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, 2007

[_] 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, 2007 the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was $18,202,356. At April 11,
2008 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
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Item 1. Business...................................................... 2

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

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

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

Item 3. Legal Proceedings............................................. 15

Item 4. Submission of Matters to a Vote of Security Holders........... 16

PART II
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Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.......... 17

Item 6. Selected Financial Data....................................... 19

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 20

Item 7A. Quantitative and Qualitative Disclosures about Market Risk ... 34

Item 8. Financial Statements and Supplementary Data................... 35

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 71

Item 9A(T). Controls and Procedures.......................... 71

Item 9B. Other Information................................ 72

PART III
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Item 10. Directors, Executive Officers and Corporate Governance........ 72

Item 11. Executive Compensation........................................ 76

Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................. 86

Item 13. Certain Relationships and Related Transactions and Director
Independence............................................... 88

Item 14. Principal Accounting Fees and Services........................ 89

PART IV
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Item 15. Exhibits and Financial Statement Schedules.................... 91

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 Levi Strauss &
Co., 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. Our web site is WWW.TAGITPACIFIC.COM. On July
20, 2007 we changed our corporate name from Tag-It Pacific, Inc. to Talon
International, Inc. 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, Mexico and Central America and have sales and marketing
teams in all of these areas. We have also developed, and are now implementing,
joint manufacturing arrangements in various geographic international local
markets to finish and sell zippers under the TALON brand name. Our contractors
work with, purchase or install equipment locally for dying and producing
finished zippers. We expect this program 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 and
South 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 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, and 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.

In 2005 we marketed and supplied complete trim packages on a
per-garment basis which we assembled on behalf of our customers. Each trim
package included all items of trim that a customer needed in the manufacture of
a particular item of apparel, including thread, zippers, labels, buttons,
rivets, polybags, packing cartons and hangers. We also included printed
marketing materials such as hang tags, bar-coded hang tags, pocket flashers,
waistband tickets and size stickers that were attached to products to identify
and promote the products, permit automated data collection, provide brand
identification and communicate consumer information such as a product's retail
price, size, fabric content and care instructions. We continue to sell the trim
package components separately, but phased-out the offering as a complete kit in
late 2005 as our cost of labor for the assembly was no longer competitive, and
the market was not willing to pay the premium for pre-assembly of the trim
material. In 2005 we also decided to discontinue offering thread as a portion of
our trim products and we negotiated an agreement with our supplier for the
return of substantially all of the company's thread products. We instead, are
sharpening our focus on the market opportunity in which we add the most value,
our full-service Trim solutions.

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
also 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 2% of our consolidated revenue for the year ended December 31,
2007, and 19% for the years ended December 31, 2006 and 2005. Accordingly, the
results of operations and financial condition could be materially adversely
affected if our dispute with Pro-Fit is not resolved in a manner favorable to
us, or if we are unsuccessful in securing new customers to replace the revenues
previously generated by our exclusive sales of this product to Levi.

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,
--------------------------------
2007 2006 2005
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Product Group Net Revenue:
Talon zipper ..................... 52.2% 34.8% 28.7%
Trim ............................. 46.1% 46.1% 52.4%
Tekfit ........................... 1.7% 19.1% 18.9%

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 500 active customers. Our customers include the
designated suppliers of well-known apparel manufacturers, such as Levi Strauss &
Co., Abercrombie & Fitch, Juicy Couture, Victoria's Secret, and Polo Ralph
Lauren, among others. Our customers also include contractors for specialty
retailers such as Express and the Gap and mass merchant retailers such as
Wal-Mart, Kohl's and Target.

For the year ended December 31, 2007, our three largest customers
represented approximately 9% of our consolidated net sales. For the year ended
December 31, 2006, no single customer represented more than 9% of our
consolidated net sales; however our three largest customers represented
approximately 18% of our consolidated net sales. For the year ended December 31,
2005, no single customer represented more than 10% of our consolidated net
sales; however, our three largest customers represented approximately 22% of our
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, 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 Paxar Corporation, YKK, Universal Button,
Inc., Avery Dennison Corporation and Scovill Fasteners, Inc. 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 and South 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 14 of
Notes 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, 2007, we had approximately 219 full-time employees
including 36 in the United States, 85 employees in Hong Kong, 77 employees in
China, 7 in Indonesia, 6 in India, 4 in The Dominican Republic, 2 in Taiwan, 1
in Thailand and 1 in Vietnam. 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.TAGITPACIFIC.COM (in the "Investor Relations"
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.

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, 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.

OUR REVENUES MAY BE HARMED IF GENERAL ECONOMIC CONDITIONS WORSEN.

Our revenues depend on the health of the economy and the growth of our
customers and potential future customers. When economic conditions weaken,
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 vendors. There can be no assurance
that we will remain a preferred vendor 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. Further, if the economic conditions in the United
States worsen or if a wider or global economic slowdown occurs, we may
experience a material adverse impact on our business, operating results, and
financial condition.

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.

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.

IF WE ARE UNABLE TO SATISFY THE FINANCIAL COVENANTS IN OUR DEBT AGREEMENTS IN
FUTURE PERIODS, THE 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 period ending June
30, 2008, as discussed in Note 7 of the Notes to Consolidated Financial
Statements. In the event that we fail to satisfy the minimum EBITDA requirement
for three consecutive quarters, the credit agreement will be in default and the
full amount of our outstanding obligations will become due. 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 by 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.

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 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 AND WE MAY BE
ADVERSELY IMPACTED 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, or we may have to pay for
false claims.

OUR STOCK PRICE MAY DECREASE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND
CAUSE OUR STOCKHOLDERS TO SUFFER
SIGNIFICANT LOSSES.

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 April 11, 2008, our officers and directors and their affiliates
beneficially owned approximately 14.5% of the outstanding shares of our common
stock. The Dyne family, which includes Mark Dyne, Colin Dyne, who are also our
directors; Larry Dyne, the estate of Harold Dyne and Jonathan Burstein;
beneficially owned approximately 13.3% of the outstanding shares of our common
stock at April 11, 2008. Additionally, at April 11, 2008 our lender Bluefin
Capital LLC 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 TO SOUTHEAST ASIA OUR
MANUFACTURING ASSETS VALUE WOULD BE
ADVERSELY AFFECTED.

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

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; 3,400 square feet of warehouse
space in Simi Valley, California; 17,700 square feet of office and warehouse
space in Kwun Tong, Hong Kong; 6,600 square feet of office and showroom space in
Shenzhen, China; office space square footage totaling 5,400 in various other
cities in China; 6,000 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. We also own a building with 41,650 square feet of manufacturing and
warehouse space in Kings Mountain, North Carolina, which is being held for sale.
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 -- HUBERMAN
V.TAG-IT PACIFIC, INC., ET AL., Case No. CV05-7352 R(Ex) -- was filed against us
and certain of our current and former officers and directors in the United
States District Court for the Central District of California, alleging claims
under Section 10(b) and Section 20 of the Securities Exchange Act of 1934. A
lead plaintiff was appointed, and his amended complaint alleged that defendants
made false and misleading statements about our financial situation and our
relationship with certain of our large customers. The action was brought on
behalf of all purchasers of our publicly-traded securities during the period
from November 13, 2003 to August 12, 2005. On February 20, 2007, the Court
denied class certification. On April 2, 2007 the Court granted defendants'
motion for summary judgment, and on or about April 5, 2007, the Court entered
judgment in favor of all defendants. On or about April 30, 2007, plaintiff filed
a notice of appeal, and his opening appellate brief was filed on October 15,
2007. Our brief was filed on November 28, 2007. We believe that this matter will
be resolved favorably on appeal, or in a later trial or in settlement within the
limits of its insurance coverage. However, the outcomes of this action or an
estimate of the potential losses, if any, related to the lawsuit cannot be
reasonably predicted, and an adverse resolution of the lawsuit could potentially
have a material adverse effect on our financial position and results of
operations.

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

technology and our business, results of operations and financial condition could
be materially adversely affected if the dispute with Pro-Fit is not resolved in
a manner favorable to us. Additionally, we have incurred significant legal fees
in this litigation, and unless the case is settled, we will continue to incur
additional legal fees in increasing amounts as the case accelerates to trial.

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

ITEM 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 2007.

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, 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

YEAR ENDED DECEMBER 31, 2006
1st Quarter........................ $ 0.84 $ 0.33
2nd Quarter........................ 0.81 0.38
3rd Quarter........................ 1.38 0.63
4th Quarter........................ 1.35 0.72

On April 10, 2008, the closing sales price of our common stock as
reported on OTC Bulletin Board was $0.36 per share. As of April 11, 2008, 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,
2002 to December 31, 2007, 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, 2002 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.

[PERFORMANCE GRAPH OMITTED]

Cumulative Total Return
----------------------------------- -------- ----------- ----------- ----------- ----------- -----------
12/02 12/03 12/04 12/05 12/06 12/07
----------------------------------- -------- ----------- ----------- ----------- ----------- -----------

TALON INTERNATIONAL, INC. 100.00 123.69 123.97 9.92 28.37 11.16
AMEX COMPOSITE 100.00 143.18 175.20 215.26 257.04 299.37
DOW JONES US CLOTHING & ACCESSORIES 100.00 125.07 147.77 154.32 191.2 143.93

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)
2003(1) 2004(1,2) 2005(1) 2006 2007
-------- -------- -------- -------- --------

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue ..................................... $ 64,443 $ 55,109 $ 47,331 $ 48,825 $ 40,530
Income (loss) from operations ..................... $ (5,881) $(14,482) $(27,098) $ 1,331 $ (3,171)
Net income (loss) ................................. $ (4,745) $(17,609) $(29,538) $ 309 $ (4,922)
Net income (loss) per share - basic ............... $ (0.46) $ (1.02) $ (1.62) $ 0.02 $ (0.24)
Net income (loss) per share - diluted ............. $ (0.46) $ (1.02) $ (1.62) $ 0.02 $ (0.24)
Weighted average shares outstanding - basic ....... 10,651 17,316 18,226 18,377 20,155
Weighted average shares outstanding - diluted ..... 10,651 17,316 18,226 18,956 20,155
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 14,443 $ 5,461 $ 2,277 $ 2,935 $ 2,919
Total assets ...................................... $ 67,770 $ 56,448 $ 30,321 $ 25,694 $ 22,094
Capital lease obligations, line of credit and
notes payable .................................. $ 11,759 $ 18,792 $ 16,001 $ 16,214 $ 12,978
Convertible redeemable preferred stock ............ $ 2,895 $ -- $ -- $ -- $ --
Stockholders' equity .............................. $ 43,564 $ 30,195 $ 912 $ 1,686 $ (717)
Total liabilities and stockholders' equity ........ $ 67,770 $ 56,448 $ 30,321 $ 25,694 $ 22,094
PER SHARE DATA:
Net book value per common share ................... $ 3.79 $ 1.66 $ 0.05 $ 0.09 $ (0.04)
Common shares outstanding ......................... 11,508 18,171 18,241 18,466 20,291

----------
(1) We incurred restructuring costs of $6.4 million, $0.4 million, and $7.7
million during the years ended December 31, 2005, 2004 and 2003,
respectively.

(2) We incurred net charges of $4.3 million from the write-off of obligations
due from a former major customer and other fourth quarter adjustments
totaling $9.5 million during the year ended December 31, 2004.

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.

On July 20, 2007, we changed our corporate name from Tag-It Pacific,
Inc. to Talon International, Inc. in order to reflect our core marketing
strategy of focusing on growth opportunities in the global zipper market with
our Talon brand zippers.

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, and 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.
This impacted 2007 Tekfit sales and resulted in a $8.6 million or 93% decrease
from 2006 sales.

The revenues we derive from the sale of products incorporating the
stretch waistband technology, represented approximately 2% of our consolidated
revenues for the year ended December 31, 2007 and 19% of consolidated revenues
for the years ended December 31, 2006 and 2005; accordingly our growth 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.

In an effort to better align our organizational and cost structures
with its future growth opportunities, in August 2005 our Board of Directors
adopted a restructuring plan that was substantially completed by December 31,
2005. The plan included restructuring our global operations by eliminating
redundancies in our Hong Kong operation, closing our facilities in Mexico, and
closing our North Carolina manufacturing facility. We have also refocused our
sales efforts on higher margin products, which may result in lower net sales
initially as we focus on acquiring high quality customers, and decrease our
customer concentration. As a result of this restructuring, we now operate with
fewer employees and will have lower associated operating and distribution
expenses.

RESULTS OF OPERATIONS

NET SALES

For the years ended December 31, 2007, 2006, and 2005, 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,
-------------------------------------------
2007 2006 2005
----------- ----------- -----------
Product Group Net Revenue:
Talon zipper .............. $21,159,595 $17,005,203 $13,593,479
Trim ...................... 18,688,698 22,502,947 24,788,397
Tekfit .................... 681,262 9,316,852 8,949,300
----------- ----------- -----------
$40,529,555 $48,825,002 $47,331,176
=========== =========== ===========

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 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 production shifted from this area to Asia and we closed our operations
in 2005 and 2006; 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.

Sales in 2006 increased modestly from 2005 as a net result of a
substantial decline within selected markets offset by large increases in other
geographical markets. Sales, principally of Trim products, to customers in
Mexico declined sharply in 2006 from 2005 ($6.0 million) as the industry shift
of apparel production from Latin America to Asia continued from 2005, from the
discontinuance of approximately $4.0 million in sales of products from 2005, and
as we completed the closure of our assembly and distribution operations within
Mexico. Total Trim product sales declined by approximately $2.3 million in 2006
as compared to 2005 as a consequence of the reductions from Mexico and the U.S.
described above offset by increased sales in Asia and the Dominican Republic
resulting mainly from the shift in industry trends. Sales of TALON products to
customers within the U.S. also declined significantly (approximately $3.6
million) as a result of the industry shift of apparel production and as a result
of our closure of our manufacturing facility in North Carolina during the third
quarter of 2005. The decline of Talon product sales from the North and Central
American regions was substantially offset by the shifting of this production to
manufacturers within Asia, and our expansion of operations with customers in
this region, resulting in a net increase in Talon product sales for 2006 over
2005 of approximately $3.4 million. Additionally, expanded demand by our former
exclusive customer for the TEKFIT waistband also resulted in an increase of
approximately $0.4 million in 2006 over 2005 in our sales to the Dominican
Republic, where the principal manufacturers of this product are located, and
sales of Trim products into this region increased as key customer sales shifted
out of the Mexico marketplace to this region. Sales within "other geographical
regions" also reflect the worldwide shifting of apparel production to Asia.

The net decrease of sales in 2005 was primarily due to a decrease in
sales to our customers in Mexico of Trim products and, to a lesser extent, TALON
zippers, resulting from the industry shift of apparel production from Latin
America to Asia, and due to our restructuring in the third quarter of 2005 which
disrupted sales in the Mexico regions as we prepared for a shift of operations
to Asia. Sales in Asia of our Trim products and Talon zippers increased
significantly during 2005 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. We responded to these market changes in 2005 with
the implementation of a restructuring plan that included reducing our operations
in Mexico and focusing our efforts on the market in Asia. Sales of our TEKFIT
waistband decreased in 2005 because of lower demand from our exclusive customer
for this product. During 2005, we continued our plan to decrease reliance on two
significant customers in Mexico. These two customers contributed approximately
$7.7 million or 16.3% of revenues for the year ended December 31, 2005.

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, 2007, 2006, and 2005
(amounts in thousands):

2007 CHANGE 2006 CHANGE 2005
-------- -------- -------- -------- --------

Sales ................................... $ 40,530 (17)% $ 48,825 3% $ 47,331

Cost of goods sold ...................... 28,423 (17)% 34,356 (27)% 47,070
% of sales .......................... 70% 70% 99%

Selling expenses ........................ 3,126 12% 2,778 (5)% 2,929
% of sales .......................... 8% 6% 6%

General and administrative expense ...... 10,877 1% 10,873 (32)% 16,098
% of sales .......................... 27% 22% 34%

Bad debt expense (recoveries) ........... 187 (136)% (513) (109)% 5,858
% of sales .......................... 0% (1)% 12%

Reserve for impairment of note receivable 1,088 100% -- -- --
% of sales .......................... 3%

Restructuring Charges ................... -- -- -- (100)% 2,474
% of sales .......................... 5%

COST OF GOODS SOLD

Cost of goods sold for the year ended December 31, 2007, declined $5.9
million or 17% from 2006 primarily a result of the 17% decrease in sales. The
reduction in cost of goods sold from 2006 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 are now sourced and delivered within the same marketplace,
reduced manufacturing and assembly overhead costs and lower inventory
obsolescence and management charges as inventory levels have been reduced and
turns accelerated.

Cost of goods sold for the year ended December 31, 2006 declined $12.7
million or 27% from 2005 as the result of a number of the actions we implemented
in connection with our 2005 restructuring plan, and as a result of our focus on
higher margin product sales and continued efforts to reduce costs worldwide.
Cost of goods sold in 2006 declined by approximately $4.8 million (10.3%) from
2005 as a result of higher direct margins on products sold; by approximately
$1.9 million (4.0%) from lower freight & duty charges as a result of relocating
our operations closer to our customers in Asia; by a reduction in inventory
adjustments and obsolescence of $1.6 million (3.5%) due primarily to inventories
located at our Mexico production operations; by the elimination of $3.4 million
(7.3%) in restructuring charges incurred in 2005; and by approximately $1.8
million (3.8%) from reductions in manufacturing and overhead charges as a result
of reduced employee related costs and operating expenses of our North Carolina
and Mexico operations; offset by increases of approximately $0.8 million (1.8%)
on higher sales volumes.

Cost of goods sold increased for the year ended December 31, 2005
included a $3.4 million (7.7%) write-down of inventory in connection with our
2005 restructuring plan, and an increase in our inventory obsolescence reserve
of $2.1 million (4.7%), including $0.5 million in the fourth quarter of 2005.

SELLING EXPENSES

Selling expenses for the year ended December 31, 2007 increased $0.4
million or 12.0% from 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).

Selling expense for the year ended December 31, 2006 decreased $0.2
million or 5.0% from 2005 as a result of lower travel and entertainment costs of
$0.3 million; lower legal costs of $0.3 million; and other employee benefit and
administrative cost reductions of approximately $0.1 million; offset by
increases in sales commissions of approximately $0.3 million and increased
spending for sales and marketing programs of $0.2 million.

Selling expenses increased $0.3 million or 1.0% for the year ended
December 31, 2005 because we were unable to reduce expenses in direct proportion
to the decrease in sales.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the year ended December 31,
2007 of $10.9 million remained relatively unchanged from 2006. General and
administrative expenses were effected 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 existing consulting contracts
with two former directors of the Company.

General and administrative expenses for the year ended December 31,
2006 decreased $5.2 million or 32% from 2005. The decrease was primarily the
result of the $0.5 million write-off of goodwill primarily associated with
closed operations, reductions in legal costs by $1.9 million principally as a
reduction of our costs associated with the ProFit litigation, lower employee and
benefit costs by $1.9 million from reduced employment levels, reduced facility
costs of $0.6 million, and reductions in other administrative and travel costs
of $1.4 million, offset by approximately $0.7 million in increased professional
and audit fees as we changed auditors and utilized more professional consultants
in lieu of full time regular employee, and stock based compensation expense of
$0.4 million associated with the implementation of SFAS 123(R).

Included in general and administrative expenses for the year ended
December 31, 2005 were legal expenses of approximately $3.5 million related
primarily to the Pro-Fit litigation, and an impairment charge to goodwill of
$0.5 million incurred in connection with the 2005 restructuring plan; offset by
reductions of approximately $1.0 million associated with lower employment levels
and related costs in connection with the restructuring plan.

BAD DEBT EXPENSE (RECOVERIES)

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.

Bad debt expense for the year ended December 31, 2006 reflected a net
recovery of $0.5 million as compared to bad debt expenses of $5.9 million for
the year ended December 31, 2005. The bad debt recoveries in 2006 represent
collections of accounts written-off in prior years as uncollectible, and the
2005 expense is primarily related to outstanding unsettled receivables from a
former customer.

IMPAIRMENT OF NOTE RECEIVABLE

Operating expense in 2007 included $1.1 million in bad debt reserve
provisions associated with the note receivable due the Company from Azteca
Production International, Inc. See Notes 2 and 3 of the Consolidated Financial
Statements.

RESTRUCTURING CHARGES

Restructuring costs in 2005 were the result of the adoption of our 2005
restructuring plan. Restructuring costs recorded in the third quarter of 2005
were $6.2 million. Additional costs of $0.2 million were incurred in the fourth
quarter of 2005. Total restructuring costs of $6.4 million were recorded in the
Consolidated Statement of Operations for the year ended December 31, 2005 as
follows (in millions):

Cost of goods sold $3.4
Operating expenses:
General & administrative expenses 0.5
Restructuring charges 2.5
---------
Total restructuring costs $6.4
=========

INTEREST EXPENSE AND INTEREST INCOME

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 3 to the consolidated financial
statements.

Net expense for the year ended December 31, 2006 decreased from 2005 by
approximately $0.4 million principally as a result of interest earnings in 2006
from the note receivable.

Included in interest expense for the year ended December 31, 2005 was
the $0.8 million 6.5% mortgage note payable to First National Bank dated June
2004, and the $0.9 million 6.5% equipment note payable to First National Bank
dated November 2004 which were outstanding for the entire year in 2005 compared
to a partial year in 2004; partially offset by the repayment of a remaining $1.4
million due pursuant to a note payable and a reduction in amounts due to factor
in 2005.

INCOME TAXES

The provision for income taxes was $0.1 million for the year ended
December 31, 2007. Income tax provisions for the year ended December 31, 2007
principally include income tax provisions from operations in China and India;
offset by an income tax benefit from net operating loss carryforward 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.

The provision for income taxes for the year ended December 31, 2005
principally reflects the elimination of the net deferred tax asset in 2005 of
$1.0 million, and estimated foreign taxes. Based on the Company's net operating
losses, there is not sufficient evidence to determine that it is more likely
than not that the Company will be able to utilize its net operating loss carry
forwards to offset future taxable income.

LIQUIDITY AND CAPITAL RESOURCES

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

DECEMBER 31, DECEMBER 31,
2007 2006
------------ ------------
Cash and cash equivalents ....................... $ 2,919 $ 2,935
Total assets .................................... 22,094 25,694
Current debt .................................... 10,457 22,471
Non-current debt ................................ 12,354 1,536
Stockholders' equity ............................ (717) 1,686

CASH AND CASH EQUIVALENTS

Our cash is held with financial institutions. Substantially all of the
balances at December 31, 2007 and 2006 are in excess of federally insured
limits. As of December 31, 2007 there was no restricted cash. At December 31,
2006 we had restricted cash balances of $50,000 related to cash collateral for a
letter of credit with Wells Fargo Bank.

FINANCING ARRANGEMENTS

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. The revolving credit portion of the facility permits borrowings based upon
a formula including 75% of our eligible receivables and 55% of eligible
inventory, and provides for monthly interest payments at the prime rate plus
2.0%. The term loan bears interest at 8.5% annually with quarterly interest
payments and repayment in full at maturity. Borrowings under both credit
facilities are secured by all our assets. There was $879,000 in available
borrowings at December 31, 2007. See Note 18 of the Consolidated Financial
Statements for an amendment to the borrowing base formula.

On April 3, 2008, we executed a further amendment to the existing
revolving credit and term loan agreement with Bluefin Capital. The amendment
provided for an amendment of the EBITDA and other financial covenants, and the
redemption of the stock warrants previously issued to Bluefin Capital in
exchange for the issuance of an additional note payable to Bluefin Capital for
$1.0 million at an interest rate of 8.5%. We will record a reduction to equity
and an increase to notes payable for the fair value of the warrants redeemed.
The difference between the fair value of the warrants of $221,723 and the face
value of the note will be accreted over the life of the note. The note will
incur interest at 8.5% on the principal amount of $1.0 million and the quarterly
accretion will also be reflected as interest expense. The additional note and
all accrued interest under the note are due and payable on June 30, 2010.

We financed building, land and equipment purchases through notes
payable and capital lease obligations expiring through June 2011. These
obligations bear interest at rates of 6.5% and 6.6% per annum, and under these
obligations, we are required to make monthly payments of principal and interest.

The outstanding balance of our demand notes payable to related parties
at December 31, 2007 and 2006 was $85,000 and $665,000, respectively. The demand
notes totaling $85,000 bear interest at various rates between 0%-10%, have no
scheduled monthly payments, and are due within fifteen days from demand.

CASH FLOWS

The following table summarizes our cash flow activity for the years
ended December 31, 2007, 2006, and 2005 (amounts in thousands):

2007 2006 2005
-------- -------- --------

Net cash provided by operating activities .......... $ 2,137 $ 1,794 $ 1,112
Net cash used in investing activities .............. (725) (345) (1,454)
Net cash used in financing activities .............. (1,433) (791) (2,841)
Net increase (decrease) in cash and cash equivalents (16) 657 (3,183)

OPERATING 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 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; net of reductions 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 2 to the Consolidated Financial Statements.

Cash and cash equivalents for the year ended December 31, 2006
increased by $0.7 million from December 31, 2005 principally arising from cash
generated by operating activities, net of payments on notes payable and capital
leases.

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 and 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.

The increase in cash provided by operating activities during the year
ended December 31, 2005 resulted from, among other changes, a $10.6 million
decrease in accounts receivable, including the collection of a $4.5 million
receivable from one customer; a $3 million increase in accounts payable; a $2.8
million decrease in inventories; a $2.1 million increase in accrued legal costs;
substantially offset by a net loss of $29.5 million.

At December 31, 2005, accounts receivable from Azteca Productions
International ("Azteca"), a significant customer, was approximately $10,968,000
less a reserve of $7,528,000, totaling $3,440,000, net. In February 2006, we
accepted a note agreement from Azteca which provided for total payments
including principal and interest of $4.0 million in exchange for the net
outstanding accounts receivable balance. The balance of the note receivable at
December 31, 2005 of $3,440,000 reflects a $560,000 charge to discount the note,
using a 10.5% discount rate, to its net present value. The Azteca accounts
receivable, net at December 31, 2005 was reclassified on the accompanying
consolidated balance sheets to note receivable to reflect this subsequent
settlement.

INVESTING ACTIVITIES

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,
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 Note 7) 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 and 2005 reflects the repayment of notes payable and capital lease
obligations. In 2005 cash used in financing activities also included, the
repayment of borrowings under a bank line of credit partially offset by proceeds
from the exercise of stock options and warrants.

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. The revolving credit portion of the facility permits borrowings based upon
a formula including 75% of our eligible receivables and 55% of eligible
inventory, and provides for monthly interest payments at the prime rate plus
2.0%. The term loan bears interest at 8.5% annually with quarterly interest
payments and repayment in full at maturity. Borrowings under both credit
facilities are secured by all of our assets. Under the terms of the credit
agreement we are required to meet certain cash flow and coverage ratios, among
other restrictions including a restriction from declaring or paying a dividend
prior to repayment of all the obligations. The financial covenants require that
we to maintain at the end of each fiscal quarter beginning June 30, 2008
"EBITDA" (as defined in the Agreement) for the preceding four quarters in excess
of our principal and interest payments for the same four-quarter period. In the
event that we fail to satisfy the minimum EBITDA requirement for two consecutive
quarters, the credit agreement will be in default and the full amount of the
notes outstanding will become due. On November 19, 2007 the Company entered into
an agreement with Bluefin Capital, LLC to modify this financial covenant and to
extend until June 30, 2008 (with a further extension to March 31, 2009 provided
certain conditions are met by June 30 2008) the application of the 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. As of December 31, 2008, we had outstanding borrowings of $9.5
million under the term note, and $3.8 million under the revolving credit note.

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

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

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

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

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

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

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The following summarizes our contractual obligations at December 31,
2007 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
to related parties (1) $ 213,100 $ 213,100 $ -- $ -- $ --
Capital lease obligations $ 561,800 $ 363,200 $ 198,600 $ -- $ --
Operating leases ......... $ 1,244,700 $ 576,600 $ 668,100 $ -- $ --
Revolver & Term Note ..... $16,207,100 $ 1,159,700 $15,047,400 $ -- $ --
Other notes payable ...... $ 1,379,000 $ 421,700 $ 957,300 $ -- $ --
----------- ----------- ----------- ----------- -----------
Total Obligations ... $19,605,700 $ 2,734,300 $16,871,400 $ -- $ --
=========== =========== =========== =========== ===========

----------
(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, 2007.

At December 31, 2007 and 2006, 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 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 receivable balances are evaluated on a continual
basis and allowances are provided for potentially
uncollectible accounts based on management's estimate of the
collectibility of customer accounts. If the financial
condition of a customer were to deteriorate, resulting in an
impairment of its ability to make payments, an additional
allowance may be required. Allowance adjustments are charged
to operations in the period in which the facts that give rise
to the adjustments become known. During the year ended
December 31, 2007, bad debt expense was $0.2 million (with
provisions of $0.2 million), net recoveries were $0.5 million
(with provisions of $0.2 million) for the year ended December
31, 2006, and bad debt expense for the year ended December 31,
2005 was $12.5 million. The bad debt expense in 2005 was
primarily associated with specific receivables from a former
customer. The 2005 accounts with the customer were settled in
early 2006 with the acceptance of a note receivable at a
substantial discount and with the full write-off of the second
customer accounts where most all collection efforts had
failed. During 2006 accounts receivable delinquencies were
substantially eliminated lowering the risk for additional
material write-offs. The note receivable accepted from the
former customer in early 2006 represents a continuing risk of
collection and its performance is evaluated each quarter.

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 and
slow-moving inventory. We use estimates to record these
reserves. Slow-moving inventory is reviewed by category and
may be partially or fully reserved for depending on the type
of product and the length of time the product has been
included in inventory. Reserve adjustments are made for the
difference between the cost of the inventory and the estimated
market value, if lower, and charged to operations in the
period in which the facts that give rise to these adjustments
become known. Market value of inventory is estimated based on
the impact of market trends, an evaluation of economic
conditions and the value of current orders relating to the
future sales of this type of inventory. Provisions for
reserves for inventory valuation for the years ended December
31, 2007, 2006 and 2005 and 2004, were $0.1 million, $0.6
million and $2.5 million, respectively. The increase in the
provision during 2005 was primarily related to the remaining
inventory we owned at our operations in Mexico. The closure of
our manufacturing operations and from the exit of operations
in Mexico as part of the 2005 restructuring plan substantially
eliminates our acquisition or production of inventory that is
not directly associated with a customer's order. Accordingly,
the risk of future inventory obsolescence adjustments is
substantially reduced in 2006. The provisions recorded in
prior years are considered adequate to dispose of the
remaining inventories without further adjustment.

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 Notes to
consolidated financial statements, Note 12, "Income Taxes".

o We record impairment charges when the carrying amounts of
long-lived assets are determined not to be recoverable.
Impairment is measured by assessing the usefulness of an asset
or by comparing the carrying value of an asset to its fair
value. Fair value is typically determined using quoted market
prices, if available, or an estimate of undiscounted future
cash flows expected to result from the use of the asset and
its eventual disposition. The amount of impairment loss is
calculated as the excess of the carrying value over the fair
value. Changes in market conditions and management strategy
have historically caused us to reassess the carrying amount of
our long-lived assets. Long-lived assets are evaluated on a
continual basis and impairment adjustments are made based upon
management's valuations. As part of our 2005 restructuring
plan, certain long-lived assets, primarily machinery and
equipment, were impaired and their values adjusted
accordingly. The long-lived assets are planned to be
re-deployed through manufacturing arrangements with our
principal suppliers in Asia. The fair value of these assets
will be affected by our ability to secure appropriate
manufacturing arrangements and to utilize the equipment to
meet future production requirements. If we are unable to
secure favorable arrangements or to secure sufficient
production through these operations the fair value of this
equipment may be impaired.

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

o Upon approval of a restructuring plan by management, we record
restructuring reserves for certain costs associated with
facility closures and business reorganization activities as
they are incurred or when they become probable and estimable.
Such costs are recorded as a current liability. We record
restructuring reserves in compliance with SFAS 146 "Accounting
for Costs Associated with Exit or Disposal Activities",
resulting in the recognition of employee severance and related
termination benefits for recurring arrangements when they
became probable and estimable and on the accrual basis for
one-time benefit arrangements. We record other costs
associated with exit activities as they are incurred. Employee
severance and termination benefits are estimates based on
agreements with the relevant union representatives or plans
adopted by us that are applicable to employees not affiliated
with unions. These costs are not associated with nor do they
benefit continuing activities. Inherent in the estimation of
these costs are assessments related to the most likely
expected outcome of the significant actions to accomplish the
restructuring. Changing business conditions may affect the
assumptions related to the timing and extent of facility
closure activities. We review the status of restructuring
activities on a quarterly basis and, if appropriate, records
changes based on updated estimates. See Note 11, "2005
Restructuring Costs".

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 September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"), which defines fair
value, provides a framework for measuring fair value and expands the disclosures
required for fair value measurements. SFAS 157 applies to all accounting
pronouncements that require fair value measurements; it does not require any new
fair value measurements. For fiscal years beginning after November 15, 2007,
companies will be required to implement SFAS 157 for financial assets and
liabilities, as well as for any other assets and liabilities that are carried at
fair value on a recurring basis in financial statements. The FASB did, however,
provide a one-year deferral for the implementation of Statement 157 for other
nonfinancial assets and liabilities. An exposure draft will be issued for
comment in the near future on this partial deferral. Accordingly, we will adopt
SFAS 157 for financial assets and liabilities commencing in the first quarter of
2008. We are currently assessing the potential impact of SFAS 157 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. We are currently assessing the
impact of SFAS 159 on our consolidated financial statements.

In December 2007, the SEC issued SAB No. 110, CERTAIN ASSUMPTIONS USED
IN VALUATION METHODS - EXPECTED TERM ("SAB 110"). According to SAB 110, under
certain circumstances the SEC staff will continue to accept beyond December 31,
2007 the use of the simplified method in developing an estimate of expected term
of share options that possess certain characteristics in accordance with SFAS
123(R) beyond December 31, 2007. We have adopted SAB 110 effective January 1,
2008 and continue to use the simplified method in developing the expected term
used for our valuation of stock-based compensation.

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.

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 additional contracts to hedge the exchange exposure
for future product purchases. There were no hedging contracts outstanding as of
December 31, 2007. 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,
2007, the Revolving Credit Note of $3.8 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 $38,000 on our
variable rate borrowings.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS
PAGE
----

Report of Independent Registered Public Accounting Firm............. 36
Consolidated Balance Sheets......................................... 37
Consolidated Statements of Operations............................... 38
Consolidated Statements of Stockholders' Equity and Convertible
Redeemable Preferred Stock....................................... 39
Consolidated Statements of Cash Flows............................... 40
Notes to Consolidated Financial Statements.......................... 42

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, 2007 and 2006, 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, 2007. 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 provided 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, 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, present 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, 2007 included in the accompanying Management's Report on Internal
Control Over Financial Reporting and accordingly, we do not express an opinion
thereon.

As discussed in Note 1 to the consolidated financial statements, the Company has
adopted the provisions of Statement of Financial Accounting Standards
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" on January 1, 2007.

/s/ Singer Lewak Greenbaum & Goldstein LLP
------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 11, 2008

TALON INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

December 31, December 31,
2007 2006
------------ ------------

Assets
Current Assets:
Cash and cash equivalents ................... $ 2,918,858 $ 2,934,673
Marketable Securities available for sale .... 1,040,000 --
Accounts receivable ......................... 3,504,351 4,664,766
Note receivable ............................. -- 1,378,491
Inventories, net ............................ 2,487,427 3,051,220
Prepaid expenses and other current assets ... 945,566 541,034
------------ ------------
Total current assets ........................... 10,896,202 12,570,184

Property and equipment, net .................... 5,210,446 5,623,040
Fixed Assets held for sale ..................... 700,000 826,904
Note receivable, less current portion .......... -- 1,420,969
Due from related parties ....................... 625,454 675,137
Other intangible assets, net ................... 4,110,751 4,139,625
Other assets ................................... 551,054 437,569
------------ ------------
Total assets ................................... $ 22,093,907 $ 25,693,428
============ ============

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................. $ 6,603,929 $ 4,006,241
Accrued legal costs .......................... 498,846 427,917
Other accrued expenses ....................... 2,646,662 3,359,267
Demand notes payable to related parties ...... 85,176 664,970
Current portion of capital lease obligations . 323,317 432,728
Current portion of notes payable ............. 299,108 1,107,207
Current portion of secured convertible
promissory notes .......................... -- 12,472,622
------------ ------------
Total current liabilities ...................... 10,457,038 22,470,952

Capital lease obligations, less current portion 189,705 474,733
Notes payable, less current portion ............ 848,484 1,061,514
Revolver note payable .......................... 3,807,806 --
Term note payable, net of discount of
$2,075,500 .................................. 7,424,573 --
Other long term liabilities .................... 83,651 --
Total liabilities .............................. 22,811,257 24,007,199
------------ ------------

Commitments and contingencies (Note 13)

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,
2007; 18,466,433 at December 31, 2006 .... 20,291 18,466
Additional paid-in capital .................. 54,510,161 51,792,502
Accumulated deficit ......................... (55,292,246) (50,124,739)
Accumulated other comprehensive income-
foreign currency ........................ 44,444 --
------------ ------------
Total stockholders' equity (deficit) ........... (717,350) 1,686,229
------------ ------------

Total liabilities and stockholders' equity ..... $ 22,093,907 $ 25,693,428
============ ============

See accompanying notes.

TALON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2007 2006 2005
------------ ------------ ------------

Net sales ................................. $ 40,529,555 $ 48,825,002 $ 47,331,176
Cost of goods sold ........................ 28,422,820 34,356,034 47,070,381
------------ ------------ ------------
Gross profit .............................. 12,106,735 14,468,968 260,795

Selling expenses .......................... 3,125,634 2,777,772 2,928,659
General and administrative expenses ....... 10,877,374 10,872,887 16,098,363
Bad debt expense (recoveries) ............. 186,753 (513,347) 5,857,946
Reserve for impairment of note
receivable ............................. 1,087,653 -- --
Restructuring charges ..................... -- -- 2,474,281
------------ ------------ ------------
Total operating expenses .................. 15,277,414 13,137,312 27,359,249

Income(loss) from operations .............. (3,170,679) 1,331,656 (27,098,454)
Interest expense, net ..................... 1,680,079 988,453 1,379,786
------------ ------------ ------------

Income(loss) before income taxes .......... (4,850,758) 343,203 (28,478,240)
Provision for income taxes ................ 70,949 33,900 1,059,479
------------ ------------ ------------

Net income (loss) ......................... $ (4,921,707) $ 309,303 $(29,537,719)
============ ============ ============

Basic income(loss) per share .............. $ (0.24) $ 0.02 $ (1.62)
============ ============ ============
Diluted income( loss) per share ........... $ (0.24) $ 0.02 $ (1.62)
============ ============ ============

Basic weighted average shares outstanding . 20,155,563 18,377,484 18,225,851
============ ============ ============
Diluted weighted average shares outstanding 20,155,563 18,955,796 18,225,851
============ ============ ============

See accompanying notes.

TALON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
CONVERTIBLE REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

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

BALANCE, JANUARY 1, 2005 ... 18,171,301 $ 18,173 -- $ --
Common stock issued upon
exercise of options and
warrants .............. 69,744 68 -- --
Net loss ................ -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2005 . 18,241,045 18,241 -- --
Common stock issued for
services .............. 225,388 225 -- --
Stock based compensation ... 362,120 --
Net loss ................ -- -- -- --
------------ ------------ ------------ ------------
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 -- -- -- --
Other comprehensive
income-foreign currency
translation ........... -- -- -- --
Adoption of Fin 48 ......... -- -- -- --
Net loss ................ -- -- -- --

BALANCE, DECEMBER 31, 2007 . 20,291,433 $ 20,291 -- $ --
============ ============ ============ ============

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

BALANCE, JANUARY 1, 2005 ... $ 51,073,402 $ -- (20,896,333) $ 30,195,242
Common stock issued upon
exercise of options and
warrants .............. 254,476 -- -- 254,544
Net loss ................ -- -- (29,537,709) (29,537,70)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2005 . 51,327,878 -- (50,434,042) 912,077
Common stock issued for
services .............. 102,504 -- -- 102,729
Stock based compensation ... -- 362,120
Net loss ................ -- -- 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
Other comprehensive
income-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)
============ ============ ============ ============

See accompanying note

TALON INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2007 2006 2005
------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (4,921,707) $ 309,303 $(29,537,709)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 1,168,434 1,523,225 1,931,990
Amortization of deferred financing cost and debt discounts 736,042 -- --
Decrease in deferred income taxes ........................ -- -- 1,000,000
Common stock and warrants issued for services ............ -- 32,729 --
Stock based compensation ................................. 245,000 362,120
Increase(decrease) in allowance for doubtful accounts .... (935,501) (1,117,500) 2,630,759
Increase(decrease) in inventory valuation reserve ........ (68,988) (6,064,000) 940,973
Asset impairment ......................................... 126,904 -- --
Asset impairment due to restructuring .................... -- -- 2,343,531
Impairment of goodwill ................................... -- -- 450,000
Disposal of assets ....................................... 58,076 129,179 --
Changes in operating assets and liabilities:
Accounts receivable ...................................... 3,258,569 2,086,076 10,666,295
Note receivable collections .............................. 596,491 640,539 --
Inventories .............................................. 632,781 8,585,879 2,791,747
Prepaid expenses and other current assets ................ (404,532) 77,543 1,880,443
Other assets ............................................. (118,499) (140,217) 314,998
Accounts payable ......................................... 2,070,784 (2,587,985) 2,986,302
Accrued legal costs ...................................... 70,929 (442,194) 2,113,197
Other accrued expenses ................................... (377,565) (733,767) 671,348
Repayment of notes payable converted from accounts payable -- (867,297) --
Income taxes payable ..................................... -- (480) (71,589)
------------ ------------ ------------
Net cash provided by (used in) operating activities ........ 2,137,218 1,793,153 1,112,285
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment ............................ -- 2,500 --
Acquisition of property and equipment ...................... (725,498) (347,188) (1,453,848)
------------ ------------ ------------
Net cash used in investing activities ...................... (725,498) (344,688) (1,453,848)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured convertible promissory notes ......... -- 254,544
Proceeds from exercise of stock options and warrants ....... -- -- (614,506)
Payment of capital lease obligations ....................... (452,232) (604,351) (906,765)
Payments on notes payable .................................. -- (186,838) (1,574,975)
Repayment of notes payable ................................. (1,187,882) -- --
Repayment of related party note payable .................... (579,794) -- --
Proceeds from revolver credit facility ..................... 4,307,806 -- --
Proceeds from stock options and warrants ................... 42,746 -- --
Proceeds from term note .................................... 7,041,852 -- --
Proceeds from note ......................................... 166,753 -- --
Proceeds from related party note ........................... 125,000 -- --
Payment of financing term note ............................. (449,840) -- --
Proceeds for equity financing, net of offering costs ....... 2,463,017 -- --
Proceeds from cost-equity financing ........................ 89,868 -- --
Repayment of revolver ...................................... (500,000) -- --
Repayment of convertible note .............................. (12,500,000) -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities ........ (1,432,706) (791,189) (2,841,702)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .......... (20,986) 657,276 (3,183,265)
Net effect of foreign currency exchange translation on cash ... 5,171 -- --
------------ ------------ ------------
Cash and cash equivalents, beginning of year .................. 2,934,673 2,277,397 5,460,662
------------ ------------ ------------
Cash and cash equivalents, end of year ........................ $ 2,918,858 $ 2,934,673 $ 2,277,397
============ ============ ============

See accompanying notes.

TALON INTERNATIONAL, INC. Year Ended Year Ended Year Ended
Consolidated Statements of Cash Flows December 31, December 31, December 31,
2007 2006 2005
------------ ------------ ------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received (paid) during the year for:
Interest paid ............................................. $ (1,166,333) $ (975,609) $ (1,264,539)
Interest received ......................................... $ 182,263 $ 320,232 $ 42,516
Income taxes paid ......................................... $ (90,530) $ (33,900) $ (64,064)
Income taxes received ..................................... $ -- $ -- $ 39,571
Non-cash financing activity:
Capital lease obligation .................................. $ 57,793 $ 64,432 $ 273,376
Deferred financing cost ................................... $ 217,302 $ -- $ --
Effect of foreign currency translation on net assets ...... $ 10,728 $ -- $ --
Accounts receivable, net converted to notes receivable .... $ -- $ -- $ 3,440,000
Trade payable & accrued legal, converted to notes payable.. $ -- $ 1,775,000 $ --

See accompanying notes.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Talon International, Inc. (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. Logistica en Avios, S.A.
de C.V. was an affiliated entity over which the Company exercised control, and
as such, is accounted for in the same manner as a wholly-owned subsidiary.

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 income in the period incurred. During 2007, 2006 and 2005, 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.
Actual results could differ from those estimates.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $2.7 million and $2.9 million at financial institutions in excess
of federally insured limits at December 31, 2007 and 2006.

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 2 of the Consolidated Financial
Statements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We are required to make judgments as to the collectibility of accounts
receivable based on established aging policy, historical experience and future
expectations. The allowances for doubtful accounts represent allowances for
customer trade accounts receivable that are estimated to be partially or
entirely uncollectible. These allowances are used to reduce gross trade
receivables to their net realizable value. We record these allowances based on
estimates related to the following factors: (i) customer specific allowances;
(ii) amounts based upon an aging schedule; and (iii) an estimated amount, based
on our historical experience, for issues not yet identified. See Note 3 of 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,
-------------------------------
2007 2006
---------- ----------

Finished goods ....................... $3,506,439 $4,293,220
Less reserves ........................ 1,019,012 1,242,000
---------- ----------
Total inventories .................... $2,487,427 $3,051,220
========== ==========

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 3 months to 1 years

Idle equipment 5 to 10 years

Property and equipment consist of the following:

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

Furniture and fixtures ......................... $ 600,491 $ 582,832
Machinery and equipment ........................ 1,694,921 1,682,296
Computer equipment ............................. 4,137,834 3,422,058
Leasehold improvements ......................... 248,129 214,807
Dies, and molds ................................ 106,273 106,273
Idle equipment ................................. 4,198,880 4,434,980
----------- -----------

10,986,528 10,443,246
Accumulated depreciation and amortization ...... 5,776,082 4,820,206
----------- -----------

Net property and equipment ..................... $ 5,210,446 $ 5,623,040
=========== ===========

Depreciation expense for the years ended December 31, 2007, 2006 and
2005 was $1,136,000, $1,090,000, and $1,499,000, respectively.

During the year ended December 31, 2007, the Company wrote-off fixed
assets with a net book of value of $54,000 related to scrap dies and molds.
During the year ended December 31, 2005, the Company wrote-off fixed assets with
a net book value of $2,036,000 in connection with the 2005 restructuring plan.

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

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has evaluated the idle equipment for impairment and has
determined that an impairment does not exist at December 31, 2007. If future
events occur that adversely affect the idle equipment the Company will record an
impairment.

Fixed assets held for sale consists of the North Carolina land and
manufacturing facility. Management has the authority and has committed to sell
the asset; the asset is listed for sale with a commercial real estate agent who
is actively marketing the property; the sale of the asset is probable and the
sale is expected to be completed within one year. See Note 11, "2005
Restructuring Plan". This asset held for sale is financed by a mortgage note
with a balance of $690,000 at December 31, 2007 and $713,000 at December 31,
2006.

OTHER 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, 2007, the Company evaluated its Other 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, 2007
and 2006. Amortization expense related to exclusive license and intellectual
property rights of $115,500 were recorded for each of the years ended December
31, 2006 and 2005. During the first quarter of 2007, the exclusive license and
intellectual property became fully amortized. For the year ended December 31,
2007, amortization expense of $29,000 was recorded.

Other intangible assets as of December 31, 2007 and 2006 are as
follows:

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

Other Intangible Assets:
Tradename .................................. $ 4,110,750 $ 4,110,750
Accumulated amortization ................... -- --
----------- -----------
Tradename, net ......................... 4,110,750 4,110,750

Exclusive license and intellectual
property rights ......................... 577,500 577,500
Accumulated amortization ................... (577,500) (548,625)
----------- -----------
Exclusive license and intellectual
property rights, net ................ 0 28,875
----------- -----------
Other intangible assets, net ............... $ 4,110,750 $ 4,139,625
=========== ===========

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.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2007, the Company recorded an
impairment on the building held for sale of $127,000 reducing the carrying value
of the building to $700,000. No impairment was recorded in 2006. During the year
ended December 31, 2005, the Company recorded asset impairment charges in
connection with its 2005 Restructuring Plan (See Note 11).

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.

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 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.

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.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION

On 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. SFAS 123(R) supersedes the Company's previous accounting
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") for periods beginning in fiscal 2006. In March 2005,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123(R). The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R).

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 and 2007 reflect the impact of SFAS 123(R). In
accordance with the modified prospective transition method, the Company's
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123(R). There was no stock-based compensation
expense related to employee or director stock options recognized during the year
ended December 31, 2005. Options issued to consultants are accounted for in
accordance with the provisions of Emerging Issues Task Force (EITF) No. 96-18,
"Accounting for Equity Instruments That Are Issued to Others Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."

As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the year ended December 31, 2007
and 2006 are $245,000 and $395,000, respectively, lower than if it had continued
to account for share-based compensation under APB Opinion 25.

The following table illustrates the effect on net income and loss per
share if the Company had applied the fair value recognition provisions of SFAS
123(R) to stock-based awards granted under the Company's stock option plans in
all periods presented. For purposes of this pro-forma disclosure, the fair value
of the options is estimated using the Black-Scholes-Merton option-pricing
formula ("Black-Scholes model") and amortized to expense generally over the
options' vesting periods.

2005
------------
Net loss as reported ....................................... $(29,537,709)
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects ................................... --

Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects ............ (221,167)
------------

Pro forma net loss ......................................... $(29,758,876)
============

Loss per share:
Basic - as reported ................................... $ (1.62)
Basic - pro forma ..................................... $ (1.63)

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2006 and 2007 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 2006 and 2007 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, 2006
and 2007, expected forfeitures are immaterial and as such the Company is
recognizing forfeitures as they occur. In the pro-forma information provided
under SFAS 123(R) for the periods prior to 2006, the Company accounted for
forfeitures as they occurred.

Prior to the adoption of SFAS 123(R), the Company accounted for
stock-based awards to employees and directors using the intrinsic value method
in accordance with APB Opinion 25. Under the intrinsic value method, the Company
recognized share-based compensation equal to the award's intrinsic value at the
time of grant over the requisite service periods using the straight-line method.
Forfeitures were recognized as incurred. During the year ended December, 31,
2005, there was no stock-based compensation expense recognized in the Statements
of Operations for awards issued to employees and directors as the awards had no
intrinsic value at the time of grant because their exercise prices equaled the
fair values of the common stock at the time of grant.

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
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.

The Company has elected to adopt the detailed method provided in SFAS
123(R) for calculating the beginning balance of the additional paid-in capital
pool ("APIC pool") related to the tax effects of employee stock-based
compensation, and to determine the subsequent impact on the APIC pool and
Statements of Cash Flows of the tax effects of employee stock-based compensation
awards that are outstanding upon adoption of SFAS 123(R).

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.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 year ended December 31, 2007
are unrealized gains in foreign currency translation gain of $44,000. The
foreign currency translation adjustment represents the net currency translation
adjustment gains and losses related to our China and India subsidiaries, There
were no material other comprehensive income items for the years ended December
31, 2007 and 2006.

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 2007 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.

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.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2007, 2006 and 2005 was
$1,922,000, $1,357,000 and $1,446,000, respectively. Interest income of
$242,000, $368,000 and $66,000 for the years ended December 31, 2007, 2006 and
2005, 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 sales. Total shipping and handling costs included as a component of
revenue for the years ended December 31, 2007, 2006 and 2005 amounted to
$235,000, $146,000, and $98,000, respectively. Total shipping and handling costs
included as a component of cost of sales for each of these years amounted to
$1,105,000, $691,000, and $925,000.

RESTRUCTURING CHARGES

The Company records restructuring reserves in compliance with SFAS 146
"Accounting for Costs Associated with Exit or Disposal Activities", resulting in
the recognition of employee severance and related termination benefits for
recurring arrangements as they are incurred and on the accrual basis for
one-time benefit arrangements. The Company records other costs associated with
exit activities as they are incurred. Employee severance and termination
benefits are estimates based on agreements with the relevant union
representatives or plans adopted by the Company that are applicable to employees
not affiliated with unions. These costs are not associated with nor do they
benefit continuing activities. Inherent in the estimation of these costs are
assessments related to the most likely expected outcome of the significant
actions to accomplish the restructuring. Changing business conditions may affect
the assumptions related to the timing and extent of facility closure activities.
The Company reviews the status of restructuring activities on a quarterly basis
and, if appropriate, records changes based on updated estimates. See Note 11,
"2005 Restructuring Plan".

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.

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.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, FAIR VALUE
MEASUREMENTS ("SFAS 157"), which defines fair value, provides a framework for
measuring fair value and expands the disclosures required for fair value
measurements. SFAS 157 applies to all accounting pronouncements that require
fair value measurements; it does not require any new fair value measurements.
For fiscal years beginning after November 15, 2007, companies will be required
to implement SFAS 157 for financial assets and liabilities, as well as for any
other assets and liabilities that are carried at fair value on a recurring basis
in financial statements. The FASB did, however, provide a one-year deferral for
the implementation of Statement 157 for other nonfinancial assets and
liabilities. An exposure draft will be issued for comment in the near future on
this partial deferral. Accordingly, we will adopt SFAS 157 for financial assets
and liabilities commencing in the first quarter of 2008. We are currently
assessing the potential impact of SFAS 157 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 will
adopt SFAS 159 in the first quarter of 2008. We are currently assessing the
impact of SFAS 159 on our consolidated financial statements.

In December 2007, the SEC issued SAB No. 110, CERTAIN ASSUMPTIONS USED
IN VALUATION METHODS - EXPECTED TERM ("SAB 110"). According to SAB 110, under
certain circumstances the SEC staff will continue to accept beyond December 31,
2007 the use of the simplified method in developing an estimate of expected term
of share options that possess certain characteristics in accordance with SFAS
123(R) beyond December 31, 2007. We will adopt SAB 110 effective January 1, 2008
and continue to use the simplified method in developing the expected term used
for our valuation of stock-based compensation.

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.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--MARKETABLE SECURITIES

On December 31, 2007, the Company obtained 2,000,000 shares of
unrestricted common stock with a value of $1,040,000 in exchange for the Azteca
Note Receivable discussed in Note 3. Pursuant to restrictions on the sale of
these shares on the open market, the Company is limited to selling no more than
10,000 shares per day unless the Company sells the shares through a private
sale. The portfolio of marketable securities is stated at the lower of cost or
market at the balance sheet date and consists of common stocks. No realized or
unrealized gains or losses were recognized during the year ended December 31,
2007. The value of the common stock on April 10, 2008 had decreased $340,000 to
$700,000.

NOTE 3--ACCOUNTS AND 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 a receivable to be paid in monthly installments over thirty-one months
beginning March 1, 2006. The payments were $50,000 per month for the first 5
months, and then ranged from $133,000-$267,000 per month until paid in full, but
no later than July 1, 2008.

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

Accounts receivable are included on the accompanying consolidated
balance sheet net of an allowance for doubtful accounts. The total allowance for
doubtful accounts at December 31, 2007 and 2006 was $140,420 and$71,500,
respectively.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4--DEMAND NOTES PAYABLE TO RELATED PARTIES

Demand notes payable to related parties consist of the following:

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

Two notes payable issued from 1995-1998 to parties
related to or affiliated with directors of the
Company with interest rates ranging from 0% to
10% per annum, due and payable on the fifteenth day
following delivery of written demand for payment ...... $ 85,176 $ 85,176

Convertible secured note payable issued in October 2000
to a director of the Company bears interest at 11%,
payable quarterly, is due on demand and convertible
into common stock at the election of the holder at
a rate of $4.50 per share, the market value of the
Company's common stock on the date of approval by
the Company's Board of Directors. The note is secured
by substantially all of the Company's assets .......... -- 500,000

Unsecured notes payable to a director of the Company
accrue interest at 7% and 8.5% per annum, principal
and interest due on demand and fifteen days from demand -- 79,795
-------- --------

$ 85,176 $664,971
======== ========

Interest expense related to the demand notes payable to related parties
for the years ended December 31, 2007, 2006 and 2005 amounted to $30,568,
$67,753 and $67,753, respectively. Included in accrued expenses at December 31,
2007 and 2006 was $127,915 and $515,738 of related accrued interest. Interest
paid on the demand notes during the year ended December 31, 2007 was $518,546.
There was no interest paid on the demand notes during the year ended December
31, 2006.

NOTE 5--CAPITAL LEASE OBLIGATIONS

The Company financed equipment purchases through various capital lease
obligations expiring through March 2010. These obligations bear interest at
various rates ranging from 4.6% to 12% per annum. Future minimum annual payments
under these capital lease obligations are as follows:

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

2008 ...................................................... $ 363,200
2009 ...................................................... 196,222
2010 ...................................................... 2,378
2011 ...................................................... --
2012 and thereafter ....................................... --
---------

Total payments ............................................ 561,800

Less amount representing interest ......................... (48,778)
---------

Balance at December 31, 2007 .............................. 513,022

Less current portion ...................................... 323,317
---------

Long-term portion ......................................... $ 189,705
=========

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2007, total property and equipment under capital lease
obligations and related accumulated depreciation was $3,533,154 and $1,635,697,
respectively. At December 31, 2006, total property and equipment under capital
lease obligations and related accumulated depreciation was $3,533,154 and
$1,178,469, respectively.

NOTE 6--NOTES PAYABLE

Notes payable consist of the following:

Year Ended December 31,
-----------------------
2007 2006
---------- ----------
$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 ............. $ 689,651 $ 712,950

$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; all unpaid
principal and interest due November 22, 2009;
secured by manufacturing equipment ................ 371,863 548,068

$1,650,000 note payable to Hennigan, Bennett &
Dorman, LLP dated May 31, 2006; interest at 3.0%;
payable in fourteen monthly payments of principal
and interest beginning June 2006, of $50,000 for
the first two payments, and $133,333 for the
next twelve months thereafter until July 1, 2007;
secured by the note receivable .................... -- 907,703

$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 .................................. 1,147,592 2,168,721
Less Current portion ........................... 299,108 1,107,207
---------- ----------

Notes payable, net of current portion ................ $ 848,484 $1,061,514
========== ==========

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

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

2008 .................................................. $ 299,108
2009 .................................................. 210,218
2010 .................................................. 28,301
2011 .................................................. 609,965
2012 and thereafter ................................... --
----------

Total ................................................. $1,147,592
==========

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7--DEBT FACILITY

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

Under the terms of the credit agreement the Company is required to meet
certain cash flow and coverage ratios, among other restrictions including a
restriction from declaring or paying a dividend prior to repayment of all the
obligations. The financial covenants require the Company to maintain at the end
of each fiscal quarter "EBITDA" (as defined in the Agreement) for the preceding
four quarters in excess of the Company's principal and interest payments for the
same four-quarter period. In the event that the Company fails to satisfy the
minimum EBITDA requirement for two consecutive quarters, the credit agreement
will be in default and the full amount of the notes outstanding will become due.
For the period ended September 30, 2007 the Company believes that this EBITDA
covenant was satisfied, but also informed the lender that the Company may fail
to satisfy the EBITDA covenant for the quarters ending December 31, 2007 or
March 31, 2008. The Company requested the lender to amend the loan agreement to
allow for additional time to satisfy the covenant. On November 19, 2007 the
Company entered into an agreement with Bluefin Capital, LLC to modify this
financial covenant and to extend until June 30, 2008 (with a further extension
to March 31, 2009 provided certain conditions are met by June 30 2008) the
application of the 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.

At closing on June 27, 2007, the proceeds of the term loan in the
amount of $9.5 million were deposited into a restricted cash escrow account and
$3.0 million of the borrowings available under the revolving credit note were
reserved and held for payment of the Company's $12.5 million convertible
promissory notes maturing in November 2007. During July 2007 waivers were
obtained from all holders of the convertible promissory notes allowing for early
payment of their notes without penalty, and as of July 31, 2007 all of the note
holders had been paid in full. At closing the Company also borrowed $1,004,306
under the revolving credit note and used the proceeds to pay the related party
note payable and accrued interest due to Mark Dyne, Chairman of the Board of the
Company. Additionally initial borrowings under the revolving credit note were
used to pay the loan and legal fees due at closing. As of September 30, 2007 the
Company had borrowed $9.5 million under the term note, and $3,807,806 under the
revolving credit note.

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

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On November 19, 2007, the Company completed an amendment on its debt
facility and issued an additional 250,000 shares of common stock to the lender
for $0.001 per share. The exercisable price for 2,100,000 warrants issued for
the purchase of common stock was amended to an issuable price of $0.75 per
share. The new relative fair value ($2,402,936, which includes a reduction for
financing costs) of the equity issued with this debt facility was allocated to
paid-in-capital and reflected as a debt discount to the face value of the term
note. This discount was to be amortized over the term of the note and recognized
as additional interest cost as amortized. If the Company does not meet a
requirement to register the common shares and warrants by May 15, 2008, the
Company will incur a penalty of $1,000 per day up to a maximum of $700,000.

On April 3, 2008 the Company executed an amendment to the existing
revolving credit and term loan agreement with Bluefin Capital. The amendment
provided for an amendment of the EBITDA and other financial covenants, and the
redemption of the stock warrants previously issued to Bluefin Capital in
exchange for the issuance of an additional note payable to Bluefin Capital for
$1.0 million at an interest rate of 8.5%. The Company will record a reduction to
equity and an increase to notes payable for the fair value of the warrants
redeemed. The difference between the fair value of the warrants of $221,723 and
the face value of the note will be accreted over the life of the note. The note
will incur interest at 8.5% on the principal amount of $1.0 million and the
quarterly accretion will also be reflected as interest expense. The additional
note and all accrued interest under the note are due and payable on June 30,
2010.

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 8--STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE 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

2003 PRIVATE PLACEMENT

On May 30, 2003, the Company raised approximately $6,037,500 in a
private placement transaction with five institutional investors. Pursuant to a
securities purchase agreement with these institutional investors, the Company
sold 1,725,000 shares of its common stock at a price per share of $3.50. After
commissions and expenses, the Company received net proceeds of approximately

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$5.5 million. The Company has registered the shares issued in the private
placement with the Securities and Exchange Commission for resale by the
investors. In conjunction with the private placement transaction, the Company
issued warrants to purchase 172,500 shares of common stock to the placement
agent. The warrants are exercisable beginning August 30, 2003 through May 30,
2008 and have a per share exercise price of $5.06.

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 13).

NOTE 9--STOCK OPTION INCENTIVE PLAN AND WARRANTS

STOCK OPTION INCENTIVE 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. At December 31, 2007 no awards
under the 2007 Stock Plan had been granted.

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 prior
to 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.

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

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the activity for the periods:

Weighted
Average
Number of Exercise
EMPLOYEE AND DIRECTOR Shares Price
---------- ----------

Options outstanding - January 1, 2005 ....... 1,742,000 $ 3.53
Granted ................................ 425,000 $ 3.22
Exercised .............................. (1,250) $ 3.63
Canceled ............................... (332,750) $ 3.50
---------- ----------
Options outstanding - December 31, 2005 ..... 1,833,000 $ 3.46
Granted ................................ 3,471,135 $ 0.31
Canceled ............................... (301,500) $ 3.56
---------- ----------
Options outstanding - December 31, 2006 ..... 5,002,635 $ 1.41
Granted ................................ 46,600 $ 1.02
Exercised .............................. (75,000) $ 0.57
Canceled ............................... (376,000) $ 0.76
---------- ----------
Options outstanding - December 31, 2007 ..... 4,598,235 $ 1.46
========== ==========

The Company has also issued certain warrants and options to non-employees.
As of December 31, 2007, there were warrants issued to acquire a total of
3,163,813 shares of common stock, outstanding to non-employees. During 2007 the
Company issued 1,750,000 shares of stock to its lender with a fair market value
of $1,637,500.

The following table summarizes the activity for the periods:

Weighted
Average
Number of Exercise
NON-EMPLOYEES Shares Price
---------- ----------
Options & warrants outstanding - January 1, 2005 .. 1,578,973 $ 4.35
Granted ...................................... -- $ --
Exercised .................................... (68,494) $ 3.65
Canceled ..................................... (133,332) $ 4.54
---------- ----------
Options & warrants outstanding - December 31, 2005 1,377,147 $ 4.36
Granted ...................................... 75,000 $ 0.57
Exercised .................................... -- $ --
Canceled ..................................... (133,334) $ 4.54
---------- ----------
Options & warrants outstanding - December 31, 2006 1,318,813 $ 4.13
Granted ...................................... 2,100,000 $ 0.75
Canceled ..................................... (180,000) $ 3.63
---------- ----------
Options & warrants outstanding - December 31, 2007 3,238,813 $ 2.00
========== ==========

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 and
the assumptions noted in the following table for the years ended December 31, as
indicated. 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

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

2007 2006 2005
------- ------- -------
Expected volatility ........................ 64% 65% 64%
Expected term in years ..................... 6.1 yrs 6.1 yrs 1.2 yrs
Expected dividends ......................... -- -- --
Risk-free rate ............................. 4.8% 4.5% 2.0%

A summary of the option activity under the 1997 Plan as of December 31,
2007, and changes during the year then ended 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, 2007 ... 7,837,048 $ 1.74 5.44 $ 75,405
Vested and Expected to Vest ........ 7,783,316 $ 1.75 5.42 $ 74,176
Exercisable ........................ 6,608,782 $ 1.95 4.91 $ 53,128

The weighted average grant-date fair value of options granted to
employees and directors during the years ended December 31, 2007 and 2006 were
$0.33 and $0.31, respectively. The total intrinsic value of options exercised
during the year ended December 31, 2005 was $1,700. There were no options
exercised in 2007 and 2006.

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

Outstanding at December 31, 2007 ... 3,163,813 $ 1.99 4.5 $ 31,638
Vested and Expected to Vest ........ 3,163,813 $ 1.99 4.5 $ 31,638
Exercisable ........................ 3,163,813 $ 1.99 4.5 $ 31,638

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The weighted average grant-date fair value of options and warrants
granted to non-employees during the years ended December 31, 2007 and 2006 was
$0.75 and $0.57, respectively. There were no grants in 2005. The total intrinsic
value of options and warrants exercised during the years ended December 31, 2007
and 2005 was $21,000 and $91,000, respectively. There were no options exercised
in 2006. The fair value of the awards approximates the values expensed for
pro-forma purposes for these periods.

As of December 31, 2007, there was $398,000 of total unrecognized
compensation costs related to non-vested share-based compensation arrangements
granted, including warrants. 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, 2007, 2006 and 2005 was $245,000, $236,000,
and $217,000, respectively.

When options are exercised, the Company's policy is to issue previously
registered, unissued shares of common stock. As of December 31, 2006, the
Company had 2,321,977 unissued shares of common stock available in its 1997
Plan. On July 31, 2007, at the Company's annual meeting of stockholders, the
2007 Stock Plan was approved, which authorizes up to 2,600,000 shares of common
stock for issuance pursuant to awards granted to individuals under the plan. The
2007 Plan shares have not yet been registered.

NOTE 10--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, 2007 December 31, 2006
------------------------------------------- ------------------------------------------
Years ended: Loss Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------ ------------ ------------ ------------ ------------

Basic income (loss):
Income (loss)
available
to common
stockholders ... $ (4,921,707) 20,155,563 $ (0.24) $ 309,303 18,377,484 $ 0.02

Effect of dilutive
securities:
Options ........ -- -- -- -- 578,312 $ 0.00
Warrants ....... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Income (loss)
available to common
stockholders ....... $ (4,921,707) 20,155,563 $ (0.24) $ 309,303 18,955,796 $ 0.02
============ ============ ============ ============ ============ ============

December 31, 2005
-------------------------------------------
Years ended: Loss Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------

Basic income (loss):
Income (loss)
available
to common
stockholders ... $(29,537,709) 18,225,851 $ (1.62)

Effect of dilutive
securities:
Options ........ -- -- --
Warrants ....... -- -- --
------------ ------------ ------------
Income (loss)
available to common
stockholders ....... $(29,537,709) 18,225,851 $ (1.62)
============ ============ ============

Warrants to purchase 3,163,813 shares of common stock at 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 of common stock at 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

Warrants to purchase 1,377,147 shares of common stock at between $3.50
and $5.06, options to purchase 1,833,000 shares of common stock at between $0.41
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, 2005, but were not included in the
computation of diluted loss per share because the effect of exercise or
conversion would have an antidilutive effect on loss per share.

NOTE 11--2005 RESTRUCTURING PLAN

In an effort to better align the Company's organizational and cost
structures with its future growth opportunities, in August 2005 the Company's
Board of Directors adopted a restructuring plan for the Company that was
substantially completed by December 2005. The plan included restructuring the
Company's global operations by eliminating redundancies in its Hong Kong
operation, closing its Mexican facilities, converting its Guatemala facility
from a manufacturing site to a distributor, and closing its North Carolina
manufacturing facility. The Company also refocused its sales efforts on higher
margin products, which may have resulted in lower net sales with certain
customers. As a result, the Company now operates with fewer employees and
reduced associated operating and manufacturing expenses. The Company recorded
charges in connection with its restructuring plan in accordance with SFAS No.
146 (As Amended), "Accounting for Costs Associated with Exit or Disposal
Activities." In addition, the Company's restructuring plan resulted in the
carrying value of certain long-lived assets, primarily equipment, being
impaired. Accordingly, in 2005 the Company recorded a charge to recognize the
impairment of these assets in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets.

The North Carolina manufacturing facility is a long-lived asset that is
classified as "held for sale" because it meets the criteria listed in Paragraph
30 of SFAS 144. Management has committed to sell the asset, and is listing the
property for sale with a commercial real estate agent. The Company believes the
sale of the asset is probable and the sale is expected to be completed within
one year. The major components of manufacturing equipment used in this plant to
manufacture zippers are not classified as held for sale since the Company
intends to re-deploy this equipment in the manufacture of TALON zippers through
investment or sale of this equipment to its distributors of TALON zippers. This
equipment is separately identified as idle equipment as a component of "Property
and equipment" which are included in the accompanying consolidated balance
sheets (See Note 1).

Restructuring costs recorded in 2005 were $6,371,000. Restructuring
costs include $3,447,000 of inventory write-downs, restructuring charges of
$2,474,000 consisting of $2,036,000 for the impairment of long-lived assets,
primarily machinery and equipment, $170,000 of one-time employee termination
benefits and other costs of $268,000, which were fully paid by the end of 2005.
In addition, an impairment charge to goodwill in the amount of $450,000 was
recorded. This goodwill was associated with an acquisition made to benefit the
Central and South American operations. Since these operations are being exited,
management concluded that this goodwill was impaired and should be written off.
These restructuring costs were recorded in the Consolidated Statement of
Operations for the year ended December 31, 2005 in the following line items and
amounts:

Cost of goods sold ..................... $3,447,000
Operating expenses:
General & administrative expenses ... 450,000
Restructuring charges ............... 2,474,000
----------
Total restructuring costs .............. $6,371,000
==========

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12--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,
----------------------------------------------
2007 2006 2005
---------- ---------- ----------
Current:
Federal ............. $ -- $ 29,900 $ 55,479
State ............... 4,360 4,000 4,000
Foreign ............. 66,589 -- --
---------- ---------- ----------
70,949 33,900 59,479
Deferred:
Federal ............. -- -- 850,000
State ............... -- -- 150,000
---------- ---------- ----------
-- -- 1,000,000
---------- ---------- ----------
$ 70,949 $ 33,900 $1,059,479
========== ========== ==========

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

Year Ended December 31,
----------------------------
2007 2006 2005
------ ------ ------
Current:
Federal statutory rate .................... (34.0)% 34.0% (34.0)%
State taxes net of federal benefit ........ 1.6 2.3 (5.8)
Income earned from foreign subsidiaries ... 54.9 18.7 0.2
Net operating loss valuation allowance
adjustments ............................ 18.4 (71.7) 43.5
Change in effective state tax rate ........ (0.1) 22.4 --
Other ..................................... (39.3) 4.2 (0.2)
------ ------ ------
1.5% 9.9% 3.7%
====== ====== ======

Income (loss) before income taxes is as follows:

Year Ended December 31,
----------------------------------------------------
2007 2006 2005
------------ ------------ ------------

Domestic ........... $(11,827,832) $ (1,341,475) $(28,724,518)
Foreign ............ 6,977,074 1,684,678 246,288
------------ ------------ ------------

$ (4,850,758) $ 343,203 $(28,478,230)
============ ============ ============

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,
------------------------------
2007 2006
------------ ------------
Net deferred tax asset:

Net operating loss carry-forwards ..... $ 20,222,679 $ 19,053,346
Depreciation and amortization
(liability) ......................... (899,776) (551,643)
Bad debt reserve ...................... 42,065 17,961
Related party interest ................ 200,093 189,605
Inventory reserve ..................... 265,200 289,813
AMT credit carryforward ............... 41,089 --
Other ................................. 332,420 225,656
------------ ------------
20,203,770 19,224,738
Less: Valuation Allowance ............ (20,162,681) (19,224,738)
------------ ------------
$ 41,089 $ --
============ ============

A reconciliation of the FIN 48 adjustments is as follows:

Balance at Jan 1, 2007 ........................................... $ --
Increase related to positions on items from prior years .......... 212,000
Decrease related to positions on items from prior years .......... --
Interest and penalty on items from prior years ................... 34,000
Increase related to 2007 ......................................... 12,000
--------
Total ............................................................ $258,000
========

At December 31, 2007 and 2006, Talon International, Inc. had Federal
and state net operating loss carry-forwards (or "NOLs") of approximately $55.9
million and $53.6 million, respectively. The Federal NOL is available to offset
future taxable income through 2025, and the state NOL expires in 2015. 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. As of December 31, 2007, some of our
net operating losses may be limited by the Section 382 rules. The amount of such
limitations, if any, has not yet been determined.

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 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 deferred tax assets in future years with the exception
of the alternative minimum tax credit carryforward of $41,089. In 2006 and in
prior years, 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 deferred tax assets in future years. Accordingly, at December
31, 2007 and 2006 the Company has recorded a valuation allowance of $20.2
million and $19.2 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. During 2005 the
Company incurred additional operating losses which resulted in an increase in
the Company's net deferred tax assets by $11.5 million. Accordingly, it was
determined that the valuation allowance from 2004 be increased by $12.5 million
to $21.4 million, which reduced the carrying value of its net deferred tax
assets to $0 at December 31, 2005.

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 has not provided withholding of U.S. federal income taxes
on undistributed earnings of its foreign subsidiaries because the Company
intends to reinvest those earnings indefinitely or any taxes on these earnings
will be offset by the approximate credits for foreign taxes paid. It is not
practical to determine the U.S. federal tax liability, if any, which would be
payable if such earnings were not invested indefinitely. At December 31, 2007
and 2006, undistributed earnings from our foreign subsidiaries were $6,286,000
and $4,581,000, respectively.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13--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 2011. 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 income
statement on a straight-line basis over the related lease term.

The future minimum lease commitments at December 31, 2007 are as
follows:

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

2008 ...................................... $ 576,611
2009 ...................................... 412,139
2010 ...................................... 240,527
2011 ...................................... 15,468
----------
Total minimum payments ................. $1,244,745
==========

Total rental expense for the years ended December 31, 2007, 2006 and
2005 aggregated $591,312, $640,864, and $750,536, 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, 2007, 2006 and 2005 amounted to $25,494, $22,276, and
$16,807, respectively.

CONTINGENCIES

On December 26, 2007, the Company elected to voluntarily withdraw the
listing of its common stock from trading on the American Stock Exchange. The
common stock began trading on the OTC Bulletin Board (OTCBB) under the new
symbol TALN.OB.

On October 12, 2005, a shareholder class action complaint -- HUBERMAN
V.TAG-IT PACIFIC, INC., ET al., Case No. CV05-7352 R(Ex) -- was filed against
the Company and certain of its current and former officers and directors in the
United States District Court for the Central District of California, alleging
claims under Section 10(b) and Section 20 of the Securities Exchange Act of
1934. A lead plaintiff was appointed, and his amended complaint alleged that
defendants made false and misleading statements about the Company's financial
situation and its relationship with certain of its large customers. The action
was brought on behalf of all purchasers of the Company's publicly-traded
securities during the period from November 13, 2003 to August 12, 2005. On
February 20, 2007, the Court denied class certification. On April 2, 2007 the
Court granted defendants' motion for summary judgment, and on or about April 5,
2007, the Court entered judgment in favor of all defendants. On or about April
30, 2007, plaintiff filed a notice of appeal, and his opening appellate brief
was filed on October 15, 2007. The Company's brief was filed on November 28,
2007. The Company believes that this matter will be resolved favorably on
appeal, or in a later trial or in settlement within the limits of its insurance
coverage. However, the outcomes of this action or an estimate of the potential

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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

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

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

The Company enters into indemnification provisions under its agreements
with investors and its agreements with other parties in the normal course of
business, typically with suppliers, customers and landlords. Under these
provisions, the Company generally indemnifies and holds harmless the indemnified
party for losses suffered or incurred by the indemnified party as a result of
the Company's activities or, in some cases, as a result of the indemnified
party's activities under the agreement. These indemnification provisions often
include indemnifications relating to representations made by the Company with
regard to intellectual property rights. These indemnification provisions
generally survive termination of the underlying agreement. The maximum potential
amount of future payments the Company could be required to make under these

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

indemnification provisions is unlimited. The Company has not incurred material
costs to defend lawsuits or settle claims related to these indemnification
agreements. As a result, the Company believes the estimated fair value of these
agreements is minimal. Accordingly, the Company has not recorded any related
liabilities.

NOTE 14--SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

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

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,
-------------------------------------------
2007 2006 2005
----------- ----------- -----------
Sales:
United States ............. $ 3,692,468 $ 4,223,052 $ 7,052,196
Hong Kong ................. 14,178,421 13,650,419 7,901,079
Dominican Republic ........ 700,868 8,966,828 150,793
China ..................... 11,159,726 6,063,416 7,091,034
India ..................... 2,187,684 1,205,486 809,972
Bangladesh ................ 1,924,943 2,070,349 798,699
Mexico .................... 783,762 2,476,313 12,945,861
Other ..................... 5,901,683 10,169,139 10,581,542
----------- ----------- -----------
Total .......................... $40,529,555 $48,825,002 $47,331,176
=========== =========== ===========
Long-lived Assets:
United States ............. $ 8,778,381 $ 9,529,932 $ 9,797,111
Hong Kong ................. 556,864 336,149 222,467
Dominican Republic ........ 558,198 667,238 776,279
Mexico .................... 1,072 5,198 23,754
China ..................... 109,770 49,488 2,633
Other ..................... 16,912 3,315 1,120

----------- ----------- -----------
Total .......................... $10,021,197 $10,591,320 $10,823,364
=========== =========== ===========

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15--MAJOR CUSTOMERS AND VENDORS

For the year ended December 31, 2007, the Company's three largest
customers represented approximately 9% 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; however the Company's three largest customers
represented approximately 18% of consolidated net sales. For the year ended
December 31, 2005, no single customer represented more than 10% of consolidated
net sales; however, the Company's three largest customers represented
approximately 22% of consolidated net sales.

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 year ended
December 31, 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. Three vendors accounted for approximately 39% of the
Company's purchases for the year ended December 31, 2005

Included in accounts payable and accrued expenses at December 31, 2007
and 2006 is $2,239,000 and $2,682,000 due to these vendors. Terms are sight to
60 days.

NOTE 16--RELATED PARTY TRANSACTIONS

Prior to 2004 the Company operated an apparel trim supply agreement
with Tarrant Apparel Group. Two of Tarrant's directors and significant
shareholders are also shareholders of the Company. In 2004, following
negotiations with Tarrant Apparel Group, the Company determined that a
significant portion of the obligations due from this customer were
uncollectible. Accordingly, included in general and administrative expenses for
2004 are charges of $4.3 million related primarily to the write-down of this
receivable and leaving a remaining balance receivable from this customer of $4.5
million at December 31, 2004. An affiliate of the customer repaid the $4.5
million receivable balance over the period from May through December 2005. The
Company terminated its supply relationship with Tarrant in 2004; however the
Company continues to conduct business with Tarrant on a limited basis. Total
sales to Tarrant for the years ended December 31, 2007, 2006 and 2005 were
$143,000, $3,000, and $574,000, respectively. As of December 31, 2005, accounts
receivable, related party included $0.05 million due from Tarrant. No amounts
were due from Tarrant at December 31, 2007 and 2006.

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 2007 and 2006 the Company
had sales of $241,000 and $147,000, respectively, to Versatile Entertainment.
Accounts receivable of $44,000 and $83,400 were outstanding from Versatile
Entertainment at December 31, 2007 and 2006, respectively.

Due from related parties at December 31, 2007 and 2006 includes
$625,454 and $675,137, respectively, of unsecured notes, advances and accrued
interest receivable from Colin Dyne. The notes and advances bear interest at
7.5% and are due on demand. During 2007 certain notes payable due to Mr. Dyne
were offset against and used to satisfy notes receivable from Mr. Dyne.

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Demand notes payable to related parties includes notes and advances to
Mark Dyne, the Chairman of the Board of Directors of the Company or to parties
related to or affiliated with Mark Dyne. The balance of Demand notes payable to
related parties at December 31, 2007 and 2006 was $85,176 and 664,971,
respectively. See Note 4 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, 2007 and 2006, sales to this entity were $88,491 and $7,342,
respectively. At December 31, 2007 and 2006, accounts receivable included
$28,657 and $2,223, respectively, due from this entity. On October 25, 2007, Mr.
Burstein resigned as a director of the Company.

Consulting fees of $291,000 were paid for services provided by Jonathan
Burstein for the year ended December 31, 2007. During the fourth quarter of 2007
the Company decided to terminate the consulting agreements of Mr. Burstein and
another consultant. 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 two contracts and recorded an
accrual of $538,000 at December 31, 2007 to reflect the liability for consulting
costs that would continue to be incurred under their remaining terms.

Consulting fees paid to Diversified Investments, a company owned by
Mark Dyne, amounted to $150,000 for each of the years ended December 31, 2007,
2006 and 2005.

Consulting fees of $304,000 and $335,000 were paid for services
provided by Colin Dyne, for the years ended December 31, 2007 and 2006,
respectively.

Brent Cohen and Raymond Musci, both members of the Board of Directors
were paid for services provided during the year ended December 31, 2005 in the
amount of $24,000, and $21,000, respectively.

NOTE 17--QUARTERLY RESULTS (UNAUDITED)

Quarterly results for the years ended December 31, 2007 and 2006 are
reflected below:

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

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

2006
----
Revenue ........................... $ 10,573,755 $ 13,366,944 $ 14,246,087 $ 10,638,216
Gross profit ...................... $ 3,350,600 $ 4,148,406 $ 4,127,237 $ 2,842,725
Operating income (loss) ........... $ 248,177 $ 630,273 $ 895,281 $ (442,275)
Net Income(loss) .................. $ 44,950 $ 339,115 $ 654,643 $ (729,404)
Basic and diluted income (loss) per
per share ...................... $ 0.00 $ 0.02 $ 0.04 $ (0.04)

TALON INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2007 and 2006, the Company had no material unusual or
infrequently occurring items or adjustments that were recognized during the
years.

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 18 - SUBSEQUENT EVENTS

As noted in Note 2 - Marketable Securities, the Company finalized an
arrangement between the Company and Azteca Production International, Inc. a
former distributor of Talon products on December 31, 2007. The agreement called
for Azteca to deliver 2 million shares of common stock in a related company in
exchange for cancellation of an outstanding note from Azteca that was in
default. On January 16, 2008, Azteca delivered restricted shares to the Company
which the Company returned. On January 30, 2008, the Company was notified that
unrestricted shares had been delivered by Azteca and that the Company could
begin trading these shares selling no more than 2 thousand shares a day. The
stock price on January 30, 2008 was used to value the shares. The value of the
common stock on April 10, 2008 had decreased $340,000 to $700,000.

Effective January 15, 2008, Wouter van Biene resigned his position as
the Company's Chief Operating Officer. In connection with Mr. van Biene's
resignation and in exchange for a full release of claims against the Company, 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.
Approximately $0.3 million in severance costs were recognized in January 2008.

Effective February 4, 2008, Stephen Forte resigned his position as the
Company's Chief Executive Officer and as a member of the Board of Directors and
from all positions with the Company's subsidiaries. In connection with Mr.
Forte's resignation, on February 4, 2008, the Company 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 the Company terminated Mr. Forte's employment
without cause. In exchange for his severance, Mr. Forte has released all claims
against the Company. Approximately $0.4 million in severance costs were
recognized in January 2008.

Also effective February 4, 2008, Lonnie D. Schnell, Chief Financial
Officer, was appointed Chief Executive Officer to replace Mr. Forte.

On March 27, 2008 Larry Dyne was appointed Executive Vice President of
Global Sales and David Hunter was appointed Vice President, Corporate Controller
and Principal Accounting Officer.

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 Stephen P. Forte, our former principal executive officer,
and Lonnie D. Schnell, our 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. Forte and 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 generally accepted accounting principles. 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, 2007.

This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our 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, 2007 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 17, 2008.

NAME AGE POSITION
---- --- --------
Mark Dyne (1)......... 47 Chairman of the Board of Directors
Colin Dyne (1)......... 45 Vice Chairman of the Board of Directors
Brent Cohen............ 49 Director
Joseph Miller.......... 44 Director
Raymond Musci ......... 47 Director
William Sweedler....... 41 Director
Lonnie D. Schnell...... 58 Chief Executive Officer & Chief Financial
Officer
Larry Dyne............. 35 Executive Vice President, Sales
David A. Hunter........ 42 Vice President, Corporate Controller

----------
(1) Colin Dyne and Mark Dyne are brothers.

CLASS II DIRECTORS: TERMS EXPIRING IN 2008

There are currently three vacancies among the Class II Directors.

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. 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.

RAYMOND MUSCI Ray Musci has served as a Director of the Company
since June 2005. Mr. Musci serves as a Director and
President of MPLC, Inc. (OTCBB:MPNC) , 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., a publicly
traded corporation (OTCBB: BDEI). 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

CLASS I DIRECTORS: TERMS EXPIRING IN 2007

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 has served as Chief Executive Officer
and a director of Dovebid Inc. since August 2005. 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

OTHER EXECUTIVE OFFICERS
LONNIE D. SCHNELL Mr. Schnell joined the Company in January 2006 as our
Chief Financial Officer, and was appointed as Chief
Executive Officer in February 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.

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.

DAVID A. HUNTER David Hunter was appointed Vice President, Corporate
Controller (and as our principal accounting officer)
in February 2008. Mr. Hunter has extensive experience
in both public and private accounting and joined
Talon in December 2007 as the Corporate Controller.
Prior to Talon, he served as the director of
accounting and financial reporting for Walt Disney
Studios. Before Disney, he served as a manager of
accounting and analysis at WellPoint's Blue Cross of
California division in its individual and small group
practice before joining its financial operations
practice. He is a certified public accountant with
experience in the international accounting firm of
Deloitte & Touche LLP, where he served as a manager
in the audit and assurance practice. Mr. Hunter
earned his Bachelor of Science in Accounting at
California Lutheran University.

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, 2007, all of our executive officers,
directors and greater-than-ten percent shareholders complied with all Section
16(a) filing requirements, except for the following: (i) three Statements of
Changes in Beneficial Ownership on Form 4, reporting nine transactions, were
filed late by Colin Dyne; (ii) one Annual Statement of Changes in Beneficial
Ownership on Form 5, reporting five transactions, was filed late by Jonathan
Burstein; and (iii) one Statement of Change in Beneficial Ownership on Form 4,
reporting two transactions, was filed late by Bluefin Capital LLC.

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 was
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 2007 were as follows:

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); and

o Lonnie D. Schnell, Chief Financial Officer (named Chief
Executive Officer as of February 4, 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.

ANNUAL INCENTIVE BONUSES

Annual 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. Annual incentive
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 2007, the long-term incentive program for
the named executive officers consisted entirely of previously
granted stock grants and 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 2007 was $325,000 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 11, 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 2007, and the one highly
compensated executive officer other than the Chief Executive Officer and Chief
Financial Officer who were serving as executive officers at the end of the 2007
whose compensation exceeded $100,000 (referred to as "named executive
officers"), information concerning all compensation earned for services to us in
all capacities for 2007.

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

Lonnie D. Schnell (1) .......... 2007 225,000 -- 1,917 45,000 11,343 283,260
Chief Executive Officer and .. 2006 171,346 -- 31,998 45,025 24,634 273,003
Chief Financial Officer

Stephen P. Forte (2) ........... 2007 325,000 -- 7,851 -- 30,484 363,335
Former Chief Executive ....... 2006 275,000 77,468 73,995 90,050 35,497 552,010
Officer

Wouter van Biene (3) ........... 2007 225,000 -- 1,986 -- 11,502 238,488
Former Chief Operating Officer 2006 180,000 -- 27,526 45,025 7,006 259,557

----------
(1) Mr. Schnell was appointed Chief Executive Officer effective February 4,
2008.

(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 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 9 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 MR. VAN BIENE
--------------- --------------- ---------------
2007 2006 2007 2006 2007 2006
------ ------ ------ ------ ------ ------
Health & medical
insurance (a) ......... 11,019 12,673 8,202 12,916 11,178 6,925

Life & disability
insurance (b) ......... 324 81 4,282 81 324 81

Automobile allowances .... -- -- 18,000 22,500 -- --

Consulting services (c) .. -- 11,880 -- -- -- --
------ ------ ------ ------ ------ ------

Total ............... 11,343 24,634 30,484 35,497 11,502 7,006
====== ====== ====== ====== ====== ======

----------
(a) Includes payments of medical premiums.
(b) Includes executive and group term life insurance.
(c) Represents fees for services provided prior to employment.

EXECUTIVE COMPENSATION

The 2007 compensation for our former Chief Executive Officer was in
accordance with our employment agreement completed with Mr. Forte in March 2006.
The terms and conditions established in this agreement were the result of our
consideration of our 2005 operating performance, our 2005 Restructuring and
Strategic Plan and current operating performance levels, as well as the
compensation levels for our previous CEO, comparative industry compensation
levels, and negotiations with Mr. Forte. 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 4.9% 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. Forte's employment agreement setting
aside 15% of the Company's earnings before interest and taxes ("EBIT") for
annual bonus awards to Mr. Forte and the other senior executives. One-half of
this MIP Fund was allocated to Mr. Forte in 2006 and is shown in the table above
as non-equity incentive plan compensation, and one-third of the MIP fund is to
be allocated to Mr. Forte in 2007 through 2009. 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. In
addition, Mr. Forte was provided a stock grant of 135,135 shares, and an
additional option grant, vesting in one year, for 135,135 shares of common
stock, in consideration of his significant contributions in the initial
development and implementation of the Company's 2005 Restructuring Plan, and the
development of the Company's Strategic Plan.

Messrs. van Biene and Schnell were employed early in 2006 at the
recommendation of Mr. Forte, our former Chief Executive Officer, to assist in
the completion of the 2005 Restructuring and Strategic Plan. The terms and
conditions established in their employment agreements were also the result of
our consideration of our 2005 operating performance, our 2005 Restructuring and
Strategic Plan and current operating performance levels, as well as our previous
compensation levels for similar positions, comparative industry compensation
levels, and individual negotiations. 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 for their positions was established near
minimum industry levels for the same role in comparable companies, and long-term
equity incentives in the form of grants of options to purchase 325,000 shares to
Mr. van Biene and 400,000 shares to Mr. Schnell, were established as an
inducement to maximum performance achievements and increased shareholder values.
The options vest monthly over a three-year term for Mr. van Biene, and a
four-year term for Mr. Schnell, after a minimum initial term of twelve months,
to coincide with the objectives of the Company's Strategic Plan. In addition Mr.
van Biene and Mr. Schnell are participants in the MIP fund established by us as
described above, pursuant to which we set aside 15% of our EBIT for annual bonus
awards to the CEO and the other senior executives as approved by the Board of
Directors. The payments allocated to Mr. van Biene and Mr. Schnell under the MIP
fund are shown in the summary compensation table as non-equity incentive plan
compensation.

GRANTS OF PLAN-BASED AWARDS IN FISCAL 2007

There were no stock option grants to named executive officers during
2007.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR 2007

The following table provides information with respect to outstanding
stock options held by each of the named executive officers as of December 31,
2007.

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

Lonnie D. Schnell ....... 1/26/06 191,667 208,333 (1) $ 0.59 1/26/2016

Stephen P. Forte ........ 1/16/06 135,135 -- $ 0.37 1/16/2016
1/16/06 650,000 250,000 (2) $ 0.37 1/16/2016

Wouter van Biene ........ 3/1/06 198,611 126,389 (3) $ 0.53 3/1/2016

----------
(1) Mr. Schnell's options become exercisable with regard to 100,000 shares on
January 26, 2007 and then with respect to 8,333 shares per month until
fully vested.

(2) Mr. Forte's options become exercisable at 25,000 shares per month until
fully vested. Mr. Forte resigned as of February 4, 2008, and the vesting
of the outstanding options was fully accelerated pursuant to the
separation agreement described below under "Employment Agreement,
Termination of Employment and Change of Control Agreements."

(3) Mr. van Biene's options became exercisable with regard to 108,333 shares
on March 1, 2007 and then with respect to 9,028 shares per month until
fully vested. 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.

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 March 16, 2006, we entered into an employment agreement with Lonnie Schnell,
pursuant to which Mr. Schnell serves as our Chief Financial Officer on an
"at-will" basis. Pursuant to this offer letter, as amended, Mr. Schnell is
entitled to receive an annual base salary of $185,000 and will be eligible to
receive an annual incentive bonus based upon our earnings before interest and
taxes. In October 2006, Mr. Schnell's annual base salary was increased to
$225,000 as recognition for superior performance and individual contributions to
the achievement to Company objectives. In the event that Mr. Schnell's
employment is terminated by us without "cause" (as defined in the agreement) or
due to Mr. Schnell's death or disability, then Mr. Schnell 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 twelve months and (ii) twelve months acceleration of vesting of all
outstanding options. In connection with the offer letter and as an inducement to
employment, we previously granted Mr. Schnell an option to purchase 400,000
shares of our common stock, which vests over a period of four years. Upon a
change of control of our company, 50% of Mr. Schnell's then-outstanding unvested
stock options shall vest and the remaining unvested options shall vest in full
if Mr. Schnell is terminated, his position or base pay is reduced or he is
required to relocate within six months before or twelve months following the
change of control. As of February 4, 2008, Mr. Schnell was also named Chief
Executive Officer.

STEPHEN FORTE, FORMER CHIEF EXECUTIVE OFFICER. On March 16, 2006, we
entered into an Executive Employment Agreement with Stephen Forte, pursuant to
which Mr. Forte served as our Chief Executive Officer. This employment agreement
had a term continuing though December 31, 2008, which could be extended to

December 31, 2009. Pursuant to this agreement, Mr. Forte received an annual base
salary of $275,000 for 2006 and $325,000 for each subsequent year of the term
and was entitled to receive an annual incentive bonus based upon our earnings
before interest and taxes. 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.

WOUTER VAN BIENE, FORMER CHIEF OPERATING OFFICER. On March 16, 2006, we
entered into an employment agreement with Wouter van Biene, pursuant to which
Mr. van Biene serves as our Chief Operating Officer on an "at-will" basis.
Pursuant to this offer letter, Mr. van Biene is entitled to an annual base
salary of $225,000 and will be eligible to receive an annual incentive bonus
based upon our earnings before interest and taxes. 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.

POTENTIAL SEVERANCE PAYMENTS

As described above, our employment agreements with Messrs. Forte, van
Biene and Schnell provided for severance benefits in the event that the
executive's employment is terminated due to executive's death or disability or
by the Company without "cause" and, in the case of Mr. Forte, for "good reason."
The following table sets forth severance payments and benefits that we would
have been obligated to pay to Messrs. Forte, van Biene and Schnell assuming a
triggering event had occurred under each of their respective agreements as of
December 31, 2007:

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

Lonnie D. Schnell ........ 240,968 -- 11,343 -- 252,311

Stephen P. Forte ......... 310,420 -- 12,483 10,000 332,903

Wouter van Biene ......... 244,471 -- 11,502 -- 255,973

----------
(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, 2007 of
$0.41, as reported by the OTC Bulletin Board.

POTENTIAL CHANGE IN CONTROL PAYMENTS

As described above, our employment agreements with Messrs. Forte, van
Biene and Schnell provided for accelerated vesting of all or a portion of the
options held by such executives upon a change in control. The following table
sets forth the change in control benefits that we would have been obligated to
pay to our named executive officers assuming a change of control had occurred as
of December 31, 2007:

VALUE OF ACCELERATION OF VESTING OF EQUITY AWARDS ($)(1)
--------------------------------------------------------
CHANGE IN CONTROL WITH
NAME CHANGE IN CONTROL ONLY (2) ADDITIONAL TRIGGER (3)
--------------------------------------------------------------------------------

Stephen P. Forte 10,000 10,000

Wouter van Biene - -

Lonnie D. Schnell - -

----------
(1) Based on the closing price of our common stock on December 31, 2007 of
$0.41, as reported by the OTC Bulletin Board.

(2) Upon a change in control, (i) Mr. Forte was entitled to full acceleration
of currently outstanding options and (ii) Messrs. van Biene and Schnell are
each entitled to accelerated vesting with respect to 50% of the unvested
portion of outstanding options.

(3) Messrs. van Biene and Schnell are each entitled to full acceleration of
vesting of the remaining unvested portion of all outstanding stock options
if, within in 12 months following the change in control: (i) he is
terminated by the acquirer, (ii) his position is reduced to less than a
general manager position or a vice president level position, (iii) his base
pay is reduced below his prevailing base pay amount at the time of the
change in control or (iv) he is asked to relocate to an office more than 60
miles from his office prior to the 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 2007.

FEES EARNED OR OPTION ALL OTHER TOTAL
NAME PAID IN CASH ($) AWARDS ($)(9) COMPENSATION ($) ($)
------------------------ ------------------- ------------------- ------------------ ------------------

Mark Dyne (1) 40,000 3,230 100,500 143,730
Colin Dyne (2) - 5,650 304,000 309,650
Brent Cohen (3) 84,583 1,250 14,417 100,250
Joseph Miller (4) 68,975 600 - 69,575
Raymond Musci (5) 64,375 600 - 64,975
William Sweedler (6) 39,667 300 - 39,967
Susan White (7) 33,417 600 4,833 38,850
Jonathan Burstein (8) - 4,250 290,507 294,757
------------------------ ------------------- ------------------- ------------------ ------------------
Total 260,667 16,480 784,607 1,061,754
------------------------ ------------------- ------------------- ------------------ ------------------

----------
(1) As of December 31, 2007, Mr. Mark Dyne held options to purchase a total of
323,000 shares. The other compensation consists of consulting and per diem
fees earned for services rendered.

(2) As of December 31, 2007, Mr. Colin Dyne held options to purchase a total of
565,000 shares. The other compensation consists of consulting fees for
services rendered.

(3) As of December 31, 2007, Mr. Cohen held options to purchase a total of
125,000 shares. The other compensation consists of consulting fees for
services rendered.

(4) As of December 31, 2007, Mr. Miller held options to purchase a total of
60,000 shares.

(5) As of December 31, 2007, Mr. Musci held options to purchase a total of
60,000 shares.

(6) As of December 31, 2007, Mr. Sweedler held options to purchase a total of
30,000 shares.

(7) As of December 31, 2007, Ms. White held options to purchase a total of
60,000 shares. The other compensation consists of consulting fees for
services rendered. Ms. White resigned from the Board of Directors as of
October 1, 2007.

(8) As of December 31, 2007, Mr. Burstein held options to purchase a total of
425,000 shares. The other compensation consists of consulting fees for
services rendered. Mr. Burstein resigned from the Board of Directors as of
October 25, 2007.

(9) The amounts in this column represent the dollar amounts recognized for
financial statement purposes in fiscal 2007 with respect to stock options
granted in 2007 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 2007, see Note 9
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.

Effective January 1, 2007, we entered into a consulting agreement with
Jonathan Burstein, previously a member of the Board of Directors. Under the
terms of the consulting agreement, Mr. Burstein provides specified consulting
services to us for a term of up to 24 months. As consideration for the services,
we pay Mr. Burstein an amount of $225,000 per annum plus an additional $3,333.33
per month for the first 18 months of the term of the agreement. We also agreed
to provide Mr. Burstein with medical benefits and an automobile allowance for a
period of 18 months.

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,
2007 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..... 3,048,235 $ 1.99 2,600,000

Equity compensation plans not
approved by security holders..... 4,788,813 $ 1.48 -
----------------------- -------------------- --------------------
Total......................... 7,837,048 $ 1.67 2,600,000
======================= ==================== ====================

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

o 172,500 warrants issued for services in 2003, are exercisable
at $5.06 per share and expire in May 2008.

o 572,818 warrants issued for services in 2003, are exercisable
at $4.74 per share and expire in December 2008.

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 2,100,000 warrants issued in conjunction with private
placement transaction in 2007, are exercisable at $0.75 per
share and expire in June 2012.

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 11, 2008:

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 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 11, 2008. 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 11, 2008, 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)............................... 1,242,001 6.0%
Colin Dyne (2).............................. 747,780 3.6%
Larry Dyne (3).............................. 547,137 2.6%
Lonnie D. Schnell (4)....................... 291,667 1.4%
William Sweedler (5)........................ 132,000 *
Brent Cohen (6) ............................ 125,000 *
Raymond Musci (6)........................... 60,000 *
Joseph M. Miller (6)........................ 60,000 *
David A. Hunter............................. - *
Directors and executive officers as a group 3,205,585 14.5%
(9 persons) (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 one percent.

(1) Includes 323,000 shares of common stock reserved for issuance upon exercise
of stock options which are currently exercisable and 83,334 shares of
common stock reserved for issuance upon exercise of warrants which are
currently exercisable. Includes 176,600 shares held by a limited liability
company of which Mr. Dyne is the manager and a member.

(2) Includes 565,000 shares of common stock reserved for issuance upon exercise
of stock options that are currently exercisable.

(3) Includes 417,537 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 191,667 shares of common stock reserved for issuance upon exercise
of stock options that are currently exercisable.

(5) Includes 30,000 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 1,772,204 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable and 83,334 shares
of common stock reserved for issuance upon exercise of warrants which
currently are exercisable.

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 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, 2007, 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, a member of our Board, is a significant shareholder in
People's Liberation, Inc., the parent company of Versatile Entertainment, Inc.
During 2007, we had sales of $241,000 to Versatile Entertainment. At December
31, 2007 accounts receivable of $44,000 were outstanding from Versatile
Entertainment.

At December 31, 2007, we had an aggregate of $625,454 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.

We paid consulting fees of $304,000 to Colin Dyne during year ended
December 31, 2007 for consulting services provided, and have an agreement with
Mr. Dyne for services through November 30, 2008. See the "Director Compensation"
section in item 11 of this report for a description of this agreement.

At December 31, 2007, we had an aggregate of $85,176 in notes and
advances due to Mark Dyne, the Chairman of our Board of Directors or to parties
related to or affiliated with Mark Dyne. The notes are payable on demand and
accrue interest at rates ranging from 0% to 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, 2007.

On January 1, 2007 we entered into an agreement with Jonathan Burstein,
previously our Executive Vice President of Operations and formerly a member of
our Board of Directors, to provide consulting services to the Company through
December 31, 2008. We paid Mr. Burstein consulting fees of $290,507 during the
year ended December 31, 2007. This agreement was terminated by the Company
during the fourth quarter of 2007.

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, 2007, 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.

Singer Lewak Greenbaum & Goldstein LLP ("SLGG") served as our
independent registered public accounting firm for each of the fiscal years ended
December 31, 2006 and 2007.

AUDIT FEES - The aggregate fees billed by our independent registered
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 $302,000 for fiscal year 2006 and $350,000 for
fiscal year 2007.

AUDIT-RELATED FEES - The aggregate fees billed by our independent
registered 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) was $66,000 for
fiscal year 2006 and $57,300 for fiscal year 2007.

TAX FEES - The aggregate fees billed by our independent registered
accounting firm for professional services rendered for tax compliance, tax
advice and tax planning were $37,000 for fiscal year 2006 and $33,400 for fiscal
year 2007.

ALL OTHER FEES - The aggregate fees billed by our independent
registered accounting firm for services rendered to us other than the services
described above under "Audit Fees," "Audit-Related Fees" and "Tax Fees" were
$13,000 for fiscal year 2006 and $25,400 for fiscal year 2007.

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

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

The audit committee has established a general policy requiring it's
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

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Balance at
Beginning of End of
Description Year Additions Deductions Year
---------------------------------------- ----------- ----------- ----------- -----------

2007
----
Allowance for doubtful accounts deducted
from accounts receivable in the
balance sheet ....................... $ 71,500 $ 135,000 $ 66,000 $ 140,500
Reserve for obsolescence deducted from
inventories on the balance sheet .... 1,242,000 148,000 368,000 1,022,000
Valuation reserve deducted from Deferred
tax Assets .......................... 19,225,000 938,000 -- 20,163,000
----------- ----------- ----------- -----------
$20,538,500 $ 1,221,000 $ 434,000 $21,325,500
=========== =========== =========== ===========

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
----------- ----------- ----------- -----------
$29,942,000 $ 755,000 $10,158,500 $20,538,500
=========== =========== =========== ===========

2005
----
Allowance for doubtful accounts deducted
from accounts receivable in the
balance sheet ....................... $ 6,086,000 $ 4,160,000 $ 9,057,000 $ 1,189,000
Reserve for obsolescence deducted from
inventories on the balance sheet .... 6,365,000 2,538,000 1,597,000 7,306,000
Valuation reserve deducted from Deferred
tax Assets .......................... 8,900,000 12,547,000 -- 21,447,000
----------- ----------- ----------- -----------
$21,351,000 $19,245,000 $10,654,000 $29,942,000
=========== =========== =========== ===========

(1) Additions to the allowance for doubtful accounts include provisions for
uncollectible accounts. Bad debt expense includes (and additions above
exclude) net recoveries of $712,000 for the year ended December 31, 2006,
and net direct write-offs of $114,000 and $1,698,000 for the years ended
December 31, 2007 and 2005, respectively. Additions to the inventory
obsolescence reserve include current year provisions. Additionally, in 2005
there were direct write-offs of inventory of $3.4 million in connection
with the restructuring, and 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 includes amounts
applied to write-offs, reversals of prior period provisions, and, for the
year ended December 31, 2005, deductions include $7,528,000 related to the
conversion of a trade account receivable to a note receivable. Deductions
from the inventory obsolescence 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 15, 2008
--------------------- Financial Officer (Principal
Lonnie D. Schnell Executive and Financial Officer)

/s/ David A. Hunter Vice President Corporate Controller April 15, 2008
--------------------- (Principal Accounting Officer)
David A. Hunter

/s/ Mark Dyne Chairman of the Board of Directors April 15, 2008
---------------------
Mark Dyne

/s/ Colin Dyne Vice Chairman of the Board of April 15, 2008
--------------------- Directors
Colin Dyne

/s/ Brent Cohen Director April 15, 2008
---------------------
Brent Cohen

/s/ Raymond Musci Director April 15, 2008
---------------------
Raymond Musci

/s/ Joseph Miller Director April 15, 2008
---------------------
Joseph Miller

/s/ William Sweedler Director April 15, 2008
---------------------
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 Common Stock Purchase Warrant dated December 18, 2003 between the
Company and Sanders Morris Harris Inc. Incorporated by reference
to Exhibit 99.4 to Form 8-K filed on December 22, 2003.

10.16 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.

10.17 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.

10.18(2) Employment offer letter dated March 16, 2006 between the
Registrant and Lonnie D. Schnell. Incorporated by reference to
Exhibit 10.3 to Form 10-Q filed on May 22, 2006.

10.18.1(2) Amendment, dated May 25, 2007, to employment offer letter dated
March 16, 2006 between the Registrant and Lonnie D. Schnell.
Incorporated by reference to Exhibit 10.31.2 to Form 10-Q filed on
August 14, 2007.

10.19(2) Consulting Agreement dated January 1, 2007 between the Registrant
and Jonathan Burstein. Incorporated by reference to Exhibit 10.1
to Form 8-K filed on January 3, 2007.

10.19(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.

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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10.20(2) 2007 Stock Plan.

10.21 Revolving Credit and Tern 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.

10.21.1 Amendment No. 1 to Loan Agreement dated July 30, 2007, by and
between the Registrant and Bluefin Capital, LLC.

10.21.2 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.

10.22 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.

10.23 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.

10.24 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.

10.25 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.

10.26 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.

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

21.1 Subsidiaries.

23.1 Consent of Singer Lewak Greenbaum & Goldstein 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.