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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                to


Commission file number 000-51483

TRUE RELIGION APPAREL, INC.(Exact Name of Registrant as Specified in Its Charter)

Delaware

98-0352633(State or Other Jurisdiction
of Incorporation or Organization)

(I.R.S. Employer
Identification Number)2263 E. Vernon Ave.
Vernon, California

90058(Address of Principal Executive Offices)

(Zip Code)


(323) 266-3072(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:Common Stock, par value $0.0001 per share(Title of Class)

Nasdaq Global Market(Name of Each Exchange
on Which Registered)Securities registered under Section 12(g) of the Act:None(Title of Class)

None(Name of Each Exchange
on Which Registered)


Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
            No ý

The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2009, was approximately $527,026,000, computed by
reference to the price of $22.30 per share, the price at which the common equity was last sold on such date as reported on the Nasdaq Global Market. For purposes of this computation, it is assumed
that the shares beneficially held by directors and officers of the registrant would be deemed to be stock held by affiliates.

On
March 9, 2010, 24,984,741 shares of common stock were outstanding.



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TRUE RELIGION APPAREL, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2009

TABLE OF CONTENTS



PagesPART I.

1Item 1.

Business

1Item 1A.

Risk Factors

6Item 1B.

Unresolved Staff Comments

12Item 2.

Properties

12Item 3.

Legal Proceedings

12Item 4.

[Removed and Reserved]

12PART II.

13Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13Item 6.

Selected Financial Data

15Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

16Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

29Item 8.

Financial Statements and Supplementary Data

29Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

29Item 9A.

Controls and Procedures

29Item 9B.

Other Information

30PART III.

30Item 10.

Directors, Executive Officers and Corporate Governance

30Item 11.

Executive Compensation

30Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

30Item 13.

Certain Relationships and Related Transactions and Director Independence

31Item 14.

Principal Accountant Fees and Services

31PART IV.

32Item 15.

Exhibits, Financial Statements Schedules

32SIGNATURES

34


Exhibit 10.14
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words "expect," "estimate," "anticipate,"
"predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this filing and include
statements regarding the intent, belief or current expectations of the Company, our directors or officers with respect to, among other things (a) trends affecting our financial condition and
(b) our business and growth strategies. Our stockholders are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ materially from those projected in this Report, for the reasons, among others, discussed in the
Sections"Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors." The following discussion should be read in conjunction with our
financial statements and related notes, which are part of this Report or incorporated by reference to our reports filed with the Securities Exchange Commission. We undertake no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

PART I.

Item 1.    Business.

General

True Religion Apparel, Inc. (referred to in this Annual Report on Form 10-K as "the Company," "our," "we," or
"True Religion") designs, markets, distributes, and sells apparel under the brand name "True Religion Brand Jeans" to fashion-conscious consumers on six continents, including North America, Europe,
Asia, Australia, Africa and South America. We seek to be a trend setting leader in the design, marketing, distribution and sale of fashion jeans and related sportswear apparel. Our products can be
categorized as denim, knit and non-denim, and most come in 'tops' and 'bottoms'. Knit styles include hoodies, t-shirts and sweats, and non-denim fabrics include
corduroy and twill. Tops range from shirts to jackets, and bottoms encompass pants, shorts and skirts. We operate in four distinct but integrated segments: U.S. Wholesale, International, Consumer
Direct and Other, which includes licensing activity. Our Consumer Direct segment consists of branded retail stores located in the United States and e-commerce sales. The business segments
share product design, manufacturing and marketing resources. During the past seven years we have developed a recognizable brand, expanded vertically into the Consumer Direct segment, expanded our
product offerings, and initiated a strategy to leverage our brand by entering into product licensing agreements.

We
market our products into the U.S. Wholesale and International segments by attendance at industry trade shows. Our collections are also presented at our Los Angeles, New York and Tokyo
wholesale showrooms. Our sales efforts for all full price customers of our U.S. Wholesale segment were conducted by an independent sales agent until December 31, 2009. Beginning in 2010, this
segment's sales efforts are directed by a newly-established sales team, headed by our VP of U.S. Wholesale Sales who joined us in November 2009. We also have a sales team serving customers in Japan,
and in 2010, we will establish a sales team in Hong Kong to sell collections beginning with the Spring 2011 line. We have international distribution or sales agreements with independent agents, each
of whom is granted rights to market and sell our products in a defined market or territory. These agreements with international distributors and sales agents cover more than 50 countries on six
continents.

Our
products are sold in the United States in leading national premium stores, including Bloomingdale's, Neiman Marcus, Nordstrom, Saks Fifth Avenue, and in approximately 800 boutique
and specialty stores. We also sell our products through our 70 branded retail stores and through our True Religion Brand Jeans website, which is operated for us by a third party. Our products are

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distributed
internationally through our network of international distributors and sales agents and sold internationally at boutiques and specialty stores in major cities throughout Africa, Asia,
Australia, Europe, the Middle East and South America.

Business Strategy

Our strategy is to build brand recognition by marketing our products to fashion-conscious, affluent consumers who shop in our own
branded retail stores, premium nationwide stores, select boutiques and specialty stores, and who want to wear and be seen in the latest and most fashionable premium jeans and related apparel. True
Religion Brand Jeans often sell in the range of $172 to $350 per pair at retail; occasionally, we offer specialty items at higher prices. We continually update our product offerings to be seen as a
trend setter in the high fashion jeans apparel market.

For
our adult denim jeans and other fabrications, we utilize contract manufacturers located in the United States. We brand products as having been "Made in the U.S.A." Local contract
manufacturing helps us control our costs, ensures fast turnaround of popular styles, and keeps fixed overhead to a minimum. Approximately 80 percent of our sportswear is made in the USA by
contract manufacturers, and the remaining merchandise is made by foreign contract manufacturers.

We
maintain and exercise control over advertising and marketing activities from our headquarters, where we set the tone for integrity, consistency and direction of the True Religion
Brand Jeans brand image worldwide. Furthermore, we control our brand image by controlling the distribution of our products. We sell our in-season merchandise only through our own branded
retail stores, premium nationwide stores, boutiques and specialty stores, and international distributors that display and merchandise our products in a way that supports our brand image and is in
synch with the lifestyle and shopping experience expected by our customers. We sell our prior season merchandise and 'seconds' through our own branded retail stores located in outlet malls and through
select off-price retailers.

Our Brand and Products

Since 2003, our brand name has become a familiar name in premium denim and apparel. We believe the strength of the True Religion Brand
Jeans brand name and image is due mainly to our emphasis on seeking innovative and distinctive product designs that stand for exceptional fit, styling details and quality. We seek to be an innovator
in premium lifestyle branding. Our fashion perspective is significantly influenced by our Chief Executive Officer, Jeffrey Lubell.

Our
principal products are high fashion denim jeans in a wide variety of styles that we design, market, distribute and sell under the True Religion Brand Jeans trademarks. We currently
sell men's, women's and kid's styles. Our products are sold in the United States and abroad through our branded retail stores, upscale retailers, boutiques and specialty stores. In addition to denim
jeans, we sell corduroy pants and jackets, cotton, twill, linen and velvet pants and jackets, fleece sweat suits and hooded sweatshirts, skirts, knit shirts, t-shirts, shorts and
sportswear for men, women and children. Many of our products can be viewed on our website located atwww.truereligionbrandjeans.com. We intend to
continue to introduce new styles and styling details in jeans and sportswear.

True
Religion Brand Jeans products are made with high quality fabrics primarily from the United States, Italy, and Japan that are gently and naturally aged, hand finished and boldly
stitched in multiple thread colors. Although we operate in a highly competitive market, we seek to distinguish True Religion Brand Jeans products by emphasizing superior fit and unique styling
details. Many of our products are made to look, feel and fit like they have been owned for years. We believe that we have a competitive advantage in the detailing of the design, the quality of the
fabric and the superiority of the fit.

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Each
year we introduce new collections that we expect will be considered trend setting by fashion-conscious consumers.

Our
2009 net sales categorized by gender were approximately as follows: women55%; men41%; and kids4%. Our largest retail product category in terms
of units sold in 2009 was denim bottoms, which accounted for 56% of total units sold in our Consumer Direct segment. Our average sales price for women's products in our full price retail stores was
$196 in 2009; for men's products, it was $192; and for kid's products, it was $112.

Our Sales Segments

Information regarding net sales, gross profit and operating income, attributable to each of our segments, is included within
Management's Discussion and Analysis of Financial Condition and Results of Operations, and within Note 14, Segment Information, of our Notes to Consolidation Financial Statements, which are
incorporated herein by reference.

Our Consumer Direct Segment

Our Consumer Direct segment includes our United States branded retail stores and our e-commerce sales. As of
December 31, 2009, we operated 70 branded retail stores in the United States. We added 28 branded retail stores in 2009, and in 2010 we expect to add 27 branded retail stores in the U.S. and
one store in Toronto, Canada. Our branded retail stores are located across the United States in a variety of upscale shopping areas ("street" locations, regional malls, and a limited number of outlet
centers). Our typical branded retail store is approximately 1,700 square feet, while our branded retail store located in an outlet center is approximately 2,500 square feet. Our branded retail stores
showcase the full range of our branded merchandise including licensed products, in an environment that emphasizes our unique "Malibu hippy-bohemian chic" image through an extensive use of
hand-hewn hickory pecan wood. Our e-commerce sales are made through a third-party who receives sales commissions in exchange for operating the 'True Religion Brand Jeans'
website, accepting customer orders and fulfilling customer orders from their distribution center, where they hold our merchandise on consignment. In 2009, our Consumer Direct segment generated net
sales of $129.0 million, comprising 41.5% of our total net sales.

Our U.S. Wholesale Segment

Our U.S. Wholesale segment sells our products to leading nationwide premium stores, specialty retailers and boutiques that have the
image and merchandising expertise that we demand for the effective presentation of our products. In 2009, our products were sold in Bloomingdale's, Neiman Marcus, Nordstrom and Saks Fifth Avenue, and
in approximately 800 specialty retailers and boutiques. Our U.S. Wholesale segment also sells our products, primarily prior season or excess merchandise to off-price retailers. In 2009,
our U.S. Wholesale segment generated net sales of $123.2 million, comprising 39.6% of our total net sales.

Our International Segment

We distribute our products through our International segment to distributors and sales agents who sell to upscale boutiques in their
respective territory and through our wholly-owned subsidiary, True Religion Japan, KK, which was formed in the second quarter of 2008. Through this network of international distributors, sales agents
and our subsidiary, our products are found in major cities throughout Africa, Asia, Australia, Europe, the Middle East, North America and South America. In 2009, 71% of our international sales were
made to our five largest distributors and via our subsidiary in Japan. In 2009, our International segment generated net sales of $54.5 million, comprising 17.5% of our total net sales. In 2009,
we established subsidiaries in the United Kingdom and Hong Kong. We

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have
established a regional office for Asia/Pacific in Hong Kong. We plan to grow our net sales and net earnings from the International segment by presenting our merchandise at True Religion Brand
Jeans stores and at premium retailers' stores in markets where fashion-conscious consumers shop. In 2010, we expect to open full price branded retail stores in London, England and Tokyo, Japan.

Our Licensing Business

We selectively license our brand name and logo to be included on products sold by other companies to enhance and extend the True
Religion Brand Jeans brand. Through licensing alliances, we combine our consumer insight, design, and marketing skills with the specific product competencies of our licensing partners to create, build
and expand our product offerings to fashion-conscious consumers. We grant our product licensees the right to design, manufacture and sell at wholesale specified categories of products under our
trademark. We have the right to approve or disapprove the licensees' designs, products and wholesale customers. Each licensing partner pays us royalties based upon its wholesale sales of products that
use our trademark. In addition, licensing partners may be required to allocate a portion of their sales revenues to advertise our products and share in the creative costs associated with these
products. Our licenses typically have three year terms and may grant the licensee conditional renewal options. We recognized $4.3 million in royalty revenue through our licensing business in
2009.

At
the end of 2009, our licensed merchandise categories were: footwear, fragrances, headwear (including scarves and gloves), legwear, sunglasses and swimwear. In 2009, two merchandise
categories that were formerly licensed, handbags and outerwear, were transitioned to in-house development, sourcing, and sales.

Marketing

Our initial marketing effort, which commenced in 2003 after our acquisition of Guru Denim, was focused on our products and emphasized
the fit, styling details and washes of our unique denim products. Beginning in 2004, we expanded our focus from the products to the brand of True Religion Apparel by distributing our products to
premier fashion retailers. This provided us with the exposure to build our brand. In 2005 we continued to focus our marketing efforts on building our brand by expanding our distribution, initially to
national premium specialty stores and boutiques, and then to our branded retail stores. These settings showcase our products to many of our target customers. Since 2008, we have focused on building
our brand image by initiating selected print advertising campaigns to build brand awareness for our women's and men's denim, sportswear and licensed products as well as to generate awareness of our
growing number of branded retail stores. As we move into 2010, we intend to continue to build brand awareness and advertise our store locations through print ads in regional and national fashion and
lifestyle publications, as well as add more out of home advertising in key markets across the United States.

Trademarks

We have 24 trademarks registered in the United States for "True Religion Brand Jeans" logos and marks. We have also secured
international trademark registrations in 32 countries and we continue to seek trademark registrations that we believe are necessary to protect the True Religion brand. Generally, our trademarks remain
valid and enforceable so long as we continue to use the marks in commerce and the required registration renewals are filed. We consider our trademarks as valuable assets in the marketing of our
products and seek to protect them from infringement worldwide.

We
have also been issued a patent in the United States for our Joey style jeans, which is a distinctive design; the patent will expire in 2027.

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Sources and Availability of Raw Materials

The fabrics used in our denim products are sourced from fabric manufacturers located in the United States, Italy and Japan. Generally,
the fabric used in our products is not purchased directly by us but by our contract manufacturers. The thread and other materials are sourced from various industry suppliers within the United States.
Our contract manufacturers use high quality fabric in the manufacturing of our products. Although we do not currently have any long-term agreements in place for the supply of our fabric,
thread or other components, such high quality fabric is currently readily available from a number of suppliers, including mills located both in the United States and abroad.

Design and Product Development

Our design team, which has 29 employees and is led by Jeffrey Lubell, Chief Executive Officer and Chief Merchant, is responsible for
the design and development of our products. We do not currently have a formal research and development effort but our design team plans to continue to develop new merchandise for each season. Our
design team is diverse in all our product categories and is known for designing leading fashion trends. Our washes are constantly in development to react to the demand for new and exciting product for
consumers. The development of our products from concept through manufacturing is engineered to be not only fashionable but durable as well.

Manufacturing

We outsource all of our manufacturing to third parties on an order-by-order basis. Currently, we have contract
manufacturers in the United States for our women's and men's denim, knits and some fleece products, Mexico for our kid's denim, knits, and some fleece products, and Asia for knit shirts. We believe we
can meet our current production needs using these and other available contract manufacturers. These contractors purchase the fabric and materials, and then sew and finish our products to our design
specifications. In addition to the contract manufacturers, we utilize various laundry and finishing houses in the Los Angeles area to complete the production of many of our products.

Our
production and sourcing staff oversee the manufacturing, quality control and production of our products and researches and develops new sources of supply for the materials used in
the manufacturing of our products.

Quality Control

Our quality control program is designed to ensure that products meet our high quality standards. We monitor the quality of the fabrics
used by our contract manufacturers prior to the production of garments and inspect prototypes of each product before production runs commence. We also perform random on-site quality
control checks during and after production before our products are shipped from our contract manufacturers. Final random inspections of our products occur when our products are received in our
distribution center. We believe that our policy of inspecting our products at both our distribution centers and on-site at our contract manufacturers' facilities is integral in maintaining
the quality, consistency and reputation of our products.

Government Regulation and Supervision

We are subject to customs, truth-in-advertising and other laws, including consumer protection regulations and
zoning and occupancy ordinances that regulate retailers generally and/or govern the promotion and sale of merchandise and the operation of retail stores. Some of our merchandise is manufactured by
factories located outside of the United States. These products are imported and are subject to U.S. customs laws, which impose tariffs as well as import quota restrictions for textiles and apparel.
While importation of goods from some countries from which we buy our products may be subject to embargo by U.S. customs authorities if shipments exceed quota limits, we currently are not

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restricted
by quotas in the operation of our business. In addition, custom duties and tariffs do not comprise a material portion of the cost of our products.

We
are committed to product quality and safety; we focus our efforts to adhere to all applicable Federal and state laws and regulations including Consumer Product Safety Improvement Act
("CPSIA"), and all Federal Trade Commission ("FTC") rules and regulations for product labeling. Labeling and advertising of our products is subject to regulation by the FTC. We use a government
approved third party testing lab to verify all federally mandated testing requirements for wearing apparel as applicable. We believe that we are in material compliance with these regulations.

Competition

The retail apparel industry is highly competitive. We compete with numerous designers and manufacturers of apparel and accessories,
domestic and foreign, including 7 for All Mankind, AG Adriano Goldschmied, Diesel, G-Star, J Brand, Joe's Jeans, Levi Strauss & Co, Rock & Republic and Citizens of Humanity.
Some of our competitors may be significantly larger and have substantially greater resources than us. We compete primarily on the basis of fashion, fit and quality, which depend on our ability
to:



Employees

As of December 31, 2009, we employed on a full or part-time basis a total of 1,238 employees, consisting of 976 in
our retail stores, 138 in design and production, and 124 in general administrative.

Website Availability of Our Reports Filed with the Securities and Exchange Commission

Our Internet Web site address iswww.truereligionbrandjeans.com. We make available free
of charge on or through our Internet Web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports as soon as reasonably practicable after we electronically file the report with or furnish it to the SEC.

Item 1A.    Risk Factors.

Risks Relating to Our Industry

Our business may be negatively impacted by general economic conditions and the current global financial crisis.

Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending that affect not only the
ultimate consumer, but also retailers, our largest direct customers. Consumer spending recently has deteriorated significantly and may remain depressed, or be subject to further deterioration for the
foreseeable future. The worldwide apparel industry is heavily influenced by general economic cycles. Purchases of high-fashion apparel and accessories tend to decline in periods of
recession or uncertainty regarding future economic prospects, as disposable income declines. Many factors affect the level of consumer spending in the apparel industries, including, among others:
prevailing economic conditions, levels of employment, salaries and wage rates, energy costs, interest rates, the availability of consumer credit, taxation and consumer confidence in

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future
economic conditions. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and
operate new retail stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain our earnings from operations as a
percentage of net sales. As a result, our operating results may be adversely and materially affected by downward trends in the United States or global economy. Furthermore, in anticipation of
continued increases in net sales, we have significantly expanded our infrastructure and workforce. Because these expenses are fixed in the short term, our operating results and margins will be
adversely impacted if we do not continue to grow as anticipated.

Our continued operations depend on current fashion trends. If our designs and products do not continue to be fashionable, our business could be adversely affected.

Our success depends in large part on our ability to develop, market and deliver innovative and stylish products that are consistent
with and build on our brand and image at a pace and intensity competitive with our competition. The novelty and the design of our True Religion Brand Jeans apparel is critical to our success and
competitive position. The apparel industry is subject to rapidly evolving fashion trends and shifting consumer demands. If we are unable to continue to develop and offer unique products to our
customers, our sales and margins will decline and we may be faced with a significant amount of unsold finished goods inventory. We cannot be certain that high-fashion denim and related
apparel will continue to be fashionable. Should the trend steer away from high-fashion denim and related apparel, our sales could decrease and our business could be adversely affected. In
addition, our future designs and plans to expand our product offerings may not be successful, and any unsuccessful designs or product offerings could adversely affect our business.

Our business and the success of our products could be harmed if we are unable to maintain our brand image.

Our success to date has been due in large part to the growth of our brand image. If we are unable to timely and appropriately respond
to changing consumer demand, our brand name and brand image may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brand image to be outdated or
associate our brand with styles that are no longer popular. In the past, many apparel companies have experienced periods of rapid growth in sales and earnings followed by periods of declining sales
and losses. Our business may be similarly affected in the future.

We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these
companies, our market share may decline and our business could be harmed.

We face intense competition in the apparel industry from other established companies. A number of our competitors may have
significantly greater financial, technological, manufacturing, sales, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand
periodic downturns in the apparel industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, there are low barriers of entry into this
industry and new companies may enter the markets in which we compete, further increasing competition in the industry. Our branded retail stores compete with many other retailers, including department
stores, some of whom are our major wholesale customers. We believe that our ability to compete successfully depends on a number of factors, including the style and quality of our products and the
strength of our brand name, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced
profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact the
trading price of our common stock.

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Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.

The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products
are dependent in part on the market price for raw materialsprimarily cottonused to produce them. The price and availability of cotton may fluctuate substantially, depending
on a variety of factors, including demand, crop yields, weather, supply conditions, transportation costs, work stoppages, government regulation, economic climates and other unpredictable factors.
Increases in raw material costs, together with other factors, will make it difficult for us to sustain the wholesale gross margin level we have achieved in recent years and result in a decrease of our
profitability unless we are able to pass higher prices on to our wholesale and retail customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production
requirements in a timely manner.

Risks Related to Our Business

We may be unable to sustain our past growth or manage our future growth, which may have a material adverse effect on our future operating results.

We have experienced rapid growth since our inception, and have increased our net sales from $103.2 million in 2005 to
$311.0 million in 2009. We anticipate that our future growth rate will depend upon various factors, including the strength of our brand image, the market success of our current and future
products, the success or our growth strategies, competitive conditions and our ability to manage our future growth. Future growth may place a significant strain on our management and operations. As we
continue to grow in our operations, our operational, administrative, financial and legal procedures and controls will need to be expanded. As a result, we may need to train and manage an increasing
number of employees, which could distract our management team from our business. Our future success will depend substantially on the ability of our management team to manage our anticipated growth. If
we are unable to anticipate or manage our growth effectively, our future operating results could be adversely affected.

Our business could be harmed if we fail to maintain proper inventory levels.

We place orders with our manufacturers for some of our products prior to the time we receive all of our customers' orders. We do this
to minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We also maintain an inventory of certain products that we anticipate will be in
greater demand. However, we may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result
in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operating results and financial
condition. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require at the time we need them, we may experience
inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, and diminish brand loyalty.

Increasing the number of branded company-operated stores will require us to develop new capabilities and increase our expenditures.

Our growth strategy is dependent in part on our ability to open and operate new stores and the availability of suitable store locations
on acceptable terms. Although we operated 70 branded retail stores as of December 31, 2009, we historically have been primarily a wholesaler. We plan to open approximately 27 company-operated
branded retail and outlet stores in 2010 in the United States. The success of this strategy is dependent upon, among other factors, the identification of suitable markets and

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sites
for store locations, the negotiation of acceptable lease terms, the hiring, training and retention of competent sales personnel, and making capital expenditures for these stores. We must also
offer a broad product assortment, appropriately manage retail inventory levels, install and operate effective retail systems, execute effective pricing strategies and integrate our stores into our
overall business mix. An increase in the number of branded company-operated stores will place increased demands on our operational, managerial and administrative resources and require us to further
develop our retailing skills and capabilities. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of
our existing stores. The commitments associated with our expansion will increase our operating expenses may be costly to terminate, and these investments may be difficult to recapture if we decide to
close a store or change our strategy.

We must successfully maintain and/or upgrade our information technology systems.

We rely on various information technology systems to manage our operations, which subjects us to inherent costs and risks associated
with maintaining, upgrading, replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial
capital expenditures, demands on management time and other risks of delays or difficulties in upgrading, transitioning to new systems or of integrating new systems into our current systems.

We rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or
failures by our contractors to perform, could harm our sales, service levels and reputation.

We source our products from independent manufacturers who purchase fabric and other raw materials. As a result, we must locate and
secure production capacity. We depend
on independent manufacturers to maintain adequate financial resources, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment
characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we do not have material long-term contracts with any
of our independent manufacturers, and these manufacturers generally may unilaterally terminate their relationship with us at any time.

Our
dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A manufacturer's failure to ship products to us in
a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our wholesale customers. In addition, any interference with our ability to receive shipments
from those manufacturers, such as conditions at ports or issues that otherwise affect transportation and warehousing providers, could cause delayed delivery of product. Additionally, if we experience
a significant increase in demand, or if we need to replace any of the manufacturers that we currently use, we may have to expand our third party manufacturing capacity. This capacity may not be
available to us, or available on terms that are acceptable to us. Failing 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 and margins.

Our success depends on the continued protection of our trademark and other proprietary intellectual property rights.

Our trademark and other intellectual property rights are important to our success and competitive position, and the loss of or
inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and
other proprietary intellectual property rights on a worldwide basis. Despite any precautions we may take to protect our intellectual property, policing unauthorized use of our

9

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intellectual
property is difficult, expensive and time consuming, and we may be unable to adequately protect our intellectual property or determine the extent of any unauthorized use, particularly in
those foreign countries where the laws do not protect proprietary rights as fully as in the United States. Our efforts to establish and protect our trademark and other proprietary intellectual
property rights may not be adequate to prevent imitation or counterfeiting of our products by others or to prevent others from seeking to block sales of our products for violating their trademarks and
proprietary rights. Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant
damage to our brand names and our ability to effectively represent ourselves to our customers. Also, we cannot assure you that others will not assert rights in, or ownership of, trademarks and other
proprietary rights of True Religion, that our proprietary rights would be upheld if challenged or that we would, in that event, not be prevented from using our trademarks, any of which could have a
material adverse effect on our financial condition and results of operations. Further, we could incur substantial costs in legal actions
relating to our use of intellectual property or the use of our intellectual property by others. Even if we are successful in these actions, the costs we incur could have a material adverse effect on
us.

Our business could suffer from the financial instability of our customers.

In the United States, we sell our products to certain retail companies on open account with 30 to 60 day payment terms. We
generally request a letter of credit or wire transfer before shipment to our foreign distributors, but these arrangements are not always possible. Customer financial difficulties could result in
losses to us.

A significant disruption at our distribution center could have a material adverse impact on our business and operating results.

We primarily rely on a single distribution center located at our corporate offices in Vernon, California to receive, store and
distribute merchandise to all of our stores and wholesale customers. Any significant interruption in the operation of our Vernon distribution center due to natural disasters, accidents, system
failures or other unforeseen causes could have a material adverse effect on our business and operating results.

Our ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks.

We expect our international operations to increase, and consequently we may face the possibility of greater losses from a number of
risks inherent in doing business in international markets and from a number of factors which are beyond our control. These factors include, among other things:



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Foreign currency fluctuations could adversely impact our financial condition and results of operations.

We generally purchase our products in U.S. dollars. However, we source some of our products overseas. The cost of these products may be
affected by changes in the value of the applicable currencies. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated prices at which our
international business will sell products. Furthermore, our international sales and some of our licensing revenue are generally derived from sales in foreign currencies. This revenue, when translated
into U.S. dollars for consolidated reporting purposes, could be materially affected by fluctuations in the U.S. dollar, negatively impacting our results of operations and our ability to generate
revenue growth.

The loss of our Chief Executive Officer or other key management personnel would have an adverse impact on our future development and could impair our ability to succeed.

Our performance is substantially dependent upon the expertise of our Chief Executive Officer, Jeffrey Lubell, and other key management
personnel. Mr. Lubell spends all of his working time on our business. It may be difficult to find qualified individuals to replace Mr. Lubell or other key management personnel if we were
to lose any one or more of them. The loss of Mr. Lubell or any of our key management personnel could have a material adverse effect on our business, development, financial condition, and
operating results. We do not maintain "key man" insurance with respect to Mr. Lubell or any of our other key management personnel, and any of them may leave us at any time, which could severely
disrupt our business and future operating results.

Our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements.

We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into
agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements.
Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our
standards. These activities could harm our brand equity, our reputation and our business.

Violation of labor laws and practices by our licensees or suppliers could harm our business.

We require our licensing partners and suppliers to operate in compliance with applicable laws and regulations. While our code of
conduct promotes ethical business practices, we do not control our licensees or suppliers or their labor practices. The violation of labor or other laws by any of our licensees or suppliers, or
divergence of a licensee's or supplier's labor practices from those generally accepted as ethical in the United States, could interrupt or otherwise disrupt the shipment of our products, harm the
value of our trademarks, damage our reputation or expose us to potential liability for their wrongdoings.

Our quarterly sales and operating results fluctuate as a result of a variety of factors, including seasonal fluctuations in demand for premium denim and related apparel, and
accessories, delivery date delays, timing of new store openings, recognition of stock-based compensation and potential fluctuations in our annualized tax rate, which may result in volatility of our
stock price.

Our quarterly sales and operating results have varied significantly in the past and can be expected to fluctuate in the future due to a
number of factors, many of which are beyond our control. For example, sales of our products have historically been somewhat seasonal in nature with the largest sales generally occurring in the second
half of the year. Delays in scheduling or pickup of products by our wholesale customers could negatively impact our net sales and results of operations for any given

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Table of Contents

quarter.
The timing of new store openings and the amount of sales contributed by new stores could also impact our net sales and results of operations for any given quarter. The compensation expense
for the awards that vest immediately caused an increase in our selling, general and administrative expenses and reduced our net income and earnings per share in our quarterly income statements. Also,
our annualized tax rate is based on projections of our operating results for the year, which we review and revise as necessary at the end of each quarter. Any quarterly fluctuations in our annualized
tax rate that may occur could have a material impact on our quarterly operating results. As a result of these specific and other general factors, our operating results will likely vary from quarter to
quarter and the results for any particular quarter may not be necessarily indicative of results for the full year. Any shortfall in sales or net income from levels expected by securities analysts and
investors could cause a decrease in the trading price of our common stock.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

We lease our corporate headquarters facility, which is a 119,000 square foot industrial building located in Vernon, California, under a
non-cancelable agreement. The lease agreement expires on June 30, 2011, and we have the right to renew the lease agreement for five years if we comply with the lease agreement
terms. We conduct our design, administrative and distribution operations at this facility.

We
lease our retail store locations under non-cancelable operating lease agreements expiring on various dates through 2021. These facilities are located in the United States,
the United Kingdom and Japan. Many of the store lease agreements allow us to terminate the agreement, generally in the third or fourth year, if our sales do not meet a pre-determined
level. As of December 31, 2009, we had 73 stores open, including three in Japan. In 2010, we expect to open approximately 27 stores in the United States, one in London, England, one in Tokyo,
Japan and one in Toronto, Canada. We are considering a few additional new stores for 2010. At the end of 2009, our retail square footage, which includes storage space at all stores, was approximately
171,000. Our retail stores range in size from 600 to 3,300 square feet.

Item 3.    Legal Proceedings.

From time to time, in the ordinary course of business, we are involved in various legal proceedings. We do not believe that these
matters, either alone or in the aggregate, will have a material impact on our financial condition.

Item 4.    (Removed and Reserved)

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Table of Contents

PART II.

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

Market Information

Our common stock trades under the symbol "TRLG" on the Nasdaq Global Market. The high and low sales prices for our common stock, as
reported by the Nasdaq Global Market for the periods indicated are as follows.

2009

2008High

Low

High

LowFirst Quarter

$
14.13

$
7.83

$
20.76

$
17.00Second Quarter

$
24.52

$
11.87

$
26.76

$
15.51Third Quarter

$
26.51

$
19.64

$
31.08

$
24.53Fourth Quarter

$
28.33

$
17.57

$
25.69

$
10.25


Holders

As of March 4, 2010 there were 63 record holders and approximately 14,500 beneficial holders of our Common Stock.

Dividends

We have not declared or paid any cash dividends since inception and we do not intend to pay any cash dividends in the foreseeable
future. There are no restrictions that limit our ability to pay dividends on our common shares. Any future determination as to the payment of dividends on our common stock will be at the discretion of
our Board of Directors and will depend on our results of operations, financial condition capital requirements and other factors deemed relevant by the Board of Directors, including the General
Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net profits.

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Table of Contents

Stock Price Performance

The following graph compares, for each of the last five fiscal years, commencing on December 31, 2004 and ending
December 31, 2009, the cumulative total return of True Religion Apparel, Inc. common stock, Standard & Poor's 500 Index, and Standard & Poor's 1500 Apparel,
Accessories & Luxury Goods Index. The Apparel, Accessories & Luxury Goods Index is comprised of 18 companies, also representing a sector of the Standard & Poor's 500 Index. The
cumulative total return of True Religion Apparel, Inc. common stock assumes $100 invested on December 31, 2004 in our common stock and in each of the foregoing indices. The stock price
performance graph is not necessarily indicative of future stock price performance. The return on $100 invested in the S&P 500 and the S&P 1500 Apparel, Accessories & Luxury Goods
Index over the 5 year period from December 2004 to December 2009 was $102 and $117, respectively.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among True Religion Apparel, Inc., The S&P 500 Index  And S&P 1500 Apparel, Accessories & Luxury Goods

GRAPHIC



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Table of Contents

Transactions in Our Equity Securities

For the period covered by this report, we have not engaged in any transactions involving the sale of our unregistered equity securities
that were not disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K. We have not engaged in any sales of registered securities for which
the use of proceeds is required to be disclosed. This table provides certain information with respect to our purchases of shares of our common stock during the fourth quarter of 2009:

Period

Total Number
of Shares
Purchased (a)

Average
Price Paid
Per Share (a)

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan

Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the PlanOctober 1, 2009October 31, 2009


1,192

$
24.78





November 1, 2009November 30, 2009


1,468

$
24.63





December 1, 2009December 31, 2009




$






Total


2,660

$
24.70








(a)These
columns reflect the surrender to us of shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting
of restricted stock awards issued to employees.


Item 6.    Selected Financial Data.

The following selected financial data are derived from the audited Consolidated Financial Statements and should be read in conjunction
with Item 1A "Risk Factors," Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Consolidated Financial Statements and the related
notes included in Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

For the Years Ended December 31,2009

2008

2007

2006

2005Statement of operations data (In Thousands):Net sales

$
311,001

$
270,000

$
173,256

$
140,489

$
103,219Operating income


77,597


68,876


47,142


34,977


31,470Provision for income taxes


30,434


25,570


21,100


14,035


13,126Net income


47,332


44,371


27,845


21,746


18,440Earnings per share:Basic

$
1.97

$
1.89

$
1.21

$
0.97

$
0.85Diluted

$
1.92

$
1.83

$
1.16

$
0.92

$
0.81Weighted number of shares outstandingbasic


23,993


23,511


22,964


22,496


21,677Weighted number of shares outstandingdiluted


24,659


24,270


23,949


23,608


22,657




As of December 31,2009

2008

2007

2006

2005Balance sheet data ($000's):Working capital

$
166,565

$
113,108

$
72,846

$
58,845

$
30,337Total assets

$
229,806

$
166,452

$
113,258

$
79,751

$
44,163Stockholders' equity

$
197,854

$
142,250

$
95,247

$
64,147

$
31,574


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Table of Contents

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

Executive Summary

We design, market, distribute and sell premium denim apparel, centered on our core denim products using the brand name "True Religion
Brand Jeans." Our products include pants, tops, and jackets, made from denim, fleece, corduroy and other fabrics. We are known for our unique fit and styling details. Through multiple wholesale and
retail channels, our expanding product line reaches fashion-conscious consumers on six continents, including North America, Europe, Asia, Australia, Africa and South America.

Strategic Initiatives

We believe that our core strengths have enabled us to be well positioned to expand our business and enhance shareholder value through
execution of our strategy and focusing on key strategic initiatives which include:



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Table of Contents



2009 Highlights

The sales growth we experienced in 2009 reflects the strength of our expanded product assortment and the continued growth in our
Consumer Direct business. The key highlights of 2009 were:



2009 Compared to 2008

The following table summarizes results of operations for 2009 compared to 2008 (dollar amounts in thousands, except per share data):

Years Ended December 31,2009

2008Amount

%

Amount

%

Change

%Net sales

$
311,001


100.0
%
$
270,000


100.0
%
$
41,001


15.2
%Gross profit


195,562


62.9
%

157,001


58.1
%

38,561


24.6
%Selling, general and administrative expenses


117,965


37.9
%

88,125


32.6
%

29,840


33.9
%Operating income


77,597


25.0
%

68,876


25.5
%

8,721


12.7
%Interest income, net


169


0.0
%

1,065


0.4
%

(896
)

(84.1
)%Provision for income taxes


30,434


9.8
%

25,570


9.5
%

4,864


19.0
%Net Income

$
47,332


15.2
%
$
44,371


16.4
%
$
2,961


6.7
%Net income per shareBasic

$
1.97




$
1.89




$
0.08


4.2
%Net income per shareDiluted

$
1.92




$
1.83




$
0.09


4.9
%


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Table of Contents

Net Sales

The following table summarizes net sales by segment (dollar amounts in thousands):

Years Ended December 31,

Change2009

2008

Amount

%Consumer Direct


129,030


75,314


53,716


71.3
%U.S. Wholesale


123,203


153,235


(30,032
)

(19.6
)%International


54,479


40,044


14,435


36.0
%Other


4,289


1,407


2,882


204.8
%Total net sales

$
311,001

$
270,000

$
41,001


15.2
%


The
following table summarizes percentage of total net sales by segment:

December 31,

Change2009

2008

%Consumer Direct


41.5
%

27.9
%

13.6
%U.S. Wholesale


39.6


56.8


(17.2
)%International


17.5


14.8


2.7
%Other


1.4


0.5


0.9
%Total net sales


100.0
%

100.0
%


Consumer
Direct net sales increased by 71.3% to $129.0 million in 2009 as we finished the year with 70 stores compared to 42 stores at the end of 2008. The additional sales from
new stores were partially offset by a decrease in sales at our 15 stores which opened before the end of 2007 due to a reduction in shoppers visiting our stores caused by the challenging economic and
consumer environment. In 2010, we expect to open 27 branded retail stores in the United States and one in Canada.

U.S.
Wholesale net sales decreased 19.6% to $123.2 million. In 2009, our net sales to boutique customers decreased sharply; these customers were more impacted by the challenging
retail environment as they generally depend to a larger extent on external financing. Our sales to "major" accounts, which consist of customers such as Nordstrom, Bloomingdale's, Saks Fifth Avenue and
Neiman Marcus, decreased 14.9% from the prior year as these customers experienced a decline in sales of premium denim due to the economic recession. Partially offsetting these decreases was a slight
increase in our sales to off-price retailers of $0.7 million to $38.5 million. Sales to Nordstrom, Inc. accounted for 15.2% of our net sales in 2009. In 2010, we
expect this segment's sales to the off-price retailers will be reduced by $10 million as we will place a greater emphasis on regular-price wholesale sales.

International
net sales increased 36.0% to $54.5 million primarily due to increased sales to distributors in Asia and Europe. Our sales to customers in Japan increased in 2009 as
compared to 2008 because we terminated our Japanese distributor in the second quarter of 2008 and established our own subsidiary, which is selling merchandise to wholesale accounts and operating three
outlet stores. Our brand is less established outside the U.S., so this segment's sales are growing in spite of the challenging retail environment in many international markets as our brand gains
greater exposure. In 2010, we expect to open two international branded retail stores in London, England and Tokyo, Japan.

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Table of Contents

Gross Profit

The following table summarizes gross profit by segment (dollar amounts in thousands):

Years Ended December 31,

Change2009

2008

Amount

%Consumer Direct

$
95,276

$
57,669

$
37,607


65.2
%U.S. Wholesale


65,882


78,670


(12,788
)

(16.3
)%International


30,115


19,255


10,860


56.4
%Other


4,289


1,407


2,882


204.8
%Total gross profit

$
195,562

$
157,001

$
38,561


24.6
%


The
following table summarizes gross profit as a percentage of net sales ("gross margin") by segment:

December 31,

Change2009

2008

%Consumer Direct


73.8
%

76.6
%

(2.8
)%U.S. Wholesale


53.5


51.3


2.2
%International


55.3


48.1


7.2
%Other


100.0


100.0


0.0
%Total gross margin


62.9
%

58.1
%

4.8
%


Overall
gross margin improved from 58.1% of net sales in 2008 to 62.9% of net sales in 2009, primarily reflecting the ongoing net sales mix shift towards the higher-margin consumer
direct business.

The
Consumer Direct gross margin decreased to 73.8% in 2009 from 76.6% in 2008 as a larger share of Consumer Direct sales came from the outlet stores as compared to the full price store
sales. Outlet stores sales generate lower gross margins because the merchandise is sold at a discounted price. Also causing the decrease was the expected decline of the outlet stores' gross margin as
we are relying more on our own outlet stores to sell slow-moving merchandise and as the outlet stores now have fewer higher-margin irregulars in their merchandise assortment.

U.S.
Wholesale gross profit decreased 16.3% to $65.9 million in 2009 compared to $78.7 million in 2008, due to the decline in U.S. Wholesale net sales. However, this
segment's gross margin increased to 53.5% in 2009 from 51.3% in 2008, due to the continued improvements in our sourcing and production processes, including an increase in the gross margin of
off-price sales.

International
gross margin increased to 55.3% in 2009 from 48.1% in 2008, primarily due to the increase in direct sales to select Asian markets, which carry higher gross margins than
sales through distributors.

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Table of Contents

Selling, General and Administrative Expenses

The following table presents the components of selling, general & administrative expenses ("SG&A") by segment (dollar amounts in
thousands):

Years Ended December 31,

Change2009

2008

Amount

%Consumer Direct

$
50,510

$
29,859

$
20,651


69.2
%U.S. Wholesale


35,119


31,218


3,901


12.5
%International


4,948


2,494


2,454


98.4
%Other


27,388


24,554


2,834


11.5
%Total selling, general and administrative expenses

$
117,965

$
88,125

$
29,840


33.9
%


The
following table summarizes SG&A as a percentage of net sales ("SG&A rate"), by segment:

December 31,

Change2009

2008

%Consumer Direct


39.1
%

39.6
%

(0.5
)%U.S. Wholesale


28.5


20.4


8.1
%International


9.1


6.2


2.9
%Other


NM


NM


NMTotal SG&A rate


37.9
%

32.6
%

5.3
%


NM
stands for not meaningful.


In
2009, SG&A increased 33.9% to $118.0 million, compared to $88.1 million in 2008.

The
Consumer Direct SG&A increased $20.7 million, from $29.9 million in 2008 to $50.5 million in 2009. This increase is directly related to the growth in the number
of stores over the prior year, from 42 at the end of 2008 to 70 at the end of 2009. The slight decrease in Consumer Direct SG&A rate from 39.6% in 2008 to 39.1% in 2009, is primarily due to the
reduction of labor expenses as a percentage of net sales.

U.S.
Wholesale SG&A increased by 12.5% primarily due to the increase in design, production, warehouse and operations accounting employees to support our overall business growth and an
increase in share-based compensation. The increase in share-based compensation is due to meeting company-wide earnings targets on performance-based awards which were granted in 2009.
Partially offsetting these increases was a decrease in sales commissions linked to the U.S. Wholesale net sales decrease.

International
SG&A increased $2.5 million, or 98.4%, primarily due to the expansion of our international operations.

Other
SG&A increased $2.8 million, from $24.6 million in 2008 to $27.4 in 2009. This increase is primarily attributable to executive performance-based compensation. Our
executive compensation program was redesigned in 2008 to condition a greater portion of executive compensation on the satisfaction of earnings targets. Our 2009 performance outpaced our 2009
earnings target by a higher rate than in 2008. Other SG&A, as a percentage of total net sales, decreased from 9.1% in 2008 to 8.8% in 2009 due to the increase is total net sales.

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Table of Contents

Operating Income

The following table summarizes operating income by segment (dollar amounts in thousands):

Years Ended December 31,

Change2009

2008

Amount

%Consumer Direct

$
44,766

$
27,810

$
16,956


61.0
%U.S. Wholesale


30,763


47,452


(16,689
)

(35.2
)%International


25,167


16,761


8,406


50.2
%Other


(23,099
)

(23,147
)

48


0.2
%Total operating income

$
77,597

$
68,876

$
8,721


12.7
%


The
following table summarizes operating income as a percentage of net sales ("operating margin"), by segment:

December 31,

Change2009

2008

%Consumer Direct


34.7
%

37.0
%

(2.3
)%U.S. Wholesale


25.0


30.9


(6.0
)%International


46.2


41.9


4.3
%Other


NM


NM


NMTotal SG&A rate


25.0
%

25.5
%

(0.5
)%


The
Consumer Direct operating margin decreased from 37.0% in 2008 to 34.7% in 2009. This decrease in operating margin was due to a combination of a decline in sales at our 15 stores
opened before the end of 2007 due to the challenging retail environment, and the planned, lower operating margin for stores opened in 2009. Overall, the stores opened in 2008 have improved their
operating margin in 2009 as compared to 2008.

U.S.
Wholesale operating income decreased as a percentage of U.S. Wholesale net sales (operating margin) from 30.9% in 2008 to 25.0% in 2009 primarily due to the decrease in this
segment's net sales and the addition of resources in 2009 to support our overall business growth.

International
operating income increased as a percentage of International net sales, from 41.9% in 2008 to 46.2% in 2009 primarily due to the increase in direct sales to customers versus
wholesale distributors.

Interest Income, net

Interest income, net was $0.2 million in 2009 compared to $1.1 million in 2008. While we had an increase in our cash
equivalents and investments in 2009 compared to 2008, the average yield on our investments has decreased due to changes in the investment market and our shift to more conservative investments.

Provision for Income Taxes

The effective tax rate was 39.1% for 2009 compared to 36.6% in 2008. In 2008, we implemented a tax planning strategy that retroactively
changed our filing status in certain states, which reduced our cumulative tax provision by $1.5 million. We also finalized our 2007 tax returns during the 2008 period, which included additional
analysis of our federal and state tax obligations; as a result of this analysis, we reduced our income tax provision in 2008 by $0.6 million. These factors were the primary drivers resulting in
a lower effective tax rate of 36.6% in 2008.

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Table of Contents

Net Income and Earnings Per Diluted Share

Net income was $47.3 million in 2009 compared to $44.4 million in 2008, an increase of 6.7%. This increase is
attributable primarily to the increase in net sales. Earnings per diluted share increased 4.9% from $1.83 in 2008 to $1.92 in 2009.

2008 Highlights

The sales growth we experienced in 2008 reflects the strength of our expanded product assortment and the continued growth in our
Consumer Direct business. The key highlights of 2008 were:



2008 Compared to 2007

The following table summarizes results of operations for 2008 compared to 2007 (dollar amounts in thousands, except per share data):

Years Ended December 31,2008

2007Amount

%

Amount

%

Change

%Net sales

$
270,000


100.0
%
$
173,256


100.0
%
$
96,744


55.8
%Gross profit


157,001


58.1
%

98,827


57.0
%

58,174


58.9
%Selling, general and administrative expenses


88,125


32.6
%

51,685


29.8
%

36,440


70.5
%Operating income


68,876


25.5
%

47,142


27.2
%

21,734


46.1
%Interest income, net


1,065


0.4
%

1,803


1.0
%

(738
)

(40.9
)%Provision for income taxes


25,570


9.5
%

21,100


12.2
%

4,470


21.2
%Net Income

$
44,371


16.4
%
$
27,845


16.1
%
$
16,526


59.3
%Net income per shareBasic

$
1.89




$
1.21




$
0.68


56.2
%Net income per shareDiluted

$
1.83




$
1.16




$
0.67


57.8
%


Net Sales

The following table summarizes net sales by segment (dollar amounts in thousands):

Years Ended
December 31,

Change2008

2007

Amount

%U.S. Wholesale

$
153,235

$
111,390

$
41,845


37.6
%Consumer Direct


75,314


29,268


46,046


157.3
%International


40,044


31,728


8,316


26.2
%Other


1,407


870


537


61.7
%Total net sales

$
270,000

$
173,256

$
96,744


55.8
%


U.S.
Wholesale net sales increased 37.6% to $153.2 million. In 2008, our sales to "major" (e.g. Nordstrom, Bloomingdale's) accounts increased 58.1% from the prior year as
our consumers

22

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Table of Contents

reacted
favorably to the new jean groups that we introduced in 2008 and the updated styling of our on-going groups. We increased our net sales in 2008 to off-price retailers as
we exited slower-moving styles and sold basic styles made from prior season fabrics. Our net sales to these customers represented 13.7% of our net sales in 2008 and 10.8% of our net sales
in 2007. Our net sales to boutique customers decreased 11.4%, as the demand for our 2008 collection was tempered by the impact of the U.S. economic slowdown and our decision to not ship
accounts that were past due or suspected of re-selling our merchandise.

Consumer
Direct net sales increased by 157.3% to $75.3 million in 2008. The increase was primarily driven by new store openings. We opened 11 stores in 2007 and 27 stores in 2008,
bringing our total to 42 stores at the end of 2008. In addition to the store count increase, our Consumer Direct net sales benefited from the favorable reaction to our 2008 collections and the
expansion of our sportswear and licensed-product offerings, which comprised 24% of our retail store sales in 2008.

International
net sales increased 26.2% to $40.0 million due primarily to increased sales to distributors for Europe and North America. Offsetting this increase was a planned
sales decrease in Japan as a result of our transition from a third party distributor to a company-owned subsidiary. Beginning with the spring 2008 season, we started the
pre-season selling activities sooner than in the prior year, which we believe contributed to the growth in our international sales along with the favorable customer reaction to our newer
collections.

Gross Profit

The following table summarizes gross profit by segment (dollar amounts in thousands):

Years Ended
December 31,

Change2008

2007

Amount

%U.S. Wholesale

$
78,670

$
60,007

$
18,663


31.1
%Consumer Direct


57,669


22,452


35,217


156.9
%International


19,255


15,498


3,757


24.2
%Other


1,407


870


537


61.7
%Total gross profit

$
157,001

$
98,827

$
58,174


58.9
%


Overall
gross margin (gross profit as a percentage of net sales) improved from 57.0% of net sales in 2007 to 58.1% of net sales in 2008, reflecting the ongoing net sales mix shift
towards the higher-margin consumer direct business.

U.S.
Wholesale gross profit increased 31.1% to $78.7 million in 2008 compared to $60.0 million in 2007, but the gross margin decreased to 51.3% in 2008 from 53.9% in 2007.
The decrease in the gross margin is due to increased sales of prior season and slow moving merchandise to select off-price retailers and a decrease in net sales to boutique customers,
which produce a higher gross margin than other wholesale customers.

The
Consumer Direct gross margin remained relatively constant in 2008 (76.6%) compared to 2007 (76.7%).

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Selling, General and Administrative Expenses

The following table presents the components of selling, general & administrative expenses (SG&A) (dollar amounts in thousands):

Years Ended
December 31,

Change2008

2007

Amount

%U.S. Wholesale

$
31,218

$
23,602

$
7,616


32.3
%Consumer Direct


29,859


10,577


19,282


182.3
%International


2,494


780


1,714


219.8
%Other


24,554


16,726


7,828


46.8
%Total selling, general and administrative expenses

$
88,125

$
51,685

$
36,440


70.5
%


U.S.
Wholesale SG&A increased to $31.2 million or 20.4% of U.S. Wholesale net sales in 2008, from $23.6 million, or 21.2% of U.S. Wholesale net sales in 2007.
With the increase in U.S. Wholesale net sales, we were able to leverage our design and production costs. Partially offsetting this leverage was additional advertising costs of
$2.1 million in connection with the 2008 spring and fall national print campaigns. We did not have any national print campaigns in 2007.

The
Consumer Direct SG&A increased $19.3 million to $29.9 million or 39.6% of Consumer Direct net sales, in 2008 from $10.6 million, or 36.1% of Consumer Direct net
sales, in 2007. This SG&A increase is directly related to the growth in the number of stores since the beginning of 2007. The increase in SG&A as a percentage of net sales is the result of increasing
the store-level labor expenses in 2008 to enhance our customer service.

Other
SG&A increased $7.8 million, from $16.7 million in 2007 to $24.6 in 2008. This increase is primarily attributable to executive performance-based
compensation and professional fees. Our executive compensation program was redesigned in 2008 to condition a greater portion of executive compensation on the satisfaction of earnings targets.
Our 2008 performance outpaced our 2008 earnings target by a higher rate than in 2007. The increase in professional fees is due to the restatement of our 2004 through 2006 annual financial statements,
as well as trademark protection and other corporate matters. Other SG&A, as a percentage of total net sales in 2008 was 9.1% compared to 9.7% in 2007.

Operating Income

The following table summarizes operating income by segment (dollar amounts in thousands):

Years Ended
December 31,

Change2008

2007

Amount

%U.S. Wholesale

$
47,452

$
36,405

$
11,047


30.3
%Consumer Direct


27,810


11,875


15,935


134.2
%International


16,761


14,718


2,043


13.9
%Other


(23,147
)

(15,856
)

(7,291
)

46.0
%Total operating income

$
68,876

$
47,142

$
21,734


46.1
%


U.S. Wholesale
operating income increased $11.0 million from 2007 to 2008 but decreased as a percentage of U.S. Wholesale net sales from 32.7% in 2007 to 31.0% in
2008. This decrease is due to the decrease in this segment's gross margin discussed above.

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Table of Contents

The
Consumer Direct operating income increased $15.9 million from 2007 to 2008 but decreased as a percentage of Consumer Direct net sales from 40.6% to 36.9%. This decrease as a
percentage of net sales was due primarily to increased operating expenses associated with the expansion of the Consumer Direct segment.

International
operating income increased to $16.8 million from $14.7 million in 2007 but decreased as a percentage of International net sales from 46.4% in 2007 to 41.9% in
2008 due to costs to establish and ramp up our first international subsidiary, in Japan.

Interest Income, net

Interest income, net was $1.1 million in 2008 compared to $1.8 million in 2007. While we had an increase in our cash
equivalents and investments in 2008 compared to 2007, the average yield on our investments has decreased due to changes in the investment market and our shift to more conservative investments.

Provision for Income Taxes

The effective tax rate was 36.6% for 2008 compared to 43.1% in 2007. The 2007 effective tax rate was higher than the 2008 rate because
in 2008 we implemented a tax planning strategy that retroactively changed our filing status in certain states, which reduced our tax provision by $1.6 million and increased our diluted earnings
per share by $0.07. Additionally, in 2007 a larger portion of our executive compensation was nondeductible for income tax purposes resulting in a higher effective income tax rate.

Net Income and Earnings Per Diluted Share

Net income was $44.4 million in 2008 compared to $27.8 million in 2007, an increase of 59.3%. This increase is
attributable primarily to the increase in net sales. Earnings per diluted share increased 57.8% from $1.16 in 2007 to $1.83 in 2008.

Inflation

Historically, our operations have not been materially affected by inflation. We cannot assure that our operations will not be affected
by inflation in the future.

Financial Condition

Net cash provided by operating activities was $66.5 million in 2009 compared to $49.1 million in 2008. The
$17.4 million increase was primarily due to continued segment mix shift towards the Consumer Direct segment, as this segment's sales become cash quicker than the wholesale business, which
extends credit to many customers.

Net
cash used in investing activities was $15.3 million in 2009 compared to $12.7 million in 2008. This increase of $2.6 million is primarily due to an increase in
capital expenditures of $1.9 million, primarily from the implementation of a new technology system in 2009.

Net
cash used in financing activities was $3.0 million in 2009 compared to net cash used of $7.9 million in 2008. Our primary financing activity in both 2009 and 2008 were
cash payments on behalf of our employees who had us withhold common stock to satisfy their minimum statutory income tax withholdings on restricted share awards that vested and options that were
exercised. The payment was higher in 2008 because approximately 837,000 stock options were exercised in that year while no stock options were exercised in 2009.

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Table of Contents

Liquidity and Capital Resources

Our primary ongoing cash requirements are currently expected to be for our ongoing operations, capital expenditures for new branded
retail stores, our expansion internationally, and information technology and other infrastructure needs. Management believes that cash flow from continuing operations and on-hand cash and
cash equivalents will provide adequate funds for the foreseeable working capital needs and planned capital expenditures. Over the long term, we manage our cash and capital structure to maximize
shareholder return, strengthen our financial position and maintain flexibility for future strategic initiatives. We believe our cash, cash equivalents, short-term investments and future
operating cash flows, as well as any potential future borrowing facilities, will be sufficient to fund scheduled future payments and potential long-term initiatives. The availability of
financing in the form of debt or equity is influenced by many factors, including our profitability, operating cash flows, debt levels, debt ratings, contractual restrictions, and market conditions,
and we cannot assure you that we would be able to obtain financing on favorable terms.

We
have investments in auction rate securities (ARS) which have experienced an illiquid market since 2008. In October 2008, we were notified that the two brokers who sold ARS to us would
purchase the ARS at a price of par plus accrued interest, and on November 11, 2008, we accepted the offers from these brokers. The first portion of the ARS, in the amount of
$4.9 million, was purchased by the broker in January 2009 at par plus accrued interest, and the second portion, in the amount of $5.0 million, is expected to be purchased by the broker
by July 2012, although we may instruct the broker to purchase these ARS beginning in June 2010. See Item 6A Quantitative and Qualitative Disclosures about Market Risk.

Capital
expenditures for 2010 are expected to approximate $20 million.

Tabular Disclosure of Contractual Obligations

The following table sets forth, as of December 31, 2009, our scheduled contractual cash obligations due for each of the periods
indicated below (dollar amounts in thousands):

Payment Due by PeriodContractual Obligations

Total

Less than
One Year

1 - 3 Years

3 - 5 Years

More Than
5 YearsLong-term debt obligations

$


$


$


$


$
Operating lease obligations


152,837


15,675


32,783


33,187


71,192Purchase obligations


20,334


20,334








Total

$
173,171

$
36,009

$
32,783

$
33,187

$
71,192


Seasonality of Business

Due to the holiday shopping season in December, our U.S. Wholesale segment sales historically have been higher in the second
half of the year and our Consumer Direct segment sales historically have been higher in the fourth quarter.

Critical Accounting Policies

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the period. Our management bases its estimates on historical experience and on other factors and assumptions that management believes to be reasonable under the
circumstances. Actual results may differ from these estimates. The following

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discussion
highlights the policies management believes are critical. For a summary of all our significant accounting policies, including those discussed below, see Note 2Summary of
Significant Accounting Policies in our consolidated financial statements provided under Part II, Item 8 of this Annual Report on Form 10-K.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "Codification" or "ASC")

In June 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162," an accounting standard which established the Codification to become the
single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the U.S. Securities and Exchange Commission (the
"SEC") and its staff. All guidance contained in the Codification carries an equal level of authority. The Codification is not intended to change GAAP, but rather is expected to simplify accounting
research by reorganizing current GAAP into approximately 90 accounting topics. We adopted this accounting standard in preparing the
Consolidated Financial Statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K. The adoption of this accounting standard had no impact on
retained earnings and did not have an impact on our financial position, results of operations or cash flows.

Sales Recognition

Sales are recognized across all segments of the business when there is persuasive evidence of an arrangement, delivery has occurred,
price has been fixed or is determinable, and collectibility can be reasonably assured.

Sales
within our U.S. Wholesale and International segments are recognized at the time title passes and risk of loss is transferred to the customer. Sales are recorded net of
estimates for returns, discounts, operational chargebacks and markdowns. Returns and allowances require pre-approval by management and discounts are based on trade terms. We review and
refine these estimates on a quarterly basis using historical trends, seasonal results, and current economic and market conditions. Our historical estimates of these costs have not differed materially
from actual results.

Retail
store sales are recognized net of estimated returns at the time of sale to consumers. E-commerce sales of products ordered through our retail internet site known as www.truereligionbrandjeans.comare
recognized upon estimated delivery of the shipment to the customers. E-commerce sales also are reduced by
an estimate of returns. Retail store sales and E-commerce sales exclude sales taxes.

Revenues
from licensing arrangements are recognized when earned in accordance with the terms of the underlying agreements, generally based upon the higher of (a) contractually
guaranteed minimum royalty levels and (b) a percentage of wholesale sales of licensed product by our licensees. We recognize revenue associated with our gift cards upon redemption of the gift
card.

Uncollectible Accounts

Management evaluates our accounts receivables to estimate if they will ultimately be collected. In performing this evaluation,
significant judgment is used, including an analysis of specific risks on a customer-by-customer basis for larger accounts. Based on this information, management provides a
reserve for the estimated amounts believed to be uncollectible.

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Inventories

Slow-moving merchandise is typically sold at prices exceeding our cost in our outlet retail stores or to wholesale
customers who specialize in off-price merchandise. As of December 31, 2009, we recorded reserves for slow-moving inventory of $0.5 million based upon analysis of
balances on hand by style, recent sales trends, projected future sales, and historical markdown trends.

Stock-Based Compensation

We recognize restricted stock compensation expense for awards with only service conditions using the straight-line method
over the requisite service period of the entire award. The requisite service period is the period during which an employee is required to provide service in exchange for an award, which often is the
vesting period. If a portion of the restricted stock vests immediately or in another period such that the cumulative vested amount exceeds the cumulative straight line expense amount, we record
compensation expense equal to at least the
cumulative compensation expense of the vested amount of the restricted stock. Compensation expense for restricted stock awards with performance based conditions is recognized on an accelerated basis
using the graded attribution method over the requisite service period.

Income Taxes

We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are
recorded based on differences between financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse. We establish valuation allowances for tax benefits when we believe it is more likely than not that such assets will not be
realized.

FASB
ASC 740: Accounting for Income Taxes ("FASB ASC 740") clarifies the accounting for uncertainty in income taxes recognized in financial statements. In accordance with FASB ASC 740,
we regularly evaluate the likelihood of recognizing the benefit for income tax positions we have taken in various federal and state filings by considering all relevant facts, circumstances, and
information available. For those benefits that we believe it is more likely than not that the benefit will be sustained, we recognize the largest amount we believe is cumulatively greater than 50%
likely to be realized.

We
record interest and penalties, if any, on any underpayment of income taxes as a component of provision for income taxes and selling, general and administrative expenses, respectively.

New Accounting Pronouncements

In April 2009, the FASB issued FASB ASC 825: Financial Instruments ("FASB ASC 825") (formerly FASB Staff Position
FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments). FASB ASC 825 which
requires disclosure about the fair value of financial instruments in interim financial statements as well as in annual financial statements was effective for interim periods ending after
June 15, 2009. We adopted the provisions of FASB ASC 825 during the second quarter of 2009, and the adoption did not have a significant impact on our financial position, cash flows or
disclosures.

In
April 2009, the FASB issued FASB ASC 320: InvestmentsDebt and Equity Securities ("FASB ASC 320") (formerly FASB Staff Position FAS 115-2
and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments). FASB ASC 320
provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments. It was effective for
interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. We adopted the provisions of

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FASB
ASC 320 during the second quarter of 2009, and the adoption did not have a significant impact on our financial position, cash flows or disclosures.

In
April 2009, the FASB issued FASB ASC 820: Fair Value Measurements and Disclosures ("FASB ASC 820") (formerly FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly). FASB ASC 820 clarifies when markets are not active or that market pricing may not actually reflect the "real" value of an asset. If a market is determined to
be inactive and the market price is reflective of a distressed price, then an alternative method of pricing can be used to estimate fair value, such as a present value technique. FASB ASC 820
was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 and shall be applied prospectively. We
adopted the provisions during the second quarter of 2009, and the adoption did not have a significant impact on our financial position, cash flows or disclosures.

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

Exchange Rate Risk

During 2008, we established a subsidiary in Japan, which operates a wholesale business and three outlet retail stores. All retail sales
and some wholesale sales, as well as our operating expenses, are denominated in the local currency. Because these operations are not significant to our overall business, our exposure to fluctuations
in the U.S. Dollar and the local exchange rates are not considered material as of December 31, 2009. We received United States dollars
("USD") for all other merchandise sales and licensing revenue during the year ended December 31, 2009. Merchandise purchases from contract manufacturers are denominated in USD.

Investments

We have investments in auction rate securities (ARS) which have experienced an illiquid market since 2008. In October 2008, we were
notified that the two brokers who sold ARS to us would purchase the ARS at a price of par plus accrued interest, and on November 11, 2008, we accepted the offers from these brokers. The first
portion of the ARS, in the amount of $4.9 million, was purchased by the broker in January 2009 at par plus accrued interest, and the second portion, in the amount of $5.0 million,
is expected to be purchased by the broker by July 2012, although we may instruct the broker to purchase these ARS beginning in June 2010.

Item 8.    Financial Statements and Supplementary Data.

The information required by this Item is incorporated herein by reference to the Consolidated Financial Statements and Supplementary
Data listed in Item 15 of Part IV of this report.

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

None

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.



As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the
supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the design and effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act of 1934 as

29

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amended).
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and
procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified
within the Commission's rules and forms. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.



Our management's report on internal control over financial reporting, and the related report of our independent public accounting firm,
are included in Part II Item 8 Financial Statements and Supplementary Data in our Annual Report on Form 10-K underManagement's Annual Report
on Internal Control Over Financial ReportingandReport of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting, on pages F-2 and F-3 respectively, and are incorporated by reference.

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



There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

Item 9B.    Other Information.

None.

PART III.

Item 10.    Directors, Executive Officers and Corporate Governance.

The information required under this item is included in our Proxy Statement for our 2010 Annual Meeting of Stockholders, which is
incorporated by reference herein and will be filed within 120 days after the end of our fiscal year.

Item 11.    Executive Compensation.

The information required under this item is included in our Proxy Statement for our 2010 Annual Meeting of Stockholders, which is
incorporated by reference herein and will be filed within 120 days after the end of our fiscal year.

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

The information required under this item is included in our Proxy Statement for our 2010 Annual Meeting of Stockholders, which is
incorporated by reference herein and will be filed within 120 days after the end of our fiscal year.

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Table of Contents

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

The information required under this item is included in our Proxy Statement for our 2010 Annual Meeting of Stockholders, which is
incorporated by reference herein and will be filed within 120 days after the end of our fiscal year.

Item 14.    Principal Accountant Fees and Services.

The information required under this item is included in our Proxy Statement for our 2010 Annual Meeting of Stockholders, which is
incorporated by reference herein and will be filed within 120 days after the end of our fiscal year.

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Table of Contents

PART IV.

Item 15.    Exhibits, Financial Statements Schedules.

(a)

(1)

FINANCIAL STATEMENTSSee Index to Consolidated Financial Statements of this Annual Report on Form 10-K.(2)

FINANCIAL STATEMENT SCHEDULESSee Index to consolidated Financial Statements on page F-1 hereof(3)

EXHIBITSSee Exhibit Index below.


EXHIBIT INDEX

Exhibit No.

Description3.1

Certificate of Incorporation (incorporated by reference from our Form 8-K Current Report, filed August 22, 2005).3.2

Amended and Restated Bylaws (incorporated by reference from our Form 8-K Current Report, filed December 12, 2008).4.1

Specimen Common Stock Certificate (incorporated by reference from our Form 8-K Current Report, filed August 22, 2005).4.2

Form of True Religion Apparel, Inc. 2009 Equity Incentive Plan Restricted Stock Award Certificate (incorporated by reference from our Registration Statement on Form S-8 filed on July 29,
2009).4.3

Form of True Religion Apparel, Inc. 2009 Equity Incentive Plan Performance Award Certificate (Restricted Stock) (incorporated by reference from our Registration Statement on Form S-8 filed on July 29,
2009).10.1

True Religion Apparel, Inc. 2005 Stock Incentive Plan (incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed on
July 22, 2005).*10.2

Form of Indemnification Agreement between True Religion Apparel, Inc. and its officers and directors (incorporated by reference from our Form 10-Q Quarterly Report, filed November 14, 2005).10.3

Employment Agreement by and between the Company and Jeffrey Lubell dated January 4, 2006 (incorporated by reference from our Form 8-K Current Report, filed on January 10, 2006).*10.4

Employment Agreement dated April 12, 2006, by and between the Company and Michael Buckley, effective as of April 24, 2006 (incorporated by reference from our Form 8-K Current Report, filed April 14,
 2006).*10.5

Standard Industrial/Commercial Single-Tenant LeaseGross dated May 17, 2006, among ADJ Enterprises, Ltd., Guru Denim, Inc. and the Company (incorporated by reference from our Form 8-K Current
Report, filed April 14, 2006).10.6

Amendment to Employment Agreement dated May 31, 2006, by and between Jeffrey Lubell and the Company (incorporated by reference from our Form 8-K Current Report, filed June 5, 2006).*10.7

Employment Letter, dated March 7, 2007, by and between the Company and Peter Collins (incorporated by reference from our Form 8-K Current Report filed on March 8, 2007).*


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Exhibit No.

Description10.8

Amendment to the True Religion Apparel, Inc. 2005 Stock Incentive Plan (incorporated by reference from our Form 8-K Current Report filed on March 8, 2007).*10.9

True Religion Apparel, Inc. Executive Cash Incentive Bonus Plan (incorporated by reference from our Form 8-K Current Report filed on April 3, 2008).*10.10

Amendment No. 2 to Employment Agreement by and between the Company and Jeffrey Lubell dated September 12, 2008 (incorporated by reference from our Form 8-K Current Report filed September 17,
2008).10.11

Letter Agreement, by and between the Company and Kelly Gvildys dated February 7, 2008. (incorporated by reference from our Form 10-K Annual Report filed on March 11, 1009)*10.12

Amended and Restated True Religion Apparel, Inc. 2009 Equity Incentive Plan (incorporated by reference from our Registration Statement on Form S-8 filed on July 29, 2009).*10.13

Employment Agreement by and between the Company and Lynne Koplin (incorporated by reference from our Form 8-K Current Report filed on January 6, 2010)*10.14

Summary of Board of Directors Compensation.*10.15

Summary of Executive Officer Compensation (incorporated by reference from our Form 8-K Current Report filed January 10, 2008).*14.1

True Religion Apparel, Inc. Code of Conduct (incorporated by reference from our Form 8-K Current Report filed October 8, 2008).21.1

Subsidiaries of the Company23.1

Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP24.1

Powers of Attorney.31.1

Certification of Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.31.2

Certification of Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.32.1

Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

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


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SIGNATURES

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

TRUE RELIGION APPAREL, INC.Dated: March 9, 2010

/s/ JEFFREY LUBELL Jeffrey Lubell Chief Executive Officer and Chairman of the Board


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

Name

Position

Date/s/ JEFFREY LUBELL Jeffrey Lubell

Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

March 9, 2010/s/ PETER F. COLLINS Peter F. Collins

Chief Financial Officer (Principal Financial and Accounting Officer)

March 9, 2010/s/ JOSEPH H. COULOMBE Joseph H. Coulombe

Director

March 9, 2010/s/ G. LOUIS GRAZIADIO III G. Louis Graziadio III

Director

March 9, 2010/s/ ROBERT L. HARRIS, II Robert L. Harris, II

Director

March 9, 2010/s/ MARK S. MARON Mark S. Maron

Director

March 9, 2010/s/ MARCELLO BOTTOLI Marcello Bottoli

Director

March 9, 2010


34

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PagesReport of Management on Internal Control Over Financial
Reporting

F-2Reports of Independent Registered Public Accounting Firm

F-3Consolidated Balance Sheets as of December 31, 2009 and 2008

F-5Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007

F-6Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

F-7Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009, 2008 and
2007

F-8Notes to Consolidated Financial Statements

F-9Consolidated Financial Statement Schedule:Valuation and Qualifying Accounts as of and for the years ended December 31, 2009, 2008, and
2007

F-27


F-1

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Table of Contents

REPORT OF MANAGEMENT ON  INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as is defined in the
Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are
adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the
possibility of human error and overriding of controls. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Consequently, an effective internal control system can only provide reasonable, not absolute,
assurance with respect to reporting financial information.

Our
management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal
control over financial reporting based on the framework inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on
this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

Our
internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as
stated in their report, which is included herein.

F-2

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
True Religion Apparel, Inc.
Vernon, California:

We
have audited the internal control over financial reporting of True Religion Apparel, Inc. and Subsidiaries ("the Company") as of December 31, 2009, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanyingReport of Management on Internal Control Over
Financial Reporting.Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing
similar functions, and effected by the company's board of directors, management, and other personnel 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. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended December 31, 2009, of the Company and our report dated March 9, 2010 expressed an unqualified opinion on those financial statements and financial statement
schedule.

/S/
DELOITTE & TOUCHE LLP
Los Angeles, California
March 9, 2010

F-3

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders of
True Religion Apparel, Inc.
Vernon, California:

We
have audited the accompanying consolidated balance sheets of True Religion Apparel, Inc. and Subsidiaries (the "Company") as of December 31, 2009 and 2008, and the related
consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement
schedule listed in Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of True Religion Apparel, Inc. and Subsidiaries as of December 31,
2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2009, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 9, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.

/S/
DELOITTE & TOUCHE LLP
Los Angeles, California
March 9, 2010

F-4

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (Amounts in thousands, except par amounts)

December 31,2009

2008ASSETSCurrent Assets:Cash and cash equivalents

$
105,531

$
57,245Short-term investments


4,948


4,850Accounts receivable, net of allowances:From customers


27,214


10,043From factor


3


23,060Inventory


34,502


25,828Deferred income tax assets


8,753


6,498Prepaid expenses and other current assets


7,000


4,148Total current assets


187,951


131,672Property and equipment, net


39,693


28,006Long-term investments





4,990Other assets


2,162


1,784TOTAL ASSETS

$
229,806

$
166,452LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable and accrued expenses

$
11,717

$
10,633Accrued salaries, wages and benefits


8,843


6,889Income taxes payable


826


1,042Total current liabilities


21,386


18,564Long-term deferred rent


7,851


4,536Long-term deferred income tax liabilities


2,715


1,102Total long-term liabilities


10,566


5,638Total liabilities


31,952


24,202Commitments and contingencies (Note 10)Stockholders' Equity:Preferred stock, $0.0001 par value, 20,000 shares authorized, none issued and outstanding, respectively





Common stock, $0.0001 par value, 80,000 shares authorized, 25,250 and 24,450 issued and outstanding, respectively


3


2Additional paid in capital


49,840


38,554Retained earnings


147,809


103,508Accumulated other comprehensive income, net of tax


202


186Total stockholders' equity


197,854


142,250TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
229,806

$
166,452


The
accompanying notes are an integral part of these consolidated financial statements.

F-5

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF INCOME        (Amounts in thousands, except per share amounts)

Years Ended2009

2008

2007Net sales

$
311,001

$
270,000

$
173,256Cost of sales


115,439


112,999


74,429Gross profit


195,562


157,001


98,827Selling, general, and administrative expenses


117,965


88,125


51,685Operating income


77,597


68,876


47,142Interest income, net


(169
)

(1,065
)

(1,803
)Income before provision for income taxes


77,766


69,941


48,945Provision for income taxes


30,434


25,570


21,100Net Income

$
47,332

$
44,371

$
27,845Earnings per share:Basic

$
1.97

$
1.89

$
1.21Diluted

$
1.92

$
1.83

$
1.16Weighted average shares outstanding:Basic


23,993


23,511


22,964Diluted


24,659


24,270


23,949


The
accompanying notes are an integral part of these consolidated financial statements.

F-6

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (Amounts in thousands)

Years Ended2009

2008

2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
47,332

$
44,371

$
27,845Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


6,492


3,427


2,044Provision for bad debts


99


577


228Stock-based compensation


11,899


10,297


5,731Tax benefit from stock-based compensation


54


229


1,303Excess tax benefit from stock-based compensation


(54
)

(229
)

(1,270
)Deferred income taxes


(642
)

(128
)

(2,636
)Other


206


305


Changes in operating assets and liabilities:Accounts receivable from factor


23,057


(8,271
)

(7,269
)Accounts receivable from customers


(17,278
)

1,914


(4,828
)Inventory


(8,719
)

(4,377
)

(11,477
)Prepaid expenses and other current assets


(2,861
)

(1,834
)

(1,608
)Other assets


(280
)

(448
)

Accounts payable and accrued expenses


2,800


(825
)

(29
)Accrued salaries, wages and benefits


1,954


2,831


2,150Income taxes payable


(884
)

(2,168
)

(1,094
)Long-term deferred rent


3,315


3,391


720Net cash provided by operating activities


66,490


49,062


9,810CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(20,082
)

(18,187
)

(8,765
)Purchases of investments








(17,505
)Sales of investments


4,900


5,550


2,105Expenditures to establish trademarks


(128
)

(81
)

(228
)Net cash used in investing activities


(15,310
)

(12,718
)

(24,393
)CASH FLOWS FROM FINANCING ACTIVITIES:Statutory tax withholding payment for stock-based compensation


(3,031
)

(8,110
)

(3,077
)Excess tax benefit from stock-based compensation


54


229


1,270Proceeds from exercise of stock options





25


198Net cash (used in) provided by financing activities


(2,977
)

(7,856
)

(1,609
)Effect of exchange rate changes in cash


83


71


Net increase (decrease) in cash and cash equivalents


48,286


28,559


(16,192
)Cash and cash equivalents, beginning of year


57,245


28,686


44,878Cash and cash equivalents, end of year

$
105,531

$
57,245

$
28,686


The
accompanying notes are an integral part of these consolidated financial statements.

F-7

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (Amounts in thousands)

Shares

Amount

Additional Paid In Capital

Accumulated Other Comprehensive Income

Retained Earnings

TotalBalance at January 1, 2007


23,254

$
2

$
20,159

$


$
43,986

$
64,147Net income for the year ended December 31, 2007














27,845


27,845Stock-based compensation








5,731








5,731Issuance of restricted shares


347














Exercise of stock options


272





198








198Retirement of common stock


(183
)










(3,077
)

(3,077
)Forfeiture of restricted shares


(103
)







Tax benefit on stock-based compensation








403








403Balance at December 31, 2007


23,587


2


26,491





68,754


95,247Net income for the year ended December 31, 2008














44,371


44,371Other comprehensive income, net:Unrealized losses arising during year











(1,583
)




(1,583
)Losses on available for sale securities reclassified to trading











1,583





1,583Cumulative translation adjustment











186





186Comprehensive net income

















44,557Stock-based compensation








10,297








10,297Issuance of restricted shares


659














Exercise of stock options


836





1,537








1,537Retirement of common stock


(583
)










(9,617
)

(9,617
)Forfeiture of restricted shares


(49
)













Tax benefit on stock-based compensation








229








229Balance at December 31, 2008


24,450


2


38,554

$
186


103,508


142,250Net income for the year ended December 31, 2009














47,332


47,332Other comprehensive income, netCumulative translation adjustment











16





16Comprehensive net income

















47,348Stock-based compensation








11,899








11,899Issuance of restricted shares


1,135


1


(1
)







Retirement of common stock


(223
)










(3,031
)

(3,031
)Forfeiture of restricted shares


(112
)













Tax deficiency on stock-based compensation








(612
)







(612
)Balance at December 31, 2009


25,250

$
3

$
49,840

$
202

$
147,809

$
197,854


The
accompanying notes are an integral part of these consolidated financial statements.

F-8

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1DESCRIPTION OF BUSINESS

True Religion Apparel, Inc. and subsidiaries (referred to in this Annual Report on Form 10-K as "the Company," "our," "we," or "True Religion") designs,
markets, sells and distributes premium fashion apparel, centered on our core denim products using the brand name "True Religion Brand Jeans." Our products include pants, tops and jackets made from
denim, fleece, corduroy and other fabrics. We are known for our unique fits and styling details. Through multiple wholesale and retail segments, our expanding product line reaches fashion-conscious
consumers on six continents, including North America, Europe, Asia, Australia, Africa and South America.

We
operate in four primary business segments: U.S. Wholesale, International, Consumer Direct and Other. Our U.S. Wholesale sales are made to leading upscale nationwide-retailers,
boutiques and off-price retailers. Our International sales are primarily made to distributors covering more than 50 countries on six continents. The distributors warehouse products at
their expense and they ship to and collect payment from their customers directly. We also sell directly to consumers through full-price branded retail stores, branded outlet stores and
through our retail internet site located atwww.truereligionbrandjeans.com. In addition, we selectively license to third parties the right to use our
various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods. The licensing business is included in the Other segment.
Our corporate operations, which include the executive, legal, and human resources departments, are also included in the Other segment.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of True Religion Apparel, Inc. and its wholly-owned
subsidiaries.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes thereto. Actual results could differ materially from those estimates.

Significant
estimates inherent in the preparation of the accompanying consolidated financial statements include reserves for customer returns; chargebacks; allowances for bad debts;
allowance for slow moving inventory; contingencies; fixed asset useful lives; income taxes and related contingencies; and the valuation of stock-based compensation and related forfeiture rates.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "Codification" or "ASC")

In June 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162," an accounting standard which established the Codification to become the
single source of authoritative generally accepted accounting principles ("GAAP") recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the U.S.
Securities and Exchange Commission (the "SEC") and its staff. All guidance contained in the Codification carries an equal level of authority. The Codification is not

F-9

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

intended
to change GAAP, but rather is expected to simplify accounting research by reorganizing current GAAP into approximately 90 accounting topics. We adopted this accounting standard in preparing
the Consolidated Financial Statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K. The adoption of this accounting standard had no impact
on retained earnings and did not have an impact on our financial position, results of operations or cash flows.

Fair Value Measurements

We use the fair value measurement hierarchy which is based on the inputs used to measure fair value. The following is a list of defined
levels in the fair value hierarchy based on the data and/or methods used to determine fair value:



We
use observable market inputs (quoted market prices) when measuring fair value and require a Level 1 quoted price to be used to measure fair value whenever possible. Our cash
equivalents represent Level 1 investments, which are valued based on quoted market prices. Our auction rate securities represent Level 3 investments, which are valued based on broker
quotes as well as subsequent auctions, if any (see Note 3).

Sales Recognition

Sales are recognized across all segments of the business when there is persuasive evidence of an arrangement, delivery has occurred,
price has been fixed or is determinable, and collectibility can be reasonably assured.

Sales
within our U.S. Wholesale and International segments are recognized at the time title passes and risk of loss is transferred to the customer. Sales are recorded net of estimates
for returns, discounts, operational chargebacks and markdowns. Returns and allowances require pre-approval by management and discounts are based on trade terms. We review and refine these
estimates on a quarterly basis using historical trends, seasonal results, and current economic and market conditions. Our historical estimates of these costs have not differed materially from actual
results.

Retail
store sales are recognized net of estimated returns at the time of sale to consumers. E-commerce sales of products ordered through our retail internet site known as www.truereligionbrandjeans.comare
recognized upon estimated delivery of the shipment to the customers. E-commerce sales also are reduced by
an estimate of returns. Retail store sales and E-commerce sales exclude sales taxes. We recognize revenue associated with our gift cards upon redemption of the gift card.

Revenue
from licensing arrangements are recognized when earned in accordance with the terms of the underlying agreements, generally based upon the higher of (a) contractually
guaranteed minimum royalty levels and (b) estimates of sales and royalty data received from our licensees.

F-10

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Classification of Certain Costs and Expenses

We classify merchandise, inbound freight costs and out-bound shipping costs in cost of sales. Selling, general &
administrative expenses ("SG&A") include merchandise design and pre-production, marketing and advertising, sales commissions, customer service, Consumer Direct expenses and general and
administrative expenses. Consumer Direct expenses include wages and commissions, retail occupancy costs, supplies and direct segment management costs. General and administrative expenses include wages
and performance compensation for our executive, finance, human resources, legal, and information systems departments, headquarters occupancy costs (including the portion used by the distribution
function), and professional service costs. Included in selling, general and administrative expenses in the accompanying consolidated statements of income are handling charges of $4.0 million,
$3.6 million and $2.8 million in 2009, 2008 and 2007, respectively.

Advertising Costs

Advertising costs, including the costs to produce advertising, are expensed when the advertisement is first exhibited. Cooperative
advertising costs paid to wholesale customers are expensed as an advertising cost because the identified advertising benefit is sufficiently separable from the purchase of our products by the
wholesale customers and the fair value of such benefit is reasonably measurable. These advertising expenses are recorded as a component of SG&A in the accompanying consolidated statements of income.

Advertising
expenses amounted to $5.4 million, $3.9 million and $1.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Comprehensive Income

Comprehensive income for the years ended December 31, 2009 and 2008, consists of net income, adjustments to available for sale
securities and cumulative translation adjustments. For the year ended December 31, 2007, comprehensive income equals net income as we had no other comprehensive income items.

Net Income per Common Share

Net income per common share is determined in accordance with FASB ASC 260: Earnings per Share. Basic net income per common share is
computed based upon the weighted average number of common shares outstanding, and diluted net income per common share is computed based upon the weighted average number of common shares outstanding
plus dilutive common share equivalents outstanding during the periods using the treasury stock method. Dilutive common share equivalents consist of incentive stock options, non-qualified
stock options and restricted stock awards, other than performance awards which are excluded from diluted shares outstanding until the performance condition is achieved. Once the performance condition
is achieved on performance awards, the shares are included in diluted common share equivalents weighted retroactive to the grant date.

F-11

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
weighted-average number of common shares outstanding used to calculate basic net income per common share is reconciled to those shares used in calculating diluted net income per
common share as follows (amounts in thousands):

Years Ended December 31,2009

2008

2007Basic


23,993


23,511


22,964Dilutive effect of unvested restricted stock awards and stock options


666


759


985Diluted shares


24,659


24,270


23,949


Stock-Based Compensation

We recognize restricted stock compensation expense for awards with only service conditions using the straight-line method
over the requisite service period of the entire award. The requisite service period is the period during which an employee is required to provide service in exchange for an award, which often is the
vesting period. If a portion of the restricted stock vests immediately or in another period such that the cumulative vested amount exceeds the cumulative straight line expense amount, we record
compensation expense equal to at least the cumulative compensation expense of the vested amount of the restricted stock. Compensation expense for restricted stock awards with performance based
conditions is recognized on an accelerated basis using the graded attribution method over the requisite service period.

Cash and Cash Equivalents

We consider all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash
equivalents are carried at cost, which approximates their fair market value. At December 31, 2009, cash equivalents consist of an investment in a money market fund that that invest only in U.S.
Treasury securities.

Accounts Receivable

Management evaluates our accounts receivables to estimate if they will ultimately be collected. In performing this evaluation,
significant judgment is used, including an analysis of specific risks on a customer-by-customer basis for larger accounts. Based on this information, management provides a
reserve for the estimated amounts believed to be uncollectible. Based on historical losses, existing economic conditions and collection practices, our allowance for doubtful accounts has been
estimated to be $0.3 million and $0.3 million at December 31, 2009 and 2008, respectively. Our actual credit losses for the periods presented have not significantly exceeded
management's estimates.

Concentration of Credit Risks

For the years ended December 31, 2009 and 2008, sales to one customer accounted for 15% of our net sales. As of
December 31, 2009, 27% and 10% of our net accounts receivable were due from two of our customers. As of December 31, 2008, our Accounts Receivable from Factor, in the amount of
$23.1 million, was due from Merchant Factor, which uses the collection function of a U.S. based

F-12

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

financial
institution to collect the receivables that Merchant Factors purchased from us. Certain of our U.S. Wholesale customers remitted their payments for goods they purchased on credit to the
financial institution; the financial institution transferred the collections to Merchant Factor, and Merchant Factor transferred to us the moneys that it received on these receivables. In July 2009,
we notified Merchant Factor that we would no longer sell accounts receivable to them, thereby eliminating this concentration of credit risk. As of December 31, 2009, we had $3,000 in
outstanding factor receivables.

Inventories

Wholesale and Consumer Direct inventories are stated at the lower of cost or market value. Cost is determined using the average cost
which approximates the first-in, first-out method.

Slow-moving
merchandise is typically sold at prices exceeding our cost in our outlet retail stores or to wholesale customers who specialize in off-price
merchandise. As of December 31, 2009, we recorded reserves for slow-moving inventory of $0.5 million based upon analysis of balances on hand by style, recent sales trends,
projected future sales, and historical markdown trends.

Our
denim manufacturing process includes two phases: i) cut and sew; and ii) washing and finishing. At times, we will instruct our contract manufacturers to send goods to
us that have been completed through the cut and sew phase only. By delaying the second phase of the manufacturing process, we can use updated market information about which washes and finishes are
most popular before we send these unwashed goods to the laundries and finishing houses to complete the manufacturing process. The denim products that we hold between the cut and sew phase and the wash
and finish phase are considered work-in-progress.

Property and Equipment, Net

Property and equipment, net, is stated at cost less accumulated depreciation. Depreciation is calculated using the
straight-line method based upon the estimated useful lives of depreciable assets, which are typically three years for computer systems and equipment, and trade show booths, five years for
furniture & fixtures and machinery & equipment, and three to ten years for leasehold improvements. Leasehold improvements are depreciated over periods equal to the shorter of the
estimated useful lives of the respective assets or the lease term.

Expenditures
for repairs and maintenance are charged to operations as incurred, while renewals and betterments are capitalized.

Property
and equipment are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. In
evaluating long-lived assets for recoverability, we use our best estimate of future cash flows
expected to result from the use of the asset and eventual disposition. To the extent that estimated future discounted net cash flows attributable to the asset are less than the carrying amount, an
impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its estimated discounted net cash flows.

Income Taxes

We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are
recorded based on differences between financial reporting and tax basis of

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

assets
and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We
establish valuation allowances for tax benefits when we believe it is more likely than not that such assets will not be realized.

In
accordance with FASB ASC 740: Accounting for Income Taxes ("FASB ASC 740"), we regularly evaluate the likelihood of recognizing the benefit for income tax positions we have taken in
various federal and state filings by considering all relevant facts, circumstances, and information available. For those benefits that we believe it is more likely than not that the benefit will be
sustained, we recognize the largest amount we believe is cumulatively greater than 50% likely to be realized. The adoption of FASB ASC 740 had no impact on our consolidated financial statements.

We
record interest and penalties, if any, on any underpayment of income taxes as a component of provision for income taxes and SG&A, respectively, in the accompanying consolidated
statements of income.

Leases

We lease our corporate headquarters facility and all of our branded retail stores. All of these leases are classified as operating
leases and they expire at various dates through 2021. We have no significant individual or master lease agreements.

Our
fixed, noncancelable lease terms generally are 5 to 10 years. Some of our leases include options that allow us to extend the lease term beyond the initial commitment period,
subject to terms agreed to at lease inception.

For
leases that contain predetermined, fixed escalations of the minimum rent, we recognize the rent expense on a straight-line basis over the lease term and record the
difference between the rent expense and the rent payable as deferred rent.

Most
of our leases also provide for payment of operating expenses, such as common area charges, real estate taxes and other executory costs. Some leases require additional payments based
on sales which are recorded in rent expense when the contingent rent is probable.

In
some lease agreements, we receive landlord incentives to reimburse us for leasehold improvements. These incentives are recorded as a deferred rent credit and recognized as a reduction
to rent expense on a straight-line basis over the lease term. As of December 31, 2009 and 2008, landlord incentives comprised $3.5 million and $2.0 million,
respectively, of the deferred rent credit balance.

Recently Issued Accounting Pronouncements

In April 2009, the FASB issued FASB ASC 825: Financial Instruments ("FASB ASC 825") (formerly FASB Staff Position
FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments). FASB ASC 825 which
requires disclosure about the fair value of financial instruments in interim financial statements as well as in annual financial statements was effective for interim periods ending after
June 15, 2009. We adopted the provisions of FASB ASC 825 during the second quarter of 2009, and the adoption did not have a significant impact on our financial position, cash flows or
disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In
April 2009, the FASB issued FASB ASC 320: InvestmentsDebt and Equity Securities ("FASB ASC 320")-10-65 (formerly FASB Staff Position
FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary
Impairments). FASB ASC 320 provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the
presentation and disclosures surrounding such instruments. It was effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after
March 15, 2009. We adopted the provisions of FASB ASC 320 during the second quarter of 2009, and the adoption did not have a significant impact on our financial position, cash flows or
disclosures.

In
April 2009, the FASB issued FASB ASC 820: Fair Value Measurements and Disclosures ("FASB ASC 820") (formerly FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly). FASB ASC 820 clarifies when markets are not active or that market pricing may not actually reflect the "real" value of an asset. If a market is determined to be
inactive and the market price is reflective of a distressed price, then an alternative method of pricing can be used to estimate fair value, such as a present value technique. FASB ASC 820 was
effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 and shall be applied prospectively. We adopted
the provisions during the second quarter of 2009, and the adoption did not have a significant impact on our financial position, cash flows or disclosures.

Reclassifications

We have reclassified certain prior period amounts to conform to the current year presentation. We have revised our previously reported
consolidated statements of cash flows for the year ended December 31, 2008 and 2007 to reflect a decrease in the provision for bad debts of $0.5 million and an increase in the provision
for bad debts of $0.5 million, respectively. The corresponding offset to these adjustments was to accounts receivable from factor. These revisions reflect a reclassification of the provision
for sales returns, which was previously included in provision for bad debts and returns to accounts receivable from factor.

NOTE 3CASH EQUIVALENTS AND INVESTMENTS

As of December 31, 2009, we held $94.3 million of cash equivalents measured at fair value using quoted prices in active markets (Level 1 input).

Our
investments consist of auction rate securities. Auction rate securities ("ARS") are variable rate bonds whose interest rate is periodically reset, typically every seven, 28, or
35 days. The underlying securities have contractual maturities from 2034 through 2039. As of December 31, 2009, we held five auction rate securities with an aggregate par value of
$5.0 million and a fair value of $4.6 million. These securities are collateralized by higher education funded student loans and are supported by the federal government as part of the
Federal Family Education Loan Program (FFELP). These securities have continued to pay their scheduled cash interest payments.

The
Dutch auction process that periodically resets the applicable interest rate is intended to provide liquidity to the holder of the auction rate securities by matching buyers and
sellers within a market context, enabling the holder to gain immediate liquidity by selling such interests at par or rolling over their investment. If there was an imbalance between buyers and
sellers, the risk of a failed auction existed. The auction rate securities that we hold began to experience failed auctions in 2008. In

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3CASH EQUIVALENTS AND INVESTMENTS (Continued)

October
2008, we were notified that the two brokers who sold ARS to us would purchase the ARS at a price of par plus accrued interest. We accepted the offers from these brokers, providing us rights
related to our ARS (the "Rights"). The first portion of the ARS, with a par amount of $4.9 million, was purchased by one broker in January 2009 at par plus accrued interest, and the second
portion, with a par amount of $5.0 million, is expected to be purchased by the second broker by July 2012, although the broker may purchase these at any time and we may instruct the broker to
purchase these ARS beginning in June 2010. Based on our ability to sell the remaining ARS in the next year, we transferred the remaining ARS from long-term to short-term during
the third quarter of 2009.

Our
Rights related to our ARS represent firm commitments, (an agreement with an unrelated party, binding on both parties and legally enforceable). The enforceability of the Rights
results in a put option and is recognized as a freestanding asset separate from the ARS. We have elected to measure the put option at fair value, in order to match the changes in the fair value of the
ARS. We expect that future changes in the fair value of the put option will approximate fair value movements in the related ARS.

Prior
to accepting the Rights from the brokers, we recorded our ARS investments as available-for-sale and reported any unrealized gains or temporary unrealized
losses, net of taxes, as a component of accumulated other comprehensive income in the consolidated balance sheets. In connection with the acceptance of the Rights from the brokers, we transferred our
ARS from investments available-for-sale to trading securities during the fourth quarter of 2008.

Our
ARS and put option represent Level 3 assets. Our ARS are recorded at fair value using broker quotes. We have elected to measure the put option at fair value, in order to match
the changes in the fair value of the ARS. The fair value of the put option is determined by an internally developed discounted cash flow model. We expect that future changes in the fair value of the
put option will approximate fair value movements in the related ARS. The following table provides a summary of changes in fair value of our Level 3 financial assets during the year ended
December 31, 2009 (amounts in thousands):

Level 3 AssetsShort-Term

Long-TermARS

Put Option

Total

ARS

Put Option

TotalBalance at December 31, 2007

$


$


$


$


$


$
Transfers to Level 3, including accrued interest


15,545





15,545Transfers to long-term


(5,000
)




(5,000
)

5,000





5,000Net settlements


(5,550
)




(5,550
)Realized gain (loss) included in interest income, net


(1,732
)




(1,732
)

(886
)




(886
)Revaluation of put option included in interest income, net





1,587


1,587





876


876Balance at December 31, 2008


3,263


1,587


4,850


4,114


876


4,990Transfer to short-term


4,618


347


4,965


(4,618
)

(347
)

(4,965
)Net settlements


(3,288
)

(1,587
)

(4,875
)

(25
)




(25
)Realized gain (loss) included in interest income, net


(45
)




(45
)

529





529Revaluation of put option included in interest income, net





53


53





(529
)

(529
)Balance at December 31, 2009

$
4,548

$
400

$
4,948

$


$


$



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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4ACCOUNTS RECEIVABLE

We recorded the following allowances against our accounts receivable as of December 31 (amounts in thousands):

2009

2008Reserve for returns

$
606

$
474Reserve for chargebacks


467


439Reserve for bad debt


297


266Total

$
1,370

$
1,179


In
addition to the above reserves, we recorded an allowance for trade discounts of $0.6 million as of December 31, 2009 and $0.8 million as of December 31,
2008.

NOTE 5INVENTORY

Inventories consisted of the following as of December 31 (amounts in thousands):

2009

2008Raw Materials

$
604

$
453Work-in-Progress


1,800


1,709Finished Goods


32,098


23,666Total

$
34,502

$
25,828


NOTE 6PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of December 31 (amounts in thousands):

2009

2008Computer systems and equipment

$
7,943

$
1,885Furniture and fixtures


4,009


2,777Leasehold improvements


34,154


22,252Machinery and equipment


2,305


1,544Trade show booths


1,013


897Construction in progress


2,728


4,67052,152


34,025Less: accumulated depreciation


12,459


6,019Property and equipment, net

$
39,693

$
28,006


Construction
in progress at December 31, 2009 and 2008 represents the capital expenditures for leasehold improvements that will be used in our new branded retail stores. Also
included in
construction in progress at December 31, 2008 were capital expenditures associated with the implementation of a new information technology system. When these projects are completed, these
balances are transferred to the appropriate property and equipment category and depreciated according to their useful life.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Depreciation
expense, which is included as a component of selling, general and administrative expenses in the accompanying consolidated statements of income, was $6.3 million,
$3.4 million and $2.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.

NOTE 7ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following as of December 31 (amounts in thousands):

2009

2008Accrued expenses

$
2,714

$
5,134Accrued sales and use taxes


2,025


1,086Accounts payable


1,602


1,956Accrued percentage rent


1,367


614Other


4,009


1,843Accounts payable and accrued expenses

$
11,717

$
10,633


NOTE 8LICENSING REVENUE

We have six license agreements whereby we granted to the licensee the right to use the True Religion Brand Jeans trademark and related
intellectual property. Each licensee is required to pay us an annual royalty fee equal to the greater of a percentage of the licensee's actual annual net sales or minimum annual net sales (as defined
in the underlying agreement). Additionally, each licensee will pay us an annual minimum advertising contribution fee equal to a percentage of the minimum annual net sales (as defined in the underlying
agreement).

Each
licensee was also required to make non-refundable advance royalty payments which are to be credited against the first dollars of royalties that become due under the
agreement and the minimum royalty guarantee. These payments are recognized ratably as revenue over the contract year (as defined) of the license agreement as a component of net sales in the
accompanying consolidated statements of income. The unearned minimum advance payments are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets and total
$0.2 million and $0.1 million at December 31, 2009 and 2008, respectively. We recognized licensing revenue of $4.3 million, $1.4 million and $0.9 million for
the years ended December 31, 2009, 2008 and 2007 as a component of net sales in the accompanying consolidated statements of income. These licensing revenues included prepayments recognized
ratably and estimated sales and royalties based on information obtained from the licensee.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future
minimum annual royalty and advertising contribution fees as of December 31, 2009 are summarized as follows (amounts in thousands):

Year ending December 31,

Royalties

Advertising Contribution2010

$
3,888

$
1,0042011


3,106


7292012


1,524


2012013


480


2014





Thereafter





Total minimum royalty and advertising fees

$
8,998

$
1,934


NOTE 9STOCK-BASED COMPENSATION

On April 7, 2009, our Board of Directors approved the True Religion Apparel, Inc. 2009 Equity Incentive Plan (the "2009
Incentive Plan") which was approved by the shareholders at our Annual Shareholder Meeting on June 2, 2009. Upon approval of the 2009 Incentive Plan by the shareholders, grants under the
Company's 2005 Stock Incentive Plan (the "2005 Incentive
Plan") were discontinued and any shares available for issuance under the 2005 Incentive Plan were rolled into the 2009 Incentive Plan.

We
recognize stock-based compensation expense either on the straight-line or the graded attribution (accelerated) method over the requisite service period. The following
table summarizes our annual stock-based compensation expense, which is included in selling, general and administrative expenses in the accompanying consolidated statements of income (amounts in
thousands):

December 31,2009

2008

2007Restricted stock grants, net of estimated forfeitures

$
11,899

$
10,297

$
5,412Stock options








319Stock-based compensation expense, before tax benefits


11,899


10,297


5,731Tax benefits


4,502


2,732


1,162Stock-based compensation expense, net

$
7,397

$
7,565

$
4,569


Restricted Stock Awards

Shares awarded under the 2009 and 2005 Incentive Plans entitle the shareholder to all the rights of common stock ownership except that
the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period. The restriction
period is determined by the Compensation Committee of the Board of Directors and may not exceed 10 years. Restricted stock awards have generally been granted with vesting periods of up to three
years. All unvested restricted shares are forfeited if the recipient of the restricted stock award no longer provides services, as defined, to us.

During
the years ended December 31, 2009 and 2008, we awarded 1,135,194 and 658,958 shares, respectively, of restricted stock to employees, officers and directors which vest over
a period of zero to three years. Included in the shares awarded in 2009 are 801,692 shares that vest in 2010 and 2011 that

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

were
based on earnings targets for 2009. The fair value of these restricted shares, based on the price of our common stock at the date of grant, was $12.9 million and $12.0 million,
respectively. Our policy for attributing the value of graded vesting share-based payments is the straight-line single option approach for grants with only service conditions and the graded
attribution (accelerated) method for grants with performance conditions.

During
2007, we implemented a practice of withholding common shares, upon an employee's request, to satisfy employee minimum statutory income tax withholdings for restricted shares as
they vest. During the years ended December 31, 2009, 2008 and 2007, we withheld 223,275, 150,926 and 115,144 shares for a total value of $3.0 million, $2.8 million and
$1.8 million, respectively. These amounts are recorded as tax withholding payment for share-based compensation as a financing activity in the accompanying 2009 and 2008 consolidated statements
of cash flows.

The
following table summarizes our restricted stock activities for the year ended December 31, 2009 (dollar amounts in thousands except per share data):

Shares

Weighted Average Grant Date Fair Value

Weighted Average Remaining Contractual Life (Years)

Intrinsic ValueNon-vested, beginning of year


751,966

$
17.49Granted


1,135,194

$
11.36Vested


(577,050
)
$
16.80Forfeitures


(111,622
)
$
11.45Non-vested, end of year


1,198,488

$
12.79


1.0

$
22,160


As
of December 31, 2009 and 2008, we estimated a forfeiture rate of 3.4% and 4.6%, respectively, based on historical experience. The aggregate intrinsic value of restricted stock
outstanding as of December 31, 2009 and 2008, adjusted for estimated forfeitures, was $21.4 million and $8.8 million, respectively. As of December 31, 2009, the total
unamortized stock-based compensation expense related to the restricted shares was $5.3 million, which is expected to be recognized over a weighted average period of 1.0 year. The total
fair value of restricted stock vested during the year ended December 31, 2009, 2008 and 2007 was $9.7 million, $7.0 million and $5.7 million, respectively.

Stock Options

Stock options were granted under the prior plans. Option grants were for a term of five years and vested over a period of zero to three
years. We did not grant any new stock options during the years ended December 31, 2009, 2008 and 2007, and all options previously granted have been exercised or forfeited.

In
2007, we recognized $0.3 million of compensation expense for stock options that were granted and modified under APB 25. Such expenses represents the intrinsic value of
options modified for which an employee who terminated in 2007 would not have received such options had the vesting terms not been accelerated.

During
the year ended December 31, 2009, no options to acquire shares of our common stock were exercised. During the year ended December 31, 2008, options to acquire
836,665 shares of our common stock were exercised, of which 432,255 of these shares were withheld by us to meet the related employee minimum statutory income tax withholding requirement of
$5.3 million and exercise price of $1.5 million. During the year ended December 31, 2007, options to acquire 271,667 shares of our

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

common
stock were exercised, of which 67,848 of these shares were withheld by us to meet the related employee minimum statutory income tax withholding requirement of $1.3 million. The minimum
statutory income tax withholding amounts are recorded as tax withholding payments for stock-based compensation as a financing activity in the accompanying consolidated statements of cash flows.

The
total intrinsic value of options exercised during the years ended December 31, 2008 and 2007 was $11.6 million and $4.6 million, respectively.

We
receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair value of stock at the date of exercise
over the exercise
price of the options. We also receive a tax deduction that may be different than our financial statement expense for restricted stock when it vests. FASB ASC 718: CompensationStock
Compensation ("FASB ASC 718") requires cash flows resulting from tax benefits in excess of the related stock-based compensation to be classified as part of cash flows from financing activities. In
accordance with FASB ASC 718, we reported $0.1 million, $0.2 million and $1.3 million, respectively, of excess tax benefits as financing cash flows for the years ended
December 31, 2009, 2008 and 2007. The total tax (deficit) benefit realized from stock option exercises or restricted stock vesting for the years ended December 31, 2009, 2008 and 2007
was ($0.6) million, $0.2 million and $1.3 million, respectively. Cash received from stock option exercises was less than $0.1 million and $0.2 million for the years ended
December 31, 2008 and 2007, respectively.

NOTE 10COMMITMENTS AND CONTINGENCIES

Leases

We lease our headquarters facility and retail store locations under operating lease agreements expiring on various dates through
January 2021. Some of these leases require us to make periodic payments for property taxes, utilities and common area operating expenses. Certain leases include lease incentives, rent abatements and
fixed rent escalations, for which the effects are being recorded and amortized over the initial lease term on a straight-line basis. We have options to renew certain leases under various
terms as specified within each lease agreement. We have no capitalized lease obligations.

As
of December 31, 2009, we had entered into a total of 95 lease agreements, which consists of 87 retail stores in the U.S., three retail stores in Japan, our headquarters
facility in Vernon, California which includes a parking annex, showrooms in Los Angeles and New York, and an administrative office in Japan. Our leased properties aggregate 313,000 square feet of
space, which consists of 133,000 square feet for our headquarters, 172,000 square feet of retail space and 8,000 square feet of showroom space. Our lease agreements for 81 of the retail stores leases
require payment of a percentage of sales, ranging from 4% to 15%, if our net sales at the retail store exceed a defined threshold. As of December 31, 2009 we had 70 retail stores that were open
in the U.S., 17 that had not been opened yet and three retail stores open in Japan.

Rent
expense was $16.2 million, $9.3 million and $3.7 million in 2009, 2008 and 2007, respectively. These amounts include contingent rental expense of
$1.6 million, $0.8 million and $0.2 million in 2009, 2008 and 2007, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future
minimum lease payments under these operating leases as of December 31, 2009 are summarized as follows (amounts in thousands):

Year ending December 31,2010

$
15,6752011


16,4642012


16,3192013


16,6352014


16,552Thereafter


71,192Total minimum lease payments

$
152,837


Subsequent
to December 31, 2009, we entered into one new retail lease, which has an expiration date of January 2021 and future minimum lease payments of approximately
$1.4 million.

Legal Proceedings

From time to time, we are involved in various legal proceedings, which are incidental to the ordinary course of business. We do not
believe that these routine matters are material to our business or financial condition.

NOTE 11INCOME TAXES

Income tax expense consists of the following for the years ended December 31 (amounts in thousands):

2009

2008

2007Current income tax:Federal

$
23,967

$
22,475

$
18,591State and local


7,098


3,191


5,145Foreign


11





Total current income tax expense


31,076


25,666


23,736Deferred income taxes:Federal


(480
)

401


(2,219
)State and local


(334
)

(423
)

(417
)Foreign


172


(74
)

Total deferred income tax benefit


(642
)

(96
)

(2,636
)Total income tax expense

$
30,434

$
25,570

$
21,100


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A
reconciliation of the statutory Federal Income tax rate to the effective tax rate on income before provision for income taxes for the years ended December 31 is as follows:

2009

2008

2007Tax provision at statutory federal rate


35.0
%

35.0
%

35.0
%State income taxes, net of federal benefit


5.7


2.5


6.3Excess compensation under IRC Sec. 162(m)





1.2


3.0Domestic production deduction


(1.8
)

(2.0
)

(1.7
)Tax exempt interest





(0.3
)

(0.7
)Interest exposure








0.7Other


0.2


0.2


0.5Effective tax rate


39.1
%

36.6
%

43.1
%


Deferred
income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts recorded for income tax purposes. The
major components of deferred tax assets and liabilities are as follows as of December 31 (amounts in thousands):

2009

2008Current deferred tax assets:Compensation

$
4,629

$
3,092Inventory


1,821


1,004Accrued interest


20


317Bad debt


116


105State taxes, net of federal benefits


1,496


1,454Other


671


526Total current deferred tax assets


8,753


6,498Long term deferred tax (liability) asset:Lease incentives


1,891


1,109Fixed assets


(4,606
)

(2,211
)Total long-term deferred tax (liability) asset


(2,715
)

(1,102
)Total net deferred tax asset

$
6,038

$
5,396


Our
federal income tax return for 2006 through 2008 remains subject to examination, and our state income tax returns for 2005 through 2008 remain subject to examination. As of
December 31, 2009 and 2008, our reserves for unrecognized tax benefits are not material to the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12EARNINGS PER SHARE

The following is a reconciliation of the shares used to compute basic and diluted earnings per share is shown in the table for the
years ended December 31 (in thousands, except per share information):

2009

2008

2007Net income

$
47,332

$
44,371

$
27,845Basic shares


23,993


23,511


22,964Dilutive effect of unvested restricted stock awards and stock options


666


759


985Diluted shares


24,659


24,270


23,949Earnings per sharebasic

$
1.97

$
1.89

$
1.21Earnings per sharediluted

$
1.92

$
1.83

$
1.16


NOTE 13COMPREHENSIVE INCOME

Comprehensive income consists of net income, unrealized gain (loss) on available-for-sale investments and
cumulative translation adjustments. A reconciliation of other comprehensive income is shown in the table for the years ended December 31 (amounts in thousands):

2009

2008

2007Net income

$
47,332

$
44,371

$
27,845Unrealized losses on investmentsUnrealized losses arising during year, net of taxes of $890





(1,583
)

Losses on available for sale securities reclassified to trading, included in net income, net of taxes of $890 (See Note 3)





1,583


Cumulative translation adjustment


16


186


Comprehensive income

$
47,348

$
44,557

$
27,845


NOTE 14SEGMENT INFORMATION

The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see
Note 2). The U.S. Wholesale segment sells merchandise to select department stores, specialty and off-price retailers and boutiques
in the United States. The International segment sells merchandise, often at a discount to our wholesale list price, primarily to foreign distributors, who in turn sell the merchandise to retailers in
specific territories. Beginning in the third quarter of 2008, the International segment operated two outlet retail stores in Japan, then added a third store in the second quarter of 2009. The Consumer
Direct segment sells our merchandise and merchandise purchased from our licensees in our U.S. stores and e-commerce site. The U.S. Wholesale segment's operations include our design,
distribution center and customer service departments. We evaluate the performance of each operating segment based on operating income.

F-24

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summarized
financial information concerning our reportable segments is shown in the following table for the years ended December 31 (amounts in thousands):

2009

2008

2007Net sales:Consumer Direct

$
129,029

$
75,314

$
29,268U.S. Wholesale


123,203


153,235


111,390International


54,479


40,044


31,728Other


4,289


1,407


870Total net sales

$
311,001

$
270,000

$
173,256Gross profit:Consumer Direct

$
95,276

$
57,669

$
22,452U.S. Wholesale


65,882


78,670


60,007International


30,115


19,255


15,498Other


4,289


1,407


870Total gross profit

$
195,562

$
157,001

$
98,827Operating income:Consumer Direct

$
44,766

$
27,810

$
11,875U.S. Wholesale


30,763


47,452


36,405International


25,167


16,761


14,718Other


(23,099
)

(23,147
)

(15,856
)Total operating income

$
77,597

$
68,876

$
47,142Capital expendituresConsumer Direct

$
14,437

$
15,540

$
5,300U.S. Wholesale


1,673


810


3,465International


347


378


Other


3,625


1,459


Total capital expenditures

$
20,082

$
18,187

$
8,765Total assetsConsumer Direct

$
55,763

$
36,603U.S. Wholesale


31,159


43,030International


16,897


8,362Other


125,987


78,457Total assets

$
229,806

$
166,452


As
of December 31, 2009 and 2008, $224.9 million and $164.9 million, respectively, of our assets were located in the United States. Also, at December 31, 2009
and 2008, we had accounts receivable due from foreign distributors of $8.0 million and $7.0 million, respectively, and trademarks of $0.2 million and $0.2 million,
respectively, associated with foreign countries. The U.S. Wholesale segment had net sales to one customer, exceeding 10% of our net sales, that amounted to $41.1 million in 2009 and
$39.2 million in 2008. Our 2009 net sales categorized by gender were approximately as follows: women55%; men41%; and kids4%. Our 2008 net sales
categorized by gender were approximately as follows: women58%; men38%; and kids4%.

F-25

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Retail
occupancy costs included in Consumer Direct expenses amount to $16.5 million, $8.8 million and $3.3 million, for the years ended December 31, 2009,
2008 and 2007, respectively.

NOTE 15QUARTERLY INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly financial information for the years ended December 31, 2009 and 2008
(amounts in thousands, except per share data):

Year ended December 31, 2009

First Quarter

Second Quarter

Third Quarter

Fourth QuarterNet sales

$
63,624

$
72,116

$
82,423

$
92,838Gross profit

$
38,719

$
44,800

$
53,334

$
58,709Net income

$
7,625

$
10,987

$
14,085

$
14,635Earnings per share:Basic

$
0.32

$
0.46

$
0.59

$
0.61Diluted

$
0.32

$
0.45

$
0.58

$
0.59




Year ended December 31, 2008

First Quarter

Second Quarter

Third Quarter

Fourth QuarterNet sales

$
53,432

$
64,158

$
79,420

$
72,990Gross profit

$
30,485

$
36,888

$
46,364

$
43,264Net income

$
6,947

$
9,281

$
15,437

$
12,707Earnings per share:Basic

$
0.30

$
0.39

$
0.65

$
0.54Diluted

$
0.29

$
0.39

$
0.64

$
0.53


NOTE 16SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended December 31, 2009, 2008 and 2007, we paid $31.1 million, $27.4 million and
$23.1 million in taxes.

As
of December 31, 2009 and 2008, we had recognized the purchase of $0.8 million and $2.4 million, respectively, of property and equipment that had not yet been paid
for. These amounts have been excluded from "Purchases of property and equipment" in the accompanying consolidated cash flows.

F-26

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS        (In thousands)

Balance at Beginning of Period

Charged to Costs and Expenses

Deductions

Balance at End of Period2009Reserve for returns

$
474

$
829

$
(697
)
$
606Reserve for chargebacks

$
439

$
952

$
(924
)
$
467Reserve for bad debt

$
266

$
99

$
(68
)
$
2972008Reserve for returns

$
317

$
298

$
(141
)
$
474Reserve for chargebacks

$
385

$
124

$
(70
)
$
439Reserve for bad debt

$
244

$
577

$
(555
)
$
2662007Reserve for returns

$
69

$
248

$


$
317Reserve for chargebacks

$
735

$


$
(350
)
$
385Reserve for bad debt

$
371

$
228

$
(355
)
$
244


F-27

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