loss from operations $ (5,961,617)
============

Twelve Months Ended
December 31, 2007
----------------------------------------------------------
Talon Trim Tekfit Consolidated
------------ ------------ ------------ ------------

Net sales .......... $ 21,159,595 $ 18,688,698 $ 681,262 $ 40,529,555
Cost of goods sold . 15,711,171 12,190,803 520,846 28,422,820
------------ ------------ ------------ ------------
Gross profit (loss) 5,448,423 6,497,895 160,416 12,106,735
Operating expenses* 15,277,414
------------
Loss from operations $ (3,170,679)
============

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

The Company distributes its products internationally and has reporting
requirements based on geographic regions. Long-lived assets are attributed to
countries based on the location of the assets and revenues are attributed to
countries based on customer delivery locations, as follows:

Year Ended December 31,
-------------------------------------------
2008 2007 2006
----------- ----------- -----------
Sales:
United States ............. $ 3,332,257 $ 3,692,468 $ 4,223,052
Hong Kong ................. 15,181,280 14,178,421 13,650,419
Dominican Republic ........ 202,529 700,868 8,966,828
China ..................... 13,614,709 11,159,726 6,063,416
India ..................... 2,536,929 2,187,684 1,205,486
Bangladesh ................ 2,434,382 1,924,943 2,070,349
Mexico .................... 610,983 783,762 2,476,313
Other ..................... 10,257,911 5,901,683 10,169,139
----------- ----------- -----------
Total .......................... $48,170,980 $40,529,555 $48,825,002
=========== =========== ===========
Long-lived Assets:
United States ............. $ 4,955,725 $ 8,778,381 $ 9,529,932
Hong Kong ................. 989,761 556,864 336,149
Dominican Republic ........ -- 558,198 667,238
Mexico .................... -- 1,072 5,198
China ..................... 243,905 109,770 49,488
Other ..................... 5,604 16,912 3,315
----------- ----------- -----------
Total .......................... $ 6,194,995 $10,021,197 $10,591,320
=========== =========== ===========

NOTE 16--MAJOR CUSTOMERS AND VENDORS

For the years ended December 31, 2008, 2007 and 2006, the Company's
three largest customers represented approximately 8%, 9% and 18%, respectively,
of consolidated net sales. For the year ended December 31, 2006, no single
customer represented more than 9% of the Company's consolidated net sales.

Five vendors, each representing more than 6% of the Company's
purchases, accounted for approximately 46% of the Company's purchases for the
year ended December 31, 2008. Three vendors, each representing more than 10% of
the Company's purchases, accounted for approximately 50% of the Company's
purchases for the year ended December 31, 2007. One vendor accounted for
substantially all of the Company's purchases associated with its TEKFIT product
for the years ended December 31, 2008 and 2007. One major vendor accounted for
substantially all of the Company's purchases associated with its TEKFIT product
for the year ended December 31, 2006 and represented 24% of the Company's
overall purchases; and three vendors, each representing more than 10% of the
Company's purchases, accounted for approximately 45% of the Company's purchases
for the year ended December 31, 2006.

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

NOTE 17--RELATED PARTY TRANSACTIONS

Colin Dyne, a director and stockholder of the Company is also a
director, officer and significant shareholder in People's Liberation, Inc., the
parent company of Versatile Entertainment, Inc. During 2008 and 2007 the Company
had sales of $88,000 and $241,000, respectively, to Versatile Entertainment.
Accounts receivable of $18,000 and $44,000 were outstanding from Versatile
Entertainment at December 31, 2008 and 2007, respectively. Colin Dyne also holds
an interest in William Rast Sourcing. During 2008 and 2007 the Company had sales
of $457,000 and $172,000 respectively, to William Rast Sourcing. Accounts
receivable of $51,000 and $42,000 were outstanding from William Rast Sourcing at
December 31, 2008 and 2007, respectively.

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Due from related parties at December 31, 2008 and 2007 includes
$674,010 and $625,500, respectively, of unsecured notes, advances and accrued
interest receivable from Colin Dyne. The notes and advances bear interest at
7.5% and are due on demand. During 2008 based upon current economic and risk
analysis and available information, management extablished a reserve of $474,010
for this receivable. During 2007 certain notes payable due to Mr. Dyne were
offset against and used to satisfy notes receivable from Mr. Dyne.

Demand notes payable to related parties includes notes and advances to
parties related to or affiliated with Mark Dyne, the Chairman of the Board of
Directors of the Company and significant stockholder. The balance of Demand
notes payable to related parties at December 31, 2008 and 2007 was $85,000 and
$85,000, respectively. See Note 6 for further discussion of these notes and
related accrued interest and interest expense.

Jonathan Burstein, a former director of the Company, purchases products
from the Company through an entity operated by his spouse. For the years
December 31, 2008 and 2007, sales to this entity were $70,500 and $88,500,
respectively. At December 31, 2008 and 2007, accounts receivable included
$35,000 and $29,000, respectively, due from this entity. On October 25, 2007,
Mr. Burstein resigned as a director of the Company. During the fourth quarter of
2007 the Company terminated the consulting agreement of Mr. Burstein. In
accordance with SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR
DISPOSAL ACTIVITIES ("SFAS 146"), the Company calculated the fair value of
monthly compensation of the contract and recorded an accrual of $263,000 at
December 31, 2007 to reflect the liability for consulting costs that would
continue to be incurred until November 30, 2008. Consulting fees of $258,000 and
$291,000 were paid for services provided under this contract for the years ended
December 31, 2008 and 2007.

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

TALON INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18--QUARTERLY RESULTS (UNAUDITED)

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

1ST 2ND 3RD 4TH
----------------------------------------------------------------------------------------------

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

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

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

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

Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with the per share amounts for the year.

NOTE 19 - SUBSEQUENT EVENT

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

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

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

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. In order to evaluate
the effectiveness of internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, the Company's management has conducted an
assessment, including testing, using the criteria in INTERNAL CONTROL -
INTEGRATED FRAMEWORK, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Our system of internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Further,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate. Based on its assessment, our management has concluded that control
over financial reporting was effective as of December 31, 2008.

This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management's report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the
fourth quarter of our fiscal year ended December 31, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth the name, age and position of each of
our executive officers and directors as of March 31, 2009.

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

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

CLASS III DIRECTORS: TERMS EXPIRING IN 2009

MARK DYNE Mr. Dyne has served as Chairman of the Board of
Directors since 1997. Mr. Dyne currently serves as
the Chief Executive Officer and the Managing Partner
of Europlay Capital Advisors, LLC, a merchant banking
and advisory firm. Mr. Dyne previously served as
Chairman and Chief Executive Officer of Sega Gaming
Technology Inc. (USA), a gaming company, and Chairman
and Chief Executive Officer of Virgin Interactive
Entertainment Ltd., a distributor of computer
software programs and video games based in London,
England. Mr. Dyne was a founder and director of
Packard Bell NEC Australia Pty. Ltd., a manufacturer
and distributor of personal computers through the
Australian mass merchant channel, and he was a
founder and former director of Sega Ozisoft Pty Ltd.,
a leading distributor of entertainment software in
both Australia and New Zealand.

MEMBER: NOMINATING AND GOVERNANCE COMMITTEES

COLIN DYNE Currently, Mr. Dyne serves as Vice Chairman of the
Board of Directors. Mr. Dyne founded Tag-It, Inc.,
one of our subsidiaries, in 1991 with his father,
Harold Dyne. Mr. Dyne served as our President from
inception and as our Chief Executive Officer from
1997 to 2005. Since May 2007, Colin Dyne has served
as Chief Executive Officer and a director of People's
Liberation, Inc. (OTCBB: PPLB), which designs,
markets and sells high-end casual apparel under the
brand names "People's Liberation" and "William Rast."
Before founding Tag-It, Inc. in 1991, Mr. Dyne worked
in numerous positions within the stationery products
industry, including owning and operating retail
stationery businesses and servicing the larger
commercial products industry through contract
stationery and printing operations.

CLASS I DIRECTORS: TERMS EXPIRING IN 2010

JOSEPH MILLER Mr. Miller has served on the Board of Directors since
June 2005. Since 2003, he has been a Managing
Director of Europlay Capital Advisors, LLC, a
merchant banking and advisory firm. From 1998 to
2003, Mr. Miller was a Senior Vice President at
Houlihan Lokey Howard & Zukin, a leading
middle-market investment bank.. From 1994 to 1998,
Mr. Miller served as the Vice President, Corporate
Development for Alliance Communications Corporation,
Canada's leading independent producer and distributor
of filmed entertainment. Mr. Miller has bachelor's
degree in Economics and Business from the University
of California, Los Angeles

MEMBER: AUDIT COMMITTEE

BRENT COHEN Mr. Cohen has served on the Board of Directors since
1998. Mr. Cohen served as Chief Executive Officer and
a director of Dovebid Inc. from August 2005 to
February 2008. Mr. Cohen served as President and was
a member of the Board of Directors of First Advantage
Corporation (formed by the merger of US Search and
First American Financial screening companies) from
June 2003 to 2005. Mr. Cohen served as Chairman of
the Board, President and Chief Executive Officer of
US Search from February 2000 until June 2003. Mr.
Cohen previously held various management positions in
both the management consulting and auditing practice
of Arthur Young & Company (now Ernst & Young). Mr.
Cohen holds a Bachelor of Commerce degree, a Graduate
Diploma in Accounting and an MBA from the University
of Cape Town in South Africa. He is also a chartered
accountant.

MEMBER: COMPENSATION, NOMINATING AND GOVERNANCE
COMMITTEES

WILLIAM SWEEDLER Mr. Sweedler has served on the Board of Directors
since 2006. He is presently Chairman & CEO of
Windsong Allegiance Group, a diversified brand
management and operating company that specializes in
the acquisition, development, licensing, and
comprehensive creative management of consumer branded
intellectual property. The company owns and licenses
the brands, Como Sport, Calvin Klein Golf, Joseph
Abboud Golf, and PRX. Mr. Sweedler previously served
as President & CEO of Joe Boxer, a wholly owned
division of the Iconix Brand Group (NASDAQ: ICON) of
which he was Executive Vice President and member of
the Board of Directors during 2005 to June 2006.
Prior to Mr. Sweedler joining Iconix Brand Group, he
was CEO & President of Windsong Allegiance Apparel
Group from 2001 to 2005. The company owned, managed,
and licensed the brands Joe Boxer, Hathaway, New
Frontier, Pivot Rules, Alexander Julian, Geoffrey
Beene, Ron Chereskin, and Hawaiian Tropic. In 1995,
Mr. Sweedler co-founded, Windsong, Inc., a full
service apparel operating and marketing company.
Prior to Windsong, he worked as a Regional Account
Manager at Polo Ralph Lauren. He graduated from
Babson College with a B.S. in Finance & Investments
in 1988. He has served as a public director at Iconix
Brand Group and Bank of Westport as well as numerous
private organizations.

MEMBER: AUDIT AND COMPENSATION COMMITTEES

CLASS II DIRECTORS: TERMS EXPIRING IN 2011

LONNIE D. SCHNELL Mr. Schnell joined the Company in January 2006 as our
Chief Financial Officer, was appointed as Chief
Executive Officer in February 2008 and has served on
our Board of Directors since May 2008. Mr. Schnell
served as Vice President of Finance for Capstone
Turbine Corporation, a manufacturer of micro-turbine
electric generators from 2004 until 2005. From 2002
to 2004 Mr. Schnell served as Chief Financial Officer
of EMSource, LLC, an electronic manufacturing service
company. Prior to EMSource, in 2002, Mr. Schnell
served as Chief Financial Officer of Vintage Capital
Group, a private equity investment firm. From 1999
through 2002, Mr. Schnell served as Chief Financial
Officer of Need2Buy, Inc. a business-to-business
internet marketplace for electronic components. Mr.
Schnell has completed an executive MBA program with
the Stanford University Executive Institute, and
earned his Bachelor of Science in Accounting at
Christian Brothers University. Mr. Schnell is a
Certified Public Accountant with experience in the
international accounting firm of Ernst & Young LLP.

RAYMOND MUSCI Ray Musci has served as a Director of the Company
since June 2005. Mr. Musci serves as a Director and
Chief Operating Officer of New Motion, Inc.
(NasdaqGM: NWMO), a publicly traded company that
develops, publishes and distributes mobile
entertainment services and products. From October
1999 to June 2005, Mr. Musci served as the President
and Chief Executive Officer and a director of BAM!
Entertainment, Inc., a publicly traded company that
develops, publishes and distributes entertainment
software products and video games. Mr. Musci
currently serves as a director of Brilliant Digital
Entertainment, Inc. From May 1990 to July 1999, Mr.
Musci served as the President, Chief Executive
Officer and as a director of Infogrames
Entertainment, Inc. (formerly Ocean of America,
Inc.), a company that develops, publishes and
distributes software products. Mr. Musci also
previously served as a director of Ocean
International, Ltd., the holding company of Ocean of
America, Inc. and Ocean Software, Ltd., and as
Executive Vice President/General Manager of Data East
USA, Inc., a subsidiary of Data East Corp., a
Japanese company.

MEMBER: AUDIT AND COMPENSATION COMMITTEES

OTHER EXECUTIVE OFFICER

LARRY DYNE Larry Dyne was appointed Executive Vice President of
Sales in February 2008. He has been an employee of
our company since 1992, and was formerly vice
president of product development and global sourcing,
as well as vice president of trim sales. Through
these positions, Mr. Dyne has established extensive
and long-term relationships with the world's top
brands and clothing retailers. He was also formerly
responsible for domestic production for all printing.

AUDIT COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT

We currently have a separately designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act. The
Audit Committee currently consists of Raymond Musci, Joseph Miller and William
Sweedler. The Board of Directors has further determined that Mr. Musci is an
"audit committee financial expert" as such term is defined in Item 401(h) of
Regulation S-K promulgated by the SEC.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers, directors and persons who own more than ten percent of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater-than-ten percent stockholders are required by
Securities and Exchange Commission regulations to furnish the Company with all
Section 16(a) forms they file. Based solely on our review of the copies of the
forms received by us and written representations from certain reporting persons
that they have complied with the relevant filing requirements, we believe that,
during the year ended December 31, 2008, all of our executive officers,
directors and greater-than-ten percent shareholders complied with all Section
16(a) filing requirements, except that one Form 4, reporting five transactions,
was filed late by Bluefin Capital LLC, ComVest Capital LLC, ComVest Capital
Management LLC, ComVest Group Holdings LLC and Michael Falk.

CODE OF ETHICS

We have adopted a Code of Ethical Conduct that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, as well as to our other
employees and directors generally. A copy of our Code of Ethical Conduct is
filed as an exhibit to our Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Talon International Inc.'s executive compensation program is
administered by the Compensation Committee of our Board of Directors, or
referred to in this section as the "Committee." The Committee is responsible
for, among other functions: (1) reviewing and approving corporate goals and
objectives relevant to the Chief Executive Officer's compensation and evaluating
the performance of the Chief Executive Officer in light of these corporate goals
and objectives; (2) reviewing and making recommendations to the Board of
Directors with respect to the compensation of other executive officers; (3)
administering our incentive-compensation and equity based plans, which may be
subject to the approval of the Board of Directors; and (4) negotiating,
reviewing and recommending the annual salary, bonus, stock options and other
benefits, direct and indirect, of the Chief Executive Officer, and other current
and former executive officers. The Committee also has the authority to select
and/or retain outside counsel, compensation and benefits consultants, or any
other consultants to provide independent advice and assistance in connection
with the execution of its responsibilities.

Our named executive officers for 2008 were as follows:

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

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

o Stephen P. Forte, former Chief Executive Officer (resigned as
of February 4, 2008);

o Wouter van Biene, former Chief Operating Officer (resigned as
of January 15, 2008)

COMPENSATION PHILOSOPHY

Our executive compensation program is designed to drive company
performance to maximize shareholder value while meeting our needs and the needs
of our employees. The specific objectives of our executive compensation program
include the following:

o ALIGNMENT - to align the interests of executives and
shareholders through equity-based compensation awards;

o RETENTION - to attract, retain and motivate highly qualified,
high performing executives to lead our continued growth and
success; and

o PERFORMANCE - to provide rewards commensurate with performance
by emphasizing variable compensation that is dependant upon
the executive's achievements and company performance.

In order to achieve these specific objectives, our executive
compensation program is guided by the following core principles:

o Rewards under incentive plans are based upon our short-term
and longer-term financial results and increasing shareholder
value;

o Senior executive pay is set at sufficiently competitive levels
to attract, retain and motivate highly talented individuals
who are necessary for us to achieve our goals, objectives and
overall financial success;

o Compensation of an executive is based on such individual's
role, responsibilities, performance and experience, taking
into account the desired pay relationships within the
executive team; and

o Our executive compensation program places a strong emphasis on
performance-based variable pay to ensure a high
pay-for-performance culture. Annual performance of our company
and the executive are taken into account in determining annual
bonuses that ensures a high pay-for-performance culture.

COMPENSATION ELEMENTS

We compensate senior executives through a variety of components,
including base salary, annual incentives, equity incentives and benefits and
perquisites, in order to provide our employees with a competitive overall
compensation package. The mix and value of these components are impacted by a
variety of factors, such as responsibility level, individual negotiations and
performance and market practice. The purpose and key characteristics for each
component are described below.

BASE SALARY

Base salary provides executives with a steady income stream and is
based upon the executive's level of responsibility, experience, individual
performance and contributions to our overall success. Competitive base salaries,
in conjunction with other pay components, enable us to attract and retain highly
talented executives. The Committee typically sets base salaries for our senior
executives at market levels. However, base salaries will vary in practice based
upon an individual's performance, individual experience and negotiations and for
changes in job responsibilities.

MANAGEMENT INCENTIVE BONUSES

Management incentive bonuses are a variable performance-based component
of compensation. The primary objective of an annual incentive bonus is to reward
executives for achieving corporate and individual goals and to align a
meaningful portion of total pay opportunities for executives and other key
employees to the attainment of our company's performance goals. These awards are
also used as a means to recognize the contribution of our executive officers to
overall financial, operational and strategic success.

EQUITY INCENTIVES

Equity incentives are intended to align senior executive and
shareholder interests by linking a meaningful portion of executive pay to
long-term shareholder value creation and financial success over a multi-year
period. Equity incentives are also provided to our executives to attract and
enhance the retention of executives and other key employees and to facilitate
stock ownership by our senior executives. The Committee also considers
individual and company performance when determining long-term incentive
opportunities.

HEALTH & WELFARE AND 401-K BENEFITS

The named executive officers participate in a variety of retirement,
health and welfare and paid time-off benefits designed to enable us to attract
and retain our workforce in a competitive marketplace. Health and welfare and
paid time-off benefits help ensure that we have a productive and focused
workforce.

SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS

We do not have a formal plan for severance or separation pay for our
employees, but we typically include a severance provision in the employment
agreements of our executive officers that is triggered in the event of
involuntary termination without cause or in the event of a change in control.

In order to preserve the morale and productivity and encourage
retention of our key executives in the face of the disruptive impact of an
actual or rumored change in control, we provide a bridge to future employment in
the event that an executive's job is eliminated as a consequence of a change in
control. This provision is intended to align executive and shareholder interests
by enabling executives to consider corporate transactions that are in the best
interests of the shareholders and other constituents without undue concern over
whether the transactions may jeopardize the executive's own employment. Our
employment agreements with our current named executive officers provide a lump
sum payment and benefits continuation as a result of an involuntary termination
without cause or for good reason following a change in control, plus accelerated
vesting of stock or option awards.

OTHER BENEFITS

In order to attract and retain highly qualified executives, we provide
some of our named executive officers, including our former CEO, with automobile
allowances that we believe are consistent with current market practices. Our
executives also may participate in a 401(k) plan under which we match
contributions for all employees up to 100% of an employee's contributions to a
maximum of $1,000 and subject to any limitations imposed by ERISA.

OTHER FACTORS AFFECTING COMPENSATION

ACCOUNTING AND TAX CONSIDERATIONS

We consider the accounting implications of all aspects of our executive
compensation program. Our executive compensation program is designed to achieve
the most favorable accounting (and tax) treatment possible as long as doing so
does not conflict with the intended plan design or program objectives.

PROCESS FOR SETTING EXECUTIVE COMPENSATION

When making pay determinations for named executive officers, the
Committee considers a variety of factors including, among others: (1) actual
company performance as compared to pre-established goals, (2) overall company
performance and size relative to industry peers, (3) individual executive
performance and expected contribution to our future success, (4) changes in
economic conditions and the external marketplace and (5) in the case of named
executive officers, other than Chief Executive Officer, the recommendation of
our Chief Executive Officer. Ultimately, the Committee uses its judgment when
determining how much to pay our executive officers. The Committee evaluates each
named executive officer's performance during the year against established goals,
leadership qualities, business responsibilities, current compensation
arrangements and long-term potential to enhance shareholder value. The opinions
of outside consultants are also taken into consideration in deciding what
salary, bonus, long-term incentives and other benefits and severance to give
each executive in order to meet our objectives stated above. The Committee
considers compensation information from data gathered from annual reports and
proxy statements from companies that the Committee generally considers
comparable to our Company; compensation of other Company employees for internal
pay equity purposes; and levels of other executive compensation plans from
compensation surveys. The Committee sets the pay for the named executive
officers and other executives, by element and in the aggregate, at levels that
it believes are competitive and necessary to attract and retain talented
executives capable of achieving the Company's long-term objectives.

FACTORS CONSIDERED

In administering the compensation program for senior executives,
including named executive officers, the Committee considers the following:

o CASH VERSUS NON-CASH COMPENSATION. The pay elements are
cash-based except for the long-term incentive program, which
is equity-based. In 2008, the long-term incentive program for
the named executive officers consisted entirely of stock
option awards that vest in installments over a one to four
year period from the date of grant;

o PRIOR YEAR'S COMPENSATION. The committee considers the prior
year's bonuses and long-term incentive awards when approving
bonus payouts or equity grants;

o ADJUSTMENTS TO COMPENSATION. On an annual basis, and in
connection with setting executive compensation packages, the
Committee reviews our operating income growth, earnings before
interest and taxes growth, earnings per share growth, cash
flow growth, operating margin, revenue growth and total
shareholder return performance. In addition, the Committee
considers peer group pay practices, emerging market trends and
other factors. No specific weighing is assigned to these
factors nor are particular targets set for any particular
factor. Total compensation from year to year can vary
significantly based on our and the individual executive's
performance. The base compensation of our former Chief
Executive Officer during 2008 was $275,000 annually in
accordance with the provisions in his employment contract.

o APPLICATION OF DISCRETION. It is our policy and practice to
use discretion in determining the appropriate compensation
levels considering performance.

REPORT OF COMPENSATION COMMITTEE

The Compensation Committee of our Board of Directors consists of Brent
Cohen, Raymond Musci and William Sweedler. The Compensation Committee is
responsible for considering and making recommendations to the Board of Directors
regarding executive compensation and is responsible for administering the
Company's stock option and executive incentive compensation plans.

The Compensation Committee has reviewed and discussed with management
the Compensation Discussion and Analysis included in this report. Based on the
review and discussion with management, the Compensation Committee recommended to
the Board of Directors that the Compensation Discussion and Analysis be included
in the Company's Annual Report on Form 10-K.

COMPENSATION COMMITTEE
Brent Cohen
Raymond Musci
William Sweedler

April 6, 2008

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

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

NON-EQUITY
STOCK OPTION INCENTIVE ALL OTHER
NAME AND AWARDS AWARDS PLAN COMPENSATION
PRINCIPAL POSITION YEAR SALARY (4) (4) COMPENSATION (5) TOTAL
------------------------------ ---- ------------ ------------ ------------ ------------ ------------ ------------

Lonnie D. Schnell (1) 2008 $ 275,000 $ -- $ 63,462 $ 53,230 $ 25,116 $ 416,808
Chief Executive Officer and 2007 225,000 -- 1,917 45,000 11,343 283,260
Chief Financial Officer 2006 171,346 -- 31,998 45,025 24,634 273,003
------------------------------ ---- ------------ ------------ ------------ ------------ ------------ ------------
Larry Dyne 2008 250,000 -- 53,818 40,000 15,927 359,745
Executive Vice President,
Sales
------------------------------ ---- ------------ ------------ ------------ ------------ ------------ ------------
Stephen P. Forte (2) 2008 31,250 -- 83,469 -- 297,073 411,792
Former Chief Executive 2007 325,000 -- 7,851 -- 30,484 363,335
Officer 2006 275,000 77,468 73,995 90,050 35,497 552,010
------------------------------ ---- ------------ ------------ ------------ ------------ ------------ ------------
Wouter van Biene (3) 2008 9,519 -- 23,366 -- 247,840 280,725
Former Chief Operating 2007 225,000 -- 1,986 -- 11,502 238,488
Officer 2006 180,000 -- 27,526 45,025 7,006 259,557
------------------------------ ---- ------------ ------------ ------------ ------------ ------------ ------------

(1) Mr. Schnell was appointed Chief Executive Officer effective February
4, 2008 and previously served as Chief Financial Officer.

(2) Mr. Forte resigned as Chief Executive Officer effective February 4,
2008.

(3) Mr. van Biene resigned as Chief Operating Officer effective January
15, 2008.

(4) The amounts in this column represent the dollar amounts recognized for
financial statement reporting purposes in fiscal 2008, 2007 and 2006
with respect to stock awards and options granted in the applicable
year as well as prior fiscal years in accordance with SFAS No. 123(R).
Pursuant to SEC rules, the amounts shown exclude the impact of
estimated forfeitures related to service-based vesting conditions. For
additional information on the valuation assumptions with respect to
these grants, refer to Note 11 to our Consolidated Financial
Statements in this Annual Report on Form 10-K. These amounts do not
reflect the actual value that may be realized by the named executive
officers which depends on the value of our shares in the future.

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

MR. SCHNELL MR. FORTE
------------------------------ ------------------------------
2008 2007 2006 2008 2007 2006
-------- -------- -------- -------- -------- --------

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

MR. VAN BIENE MR. DYNE
------------------------------ --------
2008 2007 2006 2008
-------- -------- -------- --------

Severance ..................... $234,952 $ -- $ -- $ --
Health & medical insurance (a) 12,834 11,178 6,925 9,429
Life & disability insurance (b) 54 324 81 323
Automobile allowances ......... -- -- -- 6,175
Consulting services (c) ....... -- -- -- --
-------- -------- -------- --------
Total .................... $247,840 $ 11,502 $ 7,006 $ 15,927
======== ======== ======== ========

(a) Includes payments of medical premiums.

(b) Includes executive and group term life insurance.

EXECUTIVE COMPENSATION

The 2008 compensation for Lonnie Schnell, our Chief Executive Officer
was in accordance with our employment agreement with him. The terms and
conditions established in this agreement were the result of our consideration of
our current operating performance levels, 2007 and 2006 operating performance,
our 2005 Restructuring and Strategic Plan, compensation levels for our previous
CEO, comparative industry compensation levels and negotiations with Mr. Schnell.
The base compensation was evaluated in conjunction with the long-term equity
awards and annual bonus incentives to establish a compensation arrangement
providing a substantial incentive for the achievement of our long-term
objectives and for adding shareholder value. Accordingly, the base compensation
was established near minimum industry levels for the same role in comparable
companies, and a long-term equity option of 900,000 shares of common stock,
representing approximately 4.4% of our outstanding shares, was established as an
inducement to maximum performance achievements and increased shareholder values.
The option grant was established to vest monthly over a three-year term, after a
minimum initial term of twelve months, to coincide with the objectives of our
strategic plan. In addition to the long-term equity incentive, a cash incentive,
a Management Incentive Program ("MIP"), was established as provided in Mr.
Schnell's employment agreement setting aside 12% of the Company's earnings
before interest, taxes, depreciation and amortization ("EBITDA") for annual
bonus awards to him and the other senior executives. The MIP fund is shown in
the table above as non-equity incentive plan compensation. MIP Funds were not
distributed in 2007 due the operating performance of the Company; however, a
discretionary bonus was granted to Mr. Schnell as approved by the Board of
Directors.

The 2008 compensation for Larry Dyne, our Executive Vice President,
Sales was in accordance with our employment agreement with him. The terms and
conditions established in this agreement were the result of our consideration of
our current operating performance levels, 2007 and 2006 operating performance,
our 2005 Restructuring and Strategic Plan, compensation levels for our previous
CEO, comparative industry compensation levels and negotiations with Mr. Dyne.
The base compensation was evaluated in conjunction with the long-term equity
awards and annual bonus incentives to establish a compensation arrangement
providing a substantial incentive for the achievement of our long-term
objectives and for adding shareholder value. Accordingly, the base compensation
was established near minimum industry levels for the same role in comparable
companies, and a long-term equity option of 700,000 shares of common stock,
representing approximately 3.4% of our outstanding shares, was established as an
inducement to maximum performance achievements and increased shareholder values.
The option grant was established to vest monthly over a three-year term, after a
minimum initial term of twelve months, to coincide with the objectives of our
strategic plan. In addition to the long-term equity incentive, a cash incentive,
a the MIP, was established as provided in Mr. Dyne's employment agreement
setting aside 12% of EBITDA for annual bonus awards to him and the other senior
executives.

Our employment agreement with Steve Forte, our former Chief Executive
Officer, provided that in the event that prior to the end of the term, Mr.
Forte's employment was terminated by us "without cause" (as defined in the
agreement), by Mr. Forte for "good reason" (as defined in the agreement) or due
to Mr. Forte's death or disability, then Mr. Forte or his estate would be
entitled to receive, in addition to all accrued salary, (i) severance payments
equal to Mr. Forte's base salary for the remaining term of the agreement or, in
the case of death or disability, through December 31, 2008, (ii) a pro rated
portion of the annual incentive bonus for the year in which the termination
occurred, (iii) full acceleration of vesting of the options issued to Mr. Forte
pursuant to the agreement and (iv) continued healthcare coverage for Mr. Forte
and his dependents for the remaining term of the agreement. Effective February
4, 2008, Stephen Forte resigned his position as our Chief Executive Officer and
as a member of our Board of Directors, as well from all positions with our
subsidiaries. In connection with Mr. Forte's resignation, on February 4, 2008,
we entered into a Separation Agreement with Mr. Forte. The Separation Agreement
further provides for the payment to Mr. Forte of the same severance benefits he
would have received under his employment agreement had we terminated Mr. Forte's
employment without cause. In exchange for his severance, Mr. Forte has released
all claims against us.

Our employment letter with Wouter van Biene, our former Chief Operating
Officer, provided that in the event that Mr. van Biene's employment is
terminated by us without "cause" (as defined in the agreement) or due to Mr. van
Biene's death or disability, then Mr. van Biene or his estate will be entitled
to receive as severance, in addition to all accrued salary, (i) salary
continuation and continuation of coverage under our group health plan for a
period of six months if the termination occurs during the first year of
employment, a period of twelve months if the termination occurs during the
second year of employment or a period of eighteen months if the termination
occurs after the second year of employment and (ii) twelve months acceleration
of vesting of all outstanding options. Effective January 15, 2008, Mr. van Biene
resigned. In connection with Mr. van Biene's resignation and in exchange for a
full release of claims against us, we have agreed to pay Mr. van Biene twelve
months of his current base salary and provide him twelve months of continued
coverage under our group health plan.

GRANTS OF PLAN-BASED AWARDS IN FISCAL 2008

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

ALL OTHER EXERCISE
OPTION AWARDS: OR BASE
NUMBER OF PRICE OF MARKET GRANT DATE FAIR
SECURITIES OPTION PRICE ON VALUE OF OPTION
GRANT APPROVAL UNDERLYING AWARDS GRANT DATE AWARDS
NAME DATE (1) DATE (1) OPTIONS (#) ($/SH) (2) ($/SH) (2) ($)(3)
--------------------- ----------- ----------- ---------------- ------------ ------------ ------------------

Lonnie D. Schnell 6/25/08 6/18/08 900,000 $0.20 $0.21 $140,806
--------------------- ----------- ----------- ---------------- ------------ ------------ ------------------
Larry Dyne 6/25/08 6/18/08 700,000 $0.20 $0.21 $109,516
--------------------- ----------- ----------- ---------------- ------------ ------------ ------------------

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

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

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

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

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2008

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

NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS
------------------------------ OPTION
(#) (#) EXERCISE OPTION
NAME GRANT DATE EXERCISABLE UNEXERCISABLE PRICE ($) EXPIRATION DATE
----------------------- ------------------ -------------- --------------- -------------- ------------------

Lonnie D. Schnell 1/26/06 291,667 (1) 108,333 (1) $0.59 1/26/16
6/25/08 -- 900,000 (2) $0.20 06/24/18
----------------------- ------------------ -------------- --------------- -------------- ------------------
Stephen P. Forte 1/16/06 135,135 (3) -- $0.37 02/15/09
1/16/06 900,000 (3) $0.37 02/15/09
----------------------- ------------------ -------------- --------------- -------------- ------------------
Wouter van Biene 3/01/06 225,695 (4) -- $0.53 01/15/09
----------------------- ------------------ -------------- --------------- -------------- ------------------
Larry Dyne 12/20/99 20,000 -- $4.31 12/19/09
2/28/00 15,000 -- $4.62 02/27/10
4/10/00 15,000 -- $4.25 04/09/10
12/12/00 20,000 -- $3.75 12/11/10
11/18/01 15,000 -- $3.64 11/17/11
12/31/02 25,000 -- $3.63 12/30/12
4/01/03 25,000 -- $3.50 03/31/13
4/08/03 45,500 -- $3.70 04/07/13
4/18/05 50,000 -- $3.14 04/17/15
1/16/06 413,194 11,806 (5) $0.37 01/15/16
6/25/08 -- 700,000 (6) $0.20 06/24/18
----------------------- ------------------ -------------- --------------- -------------- ------------------

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

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

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

(4) Mr. van Biene resigned as of January 15, 2008, and he received 12 months
accelerated vesting of outstanding options in accordance with his
separation arrangement. Mr. van Biene's stock options have expired
unexercised subsequent to December 31, 2008.

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

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

EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS

EMPLOYMENT AGREEMENTS

We have entered into the following employment agreements with our named
executive officers.

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

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

POTENTIAL SEVERANCE PAYMENTS

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

VALUE OF
CONTINUATION OF ACCELERATION OF
CASH SEVERANCE BONUS VALUE HEALTH BENEFITS VESTING OF EQUITY TOTAL SEVERANCE
NAME PAYMENT ($)(1) ($) ($) AWARDS ($)(2) BENEFITS ($)
------------------------ ----------------- -------------- ----------------- ------------------- --------------------

Lonnie D. Schnell 654,509 -- 27,586 -- 682,095
------------------------ ----------------- -------------- ----------------- ------------------- --------------------
Larry Dyne 593,872 -- 18,858 -- 612,730
------------------------ ----------------- -------------- ----------------- ------------------- --------------------

(1) Includes (i) earned and unpaid base salary through the date of
termination, (ii) accrued but unpaid vacation and (iii) cash severance
payments based on the executive's salary payable in a lump sum or
periodic payments as provided in the executive's employment agreement.

(2) Based on the closing price of our common stock on December 31, 2008 of
$0.11, as reported by the OTC Bulletin Board.

POTENTIAL CHANGE IN CONTROL PAYMENTS

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

DIRECTOR COMPENSATION

The general policy of the Board of Directors is that compensation for
independent directors should be a mix of cash and equity-based compensation. We
do not pay management directors for Board service in addition to their regular
employee compensation. The full Board of Directors has the primary
responsibility for reviewing and considering any revisions to director
compensation.

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

FEES EARNED
OR PAID OPTION ALL OTHER
NAME IN CASH AWARDS (8) COMPENSATION TOTAL
---------------------------- ------------ ------------ ------------ ------------

Mark Dyne (1) .............. $ 31,500 $ 15,571 $ -- $ 47,071
Colin Dyne (2) ............. -- 15,571 250,000 265,571
Brent Cohen (3) ............ 35,500 15,571 -- 51,071
Joseph Miller (4) .......... 32,500 15,571 -- 48,071
Raymond Musci (5) .......... 40,000 15,571 -- 55,571
William Sweedler (6) ....... 39,000 15,571 -- 54,571
------------ ------------ ------------ ------------
Total ................... $ 178,500 $ 93,426 $ 250,000 $ 521,926
============ ============ ============ ============

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

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

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

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

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

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

(7) The amounts in this column represent the dollar amounts recognized for
financial statement purposes in fiscal 2008 with respect to stock
options granted in 2008 as well as prior fiscal years, in accordance
with SFAS 123(R). For additional information on the valuation
assumptions with respect to option grants, including the options
granted in 2008, see Note 11 to the consolidated financial statements
in this Annual Report on Form 10-K. These amounts do not reflect the
actual value that may be realized by the named executive officers
which depends on the value of our shares in the future.

Our policy is to pay non-employee directors $1,500 for their personal
attendance at any meeting of the Board of Directors, $1,000 for their personal
attendance at any committee meeting, and $500 for attendance at any telephonic
meeting of the Board of Directors or of a committee of the Board of Directors.
We also pay non-employee directors an annual retainer of $20,000 for Board
service and an additional retainer of $5,000 for service on each committee. The
Chairman of the Board receives an annual retainer of $25,000 for Board service.
We also reimburse directors for their reasonable travel expenses incurred in
attending board or committee meetings and pay non-employee directors a per diem
for board services.

We do not have a formal policy with regard to option grants to our
Board of Directors, but we generally follow a practice of granting an option for
30,000 shares of stock upon initial appointment or election to the Board of
Directors, and thereafter issuing annual option grants to all non-employee
members of 30,000 shares.

During 2006 and through March 31, 2007 we had a verbal agreement with
Mr. Colin Dyne to provide consulting services following his resignation in 2005
as our Chief Executive Officer. We entered into a written agreement with Mr.
Dyne effective April 1, 2007 that provides for continued consulting services
through November 30, 2008 in exchange for a consulting fee of $25,000 per month.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of our Board of Directors currently consists
of Brent Cohen, Raymond Musci and William Sweedler. No current executive officer
of the Company has served as a member of the board of directors or compensation
committee of any entity for which a member of our Board of Directors or
Compensation Committee has served as an executive officer.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information as of December 31,
2008 regarding equity compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance:

NUMBER OF SECURITIES
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE REMAINING AVAILABLE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF FOR FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
----------------------- -------------------- --------------------

Equity compensation plans
approved by security holders..... 5,475,536 $ 1.14 2,250,000

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

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

o 102,741 warrants issued in conjunction with a private
placement transaction in 2004, are exercisable at $3.65 per
share and expire in November 2009.

o 215,754 warrants issued for services in 2004, are exercisable
at $3.65 per share and expire in November 2009.

o 1,625,000 inducement options issued to employees in 2006 are
exercisable at a weighted average exercise price of $0.46 per
share and expire in January and March of 2016.

Each of the above plans provides that the number of shares with respect
to which options and warrants may be granted, and the number of shares of common
stock subject to an outstanding option or warrant, shall be proportionately
adjusted in the event of a subdivision or consolidation of shares or the payment
of a stock dividend on common stock.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents information regarding the beneficial
ownership of our common stock as of April 6, 2009:

o each person who is known to us to be the beneficial owner of
more than 5% of our outstanding common stock;

o each of our current directors;

o each of our named executive officers; and

o all of our directors and executive officers as a group

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially owned by
any person who has or shares voting or investment power with respect to such
shares. Shares of common stock under warrants or options currently exercisable
or exercisable within 60 days of the date of this information are deemed
outstanding for purposes of computing the percentage ownership of the person
holding such warrants or options but are not deemed outstanding for computing
the percentage ownership of any other person. As a result, the percentage of
outstanding shares of any person as shown in this table does not necessarily
reflect the person's actual ownership or voting power with respect to the number
of shares of common stock actually outstanding at April 6, 2009. Unless
otherwise indicated, the persons named in this table have sole voting and sole
investment power with respect to all shares shown as beneficially owned, subject
to community property laws where applicable. As of April 6, 2009, we had
20,291,433 shares of common stock issued and outstanding.

The address of each person listed is in our care, at 21900 Burbank
Boulevard, Suite 270, Woodland Hills, California 91367, unless otherwise set
forth below such person's name.

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

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

* Less than 1%.

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

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

(3) Includes 655,500 shares of common stock reserved for issuance upon
exercise of stock options that are currently exercisable. Also
includes 129,600 shares of common stock held by a family trust which
Mr. Larry Dyne may be deemed to beneficially own.

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

(5) Includes 90,000 shares of common stock reserved for issuance upon
exercise of stock options that are currently exercisable.

(6) Consists of shares of common stock reserved for issuance upon the
exercise of the stock options that are currently exercisable.

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

The information as to shares beneficially owned has been individually
furnished by the respective directors, named executive officers, and other
stockholders of the company, or taken from documents filed with the Securities
and Exchange Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE

REVIEW AND APPROVAL OF RELATED PARTY TRANSACTIONS

We have adopted a policy that requires Board of Directors approval of
transactions with related persons as defined by SEC regulations, including any
sales or purchase transaction, asset exchange transaction, operating agreement,
or advance or receivable transaction that could put our assets or operating
performance at risk. All of our directors and executive officers of the Company

are required at all times, but not less than annually, to disclose all
relationships they have with companies or individuals that have conducted
business with, or had an interest in, the Company. Our executive officers
monitor our operations giving consideration to the disclosed relationships and
refer potential transactions to the Board of Directors for approval. The Board
of Directors considers a related party transaction for its potential economic
benefit to the Company, to ensure the transaction is "arms length" and in
accordance with our policies and that it is properly disclosed in our reports to
shareholders.

REPORTABLE RELATED PARTY TRANSACTIONS

Other than the employment arrangements described elsewhere in this
report and the transactions described below, since January 1, 2008, there has
not been, nor is there currently proposed, any transaction or series of similar
transactions to which we were or will be a party:

o in which the amount involved exceeds $120,000; and

o in which any director, executive officer, shareholder who
beneficially owns 5% or more of our common stock or any member
of their immediate family had or will have a direct or
indirect material interest.

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

At December 31, 2008, we had $674,010 of unsecured notes, advances and
accrued interest receivable due from Colin Dyne. The notes and advances bear
interest at 7.5% and are due on demand. A reserve was established against this
note in the amount of $474,010 at December 31, 2008.

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

At December 31, 2008, we had an aggregate of $85,176 in notes and
advances due to Mark Dyne, the Chairman of our Board of Directors and a
significant stockholder, or to parties related to or affiliated with Mark Dyne.
The notes are payable on demand and accrue interest at 10% per annum.

We paid consulting fees to Diversified Investments, a company owned by
Mark Dyne, in the amount of $150,000 during the year ended December 31, 2008.

DIRECTOR INDEPENDENCE

Because our common stock is quoted on the OTC Bulletin Board, we are
not subject to the listing requirements of any securities exchange or Nasdaq
regarding the independence of our directors. However, our Board of Directors has
determined that as of December 31, 2008, a majority of our Board of Directors is
comprised of "independent" directors within the meaning of the applicable rules
for companies listed on The Nasdaq Stock Market. The Board determined that each
of Brent Cohen, Joseph Miller, Raymond Musci and William Sweedler were
independent. The Board has also determined that each of Joseph Miller, Raymond
Musci and William Sweedler meet the independence requirements for services on
the Audit Committee pursuant to the rules for companies traded on The Nasdaq
Stock Market.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

SERVICES PROVIDED BY THE INDEPENDENT AUDITORS

The audit committee of our Board of Directors is responsible for the
appointment, compensation, retention and oversight of the work of the
independent auditors.

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

AUDIT FEES - The aggregate fees billed by our independent registered
public accounting firm for professional services rendered for the audit of our
annual financial statements and review of our financial statements included in
our Forms 10-Q or services that are normally provided in connection with
statutory and regulatory filings were $468,000 for fiscal year 2008 and $350,000
for fiscal year 2007.

AUDIT-RELATED FEES - The aggregate fees billed by our independent
registered public accounting firm for professional services rendered for
assurance and related services reasonably related to the performance of the
audit or review of our financial statements (other than those reported
above)were $44,000 for fiscal year 2008 and $57,300 for fiscal year 2007.

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

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

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

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

The audit committee has established a general policy requiring its
pre-approval of all audit services and permissible non-audit services provided
by the independent auditors, along with the associated fees for those services.
For both types of pre-approval, the audit committee considers whether the
provision of a non-audit service is consistent with the SEC's rules on auditor
independence, including whether provision of the service (1) would create a
mutual or conflicting interest between the independent auditors and the Company,
(2) would place the independent auditors in the position of auditing its own
work, (3) would result in the independent auditors acting in the role of
management or as an employee of the Company, or (4) would place the independent
auditors in a position of acting as an advocate for the Company. Additionally,
the audit committee considers whether the independent auditors are best
positioned and qualified to provide the most effective and efficient service,
based on factors such as the independent auditors' familiarity with our
business, personnel, systems or risk profile and whether provision of the
service by the independent auditors would enhance our ability to manage or
control risk or improve audit quality or would otherwise be beneficial to us.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) List the following documents filed as a part of this report:

(1) FINANCIAL STATEMENTS

See Index to Financial Statements in Item 8 of this Annual
Report on Form 10-K, which is incorporated herein by reference.

(2) FINANCIAL STATEMENT SCHEDULES

Schedule II - Valuation and Qualifying Accounts Reserves is
included beginning on the following page.

(3) EXHIBITS

See Exhibit Index attached to this Annual Report on Form 10-K,
which is incorporated herein by reference.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

BALANCE AT
BEGINNING BALANCE AT
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
---------------------------------------- ------------ ------------ ------------ ------------

2008
----
Allowance for doubtful accounts deducted
from accounts receivable in the
balance sheet ....................... $ 140,500 $ 74,500 $ (2,300) $ 217,300
Allowance for doubtful accounts deducted
from related party in the balance
sheet ............................... -- 474,000 -- 474,000
Reserve for obsolescence deducted from
inventories on the balance sheet .... 1,019,000 692,000 500,000 1,211,000
Valuation reserve deducted from
deferred tax assets ................. 20,163,000 4,947,000 1,094,000 24,016,000
------------ ------------ ------------ ------------
$ 21,322,500 $ 6,187,500 $ 1,591,700 $ 25,918,300
============ ============ ============ ============

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

2006
----
Allowance for doubtful accounts deducted
from accounts receivable in the
balance sheet ....................... $ 1,189,000 $ 198,000 $ 1,315,500 $ 71,500
Reserve for obsolescence deducted from
inventories on the balance sheet .... 7,306,000 557,000 6,621,000 1,242,000
Valuation reserve deducted from
deferred tax assets ................. 21,447,000 2,222,000 19,225,000
------------ ------------ ------------ ------------
Total .................................. $ 29,942,000 $ 755,000 $ 10,158,500 $ 20,538,500
============ ============ ============ ============

(1) Additions to the allowance for doubtful accounts include provisions
for uncollectible accounts. Bad debt expense includes (and additions
above exclude) net direct write-offs of $0.0 and $114,000 for the
years ended December 31, 2008 and 2007, respectively, and net
recoveries of $712,000 for the year ended December 31, 2006. Additions
to the inventory valuation reserve include current year provisions.
Additionally, in 2007 and 2006 there were direct write-offs of $0.4
million and $0.2 million, respectively.

(2) Deductions from the allowance for doubtful accounts include amounts
applied to write-offs and reversals of prior period provisions.
Deductions from the inventory valuation reserve include application of
the reserve against obsolete, excess, slow-moving or disposed
inventory.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

TALON INTERNATIONAL, INC.

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

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints
Lonnie D. Schnell and Mark Dyne, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Lonnie D. Schnell Chief Executive Officer and Chief April 9, 2009
--------------------- Financial Officer (Principal
Lonnie D. Schnell Executive and Financial Officer)

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

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

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

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

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

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

EXHIBIT INDEX

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

3.1 Certificate of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.1 to Form SB-2 filed on October 21, 1997,
and the amendments thereto.

3.1.2 Certificate of Designation of Rights, Preferences and Privileges
of Series A Preferred Stock. Incorporated by reference to Exhibit
A to the Rights Agreement filed as Exhibit 4.1 to Current Report
on Form 8-K filed as of November 4, 1998.

3.1.3 Certificate of Amendment of Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.4 to Annual
Report on Form 10-KSB, filed March 28, 2000.

3.1.4 Certificate of Amendment of Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.1.3 to Form
8-K filed on August 4, 2006.

3.1.5 Certificate of Ownership and Merger. Incorporated by reference to
Exhibit 3.1 to Form 8-K filed on July 20, 2007.

3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to
Form SB-2 filed on October 21, 1997, and the amendments thereto.

4.1 Specimen Stock Certificate of Common Stock of Registrant.
Incorporated by reference to Exhibit 4.1to Form SB-2 filed on
October 21, 1997, and the amendments thereto.

4.2 Rights Agreement, dated as of November 4, 1998, between
Registrant and American Stock Transfer and Trust Company as
Rights Agent. Incorporated by reference to Exhibit 4.1 to Current
Report on Form 8-K filed as of November 4, 1998.

4.3 Form of Rights Certificate. Incorporated by reference to Exhibit
B to the Rights Agreement filed as Exhibit 4.1 to Current Report
on Form 8-K filed as of November 4, 1998.

10.1 Form of Indemnification Agreement. Incorporated by reference to
Exhibit 10.1to Form SB-2 filed on October 21, 1997, and the
amendments thereto.

10.2 Promissory Note, dated September 30, 1996, provided by Tag-It,
Inc. to Harold Dyne. Incorporated by reference to Exhibit 10.21
to Form SB-2 filed on October 21, 1997, and the amendments
thereto.

10.3 Promissory Note, dated June 30, 1991, provided by Tag-It, Inc. to
Harold Dyne. Incorporated by reference to Exhibit 10.23 to Form
SB-2 filed on October 21, 1997, and the amendments thereto.

10.5 Promissory Note, dated February 29, 1996, provided by A.G.S.
Stationary, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.25 of Form SB-2 filed on October 21,
1997, and the amendments thereto.

10.6 Promissory Note, dated January 19, 1995, provided by Pacific Trim
& Belt, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.26 to Form SB-2 filed on October 21,
1997, and the amendments thereto.

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

10.7 (2) Amended and Restated 1997 Stock Incentive Plan. Incorporated by
reference to Exhibit 10.7 to Form 10-Q filed on November 13,
2006.

10.8 (2) Form of Non-statutory Stock Option Agreement. Incorporated by
reference to Exhibit 10.30 to Form SB-2 filed on October 21,
1997, and the amendments thereto.

10.9 Promissory Note, dated August 31, 1997, provided by Harold Dyne
to Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
10.32 to Form SB-2 filed on October 21, 1997, and the amendments
thereto.

10.10 Promissory Note, dated October 15, 1997, provided by Harold Dyne
to Pacific Trim & Belt, Inc. Incorporated by reference to Exhibit
10.34 to Form SB-2 filed on October 21, 1997, and the amendments
thereto.

10.11 Promissory Note, dated October 15, 1997, provided by A.G.S.
Stationary Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.48 to Form SB-2 filed on October 21,
1997, and the amendments thereto.

10.12 Promissory Note, dated November 4, 1997, provided by Pacific Trim
& Belt, Inc. to Monto Holdings Pty. Ltd. Incorporated by
reference to Exhibit 10.49 to Form SB-2 filed on October 21,
1997, and the amendments thereto.

10.13 Form of Investor Rights Agreements dated December 28, 2001.
Incorporated by reference to Exhibit 99.4 to Form 8-K filed on
January 23, 2002.

10.14 (1) Intellectual Property Rights Agreement, dated April 2, 2002,
between the Company and Pro-Fit Holdings, Ltd. Incorporated by
reference to Exhibit 10.69 to Form 10-K/A filed on October 1,
2003.

10.15 Form of Common Stock Purchase Warrant, dated as of November 9,
2004. Incorporated by reference to Exhibit 10.3 to Form S-3 filed
on December 9, 2004.

10.16 Common Stock Purchase Warrant dated as of November 9, 2004,
issued by the Registrant in favor of Sanders Morris Harris Inc.
Incorporated by reference to Exhibit 10.7 to Form S-3 filed on
December 9, 2004.

10.17 (2) Consulting Agreement effective April 1, 2007 between the
Registrant and Colin Dyne. Incorporated by reference to Exhibit
10.34 to Form 10-Q filed on May 15, 2007.

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

10.19 Revolving Credit and Term Loan Agreement dated June 27, 2007, by
and between Tag-It Pacific, Inc. and Bluefin Capital, LLC.
Incorporated by reference to Exhibit 10.35 to Form 10-Q filed on
August 14, 2007.

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

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

10.19.2 Amendment No. 2 to Loan Agreement dated November 19, 2007, by and
between the Registrant and Bluefin Capital, LLC. Incorporated by
reference to Exhibit 10.35.2 to Form 8-K filed on November 26,
2007.

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

10.20 Guaranty Agreement, dated June 27, 2007, by Talon International,
Inc., Tag-It, Inc., A.G.S. Stationary, Inc., Tag-It Pacific
Limited, Tag-It Pacific (HK) Ltd., Tagit de Mexico, S.A. de C.
V., Talon Zipper (Shenzhen) Company, Ltd., and Talon
International, Pvt. Ltd. in favor of Bluefin Capital, LLC.
Incorporated by reference to Exhibit 10.36 to Form 10-Q filed on
August 14, 2007.

10.21 Collateral Agreement, dated June 27, 2007, by and among Tag-It
Pacific, Inc., Talon International, Inc., Tag-It, Inc., A.G.S.
Stationary, Inc., Tag-It Pacific Limited, Tag-It Pacific (HK)
Ltd., Tagit de Mexico, S.A. de C. V., Talon Zipper (Shenzhen)
Company, Ltd., and Talon International, Pvt. Ltd. in favor of
Bluefin Capital, LLC. Incorporated by reference to Exhibit 10.37
to Form 10-Q filed on August 14, 2007.

10.22 Registration Rights Agreement, dated June 27, 2007, by Talon
International, Inc., for the benefit of holders. Incorporated by
reference to Exhibit 4.10 to Registration Statement on Form S-3
filed on August 10, 2007.

10.23 Form of Warrant issued to Bluefin Capital, LLC. Incorporated by
reference to Exhibit 4.10 to Registration Statement on Form S-3
filed on August 10, 2007.

10.24 Promissory Note, dated June 27, 2007, executed by Colin Dyne in
favor of Tag-It Pacific, Inc. Incorporated by reference to
Exhibit 10.40 to Form 10-Q filed on August 14, 2007.

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

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

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

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

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

21.1 Subsidiaries.

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

23.1 Consent of SingerLewak LLP.

24.1 Power of Attorney (included on signature page).

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

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

(1) Certain portions of this agreement have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for an
order granting confidential treatment pursuant to Rule 406 of the General
Rules and Regulations under the Securities Act of 1933, as amended.

(2) Indicates a management contract or compensatory plan.