##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-KSB


|   |  |                                                                                           
|-- |  | ------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
    SECURITIES EXCHANGE ACT OF 1934     
|  
|   |  | FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005                                               
|  
|OR
|  
|o  |  | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | FOR 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 Organization) |  | (I.R.S. Employer
    Identification No.)
|                                                               
|1525 Rio Vista Avenue Los Angeles CA                            |  | 90023                                   
|(Address of Principal Executive Offices)                        |  | (Zip Code)                              

Registrants telephone number, including area code:
(323) 266-3072


Securities registered pursuant to Section 12(b) of the
Act: NONE


Securities registered pursuant to Section 12(g) of the
Act:


COMMON STOCK, $0.0001 PAR VALUE





o


þ o


S-B 10-KSB 10-KSB. o


12b-2 o þ








o þ










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##### 










TRUE RELIGION APPAREL, INC.


FORM 10-KSB
ANNUAL REPORT


FISCAL YEAR ENDED DECEMBER 31, 2005


TABLE OF CONTENTS


|              |  |                                                                                                                                     |  |      |    |  |  | 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- |  |  | 
|Item          |  |                                                                                                                                     |  | Page |   
|              |  |                                                                                                                                     |  |      |   
|PART I       
|1.            |  | Business                                                                                                                            |  |      | 1  | 
|2.            |  | Property                                                                                                                            |  |      | 10 | 
|3.            |  | Legal Proceedings                                                                                                                   |  |      | 11 | 
|4.            |  | Submission of Matters to a Vote of Security
    Holders                                                                             |  |      | 12 | 
|PART II      
|5.            |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Small Business Issuer Purchases
    of Equity Securities |  |      | 12 | 
|6.            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                           |  |      | 13 | 
|7.            |  | Financial Statements                                                                                                                |  |      | 23 | 
|8.            |  | Change in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                             |  |      | 23 | 
|8A.           |  | Controls and Procedures                                                                                                             |  |      | 23 | 
|8B.           |  | Other Information                                                                                                                   |  |      | 24 | 
|PART III     
|9.            |  | Directors, Executive Officers, Promoters
    and Control Persons; Compliance with Section 16(a) of the
    Exchange Act             |  |      | 24 | 
|10.           |  | Executive Compensation                                                                                                              |  |      | 28 | 
|11.           |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                                  |  |      | 32 | 
|12.           |  | Certain Relationships and Related
    Transactions                                                                                  |  |      | 33 | 
|13.           |  | Exhibits                                                                                                                            |  |      | 33 | 
|14.           |  | Principal Accountant Fees and Services                                                                                              |  |      | 34 | 
|Exhibit 10.11
|Exhibit 10.12
|Exhibit 14.1 
|ex-21.1      
|Exhibit 23.1 
|Exhibit 31.1 
|Exhibit 31.2 
|Exhibit 32.1 
|Exhibit 32.2 





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CAUTIONARY STATEMENT









PART I







|        |         
|------- | --------
|Item 1. | BUSINESS

Overview












1



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| |          
| | ---------
| | Employees



2



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| |             
| | ------------
| | Our Products









| |                  
| | -----------------
| | Business Strategy





| |                
| | ---------------
| | Supply Strategy





| |              
| | -------------
| | Manufacturing



3



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| |            
| | -----------
| | Competition







| |                                      
| | -------------------------------------
| | Government Regulation and Supervision







| |                         
| | ------------------------
| | Research and Development



RISK FACTORS


An investment in our stock involves a number of risks. Before
making a decision to purchase our securities, you should
carefully consider all of the risks described in this quarterly
report. If any of the risks discussed in this quarterly report
actually occur, our business, financial condition and results of
operations could be materially adversely affected. If this were
to occur, the trading price of our securities could decline
significantly and you may lose all or part of your
investment.


We are in the early stages of our growth, which makes it
difficult to evaluate whether we will operate profitably in the
future.






4



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| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | continue to successfully develop and operate production
    facilities or maintain existing or new agreements with third
    parties to perform these functions on our behalf; and
|
| |  | successfully market, distribute and sell our products or enter
    into agreements with third parties to perform these functions on
    our behalf.                               





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




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




We depend on third parties for significant elements of our
sales and distribution efforts. If these third parties do not
continue to assist us in our sales and distribution, our revenue
could decrease, which would have an adverse impact on our
business.




5



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Our business may be negatively impacted as a result of
changes in the economy.




Our quarterly revenues and operating results fluctuate as a
result of a variety of factors, including seasonal fluctuations
in demand for high-fashion denim, delivery date delays and
potential fluctuations in our annualized tax rate, which may
result in volatility of our stock price.




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.






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




6



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Purchases of the merchandise we sell are generally
discretionary and are therefore particularly susceptible to
economic slowdowns.




Our business could suffer if we need to add or replace
manufacturers.




Our stock price is highly volatile.






| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly variations in our operating results;                                                                                        
|
| |  | changes in financial estimates by securities analysts;                                                                                
|
| |  | changes in market valuations or financial results of
    high-fashion denim companies;                                                
|
| |  | announcements by us or our competitors of new products, or
    significant acquisitions, strategic partnerships or joint
    ventures;
|
| |  | any deviation from projected growth rates in revenues;                                                                                
|
| |  | any loss of a major customer or a major customer order;                                                                               
|
| |  | additions or departures of key management or design personnel;                                                                        
|
| |  | any deviations in our net revenue or in losses from levels
    expected by securities analysts;                                       
|
| |  | activities of short sellers and risk arbitrageurs; and                                                                                
|
| |  | future sales of our common stock.                                                                                                     

7



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




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.






Government regulation and supervision could restrict our
business.




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






| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If an independent manufacturer violates labor or other laws,
    or is accused of violating any such laws, or if their labor
    practices diverge from those generally accepted as ethical, it
    could harm our business and brand image.



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If our competitors misappropriate our proprietary know-how
and trade secrets, it could have a material adverse affect on
our business.






One principal stockholder is able to control substantially
all matters requiring a vote of our stockholders and his
interests may differ from the interests of our other
stockholders.




We are still exposed to potential risks from recent
legislation requiring public companies to evaluate controls
under Section 404 of the Sarbanes-Oxley Act of 2002.




We do not expect to declare or pay any dividends.




Our success is dependent on our ability to protect our
worldwide intellectual property rights, and our inability to
enforce these rights could harm our business.




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Our products may infringe the intellectual property rights of
others, which may cause us to incur unexpected costs or prevent
us from selling our products.









|        |         
|------- | --------
|Item 2. | PROPERTY







10



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|        |                  
|------- | -----------------
|Item 3. | LEGAL PROCEEDINGS

Joseph C. Canouse












The Indigo Group USA, Inc.




11



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|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS






PART II







|        |                                                                                                                                    
|------- | -----------------------------------------------------------------------------------------------------------------------------------
|Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF
    EQUITY SECURITIES

Market Information


Over-the Over-the Over-the


|               |  |      |      |  |      |   |      |      |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ----- |  |  | - | ----- | 
|               |  | 2004 |      |  | 2005 |  
|               |  |      |      |  |      |  
|               |  | High |      |  | Low  |   |      | High |  |   | Low   | 
|               |  |      |      |  |      |   |      |      |  |   |       | 
|First Quarter  |  | $    | 1.57 |  |      | $ | 0.80 |      |  | $ | 14.02 |  |  | $ | 7.35  | 
|Second Quarter |  | $    | 1.16 |  |      | $ | 0.85 |      |  | $ | 14.86 |  |  | $ | 11.55 | 
|Third Quarter  |  | $    | 2.54 |  |      | $ | 0.67 |      |  | $ | 17.77 |  |  | $ | 12.94 | 
|Fourth Quarter |  | $    | 8.10 |  |      | $ | 1.96 |      |  | $ | 16.97 |  |  | $ | 11.84 | 

Holders




Dividends




12



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Equity Compensation Plan Information




|                                                              |  |                   |           |  |                   |               |                 |                  |  |  |           | 
|------------------------------------------------------------- |  | ----------------- | --------- |  | ----------------- | ------------- | --------------- | ---------------- |  |  | --------- | 
|                                                              |  | (a)               |           |  | (b)               |               |                 | (c)              | 
|                                                              |  |                   |           |  |                   |               |                 |                  | 
|                                                              |  |                   |           |  |                   | Number of     |                
|                                                              |  |                   |           |  |                   | Securities    |                
|                                                              |  |                   |           |  |                   | Remaining     |                
|                                                              |  |                   |           |  |                   | Available for |                
|                                                              |  | Number of         |           |  |                   |               | Future Issuance |                 
|                                                              |  | Securities to be  |           |  | Weighted-         |               |                 | Under Equity     | 
|                                                              |  | Issued upon       |           |  | Average Exercise  |               |                 | Compensation     | 
|                                                              |  | Exercise of       |           |  | Price of          |               |                 | Plans (Excluding | 
|                                                              |  | Outstanding       |           |  | Outstanding       |               |                 | Securities       | 
|                                                              |  | Options, Warrants |           |  | Options, Warrants |               |                 | Reflected in     | 
|Plan Category                                                 |  | and Rights        |           |  | and Rights        |               |                 | Column (a))      | 
|                                                              |  |                   |           |  |                   |               |                 |                  | 
|Equity compensation plans approved by security holders        |  |                   | 1,358,664 |  |                   | $             | 1.46            |                  |  |  | 2,688,277 | 
|Equity compensation plans not approved by security holders(1) |  |                   | N/A       |  |                   |               | N/A             |                  |  |  | N/A       | 
|                                                              |  |                   |           |  |                   |               |                 |                  | 
|Total                                                         |  |                   | 1,358,664 |  |                   | $             | 1.46            |                  |  |  |           | 






|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | We have not authorized the issuance of equity securities under
    any plan not approved by security holders.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with
our financial statements included elsewhere in this
Form 10-KSB. This
discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking
statements as a result of various factors including those set
forth under Risk Factors herein.




Overview








13



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14



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| |          
| | ---------
| | Employees





| |             
| | ------------
| | Our Products









| |                  
| | -----------------
| | Business Strategy



15



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| |                
| | ---------------
| | Supply Strategy





| |              
| | -------------
| | Manufacturing







| |            
| | -----------
| | Competition







| |                                      
| | -------------------------------------
| | Government Regulation and Supervision







| |                         
| | ------------------------
| | Research and Development



16



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Financial Condition, Liquidity and Capital Resources








Assets.


Liabilities and Working Capital.


Cash Requirements and Additional Funding




Results of Operations




| |                                                           
| | ----------------------------------------------------------
| | The year ended December 31, 2005 vs.
    December 31, 2004





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Off Balance-Sheet Arrangements






month-to




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to submit all sales to Merchant Factors Corp. for approval prior
    to shipment to the customer.                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | to assign to Merchant Factors Corp. all of its receivables that
    are acceptable to them, with full recourse to Guru Denim in the
    event of non-payment by its customer for any reason except a
    financial inability to pay (this exception only applies to
    customers whose credit has been approved by the factor in
    advance).                                                                                                                                                         
|
| |  | to pay to Merchant Factors Corp. interest on all amounts charged
    to Guru Denims account from the date charged until repaid
    at a rate equal to one percent (1%) above the prime rate of
    interest charged from
    time-to-time by HSBC
    Bank USA, New York, N.Y., provided that the rate of interest
    shall never be lower than four percent (4%).                                                                                                                                    
|
| |  | to pay to Merchant Factors Corp. monthly commissions equal to
    seventy-five one-hundredths of one percent (0.75%) of the net
    amount received by Guru Denim from Merchant Factors Corp. during
    the previous month as advances against receivables purchased by
    it, subject to increase in certain specified circumstances; and
    further subject to Guru Denims agreement that the minimum
    commission for any year during the term of the factoring
    agreement shall be $24,000.







19



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Critical Accounting Policies




first-in,




New Accounting Pronouncements








20



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05-04 00-19,


05-6, Determining the Amortization Period for Leasehold
Improvements 05-6








| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | SFAS No. 155, Accounting for Certain Hybrid
    Financial Instruments  An Amendment of FASB
    Statements No. 133 and 140

Accounting
for Certain Hybrid Instruments. Accounting for
Derivative Instruments and Hedging Activities, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.


21



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| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | clarifies which interest-only strips and principal-only strips
    are not subject to the requirements of Statement 133;                                                                                                                               
|
| |  | establishes a requirement to evaluate interests in securitized
    financial assets to identify interests that are freestanding
    derivatives or that are hybrid financial instruments that
    contain an embedded derivative requiring bifurcation;
|
| |  | clarifies that concentrations of credit risk in the form of
    subordination are not embedded derivatives; and                                                                                                                                        
|
| |  | amends Statement 140 to eliminate the prohibition on a
    qualifying special-purpose entity from holding a derivative
    financial instrument that pertains to a beneficial interest
    other than another derivative financial instrument.         





Subsequent Events




22



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|        |                     
|------- | --------------------
|Item 7. | FINANCIAL STATEMENTS








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|Item 8A. | CONTROLS AND PROCEDURES



13a-15(e) 15d-15(e)


13a-15




| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expanded the size of the board of directors to seven to include
    four independent directors on May 26, 2005;                                                                                                                   
|
| |  | formed an audit committee and adopted a written charter for such
    committee pursuant to the rules of Nasdaq;                                                                                                                   
|
| |  | formed a compensation committee and adopted a written charter
    for such committee pursuant to the rules of Nasdaq;                                                                                                             
|
| |  | formed a nominating and governance committee and adopted a
    written charter for such committee pursuant to the rules of
    Nasdaq;                                                                                            
|
| |  | adopted a Statement of Policy to Directors, Officers and
    Employees Concerning Securities Trading (insider trading policy);                                                                                                    
|
| |  | adopted Corporate Governance Guidelines pursuant to the rules of
    Nasdaq that govern, among other things, board member
    qualifications, responsibilities, compensation, management
    succession and board self evaluation;
|
| |  | adopted a Corporate Code of Conduct for all directors, executive
    officers and employees, which conforms to Nasdaq listing
    requirements, federal securities laws and SEC regulations;                                      

23



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| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | adopted a Director Code of Conduct;                                                                                                                                                                                                             
|
| |  | adopted a Fraud Policy, which applies to any fraud, or suspected
    fraud, involving employees as well as stockholders, consultants,
    vendors, contractors, outside agencies and any other parties
    with a business relation with us; and
|
| |  | hired a qualified executive assistant on a full-time basis to
    assist its principal financial officer in performing his duties.                                                                                                              








|         |                  
|-------- | -----------------
|Item 8B. | OTHER INFORMATION






PART III







|        |                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------
|Item 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
    PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
    ACT.



|                        |  |                                                |  |  |     |    |  |                    |  |                  
|----------------------- |  | ---------------------------------------------- |  |  | --- | -- |  | ------------------ |  | -----------------
|                        |  |                                                |  |  |     |    |  | Date First Elected
|Name                    |  | Position Held                                  |  |  | Age |    |  | or Appointed      
|                        |  |                                                |  |  |     |    |  |                    | 
|Jeffrey Lubell          |  | Chief Executive Office, President and Director |  |  |     | 50 |  |                    |  | June 24, 2003    
|Kymberly Lubell         |  | Vice President, Womens Design and Director    |  |  |     | 39 |  |                    |  | July 4, 2003     
|Charles A. Lesser       |  | Chief Financial Officer                        |  |  |     | 59 |  |                    |  | September 1, 2003
|Mark Saltzman           |  | Chief Operating Officer                        |  |  |     | 57 |  |                    |  | July 4, 2003     
|Joseph Coulombe         |  | Director                                       |  |  |     | 75 |  |                    |  | May 26, 2005     
|G. Louis Graziadio, III |  | Director                                       |  |  |     | 55 |  |                    |  | May 26, 2005     
|Robert L. Harris, II    |  | Director                                       |  |  |     | 46 |  |                    |  | May 26, 2005     
|Mark S. Maron           |  | Director                                       |  |  |     | 49 |  |                    |  | May 26, 2005     

Business Experience




Jeffrey Lubell


24



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Kymberly Lubell


Charles A. Lesser


Mark Saltzman


Joseph Coulombe


G. Louis Graziadio, III


Robert L. Harris, II


Mark S. Maron


25



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Significant Employees




Family Relationships




Involvement in Certain Legal Proceedings






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) any bankruptcy petition filed by or against any
    business of which such person was a general partner or executive
    officer either at the time of the bankruptcy or within two years
    prior to that time, except that Kymberly Lubell was President
    and Jeffrey Lubell was Vice President of Bella Dahl, Inc. a
    manufacturer of mens and womens apparel, until
    December 2001. In April 2002, Bella Dahl, Inc., under financial
    duress, filed a bankruptcy petition under Chapter 7 of the
    United States Bankruptcy Code;
|
| | (2) any conviction in a criminal proceeding or being
    subject to a pending criminal proceeding (excluding traffic
    violations and other minor offenses);                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (3) being subject to any order, judgment, or decree, not
    subsequently reversed, suspended or vacated, of any court of
    competent jurisdiction, permanently or temporarily enjoining,
    barring, suspending or otherwise limiting his involvement in any
    type of business, securities or banking activities; and                                                                                                                                                                                                                              
|
| | (4) being found by a court of competent jurisdiction (in a
    civil action), the Commission or the Commodity Futures Trading
    Commission to have violated a federal or state securities or
    commodities law, and the judgment has not been reversed,
    suspended, or vacated.                                                                                                                                                                                                                                                                    

Committees




Audit Committee.




Compensation Committee.


Governance and Nominating Committee.


26



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Section 16(a) Beneficial Ownership Reporting
Compliance


10-KSB


Code of Ethics








27



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|         |                        
|-------- | -----------------------
|Item 10. | EXECUTIVE COMPENSATION.



SUMMARY COMPENSATION TABLE


|                            |                          |      |      |                     |     |              |                        |         |            |              |           |            |      |         |        |       |       |  |         |           |  |           |              |         |  |  |   |     |  |  |   |     | 
|--------------------------- | ------------------------ | ---- | ---- | ------------------- | --- | ------------ | ---------------------- | ------- | ---------- | ------------ | --------- | ---------- | ---- | ------- | ------ | ----- | ----- |  | ------- | --------- |  | --------- | ------------ | ------- |  |  | - | --- |  |  | - | --- | 
|                            |                          |      |      | Annual Compensation |     |              | Long Term Compensation |        
|                            |                          |      |      |                     |     |              |                        |        
|                            |                          |      |      |                     |     | Awards       |                        |         | Payouts    |              |           |           
|                            |                          |      |      |                     |     |              |                        |         |            |              |           |           
|                            |                          |      |      |                     |     | Securities   |                        |         | Restricted |              |           |            |      |        
|                            |                          |      |      |                     |     | Underlying   |                        |         | Shares or  |              |           |            |      |        
|                            |                          |      |      |                     |     | Other Annual |                        |         | Options/   |              |           | Restricted |      |         | LTIP   |       |       | 
|                            |                          |      |      | Salary              |     |              | Bonus                  |         |            | Compensation |           |            | SARs |         |        | Share |       |  | Payouts |           |  | All Other |             
|Name and Principal Position |                          | Year |      |                     | ($) |              |                        | ($)     |            |              | ($)       |            |      | Granted |        |       | Units |  |         | ($)       |  |           | Compensation |        
|                            |                          |      |      |                     |     |              |                        |         |            |              |           |            |      |         |        |       |       |  |         |           |  |           |              |        
|Jeffrey Lubell              |                          |      | 2005 |                     |     | $            | 400,000                |         |            | $            | 1,501,962 |            |      |         |       |       |       |  |        |           |  |           |             |         |  |  |  |     |  |  |  |    
|                            | President and CEO(2)     |      |      | 2004                |     |              | $                      | 180,000 |            |              | $         | 798,777    |      |         |        |      |       |  |         | 1,150,000 |  |           |              | 200,000 |  |  |   |    |  |  |   |    | 
|                            |                          |      |      | 2003                |     |              | $                      | 90,000  |            |              | $         | 61,000     | (3)  |         |        |      |       |  |         |          |  |           |              |        |  |  |   |    |  |  |   |    | 
|Charles A. Lesser           |                          |      | 2005 |                     |     | $            | 182,000                |         |            | $            | 100,000   |            |      | $       | 15,600 |       |       |  |        |           |  |           |             |         |  |  |  |     |  |  |  |    
|                            | Chief Financial Officer  |      |      | 2004                |     |              | $                      | 130,000 |            |              | $         | 50,000     |      |         | $      | 7,800 |       |  |         | 200,000   |  |           |              | 50,000  |  |  |   |    |  |  |   |    | 
|                            |                          |      |      | 2003                |     |              | $                      | 41,600  | (4)        |              |           |           |      |         |        |      |       |  |         | 450,000   |  |           |              |        |  |  |   |    |  |  |   |    | 
|Kymberly Lubell             |                          |      | 2005 |                     |     | $            | 250,000                |         |            | $            | 100,000   |            |      |         |       |       |       |  |        |           |  |           |             |         |  |  |  |     |  |  |  |    
|                            | VP, Womens Design       |      |      | 2004                |     |              | $                      | 147,115 |            |              | $         | 50,000     |      |         |        |      |       |  |         | 250,000   |  |           |              |        |  |  |   |    |  |  |   |    | 
|                            |                          |      |      | 2003                |     |              |                        | N/A     |            |              |           |           |      |         |        | N/A   |       |  |         | N/A       |  |           |              | N/A     |  |  |   | N/A |  |  |   |    | 
|Mark Saltzman               |                          |      | 2005 |                     |     | $            | 185,000                |         |            | $            | 35,000    |            |      | $       | 15,600 |       |       |  |        |           |  |           |             |         |  |  |  |     |  |  |  |    
|                            | Chief Operations Officer |      |      | 2004                |     |              | $                      | 60,480  |            |              | $         | 25,364     |      |         | $      | 4,708 |       |  |         | 200,000   |  |           |              |        |  |  |   |    |  |  |   |    | 
|                            |                          |      |      | 2003                |     |              |                        | N/A     |            |              |           | N/A        |      |         |        | N/A   |       |  |         | N/A       |  |           |              | N/A     |  |  |   | N/A |  |  |   | N/A | 






|    |                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The value of perquisites and other personal benefits, securities
    and property for the executive officers that do not exceed the
    lesser of $50,000 or 10% of the total of the annual salary and
    bonus is not reported herein.
|   
|(2) | Jeffrey Lubell became our President and CEO on June 24,
    2003.                                                                                                                                                                       
|   
|(3) | Jeffrey Lubell receives 1.5% of sales less returns and financing
    costs as an incentive bonus, plus an annual salary of $400,000.                                                                                                    
|   
|(4) | The number shown for 2003 is prorated to reflect that
    Mr. Lesser was appointed as our CFO on September 1,
    2003.                                                                                                                 
|   
|(5) | Kymberly Lubell receives an annual salary of $250,000.
    Ms. Lubell joined our company in January, 2004.                                                                                                                              
|   
|(6) | Mark Saltzman receives an annual salary of $185,000.
    Mr. Saltzman became our subsidiarys chief operating
    officer on August 30, 2004.                                                                                           

Employment Contracts and Termination of Employment and Change
in Control Arrangements




| |               
| | --------------
| | Jeffrey Lubell





28



---



##### Table of Contents











| |                  
| | -----------------
| | Charles A. Lesser







29



---



##### Table of Contents





| |                
| | ---------------
| | Kymberly Lubell









Pension, Retirement or Similar Benefit Plans




Stock Incentive Plan






30



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##### Table of Contents





Equity Compensation Plan Information




|                                                              |  |                  |           |  |                  |               |                 |              |  |  |           | 
|------------------------------------------------------------- |  | ---------------- | --------- |  | ---------------- | ------------- | --------------- | ------------ |  |  | --------- | 
|                                                              |  | (a)              |           |  | (b)              |               |                 | (c)          | 
|                                                              |  |                  |           |  |                  |               |                 |              | 
|                                                              |  |                  |           |  |                  | Number of     |                
|                                                              |  |                  |           |  |                  | Securities    |                
|                                                              |  |                  |           |  |                  | Remaining     |                
|                                                              |  |                  |           |  |                  | Available for |                
|                                                              |  | Number of        |           |  |                  |               | Future Issuance |             
|                                                              |  | Securities to be |           |  | Weighted-        |               |                 | Under Equity | 
|                                                              |  | Issued Upon      |           |  | Average Exercise |               |                 | Compensation | 
|                                                              |  | Exercise of      |           |  | Price of         |               |                 | Plans        | 
|                                                              |  | Outstanding      |           |  | Outstanding      |               |                 | (Excluding   | 
|                                                              |  | Options,         |           |  | Options,         |               |                 | Securities   | 
|                                                              |  | Warrants and     |           |  | Warrants and     |               |                 | Reflected in | 
|Plan Category                                                 |  | Rights           |           |  | Rights           |               |                 | Column (a))  | 
|                                                              |  |                  |           |  |                  |               |                 |              | 
|Equity compensation plans approved by security holders        |  |                  | 1,358,664 |  |                  | $             | 1.46            |              |  |  | 2,688,277 | 
|Equity compensation plans not approved by security holders(1) |  |                  | N/A       |  |                  |               | N/A             |              |  |  | N/A       | 
|                                                              |  |                  |           |  |                  |               |                 |              | 
|Total                                                         |  |                  | 1,358,664 |  |                  | $             | 1.46            |              |  |  |           | 






|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | We have not authorized the issuance of equity securities under
    any plan not approved by security holders.

Option/ SAR Grants




Aggregated Option/ SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/ SAR Values


in-the


|                  |  |             |         |  |          |                         |           |             |                              |  |                         |  |  |             |         |  |               |  |           |  |  |  |            | 
|----------------- |  | ----------- | ------- |  | -------- | ----------------------- | --------- | ----------- | ---------------------------- |  | ----------------------- |  |  | ----------- | ------- |  | ------------- |  | --------- |  |  |  | ---------- | 
|                  |  |             |         |  |          | Number of Securities    |           |             |                             
|                  |  |             |         |  |          | Underlying Unexercised  |           |             | Value of Unexercised In-the- | 
|                  |  |             |         |  |          | Options at December 31, |           |             | Money Options at             | 
|                  |  | Shares      |         |  | Value    |                         |           | 2005(#)     |                              |  | December 31, 2005($)(2) | 
|                  |  | Acquired on |         |  | Realized |                         |           |             |                              |  |                         | 
|Name              |  | Exercise(#) |         |  | ($)(1)   |                         |           | Exercisable |                              |  | Unexercisable           |  |  | Exercisable |         |  | Unexercisable | 
|                  |  |             |         |  |          |                         |           |             |                              |  |                         |  |  |             |         |  |               | 
|Jeffrey Lubell    |  |             | 316,667 |  |          |                         | 4,259,171 |             |                              |  | 449,999                 |  |  |             | 383,334 |  |               |  | 6,929,985 |  |  |  | 15,903,344 | 
|Kymberly Lubell   |  |             | 83,333  |  |          |                         | 1,120,829 |             |                              |  | 83,333                  |  |  |             | 83,333  |  |               |  | 1,283,328 |  |  |  | 1,283,328  | 
|Charles A. Lesser |  |             | 450,000 |  |          |                         | 5,844,250 |             |                              |  | 33,333                  |  |  |             | 166,667 |  |               |  | 513,328   |  |  |  | 2,566,672  | 
|Mark Saltzman     |  |             | 133,334 |  |          |                         | 1,285,330 |             |                              |  |                        |  |  |             | 66,667  |  |               |  |          |  |  |  | 1,026,672  | 






|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The value realized upon the exercise of stock options represents
    the positive spread between the exercise price of stock options
    and the fair market value of the shares subject to such options
    on the exercise date.  
|   
|(2) | The value of
    in-the-money
    stock options represents the positive spread between the
    exercise price of options and the fair market value of the
    underlying shares subject to those options on December 31,
    2005.

31



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##### Table of Contents



Directors Compensation









|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Principal Stockholders




|                                                            |  |                   |           |  |               |  |       | 
|----------------------------------------------------------- |  | ----------------- | --------- |  | ------------- |  | ----- | 
|                                                            |  | Amount and Nature |           |  |              
|                                                            |  | of Beneficial     |           |  | Percentage of | 
|Name and Address of Beneficial Owner(1)                     |  | Ownership         |           |  | Class(2)      | 
|                                                            |  |                   |           |  |               | 
|Directors and Executive Officers                            |  |                   |           |  |               |  |       | 
|Jeffrey Lubell(3)                                           |  |                   | 8,574,334 |  |               |  | 37.6% | 
|Kymberly Lubell(4)                                          |  |                   | 8,142,666 |  |               |  | 36.3% | 
|Charles A. Lesser(5)                                        |  |                   | 452,500   |  |               |  | 2.0%  | 
|Mark Saltzman                                               |  |                   |          |  |               |  | *     | 
|Joseph Coulombe                                             |  |                   | 13,000    |  |               |  | *     | 
|G. Louis Graziadio, III                                     |  |                   | 27,000    |  |               |  | *     | 
|Robert L. Harris II                                         |  |                   | 13,000    |  |               |  | *     | 
|Mark S. Maron                                               |  |                   | 14,000    |  |               |  | *     | 
|All Directors and Executive Officers as a Group (8 Persons) |  |                   | 9,242,167 |  |               |  | 40.3% | 






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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Each of our directors and executive officers may be reached at
    1525 Rio Vista Avenue, Los Angeles, California 90023, telephone
    (323) 266-3072.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | Based on 22,359,948 shares of common stock outstanding as
    of March 25, 2005. Except as otherwise indicated, we
    believe that the beneficial owners of the common stock listed
    above, based on information furnished by such owners, have sole
    investment and voting power with respect to such shares, subject
    to community property laws where applicable. Beneficial
    ownership is determined in accordance with the rules of the SEC
    and generally includes voting or investment power with respect
    to securities. Shares of common stock subject to options or
    warrants currently exercisable, or exercisable within
    60 days, are deemed outstanding for purposes of computing
    the percentage ownership of the person holding such option or
    warrants, but are not deemed outstanding for purposes of
    computing the percentage ownership of any other person.
|   
|(3) | Jeffrey Lubell holds 7,994,333 shares of common stock as
    part of the Lubell Family Trust along with Kymberly Lubell.
    Mr. Lubell holds 316,667 options to purchase shares of our
    common stock granted on July 22, 2004 that are currently
    exercisable or exercisable within 60 days plus 133,334
    options to purchase shares of our common stock granted on
    December 14, 2004 that are currently exercisable within
    60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(4) | Kymberly Lubell holds 7,994,333 shares of common stock as
    part of the Lubell Family Trust along with Jeffrey Lubell.
    Ms. Lubell holds 83,333 options to purchase shares of our
    common stock granted on July 22, 2004 that are currently
    exercisable or exercisable within 60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

32



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|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Charles Lesser holds 427,500 shares of common stock plus
    25,000 options to purchase shares of our common stock granted on
    July 19, 2003 that are currently exercisable or exercisable
    within 60 days.

Changes in Control









|         |                                                
|-------- | -----------------------------------------------
|Item 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.








|         |         
|-------- | --------
|Item 13. | EXHIBITS



|        |    |             |  |                                                                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1          |  | Agreement and Plan of Merger, dated August 18, 2005, by and
    between the Registrant and True Religion Apparel, Inc., a Nevada
    corporation and the Registrants predecessor in interest
    (incorporated by reference from our Form 8-K Current
    Report, filed August 22, 2005)
|        | 3  | .1          |  | Certificate of Incorporation (incorporated by reference from our
    Form 8-K Current Report, filed August 22, 2005)                                                                                                                                                                     
|        | 3  | .2          |  | Bylaws (incorporated by reference from our Form 8-K Current
    Report, filed August 22, 2005)                                                                                                                                                                                           
|        | 4  | .1          |  | Specimen Common Stock Certificate (incorporated by reference
    from our Form 8-K Current Report, filed August 22,
    2005)                                                                                                                                                            
|        | 10 | .1          |  | Settlement Agreement and Mutual General Release with The Indigo
    Group USA and Jeremy Lew (incorporated by reference from our
    Form 10-QSB Quarterly Report, filed on November 12,
    2004)                                                                                       
|        | 10 | .2          |  | Manufacturers Agreement with The Indigo Group, USA
    (incorporated by reference from our Form 10-QSB Quarterly
    Report, filed on November 12, 2004)                                                                                                                                
|        | 10 | .3          |  | Discount Factoring Agreement dated December 20, 2004,
    between Merchant Factors Corp. and Guru Denim Inc. (incorporated
    by reference from our Form 10-KSB/ A filed on April 6,
    2005)                                                                                          
|        | 10 | .4          |  | 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 | .5          |  | Letter dated July 1, 2005 amending the terms of the
    Discount Factoring Agreement between Merchant Factors Corp. and
    Guru Denim, Inc. (incorporated by reference from our
    Form 10-Q Quarterly Report, filed August 15, 2005)                                                  
|        | 10 | .6          |  | Standard Single-Tenant Sublease dated July 1, 2005 between
    L.A. Fabric Imports, Inc. and Guru Denim, Inc. for 1557 Rio
    Vista Ave. Los Angeles, California (incorporated by reference
    from our Form 10-Q Quarterly Report, filed August 15,
    2005)                         
|        | 10 | .7          |  | 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 | .8          |  | Employment Agreement by and between True Religion Apparel, Inc.
    and Jeffrey Lubell dated January 4, 2006 (incorporated by
    reference from our Form 8-K Current Report, filed on
    January 10, 2006).*                                                                           
|        | 10 | .9          |  | Employment Agreement by and between True Religion Apparel, Inc.
    and Charles Lesser dated January 4, 2006 (incorporated by
    reference from our Form 8-K Current Report, filed on
    January 10, 2006).*                                                                           

33



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .10         |  | Employment Agreement by and between True Religion Apparel, Inc.
    and Kymberly Lubell dated January 4, 2006 (incorporated by
    reference from our Form 8-K Current Report, filed on
    January 10, 2006).*
|        | 10 | .11         |  | Lease Agreement by and among True Religion Apparel, Inc., Guru
    Denim, Inc. and Rio Vista Industrial Investments, LLC dated
    May 28, 2004                                                                
|        | 10 | .12         |  | Settlement Agreement and General Release by and between True
    Religion Apparel, Inc. and Joseph Canouse dated March 21,
    2006                                                                            
|        | 14 | .1          |  | Code of Ethics                                                                                                                                                                                                 
|        | 21 | .1          |  | Subsidiaries of the Registrant                                                                                                                                                                                 
|        | 23 | .1          |  | Consent of Stonefield Josephson Inc.                                                                                                                                                                           
|        | 31 | .1          |  | Certification of the Chief Executive Officer, as required by
    Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                                         
|        | 31 | .2          |  | Certification of the Chief Financial Officer, as required by
    Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                                         
|        | 32 | .1          |  | Certification of the Chief Executive Officer provided 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 the Chief Financial Officer provided pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                          






|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Represents a management contract or compensatory plan, contract
    or arrangement in which any director or any of the named
    executives participates.






|         |                                       
|-------- | --------------------------------------
|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit and Related Fees




|                   |        |      |         |         |  |      |   |        |        | 
|------------------ | ------ | ---- | ------- | ------- |  | ---- | - | ------ | ------ | 
|                   |        | 2005 |         |         |  | 2004 |  
|                   |        |      |         |         |  |      |  
|Audit fees         |        | $    | 144,319 |         |  |      | $ | 53,324 |       
|Audit-related fees |        |      |        |         |  |      | $ | 144    |       
|Tax fees           |        | $    | 15,452  |         |  |      | $ | 8,020  |       
|Other fees         |        | $    | 21,967  |         |  |      |   |       |       
|                   |        |      |         |         |  |      |  
|                   | Total: |      | $       | 181,738 |  |      |   | $      | 61,488 | 
|                   |        |      |         |         |  |      |  

Pre-approval Policies and Procedures




34



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##### Table of Contents



SIGNATURES






| |                            
| | ---------------------------
| | TRUE RELIGION APPAREL, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ Jeffrey Lubell

| |                                             
| | --------------------------------------------
| |                                             
| | Jeffrey Lubell, President, CEO, and Director
| | (Principal Executive Officer)               
|
| | Date: March 31, 2006                        



|                                                   |  |                                                                                              |  |                |  | 
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                          |  | Title                                                                                        |  | Date          
|                                                   |  |                                                                                              |  |               
|                                                  
|/s/ Jeffrey LubellJeffrey Lubell                   |  | Chairman of the Board, President and Chief Executive Officer
    (Principal Chief Executive) |  | March 31, 2006
|                                                  
|/s/ Charles A. LesserCharles A. Lesser             |  | Chief Financial Officer (Principal Accounting Officer)                                       |  | March 31, 2006
|                                                  
|/s/ Kymberly LubellKymberly Lubell                 |  | Vice President and Director                                                                  |  | March 31, 2006
|                                                  
|/s/ Joseph H. CoulombeJoseph H. Coulombe           |  | Director                                                                                     |  | March 31, 2006
|                                                  
|/s/ G. Louis Graziadio, IIIG. Louis Graziadio, III |  | Director                                                                                     |  | March 31, 2006
|                                                  
|/s/ Robert L. Harris, IIRobert L. Harris, II       |  | Director                                                                                     |  | March 31, 2006
|                                                  
|/s/ Mark S. MaronMark S. Maron                     |  | Director                                                                                     |  | March 31, 2006

35



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                       |  |      |     | 
|------------------------------------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                                                       |  | Page |    
|                                                                                                       |  |      |    
|Report of Independent Registered Public
    Accounting Firm Stonefield Josephson, Inc.                 |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2005 and 2004                                       |  |      | F-3 | 
|Consolidated Statements of Income for the
    Years Ended December 31, 2005 and 2004                   |  |      | F-4 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2005 and 2004               |  |      | F-5 | 
|Consolidated Statements of
    Stockholders Equity for the Years Ended December 31,
    2005 and 2004 |  |      | F-6 | 
|Notes to Consolidated Financial
    Statements                                                         |  |      | F-7 | 

F-1



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                               
| | ------------------------------
| | /s/ STONEFIELD JOSEPHSON, INC.
| |                               
| | CERTIFIED PUBLIC ACCOUNTANTS  





F-2



---



##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY





CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                                                      |  |              |            |   |              |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ------------ | - | ---------- | -
|                                                                                                                                                                                                                      |  | December 31, |            |   | December 31, |  
|                                                                                                                                                                                                                      |  | 2005         |            |   | 2004         |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  
|ASSETS                                                                                                                                                                                                               
|Current Assets:                                                                                                                                                                                                       |  |              |            |   |              |   |            |  
|Cash                                                                                                                                                                                                                  |  | $            | 9,436,632  |   |              | $ | 2,946,058  |  
|Marketable Securities                                                                                                                                                                                                 |  |              | 5,970,486  |   |              |   |           |  
|Accounts receivable, net of allowance of $478,719 and $191,527,
    respectively                                                                                                                                      |  |              | 7,795,524  |   |              |   | 2,384,996  |  
|Due from factor, net of chargebacks and other deductions
    (Note 2)                                                                                                                                                 |  |              | 6,722,496  |   |              |   | 3,971,429  |  
|Advances to vendor                                                                                                                                                                                                    |  |              | 310,000    |   |              |   |           |  
|Inventory                                                                                                                                                                                                             |  |              | 10,052,748 |   |              |   | 3,325,665  |  
|Deferred tax asset                                                                                                                                                                                                    |  |              | 1,989,000  |   |              |   | 228,654    |  
|Stock subscription receivable                                                                                                                                                                                         |  |              | 68,080     |   |              |   |           |  
|Prepaid expenses and other current assets                                                                                                                                                                             |  |              | 409,985    |   |              |   | 61,892     |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  
|Total current assets                                                                                                                                                                                                  |  |              | 42,754,951 |   |              |   | 12,918,694 |  
|Property and equipment, net of accumulated depreciation and
    amortization                                                                                                                                          |  |              | 982,672    |   |              |   | 445,519    |  
|Deposits and other assets                                                                                                                                                                                             |  |              | 254,068    |   |              |   | 52,776     |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  
|TOTAL ASSETS                                                                                                                                                                                                          |  | $            | 43,991,691 |   |              | $ | 13,416,989 |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  
|                                                                                                                                                                                                                     
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                                                                                                                
|Current Liabilities:                                                                                                                                                                                                  |  |              |            |   |              |   |            |  
|Accounts payable and accrued expenses                                                                                                                                                                                 |  | $            | 6,723,701  |   |              | $ | 2,798,526  |  
|Accrued payroll, vacation and bonus expense                                                                                                                                                                           |  |              | 157,220    |   |              |   |           |  
|Accrued customer credits                                                                                                                                                                                              |  |              | 91,000     |   |              |   | 270,000    |  
|Accrued incentive compensation-officer                                                                                                                                                                                |  |              | 355,321    |   |              |   | 248,272    |  
|Income taxes payable                                                                                                                                                                                                  |  |              | 1,237,443  |   |              |   | 2,476,933  |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  
|Total current liabilities                                                                                                                                                                                             |  |              | 8,564,685  |   |              |   | 5,793,731  |  
|Deferred tax liability                                                                                                                                                                                                |  |              | 134,000    |   |              |   | 81,195     |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  
|Total liabilities                                                                                                                                                                                                     |  |              | 8,698,685  |   |              |   | 5,874,926  |  
|Commitments and Contingencies (Note 8)                                                                                                                                                                                |  |              |           |   |              |   |           |  
|Stockholders Equity:                                                                                                                                                                                                 |  |              |            |   |              |   |            |  
|Preferred Stock, $.0001 par value, 20,000,000 shares
    authorized, 0 issued and outstanding, respectively                                                                                                           |  |              |           |   |              |   |           |  
|Common Stock, $.0001 par value, 80,000,000 shares
    authorized, 22,207,865 issued and outstanding (December 31,
    2005), and 1,200,000,000 shares authorized, 20,964,570
    issued and outstanding, respectively |  |              | 22,217     |   |              |   | 20,974     |  
|Additional paid in capital                                                                                                                                                                                            |  |              | 11,721,099 |   |              |   | 4,483,457  |  
|Deferred compensation                                                                                                                                                                                                 |  |              | (151,875   | ) |              |   | (1,155,906 | )
|Retained earnings                                                                                                                                                                                                     |  |              | 23,701,565 |   |              |   | 4,193,538  |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  
|Total Stockholders Equity                                                                                                                                                                                            |  |              | 35,293,006 |   |              |   | 7,542,063  |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                            |  | $            | 43,991,691 |   |              | $ | 13,416,989 |  
|                                                                                                                                                                                                                      |  |              |            |   |              |  



F-3



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##### Table of Contents



TRUE RELIGION APPAREL, INC AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF INCOME


Years Ended December 31, 2005 and 2004


|                                                     |  |                         |             |   |      |   |            | 
|---------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ---------- | 
|                                                     |  | Year Ended December 31, |            
|                                                     |  |                         |            
|                                                     |  | 2005                    |             |   | 2004 |  
|                                                     |  |                         |             |   |      |  
|Net Sales                                            |  | $                       | 102,572,446 |   |      | $ | 27,667,418 | 
|Cost of Sales                                        |  |                         | 49,964,420  |   |      |   | 14,513,337 | 
|                                                     |  |                         |             |   |      |  
|Gross Profit                                         |  |                         | 52,608,025  |   |      |   | 13,154,081 | 
|                                                     |  |                         |             |   |      |  
|Costs and Expenses:                                  |  |                         |             |   |      |   |            | 
|Selling and shipping                                 |  |                         | 9,587,730   |   |      |   | 3,433,353  | 
|General and administrative                           |  |                         | 8,938,170   |   |      |   | 2,868,870  | 
|General and Administrative  Retail operations       |  |                         | 60,624      |   |      |   |           | 
|                                                     |  |                         |             |   |      |  
|                                                     |  |                         | 18,586,524  |   |      |   | 6,302,223  | 
|                                                     |  |                         |             |   |      |  
|Net Income from Operations                           |  |                         | 34,021,501  |   |      |   | 6,851,858  | 
|                                                     |  |                         |             |   |      |  
|Other Income/Expense:                                |  |                         |             |   |      |   |            | 
|Interest Income (net of $35,052 of interest expense) |  |                         | (30,197     | ) |      |   |           | 
|Gain on Marketable Securities  Realized             |  |                         | (9,903      | ) |      |   |           | 
|Gain on Marketable Securities  Unrealized           |  |                         | (13,426     | ) |      |   |            | 
|Gain on legal settlement                             |  |                         | (64,000     | ) |      |   |            | 
|Other Income                                         |  |                         | (42,000     | ) |      |   |           | 
|Legal Settlement (Note 10)                           |  |                         | 2,204,000   |   |      |   | 125,000    | 
|                                                     |  |                         |             |   |      |  
|                                                     |  |                         | 2,044,474   |   |      |   | 125,000    | 
|                                                     |  |                         |             |   |      |  
|Income before Provision for Income Taxes             |  |                         | 31,977,027  |   |      |   | 6,726,858  | 
|Provision for Income Taxes                           |  |                         | 12,469,000  |   |      |   | 2,498,681  | 
|                                                     |  |                         |             |   |      |  
|Net income                                           |  | $                       | 19,508,027  |   |      | $ | 4,228,177  | 
|                                                     |  |                         |             |   |      |  
|Net Income per share  Basic                         |  | $                       | 0.90        |   |      | $ | 0.21       | 
|                                                     |  |                         |             |   |      |  
|Net Income per share  Diluted                       |  | $                       | 0.84        |   |      | $ | 0.20       | 
|                                                     |  |                         |             |   |      |  
|Weighted average shares outstanding  Basic          |  |                         | 21,674,000  |   |      |   | 19,950,000 | 
|                                                     |  |                         |             |   |      |  
|Weighted average shares outstanding  Diluted        |  |                         | 23,179,500  |   |      |   | 20,771,000 | 
|                                                     |  |                         |             |   |      |  



F-4



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                                                  |                                             |                   |            |            |                   |   |           |            |  
|--------------------------------------------------------------------------------- | ------------------------------------------- | ----------------- | ---------- | ---------- | ----------------- | - | --------- | ---------- | -
|                                                                                  |                                             | Year Ended        |            |            | Year Ended        |  
|                                                                                  |                                             | December 31, 2005 |            |            | December 31, 2004 |  
|                                                                                  |                                             |                   |            |            |                   |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                             |                   |            |            |                   |   |           |           
|Net income                                                                        |                                             | $                 | 19,508,027 |            |                   | $ | 4,228,177 |           
|Adjustments to reconcile net income to net cash used in
    operating activities: |                                             |                   |            |            |                   |   |           |           
|                                                                                  | Provision for doubtful accounts             |                   |            | 273,916    |                   |   |           | 130,120    |  
|                                                                                  | Depreciation and amortization               |                   |            | 182,618    |                   |   |           | 42,697     |  
|                                                                                  | Deferred Taxes                              |                   |            | (1,707,541 | )                 |   |           | (147,459   | )
|                                                                                  | Shares issued in lieu of a payable          |                   |            | 1,250,000  |                   |   |           |           |  
|                                                                                  | Non-cash compensation expense               |                   |            | 1,368,531  |                   |   |           | 119,094    |  
|                                                                                  | Common shares issued for services           |                   |            | 48,500     |                   |   |           | 42,320     |  
|                                                                                  | Unrealized gain on marketable securities    |                   |            | (13,426    | )                 |   |           |           |  
|                                                                                  | Non cash warrant expense                    |                   |            |           |                   |   |           | 46,100     |  
|                                                                                  | Non cash stock option expense               |                   |            |           |                   |   |           | 24,900     |  
|Changes in assets and liabilities:                                                |                                             |                   |            |            |                   |   |           |           
|                                                                                  | (Increase) Decrease in assets               |                   |            |            |                   |   |           |            |  
|                                                                                  | Accounts Receivable                         |                   |            | (5,684,443 | )                 |   |           | (1,827,939 | )
|                                                                                  | Due from Factor                             |                   |            | (2,751,067 | )                 |   |           | (3,971,429 | )
|                                                                                  | Vendor Receivable                           |                   |            | (310,000   | )                 |   |           |           |  
|                                                                                  | Inventory                                   |                   |            | (6,727,082 | )                 |   |           | (2,673,420 | )
|                                                                                  | Stock subscription receivable               |                   |            | (68,080    | )                 |   |           |           |  
|                                                                                  | Prepaid Expenses and other current assets   |                   |            | (348,093   | )                 |   |           | (61,892    | )
|                                                                                  | Deposits and other assets                   |                   |            | 168,862    |                   |   |           | (4,744     | )
|Increase (Decrease) in liabilities                                                |                                             |                   |            |            |                   |   |           |           
|                                                                                  | Accounts payable and accrued expenses       |                   |            | 3,925,176  |                   |   |           | 2,208,531  |  
|                                                                                  | Accrued payroll, vacation and bonus expense |                   |            | 157,220    |                   |   |           |           |  
|                                                                                  | Accrued incentive compensation-officer      |                   |            | 107,050    |                   |   |           | 248,272    |  
|                                                                                  | Accrued customer credits                    |                   |            | (179,000   | )                 |   |           | 270,000    |  
|                                                                                  | Income taxes payable                        |                   |            | 3,466,510  |                   |   |           | 2,630,516  |  
|                                                                                  |                                             |                   |            |            |                   |  
|Net cash provided by (used in) operating activities                               |                                             |                   | 12,329,954 |            |                   |   | 1,303,844 |           
|                                                                                  |                                             |                   |            |            |                   |  
|CASH FLOWS FROM INVESTMENT ACTIVITIES:                                            |                                             |                   |            |            |                   |   |           |           
|                                                                                  | Purchase of marketable securities           |                   |            | (5,957,060 | )                 |   |           |           |  
|                                                                                  | Purchase of equipment and trademarks        |                   |            | (752,198   | )                 |   |           | (467,728   | )
|                                                                                  |                                             |                   |            |            |                   |  
|Net cash provided by (used in) investing activities                               |                                             |                   | (6,709,258 | )          |                   |   | (467,728  | )         
|                                                                                  |                                             |                   |            |            |                   |  
|CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:                                      |                                             |                   |            |            |                   |   |           |           
|                                                                                  | Proceeds from exercise of stock options     |                   |            | 869,878    |                   |   |           | 45,510     |  
|                                                                                  | Proceeds from warrant exercise              |                   |            |           |                   |   |           | 1,000,000  |  
|                                                                                  | Proceeds from Private Placements            |                   |            |           |                   |   |           | 1,000,000  |  
|                                                                                  |                                             |                   |            |            |                   |  
|Net cash provided by financing activities                                         |                                             |                   | 869,878    |            |                   |   | 2,045,510 |           
|                                                                                  |                                             |                   |            |            |                   |  
|Net increase in cash                                                              |                                             |                   | 6,490,574  |            |                   |   | 2,881,626 |           
|Cash, beginning of year                                                           |                                             | $                 | 2,946,058  |            |                   | $ | 64,432    |           
|                                                                                  |                                             |                   |            |            |                   |  
|Cash, end of year                                                                 |                                             | $                 | 9,436,632  |            |                   | $ | 2,946,058 |           
|                                                                                  |                                             |                   |            |            |                   |  
|Supplemental disclosure of cash flow information:                                 |                                             |                   |            |            |                   |   |           |           
|Interest Paid                                                                     |                                             | $                 | 35,073     |            |                   | $ | 0         |           
|                                                                                  |                                             |                   |            |            |                   |  
|Taxes Paid                                                                        |                                             | $                 | 8,197,165  |            |                   | $ | 8,626     |           
|                                                                                  |                                             |                   |            |            |                   |  
|Non-cash fair value of restricted common stock issued for
    services            |                                             | $                 | 48,500     |            |                   |   | 1,275,000 |           
|                                                                                  |                                             |                   |            |            |                   |  
|Non-cash fair value of restricted common stock issued for payable                 |                                             |                   | 1,250,000  |            |                   |   | 0         |           
|                                                                                  |                                             |                   |            |            |                   |  



F-5



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY





STATEMENTS OF STOCKHOLDERS EQUITY


For the Years Ending December 31, 2004 and
December 31, 2005


|                                                            |  |              |            |  |            |   |        |          |  |             |              |  |  |         |            |   |       |   |            |   |  |   |            | 
|----------------------------------------------------------- |  | ------------ | ---------- |  | ---------- | - | ------ | -------- |  | ----------- | ------------ |  |  | ------- | ---------- | - | ----- | - | ---------- | - |  | - | ---------- | 
|                                                            |  | Common Stock |            |  | Additional |   |        |          |  | Net Income/ |              |  | 
|                                                            |  |              |            |  | Paid In    |   |        | Deferred |  |             | Accumulated  |  |  |        
|                                                            |  | Shares       |            |  | Amount     |   |        | Capital  |  |             | Compensation |  |  | Deficit |            |   | Total |  
|                                                            |  |              |            |  |            |   |        |          |  |             |              |  |  |         |            |   |       |  
|Balance at December 31, 2003                                |  |              | 18,825,133 |  |            | $ | 18,835 |          |  | $           | 898,185      |  |  |         |            |   |       | $ | (34,639    | ) |  | $ | 882,381    | 
|Issuance of common stock for cash                           |  |              | 900,000    |  |            |   | 900    |          |  |             | 999,100      |  |  |         |            |   |       |   |            |   |  |   | 1,000,000  | 
|Issuance of common stock for services                       |  |              | 26,437     |  |            |   | 26     |          |  |             | 42,294       |  |  |         |            |   |       |   |            |   |  |   | 42,320     | 
|Issuance of common stock for cash upon exercise of warrants |  |              | 900,000    |  |            |   | 900    |          |  |             | 999,100      |  |  |         |            |   |       |   |            |   |  |   | 1,000,000  | 
|Exercise of stock options                                   |  |              | 63,000     |  |            |   | 63     |          |  |             | 45,447       |  |  |         |            |   |       |   |            |   |  |   | 45,510     | 
|Expense related to modification of warrants                 |  |              |            |  |            |   |        |          |  |             | 46,100       |  |  |         |            |   |       |   |            |   |  |   | 46,100     | 
|Issuance of options in exchange for services                |  |              |            |  |            |   |        |          |  |             | 24,900       |  |  |         |            |   |       |   |            |   |  |   | 24,900     | 
|Issuance of restricted stock for future services            |  |              | 250,000    |  |            |   | 250    |          |  |             | 1,274,750    |  |  |         | (1,275,000 | ) |       |   |            |   |  |   |           | 
|Tax benefit arising from restricted stock issuance          |  |              |            |  |            |   |        |          |  |             | 153,581      |  |  |         |            |   |       |   |            |   |  |   | 153,581    | 
|Amortization of deferred compensation                       |  |              |            |  |            |   |        |          |  |             |              |  |  |         | 119,094    |   |       |   |            |   |  |   | 119,094    | 
|Net Income for the year ended December 31, 2004             |  |              |            |  |            |   |        |          |  |             |              |  |  |         |            |   |       |   | 4,228,177  |   |  |   | 4,228,177  | 
|                                                            |  |              |            |  |            |   |        |          |  |             |              |  |  |         |            |   |       |  
|Balance at December 31, 2004                                |  |              | 20,964,570 |  |            |   | 20,975 |          |  |             | 4,483,457    |  |  |         | (1,155,906 | ) |       |   | 4,193,538  |   |  |   | 7,542,064  | 
|                                                            |  |              |            |  |            |   |        |          |  |             |              |  |  |         |            |   |       |  
|Recognition of deferred compensation                        |  |              |            |  |            |   |        |          |  |             |              |  |  |         | 1,155,906  |   |       |   |            |   |  |   | 1,155,906  | 
|Issuance of common stock for services                       |  |              | 14,285     |  |            |   | 14     |          |  |             | 9,986        |  |  |         |            |   |       |   |            |   |  |   | 10,000     | 
|Issuance of common stock for services                       |  |              | 1,175      |  |            |   | 1      |          |  |             | 15,999       |  |  |         |            |   |       |   |            |   |  |   | 16,000     | 
|Issuance of common stock for services                       |  |              | 2,500      |  |            |   | 3      |          |  |             | 22,497       |  |  |         |            |   |       |   |            |   |  |   | 22,500     | 
|Deferred compensation                                       |  |              | 27,000     |  |            |   | 27     |          |  |             | 364,473      |  |  |         | (364,500   | ) |       |   |            |   |  |   |           | 
|Amortization of deferred compensation                       |  |              |            |  |            |   |        |          |  |             |              |  |  |         | 212,625    |   |       |   |            |   |  |   | 212,625    | 
|Cash proceeds from stock options                            |  |              | 1,098,335  |  |            |   | 1,097  |          |  |             | 868,787      |  |  |         |            |   |       |   |            |   |  |   | 869,884    | 
|Tax benefit arising from stock options                      |  |              |            |  |            |   |        |          |  |             | 4,076,000    |  |  |         |            |   |       |   |            |   |  |   | 4,076,000  | 
|Tax benefit arising from restricted stock issuance          |  |              |            |  |            |   |        |          |  |             | 630,000      |  |  |         |            |   |       |   |            |   |  |   | 630,000    | 
|Issuance of common stock in lieu of payable                 |  |              | 100,000    |  |            |   | 100    |          |  |             | 1,249,900    |  |  |         |            |   |       |   |            |   |  |   | 1,250,000  | 
|Net Income for the year ended December 31, 2005             |  |              |            |  |            |   |        |          |  |             |              |  |  |         |            |   |       |   | 19,508,027 |   |  |   | 19,508,027 | 
|                                                            |  |              |            |  |            |   |        |          |  |             |              |  |  |         |            |   |       |  
|Balance at December 31, 2005                                |  |              | 22,207,865 |  |            |   | 22,217 |          |  |             | 11,721,099   |  |  |         | (151,875   | ) |       |   | 23,701,565 |   |  |   | 35,293,006 | 
|                                                            |  |              |            |  |            |   |        |          |  |             |              |  |  |         |            |   |       |  



F-6



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY





NOTES TO FINANCIAL STATEMENTS


For the Year Ended December 31, 2005




|         |                      
|-------- | ---------------------
|NOTE 1  | BASIS OF PRESENTATION



T-shirts




| |                                             
| | --------------------------------------------
| | Reincorporation and Classes of Capital Stock







| |                            
| | ---------------------------
| | Principles of Consolidation





| |                     
| | --------------------
| | Comprehensive Income





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                 
| | ----------------
| | Use of Estimates



F-7



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                    
| | -------------------
| | Revenue Recognition





| |            
| | -----------
| | Advertising





| |                          
| | -------------------------
| | Cash and Cash Equivalents



| |            
| | -----------
| | Equivalents





| |         
| | --------
| | Balances





| |                 
| | ----------------
| | Reclassification





| |                             
| | ----------------------------
| | Concentration of Credit Risk





| |                   
| | ------------------
| | Earnings Per Share



F-8



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |             
| | ------------
| | Income Taxes





| |          
| | ---------
| | Inventory

first-in,




| |                       
| | ----------------------
| | Property and Equipment





| |                    
| | -------------------
| | Accounts Receivable





| |                         
| | ------------------------
| | Stock-Based Compensation



F-9



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                                              |  |                   |            |   |                   |   |           |  
|----------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | --------- | -
|                                                                              |  | December 31, 2005 |            |   | December 31, 2004 |  
|                                                                              |  |                   |            |   |                   |  
|Net income attributable to common stockholders, as reported                   |  | $                 | 19,508,027 |   |                   | $ | 4,228,177 |  
|APB 25 Expense                                                                |  |                   |            |   |                   |   |           |  
|Stock compensation calculated under SFAS 123                                  |  |                   | (714,400   | ) |                   |   | (337,400  | )
|                                                                              |  |                   |            |   |                   |  
|Pro forma net income attributable to common stockholders                      |  | $                 | 18,793,627 |   |                   | $ | 3,890,777 |  
|                                                                              |  |                   |            |   |                   |  
|Net income per share available to common
    stockholders  basic and diluted |  |                   |            |   |                   |   |           |  
|As reported-basic                                                             |  | $                 | 0.90       |   |                   | $ | 0.21      |  
|                                                                              |  |                   |            |   |                   |  
|As reported-diluted                                                           |  | $                 | 0.84       |   |                   | $ | 0.20      |  
|                                                                              |  |                   |            |   |                   |  
|Pro forma-basic                                                               |  | $                 | 0.87       |   |                   | $ | 0.20      |  
|                                                                              |  |                   |            |   |                   |  
|Pro forma-diluted                                                             |  | $                 | 0.81       |   |                   | $ | 0.19      |  
|                                                                              |  |                   |            |   |                   |  



|                                   |  |      |            |          |               |   |      |      |          |   |               |   |  |   |      | 
|---------------------------------- |  | ---- | ---------- | -------- | ------------- | - | ---- | ---- | -------- | - | ------------- | - |  | - | ---- | 
|                                   |  |      |            | Weighted |               |   |      |      | Weighted |  
|                                   |  | 2005 |            |          | Average Price |   |      | 2004 |          |   | Average Price |  
|                                   |  |      |            |          |               |   |      |      |          |   |               |  
|Outstanding at beginning of year   |  |      | 2,473,666  |          |               | $ | 1.16 |      |          |   | 465,000       |   |  | $ | 0.48 | 
|Granted                            |  |      |           |          |               | $ |      |      |          |   | 2,060,000     |   |  | $ | 1.31 | 
|Cancelled or expired               |  |      | (16,667    | )        |               | $ | 0.77 |      |          |   | (33,334       | ) |  | $ | 0.77 | 
|Exercised                          |  |      | (1,098,335 | )        |               | $ | 0.79 |      |          |   | (18,000       | ) |  | $ | 0.53 | 
|                                   |  |      |            |          |               |   |      |      |          |   |               |  
|Outstanding at end of year         |  |      | 1,358,664  |          |               | $ | 1.46 |      |          |   | 2,473,666     |   |  | $ | 1.16 | 
|                                   |  |      |            |          |               |   |      |      |          |   |               |  
|Exercisable at the end of the year |  |      | 638,278    |          |               | $ | 1.72 |      |          |   | 848,000       |   |  | $ | 1.16 | 
|                                   |  |      |            |          |               |   |      |      |          |   |               |  
|Price range of options             |  | $    | 0.48-7.65  |          |               |   |      |      |          | $ | 0.48-7.65     |   |  |   |      | 



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements





F-10



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)






05-04 00-19,


05-6, Determining the Amortization Period for Leasehold
Improvements 05-6






F-11



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)




SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments  An Amendment of FASB
Statements No. 133 and 140


Accounting
for Certain Hybrid Instruments. Accounting for
Derivative Instruments and Hedging Activities, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.




| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | clarifies which interest-only strips and principal-only strips
    are not subject to the requirements of Statement 133;                                                                                                                               
|
| |  | establishes a requirement to evaluate interests in securitized
    financial assets to identify interests that are freestanding
    derivatives or that are hybrid financial instruments that
    contain an embedded derivative requiring bifurcation;
|
| |  | clarifies that concentrations of credit risk in the form of
    subordination are not embedded derivatives; and                                                                                                                                        
|
| |  | amends Statement 140 to eliminate the prohibition on a
    qualifying special-purpose entity from holding a derivative
    financial instrument that pertains to a beneficial interest
    other than another derivative financial instrument.         





NOTE 2  DUE FROM FACTOR, NET OF CHARGEBACKS
AND OTHER DEDUCTIONS






F-12



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)






|                                                                       |  |                   |           |   |                   |   |           |  
|---------------------------------------------------------------------- |  | ----------------- | --------- | - | ----------------- | - | --------- | -
|                                                                       |  | December 31, 2005 |           |   | December 31, 2004 |  
|                                                                       |  |                   |           |   |                   |  
|Outstanding factored receivables                                       |  | $                 | 6,397,179 |   |                   | $ | 3,425,990 |  
|Matured Funds                                                          |  |                   | 20,666    |   |                   |   | 27,311    |  
|Assignments in transit                                                 |  |                   | 989,953   |   |                   |   | 593,128   |  
|                                                                       |  |                   |           |   |                   |  
|                                                                       |  |                   | 7,407,798 |   |                   |   | 4,046,429 |  
|Funds advanced                                                         |  |                   | (215,302  | ) |                   |   |          |  
|Reserves for chargebacks and other deductions                          |  |                   | (470,000  | ) |                   |   | (75,000   | )
|                                                                       |  |                   |           |   |                   |  
|Due from factor, net of chargebacks, other deductions and
    advances |  | $                 | 6,722,496 |   |                   | $ | 3,971,429 |  
|                                                                       |  |                   |           |   |                   |  

NOTE 3  INVENTORY




|                 |  |                   |            |  |                   |   |           | 
|---------------- |  | ----------------- | ---------- |  | ----------------- | - | --------- | 
|                 |  | December 31, 2005 |            |  | December 31, 2004 |  
|                 |  |                   |            |  |                   |  
|Finished Goods   |  | $                 | 7,630,869  |  |                   | $ | 3,168,466 | 
|Work-in-Progress |  |                   | 2,421,879  |  |                   |   | 157,199   | 
|                 |  | $                 | 10,052,748 |  |                   | $ | 3,325,665 | 
|                 |  |                   |            |  |                   |  

NOTE 4  PROPERTY AND EQUIPMENT




|                               |  |                   |           |  |                   |   |         | 
|------------------------------ |  | ----------------- | --------- |  | ----------------- | - | ------- | 
|                               |  | December 31, 2005 |           |  | December 31, 2004 |  
|                               |  |                   |           |  |                   |  
|Computers and other equipment  |  | $                 | 464,029   |  |                   | $ | 176,449 | 
|Furniture and Fixtures         |  |                   | 64,293    |  |                   |   | 45,376  | 
|Leasehold Improvements         |  |                   | 422,659   |  |                   |   | 38,005  | 
|Trade Show booths              |  |                   | 250,228   |  |                   |   | 229,723 | 
|                               |  |                   |           |  |                   |  
|Total Property and equipment   |  |                   | 1,201,209 |  |                   |   | 489,553 | 
|Less: Accumulated depreciation |  |                   | 218,537   |  |                   |   | 44,034  | 
|                               |  |                   |           |  |                   |  
|                               |  | $                 | 982,672   |  |                   | $ | 445,519 | 
|                               |  |                   |           |  |                   |  



NOTE 5  ACCOUNTS PAYABLE-MAJOR VENDORS




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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)


NOTE 6  ACCRUED INCENTIVE
COMPENSATION-OFFICER




NOTE 7  COMMON STOCK




| |                                 
| | --------------------------------
| | The Year Ended December 31, 2004

non-U.S.






S-8 S-8.




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TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)


S-8








| |                                 
| | --------------------------------
| | The Year Ended December 31, 2005









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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)














NOTE 8  COMMITMENTS AND CONTINGENCIES








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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)






|                         |  |   |         | 
|------------------------ |  | - | ------- | 
|Year ending December 31, |  |  
|                         |  |  
|2006                     |  | $ | 321,000 | 
|2007                     |  | $ | 225,000 | 
|2008                     |  | $ | 100,000 | 
|2009                     |  | $ | 51,000  | 
|2010                     |  | $ | 39,000  | 
|                         |  |   |        
|                         |  | $ | 739,000 | 
|                         |  |   |        

E-commerce


NOTE 9  CONCENTRATIONS OF CERTAIN RISKS




NOTE 10  LEGAL PROCEEDINGS










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TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)


















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TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)




|          |             
|--------- | ------------
|NOTE 11  | INCOME TAXES



|                                                       |  |              |            |   |      |   |           |  
|------------------------------------------------------ |  | ------------ | ---------- | - | ---- | - | --------- | -
|                                                       |  | December 31, |           
|                                                       |  |              |           
|                                                       |  | 2005         |            |   | 2004 |  
|                                                       |  |              |            |   |      |  
|Current:                                               |  |              |            |   |      |   |           |  
|Federal                                                |  | $            | 11,128,541 |   |      | $ | 2,010,436 |  
|State                                                  |  |              | 3,048,000  |   |      |   | 635,704   |  
|                                                       |  |              |            |   |      |  
|                                                       |  | $            | 14,176,541 |   |      | $ | 2,646,140 |  
|                                                       |  |              |            |   |      |  
|Deferred:                                              |  |              |            |   |      |   |           |  
|Federal                                                |  |              | (1,489,541 | ) |      |   | (141,975  | )
|State                                                  |  |              | (218,000   | ) |      |   | (5,484    | )
|                                                       |  |              |            |   |      |  
|                                                       |  |              | (1,707,541 | ) |      |   | (147,459  | )
|                                                       |  |              |            |   |      |  
|Income Tax Expense                                     |  | $            | 12,469,000 |   |      | $ | 2,498,681 |  
|The major deferred tax asset items are as follows      |  |              |            |   |      |   |           |  
|Current:                                               |  |              |            |   |      |   |           |  
|Bad debt reserve                                       |  | $            | 226,000    |   |      | $ | 55,691    |  
|Section 263A inventory overhead amount                 |  |              | 52,000     |   |      |   |          |  
|State income taxes                                     |  |              | 787,000    |   |      |   | 199,427   |  
|Legal Settlement                                       |  |              | 924,000    |   |      |   | (26,464   | )
|                                                       |  |              |            |   |      |  
|                                                       |  | $            | 1,989,000  |   |      | $ | 228,654   |  
|                                                       |  |              |            |   |      |  
|The major deferred tax liability items are as follows: |  |              |            |   |      |   |           |  
|Non-current:                                           |  |              |            |   |      |   |           |  
|Accumulated depreciation                               |  | $            | 134,000    |   |      | $ | 81,195    |  



|                                                      |  |              |      |   |      |  |      |  
|----------------------------------------------------- |  | ------------ | ---- | - | ---- |  | ---- | -
|                                                      |  | Year Ended   |     
|                                                      |  | December 31, |     
|                                                      |  |              |     
|                                                      |  | 2005         |      |   | 2004 | 
|                                                      |  |              |      |   |      | 
|Tax provision at statutory federal rate               |  |              | 35.0 | % |      |  | 35.0 | %
|State income taxes, net of federal income tax benefit |  |              | 5.8  |   |      |  | 8.7  |  
|Exclusion for export sales                            |  |              | (2.0 | ) |      |  | (6.6 | )
|Domestic production deduction                         |  |              | (0.7 | ) |      |  |     |  
|Other                                                 |  |              | .9   |   |      |  |     |  
|Effective tax rate                                    |  |              | 39.0 | % |      |  | 37.1 | %





|          |                    
|--------- | -------------------
|NOTE 12  | SEGMENT INFORMATION



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##### Table of Contents



TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)






|                           |  |           |             |  |  |              |   |         |               |  |  |              |          |   |  |  |   |             | 
|-------------------------- |  | --------- | ----------- |  |  | ------------ | - | ------- | ------------- |  |  | ------------ | -------- | - |  |  | - | ----------- | 
|                           |  | Wholesale |             |  |  | Retail Store |   |         | Eliminations* |  |  | Consolidated |         
|                           |  |           |             |  |  |              |   |         |               |  |  |              |          |   | 
|Net Sales                  |  | $         | 102,711,923 |  |  |              | $ | 196,654 |               |  |  | $            | (336,131 | ) |  |  | $ | 102,572,446 | 
|Gross Profit               |  | $         | 52,648,541  |  |  |              | $ | 98,461  |               |  |  | $            | (197,155 | ) |  |  | $ | 52,608,025  | 
|Net Income from Operations |  | $         | 33,983,663  |  |  |              | $ | 37,838  |               |  |  | $            |         |   |  |  | $ | 34,021,501  | 
|Total Assets               |  | $         | 43,276,731  |  |  |              | $ | 714,960 |               |  |  |              |          |   |  |  | $ | 43,991,691  | 






|  |                                                                  
|- | -----------------------------------------------------------------
|* | Represents inter-company sales from wholesale to the retail store



|          |                  
|--------- | -----------------
|NOTE 13  | SUBSEQUENT EVENTS







| |                                    
| | -----------------------------------
| | Issuance of Restricted Common Stock





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TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)














| |                              
| | -----------------------------
| | Employment Agreement-Officers







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TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)
















F-22



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TRUE RELIGION APPAREL, INC. AND SUBSIDIARY


NOTES TO FINANCIAL STATEMENTS  (Continued)






F-23



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##### Table of Contents



EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1          |  | Agreement and Plan of Merger, dated August 18, 2005, by and
    between the Registrant and True Religion Apparel, Inc., a Nevada
    corporation and the Registrants predecessor in interest
    (incorporated by reference from our Form 8-K Current
    Report, filed August 22, 2005)
|        | 3  | .1          |  | Certificate of Incorporation (incorporated by reference from our
    Form 8-K Current Report, filed August 22, 2005)                                                                                                                                                                     
|        | 3  | .2          |  | Bylaws (incorporated by reference from our Form 8-K Current
    Report, filed August 22, 2005)                                                                                                                                                                                           
|        | 4  | .1          |  | Specimen Common Stock Certificate (incorporated by reference
    from our Form 8-K Current Report, filed August 22,
    2005)                                                                                                                                                            
|        | 10 | .1          |  | Settlement Agreement and Mutual General Release with The Indigo
    Group USA and Jeremy Lew (incorporated by reference from our
    Form 10-QSB Quarterly Report, filed on November 12,
    2004)                                                                                       
|        | 10 | .2          |  | Manufacturers Agreement with The Indigo Group, USA
    (incorporated by reference from our Form 10-QSB Quarterly
    Report, filed on November 12, 2004)                                                                                                                                
|        | 10 | .3          |  | Discount Factoring Agreement dated December 20, 2004,
    between Merchant Factors Corp. and Guru Denim Inc. (incorporated
    by reference from our Form 10-KSB/ A filed on April 6,
    2005)                                                                                          
|        | 10 | .4          |  | 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 | .5          |  | Letter dated July 1, 2005 amending the terms of the
    Discount Factoring Agreement between Merchant Factors Corp. and
    Guru Denim, Inc. (incorporated by reference from our
    Form 10-Q Quarterly Report, filed August 15, 2005)                                                  
|        | 10 | .6          |  | Standard Single-Tenant Sublease dated July 1, 2005 between
    L.A. Fabric Imports, Inc. and Guru Denim, Inc. for 1557 Rio
    Vista Ave. Los Angeles, California (incorporated by reference
    from our Form 10-Q Quarterly Report, filed August 15,
    2005)                         
|        | 10 | .7          |  | 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 | .8          |  | 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 | .9          |  | Employment Agreement by and between the Company and Charles
    Lesser dated January 4, 2006 (incorporated by reference
    from our Form 8-K Current Report, filed on January 10,
    2006).*                                                                                           
|        | 10 | .10         |  | Employment Agreement by and between the Company and Kymberly
    Lubell dated January 4, 2006 (incorporated by reference
    from our Form 8-K Current Report, filed on January 10,
    2006).*                                                                                          
|        | 10 | .11         |  | Lease Agreement by and among True Religion Apparel, Inc., Guru
    Denim, Inc. and Rio Vista Industrial Investments, LLC dated
    May 28, 2004                                                                                                                                          
|        | 10 | .12         |  | Settlement Agreement and General Release by and between True
    Religion Apparel, Inc. and Joseph Canouse dated March 21,
    2006                                                                                                                                                      
|        | 14 | .1          |  | Code of Ethics                                                                                                                                                                                                                                                                           
|        | 21 | .1          |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                           
|        | 23 | .1          |  | Consent of Stonefield Josephson Inc.                                                                                                                                                                                                                                                     
|        | 31 | .1          |  | Certification of the Chief Executive Officer, as required by
    Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                   
|        | 31 | .2          |  | Certification of the Chief Financial Officer, as required by
    Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                   



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                      
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 32 | .1          |  | Certification of the Chief Executive Officer provided 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 the Chief Financial Officer provided pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002






|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Represents a management contract or compensatory plan, contract
    or arrangement in which any director or any of the named
    executives participates.