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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 2006

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

  For the transition period from __________________ to ______________________.

                         Commission file number 0-16075

                            PEOPLE'S LIBERATION, INC.
           (Name of Small Business Issuer as Specified in its Charter)

          DELAWARE                                               86-0449546
(State or Other Jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

                          150 WEST JEFFERSON BOULEVARD
                              LOS ANGELES, CA 90007
                    (Address of Principal Executive Offices)

                                 (213) 745-2123
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:
                                      NONE

         Securities registered under Section 12(g) of the Exchange Act:
                     COMMON STOCK, PAR VALUE $.001 PER SHARE

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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 the past 90 days.

                                Yes [X]   No [_]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]

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

         Issuer's  Revenues  for the fiscal  year ended  December  31, 2006 were
$15,959,766.

         The aggregate  market value of the voting and non-voting  common equity
held by non-affiliates  computed by reference to the average bid and asked price
of such common equity, as of March 12, 2007, was $9,974,011.

         As of March 12, 2007, the issuer had 34,942,563 shares of common stock,
par value $.001 per share, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE

    Transitional Small Business Disclosure Format (check one): Yes [_] No [X]


<PAGE>


                            PEOPLE'S LIBERATION, INC.
                              INDEX TO FORM 10-KSB

PART I                                                                      PAGE

Item 1.       Description of Business.......................................   3
Item 2.       Description of Property.......................................   8
Item 3.       Legal Proceedings.............................................   8
Item 4.       Submission of Matters to a Vote of Security Holders...........   8

PART II

Item 5.       Market for Common Equity and Related Stockholder Matters......   8
Item 6.       Management's Discussion and Analysis or Plan of Operation.....   9
Item 7.       Financial Statements
              Index to Consolidated Financial Statements....................  26
              Report of Independent Registered Public Accounting Firm.......  27
              Consolidated Balance Sheet....................................  28
              Consolidated Statements of Operations.........................  29
              Consolidated Statements of Cash Flows.........................  30
              Consolidated Statement of Changes in Stockholders' Equity.....  31
              Notes to Consolidated Financial Statements....................  32
Item 8.       Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosures.....................  56
Item 8A.      Controls and Procedures.......................................  56
Item 8B       Other Information.............................................  56

PART III

Item 9.       Directors, Executive Officers, Promoters,
                Control Persons, and Corporate Governance;
                Compliance with Section 16(a) of the Exchange Act...........  56
Item 10.      Executive Compensation........................................  59
Item 11.      Security Ownership of Certain Beneficial Owners
                and Management and Related Stockholder Matters..............  63
Item 12.      Certain Relationships and Related Transactions,
                and Director Independence...................................  65
Item 13.      Exhibits......................................................  68
Item 14       Principal Accountant Fees and Services........................  70


         Except as otherwise  indicated,  information  in this Annual  Report on
Form 10-KSB  reflects  the  conversion  of Series A preferred  stock into common
stock and a 1-for-9.25 reverse stock split of our common stock which took effect
on January 5, 2006.


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<PAGE>


                                     PART I

         This report, including the sections entitled "Cautionary Statements and
Risk Factors,"  "Management's  Discussion and Analysis or Plan of Operation" and
"Description of Business,"  contains  "forward-looking  statements" that include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources.
These  forward-looking   statements  include,  without  limitation,   statements
regarding:  proposed  new  services;  our  expectations  concerning  litigation,
regulatory  developments or other matters;  statements  concerning  projections,
predictions,  expectations,  estimates or forecasts for our business,  financial
and  operating   results  and  future   economic   performance;   statements  of
management's  goals and  objectives;  and other similar  expressions  concerning
matters that are not historical  facts.  Words such as "may," "will,"  "should,"
"could," "would," "predicts," "potential," "continue," "expects," "anticipates,"
"future,"   "intends,"   "plans,"   "believes"  and   "estimates,"  and  similar
expressions,  as well as statements in future  tense,  identify  forward-looking
statements.

         Forward-looking  statements should not be read as a guarantee of future
performance or results,  and will not necessarily be accurate indications of the
times at, or by which,  that  performance  or those  results  will be  achieved.
Forward-looking  statements are based on information  available at the time they
are made and/or  management's  good faith belief as of that time with respect to
future  events,  and are  subject to risks and  uncertainties  that could  cause
actual  performance or results to differ  materially  from those expressed in or
suggested by the forward-looking statements.  Important factors that could cause
these differences include, but are not limited to:

         o        our failure to  implement  our  business  plan within the time
                  period we originally planned to accomplish;

         o        the risks of  expanding  the number of products  we offer,  as
                  well as the number of brands we market and distribute;

         o        our ability to locate manufacturers who can timely manufacture
                  our products;

         o        our ability to enter into distribution  agreements both in the
                  United States and internationally;

         o        the demand for high-end  jeans and other casual apparel in the
                  United States and internationally;

         o        industry competition;

         o        general economic conditions; and

         o        other  factors   discussed  under  the  headings   "Cautionary
                  Statements  and Risk  Factors,"  "Management's  Discussion and
                  Analysis or Plan of Operation" and "Description of Business."

         Forward-looking statements speak only as of the date they are made. You
should not put undue reliance on any  forward-looking  statements.  We assume no
obligation  to update  forward-looking  statements  to reflect  actual  results,
changes in  assumptions  or changes in other factors  affecting  forward-looking
information,  except to the extent required by applicable securities laws. If we
do update one or more forward-looking  statements,  no inference should be drawn
that  we  will  make   additional   updates  with  respect  to  those  or  other
forward-looking statements.


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ITEM 1.  DESCRIPTION OF BUSINESS

CORPORATE OVERVIEW

         We design,  market and sell  high-end  casual  apparel  under the brand
names "People's  Liberation" and "William Rast." The majority of the merchandise
we offer consists of premium  denim,  knits,  wovens,  and outerwear for men and
women. In the United States,  we distribute our merchandise to better department
stores and  boutiques,  such as  Nordstrom,  Bloomingdales,  Saks Fifth  Avenue,
Neiman   Marcus,   Lisa  Klein,   Lulu's   Boutique,   Atrium  and  Fred  Segal.
Internationally,  in select countries, we sell our products directly and through
distributors to better department  stores and boutiques,  such as TNT in Canada,
Jades in Germany and Sears in Mexico City. We are  headquartered in Los Angeles,
California.

         We  commenced  our  People's  Liberation  business in July 2004 and our
William Rast clothing line in May 2005.  Our People's  Liberation  clothing line
was  developed  internally  by our Chief  Executive  Officer,  Daniel Guez.  Our
William Rast clothing line was  developed by Daniel Guez in  collaboration  with
Justin Timberlake and his childhood friend, Trace Ayala.

         Prior to November  22, 2005,  People's  Liberation,  Inc.  (then called
Century Pacific Financial Corporation) existed as a "shell company" with nominal
assets whose sole  business was to identify,  evaluate and  investigate  various
companies  to acquire or with which to merge.  On November  22,  2005,  People's
Liberation, Inc. consummated an exchange transaction in which it acquired all of
the outstanding  ownership  interests of Bella Rose,  LLC, a California  limited
liability company ("Bella Rose") and Versatile Entertainment, Inc., a California
corporation  ("Versatile"),  in exchange for an aggregate of 2,460,106.34 shares
of its series A convertible preferred stock which, on January 5, 2006, converted
into 26,595,751  shares of its common stock on a post reverse stock split basis.
At the closing of the exchange transaction,  Versatile and Bella Rose became our
wholly-owned  subsidiaries.  The exchange  transaction  was  accounted  for as a
reverse merger (recapitalization) with Versatile and Bella Rose deemed to be the
accounting  acquirers,  and  People's  Liberation,   Inc.  the  legal  acquirer.
Versatile  Entertainment  was formed in April,  2001 and currently  operates our
Peoples Liberation  business and Bella Rose was formed in May 2005 and currently
operates  our William  Rast  business  through  its  subsidiaries  William  Rast
Sourcing, LLC and William Rast Licensing, LLC.

APPAREL INDUSTRY BACKGROUND

         We operate  our  business in the  premium  contemporary  segment of the
apparel industry.  Currently,  our competitors include companies and brands such
as True Religion,  Seven For All Mankind,  Citizens of Humanity,  J. Lindenberg,
Theory,  James  Perse and Joe's  Jeans.  We  compete  in our  ability  to create
innovative  concepts and designs with the brands that we own, market,  and sell.
We anticipate that the premium contemporary segment of the apparel industry will
become  increasingly  competitive  because of the consumer demand for apparel in
this segment,  as well as the high retail prices  consumers are willing to spend
for such goods.

CUSTOMERS

         We market our products to better  department  stores and boutiques that
cater to fashion forward clientele. Our products are sold to a limited number of
better  department stores and boutiques to maintain our premium brand status. In
the  United  States,  our  products  are sold in a number of  Bloomingdales  and
Nordstrom  store  locations.  We  plan  to  continue  to  develop  our  existing
relationships with our customers, and expand our domestic sales and distribution
to better  department  stores as the  visibility  of our brands  increase in the
marketplace.  Currently, in addition to Nordstrom and Bloomingdales,  we sell to
Saks Fifth Avenue,  Neiman Marcus, Lisa Klein, Lulu's Boutique,  Atrium and Fred
Segal as well as  hundreds  of other  boutiques  and  specialty  retailers.  Our
largest international customers are distributors who sell our products to better
department stores and boutiques in their respective regions. We intend to expand
our


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international  distribution  into additional  territories and increase our brand
penetration in the countries in which our apparel is currently being sold.

         In   October    2006,    we   launched   our    e-commerce    websites,
www.peoplesliberation.com  and www.williamrast.com,  for the direct on-line sale
of select People's  Liberation and William Rast products.  The websites showcase
each  brand's  men's and women's  collections,  including  premium  denim jeans,
skirts,  knits tops,  jackets and tracksuits,  a selection of which is available
for  purchase  online.  We launched the  websites to attract new  customers  and
increase  existing loyalty to our brands.  In conjunction with the launch of our
e-commerce  websites,  we  entered  into an  agreement  with a vendor to provide
customer service,  fulfillment and site maintenance services. Services are to be
provided by the vendor over a three-year  period and the agreement is cancelable
by either party beginning  March 2007. Fees for services  provided by the vendor
are calculated based on a percentage of net website revenue.

OUR PRODUCTS

         Our principal  products are high-end fashion denim,  knits,  wovens and
casual wear that are designed, manufactured, marketed, and distributed under the
"People's  Liberation" and "William Rast" labels. Our People's  Liberation brand
primarily  includes  denim and knits for women,  and our William Rast brand is a
collection of denim, knits,  wovens,  outerwear and accessories for both men and
women.  As a result of the fit,  quality,  styles and  successful  marketing and
branding of our products,  we believe that our products will continue to command
premium prices in the marketplace.

         In May 2006,  we entered into an agreement  with rock icon Tommy Lee to
create a limited  edition  clothing  group called "PL for TL." The clothing line
consists of a range of denim, hooded sweatshirts and hats for both men and women
and combines  modern  tailoring with an edgy, yet sleek fit. The  inspiration of
the "PL for TL" group is the artistic elements of Tommy Lee's tattoos. The knits
and denim have authentic detailing influenced by Tommy's unique aesthetic. Tommy
Lee is also involved in the design and development of the products and will make
a minimum of six annual  appearances  at a  combination  of trade shows,  retail
locations  and  fashion  shows to promote  the  clothing  line.  The "PL for TL"
collection was launched in the fourth quarter of 2006. We may enter into similar
arrangements with other  celebrities to further promote our People's  Liberation
brand.

         Our denim is made  from  high  quality  fabrics  milled  in the  United
States,  Japan and Italy and  processed  with  various  treatments,  washes  and
finishes,  including light,  medium,  dark, and destroyed washes,  some of which
include studs,  stones, and embroidered pockets as embellishments.  We introduce
new  versions of our major styles each season in  different  colors,  washes and
finishes.

         Our knits and woven  products  consist  of men's and  women's  tops and
bottoms. We sell knit and woven products which consist of cotton,  velour, terry
loop, fleece and nylon fabrications. Similar to our denim products, we introduce
new versions, bodies, styles, colors and graphics of our knit and woven products
each season.  We anticipate  expanding our products and  fabrications to include
other fashion forward materials.

         Mr. Guez, along with a team of designers, is responsible for the design
and development of our product lines. We do not currently have in place a formal
research and development  effort.  Mr. Guez and the team of designers,  together
with our outside sales contractors,  shop stores, travel and speak to market and
trend setters to help generate new product ideas.

SALES AND DISTRIBUTION

    US SALES AND DISTRIBUTION

         We sell our products  through our own sales force based in Los Angeles.
Additionally,  we operate  showrooms in Los Angeles and New York with  dedicated
commissioned  sales staff and in-house salaried sales executives in Los Angeles.
We also employ customer service representatives who are assigned to


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key customers and provide in-house customer service support. We ship products to
and invoice our United  States  customers  directly  from our  facilities in Los
Angeles, California.

         Currently,  our  products are sold in the United  States to  department
stores and boutiques.  While we do not depend on any individual department store
to sell our products, for the year ended December 31, 2006,  approximately 27.9%
and 10.6% of our sales were to two customers. During the year ended December 31,
2005, approximately 16.4% and 15.3% of our sales were to two customers.

    INTERNATIONAL SALES AND DISTRIBUTION

         People's  Liberation  brand  products are available in Japan,  Germany,
Scandinavia, Mexico and Canada through our exclusive international distributors.
William Rast brand products are available in Germany,  Scandinavia,  Mexico, the
United Kingdom, and Canada through our exclusive international distributors. Our
partners  purchase  products  at a  discount  for  resale  in  their  respective
territories. Our distributors warehouse, sell, ship, market and collect People's
Liberation  and William  Rast brand  products at their  expense.  We  anticipate
growing our international distribution channels across new territories.

         A summary of the territories  covered under our exclusive  distribution
agreements by brand is as follows:

NAME OF BRAND            TERRITORY
-------------------      -------------------------------------------------------
People's Liberation      Germany, Switzerland, Austria, Norway, Sweden, Finland,
                         Iceland, Mexico and Canada.

William Rast             Germany, Switzerland, Austria, Norway, Sweden, Finland,
                         Iceland, Canada, United Kingdom and Ireland.

         On February 1, 2007, we entered into a consulting  agreement with Akari
Enterprises, LLC, a consulting firm formed and controlled by Andreas Kurz, which
specializes in international  expansion,  licensing,  retailing and branding for
apparel  companies.  Akari  Enterprises  will  be  responsible  for  negotiating
exclusive distribution agreements with distributors outside of the United States
and will manage  People's  Liberation and William  Rast's current  international
distribution  relationships.  Prior to forming Akari Enterprises,  Mr. Kurz held
several  senior  positions  at various  manufacturers,  including  Seven for All
Mankind,  Diesel  USA and Hugo  Boss.  The  consulting  agreement  provides  for
commissions to be paid to Akari  Enterprises  based on a defined formula related
to net international sales and terminates on December 31, 2009.

         In Germany, Switzerland and Austria, Unifa GmbH exclusively distributes
People's  Liberation  and William Rast brand  products.  Located in  Dusseldorf,
Unifa is the premier  distributor  for denim and U.S.  apparel  lines in Europe.
Unifa GmbH represents brands such as Von Dutch,  DKNY,  Citizens of Humanity and
Rock and  Republic.  In addition,  Unifa also  operates its own flagship  store,
Jades, which is one of the premier retail destinations in Europe.

         In Norway,  Denmark,  Sweden,  Finland and Iceland,  Sjoklint Agenturer
exclusively distributes People's Liberation and William Rast branded products. A
well known and respected  distributor  in the Nordic  fashion  market,  Sjoklint
represents  brands such as Seven for All Mankind,  Dolce & Gabanna,  Missoni and
DKNY.

         In Mexico,  Eduardo  Kurian  distributes  People's  Liberation  branded
products.  Located in Mexico City, Mr. Kurian  distributes  other premium brands
such as True  Religion,  Seven for All Mankind and Von Dutch.  Mr.  Kurian works
closely  with Sears  Mexico,  which  imports  and sells other  high-end  premium
brands.


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         In  Canada,  A&F  Apparel  Limited  exclusively   distributes  People's
Liberation  and William  Rast  branded  products.  A&F Apparel  works with other
premium brands like Citizens of Humanity, Mimi & Coco and Heatherette. A&F built
its  reputation and customer base through  introducing  Rock and Republic to the
Canadian retail market.

         In  the  United   Kingdom  and  Ireland,   William  Rast  products  are
exclusively  sold by Prelude Trading  Limited.  Prelude also sells the Von Dutch
brand and other premium brands.  Prelude's  customers  include  Harrods,  Harvey
Nichols,  Selfridges and a number of other fashion  boutiques across the British
Isles.

         During  2006,   we   distributed   our  products  in  Japan  through  U
International,  a distributor in the territory.  In February 2007, we terminated
our distribution agreement with U International, and we are now actively seeking
a new distributor in the region.

         Our distribution  agreements  contain minimum annual aggregate purchase
requirements as defined in the related agreements.

BRAND DEVELOPMENT

         The People's  Liberation  and William Rast brands already have consumer
recognition  in the high-end  fashion denim,  knits and casual wear markets.  We
plan to continue building and expanding this recognition by target marketing our
lines to fashion conscious consumers who want to wear and be seen in the latest,
trendiest jeans and related  apparel.  To facilitate this objective,  we plan to
continue to limit  distribution to exclusive  boutiques and major retailers.  We
also plan to use  celebrities  as a  marketing  catalyst  to  continue  to bring
attention  and  credibility  to our brands.  Currently,  we leverage the popular
public image of Justin  Timberlake  in the promotion of our William Rast apparel
line and Tommy Lee to promote our People's Liberation line.

         We currently  market our products  under the  People's  Liberation  and
William Rast brands and plan to expand our brand portfolio by acquiring existing
apparel  brands or internally  developing  new brands.  We  anticipate  that our
internal  growth  will be  driven  by (1)  expansion  of our  product  lines  by
introducing new styles and categories of apparel products and  accessories,  and
(2)   expansion  of  our   wholesale   distribution,   both   domestically   and
internationally through high-end retailers.  Our goal is to employ a multi-brand
strategy which  diversifies the fashion and other risks associated with reliance
on any single brand.

         Our  expansion  strategy  includes   evaluating   existing  brands  for
acquisition and collaborating with celebrities to develop new apparel brands. We
have been  successful  with our  collaboration  with Justin  Timberlake  and our
development  of the  William  Rast brand and plan to  continue to seek out other
targets for the development of new brands.

MANUFACTURING AND SUPPLY

         To maintain  low fixed costs and to reduce the time  between  order and
delivery,  we use third party  contract  manufacturers  to produce our  finished
goods from  facilities  located  primarily in Los Angeles,  California.  For the
majority of our denim  products,  we purchase fabric and trim from suppliers who
deliver these components directly to our contract manufacturers to be cut, sewn,
washed and  finished.  For the  majority  of our knits and other  products,  our
contract  manufacturers  purchase all components  necessary to deliver  finished
products to us. We believe we can realize  significant  cost  savings in product
manufacturing  because of our strong  relationships with a diverse group of U.S.
and international manufacturers established by our management team. In addition,
the increase in production  volume as a result of our multi-brand  strategy will
give us greater purchasing power. As our sales increase, we intend to expand the
number of contract  manufacturers we use, both domestically and internationally,
to  perform  some or all of the  manufacturing  processes  required  to  produce
finished  products.  We do not rely on any one  manufacturer  and  manufacturing
capacity is readily available to meet our current and planned needs.


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Currently,  we outsource the majority of our denim  production to  approximately
six local  contractors in or near Los Angeles,  California.  Our denim fabric is
purchased  from mills located in the United  States,  Europe and Japan.  For our
knits, we stock prepared for die garments.  These units are shipped to local die
houses and printing vendors on a demand basis.

         We do not  currently  have any  long-term  agreements  in place for the
supply of fabric,  thread or other raw materials.  Fabric,  thread and other raw
materials are available from a large number of suppliers worldwide.  Although we
do not depend on any one supplier,  for the year ended  December 31, 2006,  four
suppliers  provided for 52.2% of our total combined  purchases for the year. For
the year ended  December 31,  2005,  three  suppliers  provided for 84.4% of our
total combined purchases for the year.

COMPETITION

         Both the premium denim and knits  industries are intensely  competitive
and fragmented, and will continue to become more competitive and fragmented as a
result  of  the  high  margins  that  are  achievable  in  the  industries.  Our
competitors  include other small  companies like ours, as well as companies that
are  much  larger,  with  superior  economic,   marketing,   distribution,   and
manufacturing  capabilities.  Our competitors in the denim market include brands
such as  True  Religion,  Seven  For  All  Mankind,  Citizens  of  Humanity,  J.
Lindenberg,  Theory, James Perse and Joe's Jeans, as well as other premium denim
brands. In the knit market,  we compete against J. Lindenberg,  Theory and James
Perse and other premium brands.

         We compete in our ability to create  innovative  concepts  and designs,
develop  products with  extraordinary  fit, and produce high quality fabrics and
finishes, treatments and embellishments. At a retail price point of $180 to $280
for denim jeans and $85 to $125 for knits and other  apparel  items,  we believe
that we offer competitively valued products.

TRADEMARKS AND OTHER INTELLECTUAL PROPERTY

         We have filed  trademark  applications  for the following  marks in the
following territories:

NAME OF MARK               TERRITORY
-------------------        -----------------------------------------------------
People's Liberation        USA,  European  Community,  Japan,  Mexico,  People's
                           Republic of China,  People's  Republic of Korea, Hong
                           Kong,  Israel,  Russia,  Taiwan,  Singapore,  Turkey,
                           Australia and Canada.

William Rast               USA,  European  Community,  Japan,  Mexico,  People's
                           Republic of China, Hong Kong, Israel, Russia, Taiwan,
                           Singapore, Turkey, Canada, Australia and the People's
                           Republic of Korea.

Dirty Wear                 USA

DW                         USA

Adept                      USA and Canada

Americouture               USA

          We plan to  continue  to expand  our brand  names and our  proprietary
trademarks and designs worldwide.

GOVERNMENT REGULATION AND SUPERVISION

         Our operations are subject to the effects of international treaties and
regulations such as the North American Free Trade Agreement (NAFTA). We are also
subject to the  effects of  international  trade  agreements  and  embargoes  by
entities such as the World Trade  Organization.  Generally,  these international
trade agreements benefit our business rather than burden it because they tend to
reduce trade


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<PAGE>


quotas,  duties, taxes and similar impositions.  However, these trade agreements
may also impose  restrictions that could have an adverse impact on our business,
by  limiting  the  countries  from  whom we can  purchase  our  fabric  or other
component  materials,  or limiting the countries  where we might market and sell
our products.

         Labeling and  advertising  of our products is subject to  regulation by
the Federal Trade  Commission.  We believe that we are in compliance  with these
regulations.

EMPLOYEES

         As of December 31, 2006, we had a total of 56 full time employees.  Our
full time employees  consist of four officers,  Daniel Guez, our Chief Executive
Officer,  Edward  Houston,  our President,  Thomas Nields,  our Chief  Operating
Officer and Darryn  Barber,  our Chief  Financial  Officer.  Our  warehouse  and
shipping  department is comprised of seven employees  primarily  responsible for
picking,  packing,  shipping  and  receiving.  Our  production  and design teams
include  twenty-seven  employees  consisting of  production  managers as well as
sample sewers,  pattern makers,  technical designers and product designers.  Our
production and design teams are  responsible  for the design,  development,  and
preparation of sample  products.  Additionally,  we have eighteen  employees who
handle  sales,  marketing,   customer  service,  accounting  and  administration
functions.

ITEM 2.  DESCRIPTION OF PROPERTY

         We lease our principal  executive  office and  warehouse  space under a
lease  agreement that expires in December  2008.  The facility is  approximately
38,500  sq.  ft, and is  located  in Los  Angeles,  California.  It is from this
facility that we conduct all of our executive and administrative  functions, and
ship the majority of our People's  Liberation and William Rast brand products to
our customers. Our internet products are shipped from a third-party warehouse in
Long Beach,  California.  We have two  showrooms  located in Los Angeles and New
York City.  Our New York City  showroom  lease  expires in April  2009.  Our Los
Angeles  showroom  is  rented  on a  month-to-month  basis  under  a  consulting
arrangement with one of our salesmen.  We believe that the facilities we utilize
are well  maintained,  in good  operating  condition,  and  adequate to meet our
current and foreseeable needs.

ITEM 3.  LEGAL PROCEEDINGS

         We are not involved in any legal proceedings that require disclosure in
this report.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 2006.


                                       8
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

         Our common stock is quoted on the Over-The-Counter Bulletin Board under
the symbol "PPLB.OB" The following table sets forth, for the periods  indicated,
the high and low bid  information  for the  common  stock,  as  determined  from
quotations on the  Over-the-Counter  Bulletin Board, as well as the total number
of shares  of  common  stock  traded  during  the  periods  indicated.  The 2005
information has been adjusted to reflect a 1-for-9.25 reverse stock split of our
common  stock which took  effect on January 5, 2006.  The  following  quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.

                                        HIGH            LOW           VOLUME
                                        -----          -----         -------
YEAR ENDED DECEMBER 31, 2006
  First Quarter.....................    $5.00          $0.28          67,100
  Second Quarter....................    $2.80          $0.76         317,100
  Third Quarter.....................    $1.08          $0.54         576,000
  Fourth Quarter....................    $1.34          $0.75         567,800

YEAR ENDED DECEMBER 31, 2005
  First Quarter.....................    $3.24          $1.11          15,193
  Second Quarter....................    $3.24          $1.11          89,271
  Third Quarter.....................    $5.55          $1.39          59,791
  Fourth Quarter....................    $5.55          $1.94          53,882

         On March 12,  2007,  the  closing  sales  price of our common  stock as
reported on the Over-The-Counter Bulletin Board was $0.81 per share. As of March
9, 2007,  there were  approximately  477 record holders of our common stock. Our
transfer agent is Stalt, Inc., Menlo Park, CA.

DIVIDENDS

         Since January 1, 2004, we have not paid or declared cash  distributions
or dividends on our common stock.  We do not intend to pay cash dividends on our
common  stock in the  foreseeable  future.  We  currently  intend to retain  all
earnings, if and when generated,  to finance our operations.  The declaration of
cash dividends in the future will be determined by the board of directors  based
upon our earnings,  financial condition, capital requirements and other relevant
factors.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The following  discussion and analysis should be read together with the
Consolidated Financial Statements of People's Liberation, Inc. and the "Notes to
Consolidated  Financial  Statements"  included  elsewhere in this  report.  This
discussion   summarizes  the  significant  factors  affecting  the  consolidated
operating results,  financial condition and liquidity and cash flows of People's
Liberation,  Inc. for the fiscal years ended December 31, 2006 and 2005.  Except
for  historical   information,   the  matters  discussed  in  this  Management's
Discussion and Analysis or Plan of Operation are forward-looking statements that
involve risks and uncertainties and are based upon judgments  concerning various
factors that are beyond our control.

OVERVIEW

         We design,  market and sell  high-end  casual  apparel  under the brand
names "People's  Liberation" and "William Rast." The majority of the merchandise
we offer consists of premium  denim,  knits,  wovens,  and outerwear for men and
women. In the United States, we distribute our merchandise to better


                                       9
<PAGE>


department stores and boutiques,  such as Nordstrom,  Bloomingdales,  Saks Fifth
Avenue,  Neiman  Marcus,  Lisa Klein,  Lulu's  Boutique,  Atrium and Fred Segal.
Internationally,  in select countries, we sell our products directly and through
distributors to better department  stores and boutiques,  such as TNT in Canada,
Jades in Germany and Sears in Mexico City. We are  headquartered in Los Angeles,
California.

         We sell our products  through our own sales force based in Los Angeles.
Additionally,  we operate  showrooms in Los Angeles and New York with  dedicated
commissioned  sales staff and in-house salaried sales executives in Los Angeles.
We  also  employ  customer  service  representatives  who  are  assigned  to key
customers and provide in-house customer service support. We ship products to and
invoice our United States customers directly from our facilities in Los Angeles,
California.

         People's   Liberation   brand   products  are   available  in  Germany,
Scandinavia, Mexico and Canada through our exclusive international distributors.
William Rast brand products are available in Germany,  Scandinavia,  Mexico, the
United Kingdom, and Canada through our exclusive international distributors. Our
partners  purchase  products  at a  discount  for  resale  in  their  respective
territories. Our distributors warehouse, sell, ship, market and collect People's
Liberation  and William  Rast brand  products at their  expense.  We  anticipate
growing our international distribution channels across new territories.

         We use third party contract manufacturers to produce our finished goods
from facilities located primarily in Los Angeles,  California.  For the majority
of our denim  products,  we purchase  fabric and trim from suppliers who deliver
these components directly to our contract  manufacturers to be cut, sewn, washed
and  finished.  For the majority of our knits and other  products,  our contract
manufacturers  purchase all components necessary to deliver finished products to
us.  As our  sales  increase,  we  intend  to  expand  the  number  of  contract
manufacturers we use, both domestically and internationally,  to perform some or
all of the manufacturing processes required to produce finished products.

         We  operate  exclusively  in the  premium  contemporary  segment of the
apparel industry,  which is characterized by lower volume sales of higher margin
products.  Our  future  success  depends  in part  on the  continued  demand  by
consumers for high-end casual apparel,  which in recent years has contributed to
a proliferation of brands such as True Religion, Seven For All Mankind, Citizens
of Humanity,  J. Lindenberg,  Theory, James Perse and Joe's Jeans. We anticipate
that the  premium  contemporary  segment of the  apparel  industry  will  become
increasingly  competitive  because of the  consumer  demand for  apparel in this
segment,  as well as the high retail  prices  consumers are willing to spend for
such  goods.  An  increase  in the  number of brands  competing  in the  premium
contemporary segment of the apparel industry could result in reduced shelf space
for our brands at better department stores and boutiques, our primary customers.

         Our historical  operations  prior to November 22, 2005 reflect only the
operations of Versatile Entertainment, Inc., a California corporation, and Bella
Rose, LLC, a California limited liability  company.  Prior to November 22, 2005,
we existed as a "shell  company" with nominal  assets whose sole business was to
identify, evaluate and investigate various companies to acquire or with which to
merge. On November 22, 2005, we consummated an exchange  transaction in which we
acquired all of the outstanding  ownership interests of Bella Rose and Versatile
in exchange  for our  issuance of an  aggregate  of  2,460,106.34  shares of our
series A convertible  preferred stock which, on January 5, 2006,  converted into
26,595,751  shares of our common  stock on a post  reverse  stock  split  basis.
Versatile Entertainment, Inc. was formed in April 2001 and commenced its present
business in July 2004.  Versatile  began shipping its products during the fourth
quarter of 2004.  Bella Rose, LLC was formed and commenced its present  business
in May 2005. Bella Rose began shipping its products during the fourth quarter of
2005.  At the  closing of the  exchange  transaction,  Versatile  and Bella Rose
became our wholly-owned subsidiaries. The exchange transaction was accounted for
as a reverse merger  (recapitalization)  with Versatile and Bella Rose deemed to
be the accounting acquirers, and us the legal acquirer.


                                       10
<PAGE>


SIGNIFICANT DEVELOPMENTS

         On February 1, 2007, we entered into a consulting  agreement with Akari
Enterprises, LLC, a consulting firm formed and controlled by Andreas Kurz, which
specializes in international  expansion,  licensing,  retailing and branding for
apparel  companies.  Akari  Enterprises  will  be  responsible  for  negotiating
exclusive distribution agreements with distributors outside of the United States
and will manage  People's  Liberation and William  Rast's current  international
distribution  relationships.  Prior to forming Akari Enterprises,  Mr. Kurz held
several  senior  positions  at various  manufacturers,  including  Seven for All
Mankind,  Diesel  USA and Hugo  Boss.  The  consulting  agreement  provides  for
commissions to be paid to Akari  Enterprises  based on a defined formula related
to net international sales and terminates on December 31, 2009.

         In   October    2006,    we   launched   our    e-commerce    websites,
www.peoplesliberation.com  and www.williamrast.com,  for the direct on-line sale
of select People's  Liberation and William Rast products.  The websites showcase
each  brand's  men's and women's  collections,  including  premium  denim jeans,
skirts,  knits tops,  jackets and tracksuits,  a selection of which is available
for  purchase  online.  We launched the  websites to attract new  customers  and
increase  existing loyalty to our brands.  In conjunction with the launch of the
e-commerce  websites,  we  entered  into an  agreement  with a vendor to provide
customer service,  fulfillment and site maintenance services. Services are to be
provided by the vendor over a three-year  period and the agreement is cancelable
by either party beginning  March 2007. Fees for services  provided by the vendor
are calculated based on a percentage of net website revenue.

         On October 1, 2006, Bella Rose and William Rast Enterprises,  an entity
owned in part by  Justin  Timberlake,  entered  into  operating  agreements  for
William Rast Sourcing,  LLC and William Rast Licensing,  LLC, to memorialize the
terms set forth in Letter Agreements entered into on or around April 27, 2005 by
the two parties.  William Rast Enterprises received a 50% membership interest in
each of William Rast Sourcing and William Rast Licensing. Bella Rose was granted
a 50% membership interest in William Rast Sourcing in exchange for assigning all
of the assets and liabilities of the William Rast apparel  business  operated by
Bella  Rose to  William  Rast  Sourcing.  Bella  Rose  was  also  granted  a 50%
membership  interest in William Rast Licensing in exchange for  contributing the
William  Rast(TM)  trademarks to William Rast  Licensing.  Beginning  October 1,
2006,  William Rast Sourcing and William Rast Licensing are  consolidated  under
Bella Rose,  a  wholly-owned  subsidiary  of the  Company.  Until  William  Rast
Enterprises has a basis in the capital of William Rast Sourcing and William Rast
Licensing,  losses will not be allocated to William Rast  Enterprises.  Instead,
all losses will be recognized by Bella Rose in consolidation.  Subsequently,  if
profits are generated by William Rast Sourcing and William Rast Licensing,  then
profits  will not be  allocated to William  Rast  Enterprises  until  previously
unrecognized  minority  losses are fully recouped by Bella Rose.  Minimum profit
allocations  to William Rast  Enterprises  will be  accounted  for as a minority
interest in the consolidated financial statements of the Company.

         In  consideration  for  William  Rast  Enterprises  entering  into  the
operating  agreements with Bella Rose on terms which give Bella Rose operational
control  over William Rast  Sourcing and William Rast  Licensing,  on October 1,
2006, we issued to William Rast Enterprises  571,429 shares of our common stock,
par value  $0.001  per share.  The common  stock  issued  contains  restrictions
related to the sale or transfer of the shares,  including right of first refusal
and annual volume limitations. The market price of the Company's common stock on
the date of issuance of the shares was $0.75.  The $428,572  value of the common
stock  issued to William Rast  Enterprises  has been  recorded as an  intangible
asset on Bella Rose's financial statements.  The intangible asset is expected to
have an  indefinite  life and will be  reviewed  for  impairment  on a quarterly
basis.

         In May 2006,  we entered into an agreement  with rock icon Tommy Lee to
create a limited  edition  clothing  group called "PL for TL." The clothing line
consists of a range of denim, hooded sweatshirts and hats for both men and women
and combines  modern  tailoring with an edgy, yet sleek fit. The  inspiration of
the "PL for TL" group is the artistic elements of Tommy Lee's tattoos. The knits
and denim have authentic detailing influenced by Tommy's unique aesthetic. Tommy
Lee is also involved in the design


                                       11
<PAGE>

and  development  of the  products  and  will  make  a  minimum  of  six  annual
appearances at a combination of trade shows,  retail locations and fashion shows
to promote the clothing  line.  The "PL for TL"  collection  was launched in the
fourth quarter of 2006.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

         Our discussion  and analysis of our financial  condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues  and  expenses,   and  related  disclosure  of  contingent  assets  and
liabilities.  On an on-going basis,  we evaluate our estimates,  including those
related to our valuation of  inventories  and our  allowance  for  uncollectible
house  accounts   receivable,   recourse   factored   accounts   receivable  and
chargebacks. 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.
Actual results may differ from these estimates  under  different  assumptions or
conditions.  We believe the following  critical  accounting  policies affect our
more  significant  judgments  and  estimates  used  in  the  preparation  of our
consolidated financial statements:

         INVENTORIES. Inventories are evaluated on a continual basis and reserve
adjustments,  if any,  are made based on  management's  estimate of future sales
value  of  specific  inventory  items.  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 the  adjustments  become  known.  Inventories,  consisting of piece goods and
trim,  work-in-process  and  finished  goods,  are  stated  at the lower of cost
(first-in, first-out method) or market.

         ACCOUNTS   RECEIVABLE.   Factored  accounts  receivable  balances  with
recourse,  chargeback and other  receivables  are evaluated on a continual basis
and  allowances  are provided for  potentially  uncollectible  accounts based on
management's  estimate  of the  collectibility  of customer  accounts.  Factored
accounts receivable without recourse are also evaluated on a continual basis and
allowances are provided for anticipated returns, discounts and other chargebacks
based on management's  estimate of the  collectibility  of customer accounts and
historical  return,  discount  and  other  chargeback  rates.  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.

         INTANGIBLE ASSETS. Intangible assets are evaluated on a continual basis
and impairment  adjustments are made based on  management's  reassessment of the
useful  lives  related to its  intangible  assets with  definite  useful  lives.
Intangible  assets with indefinite  lives are evaluated on a continual basis and
impairment adjustments are made based on management's comparison of the carrying
amount  of an  asset  to  future  undiscounted  net cash  flows  expected  to be
generated  by the  asset.  Impairment  adjustments  are made for the  difference
between the carrying value of the intangible  asset and the estimated  valuation
and charged to operations in the period in which the facts that give rise to the
adjustments become known.

         REVENUE  RECOGNITION.  Sales are recorded at the time of  shipment,  at
which point title  transfers to the customer,  and when collection is reasonably
assured.

         DEFERRED TAX ASSETS. We may record a valuation  allowance to reduce our
deferred  tax assets to an amount  that we believe is more likely than not to be
realized.  We consider  estimated  future taxable income and ongoing prudent and
feasible  tax  planning  strategies  in  assessing  the  need  for  a  valuation
allowance.  If we determine  that we may not realize all or part 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


                                       12
<PAGE>


would be reflected as an income tax benefit. Valuation allowance adjustments are
made in the period in which the facts that give rise to the  adjustments  become
known.

         STOCK BASED COMPENSATION.  The Company adopted SAS No. 123(R) using the
modified  prospective  transition  method which requires the  application of the
accounting  standards as of January 1, 2006, the first day of the Company's 2006
fiscal year.  Stock-based  compensation  expense is  recognized  based on awards
ultimately expected to vest on a straight-line prorated basis. The fair value of
options is estimated on the date of grant using the Black-Scholes option pricing
model. The valuation  determined by the Black-Scholes  pricing model is affected
by the Company's stock price as well as assumptions regarding a number of highly
complex and subjective  variables.  These variables include, but are not limited
to our expected stock price  volatility over the term of the awards,  and actual
and projected employee stock option exercise  behaviors.  Stock price volatility
was  estimated  based on a peer group of public  companies and expected term was
estimated using the "safe harbor" provisions provided in SAB 107.

RECENT ACCOUNTING PRONOUNCEMENTS

         See Note 2 to Notes to  Consolidated  Financial  Statements  for a full
description  of  recent  accounting   pronouncements  including  the  respective
expected  dates of adoption and effects on results of  operations  and financial
condition.

RESULTS OF OPERATIONS

         The following table presents consolidated  statement of operations data
for each of the years indicated as a percentage of revenues.


                                                     YEAR ENDED     YEAR ENDED
                                                    DECEMBER 31,   DECEMBER 31,
                                                        2006           2005
                                                    ------------   ------------
Net sales ...................................          100.0%         100.0%
Cost of goods sold ..........................           55.2           61.5
                                                    ------------   ------------
Gross profit ................................           44.8           38.5
Selling expenses ............................           14.0           14.8
Design and production expenses ..............           14.3           15.4
General and administrative expenses .........           22.4           16.7
                                                    ------------   ------------
Operating loss ..............................           (5.9)%         (8.4)%
                                                    ============   ============


                                       13
<PAGE>


         NET SALES
                                      YEARS ENDED DECEMBER 31,
                                    ---------------------------       PERCENT
                                       2006            2005            CHANGE
                                    -----------     -----------     -----------
Net sales .....................     $15,960,000     $ 5,803,000        175.0%

         The increase in net sales for the year ended  December 31, 2006 was due
to the continued growth of our People's  Liberation  apparel line and the launch
of our William  Rast  apparel  line.  We  commenced  operations  of our People's
Liberation  business in July 2004 and began  shipping our products in the fourth
quarter of 2004.  We commenced  operations  of our William Rast  business in May
2005 and began  shipping our products in the fourth  quarter of 2005.  Net sales
decreased  approximately  $634,000 to $4,430,000  in the fourth  quarter of 2006
from  $5,064,000  in the third  quarter  of 2006 due to the  seasonality  of our
product mix and a decrease in sales from our distributor in Japan.

         GROSS PROFIT

                                           YEARS ENDED DECEMBER 31,
                                          ------------------------     PERCENT
                                             2006          2005         CHANGE
                                          ----------    ----------    ----------
Gross profit .........................    $7,158,000    $2,236,000        *

----------
*  not meaningful

         Gross  profit  consists of net sales less cost of goods  sold.  Cost of
goods sold  includes  expenses  primarily  related to  inventory  purchases  and
contract  labor,  freight and overhead  expenses.  Overhead  expenses  primarily
consist of  warehouse  and  shipping  salaries  and  expenses.  Our gross margin
increased to 44.8% for the year ended  December 31, 2006 from 38.5% for the year
ended  December  31, 2005.  The increase in gross profit as a percentage  of net
sales was due to economies of scale achieved in the manufacturing process of our
products,  modified  production  processes and increased  selling prices.  Gross
margin as a percentage of net sales increased to 49.5% for the fourth quarter of
2006 compared to 46.5% in the third quarter of 2006. This increase resulted from
a seasonal  change in our  product  mix  during  the fourth  quarter of 2006 and
economies of scale  achieved in the  manufacturing  process of our products.  We
expect  margins to decrease  slightly or remain flat in the first portion of the
year. In the second half of 2007, we estimate that margins will be approximately
50%.

         SELLING EXPENSES

                                      YEARS ENDED DECEMBER 31,
                                   ------------------------------     PERCENT
                                       2006              2005          CHANGE
                                   ------------       -----------    ----------
Selling expenses.................  $  2,242,000       $   862,000      160.1%

         Selling  expense  for the  years  ended  December  31,  2006  and  2005
primarily  related to tradeshow,  sales  commissions  and  salaries,  travel and
showroom expenses.  As a percentage of net sales,  selling expenses decreased to
14.0% for the year ended  December 31, 2006 compared to 14.8% for the year ended
December  31,  2005,  as a result of net sales  increasing  during the year more
rapidly than  selling  expenses.  The  increase in selling  expense for the year
ended  December  31, 2006 is  attributable  to our  increased  promotion  of our
brands,  including our  participation in several  additional  tradeshows in 2006
that we did not  participate  in during 2005 and our William  Rast  fashion show
that was  launched in the fourth  quarter of 2006.  Selling  expenses  increased
approximately $144,000 to $799,000 (or 18.0% of net sales) in the fourth quarter
of 2006 from $655,000 (or 12.9% of net sales) in the third quarter of 2006.


                                       14
<PAGE>


This increase was due primarily to our William Rast fashion show that took place
in the fourth quarter of 2006.

         DESIGN AND PRODUCTION EXPENSES

                                           YEARS ENDED DECEMBER 31,
                                           -----------------------    PERCENT
                                              2006         2005        CHANGE
                                           ----------   ----------   ----------
Design and production expenses .........   $2,278,000   $  892,000     155.4%

         Design and  production  expenses for the years ended  December 31, 2006
and 2005 primarily  related to design salaries and sample costs. As a percentage
of net sales,  design and  production  expenses  decreased to 14.3% for the year
ended  December 31, 2006 compared to 15.4% for the year ended December 31, 2005,
as a result of net sales during the year increasing more rapidly than design and
production  expenses.  Design and production  expenses increased during the year
ended  December  31,  2006  compared to the year ended  December  31, 2005 as we
increased  our design  staff and incurred  additional  sample costs for both our
People's  Liberation  and William  Rast  apparel  lines.  Design and  production
expenses  decreased  approximately  $48,000 to $546,000 in the fourth quarter of
2006 from $594,000 in the third quarter of 2006. This decrease was due primarily
to streamlining our production department and the timing of sample costs related
to the  development of new product lines,  including our Tommy Lee inspired,  PL
for TL line.

         GENERAL AND ADMINISTRATIVE EXPENSES

                                          YEARS ENDED DECEMBER 31,
                                          -----------------------     PERCENT
                                             2006         2005        CHANGE
                                          ----------   ----------   ----------

General and administrative expenses ..... $3,586,000   $  972,000       *

----------
*  not meaningful

         General and  administrative  expenses for the years ended  December 31,
2006 and 2005 primarily  related to administrative  salaries,  professional fees
and facility  costs.  As a percentage of net sales,  general and  administrative
expenses  increased to 22.4% for the year ended  December  31, 2006  compared to
16.7% for the year  ended  December  31,  2005.  The  increase  in  general  and
administrative  expenses  primarily  related  to  increased  professional  fees,
including fees related to public company reporting requirements,  and the hiring
of additional  management  personnel  including our president,  chief  financial
officer, other finance and administrative employees, and additional compensation
costs,  including  costs related to stock option grants in the second quarter of
2006. General and administrative  expenses increased  approximately  $184,000 to
$1,170,000  in the fourth  quarter of 2006 from $986,000 in the third quarter of
2006.  As a  percentage  of  net  sales,  general  and  administrative  expenses
increased to 26.4% in the fourth quarter of 2006 from 19.5% in the third quarter
of 2006. The increase in general and  administrative  expenses was due primarily
to executive compensation costs incurred in the fourth quarter of 2006.


                                       15
<PAGE>


         INTEREST INCOME (EXPENSE)

                                           YEARS ENDED DECEMBER 31,
                                           -----------------------     PERCENT
                                              2006         2005         CHANGE
                                           ----------   ----------    ----------

Interest income (expense) ..............   $   60,000   $  (29,000)       *

----------
*  not meaningful

         Under  our  factoring  arrangement,  we  may  borrow  up to  85% on our
factored  accounts  receivable.  There were no outstanding  borrowings under our
factoring arrangements as of December 31, 2006. Outstanding borrowings under our
factoring  arrangement  amounted to approximately  $41,000 at December 31, 2005.
Borrowings  during  the year ended  December  31,  2005 were  offset by the $6.6
million  of net  proceeds  received  in our  private  placement  transaction  in
November  2005,  a portion  of which was used in  November  2005 to pay down the
advances from our factor.

         BENEFIT (PROVISION) FOR INCOME TAXES

                                           YEARS ENDED DECEMBER 31,
                                           -----------------------     PERCENT
                                              2006         2005         CHANGE
                                           ----------   ----------    ----------

Benefit (provision) for income taxes....   $   23,000   $  (49,000)     146.9%

         Through May 31, 2005,  Versatile was a  Sub-Chapter  S Corporation  and
taxes  were  payable  individually  by  its  shareholder.  As  a  Sub-Chapter  S
Corporation,  Versatile was subject to the California minimum tax of $800 or was
taxed at the rate of 1.5% of net income,  whichever was higher.  Effective as of
June 1, 2005,  Versatile's  Sub-Chapter  S status was  terminated  and Versatile
became a C  Corporation  for tax  purposes.  Effective  November 22, 2005,  as a
result of the exchange  transaction,  income and losses generated by Bella Rose,
LLC became taxable at C Corporation rates on a consolidated  basis. The deferred
tax assets at December 31, 2006 represent the amounts that  management  believes
are more likely than not to be realized. A valuation allowance has been provided
for our deferred income tax asset related to net operating loss carryforwards of
approximately $323,000. At this time, we cannot determine that it is more likely
than not that we will realize the future income tax benefits  related to our net
operating losses.

         NET LOSS

                                           YEARS ENDED DECEMBER 31,
                                           -----------------------     PERCENT
                                              2006         2005         CHANGE
                                           ----------   ----------    ----------

Net loss................................   $  865,000   $  570,000       51.8%

         Our  increase  in net loss is due  primarily  to  selling,  design  and
production and general administrative  expenses incurred to promote our People's
Liberation  and William Rast brands,  as discussed  above.  Increased  operating
costs were  offset by  increased  sales and gross  margin  during the year ended
December 31, 2006.  Our net loss as a percentage of net sales for the year ended
December  31,  2006  decreased  to 5.4% as compared to 9.8% of net sales for the
year ended December 31, 2005. Net loss  increased to  approximately  $295,000 in
the fourth  quarter of 2006  compared  to net  income of  $133,000  in the third
quarter of 2006. The increase in net loss in the fourth quarter of 2006 compared
to net income in the third quarter of 2006 was due primarily to decreased  sales
and increased selling and general and  administrative  expenses during the three
months ended December 31, 2006,  offset by increased gross margin,  as discussed
above.


                                       16
<PAGE>


RELATED PARTY TRANSACTIONS

         See "Certain  Relationships  and Related Party  Transactions"  included
under Item 12 of this report.

LIQUIDITY AND CAPITAL RESOURCES

         As  of  December  31,  2006,  we  had  cash  and  cash  equivalents  of
approximately  $62,000  and a working  capital  balance  of  approximately  $4.6
million,  which  includes $2.8 million of  availability  from our factor.  As of
December  31,  2005,  we had cash and cash  equivalents  of  approximately  $4.5
million and a working capital balance of  approximately  $5.9 million.  Our cash
balance results primarily from 2005 financing activities.  Pursuant to a private
placement  transaction  with  institutional  investors  and other high net worth
individuals  that  closed on November  23,  2005,  we sold series A  convertible
preferred  stock  and  received  $6.6  million  in  net  proceeds  after  broker
commissions and expense and accounting, legal and other expenses.

         We believe that our existing cash and cash  equivalents and anticipated
cash  flows  from  our  operating  activities  and  pursuant  to  our  factoring
arrangements,  including  availability under our inventory  facility,  should be
sufficient to fund our minimum working capital and capital expenditure needs for
at least the next twelve months.  However,  we are currently  evaluating various
financing  strategies to be used to expand our business and fund future  growth.
The extent of our  future  capital  requirements  will  depend on many  factors,
including our results of  operations.  If our cash from  operations is less than
anticipated or our working  capital  requirements  or capital  expenditures  are
greater  than we expect,  or if we expand our business by acquiring or investing
in additional  brands,  we may need to raise additional debt or equity financing
within the next twelve months. There can be no assurance that additional debt or
equity  financing will be available on acceptable  terms or at all. We currently
do not have any material commitments for capital expenditures.

    CASH FLOWS

         We currently satisfy our working capital requirements primarily through
the sale of equity  securities and cash flows  generated from sales.  Cash flows
from operating,  financing and investing activities for the years ended December
31, 2006 and 2005 are summarized in the following table:

                                                     YEARS ENDED DECEMBER 31,
                                                  -----------------------------
                                                     2006               2005
                                                  -----------       -----------
Operating activities .......................      $(3,774,000)      $(1,954,000)
Investing activities .......................         (692,000)         (198,000)
Financing activities .......................             --           6,678,000
                                                  -----------       -----------
   Net (decrease) increase in cash .........      $(4,466,000)      $ 4,526,000
                                                  ===========       ===========

         CASH USED IN OPERATING ACTIVITIES

         Net cash used in operating activities was approximately  $3,774,000 and
$1,954,000  for the years ended December 31, 2006 and 2005,  respectively.  Cash
used in  operating  activities  for the year ended  December  31, 2006  resulted
primarily from a net loss of  approximately  $865,000 and increased  receivables
and  inventories,  offset by stock based  compensation  and  increased  accounts
payable and accrued  expenses.  Cash used in operating  activities  for the year
ended  December 31, 2005  resulted  primarily  from a net loss of  approximately
$570,000 and increased receivables and inventories, offset by increased accounts
payable and accrued expenses.


                                       17
<PAGE>


         CASH USED IN INVESTING ACTIVITIES

         Net cash used in investing  activities was  approximately  $692,000 and
$198,000 for the years ended December 31, 2006 and 2005, respectively.  Net cash
used in investing  activities  for the year ended December 31, 2006 consisted of
capital  expenditures  primarily  for computer  software,  office  equipment and
machinery  and  equipment  and  trademark  costs.  Net  cash  used in  investing
activities   for  the  year  ended   December  31,  2005  consisted  of  capital
expenditures primarily for computer software, office equipment and machinery and
equipment and trademark costs.

         CASH PROVIDED FROM FINANCING ACTIVITIES

         There were no financing  activities  during the year ended December 31,
2006. Net cash provided by financing activities was approximately $6,678,000 for
the year ended December 31, 2005. Net cash provided by financing  activities for
the year ended December 31, 2005  primarily  reflects net proceeds from the sale
of series A convertible  preferred stock in a private placement transaction with
institutional investors and other high net worth individuals.

     FACTORING AGREEMENTS

         Pursuant to the terms of our factoring agreements, the factor purchases
our  eligible  accounts  receivable  and assumes the credit risk with respect to
those accounts for which the factor has given its prior approval.  If the factor
does not assume the credit risk for a receivable, the collection risk associated
with the  receivable  remains  with us. We pay a fixed  commission  rate and may
borrow up to 85% of eligible accounts  receivable.  Interest is charged at prime
plus 1%. As of December 31, 2006 and 2005,  total factored  accounts  receivable
included in due from factor amounted to approximately $3,020,000 and $2,035,000,
respectively.  There were no  outstanding  advances  as of  December  31,  2006.
Outstanding  advances amounted to approximately  $41,000 as of December 31, 2005
and are  included  in the due from  factor  balance.  On  October  1,  2006,  we
increased  our  borrowing  capacity  under our  factoring  agreements to include
inventory financing  agreements pursuant to which we may borrow up to 50% of our
eligible inventory (as defined in the agreement), up to a maximum of $1 million.
Interest is charged at prime plus 1%. As of  December  31,  2006,  there were no
outstanding borrowings under these inventory financing agreements.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our  contractual  obligations at December 31,
2006 and the effects such obligations are expected to have on liquidity and cash
flows in future periods:

<TABLE>
<CAPTION>
                                            Payments Due by Period
                        --------------------------------------------------------------
 Contractual                         Less than       1-3           4-5         After
 Obligations               Total       1 Year       Years         Years       5 Years
---------------------   ----------   ----------   ----------   ----------   ----------
<S>                     <C>          <C>          <C>          <C>          <C>
Operating leases ....   $  725,477   $  351,738   $  373,739   $     --     $     --
Employment agreements    2,195,959      918,425    1,277,534         --           --
                        ----------   ----------   ----------   ----------   ----------
    Total ...........   $2,921,436   $1,270,163   $1,651,273   $     --     $     --
                        ==========   ==========   ==========   ==========   ==========
</TABLE>

         At December 31, 2006 and 2005, we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

         Factored accounts  receivable may subject us to off-balance sheet risk.
We sell the  majority  of our  trade  accounts  receivable  to a factor  and are
contingently  liable to the factor for  merchandise  disputes and other customer
claims.


                                       18
<PAGE>


CAUTIONARY STATEMENTS AND RISK FACTORS

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

                          RISKS RELATED TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY AND HAVE EXPERIENCED OPERATING LOSSES MAKING
IT DIFFICULT TO EVALUATE WHETHER WE WILL OPERATE PROFITABLY.

         Both of our subsidiaries, Versatile Entertainment, Inc. and Bella Rose,
LLC, were recently  formed.  Versatile was  established in April 2001 to design,
market,  and distribute  high-end casual apparel and commenced  operation of its
People's Liberation business in July 2004. Versatile began shipping its products
in the fourth quarter of 2004. Prior to July 2004, Versatile received commission
and other income from various consulting  arrangements  provided by Daniel Guez.
Bella Rose was formed in May of 2005, to design, market, and distribute high-end
casual  apparel under the brand name "William  Rast." Bella Rose began  shipping
its  products  in the fourth  quarter of 2005.  Because  our  subsidiaries  only
recently  commenced  their  principal  operations,  we do not have a  meaningful
historical  record of sales  and  revenues  nor an  established  business  track
record.  While we believe that we have the  opportunity  to be successful in the
premium contemporary segment of the apparel industry,  there can be no assurance
that we will be successful in accomplishing our business initiatives, or that we
will be able to achieve any significant  levels of revenues or net income,  from
the sale of our products.

         Unanticipated problems,  expenses and delays are frequently encountered
in increasing  production and sales and  developing new products,  especially in
the current  stages of our  business.  Our  ability to continue to  successfully
develop,  produce and sell our  products and to generate  significant  operating
revenues will depend on our ability to, among other matters:

         -        successfully market, distribute and sell our products or enter
                  into  agreements with third parties to perform these functions
                  on our behalf; and

         -        obtain the financing required to implement our business plan.

         Given our limited  operating  history,  lack of long-term sales history
and other sources of revenue,  there can be no assurance that we will be able to
achieve any of our goals and develop a  sufficiently  large  customer base to be
profitable.

OUR WILLIAM RAST CLOTHING LINE IS ENDORSED BY JUSTIN TIMBERLAKE,  AND SHOULD OUR
RELATIONSHIP  WITH  MR.  TIMBERLAKE   DETERIORATE,   OUR  PROFITABILITY  MAY  BE
NEGATIVELY IMPACTED.

         Two of our  consolidated  subsidiaries,  which  we own  with an  entity
controlled  by  Justin  Timberlake  have the  exclusive  rights  to  manufacture
clothing and accessories  under the William Rast tradename.  Mr.  Timberlake has
agreed to publicly promote and endorse the William Rast brand, and we manage the
companies and are  responsible  for funding the costs of their operation up to a
maximum  amount.  In  the  event  that  our  relationship  with  Mr.  Timberlake
deteriorates,  Mr.  Timberlake may refuse to directly or indirectly  promote our
William Rast brand,  which could reduce the acceptance of our William Rast brand
in the marketplace and consequently harm our sales and profitability.

WE RELY  ON A  CONSULTANT  TO  LOCATE  INTERNATIONAL  DISTRIBUTORS  TO SELL  OUR
PRODUCTS.

         Internationally,  we sell our products in Mexico, Canada,  Scandinavia,
Germany and the United Kingdom, primarily through distributors.  We are party to
an agreement  with a consultant  who is responsible  for  negotiating  exclusive
distribution  agreements  with  distributors  outside of the United


                                       19
<PAGE>


States.  The  consultant  also manages  People's  Liberation  and William Rast's
current international distribution relationships.  In exchange for his exclusive
services  to us, the  consultant  is paid a  percentage  of all our net sales to
customers  outside of the United States.  In the event the  consultant  fails to
successfully  promote  and sell our brands  outside of the  United  States,  our
ability to locate  and enter into  distribution  agreements  with  international
distributors  will be  limited  until  the  agreement  with  the  consultant  is
terminated,  as the  company has agreed not to engage  another  party to provide
similar  services  to those  provided by the  consultant  during the term of the
agreement.   This   could   also   negatively   impact  our  growth  and  future
profitability.  Also, in the event that the consultant  and/or our international
distributors fail to successfully  market and sell our products,  the reputation
of our brands  could be  negatively  impacted,  and our sales and  profitability
would decline.

WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.

         We may not be able to fund our  future  growth or react to  competitive
pressures  if we lack  sufficient  funds.  Currently,  we  believe  that we have
sufficient  cash on hand and through our factor to fund existing  operations for
the foreseeable future.  However, in the future, we may need to raise additional
funds  through  equity  or  debt  financings  or  collaborative   relationships,
including  in the event  that we lose our  relationship  with our  factor.  This
additional  funding  may  not be  available  or,  if  available,  it may  not be
available on  economically  reasonable  terms.  The extent of our future capital
requirements  will depend on many factors,  including our results of operations.
If our cash from  operations  is less than  anticipated  or our working  capital
requirements or capital expenditures are greater than we expect, or if we expand
our business by acquiring or  investing  in  additional  brands,  we may need to
raise  additional  debt or equity  financing  within the next twelve months.  In
addition,  any additional funding may result in significant dilution to existing
shareholders. If adequate funds are not available, we may be required to curtail
our operations or obtain funds through  collaborative  partners that may require
us to release material rights to our products.

FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS.

         We  believe  that we are  poised  for  significant  growth in 2007.  No
assurance can be given that we will be successful in  maintaining  or increasing
our sales in the  future.  Any future  growth in sales will  require  additional
working capital and may place a significant strain on our management, management
information systems,  inventory  management,  sourcing capability,  distribution
facilities and receivables  management.  Any disruption in our order processing,
sourcing or  distribution  systems  could cause orders to be shipped  late,  and
under  industry  practices,  retailers  generally can cancel orders or refuse to
accept goods due to late shipment.  Such  cancellations and returns would result
in a reduction  in revenue,  increased  administrative  and  shipping  costs,  a
further burden on our  distribution  facilities  and also  adversely  impact our
relations with retailers.

WE OPERATE IN A SEASONAL BUSINESS, AND OUR FAILURE TO TIMELY DELIVER PRODUCTS TO
MARKET WILL NEGATIVELY IMPACT OUR PROFITABILITY.

         The  apparel  industry is a seasonal  business  in which our  financial
success is largely determined by seasonal events such as the commencement of the
school year and holiday  seasons.  In the event that we are unable to supply our
products to the marketplace in a timely manner as a consequence of manufacturing
delays,   shipping  delays,   or  other  operational   delays,   our  sales  and
profitability will be negatively impacted.

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.

         Management  expects that we will experience  substantial  variations in
our net sales and operating results from quarter to quarter. We believe that the
factors which influence this variability of quarterly results include:

         -        the timing of our introduction of new product lines;


                                       20
<PAGE>


         -        the level of consumer acceptance of each new product line;

         -        general economic and industry  conditions that affect consumer
                  spending and retailer purchasing;

         -        the availability of manufacturing capacity;

         -        the timing of trade shows;

         -        the product mix of customer orders;

         -        the return of defective merchandise;

         -        the  timing  of the  placement  or  cancellation  of  customer
                  orders;

         -        transportation delays;

         -        quotas and other regulatory matters;

         -        the occurrence of charge backs in excess of reserves; and

         -        the timing of  expenditures in anticipation of increased sales
                  and actions of competitors.

         As a result of fluctuations in our revenue and operating  expenses that
may occur, management believes that period-to-period  comparisons of our results
of  operations  are  not a good  indication  of our  future  performance.  It is
possible that in some future quarter or quarters,  our operating results will be
below the  expectations of securities  analysts or investors.  In that case, our
stock price could fluctuate significantly or decline.

THE FINANCIAL CONDITION OF OUR CUSTOMERS COULD AFFECT OUR RESULTS OF OPERATIONS.

         Certain retailers, including some of our customers, have experienced in
the past,  and may  experience  in the  future,  financial  difficulties,  which
increase  the risk of  extending  credit  to such  retailers  and the risk  that
financial  failure will  eliminate a customer  entirely.  These  retailers  have
attempted to improve their own operating  efficiencies  by  concentrating  their
purchasing  power among a narrowing group of vendors.  There can be no assurance
that we will remain a preferred vendor for our existing customers. A decrease in
business from or loss of a major customer,  such as two customers that accounted
for 27.9% and 10.6% of our net sales for the year ended December 31, 2006, could
have a material adverse effect on the results of our operations. There can be no
assurance that our factor will approve the extension of credit to certain retail
customers in the future. If a customer's credit is not approved by the factor or
sales to a customer  exceed the  factor's  imposed  limits,  we could assume the
collection risk on sales to the customer.

OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.

         A portion of our import  operations  are subject to tariffs  imposed on
imported  products and quotas  imposed by trade  agreements.  In  addition,  the
countries  into which our  products  are  imported  may from time to time impose
additional  new  duties,  tariffs  or other  restrictions  on their  imports  or
adversely  modify existing  restrictions.  Adverse changes in these import costs
and  restrictions,  or our suppliers'  failure to comply with customs or similar
laws,  could harm our business.  We cannot  assure that future trade  agreements
will not provide our  competitors  with an  advantage  over us, or increase  our
costs,  either  of which  could  have an  adverse  effect  on our  business  and
financial condition.

         Our operations are also subject to the effects of  international  trade
agreements and regulations such as the North American Free Trade Agreement,  and
the activities and regulations of the World Trade Organization. Generally, these
trade  agreements  benefit our  business by reducing or  eliminating  the duties
assessed on products or other materials  manufactured  in a particular  country.
However, trade agreements can also impose requirements that adversely affect our
business,  such as  limiting  the  countries  from  which  we can  purchase  raw
materials and setting  duties or  restrictions  on products that may be imported
into the United States from a particular country.

         Our  ability to import  raw  materials  in a timely and  cost-effective
manner may also be affected by problems at ports or issues that otherwise affect
transportation and warehousing providers, such as labor disputes. These problems
could require us to locate  alternative ports or warehousing  providers to avoid


                                       21
<PAGE>


disruption to our customers.  These  alternatives  may not be available on short
notice or could  result in higher  transit  costs,  which  could have an adverse
impact on our business and financial condition.

OUR  DEPENDENCE  ON  INDEPENDENT  MANUFACTURERS  AND  SUPPLIERS OF RAW MATERIALS
REDUCES OUR ABILITY TO CONTROL THE MANUFACTURING  PROCESS,  WHICH COULD HARM OUR
SALES, REPUTATION AND OVERALL PROFITABILITY.

         We depend on independent  contract  manufacturers  and suppliers of raw
materials to secure a sufficient supply of raw materials and maintain sufficient
manufacturing and shipping capacity in an environment characterized by declining
prices,  labor  shortage,  continuing  cost pressures and increased  demands for
product  innovation and  speed-to-market.  This  dependence  could subject us to
difficulty in obtaining  timely delivery of products of acceptable  quality.  In
addition,  a  contractor's  failure to ship products to us in a timely manner or
failure  to meet  the  required  quality  standards  could  cause us to miss the
delivery  date  requirements  of our  customers.  The  failure  to  make  timely
deliveries  may  cause  our  customers  to  cancel  orders,   refuse  to  accept
deliveries,  impose  non-compliance  charges through invoice deductions or other
charge-backs,  demand reduced prices or reduce future orders, any of which could
harm our sales, reputation and overall profitability.

         For the year ended December 31, 2006,  four  contractors  accounted for
approximately 52% of our purchases.  We do not have long-term contracts with any
of our independent  contractors,  and any of these  contractors may unilaterally
terminate their relationship with us at any time. While management believes that
there exists an adequate supply of contractors to provide  products and services
to us, to the extent  that we are not able to secure or  maintain  relationships
with  independent  contractors  that are able to fulfill our  requirements,  our
business would be harmed.

         We do not  control  our  contractors  or  their  labor  practices.  The
violation  of  federal,  state or foreign  labor laws by one of our  contractors
could  subject  us to fines and  result in our goods  that are  manufactured  in
violation of such laws being seized or their sale in interstate  commerce  being
prohibited.   To  date,  we  have  not  been  subject  to  any  sanctions  that,
individually  or in the  aggregate,  have had a material  adverse  effect on our
business, and we are not aware of any facts on which any such sanctions could be
based.  There can be no  assurance,  however,  that in the future we will not be
subject to sanctions as a result of violations  of applicable  labor laws by our
contractors,  or that such sanctions will not have a material  adverse effect on
our business and results of operations.

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.

         The loss of or inability to enforce the  trademarks  "William Rast" and
"People's  Liberation"  and our other  proprietary  designs,  know-how and trade
secrets could adversely  affect our business.  If any third party  independently
develops similar products to ours or manufactures knock-offs of our products, it
may be costly to  enforce  our  rights  and we would not be able to  compete  as
effectively.  Additionally, the laws of foreign countries may provide inadequate
protection of intellectual  property rights, making it difficult to enforce such
rights in those countries.

         We  may  need  to  bring  legal   claims  to  enforce  or  protect  our
intellectual   property   rights.   Any   litigation,   whether   successful  or
unsuccessful,  could result in substantial costs and diversions of resources. In
addition,  notwithstanding  our  rights  we  have  secured  in our  intellectual
property,  third  parties  may bring  claims  against us  alleging  that we have
infringed  on  their  intellectual  property  rights  or that  our  intellectual
property  rights are not valid.  Any claims  against us, with or without  merit,
could be time  consuming  and costly to defend or litigate and  therefore  could
have an adverse affect on our business.


                                       22
<PAGE>


THE LOSS OF DANIEL GUEZ WOULD HAVE AN ADVERSE  EFFECT ON OUR FUTURE  DEVELOPMENT
AND COULD SIGNIFICANTLY IMPAIR OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.

         Our success is largely  dependent  upon the  expertise and knowledge of
our Chief  Executive  Officer,  Daniel Guez,  who is primarily  responsible  for
formulating  our business  strategy as well as developing our product lines.  In
addition,  Mr. Guez is responsible for managing the William Rast business.  As a
result of Mr. Guez's unique skill set and responsibilities, the loss of Mr. Guez
would have a material  adverse  effect on our business,  development,  financial
condition, and operating results. We do not maintain "key person" life insurance
on any of our management, including Mr. Guez.

THE  REQUIREMENTS  OF  THE  SARBANES-OXLEY   ACT,  INCLUDING  SECTION  404,  ARE
BURDENSOME,  AND OUR FAILURE TO COMPLY  WITH THEM COULD HAVE A MATERIAL  ADVERSE
AFFECT ON OUR BUSINESS AND STOCK PRICE.

      Effective internal control over financial reporting is necessary for us to
provide reliable financial reports and effectively prevent fraud. Section 404 of
the  Sarbanes-Oxley  Act of 2002  requires  us to  evaluate  and  report  on our
internal  control over financial  reporting  beginning with our annual report on
Form  10-KSB for the fiscal year  ending  December  31,  2007.  Our  independent
registered   public  accounting  firm  will  need  to  annually  attest  to  our
evaluation,  and issue their own opinion on our internal  control over financial
reporting  beginning  with our annual  report on Form 10-KSB for the fiscal year
ending  December 31, 2008. We plan to prepare for compliance with Section 404 by
strengthening,  assessing  and  testing  our  system of  internal  control  over
financial  reporting  to  provide  the  basis for our  report.  The  process  of
strengthening  our internal control over financial  reporting and complying with
Section 404 is expensive and time consuming, and requires significant management
attention,  especially  given that we have not yet  undertaken  any  substantial
efforts to comply  with the  requirements  of Section  404. We cannot be certain
that the measures we will undertake  will ensure that we will maintain  adequate
controls over our financial processes and reporting in the future.  Furthermore,
if we are able to rapidly grow our business, the internal control over financial
reporting  that we will need will become more complex,  and  significantly  more
resources  will be  required  to ensure  our  internal  control  over  financial
reporting  remains  effective.   Failure  to  implement  required  controls,  or
difficulties  encountered  in their  implementation,  could  harm our  operating
results  or  cause us to fail to meet our  reporting  obligations.  If we or our
auditors  discover a material  weakness in our internal  control over  financial
reporting,  the  disclosure  of that  fact,  even  if the  weakness  is  quickly
remedied,  could diminish investors'  confidence in our financial statements and
harm our stock price. In addition, non-compliance with Section 404 could subject
us to a  variety  of  administrative  sanctions,  including  the  suspension  of
trading,  ineligibility  for  listing  on one of the  Nasdaq  Stock  Markets  or
national securities exchanges, and the inability of registered broker-dealers to
make a market in our common stock, which would further reduce our stock price.

RISKS RELATED TO OUR INDUSTRY

OUR SALES ARE HEAVILY INFLUENCED BY GENERAL ECONOMIC CYCLES.

         Apparel  is a cyclical  industry  that is  heavily  dependent  upon the
overall level of consumer spending.  Purchases of apparel and related goods tend
to be highly  correlated with cycles in the disposable  income of our customers.
Our customers  anticipate and respond to adverse changes in economic  conditions
and uncertainty by reducing  inventories and canceling orders. As a result,  any
substantial deterioration in general economic conditions,  increases in interest
rates,  acts of war,  terrorist  or  political  events  that  diminish  consumer
spending and confidence in any of the regions in which we compete,  could reduce
our sales and adversely affect our businesses and financial condition.

WE OPERATE IN A HIGHLY  COMPETITIVE  INDUSTRY  AND THE  SUCCESS OF OUR  BUSINESS
DEPENDS ON OUR ABILITY TO OVERCOME A VARIETY OF COMPETITIVE CHALLENGES.

         We operate  our  business in the  premium  contemporary  segment of the
apparel industry.  Currently,  our competitors include companies and brands such
as True Religion, Seven For All Mankind,


                                       23
<PAGE>


Citizens of Humanity,  J.  Lindenberg,  Theory,  James Perse and Joe's Jeans. We
face a variety of competitive challenges including:

         -        anticipating  and  quickly  responding  to  changing  consumer
                  demands that are dictated in part by fashion and season;

         -        developing  innovative,  high-quality  products  in sizes  and
                  styles that appeal to consumers;

         -        competitively  pricing our  products  and  achieving  customer
                  perception of value; and

         -        the need to provide strong and effective  marketing support to
                  maintain our brand image.

         Our ability to anticipate and effectively  respond to these competitive
challenges depends in part on our ability to attract and retain key personnel in
our design,  merchandising and marketing staff.  Competition for these personnel
is  intense,  and we cannot be sure that we will be able to attract and retain a
sufficient  number of qualified  personnel in future periods.  In addition,  our
competitors  may have greater  financial  resources than we do which could limit
our ability to respond quickly to market  demands.  In the event that we are not
successful  in  addressing  the  competitive  challenges  we face, we could lose
market  share to our  competitors  and  consequently  our stock  price  could be
negatively impacted.

RISKS RELATED TO OUR COMMON STOCK

SINCE TRADING ON THE OTC BULLETIN BOARD MAY BE SPORADIC, YOU MAY HAVE DIFFICULTY
RESELLING YOUR SHARES OF OUR COMMON STOCK

         In the past,  our trading  price has  fluctuated  as the result of many
factors that may have little to do with our operations or business prospects. In
addition,  because the trading of securities on the OTC Bulletin  Board is often
more sporadic than the trading of securities listed on an exchange or the Nasdaq
Stock Market, Inc., you may have difficulty reselling any of our common shares.

WE HAVE A LIMITED  TRADING  VOLUME AND SHARES  ELIGIBLE  FOR FUTURE  SALE BY OUR
CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE.

         To date, we have had a very limited trading volume in our common stock.
For instance, for the year ended December 31, 2006, only 1,528,000 shares of our
common stock were traded.  As long as this  condition  continues,  the sale of a
significant  number of shares of common  stock at any  particular  time could be
difficult to achieve at the market  prices  prevailing  immediately  before such
shares are offered. In addition,  our registration  statement on Form SB-2 filed
with the SEC on January 9, 2006 became effective on April 20, 2006. As a result,
a  substantial  number of our  shares  of  common  stock  became  available  for
immediate resale. Sales of substantial amounts of common stock, including shares
issued upon the exercise of outstanding options and warrants,  under Rule 144 or
otherwise,  could  adversely  affect the  prevailing  market price of our common
stock and could  impair our  ability to raise  capital  through  the sale of our
securities.

OUR COMMON STOCK PRICE IS HIGHLY VOLATILE.

         The market price of our common stock is likely to be highly volatile as
the stock market in general has been highly volatile.

         Factors  that could  cause  such  volatility  in our  common  stock may
include, among other things:

         -        actual or anticipated  fluctuations in our quarterly operating
                  results;

         -        changes in financial estimates by securities analysts;

         -        conditions or trends in our industry; and

         -        changes  in  the  market   valuations   of  other   comparable
                  companies.


                                       24
<PAGE>


WE DO NOT FORESEE PAYING DIVIDENDS IN THE NEAR FUTURE.

         We have not paid  dividends on our common  stock and do not  anticipate
paying such dividends in the foreseeable future.

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

         Our officers and directors and their affiliates own  approximately  44%
of our outstanding  voting shares.  As a result,  our officers and directors are
able to exert  considerable  influence over the outcome of any matters submitted
to a vote of the  holders of our common  stock,  including  the  election of our
Board of Directors. The voting power of these stockholders could also discourage
others from seeking to acquire  control of us through the purchase of our common
stock, which might depress the price of our common stock.


                                       25
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

AUDITED FINANCIAL STATEMENTS:

   Report of Independent Registered Public Accounting Firm............       27

   Consolidated Balance Sheet at December 31, 2006....................       28

   Consolidated Statements of Operations for the Years Ended
      December 31, 2006 and 2005......................................       29

   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2006 and 2005......................................       30

   Consolidated Statement of Changes in Stockholders' Equity
      from January 1, 2005 to December 31, 2006.......................       31

   Notes to the Consolidated Financial Statements.....................       32


                                       26
<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders:
People's Liberation, Inc. and Subsidiaries

      We have audited the  accompanying  consolidated  balance sheet of People's
Liberation,  Inc. and  Subsidiaries  (the "Company") as of December 31, 2006 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years ended December 31, 2006 and 2005. These consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not  required  to  have,  nor were we  engaged  to  perform,  an audit of its
internal controls over financial reporting.  Our audit included consideration of
internal  controls  over  financial  reporting  as a basis for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the  effectiveness of the Company's  internal  controls
over financial reporting. Accordingly, we express no such opinion. An audit also
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present fairly, in all material respects, the consolidated financial position of
People's  Liberation,  Inc.  and  Subsidiaries,  as of December 31, 2006 and the
results of their  operations  and their  cash flows for each of the years  ended
December 31, 2006 and 2005 in conformity  with accounting  principles  generally
accepted in the United States of America.


Grobstein, Horwath & Company LLP

/s/ Grobstein, Horwath & Company LLP
------------------------------------

Sherman Oaks, California
March 2, 2007


                                       27
<PAGE>


                            PEOPLE'S LIBERATION, INC.


                           CONSOLIDATED BALANCE SHEET
                                                                    December 31,
                                                                       2006
                                                                    ------------
                             Assets
Current Assets:
   Cash and cash equivalents ..................................     $    62,389
   Due from factor ............................................       2,772,773
   Accounts receivable ........................................       1,017,884
   Inventories ................................................       2,846,181
   Refundable income taxes ....................................          16,500
   Prepaid expenses and other current assets ..................         140,486
   Deferred tax assets ........................................          52,000
                                                                    -----------
     Total current assets .....................................       6,908,213

Property and equipment, net of accumulated depreciation .......         577,331
Trademarks, net of accumulated amortization ...................         227,748
Intangible asset (Note 8) .....................................         428,572
Other assets ..................................................          64,970
                                                                    -----------
     Total Assets .............................................     $ 8,206,834
                                                                    ===========

               Liabilities and Stockholders' Equity
Current Liabilities:
   Accounts payable and accrued expenses ......................     $ 2,297,895
   Income taxes payable .......................................           3,200
                                                                    -----------
     Total current liabilities ................................       2,301,095

Deferred tax liabilities ......................................          61,000
                                                                    -----------
     Total Liabilities ........................................       2,362,095

Stockholders' Equity:
   Common stock, $.001 per value; 150,000,000
      shares authorized; 34,942,563 shares issued
      and outstanding .........................................          34,942
   Additional paid-in capital .................................       6,930,194
   Accumulated deficit ........................................      (1,120,397)
                                                                    -----------
     Total Stockholders' Equity ...............................       5,844,739
                                                                    -----------
     Total Liabilities and Stockholders' Equity ...............     $ 8,206,834
                                                                    ===========


                 See Notes to Consolidated Financial Statements.


                                       28
<PAGE>



                            PEOPLE'S LIBERATION, INC.


                      CONSOLIDATED STATEMENTS OF OPERATIONS

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

Net sales ......................................   $ 15,959,766    $  5,803,067
Cost of goods sold .............................      8,801,924       3,567,212
                                                   ------------    ------------
 Gross profit ..................................      7,157,842       2,235,855
                                                   ------------    ------------

Selling expenses ...............................      2,242,024         861,742
Design and production ..........................      2,278,495         891,985
General and administrative .....................      3,585,618         972,091
                                                   ------------    ------------

 Total operating expenses ......................      8,106,137       2,725,818
                                                   ------------    ------------

Loss from operations ...........................       (948,295)       (489,963)

Interest income (expense), net .................         59,750         (28,637)
Loss on disposal of fixed asset ................           --            (1,567)
                                                   ------------    ------------
 Total other income (expense) ..................         59,750         (30,204)
                                                   ------------    ------------

Loss before income taxes .......................       (888,545)       (520,167)
Benefit (provision) for income taxes ...........         23,494         (49,400)
                                                   ------------    ------------

Net loss .......................................       (865,051)       (569,567)
                                                   ============    ============

Less preferred stock dividend (Note 9) .........           --        (4,906,250)
                                                   ------------    ------------

Net loss available to common shareholders ......   $   (865,051)   $ (5,475,817)
                                                   ============    ============

Basic and diluted weighted average loss per
common share (1) ...............................   $      (0.03)   $     (33.60)
                                                   ============    ============

Basic and diluted weighted average common
shares outstanding (1) .........................     34,063,658         162,986
                                                   ============    ============

Pro forma income taxes and earnings per
share (Note 9):
  Net loss .....................................                   $   (569,567)
  Loss before income taxes .....................                       (520,167)
  Pro forma income tax benefit .................                       (205,000)
  Pro forma net loss ...........................                       (315,167)
  Pro forma net loss available to common
     shareholders ..............................                     (5,221,417)
  Pro forma basic and diluted loss per
     common share ..............................                         (32.04)

(1)      Reflects the reverse stock split of 1:9.25 and  subsequent  issuance of
         shares to  preserve  round lot  holders as of  January  1, 2005,  which
         became effective on January 5, 2006.


                 See Notes to Consolidated Financial Statements.


                                       29
<PAGE>


<TABLE>
                            PEOPLE'S LIBERATION, INC.


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                                       Year Ended
                                                                                      December 31,
                                                                              --------------------------
                                                                                  2006           2005
                                                                              -----------    -----------
<S>                                                                           <C>            <C>
Cash flows from operating activities:
  Net loss ................................................................   $  (865,051)   $  (569,567)
  Adjustments to reconcile net loss to net cash used by operating
   activities:
     Depreciation and amortization ........................................        97,517         18,778
     Loss on disposal of fixed asset ......................................          --            1,567
     Allowance for doubtful accounts ......................................        78,000           --
     Deferred income taxes ................................................       (22,400)        31,400
     Stock based compensation .............................................       259,402           --
     Changes in operating assets and liabilities:
       Receivables ........................................................    (1,853,817)    (2,037,295)
       Inventories ........................................................    (1,753,200)    (1,056,224)
       Refundable income taxes ............................................       (16,500)          --
       Prepaid expenses and other current assets ..........................        81,642       (205,678)
       Other assets .......................................................       (19,536)          --
       Accounts payable and accrued expenses ..............................       252,586      1,846,605
       Income taxes payable ...............................................       (12,797)        15,997
                                                                              -----------    -----------
         Net cash flows used in operating activities ......................    (3,774,154)    (1,954,417)
                                                                              -----------    -----------

Cash flows from investing activities:
  Acquisition of trademarks ...............................................      (191,492)       (41,525)
  Acquisition of property and equipment ...................................      (500,241)      (156,760)
                                                                              -----------    -----------
     Net cash flows used in investing activities ..........................      (691,733)      (198,285)
                                                                              -----------    -----------

Cash flows from financing activities:
  Net proceeds from private placement of preferred stock ..................          --        6,672,737
  Proceeds from loan payable ..............................................          --            6,011
                                                                              -----------    -----------
     Net cash flows provided by financing activities ......................          --        6,678,748
                                                                              -----------    -----------

Net (decrease) increase in cash and cash equivalents ......................    (4,465,887)     4,526,046
Cash and cash equivalents, beginning of year ..............................     4,528,276          2,230
                                                                              -----------    -----------
Cash and cash equivalents, end of year ....................................   $    62,389    $ 4,528,276
                                                                              ===========    ===========

Supplemental disclosures of cash flow information:
Cash paid during the year for:
  Interest ................................................................   $     2,048    $    28,637
  Income taxes ............................................................        28,203          2,803
   Non-cash financing transactions:
       Loan payable converted to common stock .............................          --          300,000
       Trade payable converted to equity ..................................          --           25,000
       Beneficial conversion feature of preferred stock issued to investors          --        4,906,250
       Exchange of common stock and members' equity for preferred stock:
         Common stock .....................................................          --         (301,000)
         Members' equity ..................................................          --          643,069
         S Corp earnings ..................................................          --          (13,725)
         Preferred stock Series A .........................................          --                1
      Conversion of convertible preferred stock and reverse stock split:
         Common stock .....................................................        32,846           --
         Additional paid-in capital .......................................     6,639,892           --
         Preferred stock Series A .........................................    (6,672,738)          --
      Common stock issued in exchange for intangible asset (Note 8):
         Common stock .....................................................           571           --
         Additional paid-in capital .......................................       428,001           --
         Intangible asset .................................................      (428,572)          --
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                       30
<PAGE>


<TABLE>
                            PEOPLE'S LIBERATION, INC.

                      CONSOLIDATED STATEMENT OF CHANGES IN
                              STOCKHOLDERS' EQUITY

<CAPTION>
                                       Common Stock          Preferred Stock Series A      Additional
                                -------------------------   --------------------------      Paid-in      Accumulated
                                   Shares        Amount        Shares         Amount        Capital        Deficit         Total
                                -----------   -----------   -----------    -----------    -----------    -----------    -----------
<S>                              <C>          <C>            <C>           <C>            <C>            <C>            <C>
Balance at January 1, 2005 (1)         --     $      --         984,042    $     1,000    $      --      $  (315,123)   $  (314,123)

Stock issued for assumption of
   debt (1) ...................        --            --         984,043        300,000           --             --          300,000
Formation of Bella Rose (1) ...        --            --         442,819           --             --             --             --
Trade payable converted to
   members' equity (1) ........        --            --          49,202         25,000           --             --           25,000
Issuance of common stock to
   existing shareholders of
   People's Liberation,
   Inc. (2) ...................   1,525,383         1,525          --             --           (1,525)          --             --
Exchange transaction of
   Versatile common stock and
   Bella Rose members' equity .        --            --            --         (325,999)       325,999           --             --
Members' deficit adjustment
   for operations prior to
   exchange transaction .......        --            --            --             --         (643,069)       643,069           --
Stockholder's equity
   adjustment for operations
   prior to change in S
   Corporation tax status .....        --            --            --             --           13,725        (13,725)          --
Private placement of preferred
   stock Series A, including
   intrinsic value of
   beneficial conversion
   feature ....................        --            --         578,125      6,672,737           --             --        6,672,737
Net loss ......................        --            --            --             --             --         (569,567)      (569,567)
                                -----------   -----------   -----------    -----------    -----------    -----------    -----------
Balance at December 31, 2005 ..   1,525,383         1,525     3,038,231      6,672,738       (304,870)      (255,346)     6,114,047
Conversion of preferred stock
   Series A and reverse stock
   split of 1:9.25 ............  32,845,751        32,846    (3,038,231)    (6,672,738)     6,639,892           --             --
Expenses related to 2005
   private placement of
   preferred stock Series A ...        --            --            --             --          (92,231)          --          (92,231)
Stock based compensation ......        --            --            --             --          259,402           --          259,402
Issuance of common stock in
   exchange for intangible
   asset ......................     571,429           571          --             --          428,001           --          428,572
Net loss ......................        --            --            --             --             --         (865,051)      (865,051)
                                -----------   -----------   -----------    -----------    -----------    -----------    -----------
Balance at December 31, 2006 ..  34,942,563   $    34,942          --      $      --      $ 6,930,194    $(1,120,397)   $ 5,844,739
                                ===========   ===========   ===========    ===========    ===========    ===========    ===========
</TABLE>

(1)      Reflects the  equivalent  number of shares of Series A preferred  stock
         held by the  shareholders  of Versatile  and received by the members of
         Bella  Rose at the  time  of its  formation  on May 13,  2005 as if the
         exchange transaction occurred on January 1, 2004 (Note 9).
(2)      Reflects the reverse stock split of 1:9.25 and  subsequent  issuance of
         shares to preserve  round lot holders as of December  31,  2005,  which
         became effective on January 5, 2006.

                 See Notes to Consolidated Financial Statements.


                                       31
<PAGE>


                            PEOPLE'S LIBERATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

ORGANIZATION

         People's Liberation, Inc. (the "Company") is the parent holding company
of Versatile Entertainment,  Inc. ("Versatile"),  a California corporation,  and
Bella Rose, LLC ("Bella Rose"), a California limited liability company,  both of
which  were   consolidated   on  November  22,  2005  and  became   wholly-owned
subsidiaries  of the Company on the  effective  date of the  Company's  exchange
transaction.  William Rast Sourcing,  LLC ("William Rast  Sourcing") and William
Rast  Licensing,  LLC  ("William  Rast  Licensing"),   both  California  limited
liability companies,  were formed effective October 1, 2006 and are owned 50% by
Bella Rose and 50% by William Rast Enterprises,  LLC ("WRE"), an entity owned in
part by Justin Timberlake.

         People's Liberation,  Inc. was incorporated in the State of Delaware on
December 29, 1982 under the name Philco  Financial  Management Corp. The Company
had three wholly owned  subsidiaries,  Global  Medical  Technologies,  Inc.,  an
Arizona corporation, which was operating ("Global Medical"), and Century Pacific
Fidelity Corporation and Century Pacific Investment Management Corporation, both
of which were inactive and without assets or debts.

         On January  31,  2005,  the  Company  contributed  all of the shares of
common  stock  of  its  wholly-owned,  inactive  subsidiaries,  Century  Pacific
Fidelity Corp. and Century Pacific Investment Management Corporation,  to Global
Medical. In February 2005, the Company distributed all of the outstanding shares
of  common  stock of Global  Medical  on a pro rata  basis to its  stockholders.
Following  the  distribution,  Global  Medical  continued to operate its medical
equipment   reconditioning  business  as  an  independent  company.  After  this
distribution, the Company existed as a "shell company" under the name of Century
Pacific  Financial  Corporation  with nominal  assets whose sole business was to
identify, evaluate and investigate various companies to acquire or with which to
merge.

         On November  22,  2005,  the Company  acquired  all of the  outstanding
voting  securities  of  Bella  Rose and  Versatile,  each of  which  became  its
wholly-owned subsidiaries.  The Company issued to the Bella Rose members and the
Versatile  stockholders  an  aggregate  of  2,460,106.34  shares of its series A
convertible preferred stock, which subsequently converted into 26,595,751 shares
of common  stock on January 5, 2006 on a post  reverse  stock split  basis.  The
exchange  transaction  was accounted for as a reverse merger  (recapitalization)
with  Versatile  and Bella Rose deemed to be the  accounting  acquirer,  and the
Company the legal acquirer.

         Effective on January 5, 2006,  the Company  changed its corporate  name
from  Century  Pacific  Financial  Corporation  to  People's  Liberation,  Inc.,
completed a 1-for-9.25 reverse split of its common stock, adopted its 2005 Stock
Incentive  Plan,  and its series A convertible  preferred  stock  converted into
common  stock.  Following the  conversion of the Series A convertible  preferred
stock,  the reverse stock split on January 5, 2006, and the subsequent  issuance
of shares to preserve round lot holders,  34,371,134 shares of common stock were
outstanding.  All share and per share  information  included in the accompanying
consolidated  financial  statements  reflects  the effects of the reverse  stock
split.

         Versatile was organized as a California  corporation  under the laws of
the State of California on April 21, 2001.


                                       32
<PAGE>


         Bella Rose was  organized as a  California  limited  liability  company
under the laws of the State of California on May 13, 2005.

         William  Rast  Sourcing and William Rast  Licensing  were  organized as
California limited liability companies under the laws of the State of California
on October 1, 2006.

         Beginning  October 1, 2006,  William  Rast  Sourcing  and William  Rast
Licensing are  consolidated  under Bella Rose, a wholly-owned  subsidiary of the
Company. William Rast Sourcing and William Rast Licensing are owned 50% by Bella
Rose and 50% by William Rast Enterprises, LLC ("WRE") an entity owned in part by
Justin Timberlake. Until WRE has a basis in the capital of William Rast Sourcing
and William Rast Licensing,  losses will not be allocated to WRE.  Instead,  all
losses  will be  recognized  by Bella Rose in  consolidation.  Subsequently,  if
profits are generated by William Rast Sourcing and William Rast Licensing,  then
profits  will not be  allocated to WRE until  previously  unrecognized  minority
losses are fully recouped by Bella Rose.  Minimum profit allocations to WRE will
be accounted for as a minority interest in the consolidated financial statements
of the Company.

         Bella Rose was formed in May 2005 prior to the exchange  transaction on
November 22,  2005.  From the period of Bella Rose's  inception  and  throughout
2005,Bella Rose and Versatile had common ownership and control. The consolidated
financial statements reflect the capital structure of People's Liberation, Inc.,
the parent holding company, after giving effect to the exchange transaction. The
capital structure in the historical  combined financial  statements of Versatile
and Bella Rose prior to the exchange  transaction  are  different as they do not
affect reverse merger accounting.

NATURE OF OPERATIONS

         The Company  markets and sells high-end  casual apparel under the brand
names "People's Liberation" and "William Rast" through Versatile and Bella Rose,
its wholly owned subsidiaries,  and through Bella Rose's 50% owned subsidiaries,
William  Rast  Sourcing  and  William  Rast  Licensing.   The  majority  of  the
merchandise the companies offer consists of premium denim,  knits,  wovens,  and
outerwear for men and women.  In the United  States,  Versatile and William Rast
Sourcing distribute their merchandise to better department stores and boutiques,
such as Nordstrom,  Bloomingdales, Saks Fifth Avenue, Neiman Marcus, Lisa Klein,
Lulu's Boutique,  Atrium and Fred Segal.  Internationally,  in select countries,
products are sold directly and through  distributors to better department stores
and boutiques, such as TNT in Canada, Jades in Germany and Sears in Mexico City.

         Versatile was established in April 2001 and commenced operations of its
People's  Liberation  clothing  line  in July  2004.  Versatile  began  shipping
products under the People's Liberation brand name in the fourth quarter of 2004.
The People's  Liberation  clothing  line was  developed  internally by our Chief
Executive Officer, Daniel Guez.

         Bella Rose was established in May 2005 and commenced  operations of its
William Rast clothing line in May 2005. Bella Rose began shipping products under
the  William  Rast brand name in the  fourth  quarter of 2005.  Under an apparel
brand  agreement with an entity owned in part by Justin  Timberlake,  Bella Rose
had the  exclusive  rights to  manufacture  clothing and  accessories  under the
William Rast  tradename.  Under  long-form  definitive  agreements  entered into
effective October 1, 2006, which superseded the apparel brand agreement, two new
entities  were formed,  William Rast  Sourcing and William Rast  Licensing.  All
assets and  liabilities  of the Bella Rose business were  transferred to William
Rast Sourcing effective October 1, 2006. William Rast Sourcing has the exclusive
rights to  manufacture  clothing  with the William Rast brand name.  The William
Rast trademarks were transferred to William Rast Licensing  effective October 1,
2006 and William Rast Licensing has the exclusive  rights to promote and license
the William Rast brand.  William Rast  Sourcing and William Rast  Licensing  are
owned 50% by Bella  Rose and 50% by William  Rast  Enterprises,  LLC,  an entity
owned in part by Justin Timberlake.

         The Company is headquartered in Los Angeles,  California, and maintains
two showrooms in New York and Los Angeles.


                                       33
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The  accounts of  Versatile,  Bella Rose,  William  Rast  Sourcing  and
William  Rast  Licensing  have  been   consolidated   for  financial   statement
presentation.  All significant inter-company accounts and transactions have been
eliminated in the consolidation.

USE OF ESTIMATES

         The preparation of consolidated financial statements in conformity with
accounting  principles  generally  accepted  in the  United  States of  America,
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  consolidated  financial  statements  and  the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results could differ from these estimates.

REVENUE RECOGNITION

         The Company recognizes revenues in accordance with SEC Staff Accounting
Bulletin  (SAB) No.  101,  as  amended  by SAB No.  104.  Wholesale  revenue  is
recognized  when  merchandise  is shipped to a  customer,  at which  point title
transfers to the customer, and when collection is reasonably assured.  Customers
are not given  extended  terms or dating or return rights  without  proper prior
authorization.  Revenue is recorded net of estimated  returns,  charge backs and
markdowns based upon management's estimates and historical  experience.  Website
revenue is  recognized  when  merchandise  is  shipped  to a  customer  and when
collection is reasonably assured.

COMPREHENSIVE INCOME

         The Company has adopted Statement of Financial Accounting Standards No.
130,  "Reporting  Comprehensive  Income"  ("SFAS  130").  SFAS  130  establishes
standards for reporting and display of  comprehensive  income and its components
in a full set of general-purpose  financial  statements.  There were no material
other comprehensive income items for the years ended December 31, 2006 and 2005.

SEGMENT REPORTING

         The Company has adopted Statement of Financial Accounting Standards No.
131,  "Disclosures  about  Segments of an  Enterprise  and Related  Information"
("SFAS 131"). SFAS 131 requires that public companies report certain information
about operating  segments,  products,  services and geographical  areas in which
they operate and their major  customers.  The Company  believes that it operates
within  one  segment  as there is not  enough  difference  between  the types of
products developed and distributed by the Company to justify segmented reporting
by product type.  Management decisions regarding the allocation of resources and
the  assessment  of  performance  are made on a  company-wide  basis and are not
specific to the type of product. See Note 18 for disclosure regarding geographic
regions.

ADVERTISING

         Advertising  costs are  charged  to  expense  as of the first  date the
advertisements  take place.  Advertising  expenses  included in selling expenses
approximated  $408,000 and  $134,000  for the years ended  December 31, 2006 and
2005, respectively.


                                       34
<PAGE>


INVENTORIES

         Inventories,  consisting of piece goods and trim,  work-in-process  and
finished goods, are stated at the lower of cost (first-in,  first-out method) or
market value.  Inventories are evaluated for obsolescence and slow-moving  items
based on management's  analysis of sales levels, sales projections and inventory
levels.

STOCK-BASED COMPENSATION

         On January  1,  2006,  we adopted  Statement  of  Financial  Accounting
Standards  ("SFAS") No.  123(R),  SHARE-BASED  PAYMENT,  which requires that the
compensation costs relating to share-based payment  transactions  (including the
cost of all employee stock options) be recognized in the consolidated  financial
statements.  The cost will be measured  based on the estimated fair value of the
equity or liability  instruments  issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including share options,  restricted share
plans,  performance-based  awards, share appreciation rights, and employee share
purchase  plans.  SFAS  No.  123(R)  replaces  SFAS  No.  123,   ACCOUNTING  FOR
STOCK-BASED  COMPENSATION,  and supersedes  Accounting  Principles Board Opinion
("APB Opinion") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In March 2005,
the Securities and Exchange  Commission issued Staff Accounting Bulletin No. 117
("SAB No.  107")  relating  to SFAS No.  123(R).  The  Company  has  applied the
provisions of SAB No. 107 in its adoption of SFAS No. 123(R).

         The  Company  adopted SAS No.  123(R)  using the  modified  prospective
transition method which requires the application of the accounting  standards as
of  January  1, 2006,  the first day of the  Company's  2006  fiscal  year.  The
consolidated financial statements as of and for the year ended December 31, 2006
reflect  the  impact of SFAS No.  123(R).  Stock-based  compensation  expense is
recognized  based  on  awards  ultimately  expected  to vest on a  straight-line
prorated basis. In accordance with the modified  prospective  transition method,
the consolidated  financial  statements for prior periods have not been restated
to  reflect,  and do not  include,  the impact of SFAS No.  123(R).  The Company
adopted its 2005 Stock Incentive Plan on January 5, 2006.

         During the year ended December 31, 2006,  the Company issued  2,052,000
options to employees, officers, directors and outside consultants at an exercise
price of $1.25 per share. Options to purchase 440,583 shares were exercisable as
of December 31, 2006. Total stock based compensation  expense for the year ended
December 31, 2006 was approximately $259,000,  before income tax benefits. There
was no stock-based compensation expense recognized prior to January 1, 2006. The
compensation  expense recognized during the year ended December 31, 2006 did not
change basic and diluted loss per share reported in our Statement of Operations.
The total fair value of options  granted to employees,  officers,  directors and
outside  consultants  during the year ended December 31, 2006 was  approximately
$1,052,000.  The fair value of options was  estimated on the date of grant using
the  Black-Scholes  option  pricing  model.  The  valuation  determined  by  the
Black-Scholes  pricing model is affected by the Company's stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables  include,  but are not limited to our expected stock price  volatility
over the term of the awards,  and actual and  projected  employee  stock  option
exercise  behaviors.  Stock price volatility was estimated based on a peer group
of public  companies  and expected  term was  estimated  using the "safe harbor"
provisions provided in SAB 107.


                                       35
<PAGE>


         The following is a summary of the weighted-average  assumptions we used
as inputs to the Black-Scholes pricing model for option grants in 2006:

    Dividend yield...........................................                --
    Risk-free interest rate..................................               5.2%
    Expected volatility......................................              60.3%
    Expected life of options - weighted average..............         5.9 years

          The fair value of  options  granted  to  outside  consultants  will be
adjusted until the options vest or there is a substantial performance commitment
as provided by the  Emerging  Issues Task Force  (EITF)  96-18,  ACCOUNTING  FOR
EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING,  OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES (EITF 96-18).

         During the year ended  December 31, 2005, the Company did not grant any
options to purchase  shares of its common  stock,  and during that period  there
were no options that vested.  Accordingly,  no proforma  information for 2005 is
required.

         For stock-based  awards issued to employees and directors,  stock-based
compensation  is  attributed to expense  using the  straight-line  single option
method.   Stock-based  compensation  expense  recognized  in  the  Statement  of
Operations  for the year ended  December 31, 2006 is based on awards  ultimately
expected to vest. SFAS 123(R)  requires  forfeitures to be estimated at the time
of grant and revised, if necessary,  in subsequent periods if actual forfeitures
differ from those  estimates.  For the year ended  December 31,  2006,  expected
forfeitures is immaterial and as such the Company is recognizing  forfeitures as
they occur.

         Options  awarded to  non-employees  are  charged  to  expense  when the
services are performed and benefit is received as provided by EITF 96-18.

         PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost.  Maintenance and repairs are
charged to expense as incurred. Upon retirement or other disposition of property
and equipment, applicable cost and accumulated depreciation and amortization are
removed  from the  accounts  and any gains or losses are  included in results of
operations.

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

         Furniture and fixtures     5 years

         Office equipment           5 to 7 years

         Machinery and equipment    5 to 7 years

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

         Computer Software          5 years


                                       36
<PAGE>


INTANGIBLE ASSETS

         Intangible assets consist of trademarks and operational  control rights
related to the William Rast Sourcing and William Rast  Licensing  entities (Note
8).

         Costs incurred  related to the Company's  trademarks are amortized on a
straight-line basis over an estimated useful life of fifteen years.

         Operational  control  rights  amounting to $428,572  have an indefinite
life. Therefore, amortization expense is not recorded on this asset.

         Amortization expense of intangible assets amounted to $9,616 and $1,529
for the years ended December 31, 2006 and 2005.

IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES

         Long-lived assets,  including trademarks and operational control rights
related to William Rast  Sourcing and William Rast  Licensing,  are reviewed for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be recoverable.  Recoverability of assets to
be held and used is measured by a comparison of the carrying  amount of an asset
to future  undiscounted net cash flows expected to be generated by the asset. If
such assets are  considered to be impaired,  the  impairment to be recognized is
measured by the amount by which the  carrying  amount of the assets  exceeds the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

INCOME TAXES

         Through May 31, 2005,  Versatile was a Sub-Chapter S  Corporation.  The
taxes on the income of a Sub-Chapter S Corporation  are payable  individually by
each  shareholder.  As a  Sub-Chapter  S  Corporation,  Versatile was subject to
California  minimum  tax of $800 or  taxed  at the  rate of 1.5% of net  income,
whichever  was higher.  On June 1, 2005,  Versatile's  Sub-Chapter  S status was
terminated and Versatile elected to become a C-Corporation for tax purposes.

         Bella Rose,  William  Rast  Sourcing  and William  Rast  Licensing  are
limited  liability  companies and are subject to California  minimum tax of $800
and a fee based on total annual  revenue.  The  earnings of a limited  liability
company are reported individually by its members.

         On November 22, 2005,  People's  Liberation  (formerly  Century Pacific
Financial  Corporation)  acquired all of the  outstanding  voting  securities of
Bella Rose and Versatile,  each of which became a wholly-owned subsidiary of the
Company.  As a  result,  Versatile  and  Bella  Rose  (including  its 50%  owned
subsidiaries, William Rast Sourcing and William Rast Licensing) are consolidated
and income  taxes are  reported by the parent,  People's  Liberation.  Taxes are
calculated on a consolidated basis at C-Corporation income tax rates.

         Deferred  income  taxes are  recognized  using the asset and  liability
method by applying income tax rates to cumulative temporary differences based on
when and how they are expected to affect the tax return. Deferred tax assets and
liabilities are adjusted for income tax rate changes.

         Income taxes are further described in Note 11.


                                       37
<PAGE>


CONCENTRATION OF CREDIT RISK

         Financial   instruments,   which  potentially  expose  the  Company  to
concentration of credit risk,  consist  primarily of cash and cash  equivalents,
trade accounts receivable, and amounts due from factor.  Concentration of credit
risk with respect to trade accounts receivable is significantly mitigated by the
use of a factor, which effectively transfers a substantial amount of credit risk
to the factor. The Company and its factor perform on-going credit evaluations of
its customers and the Company  maintains an allowance for doubtful  accounts and
chargebacks.  The Company may extend  unsecured  credit to its  customers in the
normal course of business.

         The Company's cash balances on deposit with banks are guaranteed by the
Federal Deposit Insurance Corporation up to $100,000. The Company may be exposed
to risk for the  amounts  of funds  held in one bank in excess of the  insurance
limit. In assessing the risk, the Company's  policy is to maintain cash balances
with high quality financial institutions.

         The  Company's  products  are  primarily  sold  to  department  stores,
specialty retail stores and international  distributors.  These customers can be
significantly affected by changes in economic, competitive or other factors. The
Company makes substantial  sales to a relatively few, large customers.  In order
to  minimize  the risk of loss,  the Company  assigns  the  majority of domestic
accounts receivable to a factor without recourse.  For non-factored and recourse
receivables,  account-monitoring procedures are utilized to minimize the risk of
loss. Collateral is generally not required.

ACCOUNTS RECEIVABLE - ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS

         The Company  evaluates the  collectibility  of accounts  receivable and
charge backs  (disputes from the customer)  based upon a combination of factors.
In circumstances where the Company is aware of a specific  customer's  inability
to meet its financial  obligations (such as in the case of bankruptcy filings or
substantial  downgrading by credit sources),  a specific allowance for bad debts
is taken  against  amounts due to reduce the net  recognized  receivable  to the
amount reasonably expected to be collected. For all other customers, the Company
recognizes  an allowance for bad debts and  uncollectible  charge backs based on
its historical collection experience. If collection experience deteriorates (for
example,  due to an unexpected  material  adverse  change in a major  customer's
ability to meet its financial obligations to the Company),  the estimates of the
recoverability of amounts due could be reduced by a material amount.

SHIPPING AND HANDLING COSTS

         The Company records  shipping and handling costs billed to customers as
a component of revenue,  and shipping and handling costs incurred by the Company
for inbound and  outbound  freight are recorded as a component of cost of sales.
Total  shipping  and handling  costs  included as a component of revenue for the
years ended  December 31, 2006 and 2005 amounted to  approximately  $115,000 and
$57,000, respectively. Total shipping and handling costs included as a component
of cost of sales amounted to  approximately  $202,000 and $128,000 for the years
ended December 31, 2006 and 2005, respectively.

CLASSIFICATION OF EXPENSES

         COST OF GOODS  SOLD - Cost of good  sold  includes  expenses  primarily
related  to  inventory  purchases  and  contract  labor,  freight  and  overhead
expenses. Overhead expenses primarily consist of warehouse salaries and expense.

         SELLING EXPENSE - Selling expenses primarily include sales salaries and
commissions,  tradeshow,  advertising,  marketing,  showroom  and other  selling
expenses, including travel and entertainment.

         DESIGN  AND  PRODUCTION  EXPENSES  -  Design  and  production  expenses
primarily include design and production  salaries,  design fees and expenses and
samples.


                                       38
<PAGE>


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

CONSIDERING   THE  EFFECTS  OF  PRIOR  YEAR   MISSTATEMENTS   WHEN   QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS.

         Staff  Accounting  Bulletin No. 108,  "Considering the Effects of Prior
Year  Misstatements  when  Quantifying  Misstatements  in Current Year Financial
Statements"  ("SAB 108"),  was issued in September  2006.  SAB 108 requires that
public companies utilize a "dual-approach" to assessing the quantitative effects
of financial misstatements. This dual approach includes both an income statement
focused assessment and a balance sheet focused  assessment.  The guidance in SAB
108 must be applied to annual financial statements for fiscal years ending after
November 15, 2006.  The  adoption of this  pronouncement  has not had a material
impact on the Company's consolidated financial statements.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 2006, the FASB issued FIN 48,  "Accounting  for  Uncertainty in
Income Taxes - an  interpretation  of FASB Statement No. 109" ("FIN 48"). FIN 48
prescribes the recognition  threshold and  measurement  criteria for determining
the  tax  benefit   amounts  to   recognize  in   financial   statements.   This
interpretation  is  effective  for the Company  beginning  January 1, 2007.  The
Company is evaluating the potential  impact of adopting this  interpretation  on
its future results of operations, financial position and cash flows.

         In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,"
to permit fair value  remeasurement  for any hybrid  financial  instrument  that
contains an embedded  derivative  that  otherwise  would require  bifurcation in
accordance  with the  provisions  of SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities." SFAS No. 155 is effective for all financial
instruments acquired,  issued, or subject to a remeasurement occurring after the
beginning of an entity's  fiscal year that begins after  September 15, 2006. The
adoption of this  Statement  is not  expected  to have a material  effect on the
Company's consolidated financial statements.

         In March 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 156,  "Accounting  for Servicing of Financial  Assets - an amendment of
FASB  Statement No. 140",  that provides  guidance on accounting  for separately
recognized  servicing assets and servicing  liabilities.  In accordance with the
provision of SFAS No. 156, separately  recognized servicing assets and servicing
liabilities must be initially measured at fair value, if applicable.  Subsequent
to initial  recognition,  the company may use either the amortization  method or
the fair value measurement  method to account for servicing assets and servicing
liabilities within the scope of this Statement.  SFAS No. 156 is effective as of
the beginning of an entity's  fiscal year that begins after  September 15, 2006.
The adoption of this Statement is not expected to have a material  effect on the
Company's consolidated financial statements.

         In  September   2006,  the  FASB  issued  SFAS  No.  157,  "Fair  Value
Measurements"  ("SFAS 157"),  which defines fair value,  establishes a framework
for  measuring  fair value in GAAP,  and  expands  disclosures  about fair value
measurements.  SFAS 157 does not  require any new fair value  measurements,  but
provides  guidance  on how to  measure  fair  value by  providing  a fair  value
hierarchy  used to classify  the source of the  information.  This  statement is
effective for the Company  beginning  January 1, 2008.  The Company is currently
evaluating  whether  adoption of this  statement  will result in a change to its
fair value measurements.


                                       39
<PAGE>


         In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined  Benefit Pension and Other  Postretirement  Plans -- an amendment of
FASB  Statements  No. 87, 88, 106 and 132(R)"  ("SFAS  158").  SFAS 158 requires
employers  to (a)  recognize in its  statement of financial  position the funded
status of a benefit plan  measured as the  difference  between the fair value of
plan assets and the benefit  obligation,  (b) recognize net of tax, the gains or
losses and prior  service  costs or credits that arise during the period but are
not  recognized as components of net periodic  benefit cost pursuant to SFAS No.
87, "Employer's Accounting for Pensions" or SFAS No. 106, "Employers' Accounting
for  Postretirement  Benefits Other Than  Pensions," (c) measure defined benefit
plan  assets  and  obligations  as of the date of the  employer's  statement  of
financial position and (d) disclose  additional  information in the notes to the
financial  statements about certain effects on net periodic benefit cost for the
next fiscal  year that arise from  delayed  recognition  of the gains or losses,
prior  service  costs or credits,  and  transition  assets or  obligations.  The
requirements  of SFAS 158 are to be applied  prospectively  upon  adoption.  For
companies  without  publicly  traded  equity  securities,  the  requirements  to
recognize the funded status of a defined benefit postretirement plan and provide
related  disclosures  are effective for fiscal years ending after June 15, 2007,
while the  requirement to measure plan assets and benefit  obligations as of the
date of the employer's  statement of financial  position is effective for fiscal
years ending after December 15, 2008, with earlier application  encouraged.  The
Company believes the adoption of this  pronouncement  will not have any material
effect on its financial statements.

         Other recent  accounting  pronouncements  issued by the FASB (including
its Emerging  Issues Task Force),  the  American  Institute of Certified  Public
Accountants, and the United States Securities and Exchange Commission did not or
are not believed to have a material  impact on the  Company's  present or future
consolidated financial statements.

FAIR VALUE OF FINANCIAL INFORMATION

         The following  methods and  assumptions  were used to estimate the fair
value of each class of  financial  instruments  for which it is  practicable  to
estimate  that  value.  ACCOUNTS  RECEIVABLE  AND DUE  FROM  FACTOR:  Due to the
short-term nature of the receivables,  the fair value  approximates the carrying
value.  ACCOUNTS PAYABLE AND ACCRUED  EXPENSES:  Due to the short-term nature of
the payables, the fair value approximates the carrying value.

NOTE 3 - EARNINGS PER SHARE

         The Company computes and presents earnings per share in accordance with
SFAS No. 128, "EARNINGS PER SHARE".  Basic earnings per share are computed based
upon the weighted average number of common shares outstanding during the period.
Warrants  representing  3,125,000  shares of  common  stock at  exercise  prices
ranging from $1.25 to $2.00 per share and stock options  representing  1,878,000
shares of common stock at an exercise price of $1.25 per share were  outstanding
as of December 31, 2006,  but were  excluded  from the average  number of common
shares  outstanding in the  calculation of earnings per share because the effect
of inclusion would be anti-dilutive.  Warrants representing  3,125,000 shares of
common stock and Series A convertible  preferred stock  representing  32,845,751
common shares on a post  conversion and reverse split basis were  outstanding as
of December 31, 2005, but were excluded from the average number of common shares
outstanding  in the  calculation  of  earnings  per share  because the effect of
inclusion would be anti-dilutive.


                                       40
<PAGE>


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

                                           LOSS        SHARES(1)     PER SHARE
                                       (NUMERATOR)   (DENOMINATOR)     AMOUNT
YEAR ENDED DECEMBER 31, 2006:          -----------    -----------   -----------
Basic loss per share:
Net loss ...........................   $  (865,051)    34,063,658   $     (0.03)

Effect of Dilutive Securities:
Options ............................          --             --            --
Warrants ...........................          --             --            --
                                       -----------    -----------   -----------
Loss available to common
   stockholders ....................   $  (865,051)    34,063,658   $     (0.03)
                                       ===========    ===========   ===========


YEAR ENDED DECEMBER 31, 2005:
Basic loss per share:
Net loss ..........................   $  (569,567)       162,986    $     (3.50)
Preferred stock deemed
   dividend (Note 9) ..............    (4,906,250)                       (30.10)

Effect of Dilutive Securities:
Options ...........................          --             --             --
Warrants ..........................          --             --             --
                                      -----------    -----------    -----------
Loss available to common
   stockholders ...................   $(5,475,817)       162,986    $    (33.60)
                                      ===========    ===========    ===========

(1) Reflects the reverse stock split of 1:9.25 and subsequent issuance of shares
to preserve round lot holders as of January 1, 2004,  which became  effective on
January 5, 2006.

NOTE 4 - DUE FROM FACTOR

         The Company uses a factor for working capital and credit administration
purposes.  Under the factoring  agreements,  the factor  purchases a substantial
portion of the Company's trade accounts  receivable and assumes credit risk with
respect to certain accounts.

         The factor agreements  provide that the Company can borrow an amount up
to 85% of the value of its approved factored customer invoices.  The Company can
also borrow up to 50% of its eligible  inventory (as defined in the  agreement),
up to a maximum of $1 million.  The factor  commission  is 0.8% of the  customer
invoice  amount for terms up to 60 days,  plus one quarter of one percent (.25%)
for each additional thirty-day term.

         Receivables  sold in excess of maximums  established  by the factor are
subject to recourse in the event of nonpayment  by the customer.  The Company is
contingently  liable to the factor for merchandise  disputes and customer claims
on receivables sold to the factor.

         To the  extent  that  the  Company  draws  funds  prior  to the  deemed
collection  date of the  accounts  receivable  sold to the  factor,  interest is
charged at the factor's  prime lending rate plus 1% per annum.  Factor  advances
and  ledger  debt  are  collateralized  by  non-factored   accounts  receivable,
inventories and general intangibles. Ledger debt (payables to suppliers that use
the same factor as the Company)  amounted to approximately  $625,000 at December
31, 2006.


                                       41
<PAGE>


         Due from factor is summarized as follows:

         Outstanding receivables:
           Without recourse .......................        $ 2,840,272
           With recourse ..........................            179,501
                                                           -----------
                                                             3,019,773
         Open credits .............................           (247,000)
                                                           -----------
                                                           $ 2,772,773
                                                           ===========
NOTE 5 - INVENTORIES

         Inventories are summarized as follows:

         Piece goods and trim .....................          $  766,177
         Work in process ..........................             353,838
         Finished goods ...........................           1,726,166
                                                             ----------
                                                             $2,846,181
                                                             ==========

NOTE 6 - PROPERTY AND EQUIPMENT

         Property and equipment is summarized as follows:

         Furniture and fixtures ..........................   $ 170,544
         Office equipment ................................     158,767
         Machinery and equipment .........................      71,280
         Leasehold improvements ..........................     103,994
         Computer software ...............................     172,335
                                                             ---------
                                                               676,920
         Less accumulated depreciation and amortization ..     (99,589)
                                                             ---------
                                                             $ 577,331
                                                             =========

         Depreciation  expense  amounted  to $87,901  and  $17,249 for the years
ended December 31, 2006 and 2005, respectively.

NOTE 7 - TRADEMARKS

         Trademarks are summarized as follows:

         Trademarks, at cost ........................        $ 236,176
         Less accumulated amortization ..............           (8,428)
                                                             ---------
                                                             $ 227,748
                                                             =========

         Future annual estimated amortization expense is summarized as follows:

         YEARS ENDING DECEMBER 31,
         2007 ........................................         $ 15,183
         2008 ........................................           15,183
         2009 ........................................           15,183
         2010 ........................................           15,183
         2011 ........................................           15,183
         Thereafter ..................................          151,833
                                                               --------
                                                               $227,748
                                                               ========


                                       42
<PAGE>


         Trademark  amortization  expense  amounted to $9,616 and $1,529 for the
years ended December 31, 2006 and 2005, respectively.

NOTE 8- INTANGIBLE  ASSET,  AND WILLIAM RAST SOURCING AND WILLIAM RAST LICENSING
AGREEMENTS

         On or around April 27, 2005, Bella Rose entered into letter  agreements
(the "Letter Agreements") with William Rast Enterprises, LLC ("WRE"). The Letter
Agreements  contemplated the formation of a joint venture between the parties to
exploit the William Rast(TM) trademark. More particularly, the Letter Agreements
contemplated  the  formation of a sourcing  company,  which would have rights to
manufacture  and sell  William Rast branded  apparel,  and a licensing  company,
which  would  own the  William  Rast(TM)  trademark  and  license  rights to the
trademark to the sourcing company and other parties.  The Letter Agreements also
contemplated a services  agreement,  pursuant to which Justin  Timberlake  would
provide  personal  services  to the  licensing  company  and  its  licensees  in
connection with the exploitation of the William Rast brand.

         While the Letter  Agreements  contemplated  that the  venture  would be
operated by a separate operating entity, which entity would be owned and managed
50% by Bella  Rose and 50% by WRE,  the  venture's  business  had been  operated
directly by Bella Rose since inception.

         On  October  1,  2006,  Bella  Rose  and  WRE  entered  into  long-form
definitive  agreements,   including  the  limited  liability  company  operating
agreement of William Rast Sourcing,  LLC (the "Sourcing  Operating  Agreement"),
the limited liability company operating agreement of William Rast Licensing, LLC
(the "Licensing Operating  Agreement",  and together with the Sourcing Operating
Agreement,  the  "Operating  Agreements"),  and the  services  agreement  by and
between William Rast Licensing and Justin Timberlake (the Operating  Agreements,
together  with  the  Services   Agreement,   the  "Transaction   Documents")  to
memorialize  the terms set forth in the Letter  Agreements,  with the  exception
that Bella Rose has  operational  control over William  Rast  Sourcing,  LLC and
William Rast Licensing, LLC.

         WRE received a 50% membership interest in William Rast Sourcing.  Bella
Rose was granted a 50% membership  interest in William Rast Sourcing in exchange
for  assigning  all of the assets and  liabilities  of the William  Rast apparel
business operated by Bella Rose. Profits and losses are allocated to each member
in accordance  with their  respective  membership  interests.  WRE is to receive
minimum annual non-cumulative profit allocations of 6% of net sales or, if less,
the  actual  amount of profits  for the year.  Bella  Rose is  required  to loan
William  Rast  Sourcing up to $1.8 million in unsecured  working  capital  funds
through  December  31, 2007.  The Sourcing  Operating  Agreement  also  includes
certain  rights  related  to the  sale  or  transfer  of  membership  interests,
including right of first refusal and drag along rights.

         WRE also received a 50% membership  interest in William Rast Licensing.
Bella Rose was granted a 50%  membership  interest in William Rast  Licensing in
exchange  for  contributing  the William  Rast(TM)  trademarks  to the  company.
Profits  and  losses  are  allocated  to each  member in  accordance  with their
respective membership interests. WRE is to receive minimum annual non-cumulative
profit  allocations of 3% of net sales or, if less, the actual amount of profits
for the year.  Bella Rose is  required  to loan  William  Rast  Licensing  up to
$200,000 in unsecured  working  capital  funds  through  December 31, 2007.  The
Licensing  Operating  Agreement also includes certain rights related to the sale
or transfer of membership  interests,  including right of first refusal and drag
along rights.

         William  Rast  Licensing  granted  William  Rast  Sourcing a perpetual,
royalty free, exclusive,  worldwide,  nontransferable license to use the William
Rast trademarks in connection with the sourcing,  marketing and  distribution of
men's, women's and children's apparel.


                                       43
<PAGE>


         In  consideration  for WRE entering  into the  Operating  Agreements on
terms which give Bella Rose  operational  control over the Sourcing  Company and
the Licensing Company,  which operational control the Letter Agreements provided
would be 50% in favor of Bella  Rose and 50% in favor of WRE,  the  Company,  on
October 1, 2006,  issued to WRE 571,429  shares of its common  stock,  par value
$0.001 per share. The common stock issued contains  restrictions  related to the
sale or  transfer  of the shares,  including  right of first  refusal and annual
volume  limitations.  The market price of the Company's common stock on the date
of  issuance of the shares was $0.75.  The  $428,572  value of the common  stock
issued to WRE has been recorded as an intangible asset on Bella Rose's financial
statements. The intangible asset is expected to have an indefinite life and will
be reviewed for impairment on a quarterly basis.

         The  issuance  of the  shares of common  stock to WRE was  exempt  from
registration  under the  Securities  Act of 1933,  as amended  (the  "Securities
Act"),  pursuant to an exemption  from  registration  contained in Regulation D,
only to accredited  investors.  The shares of common stock may not be offered or
sold in the United States unless they are registered  under the Securities  Act,
or an exemption  from the  registration  requirements  of the  Securities Act is
available.  No registration  statement  covering these securities has been filed
with the United  States  Securities  and Exchange  Commission  or with any state
securities commission.

         Pursuant to a services  agreement  entered  into  between  William Rast
Licensing and Justin  Timberlake,  Mr. Timberlake agrees to provide William Rast
Licensing and its licensees  (which includes William Rast Sourcing) with certain
services in  connection  with the launch,  advertising,  design,  and styling of
William Rast branded apparel and other consumer products. During the term of the
agreement,  except as otherwise  provided in the  agreement,  the services to be
rendered by Mr.  Timberlake in the indirect  endorsement of William Rast branded
apparel  and  other  consumer  products  shall  be  exclusive  to  William  Rast
Licensing.  The  Services  Agreement  expires on  December  31,  2008 and may be
terminated earlier by Mr. Timberlake if certain sales targets are not met.

         Beginning  October 1, 2006,  William  Rast  Sourcing  and William  Rast
Licensing are  consolidated  under Bella Rose, a wholly-owned  subsidiary of the
Company.  Until WRE has a basis in the  capital of  William  Rast  Sourcing  and
William Rast Licensing, losses will not be allocated to WRE. Instead, all losses
will be recognized by Bella Rose in consolidation.  Subsequently, if profits are
generated by William Rast Sourcing and William Rast Licensing, then profits will
not be allocated to WRE until previously  unrecognized minority losses are fully
recouped by Bella Rose.  Minimum profit allocations to WRE will be accounted for
as a minority interest in the consolidated financial statements of the Company.

         Because net liabilities of Bella Rose were  transferred to William Rast
Sourcing and William Rast  Licensing  upon  formation of the new  entities,  the
settlement of which is the sole  responsibility of Bella Rose, there was no gain
or loss recognized upon the transfer of the net liabilities to the new entities.

         Assets and  liabilities  of Bella  Rose  transferred  to  William  Rast
Sourcing and William Rast Licensing on October 1, 2006 were transferred at their
carrying value on the books of Bella Rose on the date of transfer.


                                       44
<PAGE>


NOTE 9- STOCKHOLDERS' EQUITY

EXCHANGE AGREEMENT

         On November  22,  2005,  the Company  acquired  all of the  outstanding
voting securities of Bella Rose, LLC, a California limited liability company and
Versatile  Entertainment,  Inc., a California corporation,  each of which became
wholly-owned subsidiaries.  The Company issued to the Bella Rose members and the
Versatile   stockholders  an  aggregate  of  2,460,106.34  shares  of  series  A
convertible preferred stock, which subsequently converted into 26,595,751 shares
of common stock on a post reverse  stock split basis.  The exchange  transaction
was  accounted for as a reverse  merger  (recapitalization)  with  Versatile and
Bella Rose  deemed to be the  accounting  acquirer,  and the  Company  the legal
acquirer.

CAPITAL RAISE

         Immediately  following the acquisition of Versatile and Bella Rose, the
Company  received  gross  proceeds of  approximately  $7.8  million in a private
placement  transaction  with  institutional  investors  and other high net worth
individuals.  Pursuant  to  subscription  agreements  entered  into  with  these
investors,  the Company sold 578,125.58 shares of series A convertible preferred
stock at a price  per  share of  $13.5135,  which  subsequently  converted  into
6,250,000  shares of common  stock on a post  reverse  stock  split  basis.  The
Company also issued to the investors five-year warrants to purchase an aggregate
of 2,500,000  shares of common stock with an exercise  price of $2.00 per share.
After broker commissions and expenses and accounting,  legal and other expenses,
the Company received net proceeds of  approximately  $6.6 million in the capital
raise.  The  warrants  were  valued at  approximately  $808,000  using the Black
Scholes  valuation model. The intrinsic value of the conversion  feature related
to the  issuance  of the  Series A  convertible  preferred  stock  to  investors
amounted to approximately  $4.9 million.  The effect of recording the beneficial
conversion  feature on the December 31, 2005 consolidated  financial  statements
was an  increase  in the  additional  paid-in  capital  of $4.9  million  and an
offsetting decrease in additional paid-in capital of the same amount.

         Sanders Morris Harris, Inc. acted as placement agent in connection with
the capital  raise.  For their  services as  placement  agent,  the Company paid
Sanders Morris Harris a fee equal to 7%, or approximately $546,875, of the gross
proceeds  from the  financing.  The  Company  also  paid  for the  out-of-pocket
expenses  incurred by Sanders  Morris Harris and all purchasers in the amount of
$25,000.  In  addition,  the  Company  issued to Sanders  Morris  Harris and its
employees,  Dean Oakey and Jonah  Sulak,  warrants to purchase an  aggregate  of
625,000  shares of common  stock at an  exercise  price of $1.25 per share.  The
warrants are fully vested and have a term of 5 years.  The warrants  were valued
at approximately $310,000 using the Black Scholes valuation model.

         Following the exchange  transaction  and the capital raise,  the former
security  holders of Bella Rose and Versatile and the investors in the financing
owned  95.6%,  and  the  existing   stockholders   immediately  prior  to  these
transactions  owned  4.4% of the  Company's  outstanding  common  stock on an as
converted basis.

REVERSE SPLIT AND MANDATORY CONVERSION OF PREFERRED STOCK INTO COMMON STOCK

         On November 23, 2005,  the  Company's  Board of  Directors,  as well as
holders representing approximately 66.9% of the outstanding series A convertible
preferred stock,  holders  representing  approximately  77.1% of the outstanding
common stock, and holders  representing  approximately  67.3% of the outstanding
common  stock and series A  convertible  preferred  stock  voting  together as a
single class took action by written  consent to (i) change the corporate name to
People's Liberation, Inc., (ii) adopt a


                                       45
<PAGE>


1-for-9.25  reverse stock split,  and (iii) adopt the 2005 Stock Incentive Plan.
Each of these actions became effective on January 5, 2006.

         Concurrent  with the reverse split,  each share of series A convertible
preferred stock was immediately and automatically  converted into  approximately
10.81 shares of common  stock of the Company (100 for 1 conversion  of preferred
stock to common stock and 1 for 9.25 common share reverse  split).  Accordingly,
following the reverse split and the mandatory conversion,  the former holders of
3,038,231.92  shares of series A convertible  preferred stock, in the aggregate,
received 32,845,751 shares of common stock in the Company, representing 95.6% of
the outstanding  shares of common stock immediately  following the reverse split
and the mandatory  conversion.  The former holders of the Company's common stock
owned approximately  1,525,383 shares of common stock,  representing 4.4% of the
outstanding  shares of the  Company's  common stock  immediately  following  the
reverse split and the mandatory conversion.

         The  following  2005 Pro  forma  statement  of  operations  information
assumes that the automatic  conversion  and reverse split,  as discussed  above,
occurred as of the beginning of the accounting  period.  The pro forma provision
for income taxes as of December 31, 2005 assumes that  Versatile  Entertainment,
Inc. was a C-Corporation as of the beginning of the accounting  period and Bella
Rose was  consolidated  under  People's  Liberation  as of the  beginning of the
accounting period.


Net loss, as reported .......................................      $   (569,567)
Loss before income taxes, as reported .......................          (520,167)
Pro forma income tax benefit ................................          (205,000)
Pro forma net loss ..........................................          (315,167)
Pro forma net loss available to common shareholders .........        (5,221,417)
Pro forma basic and diluted loss per common share ...........             (0.23)
Pro forma basic and diluted weighted average
   common shares outstanding ................................        22,777,938

         The following Pro forma balance sheet information assumes the automatic
conversion and reverse stock split, as discussed above,  occurred as of December
31, 2005.


Series A convertible preferred stock .......................        $      --
Common stock (34,371,134 shares outstanding) ...............             34,371
Additional Paid-in capital .................................          6,335,022
Accumulated deficit ........................................           (255,346)
                                                                    -----------
Total stockholders' equity .................................        $ 6,114,047
                                                                    ===========

SERIES A PREFERRED STOCK

         Pursuant to the Company's Certificate of Incorporation,  the Company is
authorized to issue 10,000,000  shares of preferred stock,  $0.001 par value per
share,  of which  3,500,000  were  designated as series A convertible  preferred
stock. In accordance with the Certificate of Designations,  Preferences, Rights,
and  Limitations  of the  series A  convertible  preferred  stock,  the series A
convertible  preferred  stock was  automatically  converted into common stock on
January 5, 2006, when the Company undertook its reverse split (described above).
Upon the  mandatory  conversion  of the  series A  preferred  stock,  the shares
converted  returned to the status of authorized and unissued shares of preferred
stock,  available for future  designation and issuance  pursuant to the terms of
the Certificate of Designations, Preferences, Rights, and Limitations.


                                       46
<PAGE>


WILLIAM RAST SOURCING AND WILLIAM RAST LICENSING AGREEMENTS

         In  consideration  for William Rast  Enterprises  ("WRE") entering into
certain  operating  agreements  with Bella  Rose on terms  which give Bella Rose
operational  control over the William Rast  Sourcing and William Rast  Licensing
(see Note 8), the Company,  on October 1, 2006,  issued to WRE 571,429 shares of
its common stock,  par value $0.001 per share.  The common stock issued contains
restrictions  related to the sale or transfer of the shares,  including right of
first refusal and annual volume  limitations.  The market price of the Company's
common stock on the date of issuance of the shares was $0.75. The $428,572 value
of the common stock issued to WRE has been  recorded as an  intangible  asset on
Bella Rose's financial  statements.  The intangible asset is expected to have an
indefinite life and will be reviewed for impairment on a quarterly basis.

         The  issuance  of the  shares of common  stock to WRE was  exempt  from
registration  under the  Securities  Act of 1933,  as amended  (the  "Securities
Act"),  pursuant to an exemption  from  registration  contained in Regulation D,
only to accredited  investors.  The shares of common stock may not be offered or
sold in the United States unless they are registered  under the Securities  Act,
or an exemption  from the  registration  requirements  of the  Securities Act is
available.  No registration  statement  covering these securities has been filed
with the United  States  Securities  and Exchange  Commission  or with any state
securities commission.

NOTE 10 - STOCK INCENTIVE PLAN, OPTIONS AND WARRANTS

         On January 5, 2006, the Company  adopted its 2005 Stock  Incentive Plan
(the  "Plan"),  which  authorized  the  granting  of a  variety  of  stock-based
incentive  awards.  The Plan is  administered  by the Board of  Directors,  or a
committee  appointed by the Board of Directors,  which determines the recipients
and terms of the awards  granted.  The Plan  provides  for a total of  3,500,000
shares of common stock to be reserved for issuance under the Plan. There were no
options granted during the year ended December 31, 2005.

         The   Company   recognizes   stock-based   compensation   costs   on  a
straight-line  basis over the vesting  period of each award,  which is generally
between one to four years.

         For the year ended December 31, 2006,  total  stock-based  compensation
expense  included in the  consolidated  statement of  operations  was  $259,402,
charged to the following expense categories:


         Selling expense ..............................        $ 12,628
         Design and production ........................          22,158
         General and administrative ...................         224,616
                                                               --------
         Total stock-based compensation ...............        $259,402
                                                               ========


                                       47
<PAGE>


         The following table summarizes the activity in the Plan:

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

Options outstanding - December 31, 2005 .............         --      $     --
     Granted ........................................    2,052,000          1.25
     Exercised ......................................         --            --
     Canceled .......................................     (174,000)         1.25
                                                        ----------

Options outstanding - December 31, 2006 .............    1,878,000    $     1.25
                                                        ==========

         Additional   information   relating  to  stock   options  and  warrants
outstanding and  exercisable at December 31, 2006,  summarized by exercise price
is as follows:

<TABLE>
<CAPTION>

                                                                                     Exercisable
                                     Outstanding Weighted Average                Weighted Average
                                ----------------------------------------   ---------------------------
                                                  Life         Exercise                      Exercise
Exercise Price Per Share          Shares        (years)         Price        Shares           Price
---------------------------     -----------    -----------   -----------   -----------     -----------
<S>                              <C>              <C>           <C>           <C>             <C>
       $ 1.25 (options)          1,878,000        9.5           $ 1.25        440,583         $ 1.25
       $ 1.25 (warrants)           625,000        3.9           $ 1.25        625,000         $ 1.25
       $ 2.00 (warrants)         2,500,000        3.9           $ 2.00      2,500,000         $ 2.00
                                -----------                                -----------

                                 5,003,000        6.0           $ 1.62      3,565,583         $ 1.78
                                ===========                                ===========
</TABLE>

         A summary of the changes in the  Company's  unvested  stock options for
the year ended December 31, 2006 is as follows:

                                                                      Weighted
                                                                       Average
                                                       Number of     Grant Date
                                                         Shares      Fair Value
                                                       ----------    ----------

Unvested stock options - December 31, 2005 .........         --      $     --
     Granted .......................................    2,052,000          0.51
     Vested ........................................     (440,583)        (0.40)
     Canceled, expired or forfeited ................     (174,000)        (0.45)
                                                       ----------    ----------

Unvested stock options - December 31, 2006 .........    1,437,417    $     0.56
                                                       ==========

         As of  December  31,  2006,  there was  704,519  of total  unrecognized
compensation expense related to unvested share-based  compensation  arrangements
granted   under  the  Plan.   The  cost  is  expected  to  be  recognized  on  a
weighted-average basis over the next three and a half years.

         The Company has recorded a 100% valuation allowance on its deferred tax
asset related to net operating loss carryforwards.  As a result, the stock-based
compensation  recorded  for the year ended  December  31,  2006 has not been tax
effected on the consolidated statement of operations.

NOTE 11- INCOME TAXES

         On June 1, 2005, Versatile's  Sub-Chapter S election was terminated and
Versatile became a C-Corporation for income tax purposes.


                                       48
<PAGE>


         On November 22, 2005,  People's  Liberation  (formerly  Century Pacific
Financial  Corporation)  acquired all of the  outstanding  voting  securities of
Bella Rose and Versatile,  each of which became a wholly-owned subsidiary of the
Company.  As a  result,  Versatile  and  Bella  Rose  (including  its 50%  owned
subsidiaries, William Rast Sourcing and William Rast Licensing) are consolidated
and taxes are reported by the parent, People's Liberation.  Taxes are calculated
on a consolidated basis at C-Corporation tax rates.

         Deferred income taxes arise  principally from temporary  differences in
the method of  depreciating  property  and  equipment  for income tax  reporting
purposes and the use of  inventory  capitalization  requirements  for income tax
reporting purposes.  A valuation allowance has been provided for deferred income
tax assets  related  to net  operating  loss  carryforwards.  At this time,  the
Company  cannot  determine  that it is more likely than not that it will realize
the future income tax benefits related to its net operating losses.

         The benefit  (provision)  for income taxes for the years ended December
31, 2006 and 2005 consist of the following:


                                                      2006               2005
                                                    --------           --------
Federal:
    Current provision ....................          $ 39,010           $(15,300)
    Deferred provision ...................           (19,040)           (26,700)
                                                    --------           --------
                                                      19,970            (42,000
                                                    --------           --------
State:
    Current provision ....................             6,884             (2,700)
    Deferred provision ...................            (3,360)            (4,700)
                                                    --------           --------
                                                       3,524             (7,400)
                                                    --------           --------
                                                    $ 23,494           $(49,400)
                                                    ========           ========

         The difference between the benefit (provision) for income taxes and the
expected  income tax benefit  (provision)  determined  by applying the statutory
federal and state  income tax rates to pre-tax  accounting  income for the years
ended December 31, 2006 and 2005 are as follows:

                                                         2006          2005
                                                       --------      --------

Federal statutory rate .............................      (34.0)%       (34.0)%
State taxes net of Federal benefit .................       (6.0)         (6.0)
  Net operating loss valuation allowance ...........       36.4          --
S Corp status through May 31, 2005 .................       --            (1.1)
LLC status through November 22, 2005 ...............       --            49.4
Other ..............................................        1.0           1.2
                                                       --------      --------

                                                           (2.6)%         9.5%
                                                       ========      ========


                                       49
<PAGE>


         The  components  of the  Company's  consolidated  deferred  income  tax
balances as of December 31, 2006 and 2005 are as follows:

                                                            2006         2005
                                                         ---------    ---------
Deferred income tax assets - current:
    Net operating loss carryforwards .................   $ 323,000    $    --
    Bad Debt reserve .................................      31,000         --
    Inventory capitalization .........................      21,000        9,600
                                                         ---------    ---------
                                                           375,000        9,600
    Less:  Valuation allowance .......................    (323,000)        --
                                                         ---------    ---------
         Net deferred income tax assets - current ....   $  52,000    $   9,600
                                                         =========    =========

Deferred income tax liabilities - long-term:
    Property and equipment ...........................   $ (26,000)   $ (41,000)
    Excess of liabilities over assets from LLC due
    to exchange transaction ..........................     (35,000)        --
                                                         ---------    ---------
         Deferred income tax liabilities - long-term .   $ (61,000)   $ (41,000)
                                                         =========    =========


NOTE 12 - LAUNCH OF PEOPLE'S LIBERATION AND WILLIAM RAST E-COMMERCE WEBSITES

         In   October    2006,    we   launched   our    e-commerce    websites,
www.peoplesliberation.com  and www.williamrast.com,  for the direct on-line sale
of select People's  Liberation and William Rast products.  The websites showcase
each  brand's  men's and women's  collections,  including  premium  denim jeans,
skirts,  knits tops,  jackets and tracksuits,  a selection of which is available
for  purchase  online.  We launched the  websites to attract new  customers  and
increase  existing loyalty to our brands.  In conjunction with the launch of the
e-commerce  websites,  we  entered  into an  agreement  with a vendor to provide
customer service,  fulfillment and site maintenance services. Services are to be
provided by the vendor over a three-year  period and the agreement is cancelable
by either party beginning  March 2007. Fees for services  provided by the vendor
are calculated based on a percentage of net website revenue.

NOTE 13 - PRODUCT ENDORSEMENT AGREEMENT

         In May 2006, the Company entered into a product  endorsement  agreement
with rock icon Tommy Lee to create a limited  edition  clothing group called "PL
for TL." The clothing line will consist of a range of denim,  hooded sweatshirts
and hats for both men and women and will combine modern  tailoring with an edgy,
yet sleek fit. The inspiration of the "PL for TL" group is the artistic elements
of Tommy  Lee's  tattoos.  The  knits and denim  will have  authentic  detailing
influenced by Tommy's unique  aesthetic.  Tommy Lee will also be involved in the
design and  development  of the  products  and will make a minimum of six annual
appearances at a combination of trade shows,  retail locations and fashion shows
to promote the clothing  line.  The agreement  provides for a term of 18 months,
minimum sales  targets and royalties on net product sales at a negotiated  rate.
The "PL for TL" collection  was launched in the fourth quarter of 2006.  Royalty
expense amounted to approximately $32,000 for the year ended December 31, 2006.


                                       50
<PAGE>


NOTE 14 - RELATED PARTY TRANSACTIONS

         Paul Guez, Daniel Guez's father, loaned Versatile  Entertainment,  Inc.
$75,000  in May 2005  pursuant  to a note  payable  which  was  unsecured,  bore
interest at 5% and was due on demand.  The note and accrued  interest was repaid
in November 2005.

         During 2004,  Tag-It  Pacific,  Inc. loaned an aggregate of $293,989 to
Versatile  Entertainment,  Inc., which loan was unsecured, and due on demand. On
May 16, 2005, the then  outstanding  balance of $300,000 due to Tag-It  Pacific,
Inc. was repaid with borrowings from an unrelated entity. On May 16, 2005, Colin
Dyne,  CEO of  Tag-It  Pacific,  Inc.,  assumed  Versatile's  obligation  to the
unrelated entity in exchange for the issuance of 45 shares of Versatile's common
stock.  After  giving  9.546  shares of his  Versatile  common  stock to various
parties,  the  remaining  35.454  shares of common  stock held by Mr.  Dyne were
exchanged for 775,294.3  shares of our series A convertible  preferred  stock on
November 22, 2005, the closing date of the exchange  transaction  with Versatile
Entertainment  and  Bella  Rose.  The  Company  paid  $259,000  and  $10,000  in
consulting fees to this stockholder during the years ended December 31, 2006 and
2005.

         During  the  years  ended  December  31,  2006 and  2005,  the  Company
purchased  trim products from Tag-it  Pacific,  Inc., a related entity as of May
16, 2005, amounting to approximately $152,000 and $75,000, respectively.  During
the year ended December 31, 2005, the Company incurred approximately $35,000 for
services provided by an employee of Tag-it Pacific, Inc.

         On July 15, 2005,  accounts payable resulting from consulting  services
provided to Bella Rose were converted to a 10% member interest in Bella Rose.

NOTE 15 - EMPLOYMENT AGREEMENTS

DANIEL GUEZ

         On January 12, 2007, the Company  entered into an Employment  Agreement
with Daniel Guez, pursuant to which he will serve as our Chief Executive Officer
and/or Creative Director, and Chairman of the Board of Directors.  The agreement
is for an  initial  term  of  three  years  and is  automatically  extended  for
additional one year terms unless the Company or Mr. Guez elect not to extend the
term of the agreement.  Under the agreement, Mr. Guez will receive the following
compensation:

         o        Base  salary  of  $400,000   per  annum,   subject  to  upward
                  adjustment;

         o        Annual performance bonus in the amount equal to the sum of (i)
                  ten  percent  (10%)  of  the  first  three   million   dollars
                  ($3,000,000)  of the  Company's  consolidated  EBITDA for such
                  fiscal  year,  and (ii) five percent (5%) of the amount of the
                  Company's  consolidated  EBITDA,  if any,  in  excess of three
                  million dollars ($3,000,000) for such fiscal year; and

         o        Automobile and related expense allowance of $2,300 per month.

         If during the employment  period, (a) the Company terminates Mr. Guez's
employment  without  cause or if Mr. Guez  terminates  his  employment  for good
reason,  or (b) if (i) the  Company  shall  fail to  extend  the  period  of the
employment  period as  provided  above,  and (ii) at any time  within six months
following expiration of the employment period, the Company terminates Mr. Guez's
employment  without cause or Mr. Guez  terminates his employment for good reason
or without  good reason,  Mr. Guez will be paid  severance in an amount equal to
one and one-half  times the sum of Mr.  Guez's base salary in effect on the date
of  termination  plus the average  annual bonus received by Mr. Guez for the two
complete fiscal years  immediately prior to the termination date, and all of his
outstanding  stock  options,  restricted  stock and  other  equity  awards  will
accelerate  and become fully vested on the date of  termination.  If Mr.  Guez's
employment  is  terminated  by  reason  of his death or  disability  during  the
employment period, Mr.


                                       51
<PAGE>


Guez, his estate or beneficiaries,  as applicable, will be entitled to be paid a
lump sum payment of one-hundred percent (100%) of Mr. Guez's then current annual
base salary,  and all  outstanding  stock  options,  restricted  stock and other
equity awards granted to Mr. Guez will accelerate and become fully vested on the
date of termination.  In addition,  for a period of 18 months following the date
of  termination,  the Company will continue to provide Mr. Guez and his eligible
family  members with group health  insurance  coverage.  Mr. Guez's annual bonus
amounted to $175,000 for the year ended December 31, 2006.

EDWARD HOUSTON

         On July 13, 2006, the Company entered into an employment agreement with
Edward Houston pursuant to which he serves as the Company's  President effective
July 20, 2006.  Mr. Houston is employed on an "at will" basis by the Company and
will  receive an annual  salary of  $300,000,  which is  subject  to  adjustment
pursuant to the Company's employee  compensation policies in effect from time to
time. In addition to his base salary,  commencing  with fiscal year 2006 and for
each fiscal year thereafter during which Mr. Houston is performing  services for
the Company,  the Company will maintain a Management  Incentive Program pursuant
to which the Company  will set aside  during each fiscal year for payment to Mr.
Houston an amount equal to three percent (3%) of the Company's  earnings  before
interest  and  taxes  for such  fiscal  year.  Mr.  Houston  was also  granted a
non-qualified  stock option to purchase up to 1,000,000  shares of the Company's
common  stock at an  exercise  price of  $1.25.  In the  event  Mr.  Houston  is
terminated  without cause prior to the third  anniversary of the commencement of
his  employment  with the  Company,  the  Company  shall pay to Mr.  Houston the
equivalent of six months of his base salary,  or if lesser,  the base salary Mr.
Houston would have earned had he remained employed with the Company through such
third  anniversary of commencement of his employment at his then applicable rate
of pay.

DARRYN BARBER

         On January 3, 2006,  the Company  entered into an employment  agreement
with Darryn Barber  pursuant to which he serves as the Company's Chief Financial
Officer and Chief  Operating  Officer.  The  agreement  is for a term of 2 years
commencing  as of November 22, 2005 and  terminating  on November 21, 2007.  Mr.
Barber received a base salary of $212,000 in the first year of his  appointment,
and will  receive a base  salary  of  $232,000  during  the  second  year of his
contract.  In addition to his base  salary,  Mr.  Barber will  receive an annual
bonus of not less than  $25,000 and no more than  $100,000  based on  objectives
determined  by our Board of Directors.  On July 7, 2006, in accordance  with his
employment agreement,  Mr. Barber was granted a stock option to purchase 300,000
shares of the  Company's  common stock at an exercise  price of $1.25 per share.
One-third of the options vest in monthly installments of 25,000 beginning August
7,  2006  and the  balance  vested  immediately.  In the  event  Mr.  Barber  is
terminated  without cause,  the Company shall continue to pay Mr.  Barber's then
current base salary for the remaining term of the  agreement,  without regard to
any employment of Mr. Barber by a third party.  On November 8, 2006, the Company
and Darryn Barber entered into an amendment to his employment agreement with the
Company.  Pursuant to the  amendment,  Mr. Barber  resigned from his position as
Chief Operating Officer of the Company,  effective  November 8, 2006. Mr. Barber
will continue to serve the Company as its Chief Financial Officer. The amendment
also  extends the exercise  period of Mr.  Barber's  option to purchase  300,000
shares  of  the  Company's  common  stock  to a  period  of one  year  following
termination of Mr.  Barber's  service with the Company for any reason other than
for cause (as defined in the employment  agreement).  Previously,  Mr.  Barber's
option was to remain  exercisable for a period of at least six months  following
termination of his service with the Company for any reason other than for cause.
Mr.  Barber's  annual bonus  amounted to $40,000 for the year ended December 31,
2006.


                                       52
<PAGE>


THOMAS NIELDS

         On  November  8, 2006,  Thomas  Nields was  appointed  Chief  Operating
Officer of the Company,  effective  immediately.  Pursuant to an oral  agreement
between the Company and Mr. Nields,  Mr. Nields will be paid an annual salary of
$250,000,  and a discretionary  bonus to be determined annually by the Company's
Board of Directors or Compensation Committee.

NOTE 16 - CONSULTING AGREEMENTS

         On February 1, 2007,  the Company  entered into a consulting  agreement
with Akari Enterprises, LLC ("Akari Enterprises"),  a consulting firm formed and
controlled  by Andreas  Kurz,  which  specializes  in  international  expansion,
licensing,  retailing and branding for apparel companies. Akari Enterprises will
be  responsible  for   negotiating   exclusive   distribution   agreements  with
distributors  outside of the United States and will manage  People's  Liberation
and William Rast's current international  distribution  relationships.  Prior to
forming Akari  Enterprises,  Mr. Kurz held several  senior  positions at various
manufacturers,  including  Seven for All Mankind,  Diesel USA and Hugo Boss. The
consulting  agreement  provides for commissions to be paid to Akari  Enterprises
based on a defined formula related to net international  sales and terminates on
December 31, 2009.

         In June 2006,  the Company  entered into a consulting  agreement with a
sales  consultant.  Pursuant  to the terms of the  consulting  arrangement,  the
Company  issued to the  consultant a  non-qualified  option to purchase  150,000
shares of the  Company's  common stock at an exercise  price of $1.25 per share.
The  options  were to vest 25% after one year and  monthly  thereafter  over two
years. In August 2006, the parties terminated this agreement,  and since none of
the options had vested at the time of termination,  pursuant to the terms of the
Company's 2005 Stock Incentive Plan, the options were cancelled upon termination
of the agreement.

         On January 5, 2006,  the Company  entered into a  consulting  agreement
with MK  Sportswear.  Under the terms of the  agreement,  MK  Sportswear  was to
provide  sales and customer  services  functions  on behalf of the Company.  The
agreement provided for commissions at an agreed upon percentage of net sales and
had a term of two years that expired on December 31, 2007.  In  accordance  with
the agreement,  on June 22, 2006 the Company issued a non-qualified stock option
to purchase 150,000 shares of the Company's common stock at an exercise price of
$1.25  per  share to Mark  Kanights.  The  options  vest 25%  after one year and
monthly  thereafter over two years.  On August 22, 2006, the Company  terminated
its original  agreement and entered into a new agreement  with MK Sportswear and
Mark  Kanights,  whereby Mark Kanights  will provide sales and customer  service
functions  on behalf of the Company on an exclusive  basis  through July 1, 2009
and receive a monthly salary and commissions at an agreed upon percentage of net
sales.  Pursuant to the new agreement,  in exchange for services to be performed
by Mark Kanights through July 1, 2009, the 150,000 stock options granted to Mark
Kanights under the original agreement shall remain granted to him under the same
terms and conditions set forth in the original agreement.

NOTE 17 - LEASES

         The  Company  leases  its  office  and  warehouse  space  under a lease
agreement  commencing in October 2005 and expiring in December 2008. The Company
has two  showrooms  located in Los Angeles and New York City.  The New York City
showroom lease  commenced in May 2006 and expires in April 2009. The Los Angeles
showroom is rented on a month-to-month basis under a consulting arrangement with
one of the Company's salesmen. The Company accounts for its leases in accordance
with  SFAS  No.  13,  whereby  step  provisions,   escalation  clauses,   tenant
improvement allowances,  increases based on an existing index or rate, and other
lease  concessions  are  accounted  for in the minimum  lease  payments  and are
charged to  operations  on a straight  line basis over the  related  lease term.
Total rent expense for the years ended  December  31, 2006 and 2005  amounted to
$317,500 and $85,250, respectively.


                                       53
<PAGE>


         Future annual  minimum  payments due under the office and warehouse and
showroom leases are summarized as follows:


         YEARS ENDING DECEMBER 31,
         2007 ........................................         $351,738
         2008 ........................................          350,563
         2009 ........................................           23,176
                                                               --------
                                                               $725,477
                                                               ========

NOTE 18 - GEOGRAPHIC INFORMATION

         The Company  designs,  markets and sells high-end  casual apparel under
the People's  Liberation  and William  Rast brand  names.  The types of products
developed and sold by the Company are not sufficiently  different to account for
these products separately or to justify segmented reporting by product type.

         The Company distributes its products  internationally and has reporting
requirements based on geographic regions. All of the Company's long-lived assets
are located in the United  States.  Sales are  attributed to countries  based on
customer delivery locations, as follows:

                                                      Year Ended December 31,
                                                --------------------------------
                                                    2006                 2005
                                                -----------          -----------
Net Sales:
     United States ...................          $13,625,996          $ 5,513,100
     Japan ...........................            1,072,979              248,291
     Canada ..........................              738,880               21,871
      Mexico .........................              227,304                 --
      Germany ........................              183,302                 --
     United Kingdom ..................                 --                 12,219
     Other ...........................              111,305                7,586
                                                -----------          -----------
                                                $15,959,766          $ 5,803,067
                                                ===========          ===========

NOTE 19 - CUSTOMER CONCENTRATION

         During  the year ended  December  31,  2006,  two  customers  comprised
greater than 10% of the Company's  sales.  Sales to these customers  amounted to
27.9% and 10.6% of net sales for the year ended  December 31,  2006.  During the
year ended  December 31, 2005, two customers  comprised  greater than 10% of the
Company's  sales.  Sales to these  customers  amounted to 16.4% and 15.3% of net
sales for the year ended  December  31,  2005.  At  December  31, 2006 and 2005,
receivables due from these customers are included in due from factor.

NOTE 20 - SUPPLIER CONCENTRATION

         During the year ended  December  31,  2006,  four  suppliers  comprised
greater than 10% of the  Company's  purchases.  Purchases  from these  suppliers
amounted to 11.5%,  12.2%, 13.4% and 15.0% for the year ended December 31, 2006.
At  December  31,  2006,  accounts  payable  and  accrued  expenses  included an
aggregate of approximately $502,000 due to these vendors.  During the year ended
December 31, 2005, three suppliers  comprised  greater than 10% of the Company's
purchases. Purchases from these suppliers amounted to 45.7%, 22.0% and 16.8% for
the year ended  December 31, 2005.  At December 31, 2005,  accounts  payable and
accrued expenses included an aggregate of approximately  $1,095,000 due to these
vendors.


                                       54
<PAGE>


NOTE 21 - OFF-BALANCE SHEET RISK AND CONTINGENCIES

         Financial   instruments  that   potentially   subject  the  Company  to
off-balance sheet risk consist of factored accounts receivable.  As described in
Note 3, the Company  sells the majority of its trade  accounts  receivable  to a
factor and is  contingently  liable to the factor for  merchandise  disputes and
other  customer  claims.   At  December  31,  2006,  total  factor   receivables
approximated $3,020,000.

         The  Company  may be subject to certain  legal  proceedings  and claims
arising in connection with its business. In the opinion of management, there are
currently no claims that will have a material  adverse  effect on the  Company's
consolidated financial position, results of operations or cash flows.

         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. At this time, 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.

         In  addition  to  the  indemnification  required  in  our  articles  of
incorporation and bylaws, we have entered into indemnity agreements with each of
our  current  officers  and  directors.   These   agreements   provide  for  the
indemnification  of our directors and officers for all  reasonable  expenses and
liabilities incurred in connection with any action or proceeding brought against
them by reason of the fact that they are or were our  agents.  We believe  these
indemnification  provisions  and  agreements are necessary to attract and retain
qualified directors and officers.

         The Company enters into indemnification provisions under its agreements
in  the  normal  course  of  business,  typically  with  suppliers,   customers,
distributors  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.


                                       55
<PAGE>


ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURES

         Not applicable

ITEM 8A. CONTROLS AND PROCEDURES

         EVALUATION OF CONTROLS AND PROCEDURES

         Members of the  Company's  management,  including  our Chief  Executive
Officer, Daniel Guez, and Chief Financial Officer, Darryn Barber, have evaluated
the  effectiveness  of our  disclosure  controls and  procedures,  as defined by
paragraph  (e) of Exchange Act Rules 13a-15 or 15d-15,  as of December 31, 2006,
the end of the  period  covered  by this  report.  Based  upon that  evaluation,
Messrs.  Guez and Barber  concluded that our disclosure  controls and procedures
are effective.

         CHANGES IN CONTROLS AND PROCEDURES

         There were no changes in our internal control over financial  reporting
or in other factors  identified in connection  with the  evaluation  required by
paragraph  (d) of Exchange Act Rules 13a-15 or 15d-15 that  occurred  during the
fourth quarter ended  December 31, 2006 that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

ITEM 8B. OTHER INFORMATION

         None

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
         GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The  following  table sets forth the name,  age and position of each of
our executive  officers and directors as of March 12, 2007.  There are no family
relationships between our executive officers and directors.

     NAME                    AGE             POSITION HELD

Daniel Guez                  29              Chief Executive Officer, Secretary
                                                and Director
Darryn Barber                31              Chief Financial Officer
Edward Houston               39              President
Thomas Nields                42              Chief Operating Officer
Dean Oakey                   49              Director
Kevin R. Keating             66              Director

         DANIEL  GUEZ,  the founder of Versatile  Entertainment,  Inc. and Bella
Rose,  LLC became our Chief  Executive  Officer,  President  and Secretary and a
director on November  22,  2005.  Mr. Guez also serves as President of Versatile
Entertainment,  Inc.,  a position he has held since  April 2001,  and manager of
Bella Rose, a position he has held since May 2005.  Prior to July 2004, Mr. Guez
managed  several  private  label  divisions  of Innovo  Group,  Inc.  and Azteca
Production  International,  Inc.,  Los  Angeles  based  manufacturers  of  denim
apparel. Mr. Guez started his career in the apparel industry in 1995.

         DARRYN BARBER has served as our Chief Financial  Officer since November
22, 2005. Prior to joining us, Mr. Barber spent five years as a senior associate
at Europlay Capital Advisors, LLC and its


                                       56
<PAGE>


affiliates.  Mr.  Barber has been  successful  in  evaluating,  developing,  and
operating  businesses in the entertainment and technology fields. Mr. Barber has
been responsible for preparing business models,  financial planning,  evaluating
and valuing  businesses,  providing corporate and strategic advice and preparing
businesses  for  strategic  transactions.   Mr.  Barber  brings  over  10  years
experience  in  owning  and  operating  businesses.  Prior to  Europlay  Capital
Advisors,  Mr.  Barber was  Director of  Operations  of Trademark  Cosmetics,  a
private  label  cosmetic  manufacturing  company.  Mr. Barber earned an MBA from
California State University  Northridge and a BA in business  economics from the
University of California Santa Barbara.

         EDWARD HOUSTON has served as our President  since July 20, 2006.  Prior
to joining us, Mr.  Houston was most  recently the Chief  Operating  Officer for
Rock & Republic,  a premium  denim  company  based in Los Angeles.  Prior to his
position at Rock & Republic,  Mr. Houston was the Chief Operating Officer of C&C
California and Dickies Girl, both California based apparel companies,  from 2003
through 2005 and held other  management  positions in the apparel  industry from
2000 to 2003.  Mr.  Houston has also served as a management  consultant for Moss
Adams, LLP from 1997 to 2000.

         THOMAS NIELDS has served as our Chief Operating  Officer since November
8, 2006.  Prior to joining  us, Mr.  Nields  held  various  positions  at Tag-It
Pacific,  Inc., a full service trim  management  supplier for  manufacturers  of
fashion apparel,  from November 1994 to October 2006.  These positions  included
Director  of  Global  Operations,  President  of  Talon,  Inc.  (a  wholly-owned
subsidiary of Tag-it Pacific, Inc.) and Vice President of Production. During his
employment with Tag-it, Mr. Nields was responsible for implementing and managing
production  facilities in eight  countries  including the U.S.,  Mexico and Hong
Kong.

         DEAN OAKEY has served as a director since November 22, 2005.  From June
1997 to present,  Mr.  Oakey has served as the  Managing  Director of  Corporate
Finance  and Capital  Markets at Sanders  Morris  Harris,  Inc.,  an  investment
banking  firm. In this  capacity,  Mr. Oakey has been  responsible  for business
development and management duties, with a focus on the apparel industry.

         KEVIN R. KEATING has served as a director  since  February 4, 2005, and
served as our former President, Secretary and Treasurer from February 4, 2005 to
November 22, 2005.  Mr.  Keating,  67 years old, is the Managing  Member of Vero
Management,  LLC,  which  provides  managerial,  administrative,  and  financial
consulting  services for micro-cap public  companies.  For more than 40 years he
has been engaged in various  aspects of the  investment  business.  Mr.  Keating
began his Wall Street  career with the First Boston  Corporation  in New York in
1965. From 1967 through 1974, he was employed by several institutional  research
boutiques where he functioned as Vice President Institutional Equity Sales. From
1974 until 1982,  Mr. Keating was the President and Chief  Executive  Officer of
Douglas Stewart,  Inc., a New York Stock Exchange member firm. From 1982 through
2006,  he was  associated  with a variety of  securities  firms as a  registered
representative  servicing  the  investment  needs of high net  worth  individual
investors.

         Additionally, Mr. Keating currently serves as Director on the Boards of
Catalyst Lighting Group, 99 Cent Stuff, Inc., Blue Holdings, Inc. and Digital FX
International,  Inc. He is the sole officer and director of Wentworth  II, Inc.,
Wentworth IV, Inc. and Wentworth V, Inc.,  all of which are  publicly-reporting,
non-trading blank check companies.

         None of our  executive  officers or  directors  has had any  bankruptcy
petition  filed by or against any business of which such officer or director was
a general  partner or executive  officer either at the time of the bankruptcy or
within two years prior to that time. None of our executive officers or directors
have  been  convicted  in a  criminal  proceeding  or are  subject  to a pending
criminal proceeding,  excluding traffic violations or similar misdemeanors,  nor
have they been a party to any judicial or  administrative  proceeding during the
past five years,  except for matters  that were  dismissed  without  sanction or


                                       57
<PAGE>


settlement,  that  resulted in a judgment,  decree or final order  enjoining the
person from future violations of, or prohibiting  activities subject to, federal
or state  securities  laws,  or a finding of any  violation  of federal or state
securities laws.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Section 16(a) of the Securities  Exchange Act of 1934 requires that our
executive officers and directors, and persons who own more than ten percent of a
registered class of our equity securities, file reports of ownership and changes
in ownership with the SEC. Executive  officers,  directors and  greater-than-ten
percent  stockholders  are  required by SEC  regulations  to furnish us with all
Section  16(a) forms they file.  Based solely on our review of the copies of the
forms received by us and written  representations from certain reporting persons
that they have complied with the relevant filing requirements,  we believe that,
during  the  year  ended  December  31,  2006,  all of our  executive  officers,
directors and greater-than-ten  percent  stockholders  complied with all Section
16(a) filing requirements, except for the following: one Statement of Changes in
Beneficial Ownership on Form 4, reporting two separate  transactions,  was filed
late by Colin Dyne.

CODE OF ETHICS

         We have adopted a Code of Ethics applicable to all of our Board members
and to all of our  employees,  including our Chief  Executive  Officer and Chief
Financial Officer.  The Code of Ethics constitutes a "code of ethics" as defined
by applicable SEC rules and a "code of conduct" as defined by applicable  NASDAQ
rules.  The Code of Ethics is being publicly filed with the SEC as an exhibit to
our current  Annual Report on Form 10-KSB for the fiscal year 2006.  Our code of
ethics is posted on our Internet  website located at  www.peopleslib.com  in the
section titled "Investor  Relations." You may also request a copy of the Code of
Ethics by writing or calling us at:

         People's Liberation, Inc.
         Attn:  Investor Relations
         150 West Jefferson Boulevard
         Los Angeles, CA 90007
         (213) 745-2123

         Any waiver of the Code of Ethics pertaining to a member of our Board or
one of our  executive  officers  will be disclosed in a report on Form 8-K filed
with the SEC.


                                       58
<PAGE>


ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth information  concerning all compensation
paid to our Chief Executive Officer,  Chief Financial Officer and President (our
"Named Executive  Officers") for services  rendered during our fiscal year ended
December 31, 2006.

<TABLE>
<CAPTION>
                                                                                          All Other
   Name and Principal                                                  Option Awards     Compensation
        Position               Year          Salary          Bonus          (1)               (5)             Total
-------------------------- -------------- -------------- ------------- --------------- ----------------- -------------
<S>                            <C>          <C>            <C>             <C>             <C>               <C>
Daniel Guez                    2006         $300,000       $175,000        $      0        $ 22,182          $497,182
Chief Executive
Officer(2)
-------------------------- -------------- -------------- ------------- --------------- ----------------- -------------
Darryn Barber                  2006         $203,278       $ 40,000        $ 87,771        $      0          $331,049
Chief Financial
Officer(3)
-------------------------- -------------- -------------- ------------- --------------- ----------------- -------------
Edward Houston                 2006         $131,591       $ 25,000        $103,239        $  8,000          $267,830
President(4)
-------------------------- -------------- -------------- ------------- --------------- ----------------- -------------
</TABLE>

(1)  Assumptions  relating to the estimated fair value of stock options  granted
     to Darryn  Barber,  which we are  accounting  for in  accordance  with SFAS
     123(R) are as follows:  risk-free interest rate of 5.1%;  expected dividend
     yield 0%;  expected  option  life of 5.1 years;  and  volatility  of 60.3%.
     Assumptions  relating to the estimated fair value of stock options  granted
     to Edward  Houston,  which we are  accounting  for in accordance  with SFAS
     123(R) are as follows:  risk-free interest rate of 5.0%;  expected dividend
     yield 0%;  expected  option  life of 6.0 years;  and  volatility  of 60.3%.
     Please see Note 2 to our financial statements for further discussion of our
     assumptions relating to the estimated fair value of these stock options.

(2)  Mr. Guez became our President and Chief  Executive  Officer on November 22,
     2005 in connection with the consummation of an exchange transaction and our
     reverse mergers of Versatile Entertainment, Inc., a California corporation,
     and Bella Rose, LLC, a California  limited liability  company.  Mr. Guez is
     subject  to an  employment  agreement  the  terms  of which  are  described
     hereafter.

(3)  Mr. Barber  became our Chief  Financial  Officer on November 22, 2005.  Mr.
     Barber  is  subject  to an  employment  agreement  the  terms of which  are
     described  hereafter.  Mr. Barber was granted an option to purchase 300,000
     shares of our  common  stock at a per share  price of $1.25,  which  option
     terminates on July 7, 2016 and is now fully  vested.  Mr. Barber is subject
     to an employment agreement the terms of which are described hereafter.

(4)  Mr. Houston was named our President effective July 20, 2006. Mr. Houston is
     subject  to an  employment  agreement  the  terms  of which  are  described
     hereafter.  Mr. Houston was granted an option to purchase  1,000,000 shares
     of our common stock at a per share price of $1.25,  which option terminates
     on July 31, 2016.  These options vest and become  exercisable  in quarterly
     installments  of 83,333  shares each (other  than in the last  quarter,  in
     which  83,337  shares shall vest),  with the first  installment  vesting on
     October 1, 2006, and on the first day of each fiscal quarter thereafter.

(5)  Other  compensation  indicated in the above table  consists of car expenses
     and allowances.

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE

         We compensate  our executive  officers  through a combination of a base
salary,  a cash bonus,  and options to purchase  shares of our common stock.  In
addition, we provide other perquisites to some of our executive officers,  which
primarily  consist of car  expenses  and  allowances.  The  bonuses  paid to our
executive  officers in 2006 were determined by our Board of Directors,  and were
based on the  performance  of the executive  officer and the company.  We do not
have a formal plan for determining the  compensation of our executive  officers.
Instead, each executive officer negotiates their respective employment agreement
with us.


                                       59
<PAGE>


         All  agreements  with our named  executive  officers  that  provide for
payments to such named  executive  officers at,  following or in connection with
the  resignation,  retirement  or  other  termination  of such  named  executive
officers,   or  a  change  in  control  of  our  company  or  a  change  in  the
responsibilities  of such named executive officers following a change in control
are set  forth  in the  following  description  of their  respective  employment
agreements.

         DANIEL GUEZ

         On January 12,  2007,  we entered  into an  Employment  Agreement  with
Daniel  Guez,  pursuant  to which he will serve as our Chief  Executive  Officer
and/or Creative Director, and Chairman of the Board of Directors.  The agreement
is for an  initial  term  of  three  years  and is  automatically  extended  for
additional  one year terms unless we or Mr. Guez elect not to extend the term of
the  agreement.  Under the  agreement,  Mr.  Guez  will  receive  the  following
compensation:

         o        Base  salary  of  $400,000   per  annum,   subject  to  upward
                  adjustment;

         o        Annual performance bonus in the amount equal to the sum of (i)
                  ten  percent  (10%)  of  the  first  three   million   dollars
                  ($3,000,000)  of the  Company's  consolidated  EBITDA for such
                  fiscal  year,  and (ii) five percent (5%) of the amount of the
                  Company's  consolidated  EBITDA,  if any,  in  excess of three
                  million dollars ($3,000,000) for such fiscal year; and

         o        Automobile and related expense allowance of $2,300 per month.

         If during the employment period, (a) we terminate Mr. Guez's employment
without cause or if Mr. Guez  terminates his employment for good reason,  or (b)
if (i) we fail to extend the period of the employment  period as provided above,
and (ii) at any time within six months  following  expiration of the  employment
period, we terminate Mr. Guez's employment  without cause or Mr. Guez terminates
his  employment  for good reason or without good  reason,  Mr. Guez will be paid
severance  in an amount equal to one and  one-half  times the sum of Mr.  Guez's
base salary in effect on the date of  termination  plus the average annual bonus
received by Mr. Guez for the two complete fiscal years  immediately prior to the
termination date, and all of his outstanding stock options, restricted stock and
other  equity  awards will  accelerate  and become  fully  vested on the date of
termination.  If Mr.  Guez's  employment is terminated by reason of his death or
disability during the employment  period, Mr. Guez, his estate or beneficiaries,
as  applicable,  will be entitled  to be paid a lump sum payment of  one-hundred
percent  (100%)  of  Mr.  Guez's  then  current  annual  base  salary,  and  all
outstanding  stock options,  restricted stock and other equity awards granted to
Mr. Guez will accelerate and become fully vested on the date of termination.  In
addition,  for a period of 18 months following the date of termination,  we will
continue to provide Mr. Guez and his eligible  family  members with group health
insurance coverage.

         EDWARD HOUSTON

         On July 13, 2006, we entered into an Employment  Agreement  with Edward
Houston  pursuant to which he serves as the Company's  President  effective July
20,  2006.  Mr.  Houston is employed  on an "at will" basis and will  receive an
annual  salary of  $300,000,  which is subject  to  adjustment  pursuant  to our
employee  compensation  policies in effect from time to time. In addition to his
base  salary,  commencing  with  fiscal  year  2006  and for  each  fiscal  year
thereafter  during  which Mr.  Houston is  performing  services  for us, we will
maintain a  Management  Incentive  Program  pursuant  to which we will set aside
during  each fiscal  year for  payment to Mr.  Houston an amount  equal to three
percent (3%) of our earnings before interest and taxes for such fiscal year. Mr.
Houston  was also  granted  a  non-qualified  stock  option  to  purchase  up to
1,000,000 shares of our common stock at an exercise price of $1.25. In the event
Mr.  Houston is terminated  without cause prior to the third  anniversary of the
commencement  of his  employment  with  us,  we  shall  pay to Mr.  Houston  the
equivalent of six months of his base salary,  or if lesser,  the base salary Mr.
Houston  would have earned had he remained  employed  with us through such third
anniversary of  commencement  of his employment at his then  applicable  rate of
pay.


                                       60
<PAGE>


         DARRYN BARBER

         On January 3, 2006, we entered into an Employment Agreement with Darryn
Barber  pursuant  to which he  serves  our  Chief  Financial  Officer  and Chief
Operating  Officer.  The  agreement  is for a term of 2 years  commencing  as of
November 22, 2005 and  terminating on November 21, 2007.  Mr. Barber  received a
base salary of $212,000 through the first  anniversary of his  appointment,  and
currently receives $232,000 through the second year of his contract. In addition
to his base  salary,  Mr.  Barber will  receive an annual bonus of not less than
$25,000 and no more than $100,000 based on objectives determined by our Board of
Directors.  On July 7, 2006, in accordance  with the Employment  Agreement,  Mr.
Barber was granted a stock option to purchase 300,000 shares of our common stock
at an  exercise  price of $1.25 per  share.  One-third  of the  options  vest in
monthly  installments of 25,000  beginning August 7, 2006 and the balance vested
immediately.  In the  event Mr.  Barber is  terminated  without  cause,  we will
continue to pay Mr.  Barber's then current base salary for the remaining term of
the agreement,  without regard to any employment of Mr. Barber by a third party.
On November 8, 2006,  we entered into an amendment  to Mr.  Barber's  employment
agreement.  Pursuant to the amendment,  Mr. Barber resigned from his position as
Chief Operating Officer, effective November 8, 2006. Mr. Barber will continue to
serve as our Chief  Financial  Officer.  The amendment also extends the exercise
period of Mr. Barber's option to purchase  300,000 shares of our common stock to
a period of one year  following  termination  of Mr.  Barber's  service  for any
reason  other  than  for  cause  (as  defined  in  the  employment   agreement).
Previously,  Mr.  Barber's  option was to remain  exercisable for a period of at
least six months  following  termination  of his service  with us for any reason
other than for cause. Mr. Barber's annual bonus amounted to $40,000 for the year
ended December 31, 2006.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE

     The following table presents information regarding outstanding options held
by our named executive  officers as of the end of our fiscal year ended December
31, 2006.  None of the named  executive  officers  exercised  options during the
fiscal year ended December 31, 2006.

<TABLE>
<CAPTION>
                                 Number of Securities Underlying
                                     Unexercised Options (#)
-------------------------- -------------------------------------------- ---------------------- ----------------------
          Name                 Exercisable           Unexercisable         Option Exercise       Option Expiration
                                                                              Price ($)                Date
-------------------------- --------------------- ---------------------- ---------------------- ----------------------
<S>                            <C>                   <C>                        <C>                <C>
Daniel Guez                         --                    --                     --                     --

-------------------------- --------------------- ---------------------- ---------------------- ----------------------
Darryn Barber (1)              300,000((1))               --                    $1.25              July 7, 2016

-------------------------- --------------------- ---------------------- ---------------------- ----------------------
Edward Houston (2)             83,333((2))           916,667((2))               $1.25              July 31, 2016

-------------------------- --------------------- ---------------------- ---------------------- ----------------------
</TABLE>

         (1)      On July 7, 2006,  Mr. Barber was granted an option to purchase
                  300,000  shares of our  common  stock at a per share  exercise
                  price of $1.25. As of December 31, 2006, this option was fully
                  vested.

         (2)      On July 31,  2006,  Mr.  Houston  was  granted  an  option  to
                  purchase  1,000,000  shares of our common stock at a per share
                  exercise  price of $1.25.  This option  vests in twelve  equal
                  quarterly  installments  beginning  October  2006 through July
                  2009. This option terminates on July 31, 2016.


                                       61
<PAGE>


DIRECTOR COMPENSATION AND INDEPENDENCE

         The following table presents information regarding compensation paid to
our non-employee directors for our fiscal year ended December 31, 2006.

<TABLE>
<CAPTION>
------------------------- ----------------------- ----------------------- --------------------- ----------------------
                            Fees Earned or Paid                                 All Other
          Name                   in Cash             Option Awards (3)        Compensation              Total
------------------------- ----------------------- ----------------------- --------------------- ----------------------
<S>        <C>                   <C>                     <C>                       <C>                 <C>
Dean Oakey (1)                   $10,000                 $14,724                   --                  $24,724

------------------------- ----------------------- ----------------------- --------------------- ----------------------
Kevin Keating (2)                $10,000                 $14,724                   --                  $24,724

------------------------- ----------------------- ----------------------- --------------------- ----------------------
</TABLE>

(1)  On June 22, 2006, Mr. Oakey was granted an option to purchase 36,000 shares
     of our common  stock at a per share  exercise  price of $1.25.  This option
     vested  18,000  shares  on the  date of  grant  and  1,500  shares  monthly
     thereafter  through July 2007. This option terminates on June 22, 2016. Mr.
     Oakey did not  exercise  any of his option  awards  during the fiscal  year
     ended December 31, 2006.

(2)  On June 22,  2006,  Mr.  Keating was  granted an option to purchase  36,000
     shares of our common  stock at a per share  exercise  price of $1.25.  This
     option vested  18,000 shares on the date of grant and 1,500 shares  monthly
     thereafter  through July 2007. This option terminates on June 22, 2016. Mr.
     Keating did not  exercise any of his option  awards  during the fiscal year
     ended December 31, 2006.

(3)  Assumptions  relating to the estimated  fair value of these stock  options,
     which we are accounting for in accordance  with SFAS 123(R) are as follows:
     risk-free  interest  rate of 5.2%;  expected  dividend  yield 0%;  expected
     option life of 5.3 years; and volatility of 60.3%. Please see Note 2 to our
     financial  statements for further discussion of our assumptions relating to
     the estimated fair value of these stock options.

         We  currently  pay  non-employee  directors  an annual fee of  $10,000.
Non-employee directors,  Mr. Keating and Mr. Oakey, also received 36,000 options
each to purchase  shares of our common  stock in June 2006 and  $10,000  each in
payment for service on the Board of directors  from July 2006 through June 2007.
Our directors are also reimbursed for travel expenses associated with attendance
at Board  meetings.  There were no  reimbursements  for travel  expenses for the
fiscal year ended December 31, 2006.

2005 STOCK INCENTIVE PLAN

         Our 2005 Stock  Incentive  Plan was  adopted on  November  23, 2005 and
became effective on January 5, 2006. A total of 3,500,000 shares of common stock
have been reserved for issuance  upon exercise of awards  granted under the 2005
Stock Incentive Plan. Any shares of common stock subject to an award,  which for
any reason expires or terminates  unexercised,  are again available for issuance
under the 2005 Stock Incentive Plan.

         Our 2005 Stock  Incentive Plan will  terminate  after 10 years from the
date on which our board  approved the plan,  unless it is terminated  earlier by
our board.  The plan  authorizes  the award of stock options and stock  purchase
grants.

         Our 2005  Stock  Incentive  Plan is  administered  by our full board of
directors.  To the extent we expand our board of directors,  we intend to form a
compensation  committee,  all  of the  members  of  which  will  be  independent
directors under  applicable  federal  securities  laws and outside  directors as
defined  under  applicable  federal  tax  laws.  Following  its  formation,  the
compensation  committee  will have the  authority to construe and  interpret the
plan, grant awards and make all other determinations  necessary or advisable for
the administration of the plan.


                                       62
<PAGE>


         Our 2005 Stock  Incentive Plan provides for the grant of both incentive
stock options that qualify  under  Section 422 of the Internal  Revenue Code and
nonqualified  stock  options.  Incentive  stock  options may be granted  only to
employees  of ours or any parent or  subsidiary  of ours.  All awards other than
incentive  stock options may be granted to our employees,  officers,  directors,
consultants,  independent  contractors  and  advisors  of ours or any  parent or
subsidiary  of ours.  The exercise  price of incentive  stock options must be at
least equal to the fair market  value of our common  stock on the date of grant.
The exercise price of incentive stock options granted to 10%  shareholders  must
be at least  equal to 110% of that value.  The  exercise  price of  nonqualified
stock options will be determined by our compensation  committee when the options
are granted.

         In  general,  options  will vest over a four-year  period.  The term of
options granted under our 2005 Stock Incentive Plan may not exceed 10 years.

         Awards  granted  under  our  2005  Stock  Incentive  Plan  may  not  be
transferred  in any  manner  other  than by will or by the laws of  descent  and
distribution or as determined by our  compensation  committee.  Unless otherwise
restricted  by our  compensation  committee,  nonqualified  stock options may be
exercised  during  the  lifetime  of the  optionee  only  by the  optionee,  the
optionee's  guardian or legal  representative or a family member of the optionee
who has acquired the option by a permitted transfer. Incentive stock options may
be exercised  during the  lifetime of the  optionee  only by the optionee or the
optionee's  guardian or legal  representative.  Options  granted  under our 2005
Stock  Incentive  Plan  generally  may be exercised for a period of three months
after  the  termination  of the  optionee's  service  with us or any  parent  or
subsidiary  of  ours.   Options  will  generally   terminate   immediately  upon
termination of employment for cause.

         The purchase price for restricted stock will be determined by our board
of directors or  compensation  committee,  as applicable,  at the time of grant.
Stock  bonuses  may be  issued  for past  services  or may be  awarded  upon the
completion of services or performance goals.

         If we are  subject to a sale,  merger,  consolidation,  reorganization,
liquidation or change in control,  our Board of Directors may take actions which
include  (but shall not be limited  to)  establishing,  amending  or waiving the
type,  terms,  conditions  or duration  of, or  restrictions  on rights so as to
provide for earlier,  later,  extended or additional time for exercise and other
modifications.  In addition,  the Board of Directors  may take such actions with
respect to all  participants,  to certain  categories of participants or only to
individual  participants in the plan. Moreover,  the Board of Directors may take
such  action  before or after  granting  rights to which the action  relates and
before or after any public  announcement  with  respect  to such  sale,  merger,
consolidation,  reorganization,  liquidation  or change in  control  that is the
reason for such action.

ITEM 11. SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT  AND
         RELATED STOCKHOLDER MATTERS

         The following  table  presents  information  regarding  the  beneficial
ownership of our common stock as of March 9, 2007 by:

         o        each of the named  executive  officers  listed in the  summary
                  compensation table;

         o        each of our directors;

         o        all of our directors and executive officers as a group; and

         o        each  shareholder  known to us to be the  beneficial  owner of
                  more than 5% of our common stock.


                                       63
<PAGE>


         Beneficial  ownership is determined in accordance with the rules of the
SEC  and  generally   includes  voting  or  investment  power  with  respect  to
securities.  Unless otherwise indicated below, to our knowledge, the persons and
entities  named in the table  have sole  voting and sole  investment  power with
respect to all shares  beneficially  owned,  subject to community  property laws
where applicable. Shares of our common stock subject to options from the Company
that are currently  exercisable or  exercisable  within 60 days of March 9, 2007
are deemed to be outstanding and to be beneficially  owned by the person holding
the options for the purpose of computing the percentage ownership of that person
but are not treated as  outstanding  for the purpose of computing the percentage
ownership of any other person.

         The information  presented in this table is based on 34,942,563  shares
of our common stock  outstanding on March 9, 2007.  Unless otherwise  indicated,
the  address of each of the  executive  officers  and  directors  and 5% or more
shareholders  named below is c/o People's  Liberation,  Inc., 150 West Jefferson
Boulevard, Los Angeles, CA 90007.

                                                         NUMBER OF    PERCENTAGE
                                                          SHARES          OF
                                                       BENEFICIALLY     SHARES
NAME OF BENEFICIAL OWNER                                   OWNED     OUTSTANDING
-----------------------------------------------------   ----------    ----------

EXECUTIVE OFFICERS AND DIRECTORS:
Daniel S. Guez (1) ..................................   14,198,387         40.6%
   Director, Chief Executive Officer and
   Secretary
Darryn Barber (2) ...................................      425,060          1.2%
   Chief Financial Officer
Edward Houston (3) ..................................      249,999            *
   President
Dean Oakey (4) ......................................      699,883          2.0%
   Director
Kevin R. Keating (5) ................................       85,555            *
   Director
Named Directors and officers as a group
   (5 persons) (6) ..................................   15,658,884         43.7%

5% SHAREHOLDERS:
Colin Dyne ..........................................    7,731,560         22.1%
Microcapital Fund LP and Microcapital
   Fund Ltd (7) .....................................    2,800,000          7.9%


----------
*    Less than 1%

(1)  Consists of 13,098,387 shares of common stock beneficially held by Mr. Guez
     and  1,100,000  shares of common  stock held by Daniel S. Guez as Custodian
     for Isabella Guez UTMA of CA.

(2)  Consists of 125,060 shares of common stock and 300,000  options to purchase
     common stock .

(3)  Consists of 249,999 options to purchase common stock.

(4)  Consists of 389,883  shares of common stock,  warrants to purchase  278,500
     shares of common  stock and  options to  purchase  31,500  shares of common
     stock.

(5)  Consists of 54,055  shares of common  stock and options to purchase  31,500
     shares of common stock. Kevin R. Keating, a director of the company, is the
     father  of the  principal  member  of  Keating  Investments,  LLC.  Keating
     Investments, LLC is the managing member of KRM Fund, a selling shareholder.
     KRM also has the right to  nominate  a  director  of the  company.  Keating
     Investments,  LLC is also the  managing  member  and 90%  owner of  Keating
     Securities,  LLC,  a  registered  broker-dealer.  Kevin R.  Keating  is not
     affiliated with and has no equity interest in Keating Investments, LLC, KRM
     Fund or Keating  Securities,  LLC and disclaims any beneficial  interest in
     the  shares  of our  common  stock  owned by KRM Fund.  Similarly,  Keating
     Investments,  LLC,  KRM Fund  and  Keating  Securities,  LLC  disclaim  any
     beneficial  interest in the shares of our common stock  currently  owned by
     Kevin R. Keating. Mr. Keating's address is 936A Beachland Boulevard,  Suite
     13 Vero Beach, Florida 32963.


                                       64
<PAGE>


(6)  Consists of 14,767,385 shares of common stock, warrants to purchase 278,500
     shares of common  stock and  options to purchase  612,999  shares of common
     stock.

(7)  Consists of 1,333,600 shares of common stock owned by Microcapital  Fund LP
     and 666,400  shares of common  stock owned by  Microcapital  Fund Ltd.  The
     address  of  Microcapital  Fund LP and  Microcapital  Fund  Ltd is 201 Post
     Street, San Francisco, California 94108.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2006.

<TABLE>
<CAPTION>
                              --------------------------    --------------------------    ----------------------------
                               NUMBER OF SECURITIES TO          WEIGHTED-AVERAGE              NUMBER OF SECURITIES
                               BE ISSUED UPON EXERCISE          EXERCISE PRICE OF            REMAINING AVAILABLE FOR
                               OF OUTSTANDING OPTIONS,        OUTSTANDING OPTIONS,        FUTURE ISSUANCE UNDER EQUITY
                                 WARRANTS AND RIGHTS           WARRANTS AND RIGHTS             COMPENSATION PLANS
--------------------------    --------------------------    --------------------------    ----------------------------
<S>                                   <C>                             <C>                           <C>
Equity compensation
plans approved by
security holders..........            1,878,000                       $1.25                         1,622,000
Equity compensation
plans not approved by
security holders..........              625,000                       $1.25                            --
Total.....................            2,503,000                       $1.25                         1,622,000
--------------------------    --------------------------    --------------------------    ----------------------------
</TABLE>

MATERIAL  FEATURES  OF  INDIVIDUAL  EQUITY  COMPENSATION  PLANS NOT  APPROVED BY
STOCKHOLDERS

         Sanders Morris Harris Inc. acted as placement  agent in connection with
our  capital  raise,  which we  completed  on  November  23,  2005.  In  partial
consideration for their services as placement agent, we issued to Sanders Morris
Harris and its  employees,  Dean Oakey and Jonah Sulak,  warrants to purchase an
aggregate of 625,000  shares of common  stock at an exercise  price of $1.25 per
share. The warrants are fully vested and have a term of 5 years.

ITEM 12. CERTAIN   RELATIONSHIPS   AND  RELATED   TRANSACTIONS,   AND   DIRECTOR
         INDEPENDENCE

         Other than the employment  arrangements  described  above in "Executive
Compensation" and the transactions described below, since January 1, 2005, there
has not been,  nor is there  currently  proposed,  any  transaction or series of
similar transactions to which we were or will be a party:

         o        in which the amount involved exceeds the lessor of $120,000 or
                  1% of the  average  of our  assets  at  year-end  for the last
                  three completed fiscal years; and

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

TRANSACTIONS WITH OFFICERS AND DIRECTORS

         On November 23, 2005, we received gross proceeds of approximately  $7.8
million in a private  placement  transaction  with  institutional  investors and
other high net worth  individuals.  In  conjunction  with the private  placement
transaction,  we issued  warrants to purchase an aggregate of 625,000  shares of
common stock to Sanders  Morris  Harris,  Inc.,  the  placement  agent,  and its
employees Dean Oakey and Jonah Sulak.  Dean Oakey,  who received  262,500 of the
placement  agent  warrants,  became a director of the company upon completion of
the exchange transaction with Versatile Entertainment,  Inc. and Bella Rose, LLC
on  November  22,  2005.  The  warrants  are fully  vested  and have a per share
exercise  price of $1.25.  From June 1997 to the  present  date,  Mr.  Oakey has
served as the  Managing  Director of  Corporate  Finance and Capital  Markets at
Sanders Morris Harris, Inc.


                                       65
<PAGE>


     In addition,  please see the section below entitled  "Promoters and Control
Persons."

TRANSACTIONS WITH 5% SHAREHOLDERS

         During 2004,  Tag-It  Pacific,  Inc. loaned an aggregate of $293,989 to
Versatile  Entertainment,  Inc., which loan was unsecured, and due on demand. On
May 16, 2005, the then  outstanding  balance of $300,000 due to Tag-It  Pacific,
Inc. was repaid with borrowings from an unrelated entity. On May 16, 2005, Colin
Dyne,  CEO of  Tag-It  Pacific,  Inc.,  assumed  Versatile's  obligation  to the
unrelated entity in exchange for the issuance of 45 shares of Versatile's common
stock.  After  giving  9.546  shares of his  Versatile  common  stock to various
parties,  the  remaining  35.454  shares of common  stock held by Mr.  Dyne were
exchanged for 775,294.3  shares of our series A convertible  preferred  stock on
November  22,  2005,  the closing of the  exchange  transaction  with  Versatile
Entertainment  and  Bella  Rose.  The  Company  paid  $259,000  and  $10,000  in
consulting fees to this stockholder during the years ended December 31, 2006 and
2005.

         During the years ended  December 31, 2006 and 2005,  we purchased  trim
products from Tag-It Pacific, Inc., a related entity, amounting to approximately
$152,000 and $75,000, respectively.

PROMOTERS AND CONTROL PERSONS

         On December  15, 2004,  Keating  Reverse  Merger Fund,  LLC, a Delaware
limited liability company,  David L. Hadley (our former chief executive officer)
and Natural  Technologies,  Inc., an Arizona corporation entered into a purchase
agreement  pursuant to which certain  shareholders of the company sold 5,625,287
shares (on a pre-reverse  stock split basis) of the common stock of the company,
representing  approximately  70.99% of the outstanding shares of common stock of
the company,  to Keating  Reverse  Merger Fund,  LLC, for an aggregate  purchase
price of $375,000.

         On January 31,  2005,  we entered  into an  Assumption  Agreement  with
Global Medical  Technologies,  Inc., Natural  Technologies,  Inc. and Mr. Hadley
pursuant  to which we  contributed  all of the  shares  of  common  stock of our
inactive  subsidiaries,  Century  Pacific  Financial  Corp. and Century  Pacific
Investment Management Corporation,  to Global Medical Technologies,  Inc. Global
Medical  Technologies,  Inc.  agreed to  assume  all of our  liabilities  and to
indemnify  us for any loss we incur with  respect to such  assumed  liabilities.
Global Medical,  Natural Technologies,  and Mr. Hadley also released us from all
obligations and claims.  In February 2005, we distributed all of the outstanding
shares of common stock of Global Medical Technologies,  Inc. on a pro rata basis
to our stockholders.  Following the distribution,  Global Medical  Technologies,
Inc.  continued to operate its medical equipment  reconditioning  business as an
independent  company.  After this distribution,  we existed as a "shell company"
under the name of Century  Pacific  Financial  Corporation  with nominal  assets
whose sole business was to identify,  evaluate and investigate various companies
to acquire or with which to merge.

         On February 16, 2005,  we received a  non-interest  bearing,  unsecured
demand loan from Keating Reverse Merger Fund in the amount of $50,000 to provide
working  capital for operating  expenses.  On June 28, 2005 we issued  5,000,000
restricted common shares (on a pre-reverse stock split basis) in full payment of
the $50,000 note payable to Keating  Reverse  Merger  Fund.  We granted  Keating
Reverse Merger Fund piggyback registration rights with respect to these shares.

         On November 22, 2005, we consummated  an exchange  transaction in which
we acquired all of the  outstanding  ownership  interests of Bella Rose,  LLC, a
California limited liability company ("Bella Rose") and Versatile Entertainment,
Inc., a California corporation  ("Versatile") from their respective shareholders
and members, in exchange for an aggregate of 2,460,106.34 shares of our series A


                                       66
<PAGE>


convertible preferred stock which, on January 5, 2006, converted into 26,595,751
shares of our common stock on a post reverse  stock split basis.  At the closing
of the exchange  transaction,  Versatile and Bella Rose became our  wholly-owned
subsidiaries.  The exchange  transaction  was accounted for as a reverse  merger
(recapitalization)  with  Versatile  and Bella Rose deemed to be the  accounting
acquirers, and People's Liberation, Inc. the legal acquirer.

         On November 22,  2005,  we entered  into a certain  financial  advisory
agreement with Keating Securities,  LLC under which Keating Securities,  LLC was
compensated by us for its advisory  services  rendered to us in connection  with
the closing of the exchange transaction with Versatile  Entertainment,  Inc. and
Bella Rose,  LLC. The  transaction  advisory fee was $350,000,  with the payment
thereof made at the closing of the exchange transaction.

         Kevin R.  Keating,  is the  father of the  principal  member of Keating
Investments,  LLC.  Keating  Investments,  LLC is the managing member of Keating
Reverse  Merger  Fund and is also the  managing  member and 90% owner of Keating
Securities, LLC, a registered broker-dealer.  Kevin R. Keating is not affiliated
with and has no equity  interest in Keating  Investments,  LLC,  Keating Reverse
Merger Fund or Keating Securities,  LLC and disclaims any beneficial interest in
the shares of our common stock owned by Keating Reverse Merger Fund.  Similarly,
Keating  Investments,  LLC, Keating Reverse Merger Fund and Keating  Securities,
LLC disclaim any beneficial interest in the shares of our common stock currently
owned by Kevin R. Keating.

DIRECTOR INDEPENDENCE

         Our board of directors currently consists of three members: Daniel Guez
(our Chief Executive  Officer),  Kevin Keating and Dean Oakey. Each director was
elected at a meeting of shareholders and serves until our next annual meeting or
until his or her successor is duly elected and qualified.

         We  do  not  have  a  separately  designated  audit,   compensation  or
nominating  committee of our board of directors  and the  functions  customarily
delegated to these  committees are performed by our full board of directors.  We
are not a "listed  company"  under SEC rules and are  therefore  not required to
have separate committees comprised of independent  directors.  We have, however,
determined that neither Mr. Keating nor Mr. Oakey is  "independent" as that term
is defined in Section  4200 of the  Marketplace  Rules as required by the NASDAQ
Stock Market. As we do not maintain an audit committee,  we do not have an audit
committee  "financial  expert"  within the meaning of Item 401(d) of  Regulation
S-B.

         We intend to establish an audit committee,  compensation committee, and
nominating  and corporate  governance  committee  following the expansion of our
board  to  include  at least  three  directors  who are  independent  under  the
applicable rules of the SEC and NASDAQ.


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<PAGE>


ITEM 13.  EXHIBITS

         The following exhibits are filed herewith:

EXHIBIT
NUMBER                                  EXHIBIT TITLE
-------        -----------------------------------------------------------------

2.1            Exchange   Agreement  by  and  among  Century  Pacific  Financial
               Corporation,  Versatile Entertainment,  Inc., the stockholders of
               Versatile,  Bella Rose, LLC, and the members of Bella Rose, dated
               October 28, 2005 (1)*

3.1            Restated Certificate of Century Pacific Corporation filed January
               13, 1986. (2)

3.2            Certificate of Amendment filed August 22, 1986. (2)

3.3            Certificate of Amendment filed June 14, 1989. (2)

3.4            Certificate  for Renewal and Revival of Charter filed January 31,
               1995. (2)

3.5            Certificate of Amendment of Certificate  of  Incorporation  filed
               April 6, 1995. (2)

3.6            Certificate  of  Amendment of  Certificate  of  Incorporation  of
               Century Pacific Financial Corporation filed December 2, 1996. (2)

3.7            Certificate  for  Renewal  and  Revival of Charter  filed May 18,
               2004. (2)

3.8            Certificate  of  Amendment of  Certificate  of  Incorporation  of
               Century Pacific Financial Corporation dated June 28, 2005. (4)

3.9            Certificate of Amendment of Certificate  of  Incorporation  filed
               January 5, 2006. (2) 3.10 Bylaws of People's Liberation, Inc.(2)

4.1            2005 People's Liberation, Inc. Option Plan. (2)**

4.2            Certificate of Designations,  Preferences, Rights and Limitations
               of  Series  A  Convertible  Preferred  Stock of  Century  Pacific
               Financial Corporation. (3)

10.1           Financial  Advisory  Agreement  dated November 22, 2005,  between
               Century Pacific  Financial  Corporation  and Keating  Securities,
               LLC. (3)

10.2           Lease  Agreement  entered  into by and  between  Ofer  and  Eitan
               Kashanian and  Versatile  Entertainment,  Inc.  dated October 11,
               2005. (3)

10.3           Factor Agreement  entered into on October 14, 2004 by and between
               Versatile and FTC Commercial Corp. (3)

10.4           Amendment No. 1 To Factoring  Agreement between Versatile and FTC
               Commercial Corp. dated September 30, 2005 (3)

10.5           Factoring  Agreement  entered into by and between  Bella Rose and
               FTC Commercial Corp. dated October 12, 2005 (3)

10.6           Assignment,  Assumption  and  Novation  Agreement  by and between
               Versatile,  Colin Dyne, and Venture Group, LLC dated May 16, 2005
               (3)

10.7           Form of  Subscription  Agreement  between the  Registrant and the
               Investors identified therein. (3)


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<PAGE>


10.8           Registration  Rights  Agreement dated November 23, 2005 among the
               Registrant   and  Sanders   Morris   Harris  Inc.  as  agent  and
               attorney-in-fact for the Investors identified therein. (3)

10.9           Placement  Agent  Agreement  dated  November 23, 2005 between the
               Registrant and Sanders Morris Harris Inc. (3)

10.10          Form of Common Stock Purchase Warrant. (3)

10.11          Employment  Agreement  of Darryn  Barber  dated  January 3, 2005.
               (2)**

10.12          Amendment to Employment Agreement of Darryn Barber dated November
               8, 2006.**

10.13          Employment Agreement of Edward Houston dated July 13, 2006. (5)**

10.14          Employment Agreement of Daniel Guez dated January 12, 2007. (6)**

10.15          Limited  Liability  Company  Operating  Agreement of William Rast
               Sourcing, LLC, dated as of October 1, 2006. (7)

10.16          Limited  Liability  Company  Operating  Agreement of William Rast
               Licensing, LLC, dated as of October 1, 2006. (7)

10.17          Form of Indemnity Agreement. (2)

10.18          Factoring  Agreement  entered  into  on  October  1,  2006 by and
               between William Rast Sourcing, LLC and FTC Commercial Corp.

10.19          Letter  Agreement by and between  William Rast Sourcing,  LLC and
               FTC Commercial Corp. dated October 1, 2006.

10.20          Letter Agreement by and between Versatile Entertainment, Inc. and
               FTC Commercial Corp. dated September 1, 2006.

10.21          Amendment No. 1 to Inventory Loan Facility AGreement entered into
               on October 1, 2006 by and between Versatile  Entertainment,  Inc.
               and FTC Commercial Corp.

10.22          Letter  Agreement by and between  Bella Rose,  LLC d/b/a  William
               Rast and FTC Commercial Corp. dated September 1, 2006.

14.1           People's Liberation, Inc. Code of Ethical Conduct. (8)

21.1           Subsidiaries of People's Liberation, Inc.

23.1           Consent of Independent Registered Public Accounting Firm.

31.1           Certification   of  Principal   Executive   Officer  pursuant  to
               Securities  Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted
               pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

31.2           Certification   of  Principal   Financial   Officer  pursuant  to
               Securities  Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted
               pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

32.1           Certification  of  Principal   Executive  Officer  and  Principal
               Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted
               pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

(1)  Incorporated  by reference to our Current Report on Form 8-K (dated October
     28, 2005) filed November 1, 2005.

(2)  Incorporated by reference to our Registration  Statement on Form SB-2 (File
     No. 333-130930) filed on January 9, 2006.

(3)  Incorporated by reference to our Current Report on Form 8-K (dated November
     22, 2005), filed November 25, 2005.

(4)  Incorporated by reference to our Current Report on Form 8-K (dated June 28,
     2005), filed July 1, 2005.

(5)  Incorporated by reference to our Current Report on Form 8-K (dated July 13,
     2006), filed on July 21, 2006.

(6)  Incorporated  by reference to our Current Report on Form 8-K (dated January
     12, 2007), filed on January 17, 2007.

(7)  Incorporated  by reference to our Current Report on Form 8-K (dated October
     1, 2006), filed October 5, 2006.

(8)  Incorporated  by reference to our Current Report on Form 10-KSB filed March
     7, 2006.

* Pursuant to Item  601(b)(2) of  Regulation  S-B, the schedules to the Exchange
Agreement have been omitted. The Registrant undertakes to supplementally furnish
a copy of the omitted  schedules to the Securities and Exchange  Commission upon
request.
** Each a management contract or compensatory plan or arrangement required to be
filed as an exhibit to this annual report on Form 10-KSB,


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<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Effective November 30, 2005,  Grobstein,  Horwath & Company, LLP became
our principal  independent  accounting firm. All audit work was performed by the
full time employees of Grobstein, Horwath & Company, LLP. Our board of directors
does not have an audit  committee.  The  functions  customarily  delegated to an
audit  committee  are  performed  by our full board of  directors.  Our board of
directors approves in advance,  all services  performed by Grobstein,  Horwath &
Company,  LLP. Our board of directors  has  considered  whether the provision of
non-audit  services is compatible with  maintaining  the principal  accountant's
independence,  and has approved such  services.  Prior to November 30, 2005, the
principal auditors of the Company were Shelley International, CPA.

     AUDIT FEES

         Fees for audit and review  services  provided by  Grobstein,  Horwath &
Company, LLP totaled  approximately  $117,000 during the year ended December 31,
2006,  including  fees  associated  with the  December  31, 2005 audit,  and the
reviews of our quarterly  financial  statements  for the periods ended March 31,
2006, June 30, 2006 and September 30, 2006.

         Fees for audit and review  services  provided by  Grobstein,  Horwath &
Company,  LLP totaled  approximately  $74,000 during the year ended December 31,
2005,  including fees associated with the December 31, 2004 and 2003 audits, and
the review of our nine-month period ended September 30, 2005.

         Fees for audit services provided by Shelley International,  CPA totaled
approximately $12,000 for the fiscal year ended September 30, 2005.

     AUDIT-RELATED FEES

         There  were no  audit-related  services  provided  for the years  ended
December 31, 2006 and 2005.

     TAX FEES

         Fees for tax services  provided by  Grobstein,  Horwath & Company,  LLP
during the year ended December 31, 2006 amounted to approximately  $29,000.  Tax
services provided during the year ended December 31, 2006 primarily consisted of
the  preparation  of the  Federal  and State tax returns for the Company and its
subsidiaries and other tax compliance services.

         There  were no  material  tax  services  provided  for the years  ended
December 31, 2005 and 2004.

     ALL OTHER FEES

         No other fees were  incurred  during the years ended  December 31, 2006
and 2005 for services provided by Grobstein,  Horwath & Company,  LLP or Shelley
International, CPA, except as described above.


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<PAGE>


                                   SIGNATURES

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

                                     PEOPLE'S LIBERATION, INC.


Date: March 15, 2007                 /s/ Darryn Barber
                                     -------------------------------------------
                                     By:   Darryn Barber
                                     Its:  Chief Financial Officer
                                           (Principal Financial and
                                           Accounting Officer)

                                POWER OF ATTORNEY

         The undersigned directors and officers of People's Liberation,  Inc. do
hereby  constitute  and appoint  Daniel S. Guez and Darryn  Barber,  and each of
them,  with full power of  substitution  and  resubstitution,  as their true and
lawful  attorneys and agents,  to do any and all acts and things in our name and
behalf in our  capacities  as directors  and officers and to execute any and all
instruments  for us and in our names in the capacities  indicated  below,  which
said  attorney  and  agent,  may deem  necessary  or  advisable  to enable  said
corporation to comply with the  Securities  Exchange Act of 1934, as amended and
any  rules,   regulations  and  requirements  of  the  Securities  and  Exchange
Commission,  in  connection  with this Annual  Report on Form 10-KSB,  including
specifically but without  limitation,  power and authority to sign for us or any
of us in our names in the  capacities  indicated  below,  any and all amendments
(including  post-effective  amendments)  hereto,  and we do  hereby  ratify  and
confirm all that said attorneys and agents, or either of them, shall do or cause
to be done by virtue hereof.

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

          NAME                             TITLE                       DATE
          ----                             -----                       ----

/s/ Daniel Guez                Chief Executive Officer,           March 15, 2007
--------------------------         Secretary, and Director
      Daniel Guez                  (Principal Executive
                                   Officer)

/s/ Darryn Barber              Chief Financial Officer            March 15, 2007
--------------------------         (Principal Financial
     Darryn Barber                 and Accounting Officer)

/s/ Kevin Keating              Director                           March 15, 2007
--------------------------
     Kevin Keating

/s/ Dean Oakey                 Director                           March 15, 2007
--------------------------
      Dean Oakey


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