================================================================================

                                  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, 2007

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

  For the transition period from __________________ to ______________________.

                         Commission file number 0-16075

                            PEOPLE'S LIBERATION, INC.

           (Name of Small Business Issuer as Specified in its Charter)

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

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

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

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

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

         Check  whether the issuer 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. [_]

         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, 2007 were
$20,267,377.

         The aggregate  market value of the voting and non-voting  common equity
held by non-affiliates  computed by reference to the average bid and asked price
of such common equity, as of March 20, 2008, was $5,227,316.

         As of March 21, 2008, the issuer had 36,002,563 shares of common stock,
par value $.001 per share, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

         Transitional Small Business Disclosure Format (check one):

                               Yes [_]       No [X]

================================================================================


<PAGE>


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

PART I                                                                      PAGE

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

Item 2.       Description of Property.......................................   9

Item 3.       Legal Proceedings.............................................   9

Item 4.       Submission of Matters to a Vote of Security Holders...........   9


PART II

Item 5.       Market for Common Equity and Related Stockholder Matters
              and Small Business Issuer Purchases of Equity Securities......   9

Item 6.       Management's Discussion and Analysis or Plan of Operation.....  10

Item 7.       Financial Statements

              Index to Consolidated Financial Statements....................  26

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

              Consolidated Balance Sheets...................................  28

              Consolidated Statements of Operations.........................  29

              Consolidated Statements of Cash Flows.........................  30

              Consolidated Statement of Changes in Stockholders' Equity.....  31

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

Item 8.       Changes In and Disagreements With Accountants on Accounting
              and Financial Disclosure......................................  59

Item 8A(T).   Controls and Procedures.......................................  59

Item 8B.      Other Information.............................................  60


PART III

Item 9.       Directors, Executive Officers, Promoters, Control Persons,
              and Corporate Governance; Compliance with Section 16(a) of
              the Exchange Act..............................................  60

Item 10.      Executive Compensation........................................  63

Item 11.      Security Ownership of Certain Beneficial Owners and Management
              and Related Stockholder Matters...............................  71

Item 12.      Certain Relationships and Related Transactions, and Director
              Independence..................................................  73

Item 13.      Exhibits......................................................  76

Item 14.      Principal Accountant Fees and Services........................  80



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


                                       1
<PAGE>


                                     PART I

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

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

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

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

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

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

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

         o        the demand for collection apparel;

         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.


                                       2
<PAGE>


ITEM 1.       DESCRIPTION OF BUSINESS

CORPORATE OVERVIEW

         We design,  market and sell  high-end  casual  apparel  under the brand
names "People's  Liberation" and "William Rast." The majority of the merchandise
we offer consists of premium  denim,  knits,  wovens,  and outerwear for men and
women. In the United States,  we distribute our merchandise to better department
stores and  boutiques,  such as  Nordstrom,  Bloomingdales,  Saks Fifth  Avenue,
Neiman Marcus, Lisa Klein and Fred Segal. Internationally,  in select countries,
we sell our products  directly  and through  distributors  to better  department
stores and boutiques, such as TNT in Canada, Jades in Germany and Harvey Nichols
in the United Kingdom. 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 William Rast  clothing  line is a
collaboration  with our team and Justin  Timberlake  and his  childhood  friend,
Trace  Ayala.  In  addition,  our William  Rast  lifestyle  collection  is being
developed  and  designed  in  collaboration  with  Paris68,  the New  York-based
independent  design  consultancy  of Johan and Marcella  Lindeberg.  The initial
collections  were  launched in February of 2008 and we  anticipate  shipping the
collection products in the Fall of 2008.

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

APPAREL INDUSTRY BACKGROUND

         We  operate  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,  Theory,  Rock & Republic 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.

CUSTOMERS

         We market our products to better  department  stores and boutiques that
cater to fashion forward clientele. Our products are sold to a limited number of
better  department stores and boutiques to maintain our premium brand status. In
the  United  States,  our  products  are sold in a number of  Bloomingdales  and
Nordstrom  store  locations.  We  plan  to  continue  to  develop  our  existing
relationships with our customers, and expand our domestic sales and distribution
to better  department  stores as the  visibility  of our brands  increase in the
marketplace.  Currently, in addition to Nordstrom and Bloomingdales,  we sell to


                                       3
<PAGE>


Saks Fifth Avenue,  Neiman Marcus, Lisa Klein and Fred Segal as well as hundreds
of  other  boutiques  and  specialty  retailers.   Internationally,   in  select
countries,  we sell our  products  directly and through  distributors  to better
department  stores and  boutiques,  such as TNT in Canada,  Jades in Germany and
Harvey  Nichols in the  United  Kingdom.  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     e-commerce     websites,      www.peoplesliberation.com     and
www.williamrast.com,  provide direct on-line sales of select People's Liberation
and William Rast products to our customers.  The websites  showcase each brand's
men's and women's collections, including premium denim jeans, skirts, knit tops,
jackets and tracksuits.

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 for men and women,  and our  William  Rast brand is a
collection of denim,  knits,  wovens and outerwear for both men and women.  As a
result of the fit, quality,  styles and successful marketing and branding of our
products,  we believe that our products will continue to command  premium prices
in the marketplace.

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

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

         Our William Rast lifestyle  collection is being  developed and designed
in collaboration with Paris68, the New York-based independent design consultancy
firm of Johan and Marcella Lindeberg.  Johan Lindeberg,  best known for his role
as Creative  Director of the Swedish brand J.  Lindeberg,  will design our men's
collection  while Marcella  Lindeberg will design our women's  collection.  This
collaboration  results in a  partnership  to develop the William Rast brand into
full contemporary men's and women's fashion collections. The initial collections
were  launched in February of 2008 and we  anticipate  shipping  the  collection
products in the Fall of 2008.  The design  services  agreement  with Paris68 and
Johan and Marcella Lindeberg is for a three-year period ending December 2010.

         An  in-house  team of  designers  is  responsible  for the  design  and
development of our People's  Liberation  product line and our William Rast denim
product  line.  We do  not  currently  have  in  place  a  formal  research  and
development   effort.  Our  design  teams,   together  with  our  outside  sales
contractors,  shop stores,  travel and speak to market and trend setters to help
generate new product ideas.

SALES AND DISTRIBUTION

         US SALES AND DISTRIBUTION

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


                                       4
<PAGE>


around Los Angeles, California. Under agreements with third-party warehouses, we
outsource all of our finished good shipping, receiving and warehouse functions.

         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, 2007,  approximately 31.1%
of our sales were to one  customer.  During the year ended  December  31,  2006,
approximately 27.9% and 10.6% of our sales were to two customers.

         INTERNATIONAL SALES AND DISTRIBUTION

         We  have  entered  into  a  distribution  agreement  to  make  People's
Liberation brand products available in Germany,  Switzerland and Austria through
our exclusive international distributor.  We have also entered into distribution
agreements to make William Rast brand products  available  through our exclusive
international  distributors in Germany,  Switzerland,  Austria,  Canada, Greece,
Cyprus,  Scandinavia,  which  includes  Sweden,  Norway,  Denmark,  Finland  and
Iceland, Italy, Russia and the Benelux Region of Europe, which includes Belgium,
the Netherlands and Luxembourg. Our distributors purchase products at a discount
for resale in their  respective  territories.  Our  distributors  market,  sell,
warehouse and ship People's  Liberation and William Rast brand products at their
expense.  We anticipate growing our international  distribution  channels across
new territories.

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

         NAME OF BRAND              TERRITORY
         -------------              ---------
         People's Liberation        Germany, Switzerland and Austria

         William Rast               Germany,   Switzerland,   Austria,   Canada,
                                    Greece,  Cyprus,  Sweden,  Norway,  Denmark,
                                    Finland,  Iceland,  Italy, Russia,  Belgium,
                                    the Netherlands and Luxembourg

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

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

         In Canada, How International  will exclusively  distribute William Rast
brand products.  In February 2008, we signed an exclusive two-year  distribution
agreement with How  International  for the  distribution of William Rast branded
apparel in Canada  beginning  April  2008.  How  International  distributes  top
designer brands  including Joe's Jeans,  C&C  California,  Daniel  Alessandrini,
Local Celebrity and MK2K. Founders, Howard Codas and Steve Shein, have more than
ten years of  experience  in  building  brands in Canada and have  built  strong
relationships  with prestigious  retailers such as Holt Renfrew,  Aritzia,  TNT,
Simons and Mendocino.


                                       5
<PAGE>


         In Scandinavia,  which includes Sweden,  Norway,  Denmark,  Finland and
Iceland,  Only The Brave markets and  distributes our William Rast branded men's
and women's denim and  ready-to-wear  apparel line on an exclusive basis through
December  2010.  Only  The  Brave is an  exclusive  distributor  of  brand  name
clothing,  including RARE and NOLITA. Only The Brave's founder, Hans George, was
a distributor of Diesel brand products for over a decade in Norway.

         In Italy,  Stefania  Moroni will market and distribute our William Rast
branded men's and women's denim and  ready-to-wear  apparel line on an exclusive
basis beginning March 2008 through December 2010. Stefania Moroni is an industry
veteran  with  extensive  experience  working  for  Prada  and  is an  exclusive
distributor of brand name clothing, including Anna Purna, among others.

         In Russia,  Li-Lu  Showroom  markets and  distributes  our William Rast
branded men's and women's denim and  ready-to-wear  apparel line on an exclusive
basis through December 2010.  Through her showroom in Moscow,  Oxana Bondarenko,
the  founder  of Li-Lu  Showroom,  distributes  brand  names  such as Blue Cult,
Trussardi Jeans, Calvin Klein and Prada for Kids.

         In Belgium,  the Netherlands and Luxembourg,  Fashion Deal BVBA markets
and   distributes   our  William  Rast  branded  men's  and  women's  denim  and
ready-to-wear  apparel line on an exclusive basis through December 2009. Fashion
Deal is an exclusive  importer and  distributor of brand name clothing and shoes
in the Benelux Region of Europe.

         In Greece and Cyprus, Lakis Gavalas SA markets our William Rast apparel
line on an exclusive basis through  December 2008. Lakis Gavalas is an exclusive
importer and  distributor  of brand name clothing,  accessories,  leather goods,
shoes, lingerie, fragrances, jewelry, home furnishings and lighting.

BRAND DEVELOPMENT

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

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

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

MANUFACTURING AND SUPPLY

         To maintain  low fixed costs and to reduce the time  between  order and
delivery,  we use third party  contract  manufacturers  to produce our  finished
goods from  facilities  located  primarily in Los Angeles,  California.  For the
majority of our denim  products,  we purchase fabric and trim from suppliers who
deliver these components  directly to us to be cut, sewn, washed and finished by
our contract  manufacturers.  For the majority of our knits and other  products,
our contract manufacturers purchase all components necessary to deliver finished


                                       6
<PAGE>


products to us. We believe we can  realize  additional  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 international  contract manufacturers we use 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 local  contractors in or near Los Angeles,  California.  Our
denim fabric is purchased  from mills  located in the United  States,  Italy and
Japan. For our knits, we stock garments that are prepared for dying. These units
are shipped to local contract  manufacturers for dying, printing and embroidery.
As we expand our product offering, we plan on sourcing additional finished goods
from international manufacturing facilities.

         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, 2007,  four
suppliers  provided for 52.4% of our total combined  purchases for the year. For
the year ended December 31, 2006, four suppliers provided for 52.2% of our total
combined purchases for the year.

         We ship  products to and invoice our United States  customers  directly
from warehouse facilities located in or around Los Angeles, California. Pursuant
to  agreements  with third party  warehouses,  we outsource  all of our internet
sales and our finished good shipping, receiving and warehouse functions.

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  and knit  markets
include  brands  such as True  Religion,  Seven  For All  Mankind,  Citizens  of
Humanity,  Theory,  Rock & Republic  and Joe's Jeans,  as well as other  premium
denim brands.

         We compete in our ability to create  innovative  concepts  and designs,
develop  products with  extraordinary  fit, and produce high quality fabrics and
finishes, treatments and embellishments. At a retail price point of $150 to $280
for denim jeans and $20 to $125 for knits and other  apparel  items,  we believe
that we offer competitively valued products.


                                       7
<PAGE>


TRADEMARKS AND OTHER INTELLECTUAL PROPERTY

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

         NAME OF MARK               TERRITORY
         ------------               ---------

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

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

         William Rast & Design      USA, European Community and Japan

         Rising Star                USA,  European  Community,   Japan,  Mexico,
                                    People's   Republic   of   China,   People's
                                    Republic  of  Korea,   Hong  Kong,   Israel,
                                    Russia, Taiwan, Singapore, Turkey, Australia
                                    and Canada

         Star Pocket                USA,  European  Community,   Japan,  Mexico,
                                    People's   Republic   of   China,   People's
                                    Republic  of  Korea,   Hong  Kong,   Israel,
                                    Russia, Taiwan, Singapore, Turkey, Australia
                                    and Canada

         The Dub                    USA

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

GOVERNMENT REGULATION AND SUPERVISION

         Our operations are subject to the effects of international treaties and
regulations such as the North American Free Trade Agreement (NAFTA). We are also
subject to the  effects of  international  trade  agreements  and  embargoes  by
entities such as the World Trade  Organization.  Generally,  these international
trade agreements benefit our business rather than burden it because they tend to
reduce trade 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, 2007, we had a total of 58 full time employees.  Our
full time employees  consist of three officers,  Colin Dyne, our Chief Executive
Officer, Thomas Nields, our Chief Operating Officer and Darryn Barber, our Chief
Financial  Officer.  Our  production  and  design  teams  include  28  employees
consisting  of production  managers as well as sample  sewers,  pattern  makers,
technical  designers and product designers.  Our production and design teams are
responsible for the design,  development,  and  preparation of sample  products.
Additionally,  we  have 27  employees  who  handle  sales,  marketing,  customer
service, accounting and administration functions.


                                       8
<PAGE>


ITEM 2.       DESCRIPTION OF PROPERTY

         We lease our principal  executive  office and  warehouse  space under a
lease  agreement that expires in December  2008.  The facility is  approximately
38,500  sq.  ft, and is  located  in Los  Angeles,  California.  It is from this
facility that we conduct all of our executive and administrative  functions. Our
finished goods are shipped from a third-party warehouse in Commerce, California.
Our internet  products are shipped from a  third-party  warehouse in Long Beach,
California. We have showrooms located in Los Angeles, New York City and Atlanta.
We  currently  rent  temporary  showroom  space  in Los  Angeles  under  a lease
agreement  that expires May 31, 2008. We have also signed a lease  agreement for
permanent  space in the same building with a lease term  beginning  June 1, 2008
and continuing until May 2013. Our New York City showroom lease expires in April
2009 and our Atlanta  showroom  lease  expires in May 2009.  We believe that the
facilities we utilize are well  maintained,  in good  operating  condition,  and
adequate to meet our current and foreseeable needs.

ITEM 3.       LEGAL PROCEEDINGS

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

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 2007.

                                     PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
              BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK

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

                                                HIGH          LOW        VOLUME
                                                ----          ---        ------
YEAR ENDED DECEMBER 31, 2007
     First Quarter......................        $1.12        $0.65       406,766
     Second Quarter.....................        $0.80        $0.38     4,118,881
     Third Quarter......................        $0.70        $0.29       768,726
     Fourth Quarter.....................        $0.50        $0.32       849,800

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

         On March 20,  2008,  the  closing  sales  price of our common  stock as
reported on the Over-The-Counter Bulletin Board was $0.43 per share. As of March
3, 2008,  there were  approximately  470 record holders of our common stock. Our
transfer agent is Stalt, Inc., Menlo Park, CA.


                                       9
<PAGE>


DIVIDENDS

         Since January 1, 2006, 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 near future. We currently intend to retain all earnings,  if
and when generated, to finance our operations. The declaration of cash dividends
in the  future  will be  determined  by the board of  directors  based  upon our
earnings, financial condition, capital requirements and other relevant factors.

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

         The following  discussion and analysis should be read together with the
Consolidated Financial Statements of People's Liberation, Inc. and the "Notes to
Consolidated  Financial  Statements"  included  elsewhere in this  report.  This
discussion   summarizes  the  significant  factors  affecting  the  consolidated
operating results,  financial condition and liquidity and cash flows of People's
Liberation,  Inc. for the fiscal years ended December 31, 2007 and 2006.  Except
for  historical   information,   the  matters  discussed  in  this  Management's
Discussion and Analysis or Plan of Operation are forward-looking statements that
involve risks and uncertainties and are based upon judgments  concerning various
factors that are beyond our control.

OVERVIEW

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

         Our wholly-owned subsidiary Versatile Entertainment,  Inc. conducts our
People's Liberation brand business. Our William Rast brand business is conducted
through our  wholly-owned  subsidiary Bella Rose, LLC. William Rast Sourcing and
William Rast Licensing are consolidated  under Bella Rose. William Rast Sourcing
and William Rast  Licensing  are owned 50% by Bella Rose and 50% by William Rast
Enterprises, LLC ("WRE") an entity owned in part by Justin Timberlake.

         Our  distributors  purchase  products at a discount for resale in their
respective  territories.  Our  distributors  market,  sell,  warehouse  and ship
People's  Liberation  and  William  Rast brand  products  at their  expense.  We
anticipate   growing  our   international   distribution   channels  across  new
territories.

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

RECENT DEVELOPMENTS

         In March  2008,  we signed an  exclusive  distribution  agreement  with
Stefania  Moroni for the  distribution  of our William  Rast  branded  men's and
women's  denim and  ready-to-wear  apparel  line in Italy  beginning  March 2008
through  December 2010.  Stefania  Moroni is an industry  veteran with extensive
experience  working  for Prada and is an  exclusive  distributor  of brand  name
clothing, including Anna Purna, among others.


                                       10
<PAGE>


         In  February  2008,  we  signed  an  exclusive  two-year   distribution
agreement with How  International  for the  distribution of William Rast branded
apparel in Canada.  How International  distributes top designer brands including
Joe's Jeans,  C&C  California,  Daniel  Alessandrini,  Local Celebrity and MK2K.
Founders,  Howard Codas and Steve Shein,  have more than ten years of experience
in  building  brands  in  Canada  and  have  built  strong   relationships  with
prestigious retailers such as Holt Renfrew, Aritzia, TNT, Simons and Mendocino.

         In January 2008, we signed a distribution agreement with Li-Lu Showroom
in Russia to market and  distribute  our William Rast branded  men's and women's
denim and  ready-to-wear  apparel line on an exclusive  basis  through  December
2010.  Through her showroom in Moscow,  Oxana  Bondarenko,  the founder of Li-Lu
Showroom,  distributes  brand names such as Blue Cult,  Trussardi Jeans,  Calvin
Klein and Prada for Kids.

         Effective  November 2007,  William Rast Sourcing  entered into a design
services agreement with Paris68 LLC and Johan and Marcella Lindeberg. The design
services  agreement  provides for our William Rast  lifestyle  collection  to be
developed  and  designed  in  collaboration  with  Paris68,  the New  York-based
independent design consultancy of Johan and Marcella Lindeberg. Johan Lindeberg,
best known for his role as Creative  Director of the Swedish brand J. Lindeberg,
will  design our men's  collection  while  Marcella  Lindeberg  will  design our
women's collection.  This collaboration  results in a partnership to develop the
William Rast brand into full contemporary men's and women's fashion collections.
The initial  collections  were  launched  in February of 2008 and we  anticipate
shipping  the  collection  products  in the Fall of 2008.  The  design  services
agreement  with  Paris68 and Johan and  Marcella  Lindeberg  is for a three-year
period ending December 2010.

         On September  28, 2007 and  November 2, 2007,  we sold our common stock
and  received  approximately  $496,000  in net  proceeds  after  legal and other
expenses  pursuant to a private  placement  transaction  with various  strategic
investors,  including our German distributor,  Unifa GmbH, Andreas Kurz, founder
of Akari Enterprises,  our international  distributor and sales consultant,  our
Chief  Operating  Officer,  Thomas  Nields,  and our  investment  banking  firm,
Europlay Capital Advisors, LLC.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

         Our discussion  and analysis of our financial  condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues  and  expenses,   and  related  disclosure  of  contingent  assets  and
liabilities.  On an on-going basis,  we evaluate our estimates,  including those
related to our valuation of  inventories  and our  allowance  for  uncollectible
house  accounts   receivable,   recourse   factored   accounts   receivable  and
chargebacks. We base our estimates on historical experience and on various other
assumptions  that are believed to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates  under  different  assumptions or
conditions.  We believe the following  critical  accounting  policies affect our
more  significant  judgments  and  estimates  used  in  the  preparation  of our
consolidated financial statements:

         INVENTORIES. Inventories are evaluated on a continual basis and reserve
adjustments,  if any,  are made based on  management's  estimate of future sales
value  of  specific  inventory  items.  Reserve  adjustments  are  made  for the
difference  between the cost of the inventory and the estimated market value, if
lower, and charged to operations in the period in which the facts that give rise
to the  adjustments  become  known.  Inventories,  consisting of piece goods and
trim,  work-in-process  and  finished  goods,  are  stated  at the lower of cost
(first-in, first-out method) or market.

         ACCOUNTS   RECEIVABLE.   Factored  accounts  receivable  balances  with
recourse,  chargeback and other  receivables  are evaluated on a continual basis
and  allowances  are provided for  potentially  uncollectible  accounts based on
management's  estimate  of the  collectibility  of customer  accounts.  Factored


                                       11
<PAGE>


accounts receivable without recourse are also evaluated on a continual basis and
allowances are provided for anticipated returns, discounts and chargebacks based
on  management's  estimate  of  the  collectibility  of  customer  accounts  and
historical  return,  discount  and  other  chargeback  rates.  If the  financial
condition of a customer were to  deteriorate,  resulting in an impairment of its
ability to make  payments,  an additional  allowance may be required.  Allowance
adjustments are charged to operations in the period in which the facts that give
rise to the adjustments become known.

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

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

         DEFERRED TAX ASSETS. We may record a valuation  allowance to reduce our
deferred  tax assets to an amount  that we believe is more likely than not to be
realized.  We consider  estimated  future taxable income and ongoing prudent and
feasible  tax  planning  strategies  in  assessing  the  need  for  a  valuation
allowance.  If we determine  that we may not realize all or part of our deferred
tax assets in the future,  we will make an adjustment  to the carrying  value of
the  deferred  tax asset,  which would be  reflected  as an income tax  expense.
Conversely,  if we determine  that we will  realize a deferred tax asset,  which
currently  has a  valuation  allowance,  we would be  required  to  reverse  the
valuation  allowance,  which  would  be  reflected  as an  income  tax  benefit.
Valuation  allowance  adjustments are made in the period in which the facts that
give rise to the adjustments become known.

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

RECENT ACCOUNTING PRONOUNCEMENTS

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


                                       12
<PAGE>


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,
                                                     2007             2006
                                                 ------------     ------------

Net sales ....................................          100.0%           100.0%
Cost of goods sold ...........................           51.4             55.2
                                                 ------------     ------------
Gross profit .................................           48.6             44.8
Selling expenses .............................           16.5             14.0
Design and production expenses ...............           12.0             14.3
General and administrative expenses ..........           23.1             22.4
                                                 ------------     ------------
Operating loss ...............................           (3.0)%           (5.9)%
                                                 ============     ============

         NET SALES

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

Net sales ........................    $20,267,377    $15,959,766           27.0%

         The increase in net sales for the year ended  December 31, 2007 was due
to the  continued  growth of our  William  Rast  apparel  line,  which  includes
increased sales to our international distributors during the year ended December
31, 2007. The increase in sales of our William Rast apparel line was offset by a
substantial  decline in sales of our People's Liberation product line during the
year ended  December 31, 2007.  The decrease in sale of our People's  Liberation
brand products was attributable in part to the elimination of our knits division
during the year. In an effort to increase sales to existing People's  Liberation
customers  and  generate  new  customers,  we have  reduced our price points and
increased our target market to include middle-market major retailers.  Net sales
increased  approximately  $1,177,000 to $5,607,000 in the fourth quarter of 2007
from  $4,430,000 in the fourth quarter of 2006.  This increase was due primarily
to increased sale of our William Rast apparel line.

         GROSS PROFIT

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

Gross profit .....................    $ 9,858,218    $ 7,157,842           37.7%


         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 third party warehouse and shipping costs.  Our gross margin increased
to 48.6% for the year  ended  December  31,  2007 from  44.8% for the year ended
December 31, 2006. The increase in gross profit as a percentage of net sales was
due to economies of scale achieved in the manufacturing process of our products,
modified  production  processes,  increased  sales of higher margin products and
increased selling prices. Gross margin as a percentage of net sales increased to
50.5% for the fourth  quarter of 2007 compared to 49.5% in the fourth quarter of
2006.  This increase  resulted  primarily from increased  sales of higher margin
William Rast men's and women's denim products in the fourth quarter of 2007.


                                       13
<PAGE>


         SELLING EXPENSES

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

Selling expenses .................    $ 3,362,571    $ 2,242,024           50.0%

         Selling  expense  for the  years  ended  December  31,  2007  and  2006
primarily related to tradeshow,  sales  commissions and salaries,  marketing and
promotion,  travel and showroom expenses.  As a percentage of net sales, selling
expenses  increased to 16.5% for the year ended  December  31, 2007  compared to
14.0% for the year ended December 31, 2006. The increase in selling  expense for
the year ended December 31, 2007 is attributable  to our increased  promotion of
our brands,  the opening of our New York and Atlanta showrooms and the hiring of
additional  salaried  sales  staff in Los  Angeles,  New York and  Atlanta.  The
increase in selling  expenses for the year ended December 31, 2007 was offset by
expenses  incurred  for our  William  Rast  fashion  show that took place in the
fourth quarter of 2006.  Selling  expenses  decreased  approximately  $63,000 to
$736,000 (or 13.1% of net sales) in the fourth quarter of 2007 from $799,000 (or
18.0% of net  sales)  in the  fourth  quarter  of 2006.  This  decrease  was due
primarily to our William Rast fashion show that took place in the fourth quarter
of 2006, offset by increased promotion and marketing expenses,  additional sales
salaries and showroom expenses.

         DESIGN AND PRODUCTION EXPENSES

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

Design and production expenses....    $ 2,428,501    $ 2,278,495            6.6%

         Design and  production  expenses for the years ended  December 31, 2007
and 2006 primarily  related to design and production  salaries and sample costs.
As a percentage of net sales,  design and production expenses decreased to 12.0%
for the year  ended  December  31,  2007  compared  to 14.3% for the year  ended
December 31,  2006,  as a result of net sales  during the year  increasing  more
rapidly than design and  production  expenses.  Design and  production  expenses
increased  during the year ended  December  31, 2007  compared to the year ended
December  31, 2006 as we  increased  our design  staff and  incurred  additional
sample costs for both our People's  Liberation  and William Rast apparel  lines.
Design and production expenses increased  approximately $218,000 to $764,000 (or
13.6% of net sales) in the fourth quarter of 2007 from $546,000 (or 12.3% of net
sales) in the fourth  quarter of 2006.  This  increase  was due to the hiring of
additional salaried design and merchandising staff and an increase in sample and
other design costs during the fourth quarter of 2007.

         GENERAL AND ADMINISTRATIVE EXPENSES

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

General and administrative
   expenses ......................    $ 4,681,425    $ 3,585,618           30.6%


         General and  administrative  expenses for the years ended  December 31,
2007 and 2006  primarily  related to  salaries,  professional  fees and facility
costs.  As a  percentage  of net  sales,  general  and  administrative  expenses
increased to 23.1% for the year ended  December  31, 2007  compared to 22.4% for
the year ended  December  31, 2006.  The increase in general and  administrative
expenses  primarily  related to  increased  professional  fees,  including  fees
related to public company reporting requirements and compliance with Section 404


                                       14
<PAGE>


of the  Sarbanes-Oxley  Act,  the  hiring  of  additional  management  personnel
including our former president,  other finance and administrative  employees, an
increase in insurance costs, increased depreciation and amortization expense and
an increase in bad debt expense. Included in general and administrative expenses
during the year ended December 31, 2007 is  approximately  $155,000 of severance
costs related to the  termination of our president on June 7, 2007.  General and
administrative  expenses  increased  approximately  $15,000 to $1,185,000 in the
fourth  quarter  of 2007 from  $1,170,000  in the fourth  quarter of 2006.  As a
percentage of net sales, general and administrative  expenses decreased to 21.1%
in the fourth  quarter of 2007 from  26.4% in the  fourth  quarter of 2006.  The
increase in general and  administrative  expenses in the fourth  quarter was due
primarily  to  increased  professional  fees,  additional  insurance  costs  and
recruiting fees, offset by a reduction in executive  compensation  costs related
to the restructuring of our senior management team in 2007.

         INTEREST (EXPENSE) INCOME

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

Interest (expense) income.........    $   (80,706)   $    59,750         *
* not meaningful

         Under  our  factoring  arrangements,  we  may  borrow  up to 85% on our
factored accounts  receivable and 50% on our inventory,  up to a maximum of $1.3
million  of  eligible  inventory.  Outstanding  borrowings  under our  factoring
arrangements amounted to approximately $649,000 at December 31, 2007. There were
no outstanding  borrowings  under our factoring  arrangements as of December 31,
2006.  On September  28, 2007 and November 2, 2007, we sold our common stock and
received  approximately  $496,000 in net proceeds after legal and other expenses
pursuant to a private placement transaction with various investors. A portion of
the proceeds of this private  placement was used to reduce our borrowings  under
our factor  facility and as a result,  decrease  interest  expense in the fourth
quarter of 2007.  We  received  $6.6  million  of net  proceeds  in our  private
placement  transaction in November 2005, which generated  interest income during
the year  ended  December  31,  2006 and  eliminated  our need to  borrow  funds
available under our factoring facility.

         (PROVISION)  BENEFIT FOR INCOME TAXES

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

(Provision) benefit for
   income taxes...................    $   (80,939)   $    23,494         *
* not meaningful

         The current  provision for income taxes for the year ended December 31,
2007 represents the minimum tax payments due for state purposes, including gross
receipts tax on sales generated by our limited liability  company,  William Rast
Sourcing,  LLC. Also included in the current  provision for income taxes for the
year ended December 31, 2007 is the write-down of refundable income taxes to the
amount we expect to be repaid in the future and  additional  expense  related to
the under accrual of the prior year's  income taxes.  The deferred tax assets at
December 31, 2007 represent the amounts that management believes are more likely
than  not to be  realized.  A  valuation  allowance  has been  provided  for our
deferred  income tax asset related to net operating  loss  carryforwards.  As of
December 31, 2007,  total net  operating  losses  available to  carryforward  to
future periods amounted to approximately  $1.6 million.  At this time, we cannot
determine that it is more likely than not that we will realize the future income
tax benefits related to our net operating losses.


                                       15
<PAGE>


         MINORITY INTEREST

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

Minority interest.................    $   113,017    $    --             *
* not meaningful

         Effective January 1, 2007, William Rast Sourcing was to pay its member,
William Rast Enterprises,  a minimum quarterly minority interest distribution of
6% of  applicable  net sales  generated  by  William  Rast  Sourcing  during the
quarterly period, and William Rast Licensing was to pay its member, William Rast
Enterprises,  a  minimum  quarterly  minority  interest  distribution  of  3% of
applicable net sales  generated by William Rast  Licensing  during the quarterly
period. On November 9, 2007, the limited  liability company operating  agreement
of William Rast Sourcing,  LLC was further  amended to reflect a modification of
the distributions to William Rast Enterprises.  For the calendar quarters ending
June 30, 2007,  September 30, 2007 and December 31, 2007, all cash distributions
William  Rast  Sourcing,  LLC was  required to pay to William  Rast  Enterprises
pursuant to the amended and  restated  operating  agreement  will not be paid or
accrued  for future  payment  with  respect  to such  calendar  quarters.  Total
minority  interest  distributions  recorded for the year ended December 31, 2007
amounted to $113,017 and represents distributions for the calendar quarter ended
March 31,  2007,  which were paid in May 2007.  There was no  minority  interest
recorded during the year ended December 31, 2006.

         NET LOSS

                                              YEARS ENDED
                                              DECEMBER 31,
                                      --------------------------      PERCENT
                                          2007           2006         CHANGE
                                      -----------    -----------    -----------

Net loss..........................    $  (768,497)   $  (865,051)          11.2%

         Our decrease in net loss is due primarily to increased net sales, gross
profit and other  income,  offset by increased  operating  expenses and minority
interest,  as discussed above. Our net loss as a percentage of net sales for the
year ended  December 31, 2007 decreased to 3.8% as compared to 5.4% of net sales
for the year ended  December 31, 2006. Net income for the fourth quarter of 2007
amounted  to  approximately  $53,000,  compared  to a net loss of  approximately
$295,000 in the fourth quarter of 2006. The increase in net income in the fourth
quarter  of 2007  compared  to net loss in the  fourth  quarter  of 2006 was due
primarily to increased  sales and gross  margin,  offset by increased  operating
expenses and  provision  for income taxes during the fourth  quarter of 2007, as
discussed above.

RELATED PARTY TRANSACTIONS

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

LIQUIDITY AND CAPITAL RESOURCES

         As  of  December  31,  2007,  we  had  cash  and  cash  equivalents  of
approximately $363,000, a working capital balance of approximately $4.3 million,
and  approximately  $2.8 million of availability from our factor. As of December
31, 2007, advances from our factor totaled approximately $649,000. Pursuant to a
private  placement  transaction with various  investors that closed on September
28, 2007 and  November 2, 2007,  we sold shares of our common stock and received
approximately  $496,000 in net proceeds  after legal and other  expenses.  As of
December 31, 2006, we had cash and cash equivalents of approximately  $62,000, a
working capital balance of approximately  $4.6 million,  and approximately  $2.8
million of availability from our factor.


                                       16
<PAGE>


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

     CASH FLOWS

         We currently satisfy our working capital requirements primarily through
borrowings  from our factor,  cash flows  generated from operations and proceeds
from the  private  placement  of our common  stock.  Cash flows from  operating,
financing and  investing  activities  for the years ended  December 31, 2007 and
2006 are summarized in the following table:

                                                           YEARS ENDED
                                                           DECEMBER 31,
                                                  -----------------------------
                                                      2007              2006
                                                  -----------       -----------

Operating activities .......................      $   153,000       $(3,774,000)
Investing activities .......................         (349,000)         (692,000)
Financing activities .......................          496,000              --
                                                  -----------       -----------
   Net increase (decrease) in cash .........      $   300,000       $(4,466,000)
                                                  ===========       ===========

         CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

         Net cash provided by operating  activities was  approximately  $153,000
for the year ended  December 31, 2007 and net cash used in operating  activities
was approximately $3,774,000 for the year ended December 31, 2006. Cash provided
by operating  activities for the year ended December 31, 2007 resulted primarily
from decreased receivables, increased accounts payable and accrued expenses, and
stock based  compensation,  offset by a net loss of  approximately  $768,000 and
increased  inventories and other assets.  Cash used in operating  activities for
the  year  ended  December  31,  2006  resulted  primarily  from a net  loss  of
approximately  $865,000 and increased  receivables  and  inventories,  offset by
stock based compensation and increased accounts payable and accrued expenses.

         CASH USED IN INVESTING ACTIVITIES

         Net cash used in investing  activities was  approximately  $349,000 and
$692,000 for the years ended December 31, 2007 and 2006, respectively.  Net cash
used in investing  activities  for the year ended December 31, 2007 consisted of
capital expenditures primarily for computer equipment and software and trademark
costs.  Net cash used in investing  activities  for the year ended  December 31,
2006 consisted of capital expenditures  primarily for computer software,  office
equipment and machinery and equipment and trademark costs.

         CASH PROVIDED BY FINANCING ACTIVITIES

         Net cash provided by financing  activities  for the year ended December
31, 2007 amounted to approximately $496,000 and reflects proceeds from a private
placement of our common  stock.  On September  28, 2007 and November 2, 2007, we


                                       17
<PAGE>


sold  shares of our common  stock and  received  approximately  $496,000  in net
proceeds  after  legal  and  other  expenses  pursuant  to a  private  placement
transaction with various  investors.  There were no financing  activities during
the year ended December 31, 2006.

     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  and  50% of our  eligible
inventory up to a maximum of $1.3 million. Interest is charged at prime plus 1%.
As of December 31, 2007 and 2006, total factored accounts receivable included in
due  from  factor   amounted  to   approximately   $2,552,000  and   $3,020,000,
respectively.  Outstanding  advances  amounted to  approximately  $649,000 as of
December 31, 2007, and are included in the due from factor  balance.  There were
no outstanding advances as of December 31, 2006.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

         The following  summarizes our  contractual  obligations at December 31,
2007 and the effects such obligations are expected to have on liquidity and cash
flows in future periods:

<TABLE>
<CAPTION>
                                                  Payments Due by Period
                            --------------------------------------------------------------
                                          Less than       1-3          4-5        After
Contractual Obligations        Total       1 Year        Years        Years      5 Years
-------------------------   ----------   ----------   ----------   ----------   ----------
<S>                         <C>          <C>          <C>          <C>          <C>
Operating leases ........   $  836,803   $  433,547   $  270,052   $  133,204   $     --
Design services agreement    6,300,000    2,300,000    4,000,000         --           --
Employment agreements ...        6,489        6,489         --           --           --
                            ----------   ----------   ----------   ----------   ----------
    Total ...............   $7,143,292   $2,740,036   $4,270,052   $  133,204   $     --
                            ==========   ==========   ==========   ==========   ==========
</TABLE>

         At December 31, 2007 and 2006, we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

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


                                       18
<PAGE>


CAUTIONARY STATEMENTS AND RISK FACTORS

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

                          RISKS RELATED TO OUR BUSINESS

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

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

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

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

         -        obtain the financing required to implement our business plan.

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

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

         Two of our  consolidated  subsidiaries,  which  we own  with an  entity
controlled  by Justin  Timberlake,  have the  exclusive  rights  to  manufacture
clothing and accessories  under the William Rast tradename.  Mr.  Timberlake has
agreed to publicly promote and endorse the William Rast brand, and we manage the
companies and are responsible for funding the costs of their  operation.  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 DESIGN COMPANY TO DESIGN OUR WILLIAM RAST LIFESTYLE COLLECTION.

         We are  party to a Design  Services  Agreement  with  Paris68,  the New
York-based  independent  design consultancy firm of Johan and Marcella Lindeberg
pursuant to which our William Rast lifestyle  collection is being  developed and
designed in  collaboration  with Paris68.  Our William Rast brand is an integral
component of our  business  and  accounts for the majority of our sales.  In the


                                       19
<PAGE>


event that Paris68 fails to fulfill its  contractual  obligations  to us by, for
example,  failing to timely deliver products for a particular  season, or if the
reputation of our William Rast brand is  negatively  impacted as a result of our
relationship with Paris68, our sales and profitability could decline.

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

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

WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.

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

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

         We  believe  that we are  poised  for  significant  growth in 2008.  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.


                                       20
<PAGE>


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 return of defective merchandise;

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

         -        transportation delays;

         -        quotas and other regulatory matters;

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

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

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

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

         Certain retailers, including some of our customers, have experienced in
the past,  and may  experience  in the  future,  financial  difficulties,  which
increase  the risk of  extending  credit  to such  retailers  and the risk  that
financial  failure will  eliminate a customer  entirely.  These  retailers  have
attempted to improve their own operating  efficiencies  by  concentrating  their
purchasing  power among a narrowing group of vendors.  There can be no assurance
that we will remain a preferred vendor for our existing customers. A decrease in
business from or loss of a major  customer,  such as one customer that accounted
for  31.1%  of our net  sales  for the  year  ended  December  31,  2007 and two
customers that accounted for 27.9% and 10.6% of our net sales for the year ended
December 31, 2006,  could have a material  adverse  effect on the results of our
operations. There can be no assurance that our factor will approve the extension
of credit to certain retail customers in the future.  If a customer's  credit is
not approved by the factor or sales to a customer  exceed the  factor's  imposed
limits, we could assume the collection risk on sales to the customer.

OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.

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

         Our operations are also subject to the effects of  international  trade
agreements and regulations such as the North American Free Trade Agreement,  and
the activities and regulations of the World Trade Organization. Generally, these
trade  agreements  benefit our  business by reducing or  eliminating  the duties
assessed on products or other materials  manufactured  in a particular  country.


                                       21
<PAGE>


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  each  of  the  years  ended  December  31,  2007  and  2006,  four
contractors  accounted for  approximately  52% of our purchases.  We do not have
long-term  contracts with any of our independent  contractors,  and any of these
contractors may unilaterally  terminate their  relationship with us at any time.
While management believes that there exists an adequate supply of contractors to
provide  products  and  services  to us, to the  extent  that we are not able to
secure or maintain  relationships with independent  contractors that are able to
fulfill our requirements, our business would be harmed.

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

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

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

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


                                       22
<PAGE>


THE LOSS OF CHIEF EXECUTIVE OFFICER, COLIN DYNE, COULD 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,  Colin Dyne,  who we rely upon to  formulate  our
business strategy.  As a result of the unique skill set and  responsibilities of
Mr.  Dyne,  the loss of Mr.  Dyne could 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.
Dyne.

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

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

                          RISKS RELATED TO OUR INDUSTRY

OUR SALES ARE HEAVILY INFLUENCED BY GENERAL ECONOMIC CYCLES.

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


                                       23
<PAGE>


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,  Theory, Rock &
Republic and Joe's Jeans. We face a variety of competitive challenges including:

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

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

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

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

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

                        RISKS RELATED TO OUR COMMON STOCK

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

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

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

         To date, we have had a very limited trading volume in our common stock.
For instance,  for the year ended  December 31, 2007,  6.1 million shares of our
common stock were traded and for the year ended December 31, 2006, approximately
1.5 million  shares of our common stock were traded.  As long as this  condition
continues,  the sale of a  significant  number of shares of common  stock at any
particular  time could be difficult to achieve at the market  prices  prevailing
immediately before such shares are offered.

OUR COMMON STOCK PRICE IS HIGHLY VOLATILE.

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

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

         -        actual or anticipated  fluctuations in our quarterly operating
                  results;

         -        changes in financial estimates by securities analysts;

         -        conditions or trends in our industry; and

         -        changes  in  the  market   valuations   of  other   comparable
                  companies.


                                       24
<PAGE>


WE DO NOT FORESEE PAYING DIVIDENDS IN THE NEAR FUTURE.

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

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

         Our officers and directors and their affiliates own approximately 25.2%
of our outstanding voting shares as of March 4, 2008. In addition,  Gerard Guez,
a relative of our  founder  and former  chief  executive  officer and  director,
Daniel Guez, owns  approximately  29.7% of our outstanding  voting shares.  As a
result,  our officers and directors,  and Mr. Guez, are able to exert  influence
over the outcome of any matters submitted to a vote of the holders of our common
stock,  including  the election of our Board of  Directors.  The voting power of
these  stockholders could also discourage others from seeking to acquire control
of us through the purchase of our common stock, which might depress the price of
our common stock.


                                       25
<PAGE>


ITEM 7.       FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

AUDITED FINANCIAL STATEMENTS:

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

   Consolidated Balance Sheets at December 31, 2007 and 2006...........       28

   Consolidated Statements of Operations for the Years Ended
      December 31, 2007 and 2006.......................................       29

   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2007 and 2006.......................................       30

   Consolidated Statement of Changes in Stockholders' Equity from
      January 1, 2006 to December 31, 2007.............................       31

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


                                       26
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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

      We have audited the accompanying  consolidated  balance sheets of People's
Liberation,  Inc. and  Subsidiaries  (the "Company") as of December 31, 2007 and
2006 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years ended  December  31,  2007 and 2006.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

      In our opinion,  the consolidated  financial  statements referred to above
present fairly, in all material respects, the consolidated financial position of
People's Liberation, Inc. and Subsidiaries, as of December 31, 2007 and 2006 and
the results of their operations and their cash flows for each of the years ended
December 31, 2007 and 2006 in conformity  with accounting  principles  generally
accepted in the United States of America.

Grobstein, Horwath & Company LLP

/s/ Grobstein, Horwath & Company LLP
------------------------------------
Sherman Oaks, California
March 20, 2008


                                       27
<PAGE>


<TABLE>
                            PEOPLE'S LIBERATION, INC.

                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                                   December 31,   December 31,
                                                                                       2007           2006
                                                                                   -----------    -----------
<S>                                                                                <C>            <C>
                                       Assets
Current Assets:
   Cash and cash equivalents ...................................................   $   362,505    $    62,389
   Due from factor .............................................................     1,517,029      2,772,773
   Accounts receivable, net of allowance for doubtful accounts .................     1,029,510      1,017,884
   Inventories .................................................................     3,833,170      2,846,181
   Refundable income taxes .....................................................        11,500         16,500
   Prepaid expenses and other current assets ...................................       196,730        140,486
   Deferred income taxes .......................................................        38,000         52,000
                                                                                   -----------    -----------
     Total current assets ......................................................     6,988,444      6,908,213

Property and equipment, net of accumulated depreciation and amortization .......       612,264        577,331
Trademarks, net of accumulated amortization ....................................       363,359        227,748
Intangible asset ...............................................................       428,572        428,572
Other assets ...................................................................       265,020         64,970
                                                                                   -----------    -----------
Total assets ...................................................................   $ 8,657,659    $ 8,206,834
                                                                                   ===========    ===========

                        Liabilities and Stockholders' Equity
Current Liabilities:
   Accounts payable and accrued expenses .......................................   $ 2,628,906    $ 2,297,895
   Income taxes payable ........................................................        13,390          3,200
                                                                                   -----------    -----------
     Total current liabilities .................................................     2,642,296      2,301,095

Deferred tax liabilities .......................................................        93,000         61,000
                                                                                   -----------    -----------
     Total liabilities .........................................................     2,735,296      2,362,095
                                                                                   -----------    -----------


Stockholders' equity:
   Common stock, $0.001 par value, 150,000,000 shares authorized; 36,002,563 and
     34,942,563 shares issued and outstanding at December 31, 2007
     and December 31, 2006, respectively .......................................        36,002         34,942
   Additional paid-in capital ..................................................     7,775,255      6,930,194
   Accumulated Deficit .........................................................    (1,888,894)    (1,120,397)
                                                                                   -----------    -----------
Total stockholders' equity .....................................................     5,922,363      5,844,739
                                                                                   -----------    -----------
Total liabilities and stockholders' equity .....................................   $ 8,657,659    $ 8,206,834
                                                                                   ===========    ===========
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                       28
<PAGE>


<TABLE>
                            PEOPLE'S LIBERATION, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                                        Year Ended December 31,
                                                     ----------------------------
                                                         2007            2006
                                                     ------------    ------------
<S>                                                  <C>             <C>
Net sales ........................................   $ 20,267,377    $ 15,959,766
Cost of goods sold ...............................     10,409,159       8,801,924
                                                     ------------    ------------
 Gross profit ....................................      9,858,218       7,157,842
                                                     ------------    ------------

Selling expenses .................................      3,362,571       2,242,024
Design and production ............................      2,428,501       2,278,495
General and administrative .......................      4,681,425       3,585,618
                                                     ------------    ------------

 Total operating expenses ........................     10,472,497       8,106,137
                                                     ------------    ------------

Loss from operations .............................       (614,279)       (948,295)

Interest (expense) income, net ...................        (80,706)         59,750
Other income .....................................        120,444            --
                                                     ------------    ------------
 Total other income ..............................         39,738          59,750
                                                     ------------    ------------

Loss before income taxes and minority interest ...       (574,541)       (888,545)
(Provision) benefit for income taxes .............        (80,939)         23,494
                                                     ------------    ------------
Loss before minority interest ....................       (655,480)       (865,051)
                                                     ------------    ------------

Minority interest ................................        113,017            --
                                                     ------------    ------------

Net loss .........................................   $   (768,497)   $   (865,051)
                                                     ============    ============

Basic and diluted weighted average loss per common
share (1) ........................................   $      (0.02)   $      (0.03)
                                                     ============    ============

Basic and diluted weighted average common shares
outstanding (1) ..................................     35,200,207      34,063,658
                                                     ============    ============
</TABLE>

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


                 See Notes to Consolidated Financial Statements.


                                       29
<PAGE>


<TABLE>
                            PEOPLE'S LIBERATION, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                             Year Ended December 31,
                                                                           --------------------------
                                                                               2007           2006
                                                                           -----------    -----------
<S>                                                                        <C>            <C>
Cash flows from operating activities:
  Net loss .............................................................   $  (768,497)   $  (865,051)
  Adjustments to reconcile net loss to net cash provided by (used in)
  operating activities:
     Depreciation and amortization .....................................       170,791         97,517
     Allowance for doubtful accounts ...................................        18,000         78,000
     Deferred income taxes .............................................        46,000        (22,400)
     Impairment of long-lived asset ....................................         7,955           --
     Stock based compensation ..........................................       261,133        259,402
     Warrants issued for services ......................................        27,000           --
     Changes in operating assets and liabilities:
       Receivables .....................................................     1,226,118     (1,853,817)
       Inventories .....................................................      (986,989)    (1,753,200)
       Refundable income taxes .........................................         5,000        (16,500)
       Prepaid expenses and other current assets .......................         5,756         81,642
       Other assets ....................................................      (200,050)       (19,536)
       Accounts payable and accrued expenses ...........................       331,011        252,586
       Income taxes payable ............................................        10,190        (12,797)
                                                                           -----------    -----------
         Net cash flows provided by (used in) operating activities .....       153,418     (3,774,154)
                                                                           -----------    -----------

Cash flows from investing activities:
  Acquisition of trademarks ............................................      (164,220)      (191,492)
  Acquisition of property and equipment ................................      (185,070)      (500,241)
                                                                           -----------    -----------
     Net cash flows used in investing activities .......................      (349,290)      (691,733)
                                                                           -----------    -----------

Cash flows from financing activities:
  Net proceeds from private placement of common stock ..................       495,988           --
                                                                           -----------    -----------

Net increase (decrease) in cash and cash equivalents ...................       300,116     (4,465,887)
Cash and cash equivalents, beginning of year ...........................        62,389      4,528,276
                                                                           -----------    -----------
Cash and cash equivalents, end of year .................................   $   362,505    $    62,389
                                                                           ===========    ===========

Supplemental disclosures of cash flow information:  Cash paid
during the year for:
  Interest .............................................................   $    80,717    $     2,048
  Income taxes .........................................................        19,749         28,203
   Non-cash financing transactions:
       Warrant issued in exchange for services .........................        62,000           --
      Conversion of convertible preferred stock and reverse stock split:
         Common stock ..................................................          --           32,846
         Additional paid-in capital ....................................          --        6,639,892
         Preferred stock Series A ......................................          --       (6,672,738)
      Common stock issued in exchange for intangible asset (Note 11):
         Common stock ..................................................          --              571
         Additional paid-in capital ....................................          --          428,001
         Intangible asset ..............................................          --         (428,572)
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                       30
<PAGE>


<TABLE>
                            PEOPLE'S LIBERATION, INC.

                      CONSOLIDATED STATEMENT OF CHANGES IN
                              STOCKHOLDERS' EQUITY

<CAPTION>

                                       Common Stock          Preferred Stock Series A     Additional
                                -------------------------   --------------------------      Paid-in      Accumulated
                                   Shares        Amount        Shares         Amount        Capital        Deficit         Total
                                -----------   -----------   -----------    -----------    -----------    -----------    -----------
<S>                              <C>          <C>            <C>           <C>            <C>            <C>            <C>
Balance at January 1, 2006 ..     1,525,383   $     1,525     3,038,231    $ 6,672,738    $  (304,870)   $  (255,346)   $ 6,114,047

Conversion of preferred stock
   Series A and reverse stock
   split of 1:9.25 ..........    32,845,751        32,846    (3,038,231)    (6,672,738)     6,639,892           --             --
Expenses related to 2005
   private placement of
   preferred stock Series A .          --            --            --             --          (92,231)          --          (92,231)
Stock based compensation ....          --            --            --             --          259,402           --          259,402
Issuance of common stock in
   exchange for intangible
   asset ....................       571,429           571          --             --          428,001           --          428,572
Net loss ....................          --            --            --             --             --         (865,051)      (865,051)
                                -----------   -----------   -----------    -----------    -----------    -----------    -----------
Balance at December 31, 2006     34,942,563        34,942          --             --        6,930,194     (1,120,397)     5,844,739

Private placement of common
   stock ....................     1,060,000         1,060          --             --          494,928           --          495,988
Warrants issued for services           --            --            --             --           89,000           --           89,000
Stock based compensation ....          --            --            --             --          261,133           --          261,133
Net loss ....................          --            --            --             --             --         (768,497)      (768,497)
                                -----------   -----------   -----------    -----------    -----------    -----------    -----------
Balance at December 31, 2007     36,002,563   $    36,002          --      $      --      $ 7,775,255    $(1,888,894)   $ 5,922,363
                                ===========   ===========   ===========    ===========    ===========    ===========    ===========
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                       31
<PAGE>


                            PEOPLE'S LIBERATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

ORGANIZATION

         People's Liberation, Inc. (the "Company") is the parent holding company
of  Versatile  Entertainment,   Inc.  ("Versatile"),  a  California  corporation
established in April of 2001, and Bella Rose, LLC ("Bella  Rose"),  a California
limited  liability  company   established  in  May  2005,  both  of  which  were
consolidated  on November 22, 2005 and became  wholly-owned  subsidiaries of the
Company on the effective  date of the Company's  exchange  transaction.  William
Rast Sourcing,  LLC ("William Rast  Sourcing") and William Rast  Licensing,  LLC
("William Rast Licensing"),  both California limited liability  companies,  were
formed  effective  October  1, 2006 and are  owned 50% by Bella  Rose and 50% by
William  Rast  Enterprises,  LLC  ("WRE"),  an  entity  owned in part by  Justin
Timberlake.

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

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

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

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

         Bella Rose  commenced  operations  of its William Rast clothing line in
May 2005.  Bella Rose began shipping  products under the William Rast brand name
in the fourth quarter of 2005.  Under an apparel brand  agreement with an entity
owned in part by  Justin  Timberlake,  Bella  Rose had the  exclusive  rights to
manufacture  clothing and accessories  under the William Rast  tradename.  Under
long-form  definitive  agreements  entered into effective October 1, 2006, which


                                       32
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


superseded the apparel brand  agreement,  two new entities were formed,  William
Rast  Sourcing and William Rast  Licensing.  All assets and  liabilities  of the
Bella Rose business were transferred to William Rast Sourcing  effective October
1, 2006. William Rast Sourcing has the exclusive rights to manufacture  clothing
with the William Rast brand name. The William Rast trademarks  were  transferred
to William Rast Licensing  effective  October 1, 2006 and William Rast Licensing
has the exclusive rights to promote and license the William Rast brand.  William
Rast Sourcing and William Rast  Licensing are owned 50% by Bella Rose and 50% by
William Rast Enterprises, LLC, an entity owned in part by Justin Timberlake.

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

NATURE OF OPERATIONS

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

         We  commenced  our  People's  Liberation  business in July 2004 and our
William Rast  clothing  line in May 2005.  Our William Rast  clothing  line is a
collaboration  with our team and Justin  Timberlake  and his  childhood  friend,
Trace  Ayala.  In  addition,  our William  Rast  lifestyle  collection  is being
developed  and  designed  in  collaboration  with  Paris68,  the New  York-based
independent design consultancy of Johan and Marcella Lindeberg.

         The Company is headquartered in Los Angeles,  California, and maintains
showrooms in New York, Los Angeles,  Atlanta,  and has a sales representative in
Dallas.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

         The preparation of consolidated financial statements in conformity with
accounting  principles  generally  accepted  in the  United  States of  America,
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities  at the  date  of the  consolidated  financial  statements  and  the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results could differ from these estimates.


                                       33
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


REVENUE RECOGNITION

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

COMPREHENSIVE INCOME

         The Company has adopted Statement of Financial Accounting Standards No.
130,  "Reporting  Comprehensive  Income"  ("SFAS  130").  SFAS  130  establishes
standards for reporting and display of  comprehensive  income and its components
in a full set of general-purpose  financial  statements.  There were no material
other comprehensive income items for the years ended December 31, 2007 and 2006.

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 20 for disclosure regarding geographic
regions.

ADVERTISING

         Advertising  costs are  charged  to  expense  as of the first  date the
advertisements  take place.  Advertising  expenses  included in selling expenses
approximated  $342,000 and  $408,000  for the years ended  December 31, 2007 and
2006, 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

         On January  1,  2006,  we adopted  Statement  of  Financial  Accounting
Standards  ("SFAS") No.  123(R),  SHARE-BASED  PAYMENT,  which requires that the
compensation costs relating to share-based payment  transactions  (including the
cost of all employee stock options) be recognized in the consolidated  financial
statements.  The cost will be measured  based on the estimated fair value of the
equity or liability  instruments  issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including share options,  restricted share
plans,  performance-based  awards, share appreciation rights, and employee share
purchase  plans.  SFAS  No.  123(R)  replaces  SFAS  No.  123,   ACCOUNTING  FOR


                                       34
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


STOCK-BASED  COMPENSATION,  and supersedes  Accounting  Principles Board Opinion
("APB Opinion") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In March 2005,
the Securities and Exchange  Commission issued Staff Accounting Bulletin No. 117
("SAB No.  107")  relating  to SFAS No.  123(R).  The  Company  has  applied the
provisions of SAB No. 107 in its adoption of SFAS No. 123(R).

         The Company  adopted SFAS No.  123(R)  using the  modified  prospective
transition method which requires the application of the accounting  standards as
of  January  1, 2006,  the first day of the  Company's  2006  fiscal  year.  The
consolidated  financial  statements  as of and for the years ended  December 31,
2007 and 2006 reflect the impact of SFAS No.  123(R).  Stock-based  compensation
expense  is  recognized  based  on  awards  ultimately  expected  to  vest  on a
straight-line  prorated  basis.  In  accordance  with the  modified  prospective
transition method, the consolidated  financial statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS No. 123(R).
The Company adopted its 2005 Stock Incentive Plan on January 5, 2006.

         During the year ended December 31, 2007,  the Company issued  1,912,000
options to employees,  officers,  directors and outside  consultants at exercise
prices ranging from $0.31 to $1.25 per share. During the year ended December 31,
2006, the Company issued 2,052,000 options to employees, officers, directors and
outside consultants at an exercise price of $1.25 per share. Options to purchase
972,333 and 440,583  shares were  exercisable  as of December 31, 2007 and 2006,
respectively.  Total  stock  based  compensation  expense  for the  years  ended
December  31,  2007  and  2006  was   approximately   $261,000   and   $259,000,
respectively.  There was no stock-based compensation expense recognized prior to
January 1,  2006.  The  compensation  expense  recognized  during the year ended
December 31, 2007  increased  basic and diluted  loss per share  reported in our
Statement of Operations from $0.01 to $0.02 per share. The compensation  expense
recognized  during the year ended  December  31,  2006 did not change  basic and
diluted loss per share reported in our Statement of Operations.

         The  total  fair  value of  options  granted  to  employees,  officers,
directors and outside  consultants  during the years ended December 31, 2007 and
2006 was approximately $535,000 and $1,052,000,  respectively. The fair value of
options  was  estimated  on the date of grant  using  the  Black-Scholes  option
pricing model. The valuation  determined by the  Black-Scholes  pricing model is
affected by the Company's stock price as well as assumptions  regarding a number
of highly complex and subjective variables. These variables include, but are not
limited to, our expected stock price volatility over the term of the awards, and
actual and  projected  employee  stock option  exercise  behaviors.  Stock price
volatility was estimated based on a peer group of public  companies and expected
term was estimated using the "safe harbor"  provisions  provided in SAB 107. The
weighted-average  assumptions  the Company  used as inputs to the  Black-Scholes
pricing  model for  options  granted  during the year ended  December  31,  2007
included a dividend yield of zero, a risk-free  interest rate of 4.1%,  expected
term of 5.7 years and an  expected  volatility  of 71.5%.  The  weighted-average
assumptions  the Company used as inputs to the  Black-Scholes  pricing model for
options  granted  during the year ended  December  31, 2006  included a dividend
yield of zero, a risk-free interest rate of 5.2%, expected term of 5.9 years and
an expected volatility of 60.3%.

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

         For stock-based  awards issued to employees and directors,  stock-based
compensation  is  attributed to expense  using the  straight-line  single option
method.   Stock-based  compensation  expense  recognized  in  the  Statement  of
Operations  for the years  ended  December  31, 2007 and 2006 is based on awards
ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at
the time of grant and revised,  if necessary,  in  subsequent  periods if actual


                                       35
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


forfeitures  differ from those estimates.  For the year ended December 31, 2007,
expected  forfeitures  is  immaterial  and as such,  the Company is  recognizing
forfeitures as they occur.

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

         PROPERTY AND EQUIPMENT

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

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

         Furniture and fixtures             5 years

         Office equipment                   7 years

         Machinery and equipment            7 years

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

         Computer Software                  5 years

INTANGIBLE ASSETS

         Intangible assets consist of trademarks and operational  control rights
related to the William Rast Sourcing and William Rast Licensing (Note 9).

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

OTHER ASSETS

         Other assets consist mainly of security deposits and an advance payment
made  under  the  Paris68  design  services  agreement  related  to  the  design
collection  of the  Company's  William  Rast  ready-to-wear  product  line to be
designed by Johan and Marcella  Lindeberg  (Note 10). There was no  amortization
expense recorded on these assets during the year ended December 31, 2007. Future
contractual  payments due under the Paris68  design  services  agreement will be
amortized in accordance  with the revenue  derived from sales of the  collection
products (Note 10).

IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES

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


                                       36
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


the  carrying  amount  or fair  value  less  costs to sell.  For the year  ended
December 31, 2007, the Company  recorded an impairment loss of $7,955 related to
tradenames the Company is no longer using.  The  impairment  loss was charged to
general and administrative  expense.  There were no impairment losses related to
intangible assets recorded for the year ended December 31, 2006.

INCOME TAXES

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

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

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

         In June 2006, the Financial  Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES, an
interpretation  of SFAS No. 109. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with  SFAS No.  109 and  prescribes  a  recognition  threshold  and  measurement
attribute for the  financial  statement  recognition  and  measurement  of a tax
position taken or expected to be taken in a tax return.  The Company adopted the
provisions of FIN 48 on January 1, 2007. FIN 48 contains a two-step  approach to
recognizing  and measuring  uncertain tax positions  accounted for in accordance
with  SFAS  No.  109.  The  first  step  is to  evaluate  the tax  position  for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit,  including
resolution of related appeals or litigation  processes,  if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon ultimate settlement.

         The Company files U.S.  Federal tax returns,  California  franchise tax
returns  and New York  franchise  tax  returns and  anticipates  filing  Georgia
franchise tax returns.  For the U.S. Federal return,  all periods are subject to
tax examination by the U.S.  Internal Revenue Service ("IRS").  The Company does
not  currently  have any  ongoing  tax  examinations  with the IRS.  The Company
believes that its income tax filing  positions and deductions  will be sustained
on audit and does not anticipate any adjustments  that will result in a material
change to its financial  position.  Therefore,  no reserves for uncertain income
tax positions  have been recorded  pursuant to FIN 48. In addition,  the Company
did not record a cumulative effect adjustment  related to the adoption of FIN 48
and does not  anticipate  that the total  amount  of  unrecognized  tax  benefit
related to any particular tax position will change significantly within the next
12 months.

          Income taxes are further described in Note 13.

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


                                       37
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


to the factor. The Company and its factor perform on-going credit evaluations of
its customers and the Company  maintains an allowance for doubtful  accounts and
chargebacks.  The Company may extend  unsecured  credit to its  customers in the
normal course of business.

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

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

ACCOUNTS RECEIVABLE - ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS

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

SHIPPING AND HANDLING COSTS

         The Company records  shipping and handling costs billed to customers as
a component of revenue,  and shipping and handling costs incurred by the Company
for inbound and  outbound  freight are recorded as a component of cost of sales.
Total  shipping  and handling  costs  included as a component of revenue for the
years ended  December 31, 2007 and 2006 amounted to  approximately  $195,000 and
$115,000,  respectively.  Total  shipping  and  handling  costs  included  as  a
component of cost of sales amounted to  approximately  $658,000 and $439,000 for
the years ended December 31, 2007 and 2006, respectively.

CLASSIFICATION OF EXPENSES

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

         SELLING EXPENSE - Selling expenses primarily include tradeshows,  sales
commissions and salaries, marketing and promotion, travel and showroom expenses.

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

         GENERAL  AND  ADMINISTRATIVE  EXPENSES  -  General  and  administrative
expenses  primarily  include  salaries,   professional  fees,   facility  costs,
depreciation and amortization expense, and other general corporate expenses.


                                       38
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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

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

RECENTLY ISSUED ACCOUNTING STANDARDS

         In  September   2006,   the  FASB  issued  SFAS  No.  157,  FAIR  VALUE
MEASUREMENTS. SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosure of fair value  measurements.  SFAS 157 applies
under  other  accounting  pronouncements  that  require  or  permit  fair  value
measurements and accordingly,  does not require any new fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after  November 15,  2007.  The Company is currently in the process of assessing
the  impact the  adoption  of SFAS 157 will have on its  consolidated  financial
statements.

         In December  2006,  the FASB issued FSP EITF  00-19-2,  ACCOUNTING  FOR
REGISTRATION  PAYMENT  ARRANGEMENTS which addresses  accounting for registration
payment  arrangements.  FSP 00-19-2 specifies that the contingent  obligation to
make future payments or otherwise  transfer  consideration  under a registration
payment  arrangement,  whether  issued as a separate  agreement or included as a
provision of a financial  instrument  or other  agreement,  should be separately
recognized and measured in accordance  with FASB Statement No. 5, ACCOUNTING FOR
Contingencies. FSP 00-19-2 further clarifies that a financial instrument subject
to a registration payment arrangement should be accounted for in accordance with
other applicable generally accepted accounting  principles without regard to the
contingent  obligation to transfer  consideration  pursuant to the  registration
payment  arrangement.  Adoption of FSP  00-19-02 is  required  for fiscal  years
beginning  after December 15, 2006. The adoption of this  pronouncement  has not
had a material impact on the Company's consolidated financial statements.

         In February  2007,  the FASB issued SFAS No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL  ASSETS AND FINANCIAL  LIABILITIES.  SFAS 159 permits  entities to
choose to measure many financial  instruments,  and certain other items, at fair
value.  SFAS 159 applies to reporting periods beginning after November 15, 2007.
The  adoption  of SFAS 159 is not  expected  to have a  material  impact  on the
Company's financial condition or results of operations.

         In December 2007, the FASB issued SFAS No. 141(revised 2007),  BUSINESS
COMBINATIONS,  and  SFAS  No.  160,  NONCONTROLLING  INTERESTS  IN  CONSOLIDATED
FINANCIAL  STATEMENTS.  SFAS No. 141R  improves  reporting  by creating  greater
consistency in the accounting and financial reporting of business  combinations,
resulting in more complete,  comparable,  and relevant information for investors
and other users of financial  statements.  SFAS No. 141R  requires the acquiring
entity in a business combination to recognize all (and only) the assets acquired
and liabilities  assumed in the  transaction;  establishes the  acquisition-date
fair value as the measurement  objective for all assets acquired and liabilities
assumed;  and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect  of the  business  combination.  SFAF No.  160  improves  the  relevance,
comparability,  and transparency of financial  information provided to investors
by  requiring  all  entities to report  noncontrolling  (minority)  interests in
subsidiaries  in  the  same  way--as  equity  in  the   consolidated   financial
statements.  Moreover,  SFAS No. 160  eliminates  the diversity  that  currently
exists in  accounting  for  transactions  between an entity  and  noncontrolling


                                       39
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


interests  by  requiring  they  be  treated  as  equity  transactions.  The  two
statements are effective for fiscal years  beginning after December 15, 2008 and
management  is  currently  evaluating  the  impact  that the  adoption  of these
statements may have on the Company's consolidated financial statements.

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

FAIR VALUE OF FINANCIAL INFORMATION

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

NOTE 3 - EARNINGS PER SHARE

         The Company computes and presents earnings per share in accordance with
SFAS No. 128, "EARNINGS PER SHARE".  Basic earnings per share are computed based
upon the weighted average number of common shares outstanding during the period.
Warrants  representing  3,525,000  shares of  common  stock at  exercise  prices
ranging from $0.40 to $2.00 per share and stock options  representing  2,416,000
shares of common  stock at an exercise  prices  ranging  from $0.31 to $1.25 per
share were  outstanding  as of December 31,  2007,  but were  excluded  from the
average number of common shares  outstanding in the  calculation of earnings per
share  because  the  effect  of  inclusion  would  be  anti-dilutive.   Warrants
representing  3,125,000  shares of common stock at exercise  prices ranging from
$1.25 to $2.00  per share and stock  options  representing  1,878,000  shares of
common  stock at an  exercise  price of $1.25 per share were  outstanding  as of
December 31, 2006,  but were excluded  from the average  number of common shares
outstanding  in the  calculation  of  earnings  per share  because the effect of
inclusion would be anti-dilutive.

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


                                             LOSS        SHARES(1)    PER SHARE
YEAR ENDED DECEMBER 31, 2007:             (NUMERATOR)  (DENOMINATOR)   AMOUNT
----------------------------              ----------    ----------   ----------
Basic loss per share:
Net loss ..............................   $ (768,497)   35,200,207   $    (0.02)

Effect of Dilutive Securities:
Options ...............................         --            --           --
Warrants ..............................         --            --           --
                                          ----------    ----------   ----------
Loss available to common stockholders .   $ (768,497)   35,200,207   $    (0.02)
                                          ==========    ==========   ==========


                                       40
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEAR ENDED DECEMBER 31, 2006:
----------------------------
Basic loss per share:
Net loss ..............................   $ (865,051)   34,063,658   $    (0.03)

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

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

NOTE 4 - DUE FROM FACTOR

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

         The factor agreements  provide that the Company can borrow an amount up
to 85% of the value of its approved factored customer invoices.  The Company can
also borrow up to 50% of its eligible  inventory (as defined in the  agreement),
up to a maximum of $1.3 million.  The factor  commission is 0.8% of the customer
invoice  amount for terms up to 60 days,  plus one quarter of one percent (.25%)
for each additional thirty-day term.

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

         To the  extent  that  the  Company  draws  funds  prior  to the  deemed
collection  date of the  accounts  receivable  sold to the  factor,  interest is
charged at the factor's  prime lending rate plus 1% per annum.  Factor  advances
and  ledger  debt  are  collateralized  by  accounts  receivable,   inventories,
equipment and general  intangibles.  Ledger debt (payables to suppliers that use
the same factor as the Company)  amounted to approximately  $292,000 at December
31, 2007.

         Due from factor is summarized as follows:
                                                          YEARS ENDED
                                                          DECEMBER 31,
                                                -------------------------------
                                                    2007                2006
                                                -----------         -----------
Outstanding receivables:
  Without recourse .....................        $ 2,490,588         $ 2,840,272
  With recourse ........................             61,432             179,501
                                                -----------         -----------
                                                  2,552,020           3,019,773
Advances ...............................           (649,049)               --
Open credits ...........................           (385,942)           (247,000)
                                                -----------         -----------
                                                $ 1,517,029         $ 2,772,773
                                                ===========         ===========


                                       41
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 5 - ACCOUNTS RECEIVABLE

         Accounts receivable is summarized as follows:
                                                          YEARS ENDED
                                                          DECEMBER 31,
                                                -------------------------------
                                                    2007                2006
                                                -----------         -----------

Trade accounts receivable ..............        $ 1,125,510         $ 1,095,884
Less allowance for doubtful accounts ...            (96,000)            (78,000)
                                                -----------         -----------
                                                $ 1,029,510         $ 1,017,884
                                                ===========         ===========

NOTE 6 - INVENTORIES

             Inventories are summarized as follows:
                                                          YEARS ENDED
                                                          DECEMBER 31,
                                                -------------------------------
                                                    2007                2006
                                                -----------         -----------

Piece goods and trim ...................        $ 1,287,488         $   766,177
Work in process ........................            603,394             353,838
Finished goods .........................          1,942,288           1,726,166
                                                -----------         -----------
                                                $ 3,833,170         $ 2,846,181
                                                ===========         ===========

NOTE 7 - PROPERTY AND EQUIPMENT

         Property and equipment is summarized as follows:
                                                          YEARS ENDED
                                                          DECEMBER 31,
                                                -------------------------------
                                                    2007                2006
                                                -----------         -----------

Furniture and fixtures .................        $   182,505         $   170,544
Office equipment .......................            184,225             158,767
Machinery and equipment ................             74,119              71,280
Leasehold improvements .................            115,699             103,994
Computer software ......................            305,439             172,335
                                                -----------         -----------
                                                    861,987             676,920
Less accumulated depreciation and
   amortization ........................           (249,723)            (99,589)
                                                -----------         -----------
                                                $   612,264         $   577,331
                                                ===========         ===========

         Depreciation  expense  amounted to  $150,137  and $87,901 for the years
  ended December 31, 2007 and 2005, respectively.


                                       42
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 8 - TRADEMARKS

         Trademarks are summarized as follows:
                                                          YEARS ENDED
                                                          DECEMBER 31,
                                                -------------------------------
                                                    2007                2006
                                                -----------         -----------

Trademarks, at cost ....................        $   391,717         $   236,176
Less accumulated amortization ..........            (28,358)             (8,428)
                                                -----------         -----------
                                                $   363,359         $   227,748
                                                ===========         ===========

         Future annual estimated amortization expense is summarized as follows:

         YEARS ENDING DECEMBER 31,
         2008......................................................   $   24,224
         2009......................................................       24,224
         2010......................................................       24,224
         2011......................................................       24,224
         2012......................................................       24,224
         Thereafter................................................      242,239
                                                                      ----------
                                                                      $  363,359
                                                                      ==========

         Trademark  amortization  expense amounted to $20,654 and $9,616 for the
years  ended  December  31,  2007 and  2006,  respectively.  For the year  ended
December 31, 2007, the Company  recorded an impairment loss of $7,955 related to
tradenames the Company is no longer using.  The  impairment  loss was charged to
general and  administrative  expense.  There was no impairment loss recorded for
the year ended December 31, 2006.

NOTE 9- INTANGIBLE ASSET

         Intangible asset consists of operational  control rights related to the
William Rast Sourcing and William Rast Licensing entities.

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

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

         On  October  1,  2006,  Bella  Rose  and  WRE  entered  into  long-form
definitive  agreements,   including  the  limited  liability  company  operating
agreement of William Rast Sourcing,  LLC (the "Sourcing  Operating  Agreement"),
the limited liability company operating agreement of William Rast Licensing, LLC
(the "Licensing Operating  Agreement",  and together with the Sourcing Operating
Agreement,  the  "Operating  Agreements"),  and the  services  agreement  by and


                                       43
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


between William Rast Licensing and Justin Timberlake (the Operating  Agreements,
together  with  the  Services   Agreement,   the  "Transaction   Documents")  to
memorialize  the terms set forth in the Letter  Agreements,  with the  exception
that Bella Rose has  operational  control over William  Rast  Sourcing,  LLC and
William Rast Licensing, LLC.

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

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

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

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

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

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


                                       44
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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

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

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

         In May 2007,  the limited  liability  company  operating  agreements of
William  Rast  Sourcing,  LLC and William Rast  Licensing,  LLC were amended and
restated to reflect changes in  distributions  and the allocation of profits and
losses among the entities members. The amended and restated operating agreements
provide for minimum quarterly  minority interest cash distributions to WRE based
on net  revenues,  as  defined in the  operating  agreements,  generated  by the
companies during the applicable quarter. Effective January 1, 2007, William Rast
Sourcing will pay WRE a minimum quarterly  minority interest  distribution of 6%
of applicable net sales  generated by William Rast Sourcing during the quarterly
period,  and William Rast  Licensing will pay WRE a minimum  quarterly  minority
interest  distribution  of 3% of applicable net sales  generated by William Rast
Licensing during the quarterly period. Minority interest distributions are to be
paid 45 days following the applicable quarter.

         On November 9, 2007, the limited liability company operating  agreement
of William Rast Sourcing,  LLC was further  amended to reflect a modification of
the  distributions  to WRE.  For the  calendar  quarters  ending June 30,  2007,
September 30, 2007 and December 31, 2007,  all cash  distributions  William Rast
Sourcing,  LLC is  required to pay to WRE  pursuant to the amended and  restated
Operating Agreement shall not be paid or accrued for future payment with respect
to such calendar quarters.

         Total minority  interest  recorded for the year ended December 31, 2007
amounted to $113,017 and represents distributions for the calendar quarter ended
March 31, 2007,  which were paid in May 2007.  Distributions to WRE are recorded
as minority interest in the Company's consolidated statements of operations.

         On November 13, 2007, the Company issued a warrant to purchase  150,000
shares of its common stock to WRE.  The warrant has an exercise  price of $0.40,
vests  immediately  and has a term of five  years.  The  warrant  was  valued at
approximately $27,000 using the Black Scholes valuation model.


                                       45
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 10- OTHER ASSETS

         Other assets are summarized as follows:
                                                          YEARS ENDED
                                                          DECEMBER 31,
                                                -------------------------------
                                                    2007                2006
                                                -----------         -----------

William Rast lifestyle apparel
   collection rights ...................        $   200,000         $      --
Deposits ...............................             65,020              64,970
                                                -----------         -----------
                                                $   265,020         $    64,970
                                                ===========         ===========

WILLIAM RAST LIFESTYLE APPAREL COLLECTION RIGHTS

         Effective  November 15,  2007,  William  Rast  Sourcing  entered into a
design services agreement with Paris68 LLC and Johan and Marcella Lindeberg. The
design  services  agreement  provides that the Company's  William Rast lifestyle
collection will be developed and designed in collaboration with Paris68, the New
York-based independent design consultancy of Johan and Marcella Lindeberg. Johan
Lindeberg,  best known for his role as Creative Director of the Swedish brand J.
Lindeberg,  will design the Company's men's collection while Marcella  Lindeberg
will design the  Company's  women's  collection.  The initial  collections  were
launched in February of 2008 and the Company anticipates shipping the collection
products in the Fall of 2008.  The design  services  agreement  with Paris68 and
Johan and Marcella Lindeberg is for a three-year period ending December 2010.

         In  accordance  with the terms of the design  services  agreement,  the
Company is required to make minimum annual design fee payments as follows:

         YEARS ENDING DECEMBER 31,
         2008..................................................      $ 2,300,000
         2009..................................................        2,000,000
         2010..................................................        2,000,000
                                                                     -----------
                                                                     $ 6,300,000
                                                                     ===========

         In addition to the minimum  annual  design  fees,  the design  services
agreement  also  provides for royalty  payments  for the  contract  years ending
December  31,  2009 and 2010 of 7% of net sales of the  collections  products in
excess  of  $7.5  million  up to  $20  million,  and  5% of  net  sales  of  the
collection's  products  in excess of $20  million.  The  Company  shall  have no
obligation  to pay any portion of a royalty if the  cumulative  amount of design
fees and royalties paid by the Company from the inception of the design services
agreement through the date of termination  exceeds an amount equal to 33% of the
cumulative  amount of net sales of the collection's  products from the inception
of the design services agreement.  Excess royalties, if any, shall be determined
at the date of  termination  of the  design  services  agreement.  Any amount of
excess  royalties  paid to the designer by the Company  shall be refunded by the
designer to the Company within thirty days  following  termination of the design
services agreement.

         As of  December  31,  2007,  collection  rights  related  to the design
collection of the Company's William Rast men's and women's ready-to-wear product
line by Johan and  Marcella  Lindeberg  amounted to $200,000 and  represents  an
advance  design  fee  payment  made in  accordance  with the terms of the design
services agreement.  Future contractual design fee payments due under the design
services agreement will be amortized in accordance with the revenue derived from
sales of the collection products.  There was no amortization expense recorded on
this asset  during the year ended  December 31,  2007.  Sales of the  collection
products are expected to commence in the Fall of 2008.


                                       46
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 11- STOCKHOLDERS' EQUITY

PRIVATE PLACEMENT OF COMMON STOCK

         On  September  28,  2007 and  November  2, 2007,  the  Company  sold an
aggregate of 1,060,000  shares of its common stock at a purchase  price of $0.50
per  share for gross  proceeds  after  legal  and  other  expenses  amounted  to
approximately   $495,988  to  various   investors   pursuant  to  the  terms  of
subscription agreements entered into with each investor.

         Pursuant  to the  terms  of a  certain  registration  rights  agreement
entered into with each  investor,  the Company  agreed to provide the  investors
certain  registration rights with respect to the shares under the Securities Act
of 1933, as amended. The registration rights agreement required that the Company
file a registration  statement  with the  Securities and Exchange  Commission to
register  the  resale  of the  shares  by the  investors  and  use  commercially
reasonable  efforts to cause such  registration  statement  to become and remain
effective  at least for a period  ending with the first to occur of (i) the sale
of the shares covered by the  registration  statement and (ii) the  availability
under Rule 144 for the investors to resell without restriction all of the shares
covered by the registration statement.

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

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


                                       47
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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

REVERSE SPLIT AND MANDATORY CONVERSION OF PREFERRED STOCK INTO COMMON STOCK

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

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

SERIES A PREFERRED STOCK

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

NOTE 12 - STOCK INCENTIVE PLAN, OPTIONS AND WARRANTS

         On January 5, 2006, the Company  adopted its 2005 Stock  Incentive Plan
(the  "Plan"),  which  authorized  the  granting  of a  variety  of  stock-based
incentive  awards.  The Plan is  administered  by the Board of  Directors,  or a
committee  appointed by the Board of Directors,  which determines the recipients
and terms of the awards  granted.  The Plan  provides  for a total of  3,500,000
shares of common stock to be reserved for issuance under the Plan.

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


                                       48
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         For the years  ended  December  31,  2007 and 2006,  total  stock-based
compensation  expense included in the consolidated  statements of operations was
$261,133 and $259,402, charged to the following expense categories:

                                                       Year ended December 31,
                                                     ---------------------------
                                                         2007            2006
                                                     ------------   ------------
Selling expense ..................................   $     26,411   $     12,628
Design and production ............................         34,149         22,158
General and administrative .......................        200,573        224,616
                                                     ------------   ------------
Total stock-based compensation ...................   $    261,133   $    259,402
                                                     ============   ============

         The following table summarizes the activity in the Plan:

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

Options outstanding - January 1, 2006 ...............         --      $     --
     Granted ........................................    2,052,000          1.25
     Exercised ......................................         --            --
     Canceled .......................................     (174,000)         1.25
                                                        ----------

Options outstanding - December 31, 2006 .............    1,878,000          1.25
     Granted ........................................    1,912,000          0.53
     Exercised ......................................         --            --
     Canceled .......................................   (1,374,000)         1.18
                                                        ----------

Options outstanding - December 31, 2007 .............    2,416,000    $     0.72
                                                        ==========

         Additional   information   relating  to  stock   options  and  warrants
outstanding and  exercisable at December 31, 2007,  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>
           $ 0.31 (options)           72,000        9.5             $ 0.31             51,000         $ 0.31
           $ 0.38 (options)          310,000        9.6             $ 0.38                  -         $ 0.38
           $ 0.40 (warrants)         150,000        4.9             $ 0.40            150,000         $ 0.40
           $ 0.46 (options)          450,000        9.5             $ 0.46            337,500         $ 0.46
           $ 0.50 (options)          769,000        9.9             $ 0.50            115,000         $ 0.50
           $ 0.50 (warrants)         250,000        4.8             $ 0.50             41,666         $ 0.50
           $ 1.25 (options)          815,000        8.6             $ 1.25            468,833         $ 1.25
           $ 1.25 (warrants)         625,000        2.9             $ 1.25            625,000         $ 1.25
           $ 2.00 (warrants)       2,500,000        2.9             $ 2.00          2,500,000         $ 2.00
                                  -----------                                      -----------

                                   5,941,000        5.6             $ 1.30          4,288,999         $ 1.56
                                  ===========                                      ===========
</TABLE>


                                       49
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         A summary of the changes in the  Company's  unvested  stock options for
the years ended December 31, 2007 and 2006 is as follows:



<PAGE>


                                                                      Weighted
                                                                       Average
                                                        Number of    Grant Date
                                                         Shares      Fair Value
                                                       ----------    ----------
Unvested stock options - January 1, 2006 ...........         --      $     --
     Granted .......................................    2,052,000          0.51
     Vested ........................................     (440,583)        (0.40)
     Canceled, expired or forfeited ................     (174,000)        (0.45)
                                                       ----------

Unvested stock options - December 31, 2006 .........    1,437,417          0.56
     Granted .......................................    1,912,000          0.28
     Vested ........................................     (531,750)        (0.28)
     Canceled, expired or forfeited ................   (1,374,000)        (0.48)
                                                       ----------

Unvested stock options - December 31, 2007 .........    1,443,667    $     0.32
                                                       ==========

         As of December  31,  2007,  there was  approximately  $413,000 of total
unrecognized   compensation   expense   related  to   share-based   compensation
arrangements  granted under the Plan. The cost is expected to be recognized on a
weighted-average basis over the next four years.

         The Company has recorded a 100% valuation allowance on its deferred tax
asset related to net operating loss carryforwards.  As a result, the stock-based
compensation  recorded  for the year ended  December  31,  2007 has not been tax
effected on the consolidated statement of operations.

NOTE 13- INCOME TAXES

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

         Deferred income taxes arise  principally from temporary  differences in
the method of  depreciating  property  and  equipment  for income tax  reporting
purposes and the  recognition  of expense  related to the allowance for doubtful
accounts  for income  tax  reporting  purposes.  The  Company  had  Federal  net
operating  losses  available to carryforward to future periods of  approximately
$1.6  million as of December  31,  2007.  Federal net  operating  losses  expire
beginning 2026 and state net operating losses expire beginning 2016. A valuation
allowance  has been  provided for the deferred  income tax asset  related to net
operating loss carryforwards. At this time, the Company cannot determine that it
is more likely  than not that it will  realize  the future  income tax  benefits
related to its net operating losses.


                                       50
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The  (provision)  benefit for income taxes for the years ended December
31, 2007 and 2006 consists of the following:

                                                        2007             2006
                                                      --------         --------
Federal:
    Current (provision) benefit ..............        $(29,698)        $ 39,010
    Deferred provision .......................         (39,100)         (19,040)
                                                      --------         --------
                                                       (68,798)          19,970
                                                      --------         --------
State:
    Current (provision) benefit ..............          (5,241)           6,884
    Deferred provision .......................          (6,900)          (3,360)
                                                      --------         --------
                                                       (12,141)           3,524
                                                      --------         --------
                                                      $(80,939)        $ 23,494
                                                      ========         ========

         The difference between the (provision) benefit for income taxes and the
expected  income tax  (provision)  benefit  determined by applying the statutory
Federal and state  income tax rates to pre-tax  accounting  income for the years
ended December 31, 2007 and 2006 are as follows:

                                                           2007         2006
                                                         --------     --------

Federal statutory rate ...............................       34.0%        34.0%
State taxes net of Federal benefit ...................       (6.0)         6.0
Net operating loss valuation allowance ...............      (40.0)       (36.4)
LLC gross receipts tax ...............................       (2.1)        --
Other ................................................       --           (1.0)
                                                         --------     --------

                                                            (14.1)%        2.6%
                                                         ========     ========


         The  components  of the  Company's  consolidated  deferred  income  tax
balances as of December 31, 2007 and 2006 are as follows:

                                                            2007         2006
                                                         ---------    ---------
Deferred income tax assets - current:
    Net operating loss carryforwards .................   $ 622,000    $ 323,000
    Bad debt reserve .................................      38,000       31,000
    Inventory capitalization .........................        --         21,000
                                                         ---------    ---------
                                                           660,000      375,000
    Less:  Valuation allowance .......................    (622,000)    (323,000)
                                                         ---------    ---------
         Net deferred income tax assets - current ....   $  38,000    $  52,000
                                                         =========    =========

Deferred income tax liabilities - long-term:
    Property and equipment ...........................   $ (51,000)   $ (26,000)
    Excess of liabilities over assets from LLC due
    to exchange transaction ..........................     (42,000)     (35,000)
                                                         ---------    ---------
         Deferred income tax liabilities - long-term .   $ (93,000)   $ (61,000)
                                                         =========    =========


                                       51
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 14 - RELATED PARTY TRANSACTIONS

         Colin Dyne became Chief Executive Officer and a director of the Company
on May 21, 2007. Colin Dyne is a significant stockholder of the Company, and has
served as a consultant to the Company since December 2005, advising on strategic
sales initiatives.  The Company paid $192,000 and $259,000 in consulting fees to
Mr. Dyne during the years ended December 31, 2007 and 2006.

         Mr. Dyne also  serves as Vice  Chairman  of the Board of  Directors  of
Talon  International,  Inc.  (OTCBB:  TALN),  owner of Talon  zippers and a full
service trim management supplier for manufacturers of fashion apparel.  Mr. Dyne
founded Tag-It, Inc., a subsidiary of Talon, in 1991. Mr. Dyne served as Talon's
President from inception and as its Chief  Executive  Officer from 1997 to 2005.
During the years ended  December 31, 2007 and 2006,  the Company  purchased trim
products  from  Talon   amounting  to   approximately   $395,000  and  $152,000,
respectively.

         Kenneth  Wengrod,  a  member  of  the  Company's  Board  of  Directors,
currently  serves as  President  of FTC  Commercial  Corp.,  a company  which he
founded  in 2002  and in which he holds a  minority  equity  position.  FTC is a
global  finance  commercial  service  company  primarily  focused in the apparel
industry.  The  Company is party to  various  factoring  agreements  with FTC as
further  described in Note 4 to the  consolidated  financial  statements.  As of
December 31,  2007,  total  factored  accounts  receivable  included in due from
factor amounted to approximately $2,552,000. Outstanding advances as of December
31, 2007 amounted to  approximately  $649,000,  and are included in the due from
factor balance. In connection with Mr. Wengrod's  appointment as a director,  on
September  21, 2007,  the Company  granted to Mr.  Wengrod a ten-year  option to
purchase  24,000  shares of the Company's  common stock at an exercise  price of
$0.50 per share pursuant to the Company's 2005 Stock Incentive Plan.

         We are party to a consulting  arrangement with Susan White, a member of
the Company's Board of Directors, pursuant to which Ms. White provides image and
marketing consulting services to the Company. During the year ended December 31,
2007,  the Company  paid Ms.  White  approximately  $94,000 for such  consulting
services.  Ms. White did not provide  consulting  services to the Company during
the year ended December 31, 2006.

         Pursuant to a private placement  transaction  entered into on September
28, 2007,  the Company's  international  distributor  consultant,  Andreas Kurz,
though an entity of which he is a trustee, Akil Trust,  purchased 200,000 shares
of the Company's common stock which increased Akil Trust's aggregate holdings to
450,000  shares of the Company's  common stock as of December 31, 2007. See Note
17 for a summary of the  consulting  agreement  entered into by Andreas Kurz and
his consulting firm, Akari International.

         Pursuant to a private placement  transaction  entered into on September
28, 2007, the Company's exclusive distributor in Germany,  Unifa GmbH, purchased
500,000  shares of the  Company's  common stock.  Net sales to this  distributor
amounted to approximately $1,085,000 during the year ended December 31, 2007.

         Pursuant to a private placement  transaction  entered into on September
28, 2007, the Company's  financial  advisor,  Europlay  Capital  Advisors,  LLC,
purchased  200,000  shares of the  Company's  common stock which  increased  its
aggregate  holdings  to  450,000  shares  of the  Company's  common  stock as of
December 31, 2007. See Note 17 for a summary of the consulting agreement entered
into by the Company and Europlay Capital Advisors.

NOTE 15 - SENIOR MANAGEMENT RESTRUCTURING

         On October 2, 2007,  Daniel Guez, who served as the Company's  Creative
Director,  resigned from his position with the Company.  In connection  with Mr.
Guez's resignation,  the Company entered into a separation  agreement and mutual


                                       52
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


release  with Mr.  Guez.  The  separation  agreement  provides  that the certain
amended  and  restated  employment  agreement  dated June 19,  2007  between the
Company and Mr. Guez be terminated  and of no further force or effect,  and that
except as provided in the separation agreement, all responsibilities, duties and
obligations  of Mr. Guez to the Company and of the Company to Mr. Guez under the
employment agreement are terminated and of no further force or effect.

         The separation  agreement  provided that the Company pay Mr. Guez three
months  of his base  salary  of  $16,667  per  month,  and  three  months of his
automobile allowance of $1,200 per month. In addition, Mr. Guez and his eligible
family members will continue to receive medical  benefits for a period of twelve
months from the date of his resignation.  The separation agreement also provided
that,  prior to November 30, 2007, Mr. Guez would not sell or otherwise  dispose
of any  shares of the  Company's  common  stock  beneficially  owned by him.  In
addition,  Mr. Guez granted the Company a right of first refusal to purchase any
of his shares of common  stock if he  intended to sell in a public sale prior to
the earlier of January 31,  2008 and the date when Mr. Guez  beneficially  owned
less than 10% of the Company's common stock then issued and outstanding.

         On October  12,  2007,  Mr.  Guez  resigned as a member of the Board of
Directors of the Company.

         In the  second  quarter  of 2007,  the  Company's  Board  of  Directors
authorized  management  to  take  certain  actions  to  restructure  its  senior
management  team.  These actions included the appointment of Colin Dyne as Chief
Executive Officer and Co-Chairman of the Board of Directors,  the resignation of
Daniel Guez as Chief Executive Officer and his appointment as Co-Chairman of the
Board of  Directors,  and a reduction  of Mr.  Guez's  salary.  The actions also
included the  termination of the Company's  president and the elimination of the
president position within the Company, and the reduction of base salaries of the
Company's Chief Financial Officer and Chief Operating Officer.

NOTE 16 - EMPLOYMENT AGREEMENTS

COLIN DYNE

         On May 21,  2007,  the Board of Directors  appointed  Colin Dyne as the
Company's Chief Executive Officer and Co-Chairman of the Board of Directors. Mr.
Dyne  receives an annual  salary of  $200,000,  payable in  accordance  with the
Company's  standard payroll practices,  medical and disability  insurance and an
auto  allowance  of $1,200 per  month.  Annual  bonuses  are  determined  at the
discretion  of the Board of Directors and amounted to $30,000 for the year ended
December 31, 2007.

DANIEL GUEZ

         On October 2,  2007,  Daniel  Guez,  who was  serving as the  Company's
Creative  Director,  resigned from his position with the Company.  In connection
with Mr. Guez's resignation, the Company entered into a separation agreement and
mutual release with Mr. Guez. The separation agreement provides that the certain
amended  and  restated  employment  agreement  dated June 19,  2007  between the
Company and Mr. Guez be terminated  and of no further force or effect,  and that
except as provided in the separation agreement, all responsibilities, duties and
obligations  of Mr. Guez to the Company and of the Company to Mr. Guez under the
employment agreement be terminated and of no further force or effect.

         The separation  agreement  provided that the Company pay Mr. Guez three
months  of his base  salary  of  $16,667  per  month,  and  three  months of his
automobile allowance of $1,200 per month. In addition, Mr. Guez and his eligible
family members will continue to receive medical  benefits for a period of twelve
months from the date of his resignation.  The separation agreement also provided
that,  prior to November 30, 2007, Mr. Guez would not sell or otherwise  dispose
of any  shares of the  Company's  common  stock  beneficially  owned by him.  In
addition,  Mr. Guez granted the Company a right of first refusal to purchase any
of his shares of common  stock if he  intended to sell in a public sale prior to
the earlier of January 31,  2008 and the date when Mr. Guez  beneficially  owned
less than 10% of the Company's common stock then issued and outstanding.


                                       53
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


EDWARD HOUSTON

         In  connection  with  the   restructuring  of  its  senior   management
positions,  the Company eliminated the position of President.  As a consequence,
on June 7, 2007, the Company  terminated the employment of Edward  Houston,  who
served  as its  President.  In  accordance  with  the  terms  of his  employment
agreement,  the  Company  was to pay Mr.  Houston  severance  in the  amount  of
$150,000 in equal bi-monthly  installments  over a six-month  period. A total of
$154,500,  including expenses, was charged to general and administrative expense
in June 2007 as a result of this severance  liability.  Pursuant to the terms of
his employment  agreement,  Mr. Houston was also granted a  non-qualified  stock
option to purchase up to 1,000,000  shares of the  Company's  common stock at an
exercise price of $1.25 per share. On the date of his  termination,  Mr. Houston
held options to purchase 249,999 shares of the Company's common stock which were
fully  vested,  and his  remaining  options to  purchase  750,001  shares of the
Company's  common stock were  cancelled.  Mr. Houston did not exercise his fully
vested options and these options were subsequently cancelled.

DARRYN BARBER

         On January 3, 2006,  the Company  entered into an employment  agreement
with Darryn Barber  pursuant to which he served as the Company's Chief Financial
Officer and Chief  Operating  Officer.  The  agreement was for a term of 2 years
commencing  as of November 22, 2005 and  terminating  on November 21, 2007.  Mr.
Barber received a base salary of $212,000 in the first year of his  appointment,
and was to receive a base  salary of  $232,000  during  the  second  year of his
contract.  On June  5,  2007,  in  connection  with a  restructuring  of  senior
management,  the Company and Mr.  Barber agreed to reduce the base salary of Mr.
Barber to $200,000  per annum  beginning  June 5, 2007.  In addition to his base
salary,  Mr.  Barber was to receive an annual bonus of not less than $25,000 and
no more than $100,000 based on objectives  determined by our Board of Directors.
On July 7, 2006, in accordance  with his  employment  agreement,  Mr. Barber was
granted a stock option to purchase  300,000 shares of the Company's common stock
at an exercise price of $1.25 per share which is now fully vested.  In the event
Mr. Barber was terminated  without cause, the Company was to continue to pay Mr.
Barber's  then  current  base salary for the  remaining  term of the  agreement,
without regard to any employment of Mr. Barber by a third party.

         On November 8, 2006,  the Company  and Darryn  Barber  entered  into an
amendment to his employment  agreement.  Pursuant to the  amendment,  Mr. Barber
resigned from his position as Chief Operating Officer of the Company,  effective
the same date but will  continue to serve us as the  Company's  Chief  Financial
Officer.  The amendment also extends the exercise  period of Mr. Barber's option
to purchase 300,000 shares of the Company's common stock to a period of one year
following  termination of Mr.  Barber's  service with the Company for any reason
other than for cause (as defined in the employment agreement).  Previously,  Mr.
Barber's  option was to remain  exercisable  for a period of at least six months
following  termination of his service with the Company for any reason other than
for cause.  Mr.  Barber's  annual  bonus  amounted to $25,000 for the year ended
December 31, 2007.

         On June 5, 2007, the Company's Board of Directors  approved an award to
Darryn Barber of options to purchase  150,000  shares of its common  stock.  The
options  have an exercise  price of $0.46 per share,  the  closing  price of the
Company's common stock on the Over-The-Counter Bulletin Board on the date of the
award, are fully vested, and have a term of ten years.

         On August 7, 2007, the Company's  Board of Directors  approved an award
to Darryn Barber of options to purchase  100,000 shares of its common stock. The
options  have an exercise  price of $0.38 per share,  the  closing  price of the
Company's common stock on the Over-The-Counter Bulletin Board on the date of the
award,  and have a term of ten years.  The options vested 50% on August 1, 2008,
and the remaining 50% will vest in equal monthly installments thereafter through
August 1, 2009.


                                       54
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         On November  14, 2007,  the  Company's  Board of Directors  approved an
award to Darryn  Barber of  options  to  purchase  450,000  shares of its common
stock.  The options have an exercise price of $0.50 per share, the closing price
of the Company's common stock on the Over-The-Counter Bulletin Board on the date
of the  award,  and have a term of ten  years.  The  options  vest in  quarterly
installments of 45,000 beginning February 14, 2008 through May 14, 2010.

THOMAS NIELDS

         On  November  8, 2006,  Thomas  Nields was  appointed  Chief  Operating
Officer of the Company.  Pursuant to an oral  agreement  between the Company and
Mr.  Nields,  Mr.  Nields  was to be paid an annual  salary of  $250,000,  and a
discretionary  bonus  to be  determined  annually  by  the  Company's  Board  of
Directors.  On June 5,  2007,  in  connection  with a  restructuring  of  senior
management,  the  Company  and Mr.  Nields  agreed to reduce his base  salary to
$200,000 per annum beginning June 5, 2007.

         On June 5, 2007, the Company's Board of Directors  approved an award to
Thomas  Nields of options to purchase  150,000  shares of the  Company's  common
stock.  The options have an exercise price of $0.46 per share, the closing price
of the Company's common stock on the Over-The-Counter Bulletin Board on the date
of the award, are fully vested, and have a term of ten years.

         On August 7, 2007, the Company's  Board of Directors  approved an award
to Thomas Nields of options to purchase  100,000 shares of its common stock. The
options  have an exercise  price of $0.38 per share,  the  closing  price of the
Company's common stock on the Over-The-Counter Bulletin Board on the date of the
award,  and have a term of ten years.  The options vested 50% on August 1, 2008,
and the  remaining  50%  shall  vest in equal  monthly  installments  thereafter
through August 1, 2009.

NOTE 17 - CONSULTING AGREEMENTS

         Effective  October 1,  2007,  the  Company  entered  into a  consulting
agreement with Europlay Capital Advisors, LLC. Under the terms of the consulting
agreement,  Europlay Capital Advisors will be the Company's  exclusive financial
advisor to raise capital and provide  other  financial  advisory and  investment
banking services for a term of one year.  Europlay Capital Advisors will receive
a fee for the successful completion of a financing transaction or acquisition at
a negotiated  rate. In conjunction  with the consulting  agreement,  the Company
issued to  Europlay  Capital  Advisors a warrant to purchase  250,000  shares of
common stock at an exercise price of $0.50 per share. The warrant vests over the
term of the consulting  agreement and has a term of five years. No proceeds were
received by the Company as a result of the warrant issuance.

         On February 1, 2007,  the Company  entered into a consulting  agreement
with Akari Enterprises,  LLC, a consulting firm formed and controlled by Andreas
Kurz, which  specializes in international  expansion,  licensing,  retailing and
branding  for apparel  companies.  Akari  Enterprises  will be  responsible  for
negotiating exclusive  distribution  agreements with distributors outside of the
United States and will manage  People's  Liberation  and William  Rast's current
international  distribution  relationships.  Prior to forming Akari Enterprises,
Mr. Kurz held several senior positions at various manufacturers, including Seven
for All Mankind, Diesel USA and Hugo Boss. The consulting agreement provides for
commissions to be paid to Akari  Enterprises  based on a defined formula related
to  net  international   sales  and  terminates  on  December  31,  2009.  Total
commissions  paid to Akari  International  pursuant to the consulting  agreement
amounted to  approximately  $94,000 for the year ended  December  31,  2007.  On
December 17,  2007,  the Company  granted Mr. Kurz an option to purchase  50,000
shares of the  Company's  common stock at an exercise  price of $0.50 per share.
The option vests monthly through December 17, 2009 and has a term of five years.


                                       55
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         On January 5, 2006,  the Company  entered into a  consulting  agreement
with MK  Sportswear.  Under the terms of the  agreement,  MK  Sportswear  was to
provide  sales and customer  services  functions  on behalf of the Company.  The
agreement provided for commissions at an agreed upon percentage of net sales and
had a term of two years that expired on December 31, 2007.  In  accordance  with
the agreement,  on June 22, 2006 the Company issued a non-qualified stock option
to purchase 150,000 shares of the Company's common stock at an exercise price of
$1.25  per  share to Mark  Kanights.  The  options  vest 25%  after one year and
monthly  thereafter over two years.  On August 22, 2006, the Company  terminated
its original  agreement and entered into a new agreement  with MK Sportswear and
Mark Kanights,  whereby Mark Kanights was to provide sales and customer  service
functions  on behalf of the Company on an exclusive  basis  through July 1, 2009
and receive a monthly salary and commissions at an agreed upon percentage of net
sales.  Pursuant to the new agreement,  in exchange for services to be performed
by Mark Kanights through July 1, 2009, the 150,000 stock options granted to Mark
Kanights  under the original  agreement  were to remain granted to him under the
same terms and conditions set forth in the original agreement. Effective January
15, 2008, the parties  terminated this  agreement.  Pursuant to the terms of the
Company's 2005 Stock Incentive  Plan, the unexercised  options will be cancelled
three months from termination of services.

NOTE 18 - LEASES

         The  Company  leases  its  office  and  warehouse  space  under a lease
agreement  commencing in October 2005 and expiring in December 2008. The Company
has three  showrooms  located in Los  Angeles,  New York City and  Atlanta.  The
Company  currently rents  temporary  showroom space in Los Angeles under a lease
agreement  that  expires  May 31,  2008.  The  Company  has also  signed a lease
agreement for permanent  space in the same building with a lease term  beginning
June 1, 2008 and continuing until May 2013. The Company's New York City showroom
lease expires in April 2009 and its Atlanta  showroom lease expires in May 2009.
The Company accounts for its leases in accordance with SFAS No. 13, whereby step
provisions,  escalation clauses, tenant improvement allowances,  increases based
on an existing index or rate, and other lease  concessions  are accounted for in
the minimum  lease  payments and are charged to  operations  on a straight  line
basis over the  related  lease  term.  Total rent  expense  for the years  ended
December 31, 2007 and 2006  amounted to  approximately  $341,000  and  $318,000,
respectively.

         Future annual  minimum  payments due under the leases are summarized as
follows:


         YEARS ENDING DECEMBER 31,
         2008.....................................................     $ 433,547
         2009.....................................................        96,717
         2010.....................................................        84,324
         2011.....................................................        89,011
         2012.....................................................        93,469
         2013.....................................................        39,735
                                                                       ---------
                                                                       $ 836,803
                                                                       =========

NOTE 19 - GEOGRAPHIC INFORMATION

         The Company  designs,  markets and sells high-end  casual apparel under
its 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.


                                       56
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         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,
                                                --------------------------------
                                                    2007                 2006
                                                -----------          -----------
Net Sales:
    United States ....................          $17,793,652          $13,625,996
    Germany ..........................            1,084,940              183,302
    Canada ...........................              659,192              738,880
    Italy ............................              181,967                 --
    Belgium ..........................              126,926                 --
    Sweden ...........................              124,332                 --
    United Kingdom ...................               94,553                 --
    Mexico ...........................               15,932              227,304
    Japan ............................                 --              1,072,979
    Other ............................              185,883              111,305
                                                -----------          -----------
                                                $20,267,377          $15,959,766
                                                ===========          ===========

NOTE 20 - CUSTOMER CONCENTRATION

         During the year ended December 31, 2007, one customer comprised greater
than 10% of the Company's sales. Sales to this customer amounted to 31.1% of net
sales for the year ended  December 31, 2007.  During the year ended December 31,
2006, two customers  comprised greater than 10% of the Company's sales. Sales to
these  customers  amounted  to 27.9% and  10.6% of net sales for the year  ended
December 31, 2006.  At December  31, 2007 and 2006,  receivables  due from these
customers are included in due from factor.

NOTE 21 - SUPPLIER CONCENTRATION

         During the year ended  December  31,  2007,  four  suppliers  comprised
greater than 10% of the  Company's  purchases.  Purchases  from these  suppliers
amounted to 10.7%,  11.3%, 11.8% and 18.6% for the year ended December 31, 2007.
At  December  31,  2007,  accounts  payable  and  accrued  expenses  included an
aggregate of approximately $934,000 due to these vendors.  During the year ended
December 31, 2006,  four suppliers  comprised  greater than 10% of the Company's
purchases.  Purchases from these suppliers  amounted to 11.5%,  12.2%, 13.4% and
15.1% for the year ended  December  31, 2006.  At December  31,  2006,  accounts
payable and accrued expenses included an aggregate of approximately $502,000 due
to these vendors.

NOTE 22 - 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 4, 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,  2007,  total  factor   receivables
approximated $2,552,000.

         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.


                                       57
<PAGE>


                            PEOPLE'S LIBERATION, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         In  accordance  with the bylaws of the Company,  officers and directors
are  indemnified  for certain events or  occurrences  arising as a result of the
officer or director's serving in such capacity.  The term of the indemnification
period is for the  lifetime of the officer or  director.  The maximum  potential
amount of future  payments  the  Company  could be  required  to make  under the
indemnification provisions of its bylaws is unlimited. At this time, the Company
believes  the  estimated  fair value of the  indemnification  provisions  of its
bylaws is minimal  and  therefore,  the  Company  has not  recorded  any related
liabilities.

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

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

 NOTE 23 - PROFIT SHARING PLAN

         The  Company  has  established  a  401(k)  profit-sharing  plan for the
benefit of eligible employees. The Company may make contributions to the plan as
determined by the Board of Directors.  There were no  contributions  made during
the years ended December 31, 2007 and 2006.


                                       58
<PAGE>


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

              Not applicable.

ITEM 8A(T).   CONTROLS AND PROCEDURES

         EVALUATION OF CONTROLS AND PROCEDURES

         Members of the our management,  including our Chief Executive  Officer,
Colin Dyne,  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, 2007, the end of
the period covered by this report. Based upon that evaluation,  Messrs. Dyne and
Barber concluded that our disclosure controls and procedures are effective.

         CHANGES IN CONTROLS AND PROCEDURES

         There were no changes in our internal control over financial  reporting
or in other factors  identified in connection  with the  evaluation  required by
paragraph  (d) of Exchange Act Rules 13a-15 or 15d-15 that  occurred  during the
fourth quarter ended  December 31, 2007 that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         Our management is responsible for establishing and maintaining adequate
internal  control over  financial  reporting as defined in Rules  13a-15(f)  and
15d-15(f)  under the Securities  Exchange Act of 1934, as amended.  Our internal
control over  financial  reporting is designed to provide  reasonable  assurance
regarding  the  reliability  of  financial  reporting  and  the  preparation  of
financial statements for external purposes in accordance with generally accepted
accounting  principles.  Our internal control over financial  reporting includes
those policies and procedures that:

         (i)      pertain to the  maintenance  of records  that,  in  reasonable
                  detail,  accurately  and fairly reflect the  transactions  and
                  dispositions of our assets;

         (ii)     provide reasonable assurance that transactions are recorded as
                  necessary to permit the preparation of financial statements in
                  accordance with U.S. generally accepted accounting principles,
                  and that our receipts and  expenditures are being made only in
                  accordance  with  authorizations  of management and directors;
                  and

         (iii)    provide reasonable  assurance  regarding  prevention or timely
                  detection of unauthorized acquisition,  use or disposition our
                  assets  that  could have a  material  effect on our  financial
                  statements.

         Because  of  inherent  limitations,  internal  control  over  financial
reporting may not prevent or detect misstatements.  In addition,  projections of
any  evaluation  of  effectiveness  to future  periods  are subject to risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

         Our management  assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making this assessment,  we used
the  criteria  set forth by the  Committee of  Sponsoring  Organizations  of the
Treadway Commission (COSO) in Internal  Control-Integrated  Framework.  Based on
our assessment and those criteria,  we have concluded that our internal  control
over financial reporting was effective as of December 31, 2007.


                                       59
<PAGE>


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

ITEM 8B.      OTHER INFORMATION

         None

                                    PART III

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

         The  following  table sets forth the name,  age and position of each of
our  executive  officers and  directors  as of December  31, 2007.  There are no
family relationships between our executive officers and directors.

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

Colin Dyne                 44              Chief Executive Officer, and Director
Darryn Barber              32              Chief Financial Officer
Thomas Nields              42              Chief Operating Officer
Dean Oakey                 49              Director
Susan White                57              Director
Troy Carter                34              Director
Kenneth Wengrod            57              Director

         COLIN DYNE  became our Chief  Executive  Officer  and a director of the
company on May 21, 2007. Colin Dyne is a significant stockholder of the company,
and has served as a consultant to the company since December  2005,  advising on
strategic sales initiatives.  Mr. Dyne also serves as Vice Chairman of the Board
of Directors of Talon  International,  Inc.  (OTCBB:  TALN),  owner of Talon(TM)
zippers and a full service trim management supplier for manufacturers of fashion
apparel. Mr. Dyne founded Tag-It, Inc., a subsidiary of Talon, in 1991. Mr. Dyne
served as Talon's  President from inception and as its Chief  Executive  Officer
from 1997 to 2005.

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

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


                                       60
<PAGE>


         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.

         SUSAN WHITE joined our Board of  Directors  on May 21, 2007.  Ms. White
has served as Chief Executive Officer and President of Brand Identity Solutions,
LLC, a branding,  marketing and licensing  consulting  company,  since 1987. Ms.
White also is the CEO and  president  of  Whitespeed,  LLC, an internet  design,
branding and  marketing  company.  Ms. White  previously  served on the Board of
Directors of Talon International, Inc. (OTCBB: TALN), owner of Talon(TM) zippers
and a full  service  trim  management  supplier  for  manufacturers  of  fashion
apparel.  Ms.  White  also  previously  served  as  Director  of  Marketing  and
Advertising Worldwide for Warnaco from November 1997 through August 1999.

         TROY CARTER  joined our Board of Directors on May 21, 2007.  Mr. Carter
is the Founder, Chairman and CEO of the urban talent management and full-service
film and  television  production  entity,  The  Coalition,  Inc. Mr.  Carter has
managed  and built  careers  for some of the  hottest  acts on the  urban  scene
including hip-hop artists Eve, Beanie Siegel,  and Fat Joe and hot newcomer acts
such  as Ya Boy.  Prior  to  establishing  The  Coalition,  Mr.  Carter  was the
co-founder of Erving Wonder,  a management firm purchased by Sanctuary Group UK,
the largest urban talent  manager in the world with clients  including  Beyonce,
Destiny's  Child,  Nelly,  Eve and D-12.  Mr.  Carter  began  his  entertainment
industry  career at Bad Boy Records  working for Sean "Diddy"  Combs and also at
Overbrook Entertainment, Will Smith's management/production company.

         KENNETH  WENGROD  joined our Board of Directors on September  21, 2007.
Mr. Wengrod  currently  serves as President of FTC  Commercial  Corp., a company
which he founded in 2002  ("FTC") and in which he  continues  to hold a minority
equity position.  FTC is a global finance  commercial  service company primarily
focused in the apparel  industry.  From 1996 to 2002,  Mr. Wengrod was the Chief
Financial  Officer and General  Manager of Meridian  Textiles f/k/a Mark Fabrics
where he was responsible for the operations of the  multi-million  dollar fabric
converting  company.  Prior to joining  Meridian  Textiles,  Mr. Wengrod was the
Chief  Operating  Officer of Rampage  Clothing Co. from 1992 to 1995,  and was a
Senior  Vice  President  of Barclays  Commercial  Corp.  from 1987 to 1992.  Mr.
Wengrod  holds a  Bachelor  of Science  degree in  Economics  from  Northeastern
University.

         During the past five years, none of our executive officers or directors
has had any  bankruptcy  petition filed by or against any business of which such
officer or director  was a general  partner or executive  officer  either at the
time of the bankruptcy or within two years prior to that time. Also,  during the
past five years, none of our executive officers or directors have been convicted
in a  criminal  proceeding  or are  subject  to a pending  criminal  proceeding,
excluding traffic violations or similar misdemeanors, nor have they been subject
to any order,  judgment,  or decree,  not  subsequently  reversed,  suspended or
vacated,  of any court of competent  jurisdiction,  permanently  or  temporarily
enjoining,  barring,  suspending or otherwise  limiting their involvement in any
type of business, securities, or banking activities, nor have they been found by
a court of competent  jurisdiction (in a civil action),  the Commission,  or the
Commodity  Futures  Trading  Commission  to have  violated  a  federal  or state
securities or commodities law, which judgment has not been reversed,  suspended,
or vacated.


                                       61
<PAGE>


DIRECTOR INDEPENDENCE

         Our board of directors  currently consists of five members:  Colin Dyne
(our Chief Executive Officer),  Dean Oakey, Susan White, Troy Carter and Kenneth
Wengrod.  Each of Colin  Dyne,  Dean  Oakey,  Susan  White and Troy  Carter were
elected  at a meeting  of  shareholders  and will  serve  until our next  annual
meeting or until his or her  successor  is duly elected and  qualified.  Kenneth
Wengrod was  appointed to our Board of Directors on September 21, 2007 to fill a
vacancy  created upon the expansion in the size of our Board from five directors
to six directors on the same date.  Mr. Wengrod will serve until our next annual
meeting or until his successor is duly elected and qualified.

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

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

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,  2007,  all of our  executive  officers,
directors and greater-than-ten  percent  stockholders  complied with all Section
16(a) filing requirements, except for Dean Oakey, who did not timely file a Form
4 to report one transaction and Kenneth Wengrod,  who did not timely file a Form
4 to report one transaction.

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,  Chief
Financial Officer and Chief Operating 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 has been publicly filed
with the SEC as an  exhibit  to our Annual  Report on Form  10-KSB.  Our code of
ethics is posted on our Internet  website located at  www.peopleslib.com  in the
section titled "Investors." 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


                                       62
<PAGE>


         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.

ITEM 10.      EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth information  concerning all compensation
paid to all persons  serving as our Chief  Executive  Officer during fiscal year
2007 and our Chief Financial  Officer and Chief  Operating  Officer for services
rendered during our fiscal years ended December 31, 2007 and 2006. The following
table  also  includes  compensation  related to our  highest  paid  employee  (a
non-officer)  with  compensation  in excess of  $100,000  during  the year ended
December 31, 2007. The aforementioned people are collectively referred to as our
"Named Executive Officers."

<TABLE>
<CAPTION>
                                                                        All Other
   Name and Principal                                        Option     Compensa-
        Position           Year       Salary      Bonus     Awards(1)    tion(7)      Total
---------------------   ---------   ---------   ---------   ---------   ---------   ---------
<S>                          <C>    <C>         <C>         <C>         <C>         <C>
Colin Dyne(2)
   Chief Executive           2007   $ 125,010   $  30,000   $    --     $ 216,261   $ 371,271
   Officer                   2006   $    --     $    --     $    --     $ 259,000   $ 259,000

Daniel Guez(3)
   Former Chief              2007   $ 313,619   $    --     $    --     $  32,423   $ 346,042
   Executive Officer         2006   $ 300,000   $ 175,000   $    --     $  22,182   $ 497,182

Darryn Barber(4)
   Chief Financial           2007   $ 213,698   $  25,000   $  55,856   $   8,660   $ 303,214
   Officer                   2006   $ 203,278   $  40,000   $  87,771   $    --     $ 331,049

Thomas Nields(5)
   Chief Operating           2007   $ 217,190   $  20,000   $  59,619   $   6,052   $ 302,861
   Officer                   2006   $ 165,958   $   7,500   $   6,678   $   1,792   $ 181,928
                        ---------   ---------   ---------   ---------   ---------   ---------

Jennifer Wojinski(6)
   Director of Design        2007   $ 128,263   $  18,750   $  13,520   $    --     $ 160,533
   -William Rast ....        2006   $ 100,000   $   5,000   $   3,339   $    --     $ 108,339
</TABLE>

----------
(1)  The amounts in this column  represent  the dollar  amounts  recognized  for
     financial  statement  reporting purposes in the applicable fiscal year with
     respect to stock options  granted in the applicable  fiscal year as well as
     prior  fiscal  years,  in  accordance  with  SFAS  123(R).  For  additional
     information  on the valuation  assumptions  with respect to option  grants,
     including  the options  granted in 2006 and 2007,  please see Note 2 to our
     financial  statements for the years ended December 31, 2007 and 2006. These
     amounts do not reflect  the actual  value that may be realized by the Named
     Executive Officers which depends on the value of our shares in the future.
(2)  Mr.  Dyne  became our Chief  Executive  Officer on May 21,  2007.  Prior to
     joining the Company,  Mr. Dyne provided  consulting services to the Company
     and  received  consulting  fees  amounting  to  approximately  $192,000 and
     $259,000  during the years ended  December 31, 2007 and 2006. Mr. Dyne does
     not have an employment agreement with the Company.
(3)  Mr. Guez became our President and Chief  Executive  Officer on November 22,
     2005.  On October 2, 2007,  Mr. Guez  resigned  from his position  with the
     company  to pursue  other  opportunities.  In  connection  with Mr.  Guez's
     resignation,  we entered into a  Separation  Agreement  with Mr. Guez,  the
     terms of which are described below.
(4)  Mr. Barber  became our Chief  Financial  Officer on November 22, 2005.  Mr.
     Barber was subject to an employment agreement which expired on November 21,
     2007, the terms of which are described hereafter.
(5)  Mr.  Nields was named our Chief  Operating  Officer  effective  November 6,
     2006. Mr. Nields does not have an employment agreement with the Company.
(6)  Ms.  Wojinski joined our Company in November 2005 as our Director of Design
     for our William Rast product line. Ms. Wojinski does not have an employment
     agreement with the Company.
(7)  Other  compensation  indicated  in the above table  consists of medical and
     disability insurance, consulting fees, and car expenses and allowances.


                                       63
<PAGE>


NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE

         In the  fiscal  year  ended  December  31,  2007,  we  compensated  our
executive  officers  through a combination of a base salary,  a cash bonus,  and
options to purchase shares of our common stock.  In addition,  we provided other
perquisites to some of our executive  officers,  which  consisted of medical and
disability insurance, and car expenses and allowances.

         In the second  quarter of 2007,  we  undertook a  restructuring  of our
senior  management team. The restructuring was designed to improve the financial
performance of the company and included the appointment of a new Chief Executive
Officer,  Colin Dyne, at a  compensation  level that we believe is below typical
market  conditions  for  similar  companies.  In order to  further  improve  our
operating cash flow, we reduced the cash  compensation  paid to our other senior
executives,  including  a  reduction  of the base  salary  of our  former  Chief
Executive  Officer,  Daniel Guez,  and the reduction of the base salaries of our
Chief  Financial  Officer and Chief  Operating  Officer.  We also terminated our
President, and eliminated the President position within the company.

         In 2007,  we granted Mr.  Barber  options to purchase an  aggregate  of
700,000  shares of our  common  stock and Mr.  Nields  options  to  purchase  an
aggregate  of 250,000  shares of our common  stock.  These  option  grants  were
intended  to  provide   non-cash   incentives  to  the  executives  to  maximize
shareholder  value. The bonuses paid to our senior management team in the fiscal
year ended  December 31, 2007 were  generally  low, and were  determined  by our
Board of Directors  based on the  performance  of the company and the  executive
officer.

EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT

     COLIN DYNE

         On May 21,  2007,  our Board of Directors  appointed  Colin Dyne as our
Chief  Executive  Officer and  Co-Chairman  of the Board of Directors.  Mr. Dyne
receives an annual salary of $200,000,  payable in accordance  with our standard
payroll practices,  and an auto allowance of $1,200 per month. Mr. Dyne's annual
bonus amounted to $30,000 for the year ended December 31, 2007.

     DANIEL GUEZ

         On  October 2,  2007,  Daniel  Guez,  who was  serving as our  Creative
Director,  resigned  from his position  with us. In  connection  with Mr. Guez's
resignation,  we entered into a separation agreement and mutual release with Mr.
Guez. The separation  agreement  provided that the certain  amended and restated
employment  agreement  dated June 19,  2007  between us and Mr.  Guez  (which is
further  described  below) be terminated and of no further force or effect,  and
that except as  provided  in the  separation  agreement,  all  responsibilities,
duties  and  obligations  of Mr.  Guez  to us and of us to Mr.  Guez  under  the
employment  agreement  are  terminated  and of no further  force or effect.  The
separation  agreement  provided  that we pay Mr.  Guez three  months of his base
salary of $16,667 per month,  and three  months of his  automobile  allowance of
$1,200 per month.  In addition,  Mr. Guez and his eligible  family  members will
continue to receive medical benefits for a period of twelve months from the date
of his resignation.

     AMENDED AND RESTATED EMPLOYMENT AGREEMENT WITH DANIEL GUEZ

         On May 21, 2007,  Daniel Guez resigned as our Chief Executive  Officer.
On June 19, 2007,  the Company  entered into an Amended and Restated  Employment
Agreement with Daniel Guez, which amended and restated the employment  agreement
entered  into  between us and Mr. Guez on January  12,  2007,  as  modified  and
supplemented by that certain addendum entered into as of May 21, 2007.  Pursuant
to the  Amended  and  Restated  Employment  Agreement,  Mr.  Guez  served as the


                                       64
<PAGE>


Co-Chairman of our Board of Directors  (until his resignation from this position
on October 12,  2007),  and  continued  to serve as our Creative  Director.  The
Amended and Restated Employment Agreement was for an initial term of three years
beginning  January 12, 2007 and was to be automatically  extended for additional
one year  terms  unless we or Mr.  Guez  elected  not to extend  the term of the
Amended and Restated  Employment  Agreement.  Effective July 1, 2007,  under the
Amended and Restated  Employment  Agreement,  Mr. Guez received a base salary of
$200,000 per annum,  subject to upward adjustment and an automobile allowance of
$1,200 per month,  inclusive of insurance,  gas, and  maintenance  on Mr. Guez's
vehicle

         The  agreement  provided  that  if  during  the  employment  period  we
terminated  Mr. Guez's  employment  without cause or if Mr. Guez  terminated his
employment  for good  reason,  Mr.  Guez would be paid  $600,000  in  severance.
Alternatively,  if we failed to extend  the period of the  employment  period as
provided above,  and at any time within six months  following  expiration of the
employment period, we terminated Mr. Guez's employment without cause or Mr. Guez
terminated his employment for good reason or without good reason, Mr. Guez would
be paid $300,000 in severance.  In addition to the applicable  severance  amount
payable to Mr. Guez as provided above,  if Mr. Guez's  employment was terminated
for any of the reasons set forth in this  paragraph,  the  employment  agreement
provided that all of Mr. Guez's outstanding stock options,  restricted stock and
other  equity  awards  would  accelerate  and become fully vested on the date of
termination.

         The employment  agreement  also provided that if Mr. Guez's  employment
was  terminated  by reason  of his death or  disability  during  the  employment
period, Mr. Guez, his estate or beneficiaries,  as applicable, would be entitled
to be paid a lump sum payment of $400,000,  and all  outstanding  stock options,
restricted  stock and other equity awards  granted to Mr. Guez would  accelerate
and become fully vested on the date of termination.  In addition, the employment
agreement  provided  that  for a  period  of 18  months  following  the  date of
termination,  the Company  would  continue to provide Mr. Guez and his  eligible
family members with group health  insurance  coverage.  The Amended and Restated
Employment Agreement did not include any contractual bonus provisions.

     ORIGINAL EMPLOYMENT AGREEMENT WITH MR. GUEZ

         Mr.  Guez's  original  employment  agreement  with us  entered  into on
January 12,  2007,  provided  that Mr.  Guez would serve as our Chief  Executive
Officer and/or Creative  Director,  and Chairman of our Board of Directors.  The
agreement  was for the same  duration  as the amended  and  restated  employment
agreement  described  above.  However,  under the original  agreement,  Mr. Guez
received the following compensation:

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

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

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

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


                                       65
<PAGE>


employment  was  terminated  by  reason of his death or  disability  during  the
employment period, Mr. Guez, his estate or beneficiaries,  as applicable,  would
be entitled to be paid a lump sum payment of  one-hundred  percent (100%) of Mr.
Guez's then  current  annual base salary,  and all  outstanding  stock  options,
restricted  stock and other equity awards  granted to Mr. Guez would  accelerate
and become fully vested on the date of  termination.  In addition,  the original
employment  provided  that  for a  period  of 18  months  following  the date of
termination,  the Company  would  continue to provide Mr. Guez and his  eligible
family members with group health insurance coverage.

     DARRYN BARBER

         On January 3, 2006, we entered into an employment agreement with Darryn
Barber  pursuant  to which he served as our Chief  Financial  Officer  and Chief
Operating  Officer.  The  agreement  was for a term of 2 years  commencing as of
November 22, 2005 and  terminating on November 21, 2007.  Mr. Barber  received a
base salary of $212,000 in the first year of his appointment, and was to receive
a base salary of $232,000  during the second  year of his  contract.  On June 5,
2007, in connection with a restructuring of senior management, we and Mr. Barber
agreed to reduce the base salary of Mr.  Barber to 200,000  per annum  beginning
June 5, 2007.  In  addition  to his base  salary,  Mr.  Barber was to receive an
annual  bonus  of not less  than  $25,000  and no more  than  $100,000  based on
objectives determined by our Board of Directors.  On July 7, 2006, in accordance
with his employment agreement, Mr. Barber was granted a stock option to purchase
300,000 shares of our common stock at an exercise price of $1.25 per share which
is now fully vested.  In the event Mr. Barber was terminated  without cause,  we
were to continue to pay Mr.  Barber's then current base salary for the remaining
term of the agreement, without regard to any employment of Mr. Barber by a third
party.

         On November 8, 2006, we and Darryn Barber  entered into an amendment to
his employment  agreement.  Pursuant to the amendment,  Mr. Barber resigned from
his position as Chief Operating Officer of the Company, effective the same date.
Mr.  Barber  will  continue  to serve us as our  Chief  Financial  Officer.  The
amendment also extends the exercise  period of Mr.  Barber's  option to purchase
300,000 shares of our common stock to a period of one year following termination
of Mr. Barber's  service with us for any reason other than for cause (as defined
in the employment  agreement).  Previously,  Mr.  Barber's  option was to remain
exercisable  for a period of at least six months  following  termination  of his
service with us for any reason other than for cause.  Mr.  Barber's annual bonus
amounted to $25,000 for the year ended December 31, 2007.

     THOMAS NIELDS

         On November 8, 2006,  Thomas Nields was  appointed our Chief  Operating
Officer. Pursuant to an oral agreement between us and Mr. Nields, Mr. Nields was
to be paid an  annual  salary  of  $250,000,  and a  discretionary  bonus  to be
determined annually by our Board of Directors or Compensation Committee. On June
5, 2007, in connection with a restructuring  of senior  management,  the company
and Mr. Nields agreed to reduce his base salary to $200,000 per annum  beginning
June 5, 2007.  Mr.  Nield's  annual bonus amounted to $20,000 for the year ended
December 31, 2007.


                                       66
<PAGE>


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2007

         The following table presents information  regarding outstanding options
held by our Named  Executive  Officers  as of the end of our  fiscal  year ended
December 31, 2007. None of the Named Executive Officers exercised options during
the fiscal year ended December 31, 2007.

<TABLE>
<CAPTION>
-------------------------- -------------------------------------------- ---------------------- ----------------------
                                 Number of Securities Underlying
                                     Unexercised Options (#)
-------------------------- -------------------------------------------- ---------------------- ----------------------
                                                                           Option Exercise       Option Expiration
          Name                 Exercisable           Unexercisable         Price Range ($)             Date
-------------------------- --------------------- ---------------------- ---------------------- ----------------------
<S>                              <C>                    <C>                     <C>              <C>
Colin Dyne                          --                    --                     --                     --
-------------------------- --------------------- ---------------------- ---------------------- ----------------------
Daniel Guez                         --                    --                     --                     --
-------------------------- --------------------- ---------------------- ---------------------- ----------------------
Darryn Barber (1)                150,000                  --                    $0.46              June 5, 2017
                                    --                  100,000                 $0.38             August 7, 2017
                                    --                  450,000                 $0.50            November 14, 2017
-------------------------- --------------------- ---------------------- ---------------------- ----------------------
Tom Nields (2)                   150,000                  --                    $0.46              June 5, 2017
                                    --                  100,000                 $0.38             August 7, 2017
-------------------------- --------------------- ---------------------- ---------------------- ----------------------
Jennifer Wojinski (3)               --                   50,000                 $1.25              April 9, 2017
                                  8,750                  26,250                 $0.46              June 5, 2017
                                    --                   15,000                 $0.38             August 7, 2017
-------------------------- --------------------- ---------------------- ---------------------- ----------------------
</TABLE>


(1)  On June 5, 2007, our Board of Directors  approved an award to Darryn Barber
     of options to purchase 150,000 shares of our common stock. The options have
     an exercise price of $0.46 per share, the closing price of our common stock
     on the Over-The-Counter  Bulletin Board on the date of the award, are fully
     vested, and have a term of ten years.

     On  August 7,  2007,  our Board of  Directors  approved  an award to Darryn
     Barber of options to  purchase  100,000  shares of our  common  stock.  The
     options have an exercise price of $0.38 per share, the closing price of our
     common  stock  on the  Over-The-Counter  Bulletin  Board on the date of the
     award,  and have a term of ten  years.  The  options  vest 50% on August 1,
     2008,  and the  remaining  50%  shall  vest in equal  monthly  installments
     thereafter through August 1, 2009.

     On November  14, 2007,  our Board of Directors  approved an award to Darryn
     Barber of options to  purchase  450,000  shares of our  common  stock.  The
     options have an exercise price of $0.50 per share, the closing price of our
     common  stock  on the  Over-The-Counter  Bulletin  Board on the date of the
     award,  and  have a term  of ten  years.  The  options  vest  in  quarterly
     installments of 45,000 beginning February 14, 2008 through May 14, 2010.

     On July 7, 2006,  Mr.  Barber was  granted  an option to  purchase  300,000
     shares of our common stock at a per share  exercise  price of $1.25,  which
     option  terminates July 7, 2016. This option is fully vested as of December
     31, 2007.

(2)  On June 5, 2007, our Board of Directors  approved an award to Thomas Nields
     of options to purchase 150,000 shares of our common stock. The options have
     an exercise price of $0.46 per share, the closing price of our common stock
     on the Over-The-Counter  Bulletin Board on the date of the award, are fully
     vested, and have a term of ten years.

     On  August 7,  2007,  our Board of  Directors  approved  an award to Thomas
     Nields of options to  purchase  100,000  shares of our  common  stock.  The
     options have an exercise price of $0.38 per share, the closing price of our
     common  stock  on the  Over-The-Counter  Bulletin  Board on the date of the
     award,  and have a term of ten  years.  The  options  vest 50% on August 1,
     2008,  and the  remaining  50%  shall  vest in equal  monthly  installments
     thereafter through August 1, 2009.

     During the year ended  December 31, 2006,  Mr. Nields was granted an option
     to  purchase  100,000  shares of our common  stock at a per share  price of
     $1.25,  which option  terminates on June 22, 2016.  The option vests 25% on
     June  22,  2007,  and  the  remaining  75%  shall  vest  in  equal  monthly
     installments  thereafter  through June 22,  2010.  As of December 31, 2007,
     37,500 shares of this option were fully vested.

(3)  On April 9, 2007,  our Board of  Directors  approved  an award to  Jennifer
     Wojinski  of options to purchase  50,000  shares of our common  stock.  The
     options have an exercise  price of $1.25 per share and a term of ten years.


                                       67
<PAGE>


     The options vest 25% on April 9, 2008,  and the remaining 75% shall vest in
     equal monthly installments thereafter through April 9, 2011.

     On June 5,  2007,  our Board of  Directors  approved  an award to  Jennifer
     Wojinski  of options to purchase  35,000  shares of our common  stock.  The
     options have an exercise price of $0.46 per share, the closing price of our
     common  stock  on the  Over-The-Counter  Bulletin  Board on the date of the
     award,  and a term  of ten  years.  The  options  vest in  eight  quarterly
     installments beginning July 1, 2007 through April 1, 2009.

     On August 7, 2007,  our Board of  Directors  approved  an award to Jennifer
     Wojinski  of options to purchase  15,000  shares of our common  stock.  The
     options have an exercise price of $0.38 per share, the closing price of our
     common  stock  on the  Over-The-Counter  Bulletin  Board on the date of the
     award,  and have a term of ten  years.  The  options  vest 50% on August 1,
     2008,  and the  remaining  50%  shall  vest in equal  monthly  installments
     thereafter through August 1, 2009.

     During the year ended December 31, 2006, Ms. Wojinski was granted an option
     to  purchase  50,000  shares of our  common  stock at a per share  price of
     $1.25,  which option  terminates on June 22, 2016.  The option vests 25% on
     June  22,  2007,  and  the  remaining  75%  shall  vest  in  equal  monthly
     installments  thereafter  through June 22,  2010.  As of December 31, 2007,
     18,750 shares of this option were fully vested.

DIRECTOR COMPENSATION

         The general policy of our Board is that  compensation  for non-employee
directors should be a mix of cash and equity based  compensation.  We do not pay
management  directors for Board  service in addition to their  regular  employee
compensation.  Currently,  we pay our  non-employee  directors  an annual fee of
$10,000. In July 2007, our non-employee directors,  Mr. Oakey, Ms. White and Mr.
Carter, also received 24,000 options each to purchase shares of our common stock
and $5,000 each in payment for service on the Board of directors  from July 2007
through  December 2007. In September 2007, our  non-employee  director,  Kenneth
Wengrod, also received 24,000 options to purchase shares of our common stock and
$2,500 in payment  for service on the Board of  directors  from  September  2007
through  December  2007. Our directors are also  reimbursed for travel  expenses
associated with attendance at Board meetings.  There were no reimbursements  for
travel expenses for the fiscal year ended December 31, 2007.

         The following table presents information regarding compensation paid to
our non-employee directors for our fiscal year ended December 31, 2007.

<TABLE>
<CAPTION>
---------------------- ---------------- ------------------ -------------------- ------------------- ------------------
                                         Fees Earned or                             All Other
        Name                Year          Paid in Cash      Option Awards (6)    Compensation (3)         Total
---------------------- ---------------- ------------------ -------------------- ------------------- ------------------
<S>                         <C>             <C>                  <C>                 <C>                 <C>
Dean Oakey (1)              2007            $ 10,000             $ 3,353             $   --              $ 13,353
---------------------- ---------------- ------------------ -------------------- ------------------- ------------------
Kevin Keating (2)           2007            $  2,000             $  --               $   --              $  2,000
---------------------- ---------------- ------------------ -------------------- ------------------- ------------------
Susan White (3)             2007            $  5,000             $ 3,353             $ 93,994            $102,347
---------------------- ---------------- ------------------ -------------------- ------------------- ------------------
Troy Carter (4)             2007            $  5,000             $ 3,353             $   --              $  8,353
---------------------- ---------------- ------------------ -------------------- ------------------- ------------------
Kenneth Wengrod (5)         2007            $  2,500             $ 4,694             $   --              $  7,194
---------------------- ---------------- ------------------ -------------------- ------------------- ------------------
</TABLE>

(1)  Mr. Oakey has been a member of our Board of Directors  since November 2005.
     On July 6, 2007, Mr. Oakey was granted an option to purchase  24,000 shares
     of our common  stock at a per share  exercise  price of $0.31.  This option
     vested  12,000  shares on the date of grant and vests 1,000 shares  monthly
     thereafter  through July 2008. This option  terminates on July 6, 2017. Mr.
     Oakey did not  exercise  any of his option  awards  during the fiscal years
     ended December 31, 2007 and 2006.
(2)  Mr. Keating served as a member of our Board of Directors beginning February
     2005.  On June 22,  2006,  Mr.  Keating  was  granted an option to purchase
     36,000 shares of our common stock at a per share  exercise  price of $1.25.
     This  option  vested  18,000  shares on the date of grant and 1,500  shares
     monthly thereafter through July 2007. On May 21, 2007, Mr. Keating resigned
     from our Board of  Directors.  Options  to  purchase  36,000  shares of our
     common stock were cancelled as a result of Mr. Keating's termination.


                                       68
<PAGE>

(3)  Ms. White  joined our Board of Directors on May 21, 2007.  On July 6, 2007,
     Ms.  White was  granted an option to purchase  24,000  shares of our common
     stock at a per share  exercise  price of $0.31.  This option  vested 12,000
     shares on the date of grant  and  vests  1,000  shares  monthly  thereafter
     through July 2008.  This option  terminates on July 6, 2017.  Ms. White did
     not exercise any of her options  during the fiscal year ended  December 31,
     2007.  Ms.  White also  provided  consulting  services  to the  Company and
     received  $93,994 of consulting  fees during the fiscal year ended December
     31, 2007.
(4)  Mr.  Carter joined our Board of Directors on May 21, 2007. On July 6, 2007,
     Mr.  Carter was granted an option to purchase  24,000  shares of our common
     stock at a per share  exercise  price of $0.31.  This option  vested 12,000
     shares on the date of grant  and  vests  1,000  shares  monthly  thereafter
     through July 2008.  This option  terminates on July 6, 2017. Mr. Carter did
     not exercise any of his options  during the fiscal year ended  December 31,
     2007.
(5)  Mr.  Wengrod  joined our Board of  Directors  on  September  21,  2007.  On
     September 21, 2007,  Mr.  Wengrod was granted an option to purchase  24,000
     shares of our common  stock at a per share  exercise  price of $0.50.  This
     option  vested  12,000  shares on the date of grant and vests 1,000  shares
     monthly  thereafter  through  September  2008.  This option  terminates  on
     September 21, 2017.  Mr. Wengrod did not exercise any of his options during
     the fiscal year ended December 31, 2007.
(6)  The amounts in this column  represent  the dollar  amounts  recognized  for
     financial  statement  reporting purposes in the applicable fiscal year with
     respect to stock options  granted in the applicable  fiscal year as well as
     prior  fiscal  years,  in  accordance  with  SFAS  123(R).  For  additional
     information  on the valuation  assumptions  with respect to option  grants,
     including  the options  granted in 2006 and 2007,  please see Note 2 to our
     financial  statements for the years ended December 31, 2007 and 2006. These
     amounts  do not  reflect  the  actual  value  that may be  realized  by the
     Directors which depends on the value of our shares in the future.

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.


                                       69
<PAGE>


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

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

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

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

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY

         Delaware  law provides  that  directors  of a  corporation  will not be
personally  liable for monetary  damages for breach of their fiduciary duties as
directors, except for:

         o        any breach of their duty of loyalty to the  corporation or its
                  stockholders;

         o        acts  or  omissions   not  in  good  faith  or  which  involve
                  intentional misconduct or a knowing violation of law;

         o        unlawful  payments of dividends or unlawful stock  repurchases
                  or redemptions; or

         o        any  transaction  from which the director  derived an improper
                  personal benefit.

         Article Fifth, paragraph D of our articles of incorporation states that
no director shall have personal liability to us or our stockholders for monetary
damages for breach of fiduciary duty as a director.  However, the provision does
not  eliminate  or limit the  liability  of a director (i) for any breach of the
director's duty of loyalty to us or our stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law,  (iii) under section 174 of the Delaware  General  Corporations  law, or
(iv) for any transaction  from which the director  derived an improper  personal
benefit.

         Article IX, Section 1 of our bylaws states that we shall  indemnify any
person who was, or is threatened to be, made a party to any threatened,  pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or  investigative  by reason of the fact that he is or was a Director,  officer,
employee  or agent of the  company,  or is or was  serving at the request of the
company  as  a  Director,   officer,  employee  or  agent  of  another  company,
partnership,   joint  venture,  trust  or  other  enterprise,  against  expenses
(including  attorneys'  fees),  judgments,  fines and amounts paid in settlement


                                       70
<PAGE>


actually and reasonably  incurred by him in connection with such action, suit or
proceeding,  to the extent and under the circumstances  permitted by the General
Corporation Law of the State of Delaware.  Such indemnification  (unless ordered
by a court) shall be made as authorized in a specific case upon a  determination
that  indemnification of the Director,  officer,  employee or agent is proper in
the  circumstances  because he has met the  applicable  standards of conduct set
forth  in  the  General   Corporation  Law  of  the  State  of  Delaware.   Such
determination  shall be made (1) by the Board of Directors by a majority vote of
a quorum  consisting of Directors  who were not parties to such action,  suit or
proceeding,  or (2) if such quorum is not  obtainable,  or even if  obtainable a
quorum of disinterested  Directors so directs, by independent legal counsel in a
written opinion, or (3) by our stockholders.

         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.

         A stockholder's  investment may be adversely  affected to the extent we
pay the costs of settlement and damage awards against  directors and officers as
required by these indemnification  provisions.  At present,  there is no pending
litigation or proceeding  involving any of our directors,  officers or employees
regarding  which  indemnification  by us is  sought,  nor  are we  aware  of any
threatened litigation that may result in claims for indemnification.

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors,  officers or persons  controlling us pursuant
to the foregoing  provisions,  we have been informed that, in the opinion of the
SEC,  this  indemnification  is  against  public  policy  as  expressed  in  the
Securities Act and is therefore unenforceable.

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

         The following  table  presents  information  regarding  the  beneficial
ownership of our common stock as of March 4, 2008 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 to 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 March 4, 2008
are deemed to be outstanding and to be beneficially  owned by the person holding
the options for the purpose of computing the percentage ownership of that person
but are not treated as  outstanding  for the purpose of computing the percentage
ownership of any other person.


                                       71
<PAGE>


         The information  presented in this table is based on 36,002,563  shares
of our common stock  outstanding on March 4, 2008.  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.



<PAGE>


<TABLE>
<CAPTION>
                                                           NUMBER OF
                                                             SHARES       PERCENTAGE
                                                          BENEFICIALLY    OF SHARES
NAME OF BENEFICIAL OWNER                                      OWNED       OUTSTANDING
-------------------------------------------------------   ------------   ------------
<S>                                                         <C>                <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Colin Dyne (1) ........................................      7,731,560         21.5%
   Director, Chief Executive Officer and Secretary
Darryn Barber (2) .....................................        627,560          1.7%
   Chief Financial Officer
Thomas Nields (3) .....................................        485,854          1.3%
   Chief Operating Officer
Dean Oakey (4) ........................................        428,983          1.2%
   Director
Susan White (5) .......................................         21,000            *
   Director
Troy Carter (6) .......................................         21,000            *
   Director
Kenneth Wengrod (7) ...................................         19,000            *
   Director
Named Directors and officers as a group (7 persons) (8)      9,334,957         25.2%

5% SHAREHOLDERS:
Microcapital Fund LP and Microcapital Fund Ltd (9) ....      2,800,000          7.7%
Gerard Guez (10) ......................................     10,698,387         29.7%
Bristol Investment Fund Ltd (11) ......................      2,900,000          8.1%
</TABLE>


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

(1)      Consists of 7,731,560 shares of common stock.

(2)      Consists  of  132,560  shares of common  stock and  495,000  options to
         purchase common stock.

(3)      Consists  of  290,024  shares of common  stock and  195,830  options to
         purchase common stock.

(4)      Consists of 93,483 shares of common stock, warrants to purchase 278,500
         shares of common stock and options to purchase  57,000 shares of common
         stock.

(5)      Consists of 21,000 options to purchase common stock.

(6)      Consists of 21,000 options to purchase common stock.

(7)      Consists of 19,000 options to purchase common stock

(8)      Consists  of  8,247,627  shares of common  stock,  warrants to purchase
         278,500  shares of common stock and options to purchase  808,830 shares
         of common stock

(9)      Consists of  1,333,600  shares of common stock and warrants to purchase
         533,440  shares of common stock at an exercise price of $2.00 per share
         owned by  Microcapital  Fund LP and 666,400  shares of common stock and
         warrants  to  purchase  266,560  shares of common  stock at an exercise
         price of $2.00  owned by  Microcapital  Fund  Ltd.  Ian P.  Ellis,  the
         general  partner of  MicroCapital  Fund LP and as  Director  of Fund of
         Microcapital Fund Ltd.,  exercises voting and investment authority over
         the shares held by these companies. The address of Microcapital Fund LP
         and Microcapital Fund Ltd is 201 Post Street, San Francisco, California
         94108.


                                       72
<PAGE>


(10)     Consists of 10,698,387  shares of common  stock.  On December 10, 2007,
         Gerard Guez entered into a purchase agreement with Daniel Guez, whereby
         Gerard Guez purchased  10,698,387 shares of common stock held by Daniel
         Guez.  The address of Gerard Guez is 9000 Sunset  Boulevard,  Penthouse
         West Hollywood, CA 90069.

(11)     Consists  of  2,900,000  shares  of  common  stock.  Paul  Kessler,  as
         Director,  exercises  voting and  investment  authority over the shares
         held by this company.  The address of Bristol  Investment Fund, Ltd. is
         Caledonian  House,  69 Dr.  Roy's Drive,  P.O.  Box 1043,  Grand Cayman
         KY1-1102, Cayman Islands.


SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2007.

<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..........            4,916,000                       $1.37                         1,084,000

Equity compensation
plans not approved by
security holders..........            1,025,000                       $0.94                            --

Total.....................            5,941,000                       $1.30                         1,084,000
</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.

         Effective October 1, 2007, we entered into a consulting  agreement with
Europlay  Capital  Advisors,  LLC. Under the terms of the consulting  agreement,
Europlay  Capital  Advisors  will be our  exclusive  financial  advisor to raise
capital and provide other financial  advisory and investment banking services to
us for a term of one year. In  conjunction  with the  consulting  agreement,  we
issued to Europlay  Capital Advisors a warrant to purchase 250,000 shares of our
common stock at an exercise  price of $0.50 per share.  The warrant vests over a
period of twelve  months in equal  monthly  installments  and has a term of five
years. No proceeds were received by us as a result of the warrant issuance.

         On November 13, 2007, we issued a warrant to purchase 150,000 shares of
our common stock to William Rast  Enterprises,  LLC. The warrant has an exercise
price of $0.40,  vested  immediately  and has a term of five years.  No proceeds
were received by us as a result of the warrant issuance.

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

         Other than the employment  arrangements  described  above in "Executive
Compensation" and the transactions described below, since January 1, 2006, there
has not been,  nor is there  currently  proposed,  any  transaction or series of
similar transactions to which we were or will be a party:

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


                                       73
<PAGE>


         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 AND 5% SHAREHOLDERS

         Colin Dyne  became our Chief  Executive  Officer  and a director of the
company on May 21, 2007. Colin Dyne is a significant  stockholder and has served
as a consultant to the company since December 2005,  advising on strategic sales
initiatives. We paid $192,000 and $259,000 in consulting fees to Mr. Dyne during
the years ended December 31, 2007 and 2006.

         Mr. Dyne also  serves as Vice  Chairman  of the Board of  Directors  of
Talon  International,  Inc.  (OTCBB:  TALN),  owner of Talon  zippers and a full
service trim management supplier for manufacturers of fashion apparel.  Mr. Dyne
founded Tag-It, Inc., a subsidiary of Talon, in 1991. Mr. Dyne served as Talon's
President from inception and as its Chief  Executive  Officer from 1997 to 2005.
During the year ended  December 31, 2007, we purchased  trim products from Talon
amounting to approximately $395,000.

         Kenneth Wengrod,  a member of our Board of Directors,  currently serves
as President of FTC Commercial  Corp., a company which he founded in 2002 and in
which he continues to hold a minority equity  position.  We are party to various
factoring agreements with FTC as further described in Note 4 to the consolidated
financial  statements.   As  of  December  31,  2007,  total  factored  accounts
receivable  included in due from factor  amounted to  approximately  $2,552,000.
Outstanding advances as of December 31, 2007 amounted to approximately $649,000,
and are included in the due from factor balance.

         We are party to a consulting  arrangement  with Susan White pursuant to
which Ms. White provides image and marketing  consulting  services to us. During
2007, we have paid Ms. White approximately $94,000 for such consulting services.

PROMOTERS AND CONTROL PERSONS

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

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


                                       74
<PAGE>


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

         On November 22, 2005, we consummated  an exchange  transaction in which
we acquired all of the  outstanding  ownership  interests of Bella Rose,  LLC, a
California limited liability company ("Bella Rose") and Versatile Entertainment,
Inc., a California corporation  ("Versatile") from their respective shareholders
and members, in exchange for an aggregate of 2,460,106.34 shares of our series A
convertible preferred stock which, on January 5, 2006, converted into 26,595,751
shares of our common stock on a post reverse  stock split basis.  At the closing
of the exchange  transaction,  Versatile and Bella Rose became our  wholly-owned
subsidiaries.  The exchange  transaction  was accounted for as a reverse  merger
(recapitalization)  with  Versatile  and Bella Rose deemed to be the  accounting
acquirers, and People's Liberation, Inc. the legal acquirer.

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

         Kevin R. Keating,  a former  director of the company,  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.


                                       75
<PAGE>


ITEM 13.      EXHIBITS

         The following exhibits are filed herewith:

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

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

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

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

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

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

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

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

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

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

3.9           Certificate  of Amendment of Certificate  of  Incorporation  filed
              January 5, 2006. (2)

3.10          Bylaws of People's Liberation, Inc.(2)

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

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          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)

10.7          Form of Common Stock Purchase Warrant. (3)

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

10.9          Form of Indemnity Agreement. (2)

10.10         Amendment to Employment  Agreement of Darryn Barber dated November
              8, 2006. (5)**


                                       76
<PAGE>


10.11         Employment Agreement of Edward Houston dated July 13, 2006. (6)**

10.12         Employment Agreement of Daniel Guez dated January 12, 2007. (7)**

10.13         Amended and Restated Limited Liability Company Operating Agreement
              of William Rast Licensing, LLC, dated as of January 1, 2007 by and
              between Bella Rose, LLC and William Rast Enterprises, LLC (8)

10.14         Amended and Restated Limited Liability Company Operating Agreement
              of William Rast Sourcing,  LLC, dated as of January 1, 2007 by and
              between Bella Rose, LLC and William Rast Enterprises, LLC (8)

10.15         Factoring Agreement entered into on October 1, 2006 by and between
              William Rast Sourcing, LLC and FTC Commercial Corp. (5)

10.16         Letter Agreement by and between William Rast Sourcing, LLC and FTC
              Commercial Corp. dated October 1, 2006 (5)

10.17         Letter Agreement by and between Versatile Entertainment,  Inc. and
              FTC Commercial Corp. dated September 1, 2006. (5)

10.18         Amendment No. 1 to Inventory Loan Facility  Agreement entered into
              on October 1, 2006 by and between  Versatile  Entertainment,  Inc.
              and FTC Commercial Corp. (5)

10.19         Letter Agreement by and between Bella Rose, LLC d/b/a William Rast
              and FTC Commercial Corp. dated September 1, 2006. (5)

10.20         Addendum  entered into as of May 21, 2007 by and between  People's
              Liberation, Inc. and Daniel S. Guez. (9)

10.21         Amended and Restated Employment Agreement dated as of the 19th day
              of June, 2007 by and between People's Liberation,  Inc. and Daniel
              S. Guez. (10)

10.22         Separation  Agreement  dated  October  5,  2007,  by  and  between
              People's Liberation, Inc. and Daniel S. Guez. (11)

10.23         Form of Subscription  Agreement by and between People's Liberation
              and the investor identified on the signature page thereto. (12)

10.24         Registration  Rights  Agreement  dated  September 28, 2007, by and
              among  People's  Liberation  and the  investors  identified on the
              signature pages thereof. (12)

10.25         Form of Warrant issued to Europlay  Capital  Advisors,  LLC, dated
              October 1, 2007. (12)

10.26         Form of Warrant  issued to William Rast  Enterprises,  LLC,  dated
              November 13, 2007. (12)

10.27         First  Amendment  to Amended and Restated  Operating  Agreement of
              William  Rast  Sourcing,  LLC dated as of  November  9, 2007,  and
              effective as of April 1, 2007, by and between Bella Rose,  LLC and
              William Rast Enterprises, LLC. (13)

10.28         First  Amendment  to Amended and Restated  Operating  Agreement of
              William  Rast  Licensing,  LLC dated as of November  9, 2007,  and
              effective as of April 1, 2007, by and between Bella Rose,  LLC and
              William Rast Enterprises, LLC. (13)

10.29         Consulting  Agreement  entered  into on February  1, 2007,  by and
              between Versatile Entertainment,  Inc. and Akari Enterprises, LLC.
              (13)

10.30         Amendment No. 1 to Inventory Loan Facility  Agreement entered into
              as of October 23, 2007, by and between FTC  Commercial  Corp.  and
              William Rast Sourcing, LLC. (13)


                                       77
<PAGE>


10.31         Amendment No. 2 to Inventory Loan Facility  Agreement entered into
              as of October 23, 2007 by and between  FTC  Commercial  Corp.  and
              Versatile Entertainment, Inc. (13)

10.32         Engagement Letter by and between People's  Liberation and Europlay
              Capital Advisors dated October 1, 2007. (13)(14)

10.33         Design Services  Agreement between William Rast Sourcing,  LLC and
              Paris68, LLC dated February 27, 2008.

14.1          People's Liberation, Inc. Code of Ethical Conduct. (15)

21.1          Subsidiaries of People's Liberation, Inc. (5)

23.1          Consent of Independent Registered Public Accounting Firm.

24.1          Power of Attorney (included on signature page)

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

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

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

----------

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

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

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

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

(5)      Incorporated by reference to our annual report on Form 10KSB for fiscal
         year ended December 31, 2006, filed March 16, 2007.

(6)      Incorporated by reference to our Current Report on Form 8-K (dated July
         13, 2006), filed on July 21, 2006. (7) Incorporated by reference to our
         Current Report on Form 8-K (dated  January 12, 2007),  filed on January
         17, 2007.

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

(8)      Incorporated  by reference to our current report on Form 8-K filed with
         the Securities and Exchange Commission on May 14, 2007.

(9)      Incorporated  by reference to our current report on Form 8-K filed with
         the Securities and Exchange Commission on May 24, 2007.

(10)     Incorporated  by reference to our current report on Form 8-K filed with
         the Securities and Exchange Commission on June 25, 2007.

(11)     Incorporated  by reference to our current report on Form 8-K filed with
         the Securities and Exchange Commission on October 9, 2007.

(12)     Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-QSB filed with the  Securities  and Exchange  Commission on November
         14, 2007.

(13)     Incorporated  by reference to our  Registration  Statement on Form SB-2
         (File No. 333-147684) filed on November 28, 2007.


                                       78
<PAGE>


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

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

* Pursuant to Item  601(b)(2) of  Regulation  S-B, the schedules to the Exchange
Agreement have been omitted. The Registrant undertakes to supplementally furnish
a copy of the omitted  schedules to the Securities and Exchange  Commission upon
request.

** Each a management contract or compensatory plan or arrangement required to be
filed as an exhibit to this annual report on Form 10-KSB.


                                       79
<PAGE>


ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

     AUDIT FEES

         Fees for audit and review  services  provided by  Grobstein,  Horwath &
Company, LLP totaled  approximately  $146,000 during the year ended December 31,
2007,  including  fees  associated  with the  December  31, 2006 audit,  and the
reviews of our quarterly  financial  statements  for the periods ended March 31,
2007, June 30, 2007 and September 30, 2007.

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

     AUDIT-RELATED FEES

         There  were no  audit-related  services  provided  for the years  ended
December 31, 2007 and 2006.

     TAX FEES

         Fees for tax services  provided by  Grobstein,  Horwath & Company,  LLP
during the year ended December 31, 2007 amounted to approximately  $27,175.  Tax
services provided during the year ended December 31, 2007 primarily consisted of
the  preparation  of the  Federal  and State tax returns for the Company and its
subsidiaries and other tax compliance services.

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

     ALL OTHER FEES

         No other fees were  incurred  during the years ended  December 31, 2007
and 2006 for services provided by Grobstein,  Horwath & Company,  LLP or Shelley
International, CPA, except as described above.


                                       80
<PAGE>


                                   SIGNATURES

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

                                       PEOPLE'S LIBERATION, INC.


Date: March 24, 2008                   /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 Colin Dyne 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/ Colin Dyne            Chief Executive Officer, Secretary,   March 24, 2008
-----------------------         and Director (Principal
    Colin Dyne                  Executive Officer)

 /s/ Darryn Barber          Chief Financial Officer (Principal    March 24, 2008
-----------------------         Financial and Accounting
    Darryn Barber                Officer)

 /s/ Susan White            Director                              March 24, 2008
-----------------------
    Susan White

 /s/ Ken Wengrod            Director                              March 24, 2008
-----------------------
    Ken Wengrod

 /s/ Troy Carter            Director                              March 24, 2008
-----------------------
    Troy Carter

 /s/ Dean Oakey             Director                              March 24, 2008
-----------------------
    Dean Oakey


                                       81