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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, 2005

[_]      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.

        (Exact 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 is not required to file  reports  pursuant to
Section 13 or 15(d) of the Exchange Act. [_]

         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. |X|

         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, 2005 were
$5,803,067.

         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 February 21, 2006, was $29,513,002.

         As of February 28,  2006,  the issuer had  34,370,100  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]

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

PART I                                                                      PAGE

Item 1.   Description of Business.........................................    3

Item 2.   Description of Property.........................................    6

Item 3.   Legal Proceedings...............................................    7

Item 4.   Submission of Matters to a Vote of Security Holders.............    7


PART II

Item 5.   Market for Common Equity and Related Stockholder Matters........    7

Item 6.   Management's Discussion and Analysis or Plan of Operation.......    8

Item 7.   Financial Statements

          Index to Consolidated Financial Statements......................   23

          Report of Independent Registered Public Accounting Firm.........   24

          Consolidated Balance Sheet......................................   25

          Consolidated Statements of Operations...........................   26

          Consolidated Statements of Cash Flows...........................   27

          Consolidated Statement of Changes in Stockholders' Equity.......   28

          Notes to Consolidated Financial Statements......................   29

Item 8.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosures.......................................   44

Item 8A.  Controls and Procedures.........................................   44

Item 8B   Other Information...............................................   44


PART III

Item 9.   Directors and Executive Officers................................   45

Item 10.  Executive Compensation..........................................   47

Item 11.  Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters.................................   49

Item 12.  Certain Relationships and Related Transactions..................   51

Item 13.  Exhibits........................................................   54

Item 14.  Principal Accountant Fees and Services..........................   56



         Except as otherwise  indicated,  information  in this Annual  Report on
Form 10-KSB  reflects the conversion of the Series A preferred stock into common
stock and a 1-for-9.25 reverse stock split of our common stock which took effect
at 4:30pm Eastern Standard Time on January 5, 2006.


                                       1
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                                     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,  Neiman Marcus, Kitson,
Atrium, Fred Segal, and Intermix.  Internationally, in select countries, we sell
our products  directly and through  distributors to better department stores and
boutiques, such as Mitsukoshi, TNT and Sears (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 and President,  Daniel
Guez.  Under an apparel brand  agreement  with an entity owned in part by Justin
Timberlake, we have the exclusive rights to manufacture clothing and accessories
under the William  Rast  tradename.  Mr.  Timberlake's  entity will  receive the
greater of 50% of the net profits of the William  Rast apparel line or an amount
of profit equal to 6% of net sales of William Rast  apparel,  with us to receive
the  remaining  profits.  Under the terms of the  agreement,  we will manage the
joint venture, and are responsible for funding the costs of the venture.

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,  Juicy Couture,
James Perse,  Hard Tail,  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  were  initially  sold in a limited  number of
Bloomingdales and Nordstrom store locations.  We recently  received  commitments
for our apparel to be sold in all  Bloomingdales  and Nordstrom  store locations
across  the  United  States.  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
Kitson,  Atrium, Fred Segal, and Intermix 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  international  distribution  into
additional  territories  and increase our brand  penetration in the countries in
which our apparel is currently being sold.

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 demand
premium prices in the marketplace.


                                       3
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         Our denim is made from high quality fabrics milled in the United States
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 month 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 month.  We anticipate  expanding our products and  fabrications  to include
corduroy, velvet, and 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

         In the United  States,  we use the  services of a sales agent to market
our products and provide  substantially  all of our  customer  relationship  and
sales functions. Additionally, our sales agent operates showrooms in Los Angeles
and New York for our  products and has a staff  dedicated to our product  lines.
For its  services,  we pay the sales agent a commission  on all sales  generated
through its efforts,  including a minimum monthly advance on these  commissions.
While our sales agent  assists in  facilitating  sales,  we ship products to and
invoice our United States customers directly from our facilities in Los Angeles,
California.  Our agreement  with the sales agent became  effective on January 5,
2006 and expires on December 31, 2007.  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,  2005,  approximately  16.4% and 15.3% of our sales  were to two  customers.
During the year ended December 31, 2004,  approximately  18.7% of our sales were
to one customer.

     INTERNATIONAL SALES AND DISTRIBUTION

         Internationally,  we sell our  products in Mexico,  Canada,  the United
Kingdom, and Japan. With the exception of Japan and Canada, we currently have no
exclusive  or long term  distribution  agreements  for any  other  international
territories.  We intend to  substantially  increase  the  countries in which our
products are sold by contracting  with  distributors on a territory by territory
basis. We ship products to and invoice our international  distributors,  who are
responsible for warehousing and reselling our products to their customers.

         In  Japan,  we are  party  to a  distribution  agreement  which  became
effective on August 23,  2005,  and is scheduled to expire on December 31, 2007.
Pursuant to the agreement,  our Japanese  distributor  will market,  promote and
sell  People's  Liberation  brand  products in Japan on an exclusive  basis.  In
exchange,  the distributor guarantees to us that by the end of the 2006 and 2007
calendar  years,  it shall  have  delivered  purchase  orders to us with a total
purchase order value of no less than $500,000 per year.

         In  Canada,  we are  party to a  distribution  agreement  which  became
effective on February 15, 2006, and is scheduled to expire on February 14, 2008.
Pursuant to the agreement,  our Canadian  distributor  will market,  promote and
sell People's  Liberation  brand  products in Canada on an exclusive  basis.  In
exchange,  the distributor guarantees to us that by March 31, 2007 and 2008, the
end of the respective contract years, it shall have delivered purchase orders to
us with a total purchase  order value of no less than  $1,200,000 and $1,700,000
per respective contract year.


                                       4
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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 specialty stores. 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 Mr.  Timberlake  in the  promotion  of our William Rast apparel
line.

         We currently  market our products  under the  People's  Liberation  and
William  Rast  brands and plan to expand our brand  portfolio  by  acquiring  or
licensing  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  complimentary   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.

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 some
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 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.  Currently,  we outsource the majority of
our denim  production to E & C Fashion Inc.  doing  business as Atomic Denim and
Pride  Jeans,  Inc.  and the  majority  of our  knitwear  production  to  Impact
Manufacturing Inc.

         We purchase  our fabric,  thread and other raw  materials  from various
industry suppliers within the United States and abroad. 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, 2005, three suppliers  provided for 84.4% of our
total combined purchases for the year. For the year ended December 31, 2004, one
supplier provided for 70.3% 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, Joe's Jeans,
as well as other premium denim brands.  In the knit market,  we compete  against
Juicy Couture, Hard Tail, 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


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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, China, Hong Kong, Israel,
                                              Russia, Taiwan, Singapore, Turkey,
                                              Australia and Canada.
        William Rast                          USA, European Community, Japan,
                                              Mexico, 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

          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 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,  2005,  we had a total  of  twenty-six  full  time
employees. Our full time employees consist of two officers,  namely Daniel Guez,
our  Chief  Executive  Officer  and  President,  and  Darryn  Barber,  our Chief
Financial  Officer and Chief  Operating  Officer.  Our  warehouse  and  shipping
department is comprised of four  employees  primarily  responsible  for picking,
packing,  shipping and receiving. Our production and design teams include twelve
employees  consisting of a production manager for knits and a production manager
for  denim as well as three  sample  sewers,  a  pattern  maker,  two  technical
designers  and four  product  designers.  Our  production  and design  teams are
responsible for the design,  development,  and  preparation of sample  products.
Additionally,  we have eight employees who handle  marketing,  customer service,
accounting  and  administration.  We also have four part time  employees and two
independent  contractors.  Our  business  strategy is to use  independent  sales
agents and distributors to keep fixed overhead at a minimum.

ITEM 2.  DESCRIPTION OF PROPERTY

         We lease our principal  executive  office and  warehouse  space under a
lease  agreement  commencing in October 2005 and expiring 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 People's  Liberation and William Rast brand
products to our  customers.  We also have  showrooms in Los Angeles and New York
City which were leased on a month-to-month


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basis through December 2005. Beginning January 2006, rental costs related to the
two  showrooms are incurred by our sales agent under our service  agreement.  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

         On  November  23,  2005,  our Board of  Directors,  as well as  holders
representing  approximately  66.9% of our then outstanding  series A convertible
preferred  stock,   holders   representing   approximately  77.1%  of  our  then
outstanding common stock, and holders  representing  approximately  67.3% of our
then  outstanding  common stock and series A convertible  preferred stock voting
together  as a single  class took  action by  written  consent to (i) change our
corporate name to People's  Liberation,  Inc.,  (ii) adopt a 1-for-9.25  reverse
stock  split,  and (iii) adopt our 2005 Stock  Incentive  Plan.  On December 16,
2005, we delivered an Information  Statement on Schedule 14C to our shareholders
of record as of December 9, 2005.  Each of these  actions  became  effective  on
January 5, 2006.

                                     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" The following table sets forth, for the periods indicated, the
high and low bid  information  for the common stock, as determined from sporadic
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 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,  after the  periods  presented.  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, 2004
     First Quarter.................      $4.53            $1.39            2,726
     Second Quarter................      $3.05            $1.39            2,082
     Third Quarter.................      $2.78            $1.39            4,922
     Fourth Quarter................      $4.72            $1.85            5,161

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 February  21, 2006,  the closing  sales price of our common stock as
reported  on the  Over-The-Counter  Bulletin  Board was $2.60 per  share.  As of
February 21, 2006,  there were  approximately  475 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


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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.

RECENT SALES OF UNREGISTERED SECURITIES

         EXCHANGE TRANSACTION

         On  November  22,  2005,  we  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
our  wholly-owned  subsidiaries.  We issued to the Bella  Rose  members  and the
Versatile  stockholders  an  aggregate  of  2,460,106.34  shares of our series A
convertible preferred stock, which subsequently converted into 26,595,751 shares
of our common  stock on a post reverse  stock split  basis.  The issuance of our
preferred  stock to the members and  stockholders  was exempt from  registration
under  the  Securities  Act  pursuant  to  Section  4(2)  thereof.  We made this
determination based on the representations of the stockholders and members which
included,  in pertinent  part,  that such persons  were  "accredited  investors"
within the meaning of Rule 501 of Regulation D promulgated  under the Securities
Act, that such persons were acquiring our preferred stock, and the shares of our
common stock underlying the preferred  stock, for investment  purposes for their
own  respective  accounts and not as nominees or agents,  and not with a view to
the resale or distribution  thereof in violation of the Securities Act, and that
each person  understood that the preferred stock, and shares of our common stock
underlying the preferred stock, may not be sold or otherwise disposed of without
registration under the Securities Act or an applicable exemption therefrom.

         CAPITAL RAISE

         Immediately  following the  acquisition of Versatile and Bella Rose, we
received gross  proceeds of  approximately  $7.8 million in a private  placement
transaction with  institutional  investors and other high net worth individuals.
In exchange,  we issued 578,125.58 shares of our series A convertible  preferred
stock, which subsequently converted into 6,250,000 shares of our common stock on
a post reverse  stock split  basis.  We also issued to the  investors  five-year
warrants to purchase an aggregate  of 2,500,000  shares of our 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  $6.7 million in the capital  raise.  Sanders  Morris  Harris Inc.
acted as  placement  agent in  connection  with the  capital  raise.  For  their
services  as  placement  agent,  we  issued to  Sanders  Morris  Harris  and its
employees,  Dean  Oakey and Jonah  Sulak,  five-year  warrants  to  purchase  an
aggregate of 625,000  shares of our common  stock at an exercise  price of $1.25
per share.

         The issuance of shares of preferred stock and warrants to the investors
and Sanders Morris Harris Inc. and its employees in the capital raise was exempt
from  registration  under the  Securities  Act pursuant to Section 4(2). We made
this  determination  based on the  representations  of the investors and Sanders
Morris Harris Inc. which  included,  in pertinent  part,  that such persons were
"accredited   investors"  within  the  meaning  of  Rule  501  of  Regulation  D
promulgated  under the  Securities  Act,  that such persons were  acquiring  our
preferred stock and warrants,  and the shares of our common stock underlying the
preferred stock and warrants,  for investment  purposes for their own respective
accounts  and not as  nominees  or agents,  and not with a view to the resale or
distribution  thereof in violation of the  Securities  Act, and that each person
understood that the preferred stock and warrants, and shares of our common stock
underlying  the  preferred  stock  and  warrants,  may not be sold or  otherwise
disposed  of without  registration  under the  Securities  Act or an  applicable
exemption therefrom.

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, 2005 and 2004.  Except
for  historical   information,   the  matters  discussed  in  this  Management's
Discussion  and Analysis of  Financial  Condition  and Results of Operation  are


                                       8
<PAGE>


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 department
stores and boutiques, such as Nordstrom,  Bloomingdales,  Neiman Marcus, Kitson,
Atrium, Fred Segal, and Intermix.  Internationally, in select countries, we sell
our products  directly and through  distributors to better department stores and
boutiques, such as Mitsukoshi, TNT and Sears (Mexico City). We are headquartered
in Los Angeles, California.

         In the United  States,  we use the  services of a sales agent to market
our products and provide  substantially  all of our  customer  relationship  and
sales functions. Additionally, our sales agent operates showrooms in Los Angeles
and New York for our  products and has a staff  dedicated to our product  lines.
For sales agent services, we pay a commission on all sales generated through the
agent's efforts, including a minimum monthly advance on these commissions. While
our sales agent assists in  facilitating  sales, we ship products to and invoice
our  United  States  customers  directly  from our  facilities  in Los  Angeles,
California.

         Internationally,  we sell our  products in Mexico,  Canada,  the United
Kingdom, and Japan, primarily through distributors.  With the exception of Japan
and Canada, we currently have no exclusive or long term distribution  agreements
for any other international territories. We intend to substantially increase the
countries in which our products are sold by contracting  with  distributors on a
territory by territory basis. We ship products to and invoice our  international
distributors,  who are responsible for warehousing and reselling our products to
their customers.

         We use third party contract manufacturers to produce our finished goods
from facilities located primarily in Los Angeles, California. For some 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 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,  Juicy  Couture,  James  Perse,  Hard Tail,  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


                                       9
<PAGE>


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.

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  uncollectable
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  are made based on  management's  estimate of future sales value, if
any,  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 and  chargeback  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  valuation  of
intangible assets with indefinite lives and the reassessment of the useful lives
related to other  intangible  assets  with  definite  useful  lives.  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


                                       10
<PAGE>


currently  has a  valuation  allowance,  we would be  required  to  reverse  the
valuation  allowance,  which  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.

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,
                                                         2005           2004
                                                       --------       --------

Net sales .....................................           100.0 %        100.0 %
Cost of goods sold ............................            61.5           63.0
                                                       --------       --------
Gross profit ..................................            38.5           37.0
Selling expenses ..............................            14.8           46.1
Design and production expenses ................            15.4           49.9
General and administrative expenses ...........            16.7          101.7
                                                       --------       --------
Operating loss ................................            (8.4)%       (160.7)%
                                                       ========       ========

         NET SALES

                                             YEARS ENDED
                                             DECEMBER 31,
                                      --------------------------       PERCENT
                                         2005            2004           CHANGE
                                      ----------      ----------      ----------

         Net Sales .............      $5,803,000      $  164,000          *
         ----------
         * not meaningful

         The increase in net sales for the year ended  December 31, 2005 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.

         GROSS PROFIT

                                             YEARS ENDED
                                             DECEMBER 31,
                                      --------------------------       PERCENT
                                         2005            2004           CHANGE
                                      ----------      ----------      ----------

         Gross Profit ..........      $2,236,000      $   61,000          *
         ----------
         * 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


                                       11
<PAGE>


to 38.5% for the year  ended  December  31,  2005 from  37.0% for the year ended
December 31, 2004. 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.
We anticipate that we will continue to experience  higher levels of gross margin
as a percentage of net sales as we seek out  manufacturers,  suppliers and other
vendors with competitive pricing for quality products and services.

         SELLING EXPENSES

                                             YEARS ENDED
                                             DECEMBER 31,
                                      --------------------------       PERCENT
                                         2005            2004           CHANGE
                                      ----------      ----------      ----------

         Selling Expenses ..........  $  862,000      $   75,000          *
         ----------
         * not meaningful

         Selling  expense  for the  years  ended  December  31,  2005  and  2004
primarily related to tradeshow, sales commissions, travel and showroom expenses.
As a percentage of net sales,  selling expenses  decreased to 14.8% for the year
ended  December 31, 2005 compared to 46.1% for the year ended December 31, 2004,
as a result of net sales  increasing  during the year more  rapidly than selling
expenses.  As our sales increase,  we expect selling expenses as a percentage of
net sales to further  decline.  Included in selling  expenses for the year ended
December 31, 2005,  is  approximately  $32,000 for  royalties  payable under our
apparel brand agreement related to the William Rast product line.

         DESIGN AND PRODUCTION EXPENSES

                                             YEARS ENDED
                                             DECEMBER 31,
                                      --------------------------       PERCENT
                                         2005            2004           CHANGE
                                      ----------      ----------      ----------

         Design and production
            expenses ............     $  892,000      $   82,000          *
         ----------
         * not meaningful

         Design and  production  expenses for the years ended  December 31, 2005
and 2004 primarily  related to design salaries and sample costs. As a percentage
of net sales,  design and  production  expenses  decreased to 15.4% for the year
ended  December 31, 2005 compared to 49.9% for the year ended December 31, 2004,
as a result of net sales during the year increasing more rapidly than design and
production expenses. We expect to continue to increase our design and production
expenses  as we continue to modify our  existing  product  lines and develop new
product lines to drive revenue growth.

         GENERAL AND ADMINISTRATIVE EXPENSES

                                             YEARS ENDED
                                             DECEMBER 31,
                                      --------------------------       PERCENT
                                         2005            2004           CHANGE
                                      ----------      ----------      ----------

         General and administrative
            expenses ..............   $  972,000      $  167,000         482.0%

         General and  administrative  expenses for the years ended  December 31,
2005 and 2004  primarily  related to  salaries,  professional  fees and facility
costs.  As a  percentage  of net  sales,  general  and  administrative  expenses
decreased to 16.7% for the year ended  December 31, 2005  compared to 101.7% for
the year  ended  December  31,  2004,  as a result of net sales  during the year
increasing more rapidly than general and administrative  expenses.  As our sales
increase, we expect general and administrative expenses to also increase.


                                       12
<PAGE>


         INTEREST EXPENSE

                                             YEARS ENDED
                                             DECEMBER 31,
                                      --------------------------       PERCENT
                                         2005            2004           CHANGE
                                      ----------      ----------      ----------

         Interest Expense .........   $   29,000      $    1,000          *
         ----------
         * not meaningful

         Under  our  factoring  arrangement,  we  may  borrow  up to  85% on our
factored  accounts  receivable.   Outstanding  borrowings  under  our  factoring
arrangement  amounted to approximately  $41,000 and $40,000 at December 31, 2005
and 2004, respectively.  Increased borrowings during the year ended December 31,
2005 were  offset by the $6.7  million of net  proceeds  received in our private
placement transaction in November 2005, a portion of which were used in November
2005 to pay down the advances from our factor.

         PROVISION FOR INCOME TAX

                                             YEARS ENDED
                                             DECEMBER 31,
                                      --------------------------       PERCENT
                                         2005            2004           CHANGE
                                      ----------      ----------      ----------

         Provision for Income Tax ..  $   49,400      $      800          *
         ----------
         * not meaningful

         At December 31, 2004,  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.


         NET LOSS

                                             YEARS ENDED
                                             DECEMBER 31,
                                      --------------------------       PERCENT
                                         2005            2004           CHANGE
                                      ----------      ----------      ----------

         Net Loss ..............      $  570,000      $  272,000        109.6%

         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, 2005.  Our net loss as a percentage of net sales for the year ended
December  31,  2005  decreased  to 9.8% as compared to 165% of net sales for the
year ended December 31, 2004.

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,  2005,  we  had  cash  and  cash  equivalents  of
approximately  $4.5 million and a working capital balance of approximately  $5.9
million. Our positive cash balance results primarily from


                                       13
<PAGE>


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
$6.7  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  will be sufficient to fund our minimum working capital and capital
expenditure needs for at least the next twelve months.  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. We are continually evaluating
various  financing  strategies to be used to expand our business and fund future
growth.  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,  cash  flows  generated  from  operations  and
borrowings under our factor arrangements.  Cash flows from operating,  financing
and  investing  activities  for the years ended  December  31, 2005 and 2004 are
summarized in the following table:

                                                         YEARS ENDED
                                                         DECEMBER 31,
                                               --------------------------------
                                                   2005                 2004
                                               -----------          -----------

Operating activities .................         $(1,954,000)         $  (207,000)
Investing activities .................            (198,000)             (42,000)
Financing activities .................           6,678,000              251,000
                                               -----------          -----------
   Net increase in cash ..............         $ 4,526,000          $     2,000
                                               ===========          ===========

         CASH USED IN OPERATING ACTIVITIES

         Net cash used in operating activities was approximately  $1,954,000 and
$207,000 for the years ended December 31, 2005 and 2004, respectively. 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.  Cash
used in  operating  activities  for the year ended  December  31, 2004  resulted
primarily from a net loss of  approximately  $272,000 and increased  receivables
and inventories, offset by increased accounts payable and accrued expenses.

         CASH USED IN INVESTING ACTIVITIES

         Net cash used in investing  activities was  approximately  $198,000 and
$42,000 for the years ended December 31, 2005 and 2004,  respectively.  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.  Net  cash  used in  investing
activities   for  the  year  ended   December  31,  2004  consisted  of  capital
expenditures primarily for office equipment and machinery and equipment.

         CASH PROVIDED FROM FINANCING ACTIVITIES

         Net cash provided by financing activities was approximately  $6,678,000
and $251,000 for the years ended December 31, 2005 and 2004,  respectively.  Net
cash provided by financing activities for the


                                       14
<PAGE>


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.  Net cash provided
by financing  activities for the year ended December 31, 2004 reflects  proceeds
from a loan payable, offset by the repayment of advances from a stockholder.

     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, 2005 and 2004,  total factored  accounts  receivable
included in due from factor  amounted to  approximately  $2,035,000 and $68,000,
respectively.  Outstanding advances as of December 31, 2005 and 2004 amounted to
approximately  $41,000 and  $40,000,  respectively,  and are included in the due
from factor balance.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our  contractual  obligations at December 31,
2005 and the effects such obligations are expected to have on liquidity and cash
flows in future periods:

                                            Payments Due by Period
                            ----------------------------------------------------
                                       Less than     1-3        4-5      After
Contractual Obligations       Total     1 Year      Years      Years    5 Years
-----------------------     --------   --------   --------   --------   --------
Operating leases ......     $845,460   $281,820   $563,640   $   --     $   --
Advances from Factor ..     $ 40,925   $ 40,925   $   --     $   --     $   --
                            --------   --------   --------   --------   --------
    Total .............     $886,385   $322,745   $563,640   $   --     $   --
                            ========   ========   ========   ========   ========

         At  December  31,  2005  and  December  31,  2004,  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.

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


                                       15
<PAGE>


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.

         Under an apparel brand agreement with an entity owned in part by Justin
Timberlake, we have the exclusive rights to manufacture clothing and accessories
under the William  Rast  tradename.  Mr.  Timberlake's  entity will  receive the
greater  of 50% of the net  profits  of the  William  Rast  apparel  line or net
profits equal to 6% of net sales of William Rast apparel, with us to receive the
remaining  profits.  Under  the  terms of the  agreement,  Mr.  Timberlake  will
publicly  promote and endorse  the  William  Rast brand,  and we will manage the
joint venture and are responsible  for funding the costs of the venture.  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 SALES AGENT IN THE UNITED STATES AND INTERNATIONAL  DISTRIBUTORS TO
SELL OUR PRODUCTS.

         In the United  States,  we use the  services of a sales agent to market
our products and provide  substantially  all of our  customer  relationship  and
sales functions.  Internationally,  we sell our products in Mexico,  Canada, the
United  Kingdom,  and  Japan.  In the event  that our sales  agent in the United
States 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. 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.


                                       16
<PAGE>


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

         We  believe  that we are  poised  for  significant  growth in 2006.  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;
         -        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  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 the two  customers  that
accounted  for 16.4% and 15.3% of our net sales for the year ended  December 31,
2005, could have a


                                       17
<PAGE>


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
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, 2005, three  contractors  accounted for
45.7%,  22.0%,  and 16.8% 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


                                       18
<PAGE>


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.

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  and  President,  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.

         Our management has not commenced any specific procedures to comply with
the  requirements  of  Section  404 of the  Sarbanes-Oxley  Act of  2002,  which
requires our  management to assess the  effectiveness  of our internal  controls
over financial reporting and include an assertion in our annual report as to the
effectiveness of our controls.  Unless we become an accelerated filer as defined
in the Exchange Act of 1934, at an earlier date beginning with our Annual Report
on Form 10-KSB for the year ending December 31, 2007,  unless otherwise  amended
by the Securities and Exchange  Commission,  our independent  registered  public
accounting  firm will be  required to attest to whether  our  assessment  of the
effectiveness of our internal control over financial  reporting is fairly stated
in all  material  respects  and  separately  report on  whether it  believes  we
maintained, in all material respects, effective internal controls over financial
reporting  as of  December  31,  2007.  Because  of  our  management's  lack  of
resources,  and our limited  operations,  we have not  commenced  the process of
preparing the system and process documentation,  performing an evaluation of our
internal  controls  required for our management to make this  assessment and for
the auditors to provide their  attestation  report,  and  accordingly,  have not
begun testing of the  effectiveness of these internal  controls.  We expect that
this process will require  significant amounts of management time and resources,
as well as higher  expenses in the form of higher audit and review fees,  higher
legal fees and higher internal costs to document, test and potentially remediate
internal controls. Accordingly, with respect to Section 404 in particular, there
exists a significant  risk that we will not be able to meet all the requirements
of Section 404 by the end of fiscal year 2007, when we are required to report on
our internal controls and provide our auditor's  opinion thereon.  Additionally,
even in the event we  attempt  to comply  with  Section  404,  in the  course of
evaluation and testing,


                                       19
<PAGE>


management  may  identify  deficiencies  that  will  need  to be  addressed  and
remediated,  which could potentially have a material adverse effect on our stock
price and could result in significant additional expenditures.

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,  Citizens of Humanity,  Juicy Couture,
James  Perse,  Hard Tail,  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.

         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,  in the fourth  quarter of 2005,  only 53,882 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


                                       20
<PAGE>


difficult to achieve at the market  prices  prevailing  immediately  before such
shares are offered.  In addition,  when our registration  statement on Form SB-2
filed with the SEC on January 9, 2006 becomes effective, a substantial number of
our shares of common  stock will be 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.

THE SALE OF OUR  COMMON  STOCK ON THE  OVER-THE-COUNTER  BULLETIN  BOARD AND THE
POTENTIAL  DESIGNATION  OF OUR COMMON STOCK AS A "PENNY  STOCK" COULD IMPACT THE
TRADING MARKET FOR OUR COMMON STOCK.

         Our securities,  as traded on the Over-the-Counter Bulletin Board, will
be subject to Securities and Exchange Commission rules that impose special sales
practice  requirements upon  broker-dealers  who sell such securities to persons
other than established  customers or accredited  investors.  For purposes of the
rule, the phrase  "accredited  investors" means, in general terms,  institutions
with assets in excess of $5,000,000, or individuals having a net worth in excess
of $1,000,000 or having an annual  income that exceeds  $200,000 (or that,  when
combined with a spouse's income, exceeds $300,000).  For transactions covered by
the rule, the broker-dealer  must make a special  suitability  determination for
the purchaser and receive the purchaser's  written  agreement to the transaction
prior  to  the  sale.   Consequently,   the  rule  may  affect  the  ability  of
broker-dealers  to sell our  securities  and  also may  affect  the  ability  of
purchasers to sell their securities in any market that might develop therefor.

         In  addition,  the  Securities  and Exchange  Commission  has adopted a
number of rules to regulate "penny stock." Because our securities may constitute
"penny stock"  within the meaning of the rules,  the rules would apply to us and
to our  securities.  The rules may  further  affect the ability of owners of our
common stock to sell our securities in any market that might develop for them.

         Shareholders should be aware that, according to Securities and Exchange
Commission,  the  market  for penny  stocks has  suffered  in recent  years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the  security  by one or a few  broker-dealers  that are  often  related  to the
promoter or issuer; (ii) manipulation of prices through prearranged  matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices   involving   high-pressure   sales  tactics  and  unrealistic   price
projections  by  inexperienced  sales persons;  (iv)  excessive and  undisclosed
bid-ask  differentials  and  markups  by  selling  broker-dealers;  and  (v) the
wholesale dumping of the same securities by promoters and  broker-dealers  after
prices have been  manipulated to a desired level,  resulting in investor losses.
Our  management  is aware of the abuses that have occurred  historically  in the
penny stock market. Although we do not expect to be in a position to dictate the
behavior  of the market or of  broker-dealers  who  participate  in the  market,
management  will strive within the confines of practical  limitations to prevent
the described patterns from being established with respect to our securities.


                                       21
<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.


                                       22
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

AUDITED FINANCIAL STATEMENTS:

   Report of Independent Registered Public Accounting Firm............        24

   Consolidated Balance Sheet at December 31, 2005....................        25

   Consolidated Statements of Operations for the Years Ended
      December 31, 2005 and 2004......................................        26

   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2005 and 2004......................................        27

   Consolidated Statement of Changes in Stockholders' Equity from
      January 1, 2004 to December 31, 2005............................        28

   Notes to the Consolidated Financial Statements.....................        29


                                       23
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

         We have audited the accompanying consolidated balance sheet of People's
Liberation,  Inc. and its wholly-owned  subsidiaries,  Versatile  Entertainment,
Inc. and Bella Rose, LLC,  (collectively  the "Company") as of December 31, 2005
and the related consolidated statements of operations,  stockholder's equity and
cash  flows for each of the  years  ended  December  31,  2005 and  2004.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly,  in all material  respects,  the financial  position of People's
Liberation,  Inc. and its wholly-owned  subsidiaries,  Versatile  Entertainment,
Inc.  and Bella  Rose,  LLC,  as of  December  31, 2005 and the results of their
operations and cash flows for each of the years ended December 31, 2005 and 2004
in conformity with accounting principles generally accepted in the United States
of America.

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


Sherman Oaks, California
February 14, 2006


                                       24
<PAGE>


                            PEOPLE'S LIBERATION, INC.


                           CONSOLIDATED BALANCE SHEET

                                                                    December 31,
                                                                        2005
                                                                    -----------

                              Assets
Current Assets:
   Cash and cash equivalents ..................................     $ 4,528,276
   Due from factor ............................................       1,994,249
   Accounts receivable ........................................          20,591
   Inventories ................................................       1,092,981
   Prepaid expenses and other current assets ..................         222,128
   Deferred tax asset .........................................           9,600
                                                                    -----------
     Total current assets .....................................       7,867,825

Property and equipment, net of accumulated depreciation .......         164,991
Trademarks ....................................................          44,336
Other assets ..................................................          46,970
                                                                    -----------
     Total Assets .............................................     $ 8,124,122
                                                                    ===========

              Liabilities and Stockholders' Equity
Current Liabilities:
   Accounts payable and accrued expenses ......................     $ 1,953,078
   Income taxes payable .......................................          15,997
                                                                    -----------
     Total current liabilities ................................       1,969,075

Deferred tax liability ........................................          41,000
                                                                    -----------
     Total Liabilities ........................................       2,010,075

Stockholders' Equity:
   Series A convertible preferred stock, $.001 par value;
     3,500,000 shares authorized; no shares issued and
     outstanding (1) ..........................................            --
   Common stock, $.001 per value; 150,000,000 shares
     authorized; 34,370,100 shares issued and
     outstanding (1) ..........................................          34,370
   Additional paid-in capital .................................       6,335,023
   Accumulated deficit ........................................        (255,346)
                                                                    -----------
     Total Stockholders' Equity ...............................       6,114,047
                                                                    -----------
     Total Liabilities and Stockholders' Equity ...............     $ 8,124,122
                                                                    ===========


(1)      Reflects the retroactive  conversion of Series A convertible  preferred
         stock,  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.


                                       25
<PAGE>


                            PEOPLE'S LIBERATION, INC.


                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                    Year Ended      Year Ended
                                                    December 31,    December 31,
                                                       2005            2004
                                                   ------------    ------------

Net sales ......................................   $  5,803,067    $    163,702
Cost of goods sold .............................      3,567,212         103,091
                                                   ------------    ------------
 Gross profit ..................................      2,235,855          60,611
                                                   ------------    ------------

Selling expenses ...............................        861,742          75,494
Design and production ..........................        891,985          81,638
General and administrative .....................        972,091         166,625
                                                   ------------    ------------

 Total operating expenses ......................      2,725,818         323,757
                                                   ------------    ------------

Loss from operations ...........................       (489,963)       (263,146)

Interest expense ...............................         28,637           1,189
Loss on disposal of fixed asset ................          1,567           6,786
                                                   ------------    ------------
 Total other expense ...........................         30,204           7,975
                                                   ------------    ------------

Loss before income taxes .......................       (520,167)       (271,121)
Provision for income taxes .....................         49,400             800
                                                   ------------    ------------

Net loss .......................................   $   (569,567)   $   (271,921)
                                                   ============    ============

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

Basic and diluted weighted average common
   shares outstanding (1) ......................     21,415,431      10,638,300
                                                   ============    ============


(1)      Reflects the retroactive  conversion of Series A convertible  preferred
         stock,  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.


                 See Notes to Consolidated Financial Statements.


                                       26
<PAGE>

                            PEOPLE'S LIBERATION, INC.

<TABLE>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                             Year Ended December 31,
                                                              2005            2004
                                                           -----------    -----------
<S>                                                        <C>            <C>
Cash flows from operating activities:
  Net loss .............................................   $  (569,567)   $  (271,921)
  Adjustments to reconcile net loss to net cash used by
  operating activities:
     Depreciation and amortization .....................        18,778          2,305
     Loss on disposal of fixed asset ...................         1,567          6,786
     Deferred income taxes .............................        31,400           --
     Changes in operating assets and liabilities:
       Receivables .....................................    (2,037,295)       (22,978)
       Inventories .....................................    (1,056,224)       (36,757)
       Prepaid expenses and other current assets .......      (205,678)       (16,450)
       Accounts payable and accrued expenses ...........     1,846,605        131,473
       Income taxes payable ............................        15,997           --
                                                           -----------    -----------
         Net cash flows used in operating activities ...    (1,954,417)      (207,542)
                                                           -----------    -----------

Cash flows from investing activities:
  Acquisition of trademarks ............................       (41,525)        (5,883)
  Acquisition of property and equipment ................      (156,760)       (36,131)
                                                           -----------    -----------
     Net cash flows used in investing activities .......      (198,285)       (42,014)
                                                           -----------    -----------

Cash flows from financing activities:
  Net proceeds from private placement of preferred stock     6,672,737           --
  Proceeds from loan payable ...........................         6,011        293,988
  Repayment of advances from shareholder ...............          --          (42,822)
                                                           -----------    -----------
     Net cash flows provided by financing activities ...     6,678,748        251,166
                                                           -----------    -----------

Net increase in cash and cash equivalents ..............     4,526,046          1,610
Cash and cash equivalents, beginning of year ...........         2,230            620
                                                           -----------    -----------
Cash and cash equivalents, end of year .................   $ 4,528,276    $     2,230
                                                           ===========    ===========

Supplemental disclosures of cash flow information:
Cash paid during the year for:
  Interest .............................................   $    28,637    $     1,189
  Income taxes .........................................         2,803            800
   Non-cash financing transactions:
       Loan payable converted to common stock ..........       300,000           --
       Trade payable converted to equity ...............        25,000           --
       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           --
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                       27
<PAGE>


                            PEOPLE'S LIBERATION, INC.
<TABLE>
                      CONSOLIDATED STATEMENT OF CHANGES IN
                              STOCKHOLDERS' EQUITY

<CAPTION>

                                                 Common Stock           Preferred Stock Series A
                                          -------------------------    --------------------------
                                            Shares        Amount         Shares         Amount
                                          -----------   -----------    -----------    -----------
<S>                                        <C>          <C>             <C>           <C>
Balance at January 1, 2004 ............            45   $     1,000           --      $      --

Net loss ..............................          --            --             --             --
                                          -----------   -----------    -----------    -----------

Balance at December 31, 2004 ..........            45         1,000           --             --

Stock issued for assumption of debt ...            45       300,000           --             --
Trade payable converted to members'
   equity .............................          --            --             --             --
Members' deficit adjustment for
   operations prior to exchange
   transaction (Note 8) ...............          --            --             --             --
Stockholder's equity adjustment for
   operations prior to change in S
   Corporation tax status (Notes 2
   and 8) .............................          --            --             --             --
Private placement of preferred stock
   Series A ...........................          --            --          578,125      6,672,737
Exchange transaction including
   retroactive effect of conversion of
   series A Preferred Stock and reverse
   stock split on January 5, 2006
   (Note 8) (1) .......................    34,370,010      (266,630)      (578,125)    (6,672,737)
Net loss ..............................          --            --             --             --
                                          -----------   -----------    -----------    -----------
Balance at December 31, 2005 ..........    34,370,100   $    34,370           --      $      --
                                          ===========   ===========    ===========    ===========


<CAPTION>
                                                                         Additional
                                           Members'        Paid-in      Accumulated
                                            Equity         Capital        Deficit         Total
                                          -----------    -----------    -----------    -----------
<S>                                       <C>            <C>            <C>            <C>
Balance at January 1, 2004 ............   $      --      $      --      $   (43,202)   $   (42,202)

Net loss ..............................          --             --         (271,921)      (271,921)
                                          -----------    -----------    -----------    -----------

Balance at December 31, 2004 ..........          --             --         (315,123)      (314,123)

Stock issued for assumption of debt ...          --             --             --          300,000
Trade payable converted to members'
   equity .............................        25,000           --             --           25,000
Members' deficit adjustment for
   operations prior to exchange
   transaction (Note 8) ...............          --         (643,069)       643,069           --
Stockholder's equity adjustment for
   operations prior to change in S
   Corporation tax status (Notes 2
   and 8) .............................          --           13,725        (13,725)          --
Private placement of preferred stock
   Series A ...........................          --             --             --        6,672,737
Exchange transaction including
   retroactive effect of conversion of
   series A Preferred Stock and reverse
   stock split on January 5, 2006
   (Note 8) (1) .......................       (25,000)     6,964,367           --             --
Net loss ..............................          --             --         (569,567)      (569,567)
                                          -----------    -----------    -----------    -----------
Balance at December 31, 2005 ..........   $      --      $ 6,335,023    $  (255,346)   $ 6,114,047
                                          ===========    ===========    ===========    ===========
</TABLE>


(1)      Reflects the retroactive  conversion of Series A convertible  preferred
         stock,  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.


                                       28
<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.

         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,  34,370,100 shares of common stock were
outstanding.  All share and per share  information  included in the accompanying
consolidated  financial  statements  reflects the effects of the  conversion and
reverse stock split.

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

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


                                       29
<PAGE>


         Bella Rose was formed in 2005, and therefore,  the financial  statement
information  for the year ended  December  31,  2004  contains  the  balances of
Versatile only.  Prior to the exchange  transaction on November 22, 2005,  Bella
Rose and Versatile had common ownership and control.

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.  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 Bella Rose distribute their  merchandise to
better department stores and boutiques, such as Nordstrom, Bloomingdales, Neiman
Marcus,  Kitson,  Atrium, Fred Segal, and Intermix.  Internationally,  in select
countries,  products  are sold  directly  and  through  distributors  to  better
department  stores and  boutiques,  such as  Mitsukoshi,  TNT and Sears  (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  and  President,  Daniel  Guez.  Prior to  January  1,  2005,
Versatile was considered to be a development  stage corporation as defined under
Statement of Financial  Accounting  Standards ("SFAS") No. 7. Activities through
December 31, 2004 included  design,  development  and marketing of its products.
Prior to  November  2004,  there  were no  revenues  from the sale of  products.
November and December 2004 revenues were derived from product sales to a limited
number of customers.

         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
has the  exclusive  rights to  manufacture  clothing and  accessories  under the
William Rast tradename.  Mr. Timberlake's entity will receive the greater of 50%
of the net profits of the William Rast  apparel line or net profits  equal to 6%
of net sales of William Rast  apparel,  with Bella Rose to receive the remaining
profits. Under the terms of the agreement,  Bella Rose manages the business, and
is responsible for funding the costs of the business.

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The accounts of  Versatile  and Bella Rose 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 financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from these estimates.


                                       30
<PAGE>


REVENUE RECOGNITION

         The Company recognizes revenues in accordance with SEC Staff Accounting
Bulletin  (SAB) No. 101,  and as amended by SAB No. 104.  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.

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, 2005 and 2004.

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 14 for disclosure regarding geographic
regions.

ADVERTISING

         Advertising costs are expensed as of the first date the  advertisements
take  place.  Advertising  expenses  included in selling  expenses  approximated
$134,000   and  $1,895  for  the  years  ended   December  31,  2005  and  2004,
respectively.

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

         Statement of Financial  Accounting  Standards No. 123,  "Accounting for
Stock-Based  Compensation"  ("SFAS  123"),  establishes  a fair value  method of
accounting for stock-based  compensation  plans and for  transactions in which a
company  acquires  goods or services from  non-employees  in exchange for equity
instruments.  SFAS 123 also gives the option to account for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock issued to Employees," or SFAS 123. In December 2004,
the Financial  Accounting  Standards  Board (FASB)  issued SFAS No. 123R,  which
eliminates the ability to account for share-based


                                       31
<PAGE>


compensation  transactions  using the  intrinsic  value  method under APB 25 and
generally would require instead that such  transactions be accounted for using a
fair-value-based  method.  In April 2005,  the  Securities  Exchange  Commission
("SEC")  amended Rule 401(a) of Regulation  S-X to delay the effective  date for
compliance  with SFAS No.  123R.  Based on the  amended  rule,  the  Company  is
required  to adopt SFAS No.  123R  beginning  in fiscal  year 2006.  The Company
adopted  its  2005  Stock  Incentive  Plan on  January  5,  2006.  There  was no
stock-based  compensation  issued  during the years ended  December 31, 2005 and
2004.

         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

TRADEMARKS

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

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 is a limited  liability company and is 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,  Bella Rose and Versatile are  consolidated and taxes are
reported  by  the  parent,  People's  Liberation.  Taxes  are  calculated  on  a
consolidated basis at C-Corporation tax rates.


                                       32
<PAGE>


         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 10 .

IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES

         Long-lived  assets  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.

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.


                                       33
<PAGE>


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, 2005 and 2004  amounted to  approximately  $57,000 and
$2,000.  Total  shipping and handling  costs  included as a component of cost of
sales amounted to approximately $128,000 and $6,000 for the years ended December
31, 2005 and 2004.

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  commissions,
royalties,  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.

         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.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In December 2004, the FASB issued SFAS No. 151,  "Inventory  Costs,  an
amendment of ARB No. 43, Chapter 4," which will become effective for the Company
beginning January 1, 2006. This standard clarifies that abnormal amounts of idle
facility expense, freight, handling costs and wasted material should be expensed
as incurred and not included in overhead.  In addition,  this standard  requires
that the allocation of fixed production  overhead costs to inventory be based on
the normal  capacity of the  production  facilities.  The  Company is  currently
evaluating the potential  impact of this standard on its financial  position and
results of  operations,  but does not  believe  the impact of the change will be
material.

         In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections", a replacement of Accounting Principles Board Opinion No. 20,
"Accounting  Changes",  and Statement No. 3,  "Reporting  Accounting  Changes in
Interim  Financial  Statements"  ("SFAS 154"). SFAS 154 changes the requirements
for the  accounting  for, and reporting  of, a change in  accounting  principle.
Previously,  voluntary changes in accounting  principles were generally required
to be  recognized  by way of a cumulative  effect  adjustment  within net income
during the period of the change. SFAS 154 requires retrospective  application to
prior periods'  financial  statements,  unless it is  impracticable to determine
either the period of specific  effects or the  cumulative  effect of the change.
SFAS 154 is effective  for  accounting  changes  made in fiscal years  beginning
after December 15, 2005;  however,  the statement does not change the transition
provisions  of any  existing  accounting  pronouncements.  The Company  does not
believe  adoption  of SFAS 154 will  have a  material  effect  on its  financial
position, cash flows or results of operations.


                                       34
<PAGE>


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.
Convertible   preferred  stock  and  warrants   representing  common  shares  of
32,845,751  and  3,125,000,  respectively,  were  outstanding as of December 31,
2005, but were excluded from the average number of common shares  outstanding in
the calculation because the effect of inclusion would be anti-dilutive.  For the
year ended  December 31, 2004,  there were no stock  options,  warrants or other
stock rights outstanding.

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

YEAR ENDED DECEMBER 31, 2005:            LOSS           SHARES        PER SHARE
                                      (NUMERATOR)   (DENOMINATOR)      AMOUNT
                                      ----------      ----------     ----------
Basic loss per share:
Loss available to common
   stockholders (1) .............     $ (569,567)     21,415,431     $    (0.03)

Effect of Dilutive Securities:
Options .........................           --              --             --
Warrants ........................           --              --             --
                                      ----------      ----------     ----------
Loss available to common
   stockholders (1) .............     $ (569,567)     21,415,431     $    (0.03)
                                      ==========      ==========     ==========

YEAR ENDED DECEMBER 31, 2004:
Basic loss per share:
Loss available to common
   stockholders (1) .............     $ (271,921)     10,638,300     $    (0.03)

Effect of Dilutive Securities:
Options .........................           --              --             --
Warrants ........................           --              --             --
                                      ----------      ----------     ----------
Loss available to common
   stockholders (1) .............     $ (271,921)     10,638,300     $    (0.03)
                                      ==========      ==========     ==========

(1)      Reflects the retroactive  conversion of Series A convertible  preferred
         stock,  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 trade accounts receivable and assumes credit risk with respect to
certain accounts.


                                       35
<PAGE>


         The factor agreements  provide that the Company can borrow an amount up
to 85% of the value of its  approved  factored  customer  invoices.  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 the  non-factored  accounts  receivable,
inventories and general intangibles. Ledger debt (payables to suppliers that use
the same factor as the Company)  amounted to approximately  $158,000 at December
31, 2005.

         Due from factor is summarized as follows:

                  Outstanding receivables:
                    Without recourse .........    $ 1,324,705
                    With Recourse ............        785,469
                                                  -----------
                                                    2,110,174
                  Advances ...................        (40,925)
                  Open credits ...............        (75,000)
                                                  -----------
                                                  $ 1,994,249
                                                  ===========

NOTE 5  - INVENTORIES

         Inventories are summarized as follows:

                  Piece goods and trim .......    $   255,564
                  Finished goods .............        837,417
                                                  -----------
                                                  $ 1,092,981
                                                  ===========

NOTE 6 - PROPERTY AND EQUIPMENT

         Property and equipment is summarized as follows:

                  Furniture and fixtures .....    $    11,244
                  Office equipment ...........         75,549
                  Machinery and equipment ....         48,438
                  Computer software ..........         48,160
                                                  -----------
                                                      183,391
                  Less accumulated
                     depreciation ............        (18,400)
                                                  -----------
                                                  $   164,991
                                                  ===========

         Depreciation expense amounted to $17,249 and $2,298 for the years ended
December 31, 2005 and 2004, respectively.


                                       36
<PAGE>


NOTE 7 - TRADEMARKS

         Trademarks are summarized as follows:

                  Trademarks, at cost ........    $    45,872
                  Less accumulated
                    amortization .............         (1,536)
                                                  -----------
                                                  $    44,336
                                                  ===========

         Future annual estimated amortization expense is summarized as follows:

                  YEARS ENDING DECEMBER 31,
                  2006 .......................    $     2,956
                  2007 .......................          2,956
                  2008 .......................          2,956
                  2009 .......................          2,956
                  2010 .......................          2,956
                  Thereafter .................         29,556
                                                  -----------
                                                  $    44,336
                                                  ===========

         Trademark  amortization expense amounted to $1,529 and $7 for the years
ended December 31, 2005 and 2004, respectively.

NOTE 8- 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 $6.7 million in the
capital  raise.  The warrants were valued at  approximately  $808,000  using the
Black Scholes valuation model.

         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,


                                       37
<PAGE>


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  95.7%,  and  the  exisiting  stockholders   immediately  prior  to  these
transactions  owned  4.3% 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 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 into 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 the Company,  representing  95.6% of
the outstanding  shares of common stock immediately  following the reverse split
and the mandatory conversion. The holders of the Company's common stock prior to
the mandatory conversion and reverse split, owned approximately 1,524,349 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  pro  forma  information   assumes  that  the  automatic
conversion and reverse split, as discussed  above,  occurred as of the beginning
of the respective  accounting periods.  The pro forma provision for income taxes
as of December 31, 2005 and 2004 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.

                                                       2005            2004
                                                   ------------    ------------
Net loss, as reported ...........................  $   (569,567)   $   (271,921)
Pro forma income tax benefit ....................      (205,000)        (90,800)
Pro forma net loss ..............................      (315,167)       (180,321)
Pro forma basic and diluted loss per common share         (0.01)          (0.02)

Pro forma basic and diluted weighted average
   common shares outstanding ....................    34,370,100      10,638,300

NOTE 9 - 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


                                       38
<PAGE>


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.

         Additional   information   relating  to  stock   options  and  warrants
outstanding and  exercisable at December 31, 2005,  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 (warrants)             625,000       4.9           $ 1.25          625,000       $ 1.25
    $ 2.00 (warrants)           2,500,000       4.9           $ 2.00        2,500,000       $ 2.00
                               -----------                                 -----------

                                3,125,000       4.9           $ 1.85        3,125,000       $ 1.85
                               ===========                                 ===========
</TABLE>

NOTE 10- INCOME TAXES

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

         On November 22, 2005,  People's  Liberation  (formally  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,  Bella Rose and Versatile 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  account has not been  provided  for  deferred
income tax assets as the Company  believes  that it is more likely than not that
it will realize the future income tax benefits.


         The  provision  for income  taxes for the year ended  December 31, 2005
consists of the following:

         Federal:
           Current provision ........................           $15,300
           Deferred provision .......................            26,700
                                                                -------
                                                                 42,000

         State:
           Current provision ........................             2,700
           Deferred provision .......................             4,700
                                                                -------
                                                                  7,400
                                                                -------
                                                                $49,400
                                                                =======


                                       39
<PAGE>


         The difference  between the provision for income taxes and the expected
income tax  provision  determined  by applying the  statutory  federal and state
income tax rates to pre-tax  accounting  income for the years ended December 31,
2005 and 2004 are as follows:


                                                         2005       2004
                                                        ------     ------

         Federal statutory rate ...................      (34.0)%     --   %
         State taxes net of Federal benefit .......       (6.0)       0.3
         S Corp status through May 31, 2005 .......       (1.1)      --
         LLC status through November 22, 2005 .....       49.4       --
         Other ....................................        1.2       --
                                                        ------     ------

                                                           9.5 %      0.3 %
                                                        ======     ======

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

         Deferred income tax asset - current:

              Inventories                               $   9,600
                                                        =========

         Deferred income tax liability - non current

              Property and equipment                    $  41,000
                                                        =========

NOTE 11 - APPAREL BRAND AGREEMENT

         Bella Rose has an agreement  with William Rast  Enterprises,  an entity
owned by Justin Timberlake.  Versatile owns the William Rast tradename and under
the brand agreement, Bella Rose has the exclusive rights to manufacture clothing
and accessories under the William Rast tradename. The agreement provides for the
payment to William Rast  Enterprises of the greater of 50% of the net profits of
the William Rast apparel line or net profits equal to 6% of net sales of William
Rast apparel.  The agreement has an indefinite term. Included in selling expense
for the year ended  December 31,  2005,  is  approximately  $32,000 of royalties
related to this agreement.

NOTE 12 - 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.


                                       40
<PAGE>


         During the years ended December 31, 2005 and 2004,  Versatile purchased
trim products from Tag-it  Pacific,  Inc., a related  entity as of May 16, 2005,
amounting to $74,960 and $10,480,  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.

         The Company paid $10,000 in  consulting  fees to a  stockholder  of the
Company during the year ended December 31. 2005.

NOTE 13 - LEASES

         The  Company  leases  its  office  and  warehouse  space  under a lease
agreement  commencing in October 2005 and expiring in December 2008. The Company
also leased its  showrooms on a  month-to-month  basis  through  December  2005.
Beginning  January 2006,  rental costs related to the two showrooms are incurred
by our sales agent under our service  agreement.  The Company  accounts  for its
leases in  accordance  with SFAS No. 13,  whereby  step  provisions,  escalation
clauses, tenant improvement allowances,  increases based on an existing index or
rate,  and other  lease  concessions  are  accounted  for in the  minimum  lease
payments and are charged to the income  statement on a straight  line basis over
the related lease term. Total rent expense for the years ended December 31, 2005
and 2004 totaled $85,250 and $23,900, respectively.

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


          YEARS ENDING DECEMBER 31,
          -------------------------
          2006..........................................  $281,820
          2007..........................................   281,820
          2008..........................................   281,820
                                                          --------
                                                          $845,460

NOTE 14--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.


                                       41
<PAGE>


         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,
                                                  ------------------------------
                                                     2005                2004
                                                  ----------          ----------
Sales:
     United States .....................          $5,513,100          $  163,072
     Japan .............................             248,291                --
     Canada ............................              21,871                --
     United Kingdom ....................              12,219                --
     Other .............................               7,586                --
                                                  ----------          ----------
                                                  $5,803,067          $  163,072
                                                  ==========          ==========

NOTE 15 - CUSTOMER CONCENTRATION

         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.  During the
year ended  December 31, 2004,  one customer  comprised  greater than 10% of the
Company's sales.  Sales to this customer  amounted to 18.7% of net sales for the
year ended  December 31, 2004.  At December 31, 2005 and 2004,  receivables  due
from these customers are included in due from factor.

NOTE 16 - SUPPLIER CONCENTRATION

         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. During the year ended December
31, 2004, one supplier  comprised  greater than 10% of the Company's  purchases.
Purchases  from this supplier  amounted to 70.3% for the year ended December 31,
2004.  At December  31, 2004,  accounts  payable and accrued  expenses  included
$19,233 due to this vendor.

NOTE 17 - 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,  2005,  total  factor   receivables
approximated $2,110,000.

         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.


                                       42
<PAGE>


         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.

NOTE 18 - SUBSEQUENT EVENTS

         On January 3, 2006,  the Company  entered into an Employment  Agreement
with Darryn Barber  pursuant to which he serves as 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.  For a period of
six months,  Mr.  Barber is permitted to perform  transition  services for other
entities up to approximately  one business day per week. Mr. Barber will receive
an annual salary of $172,000 during the initial  six-month  period.  Thereafter,
Mr. Barber will receive a base salary of $212,000 up to the first anniversary of
his  appointment,  and  $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. Mr. Barber will also be granted a non-qualified stock option
to purchase up to 300,000  shares of our common stock at an exercise price equal
to the "fair market  value" of such shares on the date the option is approved by
our Board of Directors. 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 January 5, 2006,  the Company  entered into a  consulting  agreement
with MK Sportswear. Under the terms of the agreement, MK Sportswear will provide
sales and customer  services  functions on behalf of the Company.  The agreement
provides for  commissions  at an agreed upon  percentage  of net sales and has a
term of two years that  expires on December  31, 2007.  In  accordance  with the
agreement,  the Company will issue 150,000  options to purchase  common stock at
the market price of the Company's  stock on the date of approval by the Board of
Directors and when the Plan is qualified  under the  regulations of the State of
California.


                                       43
<PAGE>


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

         Not applicable

ITEM 8A. CONTROLS AND PROCEDURES

CONTROLS AND PROCEDURES

         Members of the  company's  management,  including  our Chief  Executive
Officer and President,  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,  2005,  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.

INTERNAL CONTROL OVER FINANCIAL REPORTING

         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, 2005 that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

ITEM 8B. OTHER INFORMATION

         None


                                       44
<PAGE>


                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS;  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 February 21, 2006.

     NAME                    AGE             POSITION HELD
     ----                    ---             -------------

Daniel Guez                  28              Chief Executive Officer, President,
                                               Secretary and Director
Darryn Barber                30              Chief Financial Officer and Chief
                                               Operating Officer
Dean Oakey                   48              Director
Kevin R. Keating             65              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  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  University of California  Santa
Barbara.

         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 is an investment  executive and for the past nine
years  has  been the  Branch  Manager  of the Vero  Beach,  Florida,  office  of
Brookstreet  Securities  Corporation.  Brookstreet is a  full-service,  national
network of  independent  investment  professionals.  Mr.  Keating  services  the
investment needs of private clients with special emphasis on equities.  For more
than 35  years,  he has  been  engaged  in  various  aspects  of the  investment
brokerage  business.  Mr.  Keating  began his Wall Street  career with the First
Boston  Company 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.  Since 1982,  he has been  associated  with a variety of firms as a
registered  representative  servicing  the needs of  individual  investors.  Mr.
Keating is also the manager and sole member of Vero Management, LLC, which had a
management  agreement with us that terminated effective as of the closing of the
exchange agreement on November 22, 2005.


                                       45
<PAGE>


COMMITTEES OF THE BOARD OF DIRECTORS

         Our  board of  directors  currently  consists  of three  members.  Each
director was elected either at a meeting of  shareholders  or by written consent
of the shareholders and serves until our next annual meeting or until his or her
successor is duly elected and qualified.

         Our board does not have any committees,  including an audit  committee.
The functions  customarily  delegated to an audit committee are performed by our
full board of  directors.  As we do not maintain an audit  committee,  we do not
have an audit committee  "financial expert" within the meaning of Item 401(e) 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.

DIRECTOR COMPENSATION

         We are  currently  revising  our  compensation  plan and  intend to pay
outside  directors a fee for being a board  member as well as fees for  chairing
and sitting on committees of the board, when such committees are established.

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,  2005,  all of our  executive  officers,
directors and greater-than-ten  percent  stockholders  complied with all Section
16(a) filing requirements.

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 2005. 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.


                                       46
<PAGE>


ITEM 10.      EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth information  concerning all compensation
paid to our Chief  Executive  Officer for services to us in all  capacities  for
each of the three  fiscal  years ended  December 31  indicated  below.  No other
officer  was  paid  more  than  $100,000   during  the  last  fiscal  year.  The
compensation  table excludes other  compensation  in the form of perquisites and
other  personal  benefits  that  constituted  less than 10% of the total  annual
salary and bonus for the executive officer during the applicable fiscal year.

<TABLE>
<CAPTION>
                                                                                                      LONG-TERM
                                                                                                    COMPENSATION
                                                                ANNUAL COMPENSATION                    AWARDS
                                                    -------------------------------------------    --------------
                                                                                                      NUMBER OF
                                    FISCAL YEAR                                                      SECURITIES
NAME AND                               ENDED                                      OTHER ANNUAL       UNDERLYING
PRINCIPAL POSITION                  DECEMBER 31,      SALARY         BONUS        COMPENSATION        OPTIONS
-------------------------------     -----------     -----------    -----------   --------------    --------------
<S>                                    <C>           <C>            <C>             <C>                  <C>
Daniel Guez (1) ...............        2005          $151,202       $155,929        $ 15,006             N/A
   Chief Executive Officer,            2004          $ 62,308          N/A          $ 52,836             N/A
   President and Secretary             2003             --             --             --                 N/A

Kevin R. Keating (2) ..........        2005             $0             $0           $  5,000             N/A
   Former President,                   2004            N/A            N/A             N/A                N/A
   Treasurer and Secretary             2003            N/A            N/A             N/A                N/A

David Hadley (3) ..............        2005          $ 16,848          $0             N/A                N/A
   Former CEO and                      2004          $ 60,000          $0           $ 20,500             N/A
   President                           2003          $ 60,000          $0           $ 20,500             N/A
</TABLE>

----------
         (1)      Mr. Guez's commenced his service as Chief Executive Officer of
our  company on  November  22,  2005.  The  amounts  in the table  also  reflect
compensation  paid to Mr.  Guez as Chief  Executive  Officer of our  subsidiary,
Versatile Entertainment, Inc. prior to November 22, 2005.

         (2)      Mr. Keating  served as our President,  Treasurer and Secretary
from  February 4, 2005 to November  22, 2005.  On June 28,  2005,  we issued Mr.
Keating 54,054 shares of our common stock in consideration for services rendered
by him, valued at $5,000.

         (3)      Mr.  Hadley  served  as  our  Chairman  of  the  Board,  Chief
Executive  Officer and President until February 4, 2005. Mr. Hadley has no stock
options to purchase shares of common stock and was paid no compensation  for his
services as Chief Executive  Officer and President.  As Chief Executive  Officer
and   President  of  our  former   wholly-owned   subsidiary,   Global   Medical
Technologies,  Inc.,  Mr. Hadley was paid an annual  salary of $60,000  together
with an annual  bonus as set forth  above in  connection  with his  services  to
Global  Medical  Technologies,  Inc. On December 15, 2004,  we issued Mr. Hadley
2,470,000  restricted  common  shares  on a  pre-reverse  stock  split  basis in
exchange for $125,000 accumulated unpaid salary.

OPTION GRANTS IN 2005

         We did not grant options to purchase common stock during 2005.

OPTION VALUES AT DECEMBER 31, 2005

         None  of the  executive  officers  named  in the  summary  table  above
exercised options during 2005.


                                       47
<PAGE>


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.

         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


                                       48
<PAGE>


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.

EMPLOYMENT CONTRACTS

         Except  as  described  below,  we are  not  parties  to any  employment
agreements with any of our executive officers.

         On January 3, 2006, we entered into an Employment Agreement with Darryn
Barber  pursuant  to which he serves as 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.  For a period of six
months,  Mr.  Barber is  permitted  to  perform  transition  services  for other
entities up to approximately  one business day per week. Mr. Barber will receive
an annual salary of $172,000  during the initial six month  period.  Thereafter,
Mr. Barber will receive a base salary of $212,000 up to the first anniversary of
his  appointment,  and  $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. Mr. Barber will also be granted a non-qualified stock option
to purchase up to 300,000  shares of our common stock at an exercise price equal
to the "fair market  value" of such shares on the date the option is approved by
our Board of Directors.  In the event Mr. Barber is terminated without cause, we
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.

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 February 21, 2006 by:

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

         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 February 21,
2006 are deemed to be outstanding and to be beneficially owned by the


                                       49
<PAGE>


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 34,370,100  shares
of  our  common  stock  outstanding  on  February  21,  2006.  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 SHARES    PERCENTAGE
                                                   BENEFICIALLY       OF SHARES
NAME OF BENEFICIAL OWNER                               OWNED         OUTSTANDING
---------------------------------------------    ----------------    -----------

EXECUTIVE OFFICERS AND DIRECTORS:
Daniel S. Guez (1)...........................       14,218,387         41.39
   Director, President and Chief Executive
   Officer and Secretary
Darryn Barber (2)............................          125,060           *
   Chief Financial Officer and Chief
   Operating Officer
Dean Oakey (3)...............................          668,383          1.93
   Director
Kevin R. Keating (4).........................           54,055           *
   Director
Directors and officers as a group
   (4 persons) (5)...........................       15,065,885         43.82

5% SHAREHOLDERS:
Colin Dyne (6) ..............................        8,231,560         23.95

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

(1)      Consists of 13,118,387 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.

(3)      Consists  of  389,883  shares of common  stock,  warrants  to  purchase
         262,500  shares of common  stock at a strike  price of $1.25 per share,
         and  warrants to  purchase  16,000  shares of common  stock at a strike
         price of $2.00 per share.

(4)      Consists of 54,055 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.

(5)      Consists of 14,787,385 shares of common stock, and warrants to purchase
         278,500 shares of common stock.

(6)      Consists of 8,231,560 shares of common stock.


                                       50
<PAGE>


EQUITY COMPENSATION PLAN INFORMATION

         The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2005.

<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..........             --                       --                      3,500,000
Equity compensation
plans not approved by
security holders..........           625,000                   $1.25                       --
Total.....................           625,000                   $1.25                    4,125,000
</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

         Other than the employment  arrangements  described  above in "Executive
Compensation" and the transactions described below, since January 1, 2004, 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 $60,000; and

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

TRANSACTIONS WITH OFFICERS AND DIRECTORS

         On February 16, 2004,  we entered  into a one-year  contract  with Vero
Management,  LLC for managerial and administrative services. Vero Management was
not engaged to provide, and Vero Management does not render, legal,  accounting,
auditing,  investment banking or capital formation services. Kevin R. Keating is
the manager of Vero Management.  In consideration of the services provided, Vero
was paid $1,000 for each month in which  services were  rendered.  The agreement
with Vero terminated on November 22, 2005.

         On August 30, 2004, we issued  1,000,000  shares of  restricted  common
stock in exchange  for a $85,000  note  payable to David L.  Hadley,  one of our
former officers.


                                       51
<PAGE>


         On December 15, 2004, we issued 2,470,000  restricted  common shares in
exchange for $125,000 accumulated unpaid salary to David L. Hadley.

         On January 31,  2005,  we entered  into an  Assumption  Agreement  with
Global Medical Technologies,  Inc., Natural  Technologies,  Inc. and Mr. Hadley,
our former Chief Executive Officer,  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.
Global Medical 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.

         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 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 June 28, 2005, we issued 500,000  restricted  common shares to Kevin
R.  Keating for  services  valued at $5,000.  We granted Mr.  Keating  piggyback
registration rights with respect to these shares.

         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.

         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.

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


                                       52
<PAGE>


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.

         During the year ended  December 31, 2005,  we purchased  trim  products
from Tag-It Pacific,  Inc., a related entity,  amounting to $74,960.  During the
year ended  December 31, 2005,  we incurred  approximately  $35,000 for services
provided by an employee of Tag-it Pacific, Inc.


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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 (the
                 "Members"), 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)


                                       54
<PAGE>


10.7             Form of Subscription  Agreement  between the Registrant and the
                 Investor to be identified therein. (3)

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            Form of Indemnity Agreement. (2)

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

21.1             Subsidiaries of People's Liberation, Inc. (2)

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.


                                       55
<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Effective November 30, 2005,  Grobstein,  Horwath & Co., LLP became our
principal independent  accounting firm. All audit work was performed by the full
time employees of Grobstein, Horwath & Co., 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 & Co., 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  services  provided  by  Grobstein,  Horwath & Co.,  LLP
totaled  approximately  $74,000 for 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 and $36,250 for the fiscal years ended September 30, 2005
and 2004.

     AUDIT-RELATED FEES

         There  were no  audit-related  services  provided  for the years  ended
December 31, 2005 and 2004.

     TAX FEES

         There were no 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, 2005
and 2004 for  services  provided  by  Grobstein,  Horwath & Co.,  LLP or Shelley
International, CPA, except as described above.


                                       56
<PAGE>


                                   SIGNATURES

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

                                         PEOPLE'S LIBERATION, INC.


Date: March 3, 2006                            /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 S. GUEZ        President and Chief Executive         March 3, 2006
------------------------    Officer, Secretary, and
      Daniel Guez           Director (Principal Executive
                            Officer)

   /S/ DARRYN BARBER        Chief Financial Officer and           March 3, 2006
------------------------    Chief Operating Officer
     Darryn Barber          (Principal Financial and
                            Accounting Officer)

   /S/ KEVIN KEATING        Director                              March 3, 2006
------------------------
     Kevin Keating

    /S/ DEAN OAKEY          Director                              March 3, 2006
------------------------
      Dean Oakey


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