10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________

FORM 10-Q

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

For the quarterly period ended June 30, 2011.

OR

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

Commission file number 1-13669

TALON INTERNATIONAL, INC.

(Exact Name of Issuer as Specified in its Charter)

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

21900 Burbank Boulevard, Suite 270

Woodland Hills, California 91367

(Address of Principal Executive Offices)

(818) 444-4100

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [X]   No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X]    No [   ]

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

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

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

At August 10, 2011, the issuer had 20,400,808 shares of Common Stock, $.001 par value, issued and outstanding.

1

TALON INTERNATIONAL, INC.

INDEX TO FORM 10-Q

PART I	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements.	3
	Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)	4
	Consolidated Statementsof Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.	Controls and Procedures	37
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 6.	Exhibits	38

2

TALON INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2011			December 31, 2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	6,127,613		$	2,795,284
Accounts receivable, net		3,815,295			3,350,935
Inventories, net		1,015,862			1,271,991
Prepaid expenses and other current assets		387,842			331,924
Total current assets		11,346,612			7,750,134
Property and equipment, net		1,315,094			1,582,327
Intangible assets, net		4,110,751			4,110,751
Other assets		239,047			384,455
Total assets	$	17,011,504		$	13,827,667
Liabilities, Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	7,761,746		$	5,231,036
Accrued expenses		1,574,444			1,865,841
Notes payable to related parties		279,939			275,215
Other notes and current portion of capital lease obligations		71,346			69,608
Total current liabilities		9,687,475			7,441,700
Capital lease obligations, net of current portion		14,109			17,492
Deferred income taxes		710,445			608,554
Other liabilities		773,855			740,877
Total liabilities		11,185,884			8,808,623
Commitments and contingencies (Note 11)
Series B Convertible Preferred Stock, $0.001 par value; 407,160 shares authorized, issued and outstanding		19,156,999			17,820,464
Stockholders’ Equity (Deficit):
Series A Preferred Stock, $0.001 par value; 250,000 shares authorized; no shares issued or outstanding		-			-
Common Stock, $0.01 par value, 100,000,000 shares authorized; 20,400,808 and 20,291,433 shares issued      and outstanding at June 30, 2011 and December 31, 2010, respectively		20,401			20,291
Additional paid-in capital		57,548,042			56,975,314
Accumulated deficit		(70,908,918	)		(69,827,780	)
Accumulated other comprehensive income		9,096			30,755
Total stockholders’ equity (deficit)		(13,331,379	)		(12,801,420	)
Total liabilities, preferred stock and stockholders’ equity (deficit)	$	17,011,504		$	13,827,667

See accompanying notes to consolidated financial statements.

3

TALON INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Net sales	$	12,752,281		$	14,973,072	$	21,980,474		$	23,208,332
Cost of goods sold		8,688,943			10,633,835		15,026,583			16,432,402
Gross profit		4,063,338			4,339,237		6,953,891			6,775,930
Sales and marketing expenses		1,065,487			787,531		1,964,047			1,444,353
General and administrative expenses		1,996,713			1,853,937		4,279,211			3,809,510
Total operating expenses		3,062,200			2,641,468		6,243,258			5,253,863
Income from operations		1,001,138			1,697,769		710,633			1,522,067
Interest expense, net		23,193			884,821		41,633			1,592,018
Income (loss) before provision for income taxes		977,945			812,948		669,000			(69,951	)
Provision for income taxes		321,620			166,272		413,603			131,016
Net income (loss)	$	656,325		$	646,676	$	255,397		$	(200,967	)
Available to Preferred Shareholders -
Series B Preferred Stock Liquidation Preference Increase		(668,268	)		-		(1,336,535	)		-
Income (loss) applicable to Common Shareholders	$	(11,943	)	$	646,676	$	(1,081,138	)	$	(200,967	)
Per share amounts:
Net income (loss) per share	$	0.03		$	0.03	$	0.01		$	(0.01	)
Available to Preferred Shareholders		(0.03	)		-		(0.06	)		-
Basic and diluted net income (loss) per share applicable to Common Shareholders	$	0.00		$	0.03	$	(0.05	)	$	(0.01	)
Weighted average number of common shares outstanding:
Basic		20,367,154			20,291,433		20,329,503			20,291,433
Diluted		20,367,154			20,966,187		20,329,503			20,291,433

See accompanying notes to consolidated financial statements.

4

TALON INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net Income (loss)	$	255,397		$	(200,967	)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		312,924			404,101
Loss from disposal of equipment		7,391			-
Amortization of deferred financing cost and debt discounts		15,000			849,096
Stock based compensation		560,808			113,148
Deferred income taxes, net		213,345			89,564
Bad debt recovery, related party note receivable		-			(275,000	)
Bad debt recovery, other accounts receivable		(720	)		(73,683	)
Inventory valuation provisions		(42,317	)		182,936
Changes in operating assets and liabilities:
Accounts receivable		(452,440	)		(1,182,388	)
Inventories		298,446			(37,985	)
Prepaid expenses and other current assets		(54,546	)		(15,717	)
Other assets.		19,798			(56,516	)
Accounts payable and accrued expenses		2,208,028			2,062,995
Other liabilities		32,978			(33,335	)
Net cash provided by operating activities		3,374,092			1,826,249
Cash flows from investing activities:
Proceeds from sale of equipment		55,000			-
Acquisitions of property and equipment		(102,517	)		(21,014	)
Net cash used in investing activities		(47,517	)		(21,014	)
Cash flows from financing activities:
Proceeds from exercise of stock options		12,030			-
Payment of capital leases		(2,906	)		(51,636	)
Net cash provided by (used in) financing activities		9,124			(51,636	)
Net effect of foreign currency exchange translation on cash		(3,370	)		(1,433	)
Net increase in cash and cash equivalents		3,332,329			1,752,166
Cash and cash equivalents at beginning of period		2,795,284			2,264,606
Cash and cash equivalents at end of period	$	6,127,613		$	4,016,772

See accompanying notes to consolidated financial statements.

5

TALON INTERNATIONAL, INC.

 CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Supplemental disclosures of cash flow information:
	Six Months Ended June 30,
	2011			2010
Cash received (paid) during the period for:
Interest paid	$	(14,768	)	$	(394,083	)
Interest received	$	2,068		$	27,883
Income tax paid, net (principally foreign)	$	(97,802	)	$	(48,916	)
Non-cash financing activities:
Series B preferred stock liquidation preference increase	$	(1,336,535	)	$	-
Interest accrued on notes payable	$	5,985		$	5,917
Effect of foreign currency translation on net assets	$	(21,659	)	$	(6,348	)

See accompanying notes to consolidated financial statements.

6

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.              Presentation of Interim Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of the management of Talon International, Inc. and its consolidated subsidiaries (collectively, the “Company”), are considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.  The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period.  The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Form 10-K for the year ended December 31, 2010.  The balance sheet as of December 31, 2010 has been derived from the audited financial statements as of that date but omits certain information and footnotes required for complete financial statements.

Note 2.              Summary of Significant Accounting Policies

A complete description of the Company’s Significant Accounting Policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and should be read in conjunction with these unaudited consolidated financial statements.  The Significant Accounting Policies noted below are only those policies that have changed materially or have supplemental information included for the periods presented here.

Allowance for Accounts Receivable Doubtful Accounts

The Company is required to make judgments as to the collectability of accounts and note receivable based on established aging policy, historical experience and future expectations. The allowances for doubtful accounts represent allowances for customer trade accounts and that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable value. The Company records these allowances based on estimates related to the following factors: (i) customer specific allowances; (ii) amounts based upon an aging schedule; and (iii) an estimated amount, based on our historical experience, for issues not yet identified.  Bad debt recoveries on accounts receivable for the three and six months ended June 30, 2011 were $11,107 and $720, respectively. Bad debt recoveries on accounts receivable for the three and six months ended June 30, 2010 were $331,240 and $348,683, respectively, which included a recovery of a related party note of $275,000, see Note 13 “Related Party Notes and Transactions”.

7

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In accordance with this guidance, the Company measures its cash equivalents at fair value. The Company’s cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. At June 30, 2011 and December 31, 2010, cash equivalents consisted of money market funds measured at fair value on a recurring basis; fair value of the Company’s money market funds was approximately $537,000 and $1,506,000, respectively.

The Company adopted the FASB staff position that delayed the guidance on fair value measurements for non financial assets and non financial liabilities. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Intangible Assets

Intangible assets consist of our trade name and exclusive license and intellectual property rights.  Intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of FASB ASC 350, “Intangibles - Goodwill and Other”.  Intangible assets with estimable useful lives are amortized over their respective estimated useful lives, which average 5 years, and are reviewed for impairment in accordance with the provisions of ASC 360, “Property, Plant and Equipment”.  The exclusive license and intellectual property rights are fully amortized.

Convertible Preferred Stock

The Company classifies conditionally redeemable convertible preferred shares, which includes preferred shares subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity in the mezzanine section of the consolidated balance sheets, in accordance with  the guidance enumerated in FASB ASC No. 480-10 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock.

8

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company evaluated the conversion option of the convertible preferred shares in accordance with FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF when the fair market value of the preferred stock is lower than the value of common stock when the preferred stock converts to common stock at the issuance date. The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital.

Redeemable securities initially are recorded at their fair value minus the BCF and minus preferred stock issuance costs. Subsequent measurement and recognition of the changes in the preferred stock value uses the following approach:

· When an equity instrument is not currently redeemable and it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), then the changes in the redemption value (for example, fair value) are recognized immediately as they occur, and the carrying amount of the instrument is adjusted to equal the redemption value at the end of each reporting period. This method views the end of the reporting period as if it were also the redemption date for the instrument. The resulting increases in the carrying amount of the redeemable security reduce income applicable to common shareholders in the calculation of earnings per share.

· Liquidation preference increase on preferred shares is accrued against the preferred stock and reduces income applicable to common shareholders in the calculation of earnings per share.

Classification of Expenses

Costs of Goods Sold – Cost of goods sold primarily includes expenses related to inventory purchases, customs, duty, freight, overhead expenses and reserves for obsolete inventory.  Overhead expenses primarily consist of warehouse and operations salaries, and other warehouse expense.

Sales and Marketing Expenses – Sales and marketing expenses primarily include sales salaries and commissions, travel and entertainment, marketing, advertising, royalty expense, and other sales related costs.  Marketing and advertising efforts are expensed as incurred.

General and Administrative Expenses – General and administrative expenses primarily include administrative salaries, employee benefits, professional service fees, facility expenses, information technology costs, investor relations, travel and entertainment, depreciation and amortization, bad debts and other general corporate expenses.

Interest Expense, net – Interest expense reflects the cost of borrowing and amortization of deferred financing costs and discounts.  Interest expense for the three months ended June 30, 2011 and 2010 totaled $24,687 and $903,319, respectively. Interest expense for the six months ended June 30, 2011 and 2010 totaled $43,701 and $1,619,900, respectively. Interest income consists of earnings from outstanding amounts due to the Company under notes and other interest bearing receivables.  The Company recorded interest income of $1,494 and $2,068, respectively, for the three and six months ended June 30, 2011, as compared to $18,499 and $27,883, respectively for the same periods in 2010.

9

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Foreign Currency Translation

The Company has operations and holds assets in various foreign countries.  The local currency is the functional currency for the Company’s 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 until the translation adjustments are realized.  Included in accumulated other comprehensive income were a cumulative foreign currency translation gain of $9,096 and $30,755 at June 30, 2011 and December 31, 2010, respectively.

Comprehensive income (loss)

Comprehensive income (loss) consists of net loss and unrealized gains on foreign currency translation adjustments.  Comprehensive income (loss) and its components for the three and six months ended June 30, 2011 and 2010 is as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Net income (loss)	$	656,325	$	646,676		$	255,397	$	(200,967	)
Other comprehensive income (loss) -
Foreign currency translation		18,878		(3,988	)		21,659		6,348
Total comprehensive income (loss)	$	675,203	$	642,688		$	277,056	$	(194,619	)

The foreign currency translation adjustment represents the net currency translation gains and losses related to our China and India subsidiaries, which have not been reflected in the net loss for the periods presented.

Use of Estimates

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

Reclassifications

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

10

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3.              New Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”) which amends ASC Topic 820, Fair Value Measurement.  ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  The update clarifies the application of existing fair value measurement requirements.  The update also requires reporting entities to disclose additional information regarding fair value measurements categorized within Level 3 of the fair value hierarchy. ASU 2011-04 is effective during interim and annual period beginning after December 15, 2011.  Early adoption is not permitted. The adoption of this guidance will not have any impact on the Company’s results of operations and financial condition.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”) which amends ASC Topic 220, Comprehensive Income.  ASU 2011-05 gives an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance in ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance will not have any impact on the Company’s results of operations or financial condition.

11

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4.              Net income (loss) per Share

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

	Net loss (Numerator)			Shares (Denominator)		Per Share Amount
Three months ended June 30, 2011:
Basic net loss per share:
Net income	$	656,325			20,367,154	$	0.03
Series B Preferred Stock Liquidation Preference Increase		(668,268	)		-		(0.03	)
Loss applicable to Common Shareholders		(11,943	)		20,367,154		0.00
Effect of Dilutive Securities -
Options, Preferred Stock and RSUs		-			-		-
Basic and diluted net loss applicable to Common Shareholders	$	(11,943	)		20,367,154	$	0.00
Three months ended June 30, 2010:
Basic net income per share -
Income applicable to Common Shareholders	$	646,676			20,291,433	$	0.03
Effect of Dilutive Securities -
Options		-			674,754		-
Basic and diluted net income applicable to Common Shareholders	$	646,676			20,966,187	$	0.03
Six months ended June 30, 2011:
Basic net loss per share:
Net income	$	255,397			20,329,503	$	0.01
Series B Preferred Stock Liquidation Preference Increase		(1,336,535	)				(0.06	)
Loss applicable to Common Shareholders		(1,081,138	)		20,329,503		(0.05	)
Effect of Dilutive Securities -
Options, Preferred Stock and RSUs		-			-		-
Basic and diluted net loss applicable to Common Shareholders	$	(1,081,138	)		20,329,503	$	(0.05	)
Six months ended June 30, 2010:
Basic net loss per share -
Loss applicable to Common Shareholders	$	(200,967	)		20,291,433	$	(0.01	)
Effect of Dilutive Securities -
Options		-			-		-
Basic and diluted net loss applicable to Common Shareholders	$	(200,967	)		20,291,433	$	(0.01	)

12

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Options to purchase 6,127,100 shares of common stock exercisable between $0.06 and $5.23 per share were outstanding for the three and six months ended June 30, 2011, but were not included in the computation of diluted net loss per share applicable to common shareholders because the effect of exercise or conversion would have an antidilutive effect on net loss per share.

Options to purchase 6,423,600 shares of common stock exercisable between $0.06 and $5.23 per share were outstanding for the three and six months ended June 30, 2010. In the computation of diluted net income per share applicable to Common Shareholders, options to purchase 1,955,000 shares of common stock exercisable between $0.06 and $0.11 were included for the three months ended June 30, 2010. For the three and six months ended June 30, 2010 options to purchase 4,468,600 and 6,423,600 shares of common stock, respectively were excluded in the computation of diluted net loss per share applicable to Common Shareholders because exercise or conversion would have an antidilutive effect on the net loss per share.

Note 5.              Accounts Receivable

Accounts receivable are included on the accompanying consolidated balance sheets net of an allowance for doubtful accounts. The total allowance for doubtful accounts at June 30, 2011 and December 31, 2010 was $24,686 and $133,080, respectively.

Note 6.              Inventories

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

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

Inventories consist of the following:

	June 30,			December 31,
	2011			2010
Finished goods	$	1,718,958		$	2,156,026
Less reserves		(703,096	)		(884,035	)
Total inventories	$	1,015,862		$	1,271,991

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TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7.              Debt Facility

On July 30, 2010, the Company entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with CVC California, LLC (“CVC”) in which the Company issued to CVC shares of the Company’s Series B Convertible Preferred Stock in payment of all of the outstanding obligations owed by the Company to CVC under the Revolving Credit and Term Loan Agreement (the “Loan Agreement”, see Note 8) originally entered into by the Company on June 27, 2007 with Bluefin Capital, LLC (“Bluefin”). Bluefin subsequently assigned its rights and obligations under the Loan Agreement to an affiliate, CVC.  At July 30, 2010, all of the outstanding obligations owed to CVC under the Loan Agreement became due and payable, consisting of outstanding borrowings and accrued interest of $11,548,098 under the term notes, and $5,158,587 under the revolving credit note, for a total of $16,706,685. All of these outstanding obligations were converted into Series B Convertible Preferred Stock on July 30, 2010.

The Company originally entered into the Loan Agreement on June 27, 2007, which had provided for initial borrowings of $4.3 million under a revolving credit loan and a $9.5 million term loan for a three year period ending June 30, 2010. In connection with the initial Loan Agreement, the Company issued to Bluefin 1,500,000 shares of common stock for $0.001 per share and issued warrants for the purchase of 2,100,000 common shares at prices ranging from $1.05 per share to $1.14 per share.

On November 19, 2007, the Company amended the Loan Agreement to modify the original financial covenants in exchange for the issuance of an additional 250,000 shares of common stock to the lender for $0.001 per share, and a lowering of the exercise price for all of the previously issued warrants to an exercise price of $0.75 per share.

On April 3, 2008, the Company further amended the Loan Agreement.  This amendment redefined the financial covenants and cancelled of all of the common stock warrants previously issued to the lender in exchange for a note payable for $1.0 million issued by the Company under the same terms as the original term loans under Loan Agreement. In connection with this amendment the Company recorded a reduction to equity and an increase to notes payable for the fair value of the warrants of $260,205 and the difference ($739,795) between the fair value of the warrants at the time of repurchase and the face value of the note was recorded as an additional deferred cost.  This cost was amortized using the interest-method over the life of the modified notes and was reflected as interest expense.  At June 30, 2010 the modification cost was fully amortized.

Under the terms of the Loan Agreement, as amended, the Company is required to meet certain coverage ratios, among other restrictions, including a restriction from declaring or paying a dividend prior to repayment of all the obligations. The financial covenants, as amended, require that the Company maintain at the end of each fiscal quarter “EBITDA” (as defined in the agreement) of not less than $1.00 for the period and in excess of the ratios set out in the agreement for each quarter.

The Company failed to satisfy the financial covenants for two quarters ended March 31, 2009, and in connection with such failures, further amended the Loan Agreement that, among other things, required the issuance of an additional term note to CVC in the principal amount of $225,210 in lieu of paying a cash waiver fee.

On June 30, 2010 the Loan Agreement was amended to extend the existing maturity date for an additional thirty days to July 30, 2010. The Loan Agreement (as amended) was scheduled to mature July 30, 2010 and all of the principal and interest arising under the Loan Agreement in the approximate amount of $16.7 million was due.  The Company did not have sufficient resources to pay this obligation on the maturity date, and entered into the Recapitalization Agreement in settlement of this debt.

14

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In connection with the Recapitalization Agreement, the Loan Agreement (now fully paid) was amended to extend the maturity date from July 30, 2010 until July 31, 2012, reduce the maximum borrowings available under the Revolver to $3,000,000, amend the borrowing base to modify the advance rate applicable to eligible accounts receivable to 75% and modify the advance rate applicable to eligible inventory to 40%, eliminate loan maintenance fees, and modify the permissible amount of capital expenditures the Company can make in any fiscal year. The Company paid CVC a non-refundable fee in the amount of $60,000 in consideration of CVC entering into the amendment and making this facility available.  Upon execution of the amendment, CVC waived all prior events of default under the Loan Agreement.

At June 30, 2011 and December 31, 2010, the Company had no borrowings under the revolving credit facility, and  was in compliance with all loan covenants. Borrowings under the Loan Agreement are secured by all of the Company’s assets.

Interest expense related to the Loan Agreement is composed of interest on debt, amortization of debt discount, and amortization of deferred financing costs.  In total, the interest expense for the three and six months ended June 30, 2011 was $7,500 and $15,000, respectively. For the three and six months ended June 30, 2010 total interest expense was $891,210 and $1,597,082, respectively. Total interest expense in the periods was comprised as follows:

· Interest on debt related to the Loan Agreement for the three months ended June 30, 2011 and 2010 was $0 and $454,595, respectively. For the six months ended June 30, 2011 and 2010 interest on debt related to Loan Agreement was $0 and $747,986, respectively.

· Amortization of the debt discount related to the Loan Agreement for the three months ended June 30, 2011 and 2010 was $0 and $374,557, respectively. For the six months ended June 30, 2011 and 2010 amortization of the debt discount related to the Loan Agreement was $0 and $725,982, respectively.

· Amortization of deferred financing costs related to the Loan Agreement for the three months ended June 30, 2011 and 2010 was $7,500 and $62,058, respectively. For the six months ended June 30, 2011 and 2010 amortization of deferred financing costs related to the Loan Agreement was $15,000 and $123,114, respectively

Note 8.              Series B Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Series B Convertible Preferred Stock

On July 30, 2010, the Company entered into the Recapitalization Agreement with CVC, pursuant to which the Company issued to CVC an aggregate of 407,160 shares of the Company’s preferred stock, designated Series B Convertible Preferred Stock, $0.001 par value per share (the “Series B Preferred Stock”), in payment of an aggregate of $16,706,685 owed by the Company to CVC under the Loan Agreement.  Certain rights, preferences, privileges and restrictions of the Series B Preferred Stock are summarized below.

On July 30, 2010, the Company amended its certificate of incorporation by creating the Series B Preferred Stock with the following rights, preferences, privileges and restrictions:

15

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

· The Series B Preferred Stock ranks senior to the common stock and to any other preferred stock unless such preferred stock is created and issued on a senior or pari passu basis in accordance with the Company’s certificate of incorporation.

· Each share of Series B Preferred Stock is convertible into 100 shares of the Company’s common stock (subject to adjustment for stock splits, reverse stock split, etc.) at any time and from time to time at each holder’s option, unless the Series B Preferred Stock is exchanged for its Liquidation Preference as noted below.

· Upon the liquidation, dissolution or winding up of the Company, each share of Series B Preferred Stock is entitled to receive upon the surrender and cancellation of such shares (and prior to any distribution to holders of other equity securities), an amount equal to $41.033 per share plus all accrued dividends (the “Liquidation Preference”).  A merger, consolidation, share exchange or other reorganization resulting in a change in control of the Company, or any sale of all or substantially all of the Company’s assets, will be deemed a liquidation and winding up for purposes of the Company’s obligation to pay the Liquidation Preference.

· The Series B Preferred Stock Liquidation Preference will increase with the accrual of dividends on the Liquidation Preference at the rate of 16% per annum, compounded annually.  The dividends however are only payable to the holder in connection with the payment of the Liquidation Preference upon the liquidation, dissolution or winding up of the Company, or other deemed liquidation, and in conjunction with the surrender of the Preferred Stock.  No portion of the Liquidation Preference or the associated accrued dividends are convertible into common stock, nor will any portion of the Liquidation Preference or the accrued dividends be payable on shares of Series B Preferred Stock in the event of or following the conversion of such shares into common stock.

· The Company has the right, at any time upon not less than thirty (30) days’ prior written notice to the holders of Series B Preferred Stock, to redeem the Series B Preferred Stock in whole (but not in part) for a price equal to the then-applicable Liquidation Preference.  The holders of Series B Preferred Stock shall have the option, exercisable at any time and from time to time commencing on July 31, 2016, to require the Company to redeem any or all of the Series B Preferred Stock held by such holders, at the then-applicable Liquidation Preference amount. The Series B Preferred Stock vote with the common stock as a single class on all matters submitted or required to be submitted to a vote of the Company’s stockholders, with each share of Series B Preferred Stock having a number of votes equal to the number of shares of common stock that may be acquired upon conversion thereof as of the applicable date of determination.  Additionally, the Series B Preferred Stock have the right to vote as a separate class with respect to certain matters affecting the Series B Preferred Stock, including but not limited to (i) the creation or issuance of any other class or series of preferred stock, (ii) any amendments with respect to the rights, powers, preferences and limitations of the Series B Preferred Stock, (iii) paying dividends or distributions in respect of or redeem the Company’s common stock or any other junior securities; and (iv) certain affiliate transactions.  Any such vote shall require the affirmative vote or consent of a majority of the outstanding shares of Series B Preferred Stock.

16

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

· As long as the outstanding Series B Preferred Stock represents 35% or more of the voting shares of the Company, on an as-converted to common stock basis, then (a) our Board of Directors shall consist of not more than seven members, (b) the holders of Series B Preferred Stock shall have the right to elect three directors if the Board has five or fewer total directors, and four directors if the Board has six or seven directors (the directors elected by the Series B Preferred Stock are referred to as the “Series B Directors”), and (c) those members serving on the Board who were not elected by holders of the Series B Preferred Stock shall have the right to designate all remaining directors.  At least two of the Series B Directors must be, and remain at all times while serving as a director, an independent director that qualifies for service on the audit committee of a corporation with securities listed on the Nasdaq Stock Market as provided in Nasdaq Marketplace Rule 5605(c)(2) (or any successor thereto). Once the outstanding shares of Series B Preferred Stock represent less than 35% of the voting shares on an as-converted to common stock basis, then the entire Board will thereafter be elected by all stockholders having voting rights, voting as a single class.

The conversion of the term notes, revolver and related interest and fees into the Series B Preferred Stock (fair value of $17,277,600 as of July 30, 2010) was considered to be debt extinguishment according to the FASB ASC No. 405 “Liabilities” and FASB ASC No. 470-50 “Debt, Modifications and Extinguishments”. Per FASB ASC No. 470-50 a loss on extinguishment of debt of $570,915 was recorded on July 30, 2010 and was included in the Consolidated Statement of Operations for the year ended December 31, 2010. The loss on extinguishment is equal to the difference between fair value of the preferred stock and the fair value of the debt extinguished at the transaction date. The fair value of the Series B Preferred Stock on the issuance date was determined by the Company and independent valuation specialists using an option pricing valuation model.  

The Company applied the guidance enumerated in FASB ASC No. 480 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock. The Company classifies conditionally redeemable convertible preferred shares, which includes preferred shares subject to redemption upon the occurrence of uncertain events not solely within the control of the Company, as temporary equity in the mezzanine section of the consolidated balance sheet. The Series B Preferred Stock is redeemable at the option of the holders after the sixth anniversary of issuance, which is not within the control of the Company.

The Company determined that there are no embedded features that would require separate reporting as derivative instruments. Therefore, the Company evaluated the conversion option of the convertible preferred shares under FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF if the fair value of the instrument is lower than the fair value of shares of the common stock it is convertible into on the issuance date.  The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the conversion feature to additional paid-in capital.  The Company has recorded a BCF value of $1,283,343 in connection with the issuance of the Series B Preferred Stock on July 30, 2010.

The Series B Preferred Stock was initially recorded at the fair value of $17,277,600 as of July 30, 2010, reduced by the BCF ($1,283,343) as stated above and stock issuance costs ($190,744), for a net value of $15,803,513 as of July 30, 2010. The value of the Series B Preferred Stock was adjusted as follows as a consequence of its redemption features and the following approach is implemented by the Company:

17

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

· The Series B Preferred Stock is not currently redeemable but it is probable that the preferred stock will become redeemable due to the redemption option available to the preferred stock holders on July 30, 2016. Changes in the redemption value (for example, fair value) are recognized immediately as they occur, and the carrying amount of the instrument is adjusted to equal the redemption value at the end of each reporting period. This method views the end of the reporting period as if it were also the redemption date for the Series B Preferred Stock. Accordingly, the adjustment of $903,172 to record the preferred stock at its redemption value (“Original issue discount”) was charged against the preferred stock carrying value and accumulated deficit during the year ended December 31, 2010. In addition, the resulting increase in the carrying amount of the Series B Preferred Stock reduces the income applicable to common shareholders reported in the calculation of earnings per share.

· The 16% liquidation preference annual dividend (compounded annually) on outstanding preferred shares is accrued each reporting period as an addition to the carrying value of the preferred stock and reduces the income applicable to common shareholders reported in the calculation of earnings per share.

Series B Preferred Stock activity during the six months ended June 30, 2011 is as follows:

Series B Preferred Stock as of December 31, 2010	$	17,820,464
Series B Preferred Stock Liquidation Preference Increase		668,267
Series B Preferred Stock as of March 31, 2011		18,488,731
Series B Preferred Stock Liquidation Preference Increase		668,268
Series B Preferred Stock as of June 30, 2011	$	19,156,999

Common Stock

Stockholders Agreement

Concurrently with execution of the Recapitalization Agreement, on July 30, 2010, the Company entered into a Stockholders Agreement with CVC, and with Lonnie D. Schnell, Chief Executive Officer, Chief Financial Officer and a member of the Board of Directors of the Company, and Larry Dyne, President of the Company (“Messrs. Schnell and Dyne”), pursuant to which:

· Messrs. Schnell and Dyne agreed with CVC to vote their shares of Company voting stock in favor of a merger or consolidation of the Company into or with another corporation or any share exchange, business combination or other such transaction in which the Company is a constituent party, or any sale of all or substantially all of the Company’s assets (a “Triggering Transaction”), in each case to the extent such transaction is first approved by CVC.  Messrs. Schnell and Dyne also provided CVC with an irrevocable proxy to vote their shares of Company voting stock in favor of any such transaction.

18

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

· CVC agreed with the Company that in connection with any director nominees to be submitted to holders of the Company’s common stock for election at a stockholders’ meeting, a committee of our Board comprised solely of directors then serving on the Board who were not elected or appointed by holders of Series B Preferred Stock, acting by majority vote, shall have the right to designate all of the Board’s nominees for director to be elected by holders of the Company’s Common Stock.

· CVC agreed with the Company that in connection with any election of directors submitted to the Company’s stockholders for election at a stockholders’ meeting, CVC will attend the stockholders’ meeting, in person or by proxy, and vote (or cause to be voted) all of CVC’s shares of the Company’s voting stock in favor of the Board’s nominees for director.  CVC also provided the Company’s chief executive officer with an irrevocable proxy to vote its shares of the Company voting stock in favor of such nominees.

· Messrs. Schnell and Dyne provided CVC with a right of first refusal with respect to any shares of the Company’s voting securities that Messrs. Schnell and Dyne propose to sell in a private placement transaction, and agreed to provide CVC with advance notice of their intent to sell the Company’s voting securities in any public sale transaction.

· CVC provided Messrs. Schnell and Dyne with a tag-along right, providing Messrs. Schnell and Dyne with the right to sell their shares of the Company’s voting securities in a transaction where CVC is selling its shares of the Company’s voting securities.

· CVC agreed with the Company not to sell or otherwise transfer its shares of the Company’s voting securities, or to vote its shares of the Company’s voting securities in favor of any Triggering Transaction, at any time on or before July 31, 2011, other than in connection with a transaction that is approved by a majority of the Company’s voting shares (where, in calculating such majority, the votes attributable to CVC’s shares of the Company’s voting securities are excluded in the numerator but included in the denominator).

· The Company provided CVC with a preemptive right, pursuant to which CVC will have the right, subject to certain exceptions set forth in the Stockholders Agreement, to acquire in a subsequent issuance of securities by the Company a number of offered securities that will allow CVC to maintain its percentage ownership of the Company’s voting securities.

· CVC agreed with Messrs. Schnell and Dyne that in connection with a Triggering Transaction, CVC, and any other holder of Series B Preferred Stock and shares of common stock acquired upon conversion thereof, shall pay to Messrs. Schnell and Dyne a portion (beginning at 5% and increasing to 10%) of the sales proceeds payable in the Triggering Transaction to CVC or such other holder in respect of such Series B Preferred Stock or conversion shares.  Each of Messrs. Schnell and Dyne’s right to receive such portion of the sales proceeds is conditional upon the Triggering Transaction occurring (i) while employed by the Company or (ii) within 12 months following termination of employment with the Company for any reason other than termination of employment for “cause” or termination of employment by Messrs. Schnell or Dyne without “good reason” (as such terms are defined in their respective employment agreements).

19

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $612,500, which is fully amortized.  The Company is currently in litigation with this licensor (See Note 11).

Note 9.              Stock-Based Compensation

The Company accounts for stock-based awards to employees and directors in accordance with FASB ASC 718, “Compensation - Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Options issued to consultants are accounted for in accordance with the provisions of FASB ASC 505-50, “Equity-Based Payments to Non-Employees”.

Stock Options

The Company’s 2008 and 2007 Stock Incentive Plans, as amended, authorize up to 4,810,000 and 2,600,000 shares of common stock, respectively, for issuance pursuant to awards granted to individuals under the plans.  The Company’s 1997 Stock Incentive Plan authorized the issuance of up to 6,000,000 shares of common stock pursuant to stock-based incentive awards granted to individuals.

Option awards are granted with an exercise price equal to the average market price of the Company’s stock for the five trading days following the date of the grant. Those option awards generally vest over periods determined by the Board from immediate to four years of continuous service and have ten year contractual terms. (See Note 8).

The Recapitalization Agreement constituted a change of control of the Company and as a result, on July 30, 2010, all options previously granted to Messrs. Schnell and Dyne became fully vested in accordance with provisions in their employment agreements and their option grants. On July 30, 2010 the Company entered into new executive employment agreements with Messrs. Schnell and Dyne and Messrs. Schnell and Dyne agreed to cancel all option grants previously awarded to them on or before December 31, 2007.  Accordingly, option grants constituting a total of 1,005,500 shares of common stock were cancelled effective July 30, 2010 (See Note 8).

Options to purchase 1,355,000 shares of common stock were granted under the 2008 Stock Incentive Plan during six months ended June 30, 2011.  No options were granted for the three and six months ended June 30, 2010.

During three months ended June 30, 2011, a former employee exercised options to acquire 109,375 shares of common stock under the 2008 Stock Incentive Plan.  Cash received upon exercise was $12,030 or $0.11 per share.  At the time of exercise, the total intrinsic value of the options exercised was $4,375 (or $0.04 per share). No options were exercised for the three and six months ended June 30, 2010.

20

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of June 30, 2011, the Company had $172,064 of unamortized stock-based compensation expense related to options issued to employees and directors, which will be recognized over the weighted average period of 2.7 years.  As of June 30, 2010, unamortized stock-based compensation expense related to options issued to employees and directors was $98,342, which is being recognized over the weighted average period of approximately 1.5 years.

The following table summarizes the activity in the Company’s share based plans during the six months ended June 30, 2011.

	Number of Shares			Weighted Average Exercise Price
Employees and Directors
Options outstanding - January 1, 2011		5,147,100		$	0.35
Granted		1,355,000		$	0.10
Exercised		-		$	-
Cancelled		(135,417	) )	$	0.11
Options outstanding - March 31, 2011		6,366,683		$	0.30
Granted		-		$	-
Exercised		(109,375	)	$	0.11
Cancelled		(130,208	)	$	3.83
Options outstanding - June 30, 2011		6,127,100		$	0.23

Restricted Stock Units (RSU’s)

On July 30, 2010, the Company granted each of Messrs. Schnell and Dyne a restricted stock unit award (an “RSU Award”) for 5,778,500 shares of the Company’s common stock.  Each RSU Award will vest 50% on a date which is 13 months following the grant date, and 10% on each date which is 18, 24, 30, 36 and 42 months following the grant date, subject to partial acceleration of vesting as part of the executives’ severance benefits and full acceleration of vesting upon a change in control of the Company.  As of July 30, 2010, the RSU’s were valued at $2,263,384 which was reduced by the fair value of the options surrendered (see Stock Options above). As of June 30, 2011, the Company had $1,306,307 of unamortized stock-based compensation expense related to RSU’s.  The remaining expense will be recognized over the remaining weighted average period of 1.4 years.

Note 10.            Income taxes

The Company accrues interest and penalties related to unrecognized tax benefits in interest expense.  For each of the three months ended June 30, 2011 and 2010, the Company accrued interest and penalties for unrecognized tax benefits of $3,975. At June 30, 2011 and December 31, 2010, the Company had $101, 475 and $93,525, respectively, of accrued interest and penalties associated with the unrecognized tax liabilities.

21

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Net deferred tax assets of $0 and $111,454 as of June 30, 2011 and December 31, 2010, respectively, and were related to the Company’s foreign operations and are included in other assets. Due to prior operating losses incurred, no benefit for domestic income taxes and no benefit for a portion of the foreign income taxes have been recorded because there is not sufficient evidence to determine that the Company will be able to utilize its net operating loss carryforwards to offset future taxable income.

Other tax liabilities were $61,159 and $3,215 as of June 30, 2011 and December 31, 2010, respectively, and were included in other accrued expenses. Current receivable for income taxes totaled $47,935 and $87,638, respectively, as of June 30, 2011 and December 31, 2010.

Long term deferred income tax liabilities totaled $710,445 and $608,554 as of June 30, 2011 and December 31, 2010, respectively. The deferred income tax liability includes a tax basis difference related to the Company’s indefinite lived intangible asset, where the Company determined that it would no longer be able to support the use of the deferred tax asset related to its net operating losses to offset the liability and tax basis difference related to the Company’s foreign operations ($29,259 and $0 as of June 30, 2011 and December 31, 2010, respectively).

Note 11.            Commitments and Contingencies

On April 16, 2004, the Company filed suit against Pro-Fit Holdings, Limited in the U.S. District Court for the Central District of California – Tag-It Pacific, Inc. v. Pro-Fit Holdings, Limited, CV 04-2694 LGB (RCx) -- asserting various contractual and tort claims relating to the Company’s exclusive license and intellectual property agreement with Pro-Fit, seeking declaratory relief, injunctive relief and damages.  It is the Company’s position that the agreement with Pro-Fit gives the Company exclusive rights in certain geographic areas to Pro-Fit’s stretch and rigid waistband technology.  The Company also filed a second civil action against Pro-Fit and related companies in the California Superior Court which was removed to the United States District Court, Central District of California.  In the second quarter of 2008, Pro-Fit and certain related companies were placed into administration in the United Kingdom and filed petitions under Chapter 15 of Title 11 of the United States Code.  As a consequence of the Chapter 15 filings, all litigation by the Company against Pro-Fit has been stayed. The Company has incurred significant legal fees in this litigation, and unless the case is settled or resolved, may continue to incur additional legal fees in order to assert its rights and claims against Pro-Fit and any successor to those assets of Pro-Fit that are subject to its exclusive license and intellectual property agreement with Pro-Fit and to defend against any counterclaims.

The Company currently has pending other claims and complaints that arise in the ordinary course of the Company’s business.  The Company believes that it has meritorious defenses to these claims and that the claims are either covered by insurance or would not have a material effect on the Company’s consolidated financial position or results of operations if adversely determined against the Company.

In November 2002, the FASB issued Topics of the FASB ASC 460-10, “Guarantees” (“ASC 460-10”) and FASB ASC 850-10, “Related Party Disclosures” (”ASC 850-10”). The following is a summary of the Company’s agreements that it has determined are within the scope of ASC 460-10 and ASC 850-10:

22

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Note 12.            Segment Reporting and Geographic Information

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

	Three Months Ended June 30, 2011
	Talon		Trim		Tekfit		Consolidated
Net sales	$	7,299,479	$	5,450,562	$	2,240	$	12,752,281
Cost of goods sold		5,348,390		3,340,015		538		8,688,943
Gross profit	$	1,951,089	$	2,110,547	$	1,702		4,063,338
Operating expenses								3,062,200
Income from operations							$	1,001,138

23

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three Months Ended June 30, 2010
Talon	Trim	Tekfit	Consolidated

Net sales	$	9,752,437	$	5,220,635	$	-		$	14,973,072
Cost of goods sold		7,316,812		3,274,272		42,751			10,633,835
Gross profit	$	2,435,625	$	1,946,363	$	(42,751	)		4,339,237
Operating expenses									2,641,468
Income from operations								$	1,697,769

Six Months Ended June 30, 2011
Talon	Trim	Tekfit	Consolidated

Net sales	$	12,781,001	$	9,197,233	$	2,240	$	21,980,474
Cost of goods sold		9,272,461		5,753,510		612		15,026,583
Gross profit	$	3,508,540	$	3,443,723	$	1,628		6,953,891
Operating expenses								6,243,258
Income from operations							$	710,633

Six Months Ended June 30, 2010
Talon	Trim	Tekfit	Consolidated

Net sales	$	14,686,739	$	8,521,593	$	-		$	23,208,332
Cost of goods sold		10,938,684		5,428,467		65,251			16,432,402
Gross profit (loss)	$	3,748,055	$	3,093,126	$	(65,251	)		6,775,930
Operating expenses									5,253,863
Income from operations								$	1,522,067

24

TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Sales:	Three Months Ended June 30,				Six Months Ended June 30
Country / Region	2011		2010		2011		2010
United States	$	914,864	$	1,201,996	$	1,796,911	$	2,007,615
Hong Kong		4,273,926		4,752,797		7,496,328		7,974,739
China		3,539,886		4,556,589		5,147,472		6,091,380
Korea		713,343		300,504		1,120,558		507,352
Bangladesh		374,558		706,696		1,367,182		1,387,299
Other		2,935,704		3,454,490		5,052,023		5,239,947
Total	$	12,752,281	$	14,973,072	$	21,980,474	$	23,208,332

	June 30,		December 31,
	2011		2010
Long-lived Assets:
United States	$	4,515,466	$	4,623,448
Hong Kong		752,392		884,344
China		156,646		182,980
Other		1,341		2,306
Total	$	5,425,845	$	5,693,078

Note 13.            Related Party Notes and Transactions

On July 30, 2010, the Company entered into a Recapitalization Agreement with CVC (See Note 7 and Note 8).  As a result of this transaction CVC (currently the sole holder of the Series B Preferred Stock) has become the majority stockholder in the Company.  Commencing August 1, 2010, a $5,000 monthly debt monitoring fee has been paid to CVC. A $60,000 fee was paid to CVC in consideration of CVC entering into an amendment to the Loan Agreement during the quarter ended September 30, 2010.

Colin Dyne, brother of both Mark Dyne, the Chairman of the Board of Directors of the Company and Larry Dyne, the President of the Company, is also a director, officer and significant stockholder of People’s Liberation, Inc., the parent company of William Rast Sourcing.  During the three and six months ended June 30, 2011, the Company had sales of $81,824 and $139,003, respectively, to William Rast Sourcing. During the three and six months ended June 30, 2010 the Company had sales of $150,166 and $230,247, respectively, to William Rast Sourcing. Accounts receivable of $2,404 and $26,711 were outstanding from William Rast Sourcing at June 30, 2011 and December 31, 2010, respectively.

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 TALON INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In November 2009, the Company entered into an agreement with Colin Dyne to pay a commission equal to 7% of the collected revenues associated with the sales of products to a specific retail brand, with 2% of the 7% earned applied to a note receivable balance. For the three months ended June 30, 2011 and 2010 commissions of $14,172 and $34,155 were paid, respectively. For the six months ended June 30, 2011 and 2010 commissions of $14,172 and $55,540 were paid, respectively.  A Note Receivable from Related Party, net at December 31, 2009 represented the unsecured note and accrued interest receivable due from Colin Dyne, and included a valuation reserve for the full amount due. The note bore interest at 7.5% and was due on demand.  For the three and six months ended June 30, 2010 $17,679 and $27,057, respectively in commissions were applied to the note receivable balance. On June 29, 2010, the Company sold the Note Receivable with all of the Company’s rights, title and interest therein to an unrelated third party for cash proceeds of $275,000. The amount received was recorded as a recovery of bad debts.

Notes payable to related parties includes demand notes and advances to parties related to or affiliated with Mark Dyne, the Chairman of the Board of Directors of the Company and a significant stockholder.  The balance of demand notes payable and interest expense due to Mark Dyne and affiliated parties at June 30, 2011 and December 31, 2010 was $239,993 and $236,448, respectively.

In March 2010, a consulting agreement with Diversified Consulting, LLC, a company owned by Mark Dyne expired.  Accrued consulting fees and related interest amounted to $95,548 and $164,761, as of June 30, 2011 and December 31, 2010, respectively, in consideration of the final payments under the agreement.  Interest related to the amount owed amounted to $2,527 and $5,787 for the three and six months ended June 30, 2011, respectively. Related interest amounted to $5,367 and $54,536 for the three and six months ended June 30, 2010, respectively.

Notes payable to related parties includes a note and associated interest due to Lonnie D. Schnell, the Chief Executive Officer and Chief Financial Officer of the Company. The note, issued on August 6, 2009 in partial satisfaction of 2008 annual incentive payments to which Mr. Schnell was entitled, bears 6% interest annually and the maturity date is the earlier of December 31, 2011 or ten days following Mr. Schnell’s employment termination date. The balance of the note payable and accrued interest expense due to Mr. Schnell at June 30, 2011 and December 31, 2010 was $39,946 and $38,768, respectively.

Note 14.            Subsequent Events

The Company evaluated subsequent events after the balance sheet date of June 30, 2011 through the date these unaudited financial statements were issued.

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Item 2.              Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements

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

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

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

We pursue the global expansion of our business through the establishment of Talon owned sales, distribution and manufacturing locations, strategic manufacturing relationships and joint ventures.  The manufacturing joint ventures, in combination with Talon owned and affiliated facilities under the Talon brand, improve our time-to-market throughout the world by sourcing, finishing and distributing to apparel manufacturers in their local markets.

Our business focuses on serving as an outsourced zipper and trim supplier, product development, sampling and sourcing department for the most demanding brands and retailers.  We believe that design differentiation among brands and retailers is a critical marketing tool for our customers.  By assisting our customers in the design, development, sampling and sourcing of all trim components, we generally achieve higher margins for our products, create long-term relationships with our customers, grow our sales to a particular customer by supplying a larger proportion of their brands and better differentiate our sales and services from those of our competitors.  We are expanding our business globally, to better serve our apparel customers in the field, in addition to our brand and retail customer.  We believe we can lead the industry in apparel accessories by having strong relationships with our brand and retail customers and having a distributed service organization to serve our factory customers globally.

Our Tekfit business provides manufacturers with the patented technology, manufacturing know-how, equipment and materials required to produce an expandable waistband.  Our efforts to promote this product to customers have been limited by a licensing dispute.  As described more fully in this report under Item 1. “Legal Proceedings”, we are 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.  For the three and six months ended June 30, 2011 we had $2,240 revenue from the sale of products incorporating the stretch waistband technology. We derived no revenue from the sale of products incorporating the stretch waistband technology for the three and six months ended June 30, 2010.

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Seasonality

We typically experience seasonal fluctuations in sales volume consistent with the purchase demands of the apparel industry.  These seasonal fluctuations result in lower sales volumes for our business in the first and fourth quarters of each year due to the seasonal buying patterns by the majority of our customers.  The apparel retailers typically experience higher sales volumes during the second quarter associated with back-to-school sales and in the fourth quarter in association with year-end holiday purchases. Sales of our products can typically precede the retail sales patterns by 90 to 150 days.  Backlogs of sales orders are not considered material in the industries in which we compete, which reduces the predictability and reinforces the volatility of these cyclical buying patterns on our sales volume.

Results of Operations

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	68.1		71.0		68.4		70.8
Gross profit	31.9		29.0		31.6		29.2
Sales and marketing expenses	8.4		5.3		8.9		6.2
General and administrative expenses	15.7		12.4		19.5		16.4
Interest expense, net	0.2		5.9		0.2		6.9
Income taxes	2.5		1.1		1.8		0.6
Net income (loss)	5.1	%	4.3	%	1.2	%	(0.9	)%

Sales

For the three and six months ended June 30, 2011 and 2010, sales by geographic region based on the location of the customer as a percentage of sales were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
Region	2011		2010		2011		2010
United States	7.2	%	8.0	%	9.6	%	8.7	%
Hong Kong	33.5		31.7		34.9		34.4
China	27.8		30.4		17.4		26.2
Korea	5.6		2.0		4.4		2.2
Bangladesh	2.9		4.7		10.8		6.0
Other	23.0		23.2		22.9		22.5
	100.0	%	100.0	%	100.0	%	100.0	%

Sales for the three months ended June 30, 2011 were $12.8 million, a decline of $2.2 million or 14.8% from the same period in 2010.  Sales for the six months ended June 30, 2011 were $22.0 million, a decline of $1.2 million or 5.3% from the same period in 2010.  The net decline reflected continued economic weakness in the U.S. apparel market resulting in lower demand for our products, and a sharp decline in the demand from price sensitive mass retailer accounts who shifted their purchases to buy directly from factories in Asia, partially offset by additional new programs and new customers.

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Gross Profit

Gross profit for the three months ended June 30, 2011 was $4.1 million as compared to $4.3 million for the same period in 2010. The reduction in gross profit for the three months ended June 30, 2011 as compared to the same period in 2010 was principally attributable to lower overall sales volumes offset by improved product mix, lower freight and duty costs and lower manufacturing support and inventory obsolescence costs.

Gross profit for the six months ended June 30, 2011 was $7.0 million as compared to $6.8 million for the same period in 2010. The improvement in gross profit for the six months ended June 30, 2011 as compared to the same period in 2010 was principally attributable to improved product mix, and lower freight and duties costs, manufacturing support and inventory obsolescence costs offset by lower overall sales volumes.

A recap of the change in gross margin for the three and six months ended June 30, 2011 as compared with the same period in 2010 is as follows:

	Three Months Ended June 30, 2011 compared to same period in 2010					Six Months Ended June 30, 2011 compared to same period in 2010
	$ in 000’s(1)			%(1)		$ in 000’s(1)			%(1)
Gross profit increased (reduced) as a result of:
Lower volumes		(820	)	(18.9	)		(463	)	(6.9	)
Mix of products		384		8.9			457		6.7
Reduced freight and duty costs		80		1.8			68		1.0
Reduced manufacturing support and inventory obsolescence costs		80		1.8			116		1.7
Gross profit increase (decrease)		(276	)	(6.4	)		178		2.5

(1) Represents the amount or percentage, as applicable, change in each item in the three and six months ended June 30, 2011 period, as compared to the same period in 2010.

Sales and marketing expenses

Sales and marketing expenses for the three months ended June 30, 2011 were $1.1 million, or 8.4% of sales, as compared to $0.8 million, or 5.3% of sales, for the same period in 2010. Sales and marketing expenses for the six months ended June 30, 2011 were $2.0 million, or 8.9% of sales, as compared to $1.4 million, or 6.2% of sales, for the same period in 2010.  Sales expenses increased due to the expansion of our sales force in the US during the third quarter of 2010 and second quarter of 2011 and in Asia during first quarter of 2011.

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General and administrative expenses

General and administrative expenses for the three months ended June 30, 2011 were $2.0 million, or 15.7% of sales, as compared with $1.9 million, or 12.4% of sales, for the same period in 2010. The general and administrative expenses in 2010 benefited from the sale of the Note Receivable from Related party with a recovery of bad debts of $0.3 million. Increased charges for non-cash compensation expenses of $0.2 million in 2011 offset by lower professional fees and lower facilities expenses of $0.4 million, and the bed debt recovery in 2010 generally attributed to the change from prior year. General and administrative expenses for the six months ended June 30, 2011 were $4.3 million, or 19.5% of sales, as compared with $3.8 million, or 16.4% of sales, for the same period in 2010. The increase of $0.5 million mainly reflected increased charges for non-cash compensation expenses of $0.4 million, the beneficial effect of the sale of the Note Receivable from Related party of $0.3 million in 2010, and increased compensation of $0.1 million offset by lower professional fees and lower facilities expenses of $0.2 million and lower depreciation expenses of $0.1 million.

Interest expense and interest income

Interest expense for the three months ended June 30, 2011 decreased by approximately $879,000, as compared to the same period in 2010, to $25,000. Interest expense for the six months ended June 30, 2011 decreased by approximately $1,576,000, as compared to the same period in 2010, to $44,000. The decrease resulted from the elimination of amounts owed under our former revolver and term notes with CVC that were converted into preferred stock as of July 30, 2010. (See Note 7 and note 8 in the accompanying Notes to Consolidated Financial Statements).

Interest income for the three and six months ended June 30, 2011 decreased by approximately $17,000 and $26,000, respectively, as compared to the same periods in 2010. The decreases were due primarily to the recognition of and collection of interest income on the Related Party note receivable in 2010 which we sold to a third party on June 29, 2010.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Amortization of deferred financing costs and debt discounts	$	7,500		$	436,615		$	15,000		$	849,096
Other interest expense		17,187			466,705			28,701			770,805
Interest expense		24,687			903,320			43,701			1,619,901
Interest income		(1,494	)		(18,499	)		(2,068	)		(27,883	)
Interest expense, net	$	23,193		$	884,821		$	41,633		$	1,592,018

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Income taxes

Provision for (recovery from) income taxes for the three and six months ended June 30, 2011 was approximately $322,000 and $414,000, respectively.  Provision for income taxes for the three and six months ended June 30, 2010 was approximately $166,000 and $131,000, respectively.  During the three and six months ended June 30, 2011 we recorded a deferred income tax liability in amount of approximately $36,000 and $73,000, respectively, due to a tax basis difference related to our indefinite lived intangible asset, following our determination during the third quarter of 2010, that we would no longer be able to support the use of the deferred tax asset related to net operating losses to offset the liability (See Note 10 in the accompanying Notes to Consolidated Financial Statements). The provision for income taxes other than this deferred income tax liability is mainly associated with our foreign operations. There is not sufficient evidence to ensure that it is more likely than not that we will be able to utilize our domestic operating loss carry forwards (as well as a portion of our foreign net operating loss carry forwards) to offset future taxable income, and consequently the tax benefit of these losses is offset by a full valuation reserve.

Liquidity and Capital Resources

The following table summarizes selected financial data at:

	($ in thousands)
	June 30,			December 31,
	2011			2010
Cash and cash equivalents	$	6,128		$	2,795
Total assets	$	17,012		$	13,828
Current liabilities	$	9,687		$	7,442
Long term liabilities	$	1,499		$	1,367
Preferred stock	$	19,157		$	17,820
Stockholders’ equity (deficit)	$	(13,331	)	$	(12,801	)
Total equity and preferred stock	$	5,826		$	5,019

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 for operating activities for at least the next twelve months.

Cash and cash equivalents

Cash and cash equivalents increased by approximately $3,332,000 at June 30, 2011 as compared to December 31, 2010, principally due to cash provided by operating activities of approximately $3,374,000, proceeds from the sale of equipment of $55,000, and proceeds from the exercise of stock options of approximately $12,000, partially offset by the acquisition of property and equipment of $103,000. 

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Cash provided by operating activities is our primary recurring source of funds, and reflects the net loss from operations excluding non-cash charges, and changes in operating capital. The six months ended June 30, 2011 and 2010 reflected net cash provided by operating activities of approximately $3,374,000 and $1,826,000, respectively.

The net cash provided by operating activities during the six months ended June 30, 2011 and 2010 resulted principally from:

	($ in thousands)
	Six Months Ended June 30,
	2011			2010
Net income before non-cash expenses	$	1,322		$	1,089
Reduced (increased) inventory		298			(38	)
Reduced (increased) accounts receivable		(452	)		(1,182	)
Increased accounts payable and accrued expenses		2,208			2,063
Other reductions in operating capital		(2	)		(106	)
Cash provided by operating activities	$	3,374		$	1,826

Net cash (used in) investing activities for the six months ended June 30, 2011 and 2010 was approximately $(48,000) and $(21,000), respectively, due to acquisition of property and equipment in the six months ended June 30, 2011 and 2010 of approximately $103,000 and $21,000, respectively, offset by proceeds from sale of equipment in amount of $55,000 during first six month ended June 30, 2011.

Net cash used in financing activities for the six months ended June 30, 2011 and 2010 was approximately $9,000 and $52,000, respectively, reflecting proceeds from exercise of stock options in amount of approximately $12,000 in 2011 offset by repayment of borrowings under capital leases in the six months ended June 30, 2011 and 2010 of approximately $3,000 and $52,000, respectively.

On June 27, 2007, we entered into a Revolving Credit and Term Loan Agreement (the “Loan Agreement”) with Bluefin Capital, LLC that provided for a $5.0 million revolving credit facility and a $9.5 million term loan, each with a three year term maturing June 30, 2010. Bluefin Capital subsequently assigned its rights and obligations under the Loan Agreement to an affiliate, CVC. 

On June 30, 2010 the Loan Agreement was amended to extend the existing maturity date for an additional thirty days to July 30, 2010. The Loan Agreement (as amended) was scheduled to mature July 30, 2010 and all of the principal and interest arising under the Loan Agreement in the approximate amount of $16.7 million was due. We did not have sufficient resources to pay this obligation on the maturity date, and entered into the Recapitalization Agreement in settlement of this debt.

On July 30, 2010, we entered into a Recapitalization Agreement in which we issued to CVC shares of Series B Preferred Stock in payment of all of the outstanding obligations owed by us under the Loan Agreement.  At that date, we had outstanding borrowings and accrued interest of $11,548,098 under the term notes, and $5,158,587 under the revolving credit note, all of which was exchanged for the Series B Preferred Stock. See Note 8 in the accompanying Notes to Consolidated Financial Statements.

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In connection with the Recapitalization Agreement, we amended the Loan Agreement to extend the maturity date of the Loan Agreement from July 30, 2010 until July 31, 2012, reduce the maximum borrowings available under the Revolver to $3,000,000, amend the borrowing base to modify the advance rate applicable to eligible accounts receivable to 75% and modify the advance rate applicable to eligible inventory to 40%, eliminate loan maintenance fees, and modify the permissible amount of capital expenditures we can make in any fiscal year.  The current financial covenants continue to exist through the maturity date.  We paid CVC a non-refundable fee in the amount of $60,000 in consideration of CVC entering into the amendment.  Upon execution of the amendment, CVC waived all prior events of default under the Loan Agreement.

Borrowings under the Loan Agreement are secured by all of our assets. At June 30, 2011 and December 31, 2010, we had no borrowings under the revolving credit facility portion of the Loan Agreement and no term loans under the Loan Agreement and we were in compliance with all loan covenants.

We have financed equipment purchases through various notes payable and capital lease obligations. Our equipment obligations as of June 30, 2011 are approximately $21,000 and bear interest at rates of 8.0% and 15.4% per annum. Under these obligations, we are required to make monthly payments of principal and interest through June 2014.

The outstanding balance (including accrued interest) of our notes payable to related parties at June 30, 2011 and December 31, 2010 was approximately $280,000 and $275,000, respectively.  Included in this balance are demand notes which bear interest at 10% (balance as of June 30, 2011 and December 31, 2010 of approximately $240,000 and $236,000, respectively), have no scheduled monthly payments and are due within fifteen days following demand. The remainder of the notes payable to related parties includes our note payable to an officer for approximately $40,000 and $39,000 at June 30, 2011 and December 31, 2010, respectively. The note bears 6% interest annually and the maturity date is the earlier of December 31, 2011 or ten days following employment termination date.

We have satisfied our working capital requirements primarily through cash flows generated from operations and borrowings under our credit facility.  As we continue to expand globally with our apparel manufacturing in offshore locations, our customers are substantially all foreign-based and foreign-owned entities.  We continue to evaluate both financing and equity options to provide capital needed to fund our expansion and on-going operations. If we experience greater than anticipated reductions in sales, we may need to borrow or raise additional capital, or further reduce the scope of our business in order to fund our on-going operations or to satisfy our future short-term operating requirements.  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 possible acquisitions, our borrowing base availability limitations and our expansion into foreign markets.  Our need for additional long-term financing may include the integration and expansion of our operations to exploit our rights under our Talon trade name, and the expansion of our operations in the Asian and European markets. 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.

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Contractual Obligations and Off-Balance Sheet Arrangements

The following summarizes our contractual obligations at June 30, 2011:

	Payments Due by Period ($ in thousands)
			Less than		1-3		4-5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Notes payable to related parties(1)	$	280	$	280	$	-	$	-	$	-
Capital lease obligations		25		9		16		-		-
Operating leases		1,115		531		584		-		-
Other notes payable		65		65		-		-		-
Total Obligations	$	1,485	$	885	$	600	$	-	$	-

(1) The majority of notes payable to related parties is due upon or near demand for payment and includes accrued interest payable through June 30, 2011.

At June 30, 2011 and December 31, 2010, 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 do not have any of the risks associated with financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Related Party Transactions

See Note 13 in the accompanying Notes to Consolidated Financial Statements for a discussion of related party transactions.

Application of Critical Accounting Policies and Estimates

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

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

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

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· The net bad debt expenses, recoveries and allowances for the three and six months ended June 30, 2011 and 2010 are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Bad debt expenses for accounts receivable	$	(11,107	)	$	(56,240	)	$	(720	)	$	(62,351	)
Bad debt recovery, related party note receivable	$	-		$	(275,000	)	$	-		$	(275,000	)
Bad debt recovery, other accounts receivable	$	-		$	-		$	-		$	(11,332	)
Allowance for doubtful accounts,     Accounts receivable	$	24,686		$	160,001		$	24,686		$	160,001

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

· We record deferred tax assets and liabilities 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. A deferred income tax liability related to indefinite lived intangibles should not be offset against deferred income tax assets. We believe that our estimate of deferred tax assets and liabilities and determination to record a valuation allowance against such assets are critical accounting estimates because they are subject to, among other things, an estimate of future taxable income, which is susceptible to change and dependent upon events that may or may not occur, and because the impact of recording a valuation allowance may be material to the assets reported on the balance sheet and results of operations.  See Note 10 in the accompanying Notes to Consolidated Financial Statements.

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

· 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 FASB ASC 450, “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. We believe that we have meritorious defenses to these claims and that the claims are either covered by insurance or would not have a material effect on our consolidated financial position or results of operations if adversely determined against us.

New Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”) which amends ASC Topic 820, Fair Value Measurement.  ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  The update clarifies the application of existing fair value measurement requirements.  The update also requires reporting entities to disclose additional information regarding fair value measurements categorized within Level 3 of the fair value hierarchy. ASU 2011-04 is effective during interim and annual period beginning after December 15, 2011.  Early adoption is not permitted. The adoption of this guidance will not have any impact on our results of operations and financial condition.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”) which amends ASC Topic 220, Comprehensive Income.  ASU 2011-05 gives an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance in ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance will not have any impact on our results of operations or financial condition.

Item 3.               Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable

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Item 4.               Controls and Procedures

Evaluation of Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2011, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.               Legal Proceedings

On April 16, 2004, we filed suit against Pro-Fit Holdings, Limited in the U.S. District Court for the Central District of California – Tag-It Pacific, Inc. v. Pro-Fit Holdings, Limited, CV 04-2694 LGB (RCx) -- asserting various contractual and tort claims relating to our exclusive license and intellectual property agreement with Pro-Fit, seeking declaratory relief, injunctive relief and damages.  It is our position that the agreement with Pro-Fit gives us exclusive rights in certain geographic areas to Pro-Fit’s stretch and rigid waistband technology.  We also filed a second civil action against Pro-Fit and related companies in the California Superior Court which was removed to the United States District Court, Central District of California.  In the second quarter of 2008, Pro-Fit and certain related companies were placed into administration in the United Kingdom and filed petitions under Chapter 15 of Title 11 of the United States Code. As a consequence of the Chapter 15 filings, all litigation by us against Pro-Fit has been stayed.  We have incurred significant legal fees in this litigation, and unless the case is settled or resolved, may continue to incur additional legal fees in order to assert its rights and claims against Pro-Fit and any successor to those assets of Pro-Fit that are subject to our exclusive license and intellectual property agreement with Pro-Fit and to defend against any counterclaims.

We currently have pending various other claims 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 would not have a material effect on our consolidated financial condition if adversely determined against us.

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Item 1A.            Risk Factors

Risk factors are contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. No material change to such risk factors has occurred during the three months ended June 30, 2011.

Item 6.               Exhibits

Exhibit No.	Description
3.1	Bylaws of Talon International, Inc. Incorporated by reference to Exhibit 3.2 to Form SB-2 filed on October 21, 1997.
3.2	Certificate of Amendment to the Bylaws of Talon International, Inc., dated as of August 2, 2011.  Incorporated by reference to Exhibit 3.2 to Form 8-K filed on August 4, 2011.
10.25 +	Employment Agreement, dated July 30, 2010, between Talon International, Inc. and Lonnie D. Schnell.
10.26 +	Employment Agreement, dated July 30, 2010, between Talon International, Inc. and Larry Dyne.
31.1	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**	XBRL Instance
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation
101.DEF**	XBRL Taxonomy Extension Definition
101.LAB**	XBRL Taxonomy Extension Labels
101.PRE**	XBRL Taxonomy Extension Presentation

+	Indicates a management contract or compensatory plan or arrangement.
**	XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

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

August 11, 2011	/s/ Lonnie D. Schnell
	Lonnie D. Schnell Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

/s/ James E. Reeder

James E. Reeder

Vice President, Corporate Controller

(Principal Accounting Officer)

EX-10.25

Exhibit 10.25

EXECUTIVE EMPLOYMENT AGREEMENT

This Executive Employment Agreement (this “Agreement”) is made and entered into as of this 30th day of July, 2010 (the “Effective Date”), by and between TALON INTERNATIONAL, INC., a Delaware corporation (the “Company”) and LONNIE D. SCHNELL (“Executive”).

1.           Engagement and Duties.

1.1           Commencing as of the Effective Date, and upon the terms and subject to the conditions set forth in this Agreement, the Company hereby engages and employs Executive as an officer of the Company, with the title and designation of Chief Executive Officer of the Company.  Executive hereby accepts such engagement and employment.

1.2           Executive’s duties and responsibilities’ shall be those normally and customarily vested in the office of Chief Executive Officer of a corporation, subject to the supervision, direction and control of the Board of Directors (the “Board”) of the Company. Executive shall report directly to the Board.

1.3           Executive agrees to devote his primary business time, energies, skills, efforts and attention to his duties hereunder, and will not, without the prior written consent of the Board, which consent will not be unreasonably withheld, render any material services to any other for-profit and/or not-for-profit business concern or organization.  Executive will use his best efforts and abilities faithfully and diligently to promote the Company’s business interests.

1.4           Except for routine travel incident to the business of the Company, Executive shall perform his duties and obligations under this Agreement principally from an office provided by the Company in Woodland Hills, California, or such other location in Los Angeles or Ventura County, California, as the Board may from time to time determine.

2.           Term of Employment.  Executive’s employment pursuant to this Agreement shall commence on the Effective Date and shall terminate on the earliest to occur of the following (in any case, the “Term”) (the word “Term,” as used throughout this Agreement, shall include any extensions of the Term, as set forth in this Agreement or as otherwise agreed upon by the parties):

(a)           the close of business on December 31, 2013, provided, that if the Company has not given Executive Notice of its decision not to renew the Term on or before April 1, 2013, then, unless otherwise terminated as provided below, the Term shall be automatically extended until the earlier of (i) a date which is nine (9) months following delivery after April 1, 2013 by the Company to Executive of Notice of its decision not to extend the Term further, and (ii) December 31, 2014;

(b)           the death of Executive;

(c)           delivery to Executive of written Notice (as defined below) of termination by the Company if Executive shall suffer a “Permanent Disability,” which for purposes of this Agreement shall mean Executive’s inability to perform his duties and obligations under this Agreement for a period of 90 or more work days in any 12-month period by reason of a medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than twelve (12) months;

(d)           delivery to Executive of written Notice of termination by the Company for “Cause,” which Notice shall identify the particular details of the conduct that the Company believes constitutes Cause. For purposes of this Agreement, “Cause” shall mean: (i) any act or omission knowingly undertaken or omitted by Executive with the intent of causing damage to the Company, its properties, assets or business or its stockholders, officers, directors or employees; (ii) any fraud, misappropriation or embezzlement by Executive resulting in a material personal profit to Executive, in any case, involving properties, assets or funds of the Company or any of its subsidiaries; (iii) Executive’s consistent failure to materially perform his normal duties as described in Section 1.2, other than any such failure resulting from Executive’s Permanent Disability; (iv) conviction of, or pleading nolo contendere to, (A) any crime or offense involving monies or other property of the Company; or (B) any felony offense involving a crime of moral turpitude; or (v) Executive’s chronic or habitual use or consumption of drugs or alcoholic beverages, in either case, that causes material damage to the Company, its properties, assets or business, provided, that to the extent any circumstances that would otherwise constitute Cause shall be capable of cure, including without limitation subsections (iii) and (v) of this paragraph, Executive shall be given no less than thirty days written notice by the Company to cure such circumstances prior to any termination of his employment for Cause;

(e)           delivery to Executive of written Notice to Executive of termination by the Company “without Cause;”

(f)           delivery to the Company of written Notice of termination by Executive for “Good Reason,” by reason of: (i) the material diminution of Executive’s duties, job title or responsibilities as provided in Section 1 above; (ii) a relocation of Executive’s principal work location to a location that is inconsistent with the terms of Section 1.4 above; (iii) a material breach by the Company of this Agreement, including without limitation, a material reduction in any component of Executive’s compensation or benefits as provided for herein; or (iv) a change in Executive’s reporting arrangement such that Executive no longer reports directly to the Board; or (v) the commencement of a voluntary or involuntary proceeding by or against the Company under Chapter 7 of the United States Bankruptcy Code or other law or statute of any jurisdiction providing for the cessation of the Company’s business and the liquidation of its assets; or

(g)           delivery to the Company of written Notice of termination by Executive without “Good Reason.”

3.           Compensation; Executive Benefit Plans.

3.1           The Company shall pay to Executive a base salary (the “Base Salary”) at an annual rate of (i) $325,000 for the period effective from the Effective Date through December 31, 2010, and (ii) $350,000 for the period from January 1, 2011 through the remainder of the Term, which Base Salary shall be subject to increase, but not decrease, at the discretion of the Board.  The Base Salary shall be payable in installments throughout the year in the same manner and at the same times the Company pays base salaries to similarly situated executive officers of the Company, but in any event, no less frequently than monthly.

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3.2           Commencing with fiscal year 2010 and for each fiscal year during the Term thereafter during which Executive is performing services to the Company, Executive shall be eligible to receive an annual cash bonus on the terms described on Exhibit A attached hereto (the “EBITDA Bonus”).

3.3           During the Term, Executive shall be entitled each year to vacation for a minimum of four calendar weeks (pro-rated for any partial year of service during the Term), plus such additional period or periods as the Board may approve in the exercise of its reasonable discretion, during which time his compensation shall be paid in full. To the extent that Executive does not use any such vacation during any year, up to two calendar weeks of such unused vacation shall be carried over from year to year; provided, however that in no event shall Executive’s total accrued but unused vacation at any time exceed six weeks.

3.4           Executive shall receive a restricted stock unit award (the “RSU Award”) for an aggregate of 5,778,500 shares of common stock of the Company (the “Common Stock”).  Except as otherwise provided below, and subject to earlier termination in accordance with its terms, the RSU Award shall vest 50% on a date which is 13 months following the grant date, and 10% on each date which is 18, 24, 30, 36 and 42 months following the grant date.  Executive shall be afforded the opportunity to defer receipt of the Common Stock underlying the RSU Award pursuant to a deferral election.  The RSU Award agreement (the “RSU Agreement”) will provide for the full acceleration of all applicable vesting requirements of all shares granted under the RSU Agreement upon a change in control of the Company, as defined in the RSU Agreement.  The RSU Agreement shall be in the form of Exhibit B attached hereto.  Any variation from the RSU Agreement attached as Exhibit B shall be mutually agreed upon by the Company and Executive; such agreement shall not be unreasonably withheld.

3.5           Executive agrees that all options to purchase Common Stock awarded by the Company to Executive on or before December 31, 2007 shall, effective as of the Effective Date, be cancelled and of no further force or effect, and Executive shall have no further rights to acquire Common Stock pursuant thereto.  The Company acknowledges and agrees that a “Change of Control” (as defined in each of Executive’s existing equity compensation agreements) has occurred as of the Effective Date, and that vesting under each such existing equity compensation agreement has accelerated and that each such award is now 100% vested.

3.6           During the Term, Executive shall be entitled to reimbursement from the Company for the reasonable costs and expenses which he incurs in connection with the performance of his duties and obligations under this Agreement, substantiated in a manner consistent with the Company’s practices and policies as adopted or approved from time to time by the Board for executive officers. For the avoidance of doubt, “business class” travel shall constitute reasonable costs and expenses on any flight greater than five hours in duration.

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3.7           The Company shall promptly pay or reimburse to Executive legal fees actually incurred by Executive in connection with the negotiation and drafting of this Agreement, which fees shall not exceed $10,000 in the aggregate.

3.8           The Company may deduct from any compensation payable to Executive the minimum amounts sufficient to cover applicable federal, state and/or local income and employment tax withholding.

4.           Other Benefits. During the Term, Executive shall be eligible to participate in all operative employee compensation, fringe benefit and perquisite, and other benefit and welfare plans or arrangements of the Company then in effect from time to time and in which similarly situated executive officers of the Company generally are entitled to participate, including without limitation, to the extent then in effect, incentive, group life, medical, dental, prescription, disability and other insurance plans, all on terms at least as favorable as those offered to similarly situated executives of the Company.  During the Term, the Company shall also pay to Executive, in increments payable at the times that the Company pays the Base Salary to Executive, an allowance of $1,000 per month for costs associated with the lease or purchase, maintenance and insurance of an automobile.

5.           Termination of Employment. Subject to the provisions of this Section 5, either the Company or Executive may terminate Executive’s employment at any time for any reason or no reason. The following provisions shall control any such termination of Executive’s employment.

5.1           Termination Without Cause, for Good Reason, or due to Executive’s death or Permanent Disability. The Company may terminate Executive’s employment without Cause at any time upon 15 days’ prior written Notice to Executive, and Executive may terminate his employment with Good Reason at any time upon 15 days’ prior written Notice to the Company, in each case, subject to any applicable cure periods (in the case of a termination without Cause or for Good Reason, the date specified in any such Notice in accordance with this Section 5.1 shall constitute the “Date of Termination”). For purposes of clarity, the Company’s delivery of Notice in accordance with Section 2(a) of its decision not to renew the Term shall not constitute termination without Cause, and shall be governed by Section 5.5 below. Executive’s employment shall also terminate upon the occurrence of Executive’s death or Permanent Disability (in the case of a termination due to Executive’s death or Permanent Disability, the date of the death or the date specified in a Notice from the Company indicating termination due to Permanent Disability shall constitute the “Date of Termination”).  If Executive’s employment is terminated pursuant to this Section 5.1, the Company shall promptly, or in the case of obligations described in clauses (c) and (e) below, as such obligations become due to Executive, pay or provide to Executive (or his estate), (a) Executive’s earned but unpaid Base Salary accrued through such Date of Termination, (b) accrued but unpaid vacation time through such Date of Termination, (c) any EBITDA Bonus required to be paid to Executive pursuant to this Agreement for any fiscal year of the Company ending on or prior to the Date of Termination, to the extent payable, but not previously paid, (d) reimbursement of any business expenses incurred by Executive prior to the Date of Termination that are reimbursable under Section 3.6 above, and (e) any vested benefits and other amounts due to Executive under any plan, program, policy of, or other agreement with, the Company (together, the “Accrued Obligations”).  In addition, if Executive (or his estate) delivers to the Company a signed settlement agreement and general release in the form attached hereto as Exhibit C (the “Release”) and satisfies all conditions to make the Release effective, Executive (or his estate) shall be entitled to the following payments and benefits (the “Severance”) from the Company:

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(i)           payment of an aggregate amount equal to Executive’s Base Salary (at the rate then in effect, but disregarding any reduction of Base Salary in violation of this Agreement) for the period (the “Severance Period”) commencing on the Date of Termination and ending on a date which is eighteen (18) months following the Date of Termination.  The Severance payable to the Executive pursuant to this paragraph (i) is hereinafter referred to as the “Base Salary Severance”.  Of the Base Salary Severance, (a) 50% of such amount shall be paid on the date of Executive’s “separation from service” within the meaning of Section 409A(a)(2)(A)(i) of the Code (a “separation from service”) , and (b) 50% of such amount shall be paid in equal installments on the first day of each of the twelve (12) calendar months immediately following such separation from service;

(ii)           payment on the first day of the month during the Severance Period of an allowance of $1,000 (or such greater amount in effect as of the Date of Termination) per month for costs associated with the lease or purchase, maintenance and insurance of an automobile; and

(iii)           all options to purchase Common Stock awarded by the Company to Executive from and after January 1, 2008 and prior to the date hereof shall remain outstanding and be exercisable for the Severance Period (and shall be exercisable by Executive’s estate in the event of his death).  To the extent the terms of this paragraph (iii) are inconsistent with the terms of any stock option agreement previously executed between Executive and the Company for any such options, the terms of this paragraph (iii) shall supersede the terms of any such existing stock option agreement;

(iv)           if the Date of Termination occurs before a date on which 50% of the RSU Award vests (i.e., 13 months following the grant date), then 50% of the RSU Award shall vest as of the Date of Termination; and

(v)           continued medical coverage of the type provided to Executive pursuant to Section 4 of this Agreement for Executive (if living) and his dependents for the Severance Period, to the extent each such individual received medical coverage immediately prior to such termination of employment, at the same cost to Executive and his dependents as such coverage cost immediately prior to such termination of employment (subject to premium increases affecting participants in such plan(s) generally), provided, that if the Board determines, in its sole discretion, that it is necessary or advisable for Executive to elect continuation medical coverage under Section 4980B of the Code and the regulations thereunder in order for the Company to provide such coverage under its healthcare plans, and the Company so notifies the Executive, Executive hereby agrees to make such an election. For the avoidance of doubt, if the Company requires that Executive elect continuation coverage under Section 4980B of the Code, such coverage shall nevertheless be provided to Executive and his dependents (as described above) at the same cost to Executive and his dependents as was paid for medical coverage immediately prior to Executive’s termination of employment.

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5.2           EBITDA Bonus.  For purposes of clarity, the EBITDA Bonus for a fiscal year shall be deemed earned by Executive if he was employed with the Company on December 31 of such fiscal year.  If the Date of Termination occurs on or after December 31 of a fiscal year, the Accrued Obligations shall include the EBITDA Bonus, if any, for such fiscal year even if the EBITDA Bonus has not yet been calculated as of the Date of Termination.  The Company shall pay Executive the EBITDA Bonus, if any, as provided in Exhibit A.

5.3           Cause. If Executive’s employment becomes terminable by the Company for Cause, the Company may terminate Executive’s employment immediately (subject to the notice and cure rights described in Section 5.1) and Executive shall be entitled to receive the Accrued Obligations upon the Date of Termination, or, in the case of benefits described in Section 5.l(e), as such obligations become due to Executive.

5.4           Resignation. Executive may terminate his employment without Good Reason upon thirty (30) days’ Notice to the Company. If Executive so terminates his employment, Executive shall be entitled to receive the Accrued Obligations promptly, or, in the case of benefits described in Section 5.l(e), as such obligations become due to Executive.

5.5           Nonrenewal. In the event that either the Company or the Executive elects not to renew the Term (or any extension thereof) in accordance with Section 2(a), Executive shall be entitled to receive the Accrued Obligations upon the Date of Termination, or, in the case of benefits described in Sections 5.l(c) and (e), as such obligations become due to Executive.

5.6           Six-Month Delay.  Notwithstanding anything to the contrary in this Agreement, no Severance payments or benefits subject to Section 409A of the Code (including the RSU’s) shall be paid to Executive during the six-month period following the Executive’s separation from service to the extent that the Company and the Executive mutually determine in good faith that paying such amounts at the time or times indicated in this Section 5 would cause the Executive to incur an additional tax under Section 409A of the Code (in which case such amounts shall be paid at the time or times indicated in this Section 5.6). If the payment of any such amounts are delayed as a result of the previous sentence, then on the first day following the end of such six-month period, the Company will pay the Executive a lump-sum amount equal to the cumulative amount that would have otherwise been payable to the Executive during such six-month period.

6.           Confidentiality of Proprietary Information and Material.

6.1           Industrial Property Rights.  For the purpose of this Agreement, “Industrial Property Rights” shall mean all of the Company’s patents, trademarks, trade names, inventions, copyrights, know-how, formulas and science, now in existence or hereafter developed or acquired by the Company or for its use, relating to any and all products and services which are developed, formulated and/or manufactured by the Company.

6.2           Trade Secrets.  For the purpose of this Agreement, “Trade Secrets” shall mean any formula, pattern, device, or compilation of information that is used in the Company’s business and gives the Company an opportunity to obtain an advantage over its competitors who do not know and/or do not use it, and that the Company has kept confidential in a manner sufficient to protect them as trade secrets. This term includes, but is not limited to, information relating to the marketing of the Company’s products and services, including price lists, pricing information, customer lists, customer names, the particular needs of customers, information relating to their desirability as customers, financial information, intangible property and other such information which is not in the public domain.

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6.3           Technical Data.  For the purpose of this Agreement, “Technical Data” shall mean all information of the Company in written, graphic or tangible form relating to any and all products which are developed, formulated and/or manufactured by the Company, as such information exists as of the Effective Date or is developed by the Company during the Term of this Agreement.

6.4           Proprietary Information.  For the purpose of this Agreement, “Proprietary Information” shall mean all of the Company’s Industrial Property Rights, Trade Secrets and Technical Data. Proprietary Information shall not include any information which (i) was lawfully in the possession of Executive prior to Executive’s employment with the Company, (ii) may be obtained by a reasonably diligent businessperson from readily available and public sources of information, (iii) is lawfully disclosed to Executive after termination of Executive’s employment by a third party which does not have an obligation to the Company to keep such information confidential, or (iv) is independently developed by Executive without utilizing any of the Company’s Proprietary Information.

6.5           Agreement Not To Copy Or Use.  Executive agrees, at any time during the Term of this Agreement and for a period often years thereafter, not to copy, use or disclose (except (i) as required, authorized or permitted in connection with the performance of Executive’s services hereunder to the Company, (ii) as required by law after first notifying the Company and giving it an opportunity to object, or (iii) as required to enforce Executive’s rights under this Agreement) any Proprietary Information without the Company’s prior written permission. The Company may withhold such permission as a matter within its sole discretion during the Term of this Agreement and thereafter, except as set forth in this paragraph.

7.           Return of Corporate Property. Upon any termination of this Agreement, Executive shall turn over to the Company all property, writings or documents then in his possession or custody belonging to or relating to the affairs of the Company or comprising or relating to any Proprietary Information.

8.           Discoveries and Inventions.

8.1           Disclosure. Executive will promptly disclose in writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method, product or work of authorship, in any case, relating to the business, products, practices, techniques or confidential information of the Company, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by Executive, (hereinafter referred to as “Developments”), either solely or in collaboration with others, (a) prior to the Term while working for the Company, (b) during the Term or (c) within six months after the Term.

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8.2           Assignment. Executive, to the extent that he has the legal right to do so, hereby acknowledges that any and all Developments that are created during the Term, are the property of the Company and hereby assigns and agrees to assign to the Company any and all of Executive’s right, title and interest in and to any and all of such Developments; provided, however, that, in accordance with California Labor Code Sections 2870 and 2872, the provisions of this Section 8.2 shall not apply to any Development that Executive developed entirely on his own time without using the Company’s equipment, supplies, facilities or trade secret information except for those Developments that either:

(a)           relate at the time of conception or reduction to practice of the Development to the Company’s business, or actual or demonstrably anticipated research or development of the Company; or

(b)           result directly from any work performed by Executive for the Company.

8.3           Assistance of Executive. Upon the Company’s request and at no expense to Executive, whether during the Term or thereafter, Executive will do all reasonable lawful acts, including, but not limited to, the execution of papers and lawful oaths and the giving of testimony, that, in the reasonable opinion of the Company, its successors and assigns, may be necessary or desirable in obtaining, sustaining, reissuing, extending and enforcing United States and foreign Letters Patent, including, but not limited to, design patents, on any and all Developments and for perfecting, affirming and recording the Company’s complete ownership and title thereto, subject to the proviso in Section 8.2 hereof, and Executive will otherwise reasonably cooperate in all proceedings and matters relating thereto. Executive shall be compensated at a rate of $250 per hour for any actions he is required to take and reimbursed for Executive’s reasonable expenses incurred as a result of any actions he is required to take pursuant to this Section 8.3 after the Term.

8.4           Records. Executive will keep complete and accurate accounts, notes, data and records of all Developments in the manner and form reasonably requested by the Company in writing. Such accounts, notes, data and records shall be the property of the Company, subject to the proviso in Section 8.2 hereof, and, upon written request by the Company, Executive will promptly surrender the same to it.

8.5           Obligations, Restrictions and Limitations. Executive understands that the Company may enter into agreements or arrangements with agencies of the United States Government and that the Company may be subject to laws and regulations which impose obligations, restrictions and limitations on it with respect to inventions and patents which may be acquired by it or which may be conceived or developed by employees, consultants or other agents rendering services to it.  Executive agrees that he shall be bound by all such obligations, restrictions and limitations applicable to any such invention conceived or developed by him during the Term and shall take any reasonable action which may be required to discharge such obligations and to comply with such restrictions and limitations.

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9.           Non-solicitation Covenant.

9.1           Non-solicitation and Noninterference. Until the earlier of (i) two years following termination of this Agreement and (ii) December 31, 2014, Executive shall not (a) induce or attempt to induce any employee of the Company to leave the employ of the Company, (b) induce or attempt to induce any employee of the Company to work for, render services or provide advice to or supply confidential business information or Trade Secrets of the Company to any third person, firm or corporation, or (c) induce or attempt to induce any customer, supplier, licensee, licensor or other business relation of the Company to cease doing business with the Company, provided, that advertisements and general solicitations shall not constitute a breach of this Section 9.1.

9.2           Indirect Solicitation. Executive agrees that, during the period covered by Section 9.1 hereof, he will not, directly or indirectly, assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the provisions of Section 9.1 if such activity were carried out by Executive, either directly or indirectly; and, in particular, Executive agrees that he will not, directly or indirectly, induce any employee of the Company to carry out, directly or indirectly, any such activity.

10.           Injunctive Relief.   Executive hereby recognizes, acknowledges and agrees that in the event of any breach by Executive of any of his covenants, agreements, duties or obligations contained in Sections 6, 7, 8 and 9 of this Agreement, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual amount of damages suffered by the Company as a result of such breach, and the Company would not be reasonably or adequately compensated in damages in any action at law. Executive therefore covenants and agrees that, in addition to any other remedy the Company may have at law, in equity, by statute or otherwise, in the event of any breach by Executive of any of his covenants, agreements, duties or obligations contained in Sections 6, 7, 8 and of this Agreement, the Company shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the duties or obligations contained in Sections 6. 7. 8 and 9 of this Agreement without the necessity of proving the amount of any actual damage to the Company or any affiliate thereof resulting therefrom; provided, however, that nothing contained in this Section 10 shall be deemed or construed in any manner whatsoever as a waiver by the Company of any of the rights which the Company may have against Executive at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by Executive of any of his covenants, agreements, duties or obligations hereunder.

11.           Code Section 409A. Certain amounts under this Agreement may constitute “nonqualified deferred compensation” which are intended to comply with the requirements of Section 409A of the Code. To the extent that the parties reasonably determine that any compensation or benefits payable under this Agreement are subject to Section 409A of the Code, this Agreement shall incorporate the terms and conditions required by Section 409A of the Code and Department of Treasury regulations as reasonably determined by the Company and the Executive. To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretative guidance issued thereunder. In the event that following the Effective Date, the Company and the Executive reasonably determine that any compensation or benefits payable under this Agreement may be subject to Section 409A of the Code and related Department of Treasury guidance, the Company and the Executive shall work together to adopt such amendments to this Agreement or adopt other policies or procedures (including amendments, policies and procedures with retroactive effective), or take any other commercially reasonable actions necessary or appropriate to (a) exempt the compensation and benefits payable under this Agreement from Section 409A of the Code and/or preserve the intended tax treatment of the compensation and benefits provided with respect to this Agreement, or (b) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance.

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12.           Code Section 280G.  If any payment or benefit received or to be received by Executive in connection with a “change in ownership or control” of the Company (within the meaning of Section 280G of the Code), whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company or an affiliate of the Company (the “Payments”), would constitute a “parachute payment” within the meaning of Section 280G of the Code, the Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit to Executive shall exceed the net after-tax benefit to Executive if no such reduction was made. For purposes of this Section 12, “net after-tax benefit” shall mean (i) the total of all payments and the value of all benefits which Executive receives or is then entitled to receive from the Company that would constitute “parachute payments” within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to Executive (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the code. The foregoing determination will be made by a nationally recognized accounting firm (the “Accounting Firm”) selected by Executive and reasonably acceptable to the Company, provided, that the Accounting Firm’s determination shall be made based upon “substantial authority” within the meaning of Section 6662 of the Code. The Accounting Firm shall provide Executive and the Company with its determinations and detailed supporting calculations with respect thereto at least 15 business days prior to the date on which Executive would be entitled to receive a Payment (or as soon as practicable in the event that the Accounting Firm has less than 15 business days advance notice that Executive may receive a Payment) in order that Executive may determine whether it is in Executive’s best interest to waive the receipt of any or all amounts which may constitute “excess parachute payments.” If the Accounting Firm determines that such reduction is required by this Section 12, Executive, in his sole and absolute discretion, may determine which of the Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, and the Company shall pay such reduced amount to Executive. Executive and the Company shall each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of Executive or the Company, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 12. The first $10,000 of fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 12 will be borne exclusively by the Company, and the balance of any such fees and expenses, if any shall be borne exclusively by Executive.

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13.           Miscellaneous.

13.1           Arbitration.  The parties agree that they will use their best efforts to amicably resolve any dispute arising out of or relating to this Agreement. Executive and the Company agree to submit to mandatory binding arbitration any future disputes, including any claim arising out of or relating to this Agreement.  Any controversy, claim or dispute that cannot be so resolved shall be settled by final, binding arbitration before the Judicial Arbitration and Mediation Service in the State of California, Country of Los Angeles or Ventura.  The parties waive any rights that they may have to trial by jury of any claims.  The parties agree that the Judicial Arbitration and Mediation Service will administer any such arbitration(s) under its then-in-effect rules for the resolution of employment disputes,  with administrative and arbitrator’s fees to be borne entirely by the Company. The arbitrator shall issue a written arbitration decision stating his or her essential findings and conclusions upon which the award is based.  A party’s right to review of the decision is limited to the grounds provided under applicable law.  The parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement.  This Agreement does not extend or waive any statutes of limitations or other provisions of law that specify the time within which a claim must be brought. Notwithstanding the foregoing, each party retains the right to seek injunctive relief in a court of competent jurisdiction to preserve the status quo or prevent irreparable injury before a matter can be heard in arbitration.  Each party shall bear its own costs and expenses and an equal share of the arbitrator’s expenses and administrative fees of arbitration, subject to a party’s right to recover such costs and expenses pursuant to Section 13.2 of this Agreement.

13.2           Attorneys’ Fees.  If any legal action is brought for the enforcement of this Agreement, or because of an alleged dispute, breach or default in connection with or arising out of any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys’ fees and other costs incurred in that action or proceeding, including the prevailing party’s share of the arbitrator’s expenses and administrative fees of arbitration, in addition to any other relief to which such party or parties may be entitled.

13.3           Notices. All notices, requests and other communications (collectively, “Notices”) given pursuant to this Agreement shall be in writing, and shall be delivered by fax, email, personal service, reputable overnight carrier or by United States first class, registered or certified mail (return receipt requested), postage prepaid, addressed to the party at the address set forth below:

If to Company:

Talon International, Inc.

21900 Burbank Boulevard, Suite 270

Woodland Hills, CA 91367

Attn: Board of Directors

Fax:  818-444-4110

mdyne@ecamail.com

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If to Executive, at the address, fax or email maintained for Executive in the Company’s payroll records.

Any Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by registered or certified mail shall be deemed to have been duly given three days from date of deposit in the United States mails, unless sooner received. Either party may from time to time change its address for further Notices hereunder by giving Notice to the other party in the manner prescribed in this section.

13.4           Entire Agreement. This Agreement, together with the RSU Agreement and each Existing Option Agreement, contains the sole and entire agreement and understanding of the parties with respect to the entire subject matter of this Agreement, and any and all prior agreements, discussions, negotiations, commitments and understandings, whether oral or otherwise, related to the subject matter of this Agreement are hereby merged herein. No representations, oral or otherwise, express or implied, other than those contained in this Agreement have been relied upon by any party to this Agreement.  This Agreement supersedes and replaces in its entirety that certain Executive Employment Agreement, dated June 18, 2008, between the Company and Executive.

13.5           Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF.

13.6           Indemnification/Insurance. The Company shall defend, indemnify and hold Executive harmless from any and all liabilities, obligations, claims or expenses which arise in connection with or as a result of Executive’s service as an officer, director, or fiduciary of the Company, to the greatest extent now provided in the Company’s Articles and Bylaws and as otherwise allowed by law.  During the Term and for a period of at least six years thereafter, Executive shall be entitled to the same directors and officers’ liability insurance coverage and fiduciary liability insurance coverage that the Company provides generally to its other current directors and officers, as they may be amended from time to time for such current directors and officers (commonly referred to as “tail” coverage).

13.7           Amendment. The terms of this Agreement may not be amended or modified other than by a written instrument executed by the parties hereto or their respective successors.

13.8           Waiver.  Failure by any party hereto to insist upon strict compliance with any provision of this Agreement or to assert any right such party may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

13.9           Assignment.  This Agreement is binding on and for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives.

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13.10           Captions.  The various captions of this Agreement are for reference only and shall not be considered or referred to in resolving questions of interpretation of this Agreement.

13.11           Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

13.12           Business Day.  If the last day permissible for delivery of any Notice under any provision of this Agreement, or for the performance of any obligation under this Agreement, shall be other than a business day, such last day for such Notice or performance shall be extended to the next following business day (provided, however, under no circumstances shall this provision be construed to extend the date of termination of this Agreement).

13.13           Savings and Severability Clause.  Should any court, arbitrator or government agency of competent jurisdiction declare or determine any of the provisions of this Agreement to be illegal, invalid or unenforceable, those provisions shall be severed and the remaining parts, terms or provisions shall not be affected thereby and shall remain legal, valid and enforceable.

(Signatures on Following Page)

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.

Company:		Executive:
TALON INTERNATIONAL, INC.
By:	/s/ Mark Dyne	/s/ Lonnie D. Schnell
	Mark Dyne	Lonnie D. Schnell
	Chairman of the Board

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EXHIBIT A

EBITDA Bonus

Commencing with fiscal year 2010 and for each fiscal year during the Term thereafter during which Executive is performing services to the Company, Executive shall be eligible to earn a cash bonus, referred to herein as the EBITDA Bonus.

The EBITDA Bonus shall be an amount determined by reference to the Company’s Adjusted EBITDA for such fiscal year.  For purposes hereof and subject to the terms of this Exhibit A, “Adjusted EBITDA” means earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, CVC Management Charges, and CVC Reorganization Expenses, calculated based on the Company’s audited consolidated financial statements for the applicable fiscal year in question prepared in accordance with generally accepted accounting principles in the United States.  Adjusted EBTIDA will be calculated after taking into account the EBITDA Bonus and any other management incentive cash bonuses.  For purposes of calculating Adjusted EBITDA:

“CVC” means CVC California, LLC, together with its affiliates, successors and assigns;

“CVC Management Expenses” means all investment oversight, debt maintenance or similar fees, charges or other expenses arising in connection with the Company’s debt arrangements with CVC or CVC’s investment in equity securities of the Company; and

“CVC Reorganization Expenses” means any direct expenses, fees or charges incurred or accrued with connection with the restructuring of the Company’s previously existing Revolving Credit and Term Loan Agreement with CVC and the acquisition by CVC of shares of the Company’s preferred stock on or about the date of this Agreement, including without limitation any legal or accounting expenses, consulting or advisory fees and other expenses, and any fees, charges or penalties associated with all prior debt agreements with CVC.

For fiscal year 2010 and thereafter, Executive shall be entitled to an EBITDA Bonus, if any, equal to a percentage of Executive’s Base Salary for such fiscal year, if the Company achieves in such fiscal year actual Adjusted EBITDA of at least 80% of targeted Adjusted EBITDA for such fiscal year, pursuant to the following matrix:

	2010			2011			2012			2013
Target Adjusted EBITDA	$	2,982,000		$	4,215,000		$	6,005,000		$	7,500,000
Percentage of Target	Percentage of Base Salary
(Equal to or Greater than)		2010			2011			2012			2013
80%		20	%		20	%		25	%		25	%
90%		50	%		50	%		55	%		55	%
100%		70	%		100	%		100	%		100	%
110%		100	%		120	%		120	%		120	%

A-1

The EBITDA Bonus, if any, shall be payable in cash on or about April 15 of the year immediately following the fiscal year for which such EBITDA Bonus is calculated.

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EXHIBIT B

RSU Agreement

Schnell

TALON INTERNATIONAL, INC.

RESTRICTED STOCK UNIT AGREEMENT

Schnell

TALON INTERNATIONAL, INC.

NOTICE OF RESTRICTED STOCK UNIT GRANT

You have been granted the following Restricted Stock Units (“RSUs”) of Talon International, Inc. (“Talon” or the “Company”):

Name of Recipient: Lonnie Schnell

Total Number of RSUs: 5,778,500

  Value of Stock on Grant Date: $

Grant Date: July 30, 2010

Vesting Commencement Date: July 30, 2010

Vesting Schedule: 50% of the Total Number of RSUs will vest on the date which is thirteen months following the Vesting Commencement Date, and an additional 10% of the Total Number of RSUs will vest on each date which is eighteen, twenty-four, thirty, thirty-six and forty-two months following the Vesting Commencement Date, subject to acceleration as set forth in the Standard Terms.

By your signature and the signature of the Company’s representative below, you and the Company agree that the RSUs are granted under and governed by the terms and conditions of the Restricted Stock Unit Agreement, which is attached hereto and is made a part of this document.

Recipient:		Talon International, Inc.
By:		By:
	Name: Lonnie Schnell		Mark Dyne
		Its:	Chairman of the Board

Schnell

TALON INTERNATIONAL, INC.

Restricted Stock Unit Agreement

1.           Terms.  Unless provided otherwise in the Notice of Restricted Stock Unit Grant (“Notice of Grant”), the following standard terms and conditions (“Standard Terms”) apply to Restricted Stock Units (“RSUs”) granted to you.  Your Notice of Grant and these Standard Terms constitute the entire understanding between you and Talon.

2.           Definitions.  In addition to the terms defined elsewhere in these Standard Terms, as used herein, the following terms shall have the following meanings:

(a)           “Administrator” means the Board or any of its Committees as shall be administering this RSU.

(b)           “Board” means the Board of Directors of the Company.

(c)           “Cause” shall have the meaning given such term in the Employment Agreement.

(d)           “Change in Control” shall mean (i) the dissolution or liquidation of the Company, (ii) any sale, lease, exchange or other transfer (in one or a series of transactions) of all or substantially all of the assets of the Company, (iii) any merger or consolidation of the Company in which the holders of voting stock of the Company immediately before the merger or consolidation will not own thirty five percent (35%) or more of the voting stock of the continuing or surviving corporation immediately after such merger or consolidation; or (iv) a change of fifty percent (50%) (rounded to the next whole person) in the membership of the Board within a twelve (12)-month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of a majority of the directors then still in office who were in office at the beginning of the twelve (12)-month period; provided, however, that the election or replacement by the holders of Series B Preferred Stock of the Company of directors that the holders of Series B Preferred Stock of the Company are entitled to elect shall not, by itself, constitute a “Change in Control” hereunder.  A Change in Control must also constitute a change in the ownership or effective control of the Company or the ownership of a substantial portion of the Company’s assets within the meaning of Code Section 409A.

(e)           “Code” means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, as such is amended from time to time, and any reference to a section of the Code shall include any successor provision of the Code.

(f)           “Committee” means a committee appointed by the Board from among its members to administer this RSU.

(g)           “Common Stock” means the common stock, $0.001 par value, of the Company.

(h)           “Company” means Talon International, Inc.

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(i)           “Consultant” means any person, including an advisor, engaged by the Company or a Subsidiary to render services and who is compensated for such services; provided such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities; and provided further that the term “Consultant” shall not include Directors who are paid only a director’s fee by the Company or who are not otherwise compensated by the Company for their services as Directors.

(j)           “Director” means a member of the Board.

(k)           “Permanent Disability” shall have the meaning given such term in the Employment Agreement.

(l)           “Employee” means any person, including Officers and Directors, employed by the Company or any Subsidiary of the Company.  Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

(m)           “Employment Agreement” means that certain Executive Employment Agreement, dated of even date herewith, by and between you and the Company.

(n)           “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(o)           “Good Reason” shall have the meaning given such term in the Employment Agreement.

(p)           “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(q)           “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(r)           “Share” means a share of the Common Stock.

(s)           “Service” means service to the Company or any of its Subsidiaries as an Employee, Director or Consultant.

(t)           “Subsidiary” means any corporation or entity in which the Company owns or controls, directly or indirectly, fifty percent (50%) or more of the voting power or economic interests of such corporation or entity.

3.           Vesting of RSUs.

(a)           Provided that you continuously provide Service from the Grant Date specified in the Notice of Grant through each vesting date specified in the Notice of Grant, the RSUs shall vest and be converted into the right to receive the number of shares of Common Stock specified on the Notice of Grant with respect to such vesting date, except as otherwise provided in these Standard Terms.  If a vesting date falls on a weekend or any other day on which the Over-the-Counter Bulletin Board (the “OTCBB”) is not open, affected RSUs shall vest on the next following OTCBB business day.

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(b)           RSUs will vest to the extent provided in and in accordance with the terms of the Notice of Grant and these Standard Terms.  Except as expressly provided otherwise in these Standard Terms, if your Service (as defined below) terminates for any reason, whether voluntarily or involuntarily, all unvested RSUs shall be cancelled on the date of Service termination.

(c)           For purposes of these Standard Terms, your Service is not deemed terminated if, prior to sixty (60) days after the date of termination of your Service, you are re-engaged by the Company or a Subsidiary on a basis that would make you eligible for future RSU grants, nor would your transfer from the Company to any Subsidiary or from any one Subsidiary to another, or from a Subsidiary to the Company be deemed a termination of your Service.  Further, your provision of service as an employee, director or consultant to any partnership, joint venture or corporation not meeting the requirements of a Subsidiary in which the Company or a Subsidiary is a party shall be considered Service for purposes of this provision if either (a) the entity is designated by the Administrator as a Subsidiary for purposes of this provision or (b) you are specifically designated as providing Service for purposes of this provision.

4.           Conversion into Common Stock.

(a)           Shares of Common Stock will be issued or become free of restrictions as soon as practicable following vesting of the RSUs, provided that you have satisfied your tax withholding obligations as specified under Section 10 of these Standard Terms and you have completed, signed and returned any documents and taken any additional action that the Administrator reasonably deems appropriate to enable it to accomplish the delivery of the shares of Common Stock.  The shares of Common Stock will be issued in your name (or may be issued to your executor or personal representative or other applicable party, as permitted in Section 11, in the event of your death or Permanent Disability), and may be effected by recording shares on the stock records of the Company or by crediting shares in an account established on your behalf with a brokerage firm or other custodian, in each case as determined by the Administrator.  In no event will the Company be obligated to issue a fractional share.

(b)           Notwithstanding the foregoing, (i) the Company shall not be obligated to deliver any shares of Common Stock during any period when the Administrator reasonably determines that the conversion of an RSU or the delivery of shares hereunder would violate any federal, state or other applicable laws and/or may issue shares subject to any restrictive legends that, as reasonably determined by the Company’s counsel, is necessary to comply with securities or other regulatory requirements, and (ii) the date on which shares are issued may include a reasonable delay in order to provide the Company such time as it reasonably determines appropriate to address tax withholding and other administrative matters.

5.           Adjustments of and Changes in the Common Stock.

(a)           The existence of outstanding RSUs shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations, exchanges, or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company or any issuance of Shares or other securities or subscription rights thereto, or any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Shares or other securities of the Company or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.  Further, except as expressly provided herein or by the Administrator, (i) the issuance by the Company of shares of stock or any class of securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, (ii) the payment of a dividend in property other than Shares, or (iii) the occurrence of any similar transaction, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to the RSUs, unless the Administrator shall determine that an adjustment is necessary or appropriate.

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(b)           If the outstanding Shares or other securities of the Company, or both, for which the RSU is to be settled shall at any time be changed or exchanged by declaration of a stock dividend, stock split, combination of shares, extraordinary dividend of cash and/or assets, recapitalization, reorganization or any similar equity restructuring transaction (as that term is used in Statement of Financial Accounting Standards No. 123 (revised) affecting the Shares or other securities of the Company, the Administrator shall adjust the number and kind of Shares or other securities that are subject to the RSUs so as to maintain the proportionate number of Shares or other securities subject to the RSUs.

(c)           Subject to the other terms set forth in these Standard Terms, and not in limitation of any other rights you have under these Standard Terms (including, without limitation, acceleration of unvested RSUs upon the occurrence of a Change in Control as provide in Section 6 below), in the event the Company is a party to a merger or other reorganization, the RSUs shall be subject to the agreement of merger or reorganization, which agreement may provide, without limitation, for the assumption of outstanding RSUs by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated expiration, or for settlement in cash, unless such merger or other reorganization constitutes a Change in Control, in which case all RSUs will immediately vest, as discussed below in Section 6.

6.           Change in Control.  All unvested RSUs will vest immediately prior to the effective date of the occurrence of a Change in Control.  In addition, in the event that your Service is terminated by you for Good Reason or by the Company for reasons other than Cause within three (3) months prior to the occurrence of a Change in Control, then all unvested RSUs will vest immediately prior to the effective date of such termination.

7.           Leaves of Absence.  For any purpose under these Standard Terms, your Service shall be deemed to continue while you are on a bona fide leave of absence, to the extent required by applicable law.  To the extent applicable law does not require such a leave to be deemed to continue your Service such Service shall be deemed to continue if, and only if, expressly provided in writing by the Administrator or an Officer of the Company or Subsidiary for whom you provide Service.

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8.           Termination Without Cause, for Good Reason, or Upon Death or Disability.  In the event that your Service is terminated by you for Good Reason, by the Company for reasons other than Cause, or as a result of your Death or Permanent Disability, in each case at any time on or before the date that the initial 50% of your RSUs vest (i.e., the 13th month following the Vesting Commencement Date), than a portion of your RSUs equal to 50% of the Total Number of RSUs shall vest immediately prior to the effective date of such termination or, if later, the date of determination of your Permanent Disability.

9.           Termination for Cause.  In the event that your Service is terminated for Cause, all unvested RSUs shall be cancelled immediately prior to the effective date of such termination and neither you nor any beneficiary shall be entitled to any claim with respect to the cancelled RSUs whatsoever.

10.           Tax Withholding.

(a)           To the extent required by applicable federal, state or other law, you shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of vesting of an RSU and, if applicable, any sale of shares of Common Stock.  The Company shall not be required to issue or lift any restrictions on shares of Common Stock or to recognize any purported transfer of shares of Common Stock until such obligations are satisfied.  Upon your request, but not without your agreement, the Administrator may permit these obligations to be satisfied by having the Company withhold a portion of the shares of Common Stock that otherwise would be issued to you upon vesting of the RSUs, or to the extent permitted by the Administrator, by tendering shares of Common Stock previously acquired.

(b)           You are ultimately liable and responsible for all taxes owed by you in connection with your RSUs, regardless of whether the Administrator or the Company satisfies its tax withholding obligations that arise in connection with your RSUs.  The Company makes no representation or undertaking regarding the treatment of any tax withholding in connection with the grant, issuance, vesting or settlement of your RSUs or the subsequent sale of any of the shares of Common Stock underlying your RSUs that vest.  The Company does not commit and is under no obligation to administer the RSUs in a manner that reduces or eliminates your tax liability.

11.           Transferability; Rights as a Stockholder.

(a)           Unless otherwise provided by the Administrator, each RSU shall be transferable only:

(i)           pursuant to your will or upon your death to your beneficiaries;

(ii)           by gift to your Immediate Family (defined below), partnerships whose only partners are you or members of your Immediate Family, limited liability companies whose only members are you or members of your Immediate Family, or trusts established solely for the benefit of you or members of your Immediate Family; or

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(iii)           by gift to a foundation in which you and/or members of your Immediate Family control the management of the foundation’s assets.

(b)           For purposes of these Standard Terms, “Immediate Family” is defined as your spouse or domestic partner, children, grandchildren, parents, or siblings.  Any purported assignment, transfer or encumbrance that does not qualify under Section 11(a) above shall be void and unenforceable against the Company.  Any RSU transferred by you pursuant to this section shall not be transferable by the recipient except by will or the laws of descent and distribution.  The transferability of RSUs is subject to any applicable laws of your country of residence or employment.

(c)           You will have the rights of a stockholder only after shares of Common Stock have been issued to you following vesting of your RSUs and satisfaction of all other conditions to the issuance of those shares as set forth in these Standard Terms.  RSUs shall not entitle you to any rights of a stockholder of Common Stock and there are no voting or dividend rights with respect to your RSUs.  RSUs shall remain terminable pursuant to these Standard Terms at all times until they vest and convert into shares.  As a condition to having the right to receive shares of Common Stock pursuant to your RSUs, you acknowledge that unvested RSUs shall have no value for purposes of any aspect of your Service relationship with the Company.

12.           Disputes.  Any question concerning the interpretation of these Standard Terms, your Notice of Grant or the RSUs, any adjustments required to be made thereunder, and any controversy that may arise under the Standard Terms, your Notice of Grant or the RSUs shall be settled in accordance with Section 13.1 of your Employment Agreement.

13.           Other Matters.

(a)           Any prior agreements, commitments or negotiations concerning the RSUs are superseded by these Standard Terms and your Notice of Grant.  The grant of RSUs to you in any one year, or at any time, does not obligate the Company or any Subsidiary to make a grant in any future year or in any given amount and should not create an expectation that the Company or any Subsidiary might make a grant in any future year or in any given amount.

(b)           Nothing contained in these Standard Terms creates or implies an employment contract or term of employment upon which you may rely.

(c)           Notwithstanding any provision of these Standard Terms or the Notice of Grant to the contrary, if, at the time of your termination of Service with the Company, you are a “specified employee” as defined in Section 409A of the Code, and one or more of the payments or benefits received or to be received by you pursuant to the RSUs would constitute deferred compensation subject to Section 409A, no such payment or benefit will be provided under the RSUs until the earliest of (A) the date which is six (6) months after your “separation from service” for any reason, other than death or “disability” (as such terms are used in Section 409A(a)(2) of the Code), (B) the date of your death or “disability” (as such term is used in Section 409A(a)(2)(C) of the Code) or (C) the effective date of a “change in the ownership or effective control” of the Company (as such term is used in Section 409A(a)(2)(A)(v) of the Code).  The provisions of this Section 13(c) shall only apply to the extent required to avoid your incurrence of any penalty tax or interest under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder.  In addition, if any provision of the RSUs would cause you to incur any penalty tax or interest under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder, the Administrator may reform such provision to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A of the Code.

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Schnell

(d)           Because these Standard Terms relate to terms and conditions under which you may be issued shares of Common Stock, an essential term of these Standard Terms is that it shall be governed by the laws of the State of Delaware, without regard to choice of law principles of the State of Delaware or other jurisdictions.  Any action, suit, or proceeding relating to these Standard Terms or the RSUs granted hereunder shall be brought in the state or federal courts of competent jurisdiction in the State of California.

(e)           Copies of the Company’s Annual Report to Stockholders for its latest fiscal year and the Company’s latest quarterly report are available, without charge, at the Company’s business office.

(f)           Any notice required by these Standard Terms shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid.  Notice shall be addressed to you at the address set forth in the records of the Company.  Notice shall be addressed to the Company at:

Talon International, Inc.

21900 Burbank Blvd. Suite 270

Woodland Hills, CA 91367

Attn:  Chairman of the Board

(g)           You shall have the right to elect to defer the settlement date of all or part of the RSUs set forth herein, as defined herein, by completing and returning to the Company the Restricted Stock Unit Deferral Election provided herewith no later than a date which is 30 calendar days following the Grant Date.

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EXHIBIT C

Release

[TALON INTERNATIONAL, INC. LETTERHEAD]

RELEASE

[DATE]

EMPLOYEE NAME

ADDRESS

Re:           Separation Terms and General Release Agreement

Dear [NAME]:

This letter confirms the terms of your separation from the employment of Talon International, Inc. and consideration in exchange for your waiver and general release of claims in favor of Talon International, Inc. and its officers, directors, employees, agents, representatives, subsidiaries, divisions, affiliated companies, successors, and assigns (collectively, the “Company”or “TLN”).

1.           Termination Date. Your employment with the Company will end effective _____________ (the “Termination Date”).  Between now and the Termination Date, you should assist with any transition-related activities as directed by the employee to whom you directly report.

2.           Acknowledgment of Payment of Wages. On or before execution of this release, we delivered to you a final paycheck that includes payment for all accrued wages, salary, accrued and unused vacation time, reimbursable expenses, and any similar payments due and owing to you from the Company as of the Termination Date (collectively referred to as “Wages”).  You are entitled to these Wages regardless of whether you sign this Separation Terms and General Release Agreement (the “Agreement”).

3.           Consideration For Release. In consideration of the waiver and release of claims set forth in Paragraphs 7 and 8 below, and in exchange for your signing this Agreement, the Company agrees to provide you with the post-termination payments (the “Severance Payments”) described in Section 5 of that certain Executive Employment Agreement, dated July 30, 2010.  The Severance Payments are in addition to any amounts owed to you by the Company.  You acknowledge and agree that but for the terms of the Employment Agreement, you would not otherwise be entitled to receive the Severance Payments.  You understand that if you do not sign the Agreement, or if you revoke the signed Agreement as described in Paragraph 19 below (if applicable), the Company has no obligation to provide you with the Severance Payments.

4.           COBRA and Cal-COBRA Continuation Coverage. Your Company provided health coverage will end on the last day of the month of your Termination Date.  If you are eligible for, and timely elect COBRA and/or Cal-COBRA continuation coverage, you may continue health coverage pursuant to the terms and conditions of COBRA and/or Cal-COBRA at your own expense, unless the Company has agreed to pay for such coverage as part of your Severance Payments.  Our Human Resources Department will contact you shortly after your Termination Date.  All other insured benefit coverage (e.g., life insurance, disability insurance) will end on your Termination Date, unless the Company has agreed to pay for such coverage as part of your Severance Payments.

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5.           Return of Company Property.  By signing below, you represent that you have returned all the Company property and data of any type whatsoever, except such information relevant to the terms and conditions of your employment, that was in your possession or control.

6.           Confidential Information. You hereby acknowledge that as a result of your employment with the Company you have had access to the Company’s confidential information. You acknowledge your continuing obligations under any proprietary information and inventions agreement you have previously executed, and you agree you will hold all such confidential information in strictest confidence and that you may not make any use of such confidential information.  You further confirm that you have delivered to the Company all documents and data of any nature containing or pertaining to such confidential information and that you have not taken with you any such documents or data or any copies thereof.

7.           General Release and Waiver of Claims.

7.1.           The payments and agreements set forth in this Agreement fully satisfy any and all accrued salary, vacation pay, bonus and commission pay, stock-based compensation, profit sharing, termination benefits or other compensation to which you may be entitled by virtue of your employment with the Company or your termination of employment.  You acknowledge that you have no claims and have not filed any claims against the Company based on your employment with or the separation of your employment with the Company.

7.2.           Except for the exclusions set forth in Paragraph 7.3, to the fullest extent permitted by law, you hereby release and forever discharge the Company, its successors, subsidiaries and affiliates, directors, shareholders, current and former officers, agents and employees (all of whom are collectively referred to as “Releasees”) from any and all existing claims, demands, causes of action, damages and liabilities, known or unknown, that you ever had, now have or may claim to have had arising out of or relating in any way to your employment or separation from employment with the Company including, without limitation, claims based on any oral, written or implied employment agreement, claims for wages, bonuses, commissions, stock-based compensation, expense reimbursement, and any claims that the terms of your employment with the Company, or the circumstances of your separation, were wrongful, in breach of any obligation of the Company or in violation of any of your rights, contractual, statutory or otherwise.  Each of the Releasees is intended to be a third party beneficiary of the General Release and Waiver of Claims set forth in this Paragraph 7.2.

(a)           Release of Statutory and Common Law Claims.  Except for the exclusions set forth in Paragraph 7.3, such rights include, but are not limited to, your rights under the following federal and state statutes: the Employee Retirement Income Security Act (ERISA) (regarding employee benefits); the Occupational Safety and Health Act (safety matters); the Family and Medical Leave Act of 1993; the Worker Adjustment and Retraining Act (“WARN”) (notification requirements for employers who are curtailing or closing an operation) and common law; tort; wrongful discharge; public policy; workers’ compensation retaliation; tortious interference with contractual relations, misrepresentation, fraud, loss of consortium; slander, libel, defamation, intentional or negligent infliction of emotional distress; claims for wages, bonuses, commissions, stock-based compensation or fringe benefits; vacation pay; sick pay; insurance reimbursement, medical expenses, and the like.

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(b)           Release of Discrimination Claims.  You understand that various federal, state and local laws prohibit age, sex, race, disability, benefits, pension, health and other forms of discrimination, harassment and retaliation, and that these laws can be enforced through the U.S. Equal Employment Opportunity Commission, the National Labor Relations Board, the Department of Labor, and similar state and local agencies and federal and state courts. You understand that if you believe your treatment by the Company violated any laws, you have the right to consult with these agencies and to file a charge with them.  Instead, you have decided voluntarily to enter into this Agreement, release the claims and waive the right to recover any amounts to which you may have been entitled under such laws, including but not limited to, any claims you may have based on age or under the Age Discrimination in Employment Act of 1967 (ADEA; 29 U.S.C. Section 621 et. seq.) (age); the Older Workers Benefit Protection Act (“OWBPA”) (age); Title VII of the Civil Rights Act of 1964 (race, color, religion, national origin or sex); the 1991 Civil Rights Act; the Vocational Rehabilitation Act of 1973 (disability); The Americans with Disabilities Act of 1990 (disability); 42 U.S.C. Section 1981, 1986 and 1988 (race); the Equal Pay Act of 1963 (prohibits pay differentials based on sex); the Immigration Reform and Control Act of 1986; Executive Order 11246 (race, color, religion, sex or national origin); Executive Order 11141 (age); Vietnam Era Veterans Readjustment Assistance Act of 1974 (Vietnam era veterans and disabled veterans); and California state statutes and local laws of similar effect.

7.3.           Notwithstanding the releases contained in this Section 7 of the Agreement, Releasees and you do not intend that you release, and you are not releasing claims (i) which you may not release as a matter of law (including, but not limited to, indemnification claims under applicable law); (ii) for unemployment, state disability and/or paid family leave insurance benefits pursuant to the terms of applicable state law; (iii) for any benefit entitlements that are vested as of the Termination Date pursuant to the terms of a Company-sponsored benefit plan governed by the federal law known as “ERISA” or otherwise provided for in the Employment Agreement and concurrently executed agreements related thereto; (iv) for vested stock, vested stock units and/or vested option shares pursuant to the written terms and conditions of your existing stock, stock unit and stock option grants and agreements existing as of the Termination Date; and (v) rights to extended directors and officers insurance coverage and fiduciary liability insurance coverage provided for in Section 13.6 of the Employment Agreement.  To the fullest extent permitted by law, any dispute regarding the scope of the general release shall be determined by an arbitrator under the procedures set forth in paragraph 12.

8.           Waiver of Unknown Claims.  Except for the exclusions set forth in Paragraph 7.3, you expressly waive any benefits of Section 1542 of the Civil Code of the State of California (and any other laws of similar effect), which provides:

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“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

9.           Covenant Not to Sue.

9.1.           To the fullest extent permitted by law, you agree that you will not now or at any time in the future pursue any charge, claim, or action of any kind, nature and character whatsoever against any of the Releasees, or cause or knowingly permit any such charge, claim or action to be pursued, in any federal, state or municipal court, administrative agency, arbitral forum, or other tribunal, arising out of any of the matters covered by paragraphs 7 and 8 above, except as necessary to enforce your rights and the claims excepted under Section 7.3, above.

9.2.           Except as necessary to enforce your rights and the claims excepted under Section 7.3, above, you further agree that you will not pursue, join, participate, encourage, or directly or indirectly assist in the pursuit of any legal claims against the Releasees, whether the claims are brought on your own behalf or on behalf of any other person or entity.

9.3.           Nothing in this paragraph shall prohibit you from: (1) providing truthful testimony in response to a subpoena or other compulsory legal process, and/or (2) filing a charge or complaint with a government agency such as the Equal Employment Opportunity Commission, the National Labor Relations Board or applicable state anti-discrimination agency; (3) and/or filing and maintaining a claim or complaint excepted under Section 7.3.

10.           Non-disparagement.  You agree that you will not make any statement, written or oral, or engage in any conduct that is or could reasonably be construed to be disparaging of the Company or its products, services, agents, representatives, directors, officers, shareholders, attorneys, employees, vendors, affiliates, successors or assigns, or any person acting by, through, under or in concert with any of them.  The Company agrees that its officers, directors, and other executive management personnel will not make any statement, written or oral, or engage in any conduct that is or could reasonably be construed to be disparaging of you, and shall not encourage, direct, or participate in any such actions by third parties.  Nothing in this paragraph shall prohibit you or the Company from providing truthful testimony in response to a subpoena or other compulsory legal process.

11.           Legal and Equitable Remedies.  You and the Company agree that either party shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief without prejudice to any other rights or remedies that either party may have at law or in equity for breach of this Agreement.

12.           Arbitration of Disputes.  Except for claims for injunctive relief arising out of a breach of any proprietary information and inventions agreement you have executed in favor of the Company, you and the Company agree to submit to mandatory binding arbitration any future disputes between you and the Company, including any claim arising out of or relating to this Agreement. By signing below, you and the Company waive any rights you and the Company may have to trial by jury of any such claims. You agree that the Judicial Arbitration and Mediation Service will administer any such arbitration(s) under its then-in-effect rules for the resolution of employment disputes in California,  with administrative and arbitrator’s fees to be borne entirely by the Company. The arbitrator shall issue a written arbitration decision stating his or her essential findings and conclusions upon which the award is based.  A party’s right to review of the decision is limited to the grounds provided under applicable law. The parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement. This Agreement does not extend or waive any statutes of limitations or other provisions of law that specify the time within which a claim must be brought. Notwithstanding the foregoing, each party retains the right to seek preliminary injunctive relief in a court of competent jurisdiction to preserve the status quo or prevent irreparable injury before a matter can be heard in arbitration.

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13.           Attorneys’ Fees.  If any legal action arises or is brought to enforce the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys’ fees, costs and expenses from the other party, in addition to any other relief to which such prevailing party may be entitled, except where the law provides otherwise.  The costs and expenses that may be recovered exclude arbitration fees pursuant to paragraph 12 above.

14.           Confidentiality Provision.  You agree to keep the contents, terms and conditions of this Agreement confidential and not disclose them except to your spouse or domestic partner, attorneys, accountant or as required by subpoena or court order.

15.           Materiality of Breach.  Any material breach of the provisions contained in paragraphs 6 through 10 and/or 14 will be deemed a breach of this Agreement.

16.           No Admission of Liability.  You agree that this Agreement is not an admission or evidence of any wrongdoing or liability on the part of the Company, its representatives, attorneys, agents, partners, officers, shareholders, directors, employees, subsidiaries, affiliates, divisions, successors or assigns. This Agreement will be afforded the maximum protection allowable under California Evidence Code Section 1152 and/or any other state or Federal provisions of similar effect.

17.           Indemnification.  This Release shall not apply with respect to any claims arising under your existing rights to indemnification and defense pursuant to (a) the articles and bylaws of the Company for acts as a director and/or officer, (b) any indemnification agreement with the Company, or (c) your rights of insurance under any director and officer liability policy in effect covering the Company’s directors and officers.

18.           Review of Agreement.  You may not sign this Agreement prior to your Termination Date. You may take up to twenty-one (21) days from the date you receive this Agreement, or until your Termination Date, whichever date is later, to consider this Agreement and release and, by signing below, affirm that you were advised by this letter to consult with an attorney before signing this Agreement and were given ample opportunity to do so. You understand that this Agreement will not become effective until you return the original properly signed Agreement to the Company, Attention: Human Resources Department, at the Company’s principal executive offices in Los Angeles, California, and after expiration of the revocation period without revocation by you.

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[IF EMPLOYEE IS OVER 40 AT THE TIME OF TERMINATION, THE FOLLOWING SECTION 19 APPLIES:

19.           Revocation of Agreement.  You acknowledge and understand that you may revoke this Agreement by faxing a written notice of revocation to the Company, Attention: Human Resources Department, at (818) 444-4108 any time up to seven (7) days after you sign it.  After the revocation period has passed, however, you may no longer revoke your Agreement.

IF EMPLOYEE IS UNDER 40 AT THE TIME OF TERMINATION, THE FOLLOWING SECTION 19 APPLIES:

19.           Intentionally Omitted.]

20.           Entire Agreement.  This Agreement together with any proprietary information and inventions agreement you have executed in favor of the Company is the entire agreement between you and the Company with respect to the subject matter of this Agreement and supersedes all prior negotiations and agreements, whether written or oral, relating to this subject matter.  You acknowledge that none of the Company, its agents or attorneys made any promise or representation, express or implied, written or oral, not contained in this Agreement to induce you to execute this Agreement.  You acknowledge that you have signed this Agreement knowingly, voluntarily and without coercion, relying only on such promises, representations and warranties as are contained in this document. You understand that you do not waive any right or claim that may arise after the date this Agreement is executed.

21.           Modification.  By signing below, you acknowledge your understanding that this Agreement may not be altered, amended, modified, or otherwise changed in any respect except by another written agreement that specifically refers to this Agreement, executed by the Company’s authorized representatives and you.

22.           Governing Law.  This Agreement is governed by, and is to be interpreted according to, the laws of the State of California.

23.           Savings and Severability Clause.  Should any court, arbitrator or government agency of competent jurisdiction declare or determine any of the provisions of this Agreement to be illegal, invalid or unenforceable, those provisions shall be severed, and the remaining parts, terms or provisions shall not be affected thereby and shall remain legal, valid and enforceable. Further, it is the intention of the parties to this Agreement that, if a court, arbitrator or agency concludes that any claim under paragraph 7 above may not be released as a matter of law, the General Release in paragraph 7 and the Waiver Of Unknown Claims in paragraph 8 shall otherwise remain effective as to any and all other claims.

If this Agreement accurately sets forth the terms of your separation from the Company and if you voluntarily agree to accept the terms of the severance package offered please sign below no earlier than your Termination Date and return it to the Company’s Human Resources Department.

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PLEASE REVIEW CAREFULLY.  THIS AGREEMENT CONTAINS

A GENERAL RELEASE OF KNOWN AND UNKNOWN CLAIMS.

Sincerely,

[NAME]

REVIEWED, UNDERSTOOD AND AGREED:
By:
	[NAME]
Date:

DO NOT SIGN PRIOR TO YOUR TERMINATION DATE

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EX-10.26

Exhibit 10.26

EXECUTIVE EMPLOYMENT AGREEMENT

This Executive Employment Agreement (this “Agreement”) is made and entered into as of this 30th day of July, 2010 (the “Effective Date”), by and between TALON INTERNATIONAL, INC., a Delaware corporation (the “Company”) and LARRY DYNE (“Executive”).

1.           Engagement and Duties.

1.1           Commencing as of the Effective Date, and upon the terms and subject to the conditions set forth in this Agreement, the Company hereby engages and employs Executive as an officer of the Company, with the title and designation of President of the Company.  Executive hereby accepts such engagement and employment.

1.2           Executive’s duties and responsibilities’ shall be those normally and customarily vested in the office of President of a corporation, subject to the supervision, direction and control of the Chief Executive Officer (“CEO”) and the Board of Directors (the “Board”) of the Company. Executive shall report directly to the CEO.

1.3           Executive agrees to devote his primary business time, energies, skills, efforts and attention to his duties hereunder, and will not, without the prior written consent of the Board, which consent will not be unreasonably withheld, render any material services to any other for-profit and/or not-for-profit business concern or organization.  Executive will use his best efforts and abilities faithfully and diligently to promote the Company’s business interests.

1.4           Except for routine travel incident to the business of the Company, Executive shall perform his duties and obligations under this Agreement principally from an office provided by the Company in Woodland Hills, California, or such other location in Los Angeles or Ventura County, California, as the Board may from time to time determine.

2.           Term of Employment.  Executive’s employment pursuant to this Agreement shall commence on the Effective Date and shall terminate on the earliest to occur of the following (in any case, the “Term”) (the word “Term,” as used throughout this Agreement, shall include any extensions of the Term, as set forth in this Agreement or as otherwise agreed upon by the parties):

(a)           the close of business on December 31, 2013, provided, that if the Company has not given Executive Notice of its decision not to renew the Term on or before April 1, 2013, then, unless otherwise terminated as provided below, the Term shall be automatically extended until the earlier of (i) a date which is nine (9) months following delivery after April 1, 2013 by the Company to Executive of Notice of its decision not to extend the Term further, and (ii) December 31, 2014;

(b)           the death of Executive;

(c)           delivery to Executive of written Notice (as defined below) of termination by the Company if Executive shall suffer a “Permanent Disability,” which for purposes of this Agreement shall mean Executive’s inability to perform his duties and obligations under this Agreement for a period of 90 or more work days in any 12-month period by reason of a medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than twelve (12) months;

(d)           delivery to Executive of written Notice of termination by the Company for “Cause,” which Notice shall identify the particular details of the conduct that the Company believes constitutes Cause. For purposes of this Agreement, “Cause” shall mean: (i) any act or omission knowingly undertaken or omitted by Executive with the intent of causing damage to the Company, its properties, assets or business or its stockholders, officers, directors or employees; (ii) any fraud, misappropriation or embezzlement by Executive resulting in a material personal profit to Executive, in any case, involving properties, assets or funds of the Company or any of its subsidiaries; (iii) Executive’s consistent failure to materially perform his normal duties as described in Section 1.2, other than any such failure resulting from Executive’s Permanent Disability; (iv) conviction of, or pleading nolo contendere to, (A) any crime or offense involving monies or other property of the Company; or (B) any felony offense involving a crime of moral turpitude; or (v) Executive’s chronic or habitual use or consumption of drugs or alcoholic beverages, in either case, that causes material damage to the Company, its properties, assets or business, provided, that to the extent any circumstances that would otherwise constitute Cause shall be capable of cure, including without limitation subsections (iii) and (v) of this paragraph, Executive shall be given no less than thirty days written notice by the Company to cure such circumstances prior to any termination of his employment for Cause;

(e)           delivery to Executive of written Notice to Executive of termination by the Company “without Cause;”

(f)           delivery to the Company of written Notice of termination by Executive for “Good Reason,” by reason of: (i) the material diminution of Executive’s duties, job title or responsibilities as provided in Section 1 above; (ii) a relocation of Executive’s principal work location to a location that is inconsistent with the terms of Section 1.4 above; (iii) a material breach by the Company of this Agreement, including without limitation, a material reduction in any component of Executive’s compensation or benefits as provided for herein; or (iv) a change in Executive’s reporting arrangement such that Executive no longer reports directly to the CEO; or (v) the commencement of a voluntary or involuntary proceeding by or against the Company under Chapter 7 of the United States Bankruptcy Code or other law or statute of any jurisdiction providing for the cessation of the Company’s business and the liquidation of its assets; or

(g)           delivery to the Company of written Notice of termination by Executive without “Good Reason.”

3.           Compensation; Executive Benefit Plans.

3.1           The Company shall pay to Executive a base salary (the “Base Salary”) at an annual rate of (i) $300,000 for the period effective from the Effective Date through December 31, 2010, and (ii) $325,000 for the period from January 1, 2011 through the remainder of the Term, which Base Salary shall be subject to increase, but not decrease, at the discretion of the Board.  The Base Salary shall be payable in installments throughout the year in the same manner and at the same times the Company pays base salaries to similarly situated executive officers of the Company, but in any event, no less frequently than monthly.

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3.2           Commencing with fiscal year 2010 and for each fiscal year during the Term thereafter during which Executive is performing services to the Company, Executive shall be eligible to receive an annual cash bonus on the terms described on Exhibit A attached hereto (the “EBITDA Bonus”).

3.3           During the Term, Executive shall be entitled each year to vacation for a minimum of four calendar weeks (pro-rated for any partial year of service during the Term), plus such additional period or periods as the Board may approve in the exercise of its reasonable discretion, during which time his compensation shall be paid in full. To the extent that Executive does not use any such vacation during any year, up to two calendar weeks of such unused vacation shall be carried over from year to year; provided, however that in no event shall Executive’s total accrued but unused vacation at any time exceed six weeks.

3.4           Executive shall receive a restricted stock unit award (the “RSU Award”) for an aggregate of 5,778,500 shares of common stock of the Company (the “Common Stock”).  Except as otherwise provided below, and subject to earlier termination in accordance with its terms, the RSU Award shall vest 50% on a date which is 13 months following the grant date, and 10% on each date which is 18, 24, 30, 36 and 42 months following the grant date.  Executive shall be afforded the opportunity to defer receipt of the Common Stock underlying the RSU Award pursuant to a deferral election.  The RSU Award agreement (the “RSU Agreement”) will provide for the full acceleration of all applicable vesting requirements of all shares granted under the RSU Agreement upon a change in control of the Company, as defined in the RSU Agreement.  The RSU Agreement shall be in the form of Exhibit B attached hereto.  Any variation from the RSU Agreement attached as Exhibit B shall be mutually agreed upon by the Company and Executive; such agreement shall not be unreasonably withheld.

3.5           Executive agrees that all options to purchase Common Stock awarded by the Company to Executive on or before December 31, 2007 shall, effective as of the Effective Date, be cancelled and of no further force or effect, and Executive shall have no further rights to acquire Common Stock pursuant thereto.  The Company acknowledges and agrees that a “Change of Control” (as defined in each of Executive’s existing equity compensation agreements) has occurred as of the Effective Date, and that vesting under each such existing equity compensation agreement has accelerated and that each such award is now 100% vested.

3.6           During the Term, Executive shall be entitled to reimbursement from the Company for the reasonable costs and expenses which he incurs in connection with the performance of his duties and obligations under this Agreement, substantiated in a manner consistent with the Company’s practices and policies as adopted or approved from time to time by the Board for executive officers. For the avoidance of doubt, “business class” travel shall constitute reasonable costs and expenses on any flight greater than five hours in duration.

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3.7           The Company shall promptly pay or reimburse to Executive legal fees actually incurred by Executive in connection with the negotiation and drafting of this Agreement, which fees shall not exceed $10,000 in the aggregate.

3.8           The Company may deduct from any compensation payable to Executive the minimum amounts sufficient to cover applicable federal, state and/or local income and employment tax withholding.

4.           Other Benefits. During the Term, Executive shall be eligible to participate in all operative employee compensation, fringe benefit and perquisite, and other benefit and welfare plans or arrangements of the Company then in effect from time to time and in which similarly situated executive officers of the Company generally are entitled to participate, including without limitation, to the extent then in effect, incentive, group life, medical, dental, prescription, disability and other insurance plans, all on terms at least as favorable as those offered to similarly situated executives of the Company.  During the Term, the Company shall also pay to Executive, in increments payable at the times that the Company pays the Base Salary to Executive, an allowance of $950 per month for costs associated with the lease or purchase, maintenance and insurance of an automobile.

5.           Termination of Employment. Subject to the provisions of this Section 5, either the Company or Executive may terminate Executive’s employment at any time for any reason or no reason. The following provisions shall control any such termination of Executive’s employment.

5.1           Termination Without Cause, for Good Reason, or due to Executive’s death or Permanent Disability. The Company may terminate Executive’s employment without Cause at any time upon 15 days’ prior written Notice to Executive, and Executive may terminate his employment with Good Reason at any time upon 15 days’ prior written Notice to the Company, in each case, subject to any applicable cure periods (in the case of a termination without Cause or for Good Reason, the date specified in any such Notice in accordance with this Section 5.1 shall constitute the “Date of Termination”). For purposes of clarity, the Company’s delivery of Notice in accordance with Section 2(a) of its decision not to renew the Term shall not constitute termination without Cause, and shall be governed by Section 5.5 below. Executive’s employment shall also terminate upon the occurrence of Executive’s death or Permanent Disability (in the case of a termination due to Executive’s death or Permanent Disability, the date of the death or the date specified in a Notice from the Company indicating termination due to Permanent Disability shall constitute the “Date of Termination”).  If Executive’s employment is terminated pursuant to this Section 5.1, the Company shall promptly, or in the case of obligations described in clauses (c) and (e) below, as such obligations become due to Executive, pay or provide to Executive (or his estate), (a) Executive’s earned but unpaid Base Salary accrued through such Date of Termination, (b) accrued but unpaid vacation time through such Date of Termination, (c) any EBITDA Bonus required to be paid to Executive pursuant to this Agreement for any fiscal year of the Company ending on or prior to the Date of Termination, to the extent payable, but not previously paid, (d) reimbursement of any business expenses incurred by Executive prior to the Date of Termination that are reimbursable under Section 3.6 above, and (e) any vested benefits and other amounts due to Executive under any plan, program, policy of, or other agreement with, the Company (together, the “Accrued Obligations”).  In addition, if Executive (or his estate) delivers to the Company a signed settlement agreement and general release in the form attached hereto as Exhibit C (the “Release”) and satisfies all conditions to make the Release effective, Executive (or his estate) shall be entitled to the following payments and benefits (the “Severance”) from the Company:

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(i)           payment of an aggregate amount equal to Executive’s Base Salary (at the rate then in effect, but disregarding any reduction of Base Salary in violation of this Agreement) for the period (the “Severance Period”) commencing on the Date of Termination and ending on a date which is eighteen (18) months following the Date of Termination.  The Severance payable to the Executive pursuant to this paragraph (i) is hereinafter referred to as the “Base Salary Severance”.  Of the Base Salary Severance, (a) 50% of such amount shall be paid on the date of Executive’s “separation from service” within the meaning of Section 409A(a)(2)(A)(i) of the Code (a “separation from service”) , and (b) 50% of such amount shall be paid in equal installments on the first day of each of the twelve (12) calendar months immediately following such separation from service;

(ii)           payment on the first day of the month during the Severance Period of an allowance of $950 (or such greater amount in effect as of the Date of Termination) per month for costs associated with the lease or purchase, maintenance and insurance of an automobile; and

(iii)           all options to purchase Common Stock awarded by the Company to Executive from and after January 1, 2008 and prior to the date hereof shall remain outstanding and be exercisable for the Severance Period (and shall be exercisable by Executive’s estate in the event of his death).  To the extent the terms of this paragraph (iii) are inconsistent with the terms of any stock option agreement previously executed between Executive and the Company for any such options, the terms of this paragraph (iii) shall supersede the terms of any such existing stock option agreement;

(iv)           if the Date of Termination occurs before a date on which 50% of the RSU Award vests (i.e., 13 months following the grant date), then 50% of the RSU Award shall vest as of the Date of Termination; and

(v)           continued medical coverage of the type provided to Executive pursuant to Section 4 of this Agreement for Executive (if living) and his dependents for the Severance Period, to the extent each such individual received medical coverage immediately prior to such termination of employment, at the same cost to Executive and his dependents as such coverage cost immediately prior to such termination of employment (subject to premium increases affecting participants in such plan(s) generally), provided, that if the Board determines, in its sole discretion, that it is necessary or advisable for Executive to elect continuation medical coverage under Section 4980B of the Code and the regulations thereunder in order for the Company to provide such coverage under its healthcare plans, and the Company so notifies the Executive, Executive hereby agrees to make such an election. For the avoidance of doubt, if the Company requires that Executive elect continuation coverage under Section 4980B of the Code, such coverage shall nevertheless be provided to Executive and his dependents (as described above) at the same cost to Executive and his dependents as was paid for medical coverage immediately prior to Executive’s termination of employment.

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5.2           EBITDA Bonus.  For purposes of clarity, the EBITDA Bonus for a fiscal year shall be deemed earned by Executive if he was employed with the Company on December 31 of such fiscal year.  If the Date of Termination occurs on or after December 31 of a fiscal year, the Accrued Obligations shall include the EBITDA Bonus, if any, for such fiscal year even if the EBITDA Bonus has not yet been calculated as of the Date of Termination.  The Company shall pay Executive the EBITDA Bonus, if any, as provided in Exhibit A.

5.3           Cause. If Executive’s employment becomes terminable by the Company for Cause, the Company may terminate Executive’s employment immediately (subject to the notice and cure rights described in Section 5.1) and Executive shall be entitled to receive the Accrued Obligations upon the Date of Termination, or, in the case of benefits described in Section 5.l(e), as such obligations become due to Executive.

5.4           Resignation. Executive may terminate his employment without Good Reason upon thirty (30) days’ Notice to the Company. If Executive so terminates his employment, Executive shall be entitled to receive the Accrued Obligations promptly, or, in the case of benefits described in Section 5.l(e), as such obligations become due to Executive.

5.5           Nonrenewal. In the event that either the Company or the Executive elects not to renew the Term (or any extension thereof) in accordance with Section 2(a), Executive shall be entitled to receive the Accrued Obligations upon the Date of Termination, or, in the case of benefits described in Sections 5.l(c) and (e), as such obligations become due to Executive.

5.6           Six-Month Delay.  Notwithstanding anything to the contrary in this Agreement, no Severance payments or benefits subject to Section 409A of the Code (including the RSU’s) shall be paid to Executive during the six-month period following the Executive’s separation from service to the extent that the Company and the Executive mutually determine in good faith that paying such amounts at the time or times indicated in this Section 5 would cause the Executive to incur an additional tax under Section 409A of the Code (in which case such amounts shall be paid at the time or times indicated in this Section 5.6). If the payment of any such amounts are delayed as a result of the previous sentence, then on the first day following the end of such six-month period, the Company will pay the Executive a lump-sum amount equal to the cumulative amount that would have otherwise been payable to the Executive during such six-month period.

6.           Confidentiality of Proprietary Information and Material.

6.1           Industrial Property Rights.  For the purpose of this Agreement, “Industrial Property Rights” shall mean all of the Company’s patents, trademarks, trade names, inventions, copyrights, know-how, formulas and science, now in existence or hereafter developed or acquired by the Company or for its use, relating to any and all products and services which are developed, formulated and/or manufactured by the Company.

6.2           Trade Secrets.  For the purpose of this Agreement, “Trade Secrets” shall mean any formula, pattern, device, or compilation of information that is used in the Company’s business and gives the Company an opportunity to obtain an advantage over its competitors who do not know and/or do not use it, and that the Company has kept confidential in a manner sufficient to protect them as trade secrets. This term includes, but is not limited to, information relating to the marketing of the Company’s products and services, including price lists, pricing information, customer lists, customer names, the particular needs of customers, information relating to their desirability as customers, financial information, intangible property and other such information which is not in the public domain.

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6.3           Technical Data.  For the purpose of this Agreement, “Technical Data” shall mean all information of the Company in written, graphic or tangible form relating to any and all products which are developed, formulated and/or manufactured by the Company, as such information exists as of the Effective Date or is developed by the Company during the Term of this Agreement.

6.4           Proprietary Information.  For the purpose of this Agreement, “Proprietary Information” shall mean all of the Company’s Industrial Property Rights, Trade Secrets and Technical Data. Proprietary Information shall not include any information which (i) was lawfully in the possession of Executive prior to Executive’s employment with the Company, (ii) may be obtained by a reasonably diligent businessperson from readily available and public sources of information, (iii) is lawfully disclosed to Executive after termination of Executive’s employment by a third party which does not have an obligation to the Company to keep such information confidential, or (iv) is independently developed by Executive without utilizing any of the Company’s Proprietary Information.

6.5           Agreement Not To Copy Or Use.  Executive agrees, at any time during the Term of this Agreement and for a period often years thereafter, not to copy, use or disclose (except (i) as required, authorized or permitted in connection with the performance of Executive’s services hereunder to the Company, (ii) as required by law after first notifying the Company and giving it an opportunity to object, or (iii) as required to enforce Executive’s rights under this Agreement) any Proprietary Information without the Company’s prior written permission. The Company may withhold such permission as a matter within its sole discretion during the Term of this Agreement and thereafter, except as set forth in this paragraph.

7.           Return of Corporate Property. Upon any termination of this Agreement, Executive shall turn over to the Company all property, writings or documents then in his possession or custody belonging to or relating to the affairs of the Company or comprising or relating to any Proprietary Information.

8.           Discoveries and Inventions.

8.1           Disclosure. Executive will promptly disclose in writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method, product or work of authorship, in any case, relating to the business, products, practices, techniques or confidential information of the Company, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by Executive, (hereinafter referred to as “Developments”), either solely or in collaboration with others, (a) prior to the Term while working for the Company, (b) during the Term or (c) within six months after the Term.

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8.2           Assignment. Executive, to the extent that he has the legal right to do so, hereby acknowledges that any and all Developments that are created during the Term, are the property of the Company and hereby assigns and agrees to assign to the Company any and all of Executive’s right, title and interest in and to any and all of such Developments; provided, however, that, in accordance with California Labor Code Sections 2870 and 2872, the provisions of this Section 8.2 shall not apply to any Development that Executive developed entirely on his own time without using the Company’s equipment, supplies, facilities or trade secret information except for those Developments that either:

(a)           relate at the time of conception or reduction to practice of the Development to the Company’s business, or actual or demonstrably anticipated research or development of the Company; or

(b)           result directly from any work performed by Executive for the Company.

8.3           Assistance of Executive. Upon the Company’s request and at no expense to Executive, whether during the Term or thereafter, Executive will do all reasonable lawful acts, including, but not limited to, the execution of papers and lawful oaths and the giving of testimony, that, in the reasonable opinion of the Company, its successors and assigns, may be necessary or desirable in obtaining, sustaining, reissuing, extending and enforcing United States and foreign Letters Patent, including, but not limited to, design patents, on any and all Developments and for perfecting, affirming and recording the Company’s complete ownership and title thereto, subject to the proviso in Section 8.2 hereof, and Executive will otherwise reasonably cooperate in all proceedings and matters relating thereto. Executive shall be compensated at a rate of $250 per hour for any actions he is required to take and reimbursed for Executive’s reasonable expenses incurred as a result of any actions he is required to take pursuant to this Section 8.3 after the Term.

8.4           Records. Executive will keep complete and accurate accounts, notes, data and records of all Developments in the manner and form reasonably requested by the Company in writing. Such accounts, notes, data and records shall be the property of the Company, subject to the proviso in Section 8.2 hereof, and, upon written request by the Company, Executive will promptly surrender the same to it.

8.5           Obligations, Restrictions and Limitations. Executive understands that the Company may enter into agreements or arrangements with agencies of the United States Government and that the Company may be subject to laws and regulations which impose obligations, restrictions and limitations on it with respect to inventions and patents which may be acquired by it or which may be conceived or developed by employees, consultants or other agents rendering services to it.  Executive agrees that he shall be bound by all such obligations, restrictions and limitations applicable to any such invention conceived or developed by him during the Term and shall take any reasonable action which may be required to discharge such obligations and to comply with such restrictions and limitations.

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9.           Non-solicitation Covenant.

9.1           Non-solicitation and Noninterference. Until the earlier of (i) two years following termination of this Agreement and (ii) December 31, 2014, Executive shall not (a) induce or attempt to induce any employee of the Company to leave the employ of the Company, (b) induce or attempt to induce any employee of the Company to work for, render services or provide advice to or supply confidential business information or Trade Secrets of the Company to any third person, firm or corporation, or (c) induce or attempt to induce any customer, supplier, licensee, licensor or other business relation of the Company to cease doing business with the Company, provided, that advertisements and general solicitations shall not constitute a breach of this Section 9.1.

9.2           Indirect Solicitation. Executive agrees that, during the period covered by Section 9.1 hereof, he will not, directly or indirectly, assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the provisions of Section 9.1 if such activity were carried out by Executive, either directly or indirectly; and, in particular, Executive agrees that he will not, directly or indirectly, induce any employee of the Company to carry out, directly or indirectly, any such activity.

10.           Injunctive Relief.   Executive hereby recognizes, acknowledges and agrees that in the event of any breach by Executive of any of his covenants, agreements, duties or obligations contained in Sections 6, 7, 8 and 9 of this Agreement, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual amount of damages suffered by the Company as a result of such breach, and the Company would not be reasonably or adequately compensated in damages in any action at law. Executive therefore covenants and agrees that, in addition to any other remedy the Company may have at law, in equity, by statute or otherwise, in the event of any breach by Executive of any of his covenants, agreements, duties or obligations contained in Sections 6, 7, 8 and of this Agreement, the Company shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the duties or obligations contained in Sections 6. 7. 8 and 9 of this Agreement without the necessity of proving the amount of any actual damage to the Company or any affiliate thereof resulting therefrom; provided, however, that nothing contained in this Section 10 shall be deemed or construed in any manner whatsoever as a waiver by the Company of any of the rights which the Company may have against Executive at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by Executive of any of his covenants, agreements, duties or obligations hereunder.

11.           Code Section 409A. Certain amounts under this Agreement may constitute “nonqualified deferred compensation” which are intended to comply with the requirements of Section 409A of the Code. To the extent that the parties reasonably determine that any compensation or benefits payable under this Agreement are subject to Section 409A of the Code, this Agreement shall incorporate the terms and conditions required by Section 409A of the Code and Department of Treasury regulations as reasonably determined by the Company and the Executive. To the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretative guidance issued thereunder. In the event that following the Effective Date, the Company and the Executive reasonably determine that any compensation or benefits payable under this Agreement may be subject to Section 409A of the Code and related Department of Treasury guidance, the Company and the Executive shall work together to adopt such amendments to this Agreement or adopt other policies or procedures (including amendments, policies and procedures with retroactive effective), or take any other commercially reasonable actions necessary or appropriate to (a) exempt the compensation and benefits payable under this Agreement from Section 409A of the Code and/or preserve the intended tax treatment of the compensation and benefits provided with respect to this Agreement, or (b) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance.

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12.           Code Section 280G.  If any payment or benefit received or to be received by Executive in connection with a “change in ownership or control” of the Company (within the meaning of Section 280G of the Code), whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company or an affiliate of the Company (the “Payments”), would constitute a “parachute payment” within the meaning of Section 280G of the Code, the Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit to Executive shall exceed the net after-tax benefit to Executive if no such reduction was made. For purposes of this Section 12, “net after-tax benefit” shall mean (i) the total of all payments and the value of all benefits which Executive receives or is then entitled to receive from the Company that would constitute “parachute payments” within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to Executive (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the code. The foregoing determination will be made by a nationally recognized accounting firm (the “Accounting Firm”) selected by Executive and reasonably acceptable to the Company, provided, that the Accounting Firm’s determination shall be made based upon “substantial authority” within the meaning of Section 6662 of the Code. The Accounting Firm shall provide Executive and the Company with its determinations and detailed supporting calculations with respect thereto at least 15 business days prior to the date on which Executive would be entitled to receive a Payment (or as soon as practicable in the event that the Accounting Firm has less than 15 business days advance notice that Executive may receive a Payment) in order that Executive may determine whether it is in Executive’s best interest to waive the receipt of any or all amounts which may constitute “excess parachute payments.” If the Accounting Firm determines that such reduction is required by this Section 12, Executive, in his sole and absolute discretion, may determine which of the Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, and the Company shall pay such reduced amount to Executive. Executive and the Company shall each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of Executive or the Company, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 12. The first $10,000 of fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 12 will be borne exclusively by the Company, and the balance of any such fees and expenses, if any shall be borne exclusively by Executive.

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13.           Miscellaneous.

13.1           Arbitration.  The parties agree that they will use their best efforts to amicably resolve any dispute arising out of or relating to this Agreement. Executive and the Company agree to submit to mandatory binding arbitration any future disputes, including any claim arising out of or relating to this Agreement.  Any controversy, claim or dispute that cannot be so resolved shall be settled by final, binding arbitration before the Judicial Arbitration and Mediation Service in the State of California, Country of Los Angeles or Ventura.  The parties waive any rights that they may have to trial by jury of any claims.  The parties agree that the Judicial Arbitration and Mediation Service will administer any such arbitration(s) under its then-in-effect rules for the resolution of employment disputes,  with administrative and arbitrator’s fees to be borne entirely by the Company. The arbitrator shall issue a written arbitration decision stating his or her essential findings and conclusions upon which the award is based.  A party’s right to review of the decision is limited to the grounds provided under applicable law.  The parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement.  This Agreement does not extend or waive any statutes of limitations or other provisions of law that specify the time within which a claim must be brought. Notwithstanding the foregoing, each party retains the right to seek injunctive relief in a court of competent jurisdiction to preserve the status quo or prevent irreparable injury before a matter can be heard in arbitration.  Each party shall bear its own costs and expenses and an equal share of the arbitrator’s expenses and administrative fees of arbitration, subject to a party’s right to recover such costs and expenses pursuant to Section 13.2 of this Agreement.

13.2           Attorneys’ Fees.  If any legal action is brought for the enforcement of this Agreement, or because of an alleged dispute, breach or default in connection with or arising out of any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys’ fees and other costs incurred in that action or proceeding, including the prevailing party’s share of the arbitrator’s expenses and administrative fees of arbitration, in addition to any other relief to which such party or parties may be entitled.

13.3           Notices. All notices, requests and other communications (collectively, “Notices”) given pursuant to this Agreement shall be in writing, and shall be delivered by fax, email, personal service, reputable overnight carrier or by United States first class, registered or certified mail (return receipt requested), postage prepaid, addressed to the party at the address set forth below:

If to Company:

Talon International, Inc.

21900 Burbank Boulevard, Suite 270

Woodland Hills, CA 91367

Attn: Chief Executive Officer

Fax:  818-444-4108

lschnell@talonzippers.com

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If to Executive, at the address, fax or email maintained for Executive in the Company’s payroll records.

Any Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by registered or certified mail shall be deemed to have been duly given three days from date of deposit in the United States mails, unless sooner received. Either party may from time to time change its address for further Notices hereunder by giving Notice to the other party in the manner prescribed in this section.

13.4           Entire Agreement. This Agreement, together with the RSU Agreement and each Existing Option Agreement, contains the sole and entire agreement and understanding of the parties with respect to the entire subject matter of this Agreement, and any and all prior agreements, discussions, negotiations, commitments and understandings, whether oral or otherwise, related to the subject matter of this Agreement are hereby merged herein. No representations, oral or otherwise, express or implied, other than those contained in this Agreement have been relied upon by any party to this Agreement.  This Agreement supersedes and replaces in its entirety that certain Executive Employment Agreement, dated June 18, 2008, between the Company and Executive.

13.5           Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF.

13.6           Indemnification/Insurance. The Company shall defend, indemnify and hold Executive harmless from any and all liabilities, obligations, claims or expenses which arise in connection with or as a result of Executive’s service as an officer, director, or fiduciary of the Company, to the greatest extent now provided in the Company’s Articles and Bylaws and as otherwise allowed by law.  During the Term and for a period of at least six years thereafter, Executive shall be entitled to the same directors and officers’ liability insurance coverage and fiduciary liability insurance coverage that the Company provides generally to its other current directors and officers, as they may be amended from time to time for such current directors and officers (commonly referred to as “tail” coverage).

13.7           Amendment. The terms of this Agreement may not be amended or modified other than by a written instrument executed by the parties hereto or their respective successors.

13.8           Waiver.  Failure by any party hereto to insist upon strict compliance with any provision of this Agreement or to assert any right such party may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

13.9           Assignment.  This Agreement is binding on and for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives.

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13.10           Captions.  The various captions of this Agreement are for reference only and shall not be considered or referred to in resolving questions of interpretation of this Agreement.

13.11           Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

13.12           Business Day.  If the last day permissible for delivery of any Notice under any provision of this Agreement, or for the performance of any obligation under this Agreement, shall be other than a business day, such last day for such Notice or performance shall be extended to the next following business day (provided, however, under no circumstances shall this provision be construed to extend the date of termination of this Agreement).

13.13           Savings and Severability Clause.  Should any court, arbitrator or government agency of competent jurisdiction declare or determine any of the provisions of this Agreement to be illegal, invalid or unenforceable, those provisions shall be severed and the remaining parts, terms or provisions shall not be affected thereby and shall remain legal, valid and enforceable.

(Signatures on Following Page)

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.

Company:	Executive:
TALON INTERNATIONAL, INC.
By: /s/ Lonnie D. Schnell	/s/ Larry Dyne
Lonnie D. Schnell Chief Executive Officer	Larry Dyne

S-1

EXHIBIT A

EBITDA Bonus

Commencing with fiscal year 2010 and for each fiscal year during the Term thereafter during which Executive is performing services to the Company, Executive shall be eligible to earn a cash bonus, referred to herein as the EBITDA Bonus.

The EBITDA Bonus shall be an amount determined by reference to the Company’s Adjusted EBITDA for such fiscal year.  For purposes hereof and subject to the terms of this Exhibit A, “Adjusted EBITDA” means earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, CVC Management Charges, and CVC Reorganization Expenses, calculated based on the Company’s audited consolidated financial statements for the applicable fiscal year in question prepared in accordance with generally accepted accounting principles in the United States.  Adjusted EBTIDA will be calculated after taking into account the EBITDA Bonus and any other management incentive cash bonuses.  For purposes of calculating Adjusted EBITDA:

“CVC” means CVC California, LLC, together with its affiliates, successors and assigns;

“CVC Management Expenses” means all investment oversight, debt maintenance or similar fees, charges or other expenses arising in connection with the Company’s debt arrangements with CVC or CVC’s investment in equity securities of the Company; and

“CVC Reorganization Expenses” means any direct expenses, fees or charges incurred or accrued with connection with the restructuring of the Company’s previously existing Revolving Credit and Term Loan Agreement with CVC and the acquisition by CVC of shares of the Company’s preferred stock on or about the date of this Agreement, including without limitation any legal or accounting expenses, consulting or advisory fees and other expenses, and any fees, charges or penalties associated with all prior debt agreements with CVC.

For fiscal year 2010 and thereafter, Executive shall be entitled to an EBITDA Bonus, if any, equal to a percentage of Executive’s Base Salary for such fiscal year, if the Company achieves in such fiscal year actual Adjusted EBITDA of at least 80% of targeted Adjusted EBITDA for such fiscal year, pursuant to the following matrix:

	2010			2011			2012			2013
Target Adjusted EBITDA	$	2,982,000		$	4,215,000		$	6,005,000		$	7,500,000
Percentage of Target	Percentage of Base Salary
(Equal to or Greater than)		2010			2011			2012			2013
80%		20	%		20	%		25	%		25	%
90%		50	%		50	%		55	%		55	%
100%		70	%		100	%		100	%		100	%
110%		100	%		120	%		120	%		120	%

A-1

The EBITDA Bonus, if any, shall be payable in cash on or about April 15 of the year immediately following the fiscal year for which such EBITDA Bonus is calculated.

A-2

EXHIBIT B

RSU Agreement

Dyne

TALON INTERNATIONAL, INC.

RESTRICTED STOCK UNIT AGREEMENT

Dyne

TALON INTERNATIONAL, INC.

NOTICE OF RESTRICTED STOCK UNIT GRANT

You have been granted the following Restricted Stock Units (“RSUs”) of Talon International, Inc. (“Talon” or the “Company”):

Name of Recipient: Larry Dyne

Total Number of RSUs: 5,778,500

Value of Stock on Grant Date: $ ________________________

Grant Date: July 30, 2010

Vesting Commencement Date: July 30, 2010

Vesting Schedule: 50% of the Total Number of RSUs will vest on the date which is thirteen months following the Vesting Commencement Date, and an additional 10% of the Total Number of RSUs will vest on each date which is eighteen, twenty-four, thirty, thirty-six and forty-two months following the Vesting Commencement Date, subject to acceleration as set forth in the Standard Terms.

By your signature and the signature of the Company’s representative below, you and the Company agree that the RSUs are granted under and governed by the terms and conditions of the Restricted Stock Unit Agreement, which is attached hereto and is made a part of this document.

Recipient:	Talon International, Inc.
By:________________________________	By:________________________________
Name: Larry Dyne	Lonnie Schnell
	Its: Chief Executive Officer

Dyne

TALON INTERNATIONAL, INC.

Restricted Stock Unit Agreement

1.           Terms.  Unless provided otherwise in the Notice of Restricted Stock Unit Grant (“Notice of Grant”), the following standard terms and conditions (“Standard Terms”) apply to Restricted Stock Units (“RSUs”) granted to you.  Your Notice of Grant and these Standard Terms constitute the entire understanding between you and Talon.

2.           Definitions.  In addition to the terms defined elsewhere in these Standard Terms, as used herein, the following terms shall have the following meanings:

(a)           “Administrator” means the Board or any of its Committees as shall be administering this RSU.

(b)           “Board” means the Board of Directors of the Company.

(c)           “Cause” shall have the meaning given such term in the Employment Agreement.

(d)           “Change in Control” shall mean (i) the dissolution or liquidation of the Company, (ii) any sale, lease, exchange or other transfer (in one or a series of transactions) of all or substantially all of the assets of the Company, (iii) any merger or consolidation of the Company in which the holders of voting stock of the Company immediately before the merger or consolidation will not own thirty five percent (35%) or more of the voting stock of the continuing or surviving corporation immediately after such merger or consolidation; or (iv) a change of fifty percent (50%) (rounded to the next whole person) in the membership of the Board within a twelve (12)-month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of a majority of the directors then still in office who were in office at the beginning of the twelve (12)-month period; provided, however, that the election or replacement by the holders of Series B Preferred Stock of the Company of directors that the holders of Series B Preferred Stock of the Company are entitled to elect shall not, by itself, constitute a “Change in Control” hereunder.  A Change in Control must also constitute a change in the ownership or effective control of the Company or the ownership of a substantial portion of the Company’s assets within the meaning of Code Section 409A.

(e)           “Code” means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, as such is amended from time to time, and any reference to a section of the Code shall include any successor provision of the Code.

(f)           “Committee” means a committee appointed by the Board from among its members to administer this RSU.

(g)           “Common Stock” means the common stock, $0.001 par value, of the Company.

(h)           “Company” means Talon International, Inc.

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(i)           “Consultant” means any person, including an advisor, engaged by the Company or a Subsidiary to render services and who is compensated for such services; provided such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities; and provided further that the term “Consultant” shall not include Directors who are paid only a director’s fee by the Company or who are not otherwise compensated by the Company for their services as Directors.

(j)           “Director” means a member of the Board.

(k)           “Permanent Disability” shall have the meaning given such term in the Employment Agreement.

(l)           “Employee” means any person, including Officers and Directors, employed by the Company or any Subsidiary of the Company.  Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

(m)           “Employment Agreement” means that certain Executive Employment Agreement, dated of even date herewith, by and between you and the Company.

(n)           “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(o)           “Good Reason” shall have the meaning given such term in the Employment Agreement.

(p)           “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(q)           “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(r)           “Share” means a share of the Common Stock.

(s)           “Service” means service to the Company or any of its Subsidiaries as an Employee, Director or Consultant.

(t)           “Subsidiary” means any corporation or entity in which the Company owns or controls, directly or indirectly, fifty percent (50%) or more of the voting power or economic interests of such corporation or entity.

3.           Vesting of RSUs.

(a)           Provided that you continuously provide Service from the Grant Date specified in the Notice of Grant through each vesting date specified in the Notice of Grant, the RSUs shall vest and be converted into the right to receive the number of shares of Common Stock specified on the Notice of Grant with respect to such vesting date, except as otherwise provided in these Standard Terms.  If a vesting date falls on a weekend or any other day on which the Over-the-Counter Bulletin Board (the “OTCBB”) is not open, affected RSUs shall vest on the next following OTCBB business day.

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(b)           RSUs will vest to the extent provided in and in accordance with the terms of the Notice of Grant and these Standard Terms.  Except as expressly provided otherwise in these Standard Terms, if your Service (as defined below) terminates for any reason, whether voluntarily or involuntarily, all unvested RSUs shall be cancelled on the date of Service termination.

(c)           For purposes of these Standard Terms, your Service is not deemed terminated if, prior to sixty (60) days after the date of termination of your Service, you are re-engaged by the Company or a Subsidiary on a basis that would make you eligible for future RSU grants, nor would your transfer from the Company to any Subsidiary or from any one Subsidiary to another, or from a Subsidiary to the Company be deemed a termination of your Service.  Further, your provision of service as an employee, director or consultant to any partnership, joint venture or corporation not meeting the requirements of a Subsidiary in which the Company or a Subsidiary is a party shall be considered Service for purposes of this provision if either (a) the entity is designated by the Administrator as a Subsidiary for purposes of this provision or (b) you are specifically designated as providing Service for purposes of this provision.

4.           Conversion into Common Stock.

(a)           Shares of Common Stock will be issued or become free of restrictions as soon as practicable following vesting of the RSUs, provided that you have satisfied your tax withholding obligations as specified under Section 10 of these Standard Terms and you have completed, signed and returned any documents and taken any additional action that the Administrator reasonably deems appropriate to enable it to accomplish the delivery of the shares of Common Stock.  The shares of Common Stock will be issued in your name (or may be issued to your executor or personal representative or other applicable party, as permitted in Section 11, in the event of your death or Permanent Disability), and may be effected by recording shares on the stock records of the Company or by crediting shares in an account established on your behalf with a brokerage firm or other custodian, in each case as determined by the Administrator.  In no event will the Company be obligated to issue a fractional share.

(b)           Notwithstanding the foregoing, (i) the Company shall not be obligated to deliver any shares of Common Stock during any period when the Administrator reasonably determines that the conversion of an RSU or the delivery of shares hereunder would violate any federal, state or other applicable laws and/or may issue shares subject to any restrictive legends that, as reasonably determined by the Company’s counsel, is necessary to comply with securities or other regulatory requirements, and (ii) the date on which shares are issued may include a reasonable delay in order to provide the Company such time as it reasonably determines appropriate to address tax withholding and other administrative matters.

5.           Adjustments of and Changes in the Common Stock.

(a)           The existence of outstanding RSUs shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations, exchanges, or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company or any issuance of Shares or other securities or subscription rights thereto, or any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Shares or other securities of the Company or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.  Further, except as expressly provided herein or by the Administrator, (i) the issuance by the Company of shares of stock or any class of securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, (ii) the payment of a dividend in property other than Shares, or (iii) the occurrence of any similar transaction, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to the RSUs, unless the Administrator shall determine that an adjustment is necessary or appropriate.

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(b)           If the outstanding Shares or other securities of the Company, or both, for which the RSU is to be settled shall at any time be changed or exchanged by declaration of a stock dividend, stock split, combination of shares, extraordinary dividend of cash and/or assets, recapitalization, reorganization or any similar equity restructuring transaction (as that term is used in Statement of Financial Accounting Standards No. 123 (revised) affecting the Shares or other securities of the Company, the Administrator shall adjust the number and kind of Shares or other securities that are subject to the RSUs so as to maintain the proportionate number of Shares or other securities subject to the RSUs.

(c)           Subject to the other terms set forth in these Standard Terms, and not in limitation of any other rights you have under these Standard Terms (including, without limitation, acceleration of unvested RSUs upon the occurrence of a Change in Control as provide in Section 6 below), in the event the Company is a party to a merger or other reorganization, the RSUs shall be subject to the agreement of merger or reorganization, which agreement may provide, without limitation, for the assumption of outstanding RSUs by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated expiration, or for settlement in cash, unless such merger or other reorganization constitutes a Change in Control, in which case all RSUs will immediately vest, as discussed below in Section 6.

6.           Change in Control.  All unvested RSUs will vest immediately prior to the effective date of the occurrence of a Change in Control.  In addition, in the event that your Service is terminated by you for Good Reason or by the Company for reasons other than Cause within three (3) months prior to the occurrence of a Change in Control, then all unvested RSUs will vest immediately prior to the effective date of such termination.

7.           Leaves of Absence.  For any purpose under these Standard Terms, your Service shall be deemed to continue while you are on a bona fide leave of absence, to the extent required by applicable law.  To the extent applicable law does not require such a leave to be deemed to continue your Service such Service shall be deemed to continue if, and only if, expressly provided in writing by the Administrator or an Officer of the Company or Subsidiary for whom you provide Service.

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8.           Termination Without Cause, for Good Reason, or Upon Death or Disability.  In the event that your Service is terminated by you for Good Reason, by the Company for reasons other than Cause, or as a result of your Death or Permanent Disability, in each case at any time on or before the date that the initial 50% of your RSUs vest (i.e., the 13th month following the Vesting Commencement Date), than a portion of your RSUs equal to 50% of the Total Number of RSUs shall vest immediately prior to the effective date of such termination or, if later, the date of determination of your Permanent Disability.

9.           Termination for Cause.  In the event that your Service is terminated for Cause, all unvested RSUs shall be cancelled immediately prior to the effective date of such termination and neither you nor any beneficiary shall be entitled to any claim with respect to the cancelled RSUs whatsoever.

10.           Tax Withholding.

(a)           To the extent required by applicable federal, state or other law, you shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of vesting of an RSU and, if applicable, any sale of shares of Common Stock.  The Company shall not be required to issue or lift any restrictions on shares of Common Stock or to recognize any purported transfer of shares of Common Stock until such obligations are satisfied.  Upon your request, but not without your agreement, the Administrator may permit these obligations to be satisfied by having the Company withhold a portion of the shares of Common Stock that otherwise would be issued to you upon vesting of the RSUs, or to the extent permitted by the Administrator, by tendering shares of Common Stock previously acquired.

(b)           You are ultimately liable and responsible for all taxes owed by you in connection with your RSUs, regardless of whether the Administrator or the Company satisfies its tax withholding obligations that arise in connection with your RSUs.  The Company makes no representation or undertaking regarding the treatment of any tax withholding in connection with the grant, issuance, vesting or settlement of your RSUs or the subsequent sale of any of the shares of Common Stock underlying your RSUs that vest.  The Company does not commit and is under no obligation to administer the RSUs in a manner that reduces or eliminates your tax liability.

11.           Transferability; Rights as a Stockholder.

(a)           Unless otherwise provided by the Administrator, each RSU shall be transferable only:

(i)           pursuant to your will or upon your death to your beneficiaries;

(ii)           by gift to your Immediate Family (defined below), partnerships whose only partners are you or members of your Immediate Family, limited liability companies whose only members are you or members of your Immediate Family, or trusts established solely for the benefit of you or members of your Immediate Family; or

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(iii)           by gift to a foundation in which you and/or members of your Immediate Family control the management of the foundation’s assets.

(b)           For purposes of these Standard Terms, “Immediate Family” is defined as your spouse or domestic partner, children, grandchildren, parents, or siblings.  Any purported assignment, transfer or encumbrance that does not qualify under Section 11(a) above shall be void and unenforceable against the Company.  Any RSU transferred by you pursuant to this section shall not be transferable by the recipient except by will or the laws of descent and distribution.  The transferability of RSUs is subject to any applicable laws of your country of residence or employment.

(c)           You will have the rights of a stockholder only after shares of Common Stock have been issued to you following vesting of your RSUs and satisfaction of all other conditions to the issuance of those shares as set forth in these Standard Terms.  RSUs shall not entitle you to any rights of a stockholder of Common Stock and there are no voting or dividend rights with respect to your RSUs.  RSUs shall remain terminable pursuant to these Standard Terms at all times until they vest and convert into shares.  As a condition to having the right to receive shares of Common Stock pursuant to your RSUs, you acknowledge that unvested RSUs shall have no value for purposes of any aspect of your Service relationship with the Company.

12.           Disputes.  Any question concerning the interpretation of these Standard Terms, your Notice of Grant or the RSUs, any adjustments required to be made thereunder, and any controversy that may arise under the Standard Terms, your Notice of Grant or the RSUs shall be settled in accordance with Section 13.1 of your Employment Agreement.

13.           Other Matters.

(a)           Any prior agreements, commitments or negotiations concerning the RSUs are superseded by these Standard Terms and your Notice of Grant.  The grant of RSUs to you in any one year, or at any time, does not obligate the Company or any Subsidiary to make a grant in any future year or in any given amount and should not create an expectation that the Company or any Subsidiary might make a grant in any future year or in any given amount.

(b)           Nothing contained in these Standard Terms creates or implies an employment contract or term of employment upon which you may rely.

(c)           Notwithstanding any provision of these Standard Terms or the Notice of Grant to the contrary, if, at the time of your termination of Service with the Company, you are a “specified employee” as defined in Section 409A of the Code, and one or more of the payments or benefits received or to be received by you pursuant to the RSUs would constitute deferred compensation subject to Section 409A, no such payment or benefit will be provided under the RSUs until the earliest of (A) the date which is six (6) months after your “separation from service” for any reason, other than death or “disability” (as such terms are used in Section 409A(a)(2) of the Code), (B) the date of your death or “disability” (as such term is used in Section 409A(a)(2)(C) of the Code) or (C) the effective date of a “change in the ownership or effective control” of the Company (as such term is used in Section 409A(a)(2)(A)(v) of the Code).  The provisions of this Section 13(c) shall only apply to the extent required to avoid your incurrence of any penalty tax or interest under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder.  In addition, if any provision of the RSUs would cause you to incur any penalty tax or interest under Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder, the Administrator may reform such provision to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A of the Code.

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(d)           Because these Standard Terms relate to terms and conditions under which you may be issued shares of Common Stock, an essential term of these Standard Terms is that it shall be governed by the laws of the State of Delaware, without regard to choice of law principles of the State of Delaware or other jurisdictions.  Any action, suit, or proceeding relating to these Standard Terms or the RSUs granted hereunder shall be brought in the state or federal courts of competent jurisdiction in the State of California.

(e)           Copies of the Company’s Annual Report to Stockholders for its latest fiscal year and the Company’s latest quarterly report are available, without charge, at the Company’s business office.

(f)           Any notice required by these Standard Terms shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid.  Notice shall be addressed to you at the address set forth in the records of the Company.  Notice shall be addressed to the Company at:

Talon International, Inc.

21900 Burbank Blvd. Suite 270

Woodland Hills, CA 91367

Attn:  Chairman of the Board

(g)           You shall have the right to elect to defer the settlement date of all or part of the RSUs set forth herein, as defined herein, by completing and returning to the Company the Restricted Stock Unit Deferral Election provided herewith no later than a date which is 30 calendar days following the Grant Date.

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EXHIBIT C

Release

[TALON INTERNATIONAL, INC. LETTERHEAD]

RELEASE

[DATE]

EMPLOYEE NAME

ADDRESS

Re:           Separation Terms and General Release Agreement

Dear [NAME]:

This letter confirms the terms of your separation from the employment of Talon International, Inc. and consideration in exchange for your waiver and general release of claims in favor of Talon International, Inc. and its officers, directors, employees, agents, representatives, subsidiaries, divisions, affiliated companies, successors, and assigns (collectively, the “Company”or “TLN”).

1.           Termination Date. Your employment with the Company will end effective _____________ (the “Termination Date”).  Between now and the Termination Date, you should assist with any transition-related activities as directed by the employee to whom you directly report.

2.           Acknowledgment of Payment of Wages. On or before execution of this release, we delivered to you a final paycheck that includes payment for all accrued wages, salary, accrued and unused vacation time, reimbursable expenses, and any similar payments due and owing to you from the Company as of the Termination Date (collectively referred to as “Wages”).  You are entitled to these Wages regardless of whether you sign this Separation Terms and General Release Agreement (the “Agreement”).

3.           Consideration For Release. In consideration of the waiver and release of claims set forth in Paragraphs 7 and 8 below, and in exchange for your signing this Agreement, the Company agrees to provide you with the post-termination payments (the “Severance Payments”) described in Section 5 of that certain Executive Employment Agreement, dated July 30, 2010.  The Severance Payments are in addition to any amounts owed to you by the Company.  You acknowledge and agree that but for the terms of the Employment Agreement, you would not otherwise be entitled to receive the Severance Payments.  You understand that if you do not sign the Agreement, or if you revoke the signed Agreement as described in Paragraph 19 below (if applicable), the Company has no obligation to provide you with the Severance Payments.

4.           COBRA and Cal-COBRA Continuation Coverage. Your Company provided health coverage will end on the last day of the month of your Termination Date.  If you are eligible for, and timely elect COBRA and/or Cal-COBRA continuation coverage, you may continue health coverage pursuant to the terms and conditions of COBRA and/or Cal-COBRA at your own expense, unless the Company has agreed to pay for such coverage as part of your Severance Payments.  Our Human Resources Department will contact you shortly after your Termination Date.  All other insured benefit coverage (e.g., life insurance, disability insurance) will end on your Termination Date, unless the Company has agreed to pay for such coverage as part of your Severance Payments.

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5.           Return of Company Property.  By signing below, you represent that you have returned all the Company property and data of any type whatsoever, except such information relevant to the terms and conditions of your employment, that was in your possession or control.

6.           Confidential Information. You hereby acknowledge that as a result of your employment with the Company you have had access to the Company’s confidential information. You acknowledge your continuing obligations under any proprietary information and inventions agreement you have previously executed, and you agree you will hold all such confidential information in strictest confidence and that you may not make any use of such confidential information.  You further confirm that you have delivered to the Company all documents and data of any nature containing or pertaining to such confidential information and that you have not taken with you any such documents or data or any copies thereof.

7.           General Release and Waiver of Claims.

7.1.           The payments and agreements set forth in this Agreement fully satisfy any and all accrued salary, vacation pay, bonus and commission pay, stock-based compensation, profit sharing, termination benefits or other compensation to which you may be entitled by virtue of your employment with the Company or your termination of employment.  You acknowledge that you have no claims and have not filed any claims against the Company based on your employment with or the separation of your employment with the Company.

7.2.           Except for the exclusions set forth in Paragraph 7.3, to the fullest extent permitted by law, you hereby release and forever discharge the Company, its successors, subsidiaries and affiliates, directors, shareholders, current and former officers, agents and employees (all of whom are collectively referred to as “Releasees”) from any and all existing claims, demands, causes of action, damages and liabilities, known or unknown, that you ever had, now have or may claim to have had arising out of or relating in any way to your employment or separation from employment with the Company including, without limitation, claims based on any oral, written or implied employment agreement, claims for wages, bonuses, commissions, stock-based compensation, expense reimbursement, and any claims that the terms of your employment with the Company, or the circumstances of your separation, were wrongful, in breach of any obligation of the Company or in violation of any of your rights, contractual, statutory or otherwise.  Each of the Releasees is intended to be a third party beneficiary of the General Release and Waiver of Claims set forth in this Paragraph 7.2.

(a)           Release of Statutory and Common Law Claims.  Except for the exclusions set forth in Paragraph 7.3, such rights include, but are not limited to, your rights under the following federal and state statutes: the Employee Retirement Income Security Act (ERISA) (regarding employee benefits); the Occupational Safety and Health Act (safety matters); the Family and Medical Leave Act of 1993; the Worker Adjustment and Retraining Act (“WARN”) (notification requirements for employers who are curtailing or closing an operation) and common law; tort; wrongful discharge; public policy; workers’ compensation retaliation; tortious interference with contractual relations, misrepresentation, fraud, loss of consortium; slander, libel, defamation, intentional or negligent infliction of emotional distress; claims for wages, bonuses, commissions, stock-based compensation or fringe benefits; vacation pay; sick pay; insurance reimbursement, medical expenses, and the like.

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(b)           Release of Discrimination Claims.  You understand that various federal, state and local laws prohibit age, sex, race, disability, benefits, pension, health and other forms of discrimination, harassment and retaliation, and that these laws can be enforced through the U.S. Equal Employment Opportunity Commission, the National Labor Relations Board, the Department of Labor, and similar state and local agencies and federal and state courts. You understand that if you believe your treatment by the Company violated any laws, you have the right to consult with these agencies and to file a charge with them.  Instead, you have decided voluntarily to enter into this Agreement, release the claims and waive the right to recover any amounts to which you may have been entitled under such laws, including but not limited to, any claims you may have based on age or under the Age Discrimination in Employment Act of 1967 (ADEA; 29 U.S.C. Section 621 et. seq.) (age); the Older Workers Benefit Protection Act (“OWBPA”) (age); Title VII of the Civil Rights Act of 1964 (race, color, religion, national origin or sex); the 1991 Civil Rights Act; the Vocational Rehabilitation Act of 1973 (disability); The Americans with Disabilities Act of 1990 (disability); 42 U.S.C. Section 1981, 1986 and 1988 (race); the Equal Pay Act of 1963 (prohibits pay differentials based on sex); the Immigration Reform and Control Act of 1986; Executive Order 11246 (race, color, religion, sex or national origin); Executive Order 11141 (age); Vietnam Era Veterans Readjustment Assistance Act of 1974 (Vietnam era veterans and disabled veterans); and California state statutes and local laws of similar effect.

7.3.           Notwithstanding the releases contained in this Section 7 of the Agreement, Releasees and you do not intend that you release, and you are not releasing claims (i) which you may not release as a matter of law (including, but not limited to, indemnification claims under applicable law); (ii) for unemployment, state disability and/or paid family leave insurance benefits pursuant to the terms of applicable state law; (iii) for any benefit entitlements that are vested as of the Termination Date pursuant to the terms of a Company-sponsored benefit plan governed by the federal law known as “ERISA” or otherwise provided for in the Employment Agreement and concurrently executed agreements related thereto; (iv) for vested stock, vested stock units and/or vested option shares pursuant to the written terms and conditions of your existing stock, stock unit and stock option grants and agreements existing as of the Termination Date; and (v) rights to extended directors and officers insurance coverage and fiduciary liability insurance coverage provided for in Section 13.6 of the Employment Agreement.  To the fullest extent permitted by law, any dispute regarding the scope of the general release shall be determined by an arbitrator under the procedures set forth in paragraph 12.

8.           Waiver of Unknown Claims.  Except for the exclusions set forth in Paragraph 7.3, you expressly waive any benefits of Section 1542 of the Civil Code of the State of California (and any other laws of similar effect), which provides:

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“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

9.           Covenant Not to Sue.

9.1.           To the fullest extent permitted by law, you agree that you will not now or at any time in the future pursue any charge, claim, or action of any kind, nature and character whatsoever against any of the Releasees, or cause or knowingly permit any such charge, claim or action to be pursued, in any federal, state or municipal court, administrative agency, arbitral forum, or other tribunal, arising out of any of the matters covered by paragraphs 7 and 8 above, except as necessary to enforce your rights and the claims excepted under Section 7.3, above.

9.2.           Except as necessary to enforce your rights and the claims excepted under Section 7.3, above, you further agree that you will not pursue, join, participate, encourage, or directly or indirectly assist in the pursuit of any legal claims against the Releasees, whether the claims are brought on your own behalf or on behalf of any other person or entity.

9.3.           Nothing in this paragraph shall prohibit you from: (1) providing truthful testimony in response to a subpoena or other compulsory legal process, and/or (2) filing a charge or complaint with a government agency such as the Equal Employment Opportunity Commission, the National Labor Relations Board or applicable state anti-discrimination agency; (3) and/or filing and maintaining a claim or complaint excepted under Section 7.3.

10.           Non-disparagement.  You agree that you will not make any statement, written or oral, or engage in any conduct that is or could reasonably be construed to be disparaging of the Company or its products, services, agents, representatives, directors, officers, shareholders, attorneys, employees, vendors, affiliates, successors or assigns, or any person acting by, through, under or in concert with any of them.  The Company agrees that its officers, directors, and other executive management personnel will not make any statement, written or oral, or engage in any conduct that is or could reasonably be construed to be disparaging of you, and shall not encourage, direct, or participate in any such actions by third parties.  Nothing in this paragraph shall prohibit you or the Company from providing truthful testimony in response to a subpoena or other compulsory legal process.

11.           Legal and Equitable Remedies.  You and the Company agree that either party shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief without prejudice to any other rights or remedies that either party may have at law or in equity for breach of this Agreement.

12.           Arbitration of Disputes.  Except for claims for injunctive relief arising out of a breach of any proprietary information and inventions agreement you have executed in favor of the Company, you and the Company agree to submit to mandatory binding arbitration any future disputes between you and the Company, including any claim arising out of or relating to this Agreement. By signing below, you and the Company waive any rights you and the Company may have to trial by jury of any such claims. You agree that the Judicial Arbitration and Mediation Service will administer any such arbitration(s) under its then-in-effect rules for the resolution of employment disputes in California,  with administrative and arbitrator’s fees to be borne entirely by the Company. The arbitrator shall issue a written arbitration decision stating his or her essential findings and conclusions upon which the award is based.  A party’s right to review of the decision is limited to the grounds provided under applicable law. The parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement. This Agreement does not extend or waive any statutes of limitations or other provisions of law that specify the time within which a claim must be brought. Notwithstanding the foregoing, each party retains the right to seek preliminary injunctive relief in a court of competent jurisdiction to preserve the status quo or prevent irreparable injury before a matter can be heard in arbitration.

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13.           Attorneys’ Fees.  If any legal action arises or is brought to enforce the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys’ fees, costs and expenses from the other party, in addition to any other relief to which such prevailing party may be entitled, except where the law provides otherwise.  The costs and expenses that may be recovered exclude arbitration fees pursuant to paragraph 12 above.

14.           Confidentiality Provision.  You agree to keep the contents, terms and conditions of this Agreement confidential and not disclose them except to your spouse or domestic partner, attorneys, accountant or as required by subpoena or court order.

15.           Materiality of Breach.  Any material breach of the provisions contained in paragraphs 6 through 10 and/or 14 will be deemed a breach of this Agreement.

16.           No Admission of Liability.  You agree that this Agreement is not an admission or evidence of any wrongdoing or liability on the part of the Company, its representatives, attorneys, agents, partners, officers, shareholders, directors, employees, subsidiaries, affiliates, divisions, successors or assigns. This Agreement will be afforded the maximum protection allowable under California Evidence Code Section 1152 and/or any other state or Federal provisions of similar effect.

17.           Indemnification.  This Release shall not apply with respect to any claims arising under your existing rights to indemnification and defense pursuant to (a) the articles and bylaws of the Company for acts as a director and/or officer, (b) any indemnification agreement with the Company, or (c) your rights of insurance under any director and officer liability policy in effect covering the Company’s directors and officers.

18.           Review of Agreement.  You may not sign this Agreement prior to your Termination Date. You may take up to twenty-one (21) days from the date you receive this Agreement, or until your Termination Date, whichever date is later, to consider this Agreement and release and, by signing below, affirm that you were advised by this letter to consult with an attorney before signing this Agreement and were given ample opportunity to do so. You understand that this Agreement will not become effective until you return the original properly signed Agreement to the Company, Attention: Human Resources Department, at the Company’s principal executive offices in Los Angeles, California, and after expiration of the revocation period without revocation by you.

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[IF EMPLOYEE IS OVER 40 AT THE TIME OF TERMINATION, THE FOLLOWING SECTION 19 APPLIES:

19.           Revocation of Agreement.  You acknowledge and understand that you may revoke this Agreement by faxing a written notice of revocation to the Company, Attention: Human Resources Department, at (818) 444-4108 any time up to seven (7) days after you sign it.  After the revocation period has passed, however, you may no longer revoke your Agreement.

IF EMPLOYEE IS UNDER 40 AT THE TIME OF TERMINATION, THE FOLLOWING SECTION 19 APPLIES:

19.           Intentionally Omitted.]

20.           Entire Agreement.  This Agreement together with any proprietary information and inventions agreement you have executed in favor of the Company is the entire agreement between you and the Company with respect to the subject matter of this Agreement and supersedes all prior negotiations and agreements, whether written or oral, relating to this subject matter.  You acknowledge that none of the Company, its agents or attorneys made any promise or representation, express or implied, written or oral, not contained in this Agreement to induce you to execute this Agreement.  You acknowledge that you have signed this Agreement knowingly, voluntarily and without coercion, relying only on such promises, representations and warranties as are contained in this document. You understand that you do not waive any right or claim that may arise after the date this Agreement is executed.

21.           Modification.  By signing below, you acknowledge your understanding that this Agreement may not be altered, amended, modified, or otherwise changed in any respect except by another written agreement that specifically refers to this Agreement, executed by the Company’s authorized representatives and you.

22.           Governing Law.  This Agreement is governed by, and is to be interpreted according to, the laws of the State of California.

23.           Savings and Severability Clause.  Should any court, arbitrator or government agency of competent jurisdiction declare or determine any of the provisions of this Agreement to be illegal, invalid or unenforceable, those provisions shall be severed, and the remaining parts, terms or provisions shall not be affected thereby and shall remain legal, valid and enforceable. Further, it is the intention of the parties to this Agreement that, if a court, arbitrator or agency concludes that any claim under paragraph 7 above may not be released as a matter of law, the General Release in paragraph 7 and the Waiver Of Unknown Claims in paragraph 8 shall otherwise remain effective as to any and all other claims.

If this Agreement accurately sets forth the terms of your separation from the Company and if you voluntarily agree to accept the terms of the severance package offered please sign below no earlier than your Termination Date and return it to the Company’s Human Resources Department.

C-6

PLEASE REVIEW CAREFULLY.  THIS AGREEMENT CONTAINS

A GENERAL RELEASE OF KNOWN AND UNKNOWN CLAIMS.

Sincerely,

[NAME]

REVIEWED, UNDERSTOOD AND AGREED:

By:
	[NAME]
Date:

DO NOT SIGN PRIOR TO YOUR TERMINATION DATE

C-7

EX-31.1

Exhibit 31.1

Certification of CEO and CFO Pursuant to

Securities Exchange Act Rules 13a-14 and 15d-14

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Lonnie D. Schnell, certify that:

1.           I have reviewed this quarterly report on Form 10-Q of Talon International, Inc.;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 11, 2011	/s/ Lonnie D. Schnell
	Lonnie D. Schnell Chief Executive Officer and Chief Financial Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2011 (the "Report") by Talon International, Inc. ("Registrant"), the undersigned hereby certifies that:

1.   to the best of my knowledge, the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.   to the best of my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant.

Dated:  August 11, 2011	/s/Lonnie D. Schnell
	Lonnie D. Schnell
	Chief Executive Officer and Chief Financial Officer

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Consolidated Balance Sheets (Undaudited) (Parentheticals) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Series B Convertible Preferred Stock par value (in Dollars per share)	$ 0.001	$ 0.001
Series B Convertible Preferred Stock shares authorized	407,160	407,160
Series B Convertible Preferred Stock shares issued	407,160	407,160
Series B Convertible Preferred Stock shares outstanding	407,160	407,160
Series A Preferred stock, shares authorized	250,000	250,000
Series A Preferred Stock, par value; (in Dollars per share)	$ 0.001	$ 0.001
Series A Preferred Stock, no shares issued
Series A Preferred Stock, no shares outstanding
Common Stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Common Stock, shares authorized	100,000,000	100,000,000
Common Stock, shares issued	20,400,808	20,291,433
Common Stock,shares outstanding	20,400,808	20,291,433

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Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Net sales	$ 12,752,281	$ 14,973,072	$ 21,980,474	$ 23,208,332
Cost of goods sold	8,688,943	10,633,835	15,026,583	16,432,402
Gross profit	4,063,338	4,339,237	6,953,891	6,775,930
Sales and marketing expenses	1,065,487	787,531	1,964,047	1,444,353
General and administrative expenses	1,996,713	1,853,937	4,279,211	3,809,510
Total operating expenses	3,062,200	2,641,468	6,243,258	5,253,863
Income from operations	1,001,138	1,697,769	710,633	1,522,067
Interest expense, net	23,193	884,821	41,633	1,592,018
Income (loss) before provision for income taxes	977,945	812,948	669,000	(69,951)
Provision for income taxes	321,620	166,272	413,603	131,016
Net income (loss)	656,325	646,676	255,397	(200,967)
Series B Preferred Stock Liquidation Preference Increase	(668,268)		(1,336,535)
Income (loss) applicable to Common Shareholders	$ (11,943)	$ 646,676	$ (1,081,138)	$ (200,967)
Net income (loss) per share (in Dollars per share)	$ 0.03	$ 0.03	$ 0.01	$ (0.01)
Available to Preferred Shareholders (in Dollars per share)	$ (0.03)		$ (0.06)
Basic and diluted net income (loss) per share applicable to Common Shareholders (in Dollars per share)	$ 0.00	$ 0.03	$ (0.05)	$ (0.01)
Weighted average number of common shares outstanding:
Basic (in Shares)	20,367,154	20,291,433	20,329,503	20,291,433
Diluted (in Shares)	20,367,154	20,966,187	20,329,503	20,291,433

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Document And Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 10, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	TALON INTERNATIONAL, INC.
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		20,400,808
Amendment Flag	false
Entity Central Index Key	0001047881
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2

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Note 6 - Inventories

6 Months Ended

Jun. 30, 2011

Inventory Disclosure [Text Block]

Note 6.              Inventories

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

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

Inventories consist of the following:

	June 30,			December 31,
	2011			2010
Finished goods	$	1,718,958		$	2,156,026
Less reserves		(703,096	)		(884,035	)
Total inventories	$	1,015,862		$	1,271,991

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Note 11 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies Disclosure [Text Block]

Note 11.            Commitments and Contingencies

On April 16, 2004, the Company filed suit against Pro-Fit Holdings, Limited in the U.S. District Court for the Central District of California – Tag-It Pacific, Inc. v. Pro-Fit Holdings, Limited, CV 04-2694 LGB (RCx) -- asserting various contractual and tort claims relating to the Company’s exclusive license and intellectual property agreement with Pro-Fit, seeking declaratory relief, injunctive relief and damages.  It is the Company’s position that the agreement with Pro-Fit gives the Company exclusive rights in certain geographic areas to Pro-Fit’s stretch and rigid waistband technology.  The Company also filed a second civil action against Pro-Fit and related companies in the California Superior Court which was removed to the United States District Court, Central District of California.  In the second quarter of 2008, Pro-Fit and certain related companies were placed into administration in the United Kingdom and filed petitions under Chapter 15 of Title 11 of the United States Code.  As a consequence of the Chapter 15 filings, all litigation by the Company against Pro-Fit has been stayed. The Company has incurred significant legal fees in this litigation, and unless the case is settled or resolved, may continue to incur additional legal fees in order to assert its rights and claims against Pro-Fit and any successor to those assets of Pro-Fit that are subject to its exclusive license and intellectual property agreement with Pro-Fit and to defend against any counterclaims.

The Company currently has pending other claims and complaints that arise in the ordinary course of the Company’s business.  The Company believes that it has meritorious defenses to these claims and that the claims are either covered by insurance or would not have a material effect on the Company’s consolidated financial position or results of operations if adversely determined against the Company.

In November 2002, the FASB issued Topics of the FASB ASC 460-10, “Guarantees” (“ASC 460-10”) and FASB ASC 850-10, “Related Party Disclosures” (”ASC 850-10”). The following is a summary of the Company’s agreements that it has determined are within the scope of ASC 460-10 and ASC 850-10:

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

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

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Note 2 - Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Significant Accounting Policies [Text Block]

Note 2.              Summary of Significant Accounting Policies

A complete description of the Company’s Significant Accounting Policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and should be read in conjunction with these unaudited consolidated financial statements.  The Significant Accounting Policies noted below are only those policies that have changed materially or have supplemental information included for the periods presented here.

Allowance for Accounts Receivable Doubtful Accounts

The Company is required to make judgments as to the collectability of accounts and note receivable based on established aging policy, historical experience and future expectations. The allowances for doubtful accounts represent allowances for customer trade accounts and that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable value. The Company records these allowances based on estimates related to the following factors: (i) customer specific allowances; (ii) amounts based upon an aging schedule; and (iii) an estimated amount, based on our historical experience, for issues not yet identified.  Bad debt recoveries on accounts receivable for the three and six months ended June 30, 2011 were $11,107 and $720, respectively. Bad debt recoveries on accounts receivable for the three and six months ended June 30, 2010 were $331,240 and $348,683, respectively, which included a recovery of a related party note of $275,000, see Note 13 “Related Party Notes and Transactions”.

Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In accordance with this guidance, the Company measures its cash equivalents at fair value. The Company’s cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. At June 30, 2011 and December 31, 2010, cash equivalents consisted of money market funds measured at fair value on a recurring basis; fair value of the Company’s money market funds was approximately $537,000 and $1,506,000, respectively.

The Company adopted the FASB staff position that delayed the guidance on fair value measurements for non financial assets and non financial liabilities. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Intangible Assets

Intangible assets consist of our trade name and exclusive license and intellectual property rights.  Intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of FASB ASC 350, “Intangibles - Goodwill and Other”.  Intangible assets with estimable useful lives are amortized over their respective estimated useful lives, which average 5 years, and are reviewed for impairment in accordance with the provisions of ASC 360, “Property, Plant and Equipment”.  The exclusive license and intellectual property rights are fully amortized.

Convertible Preferred Stock

The Company classifies conditionally redeemable convertible preferred shares, which includes preferred shares subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity in the mezzanine section of the consolidated balance sheets, in accordance with  the guidance enumerated in FASB ASC No. 480-10 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock.

The Company evaluated the conversion option of the convertible preferred shares in accordance with FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF when the fair market value of the preferred stock is lower than the value of common stock when the preferred stock converts to common stock at the issuance date. The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital.

Redeemable securities initially are recorded at their fair value minus the BCF and minus preferred stock issuance costs. Subsequent measurement and recognition of the changes in the preferred stock value uses the following approach:

· When an equity instrument is not currently redeemable and it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), then the changes in the redemption value (for example, fair value) are recognized immediately as they occur, and the carrying amount of the instrument is adjusted to equal the redemption value at the end of each reporting period. This method views the end of the reporting period as if it were also the redemption date for the instrument. The resulting increases in the carrying amount of the redeemable security reduce income applicable to common shareholders in the calculation of earnings per share.

· Liquidation preference increase on preferred shares is accrued against the preferred stock and reduces income applicable to common shareholders in the calculation of earnings per share.

Classification of Expenses

Costs of Goods Sold – Cost of goods sold primarily includes expenses related to inventory purchases, customs, duty, freight, overhead expenses and reserves for obsolete inventory.  Overhead expenses primarily consist of warehouse and operations salaries, and other warehouse expense.

Sales and Marketing Expenses – Sales and marketing expenses primarily include sales salaries and commissions, travel and entertainment, marketing, advertising, royalty expense, and other sales related costs.  Marketing and advertising efforts are expensed as incurred.

General and Administrative Expenses – General and administrative expenses primarily include administrative salaries, employee benefits, professional service fees, facility expenses, information technology costs, investor relations, travel and entertainment, depreciation and amortization, bad debts and other general corporate expenses.

Interest Expense, net – Interest expense reflects the cost of borrowing and amortization of deferred financing costs and discounts.  Interest expense for the three months ended June 30, 2011 and 2010 totaled $24,687 and $903,319, respectively. Interest expense for the six months ended June 30, 2011 and 2010 totaled $43,701 and $1,619,900, respectively. Interest income consists of earnings from outstanding amounts due to the Company under notes and other interest bearing receivables.  The Company recorded interest income of $1,494 and $2,068, respectively, for the three and six months ended June 30, 2011, as compared to $18,499 and $27,883, respectively for the same periods in 2010.

Foreign Currency Translation

The Company has operations and holds assets in various foreign countries.  The local currency is the functional currency for the Company’s 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 until the translation adjustments are realized.  Included in accumulated other comprehensive income were a cumulative foreign currency translation gain of $9,096 and $30,755 at June 30, 2011 and December 31, 2010, respectively.

Comprehensive income (loss)

Comprehensive income (loss) consists of net loss and unrealized gains on foreign currency translation adjustments.  Comprehensive income (loss) and its components for the three and six months ended June 30, 2011 and 2010 is as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Net income (loss)	$	656,325	$	646,676		$	255,397	$	(200,967	)
Other comprehensive income (loss) -
Foreign currency translation		18,878		(3,988	)		21,659		6,348
Total comprehensive income (loss)	$	675,203	$	642,688		$	277,056	$	(194,619	)

The foreign currency translation adjustment represents the net currency translation gains and losses related to our China and India subsidiaries, which have not been reflected in the net loss for the periods presented.

Use of Estimates

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

Reclassifications

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

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Note 8 - Series B Convertible Preferred Stock and Stockholders Equity (Deficit)

6 Months Ended

Jun. 30, 2011

Stockholders' Equity, Policy [Policy Text Block]

Note 8.              Series B Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Series B Convertible Preferred Stock

On July 30, 2010, the Company entered into the Recapitalization Agreement with CVC, pursuant to which the Company issued to CVC an aggregate of 407,160 shares of the Company’s preferred stock, designated Series B Convertible Preferred Stock, $0.001 par value per share (the “Series B Preferred Stock”), in payment of an aggregate of $16,706,685 owed by the Company to CVC under the Loan Agreement.  Certain rights, preferences, privileges and restrictions of the Series B Preferred Stock are summarized below.

On July 30, 2010, the Company amended its certificate of incorporation by creating the Series B Preferred Stock with the following rights, preferences, privileges and restrictions:

· The Series B Preferred Stock ranks senior to the common stock and to any other preferred stock unless such preferred stock is created and issued on a senior or pari passu basis in accordance with the Company’s certificate of incorporation.

· Each share of Series B Preferred Stock is convertible into 100 shares of the Company’s common stock (subject to adjustment for stock splits, reverse stock split, etc.) at any time and from time to time at each holder’s option, unless the Series B Preferred Stock is exchanged for its Liquidation Preference as noted below.

· Upon the liquidation, dissolution or winding up of the Company, each share of Series B Preferred Stock is entitled to receive upon the surrender and cancellation of such shares (and prior to any distribution to holders of other equity securities), an amount equal to $41.033 per share plus all accrued dividends (the “Liquidation Preference”).  A merger, consolidation, share exchange or other reorganization resulting in a change in control of the Company, or any sale of all or substantially all of the Company’s assets, will be deemed a liquidation and winding up for purposes of the Company’s obligation to pay the Liquidation Preference.

· The Series B Preferred Stock Liquidation Preference will increase with the accrual of dividends on the Liquidation Preference at the rate of 16% per annum, compounded annually.  The dividends however are only payable to the holder in connection with the payment of the Liquidation Preference upon the liquidation, dissolution or winding up of the Company, or other deemed liquidation, and in conjunction with the surrender of the Preferred Stock.  No portion of the Liquidation Preference or the associated accrued dividends are convertible into common stock, nor will any portion of the Liquidation Preference or the accrued dividends be payable on shares of Series B Preferred Stock in the event of or following the conversion of such shares into common stock.

· The Company has the right, at any time upon not less than thirty (30) days’ prior written notice to the holders of Series B Preferred Stock, to redeem the Series B Preferred Stock in whole (but not in part) for a price equal to the then-applicable Liquidation Preference.  The holders of Series B Preferred Stock shall have the option, exercisable at any time and from time to time commencing on July 31, 2016, to require the Company to redeem any or all of the Series B Preferred Stock held by such holders, at the then-applicable Liquidation Preference amount. The Series B Preferred Stock vote with the common stock as a single class on all matters submitted or required to be submitted to a vote of the Company’s stockholders, with each share of Series B Preferred Stock having a number of votes equal to the number of shares of common stock that may be acquired upon conversion thereof as of the applicable date of determination.  Additionally, the Series B Preferred Stock have the right to vote as a separate class with respect to certain matters affecting the Series B Preferred Stock, including but not limited to (i) the creation or issuance of any other class or series of preferred stock, (ii) any amendments with respect to the rights, powers, preferences and limitations of the Series B Preferred Stock, (iii) paying dividends or distributions in respect of or redeem the Company’s common stock or any other junior securities; and (iv) certain affiliate transactions.  Any such vote shall require the affirmative vote or consent of a majority of the outstanding shares of Series B Preferred Stock.

· As long as the outstanding Series B Preferred Stock represents 35% or more of the voting shares of the Company, on an as-converted to common stock basis, then (a) our Board of Directors shall consist of not more than seven members, (b) the holders of Series B Preferred Stock shall have the right to elect three directors if the Board has five or fewer total directors, and four directors if the Board has six or seven directors (the directors elected by the Series B Preferred Stock are referred to as the “Series B Directors”), and (c) those members serving on the Board who were not elected by holders of the Series B Preferred Stock shall have the right to designate all remaining directors.  At least two of the Series B Directors must be, and remain at all times while serving as a director, an independent director that qualifies for service on the audit committee of a corporation with securities listed on the Nasdaq Stock Market as provided in Nasdaq Marketplace Rule 5605(c)(2) (or any successor thereto). Once the outstanding shares of Series B Preferred Stock represent less than 35% of the voting shares on an as-converted to common stock basis, then the entire Board will thereafter be elected by all stockholders having voting rights, voting as a single class.

The conversion of the term notes, revolver and related interest and fees into the Series B Preferred Stock (fair value of $17,277,600 as of July 30, 2010) was considered to be debt extinguishment according to the FASB ASC No. 405 “Liabilities” and FASB ASC No. 470-50 “Debt, Modifications and Extinguishments”. Per FASB ASC No. 470-50 a loss on extinguishment of debt of $570,915 was recorded on July 30, 2010 and was included in the Consolidated Statement of Operations for the year ended December 31, 2010. The loss on extinguishment is equal to the difference between fair value of the preferred stock and the fair value of the debt extinguished at the transaction date. The fair value of the Series B Preferred Stock on the issuance date was determined by the Company and independent valuation specialists using an option pricing valuation model.  

The Company applied the guidance enumerated in FASB ASC No. 480 “Distinguishing Liabilities from Equity”, FASB ASC No. 210 “Classification and Measurement of Redeemable Securities” and Rule 5-02.28 of Regulation S-X, when determining the classification and measurement of preferred stock. The Company classifies conditionally redeemable convertible preferred shares, which includes preferred shares subject to redemption upon the occurrence of uncertain events not solely within the control of the Company, as temporary equity in the mezzanine section of the consolidated balance sheet. The Series B Preferred Stock is redeemable at the option of the holders after the sixth anniversary of issuance, which is not within the control of the Company.

The Company determined that there are no embedded features that would require separate reporting as derivative instruments. Therefore, the Company evaluated the conversion option of the convertible preferred shares under FASB ASC No. 470-20, “Debt with Conversion and Other Options”, Accounting for Convertible Securities with Beneficial Conversion Features (“BCF”) or Contingently Adjustable Conversion Ratios.  A convertible financial instrument includes a BCF if the fair value of the instrument is lower than the fair value of shares of the common stock it is convertible into on the issuance date.  The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the conversion feature to additional paid-in capital.  The Company has recorded a BCF value of $1,283,343 in connection with the issuance of the Series B Preferred Stock on July 30, 2010.

The Series B Preferred Stock was initially recorded at the fair value of $17,277,600 as of July 30, 2010, reduced by the BCF ($1,283,343) as stated above and stock issuance costs ($190,744), for a net value of $15,803,513 as of July 30, 2010. The value of the Series B Preferred Stock was adjusted as follows as a consequence of its redemption features and the following approach is implemented by the Company:

· The Series B Preferred Stock is not currently redeemable but it is probable that the preferred stock will become redeemable due to the redemption option available to the preferred stock holders on July 30, 2016. Changes in the redemption value (for example, fair value) are recognized immediately as they occur, and the carrying amount of the instrument is adjusted to equal the redemption value at the end of each reporting period. This method views the end of the reporting period as if it were also the redemption date for the Series B Preferred Stock. Accordingly, the adjustment of $903,172 to record the preferred stock at its redemption value (“Original issue discount”) was charged against the preferred stock carrying value and accumulated deficit during the year ended December 31, 2010. In addition, the resulting increase in the carrying amount of the Series B Preferred Stock reduces the income applicable to common shareholders reported in the calculation of earnings per share.

· The 16% liquidation preference annual dividend (compounded annually) on outstanding preferred shares is accrued each reporting period as an addition to the carrying value of the preferred stock and reduces the income applicable to common shareholders reported in the calculation of earnings per share.

Series B Preferred Stock activity during the six months ended June 30, 2011 is as follows:

Series B Preferred Stock as of December 31, 2010	$	17,820,464
Series B Preferred Stock Liquidation Preference Increase		668,267
Series B Preferred Stock as of March 31, 2011		18,488,731
Series B Preferred Stock Liquidation Preference Increase		668,268
Series B Preferred Stock as of June 30, 2011	$	19,156,999

Common Stock

Stockholders Agreement

Concurrently with execution of the Recapitalization Agreement, on July 30, 2010, the Company entered into a Stockholders Agreement with CVC, and with Lonnie D. Schnell, Chief Executive Officer, Chief Financial Officer and a member of the Board of Directors of the Company, and Larry Dyne, President of the Company (“Messrs. Schnell and Dyne”), pursuant to which:

· Messrs. Schnell and Dyne agreed with CVC to vote their shares of Company voting stock in favor of a merger or consolidation of the Company into or with another corporation or any share exchange, business combination or other such transaction in which the Company is a constituent party, or any sale of all or substantially all of the Company’s assets (a “Triggering Transaction”), in each case to the extent such transaction is first approved by CVC.  Messrs. Schnell and Dyne also provided CVC with an irrevocable proxy to vote their shares of Company voting stock in favor of any such transaction.

· CVC agreed with the Company that in connection with any director nominees to be submitted to holders of the Company’s common stock for election at a stockholders’ meeting, a committee of our Board comprised solely of directors then serving on the Board who were not elected or appointed by holders of Series B Preferred Stock, acting by majority vote, shall have the right to designate all of the Board’s nominees for director to be elected by holders of the Company’s Common Stock.

· CVC agreed with the Company that in connection with any election of directors submitted to the Company’s stockholders for election at a stockholders’ meeting, CVC will attend the stockholders’ meeting, in person or by proxy, and vote (or cause to be voted) all of CVC’s shares of the Company’s voting stock in favor of the Board’s nominees for director.  CVC also provided the Company’s chief executive officer with an irrevocable proxy to vote its shares of the Company voting stock in favor of such nominees.

· Messrs. Schnell and Dyne provided CVC with a right of first refusal with respect to any shares of the Company’s voting securities that Messrs. Schnell and Dyne propose to sell in a private placement transaction, and agreed to provide CVC with advance notice of their intent to sell the Company’s voting securities in any public sale transaction.

· CVC provided Messrs. Schnell and Dyne with a tag-along right, providing Messrs. Schnell and Dyne with the right to sell their shares of the Company’s voting securities in a transaction where CVC is selling its shares of the Company’s voting securities.

· CVC agreed with the Company not to sell or otherwise transfer its shares of the Company’s voting securities, or to vote its shares of the Company’s voting securities in favor of any Triggering Transaction, at any time on or before July 31, 2011, other than in connection with a transaction that is approved by a majority of the Company’s voting shares (where, in calculating such majority, the votes attributable to CVC’s shares of the Company’s voting securities are excluded in the numerator but included in the denominator).

· The Company provided CVC with a preemptive right, pursuant to which CVC will have the right, subject to certain exceptions set forth in the Stockholders Agreement, to acquire in a subsequent issuance of securities by the Company a number of offered securities that will allow CVC to maintain its percentage ownership of the Company’s voting securities.

· CVC agreed with Messrs. Schnell and Dyne that in connection with a Triggering Transaction, CVC, and any other holder of Series B Preferred Stock and shares of common stock acquired upon conversion thereof, shall pay to Messrs. Schnell and Dyne a portion (beginning at 5% and increasing to 10%) of the sales proceeds payable in the Triggering Transaction to CVC or such other holder in respect of such Series B Preferred Stock or conversion shares.  Each of Messrs. Schnell and Dyne’s right to receive such portion of the sales proceeds is conditional upon the Triggering Transaction occurring (i) while employed by the Company or (ii) within 12 months following termination of employment with the Company for any reason other than termination of employment for “cause” or termination of employment by Messrs. Schnell or Dyne without “good reason” (as such terms are defined in their respective employment agreements).

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 $612,500, which is fully amortized.  The Company is currently in litigation with this licensor (See Note 11).

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Note 13 - Related Party Notes and Transactions

6 Months Ended

Jun. 30, 2011

Related Party Transactions Disclosure [Text Block]

Note 13.            Related Party Notes and Transactions

On July 30, 2010, the Company entered into a Recapitalization Agreement with CVC (See Note 7 and Note 8).  As a result of this transaction CVC (currently the sole holder of the Series B Preferred Stock) has become the majority stockholder in the Company.  Commencing August 1, 2010, a $5,000 monthly debt monitoring fee has been paid to CVC. A $60,000 fee was paid to CVC in consideration of CVC entering into an amendment to the Loan Agreement during the quarter ended September 30, 2010.

Colin Dyne, brother of both Mark Dyne, the Chairman of the Board of Directors of the Company and Larry Dyne, the President of the Company, is also a director, officer and significant stockholder of People’s Liberation, Inc., the parent company of William Rast Sourcing.  During the three and six months ended June 30, 2011, the Company had sales of $81,824 and $139,003, respectively, to William Rast Sourcing. During the three and six months ended June 30, 2010 the Company had sales of $150,166 and $230,247, respectively, to William Rast Sourcing. Accounts receivable of $2,404 and $26,711 were outstanding from William Rast Sourcing at June 30, 2011 and December 31, 2010, respectively.

In November 2009, the Company entered into an agreement with Colin Dyne to pay a commission equal to 7% of the collected revenues associated with the sales of products to a specific retail brand, with 2% of the 7% earned applied to a note receivable balance. For the three months ended June 30, 2011 and 2010 commissions of $14,172 and $34,155 were paid, respectively. For the six months ended June 30, 2011 and 2010 commissions of $14,172 and $55,540 were paid, respectively.  A Note Receivable from Related Party, net at December 31, 2009 represented the unsecured note and accrued interest receivable due from Colin Dyne, and included a valuation reserve for the full amount due. The note bore interest at 7.5% and was due on demand.  For the three and six months ended June 30, 2010 $17,679 and $27,057, respectively in commissions were applied to the note receivable balance. On June 29, 2010, the Company sold the Note Receivable with all of the Company’s rights, title and interest therein to an unrelated third party for cash proceeds of $275,000. The amount received was recorded as a recovery of bad debts.

Notes payable to related parties includes demand notes and advances to parties related to or affiliated with Mark Dyne, the Chairman of the Board of Directors of the Company and a significant stockholder.  The balance of demand notes payable and interest expense due to Mark Dyne and affiliated parties at June 30, 2011 and December 31, 2010 was $239,993 and $236,448, respectively.

In March 2010, a consulting agreement with Diversified Consulting, LLC, a company owned by Mark Dyne expired.  Accrued consulting fees and related interest amounted to $95,548 and $164,761, as of June 30, 2011 and December 31, 2010, respectively, in consideration of the final payments under the agreement.  Interest related to the amount owed amounted to $2,527 and $5,787 for the three and six months ended June 30, 2011, respectively. Related interest amounted to $5,367 and $54,536 for the three and six months ended June 30, 2010, respectively.

Notes payable to related parties includes a note and associated interest due to Lonnie D. Schnell, the Chief Executive Officer and Chief Financial Officer of the Company. The note, issued on August 6, 2009 in partial satisfaction of 2008 annual incentive payments to which Mr. Schnell was entitled, bears 6% interest annually and the maturity date is the earlier of December 31, 2011 or ten days following Mr. Schnell’s employment termination date. The balance of the note payable and accrued interest expense due to Mr. Schnell at June 30, 2011 and December 31, 2010 was $39,946 and $38,768, respectively.

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Note 9 - Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note 9.              Stock-Based Compensation

The Company accounts for stock-based awards to employees and directors in accordance with FASB ASC 718, “Compensation - Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Options issued to consultants are accounted for in accordance with the provisions of FASB ASC 505-50, “Equity-Based Payments to Non-Employees”.

Stock Options

The Company’s 2008 and 2007 Stock Incentive Plans, as amended, authorize up to 4,810,000 and 2,600,000 shares of common stock, respectively, for issuance pursuant to awards granted to individuals under the plans.  The Company’s 1997 Stock Incentive Plan authorized the issuance of up to 6,000,000 shares of common stock pursuant to stock-based incentive awards granted to individuals.

Option awards are granted with an exercise price equal to the average market price of the Company’s stock for the five trading days following the date of the grant. Those option awards generally vest over periods determined by the Board from immediate to four years of continuous service and have ten year contractual terms. (See Note 8).

The Recapitalization Agreement constituted a change of control of the Company and as a result, on July 30, 2010, all options previously granted to Messrs. Schnell and Dyne became fully vested in accordance with provisions in their employment agreements and their option grants. On July 30, 2010 the Company entered into new executive employment agreements with Messrs. Schnell and Dyne and Messrs. Schnell and Dyne agreed to cancel all option grants previously awarded to them on or before December 31, 2007.  Accordingly, option grants constituting a total of 1,005,500 shares of common stock were cancelled effective July 30, 2010 (See Note 8).

Options to purchase 1,355,000 shares of common stock were granted under the 2008 Stock Incentive Plan during six months ended June 30, 2011.  No options were granted for the three and six months ended June 30, 2010.

During three months ended June 30, 2011, a former employee exercised options to acquire 109,375 shares of common stock under the 2008 Stock Incentive Plan.  Cash received upon exercise was $12,030 or $0.11 per share.  At the time of exercise, the total intrinsic value of the options exercised was $4,375 (or $0.04 per share). No options were exercised for the three and six months ended June 30, 2010.

As of June 30, 2011, the Company had $172,064 of unamortized stock-based compensation expense related to options issued to employees and directors, which will be recognized over the weighted average period of 2.7 years.  As of June 30, 2010, unamortized stock-based compensation expense related to options issued to employees and directors was $98,342, which is being recognized over the weighted average period of approximately 1.5 years.

The following table summarizes the activity in the Company’s share based plans during the six months ended June 30, 2011.

	Number of Shares			Weighted Average Exercise Price
Employees and Directors
Options outstanding - January 1, 2011		5,147,100		$	0.35
Granted		1,355,000		$	0.10
Exercised		-		$	-
Cancelled		(135,417	) )	$	0.11
Options outstanding - March 31, 2011		6,366,683		$	0.30
Granted		-		$	-
Exercised		(109,375	)	$	0.11
Cancelled		(130,208	)	$	3.83
Options outstanding - June 30, 2011		6,127,100		$	0.23

Restricted Stock Units (RSU’s)

On July 30, 2010, the Company granted each of Messrs. Schnell and Dyne a restricted stock unit award (an “RSU Award”) for 5,778,500 shares of the Company’s common stock.  Each RSU Award will vest 50% on a date which is 13 months following the grant date, and 10% on each date which is 18, 24, 30, 36 and 42 months following the grant date, subject to partial acceleration of vesting as part of the executives’ severance benefits and full acceleration of vesting upon a change in control of the Company.  As of July 30, 2010, the RSU’s were valued at $2,263,384 which was reduced by the fair value of the options surrendered (see Stock Options above). As of June 30, 2011, the Company had $1,306,307 of unamortized stock-based compensation expense related to RSU’s.  The remaining expense will be recognized over the remaining weighted average period of 1.4 years.

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Note 7 - Debt Facility

6 Months Ended

Jun. 30, 2011

Debt Disclosure [Text Block]

Note 7.              Debt Facility

On July 30, 2010, the Company entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with CVC California, LLC (“CVC”) in which the Company issued to CVC shares of the Company’s Series B Convertible Preferred Stock in payment of all of the outstanding obligations owed by the Company to CVC under the Revolving Credit and Term Loan Agreement (the “Loan Agreement”, see Note 8) originally entered into by the Company on June 27, 2007 with Bluefin Capital, LLC (“Bluefin”). Bluefin subsequently assigned its rights and obligations under the Loan Agreement to an affiliate, CVC.  At July 30, 2010, all of the outstanding obligations owed to CVC under the Loan Agreement became due and payable, consisting of outstanding borrowings and accrued interest of $11,548,098 under the term notes, and $5,158,587 under the revolving credit note, for a total of $16,706,685. All of these outstanding obligations were converted into Series B Convertible Preferred Stock on July 30, 2010.

The Company originally entered into the Loan Agreement on June 27, 2007, which had provided for initial borrowings of $4.3 million under a revolving credit loan and a $9.5 million term loan for a three year period ending June 30, 2010. In connection with the initial Loan Agreement, the Company issued to Bluefin 1,500,000 shares of common stock for $0.001 per share and issued warrants for the purchase of 2,100,000 common shares at prices ranging from $1.05 per share to $1.14 per share.

On November 19, 2007, the Company amended the Loan Agreement to modify the original financial covenants in exchange for the issuance of an additional 250,000 shares of common stock to the lender for $0.001 per share, and a lowering of the exercise price for all of the previously issued warrants to an exercise price of $0.75 per share.

On April 3, 2008, the Company further amended the Loan Agreement.  This amendment redefined the financial covenants and cancelled of all of the common stock warrants previously issued to the lender in exchange for a note payable for $1.0 million issued by the Company under the same terms as the original term loans under Loan Agreement. In connection with this amendment the Company recorded a reduction to equity and an increase to notes payable for the fair value of the warrants of $260,205 and the difference ($739,795) between the fair value of the warrants at the time of repurchase and the face value of the note was recorded as an additional deferred cost.  This cost was amortized using the interest-method over the life of the modified notes and was reflected as interest expense.  At June 30, 2010 the modification cost was fully amortized.

Under the terms of the Loan Agreement, as amended, the Company is required to meet certain coverage ratios, among other restrictions, including a restriction from declaring or paying a dividend prior to repayment of all the obligations. The financial covenants, as amended, require that the Company maintain at the end of each fiscal quarter “EBITDA” (as defined in the agreement) of not less than $1.00 for the period and in excess of the ratios set out in the agreement for each quarter.

The Company failed to satisfy the financial covenants for two quarters ended March 31, 2009, and in connection with such failures, further amended the Loan Agreement that, among other things, required the issuance of an additional term note to CVC in the principal amount of $225,210 in lieu of paying a cash waiver fee.

On June 30, 2010 the Loan Agreement was amended to extend the existing maturity date for an additional thirty days to July 30, 2010. The Loan Agreement (as amended) was scheduled to mature July 30, 2010 and all of the principal and interest arising under the Loan Agreement in the approximate amount of $16.7 million was due.  The Company did not have sufficient resources to pay this obligation on the maturity date, and entered into the Recapitalization Agreement in settlement of this debt.

In connection with the Recapitalization Agreement, the Loan Agreement (now fully paid) was amended to extend the maturity date from July 30, 2010 until July 31, 2012, reduce the maximum borrowings available under the Revolver to $3,000,000, amend the borrowing base to modify the advance rate applicable to eligible accounts receivable to 75% and modify the advance rate applicable to eligible inventory to 40%, eliminate loan maintenance fees, and modify the permissible amount of capital expenditures the Company can make in any fiscal year. The Company paid CVC a non-refundable fee in the amount of $60,000 in consideration of CVC entering into the amendment and making this facility available.  Upon execution of the amendment, CVC waived all prior events of default under the Loan Agreement.

At June 30, 2011 and December 31, 2010, the Company had no borrowings under the revolving credit facility, and  was in compliance with all loan covenants. Borrowings under the Loan Agreement are secured by all of the Company’s assets.

Interest expense related to the Loan Agreement is composed of interest on debt, amortization of debt discount, and amortization of deferred financing costs.  In total, the interest expense for the three and six months ended June 30, 2011 was $7,500 and $15,000, respectively. For the three and six months ended June 30, 2010 total interest expense was $891,210 and $1,597,082, respectively. Total interest expense in the periods was comprised as follows:

· Interest on debt related to the Loan Agreement for the three months ended June 30, 2011 and 2010 was $0 and $454,595, respectively. For the six months ended June 30, 2011 and 2010 interest on debt related to Loan Agreement was $0 and $747,986, respectively.

· Amortization of the debt discount related to the Loan Agreement for the three months ended June 30, 2011 and 2010 was $0 and $374,557, respectively. For the six months ended June 30, 2011 and 2010 amortization of the debt discount related to the Loan Agreement was $0 and $725,982, respectively.

· Amortization of deferred financing costs related to the Loan Agreement for the three months ended June 30, 2011 and 2010 was $7,500 and $62,058, respectively. For the six months ended June 30, 2011 and 2010 amortization of deferred financing costs related to the Loan Agreement was $15,000 and $123,114, respectively

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Supplemental Disclosures of Cash Flow Information (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash received (paid) during the period for:
Interest paid	$ (14,768)	$ (394,083)
Interest received	2,068	27,883
Income tax paid, net (principally foreign)	(97,802)	(48,916)
Non-cash financing activities:
Series B preferred stock liquidation preference increase	(1,336,535)
Interest accrued on notes payable	5,985	5,917
Effect of foreign currency translation on net assets	$ (21,659)	$ (6,348)

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Note 3 - New Accounting Pronouncements

6 Months Ended

Jun. 30, 2011

Schedule of New Accounting Pronouncements and Changes in Accounting Principles [Table Text Block]

Note 3.              New Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”) which amends ASC Topic 820, Fair Value Measurement.  ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  The update clarifies the application of existing fair value measurement requirements.  The update also requires reporting entities to disclose additional information regarding fair value measurements categorized within Level 3 of the fair value hierarchy. ASU 2011-04 is effective during interim and annual period beginning after December 15, 2011.  Early adoption is not permitted. The adoption of this guidance will not have any impact on the Company’s results of operations and financial condition.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”) which amends ASC Topic 220, Comprehensive Income.  ASU 2011-05 gives an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance in ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance will not have any impact on the Company’s results of operations or financial condition.

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Note 4 - Net Loss Per Share

6 Months Ended

Jun. 30, 2011

Earnings Per Share [Text Block]

Note 4.              Net income (loss) per Share

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

	Net loss (Numerator)			Shares (Denominator)		Per Share Amount
Three months ended June 30, 2011:
Basic net loss per share:
Net income	$	656,325			20,367,154	$	0.03
Series B Preferred Stock Liquidation Preference Increase		(668,268	)		-		(0.03	)
Loss applicable to Common Shareholders		(11,943	)		20,367,154		0.00
Effect of Dilutive Securities -
Options, Preferred Stock and RSUs		-			-		-
Basic and diluted net loss applicable to Common Shareholders	$	(11,943	)		20,367,154	$	0.00
Three months ended June 30, 2010:
Basic net income per share -
Income applicable to Common Shareholders	$	646,676			20,291,433	$	0.03
Effect of Dilutive Securities -
Options		-			674,754		-
Basic and diluted net income applicable to Common Shareholders	$	646,676			20,966,187	$	0.03
Six months ended June 30, 2011:
Basic net loss per share:
Net income	$	255,397			20,329,503	$	0.01
Series B Preferred Stock Liquidation Preference Increase		(1,336,535	)				(0.06	)
Loss applicable to Common Shareholders		(1,081,138	)		20,329,503		(0.05	)
Effect of Dilutive Securities -
Options, Preferred Stock and RSUs		-			-		-
Basic and diluted net loss applicable to Common Shareholders	$	(1,081,138	)		20,329,503	$	(0.05	)
Six months ended June 30, 2010:
Basic net loss per share -
Loss applicable to Common Shareholders	$	(200,967	)		20,291,433	$	(0.01	)
Effect of Dilutive Securities -
Options		-			-		-
Basic and diluted net loss applicable to Common Shareholders	$	(200,967	)		20,291,433	$	(0.01	)

Options to purchase 6,127,100 shares of common stock exercisable between $0.06 and $5.23 per share were outstanding for the three and six months ended June 30, 2011, but were not included in the computation of diluted net loss per share applicable to common shareholders because the effect of exercise or conversion would have an antidilutive effect on net loss per share.

Options to purchase 6,423,600 shares of common stock exercisable between $0.06 and $5.23 per share were outstanding for the three and six months ended June 30, 2010. In the computation of diluted net income per share applicable to Common Shareholders, options to purchase 1,955,000 shares of common stock exercisable between $0.06 and $0.11 were included for the three months ended June 30, 2010. For the three and six months ended June 30, 2010 options to purchase 4,468,600 and 6,423,600 shares of common stock, respectively were excluded in the computation of diluted net loss per share applicable to Common Shareholders because exercise or conversion would have an antidilutive effect on the net loss per share.

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Note 12 - Segment Reporting and Geographic Information

6 Months Ended

Jun. 30, 2011

Segment Reporting Disclosure [Text Block]

Note 12.            Segment Reporting and Geographic Information

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

	Three Months Ended June 30, 2011
	Talon		Trim		Tekfit		Consolidated
Net sales	$	7,299,479	$	5,450,562	$	2,240	$	12,752,281
Cost of goods sold		5,348,390		3,340,015		538		8,688,943
Gross profit	$	1,951,089	$	2,110,547	$	1,702		4,063,338
Operating expenses								3,062,200
Income from operations							$	1,001,138

Three Months Ended June 30, 2010
Talon	Trim	Tekfit	Consolidated

Net sales	$	9,752,437	$	5,220,635	$	-		$	14,973,072
Cost of goods sold		7,316,812		3,274,272		42,751			10,633,835
Gross profit	$	2,435,625	$	1,946,363	$	(42,751	)		4,339,237
Operating expenses									2,641,468
Income from operations								$	1,697,769

Six Months Ended June 30, 2011
Talon	Trim	Tekfit	Consolidated

Net sales	$	12,781,001	$	9,197,233	$	2,240	$	21,980,474
Cost of goods sold		9,272,461		5,753,510		612		15,026,583
Gross profit	$	3,508,540	$	3,443,723	$	1,628		6,953,891
Operating expenses								6,243,258
Income from operations							$	710,633

Six Months Ended June 30, 2010
Talon	Trim	Tekfit	Consolidated

Net sales	$	14,686,739	$	8,521,593	$	-		$	23,208,332
Cost of goods sold		10,938,684		5,428,467		65,251			16,432,402
Gross profit (loss)	$	3,748,055	$	3,093,126	$	(65,251	)		6,775,930
Operating expenses									5,253,863
Income from operations								$	1,522,067

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

Sales:	Three Months Ended June 30,				Six Months Ended June 30
Country / Region	2011		2010		2011		2010
United States	$	914,864	$	1,201,996	$	1,796,911	$	2,007,615
Hong Kong		4,273,926		4,752,797		7,496,328		7,974,739
China		3,539,886		4,556,589		5,147,472		6,091,380
Korea		713,343		300,504		1,120,558		507,352
Bangladesh		374,558		706,696		1,367,182		1,387,299
Other		2,935,704		3,454,490		5,052,023		5,239,947
Total	$	12,752,281	$	14,973,072	$	21,980,474	$	23,208,332

	June 30,		December 31,
	2011		2010
Long-lived Assets:
United States	$	4,515,466	$	4,623,448
Hong Kong		752,392		884,344
China		156,646		182,980
Other		1,341		2,306
Total	$	5,425,845	$	5,693,078

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Note 5 - Accounts Receivable

6 Months Ended

Jun. 30, 2011

Receivables, Policy [Policy Text Block]

Note 5.              Accounts Receivable

Accounts receivable are included on the accompanying consolidated balance sheets net of an allowance for doubtful accounts. The total allowance for doubtful accounts at June 30, 2011 and December 31, 2010 was $24,686 and $133,080, respectively.

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities:
Net Income (loss)	$ 255,397	$ (200,967)
Adjustments to reconcile net income (loss) to net cash
Depreciation and amortization	312,924	404,101
Loss from disposal of equipment	7,391
Amortization of deferred financing cost and debt discounts	15,000	849,096
Stock based compensation	560,808	113,148
Deferred income taxes, net	213,345	89,564
Bad debt recovery, related party note receivable		(275,000)
Bad debt recovery, other accounts receivable	(720)	(73,683)
Inventory valuation provisions	(42,317)	182,936
Changes in operating assets and liabilities:
Accounts receivable	(452,440)	(1,182,388)
Inventories	298,446	(37,985)
Prepaid expenses and other current assets	(54,546)	(15,717)
Other assets.	19,798	(56,516)
Accounts payable and accrued expenses	2,208,028	2,062,995
Other liabilities	32,978	(33,335)
Net cash provided by operating activities	3,374,092	1,826,249
Cash flows from investing activities:
Proceeds from sale of equipment	55,000
Acquisitions of property and equipment	(102,517)	(21,014)
Net cash used in investing activities	(47,517)	(21,014)
Cash flows from financing activities:
Proceeds from exercise of stock options	12,030
Payment of capital leases	(2,906)	(51,636)
Net cash provided by (used in) financing activities	9,124	(51,636)
Net effect of foreign currency exchange translation on cash	(3,370)	(1,433)
Net increase in cash and cash equivalents	3,332,329	1,752,166
Cash and cash equivalents at beginning of period	2,795,284	2,264,606
Cash and cash equivalents at end of period	$ 6,127,613	$ 4,016,772

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Note 1 - Presentation of Interim Information

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note 1.              Presentation of Interim Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of the management of Talon International, Inc. and its consolidated subsidiaries (collectively, the “Company”), are considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.  The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period.  The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Form 10-K for the year ended December 31, 2010.  The balance sheet as of December 31, 2010 has been derived from the audited financial statements as of that date but omits certain information and footnotes required for complete financial statements.

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Note 10 - Income Taxes

6 Months Ended

Jun. 30, 2011

Income Tax Disclosure [Text Block]

Note 10.            Income taxes

The Company accrues interest and penalties related to unrecognized tax benefits in interest expense.  For each of the three months ended June 30, 2011 and 2010, the Company accrued interest and penalties for unrecognized tax benefits of $3,975. At June 30, 2011 and December 31, 2010, the Company had $101, 475 and $93,525, respectively, of accrued interest and penalties associated with the unrecognized tax liabilities.

Net deferred tax assets of $0 and $111,454 as of June 30, 2011 and December 31, 2010, respectively, and were related to the Company’s foreign operations and are included in other assets. Due to prior operating losses incurred, no benefit for domestic income taxes and no benefit for a portion of the foreign income taxes have been recorded because there is not sufficient evidence to determine that the Company will be able to utilize its net operating loss carryforwards to offset future taxable income.

Other tax liabilities were $61,159 and $3,215 as of June 30, 2011 and December 31, 2010, respectively, and were included in other accrued expenses. Current receivable for income taxes totaled $47,935 and $87,638, respectively, as of June 30, 2011 and December 31, 2010.

Long term deferred income tax liabilities totaled $710,445 and $608,554 as of June 30, 2011 and December 31, 2010, respectively. The deferred income tax liability includes a tax basis difference related to the Company’s indefinite lived intangible asset, where the Company determined that it would no longer be able to support the use of the deferred tax asset related to its net operating losses to offset the liability and tax basis difference related to the Company’s foreign operations ($29,259 and $0 as of June 30, 2011 and December 31, 2010, respectively).

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Note 14 - Subsequent Events

6 Months Ended

Jun. 30, 2011

Subsequent Events [Text Block]

Note 14.            Subsequent Events

The Company evaluated subsequent events after the balance sheet date of June 30, 2011 through the date these unaudited financial statements were issued.

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Consolidated Balance Sheets (Undaudited) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Cash and cash equivalents	$ 6,127,613	$ 2,795,284
Accounts receivable, net	3,815,295	3,350,935
Inventories, net	1,015,862	1,271,991
Prepaid expenses and other current assets	387,842	331,924
Total current assets	11,346,612	7,750,134
Property and equipment, net	1,315,094	1,582,327
Intangible assets, net	4,110,751	4,110,751
Other assets	239,047	384,455
Total assets	17,011,504	13,827,667
Accounts payable	7,761,746	5,231,036
Accrued expenses	1,574,444	1,865,841
Notes payable to related parties	279,939	275,215
Other notes and current portion of capital lease obligations	71,346	69,608
Total current liabilities	9,687,475	7,441,700
Capital lease obligations, net of current portion	14,109	17,492
Deferred income taxes	710,445	608,554
Other liabilities	773,855	740,877
Total liabilities	11,185,884	8,808,623
Series B Convertible Preferred Stock, $0.001 par value; 407,160 shares authorized, issued and outstanding	19,156,999	17,820,464
Stockholders’ Equity (Deficit):
Series A Preferred Stock, $0.001 par value; 250,000 shares authorized; no shares issued or outstanding
Common Stock, $0.01 par value, 100,000,000 shares authorized; 20,400,808 and 20,291,433 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively	20,401	20,291
Additional paid-in capital	57,548,042	56,975,314
Accumulated deficit	(70,908,918)	(69,827,780)
Accumulated other comprehensive income	9,096	30,755
Total stockholders’ equity (deficit)	(13,331,379)	(12,801,420)
Total liabilities, preferred stock and stockholders’ equity (deficit)	$ 17,011,504	$ 13,827,667