UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008oro

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


Commission file number 000-51483

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

Delaware

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

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

90058(Address of Principal Executive Offices)

(Zip Code)


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

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

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

None(Name of Each Exchange
on Which Registered)


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

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

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

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2008, was approximately $539,093,000,
computed by reference to the price of $26.65 per share, the price at which the common equity was last sold on such date as reported on the Nasdaq Global Market. For purposes of this computation, it is
assumed that the shares beneficially held by directors and officers of the registrant would be deemed to be stock held by affiliates.

On
March 6, 2009, 25,360,030 shares of common stock were outstanding.



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TRUE RELIGION APPAREL, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2008

TABLE OF CONTENTS



PagesPART I.

1Item 1.

Business

1Item 1A.

Risk Factors

6Item 1B.

Unresolved Staff Comments

12Item 2.

Properties

12Item 3.

Legal Proceedings

12Item 4.

Submission of Matters to a Vote of Security Holders

13PART II.

14Item 5.

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

14Item 6.

Selected Financial Data

16Item 7.

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

17Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

28Item 8.

Financial Statements and Supplementary Data

29Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

29Item 9A.

Controls and Procedures

29Item 9B.

Other Information

30PART III.

30Item 10.

Directors, Executive Officers and Corporate Governance

30Item 11.

Executive Compensation

30Item 12.

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

30Item 13.

Certain Relationships and Related Transactions and Director Independence

31Item 14.

Principal Accountant Fees and Services

31PART IV.

32Item 15.

Exhibits, Financial Statements Schedules

32SIGNATURES

35


Exhibit
10.2
Exhibit 21.1
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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FORWARD-LOOKING STATEMENTS

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

PART I.

Item 1.    Business.

General

True Religion Apparel, Inc. (referred to in this Annual Report on Form 10-K as "the Company," "our," "we," or
"True Religion") was first incorporated in Nevada in 2001 under the name Gusana Explorations Inc. In June of 2003, our Company acquired Guru Denim, Inc. (Guru Denim), a private,
California corporation. Following the acquisition of Guru Denim, we changed our name to True Religion Apparel, Inc. and reincorporated in Delaware in 2005. We currently design, market,
distribute, and sell apparel under the brand name "True Religion Brand Jeans" to fashion-conscious consumers on six continents, including North America, Europe, Asia, Australia, Africa and South
America. We seek to be a trend setting leader in the design, marketing, distribution and sale of fashion jeans and related sportswear apparel. Our products can be categorized as denim, knit and
non-denim, and most come in 'tops' and 'bottoms'. Knit styles include hoodies, t-shirts and sweats, and non-denim fabrics include corduroy and twill. Tops range
from shirts to jackets, and bottoms encompass pants, shorts and skirts. We operate in four distinct but integrated segments: U.S. Wholesale, International, Consumer Direct and Other, which includes
licensing activity. Our Consumer Direct segment consists of branded retail stores and e-commerce sales. The business segments share product design, manufacturing and marketing resources.
During the past six years we have developed a recognizable brand, expanded vertically into the Consumer Direct segment, expanded our product offerings, and initiated a strategy to leverage our brand
by entering into product licensing agreements.

We
market and distribute our products into the U.S. Wholesale and International segments by attendance at industry trade shows and by entering into sales agency or distribution
agreements with independent agents, each of whom is granted rights to market and sell our products in a defined market or territory. We have agreements with international distributors and sales agents
covering more than 50 countries on six continents.

Our
products are sold in the United States in leading national premium stores, including Bloomingdale's, Neiman Marcus, Nordstrom, Saks Fifth Avenue, and in approximately 900 boutique
and specialty stores. Our U.S. sales agent, L'Atelier, presents our collections at their showrooms in Los Angeles and New York. Through our network of international distributors and
sales agents, our products are sold internationally at boutiques and specialty stores in major cities throughout Africa, Asia, Australia, Europe, the Middle East and South America.

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We
also sell our products through our Consumer Direct division in our own branded retail stores and through our True Religion Brand Jeans website, which is operated for us by a third
party.

Business Strategy

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

For
our denim jeans and other fabrications, we utilize contract manufacturers located in the United States. We brand products as having been "Made in the U.S.A." Local manufacturing
helps us control our costs, ensures fast turnaround of popular styles, and keeps fixed overhead to a minimum. Many of our jackets and children's products are manufactured in Mexico, and much of our
shirts and sportswear is manufactured in the Far East.

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

Our Brand and Products

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

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

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

In
2007, we patented our Super Big-T stitch, which is a distinctive thread stitch process. The styles that we designed using this Super Big-T stitch were some of
our best sellers in 2007 and 2008. In 2008,

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we
introduced new jean collections such as "XXX" and "Stealth," and we updated existing collections, such as introducing gold crystals to the "Disco" collections.

Our
2008 net sales categorized by gender were approximately as follows: women58%; men38%; and kids4%. Our largest product category in terms of
units sold in 2008 was denim bottoms, which accounted for 76% of total units sold. Our average sales price for women's products in our full price retail stores was $207 in 2008; for men's products, it
was $202; and for kid's products, it was $106.

Our Sales Segments

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

Our U.S. Wholesale Segment

Our U.S. Wholesale segment sells our products to leading nationwide premium stores, specialty retailers and boutiques that have the
image and merchandising expertise that we demand for the effective presentation of our products. In 2008, our products were sold in Bloomingdale's, Neiman Marcus, Nordstrom and Saks Fifth Avenue, and
in approximately 900 specialty retailers and boutiques. Our U.S. Wholesale segment also sells prior season or excess merchandise to off-price retailers. In 2008, our U.S. Wholesale segment
generated net sales of $153.2 million, comprising 56.8% of our total net sales.

Our International Segment

We distribute our products through our International segment to distributors and sales agents who sell to upscale boutiques in their
respective territory and through our wholly-owned subsidiary, True Religion Japan, KK, which was formed in the second quarter of 2008. Through this network of international distributors, sales agents
and our subsidiary, our products are found in major cities throughout Africa, Asia, Australia, Europe, the Middle East, North America and South America. In 2008, 81% of our international sales were
made to our five largest distributors and via our subsidiary in Japan. In 2008, our International segment generated net sales of $40.0 million, comprising 14.8% of our total net sales.

Our Consumer Direct Segment

Our Consumer Direct segment includes our branded retail stores and our e-commerce sales. As of December 31, 2008, we
operated 42 branded retail stores. We added 27 branded retail stores in 2008 and expect to add 25 branded retail stores in 2009. Our branded retail stores are located across the United States in a
variety of upscale shopping areas ("street" locations, regional malls, and a limited number of outlet centers). Our typical branded retail store is approximately 1,600 square feet, while our branded
retail store located in an outlet center is approximately 2,500 square feet. Our branded retail stores showcase the full range of our branded merchandise including licensed products, in an environment
that emphasizes our unique "Malibu hippy-bohemian chic" image through an extensive use of hand-hewn hickory pecan wood. Our e-commerce sales are made through a third-party who
receives sales commissions in exchange for operating the 'True Religion Brand Jeans' website, accepting customer orders and fulfilling customer orders from their distribution center, where they hold
our merchandise on consignment. In 2008, our Consumer Direct segment generated net sales of $75.3 million, comprising 27.9% of our total net sales.

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Our Licensing Business

We selectively license our brand name and logo to be included on products sold by other companies to enhance and extend the True
Religion Brand Jeans brand. Through licensing alliances, we combine our consumer insight, design, and marketing skills with the specific product competencies of our licensing partners to create, build
and expand our product offerings to fashion conscious consumers. We grant our product licensees the right to design, manufacture and sell at wholesale specified categories of products under our
trademark. We have the right to approve or disapprove the licensees' designs, products and wholesale customers. Each licensing partner pays us royalties based upon its wholesale sales of products that
use our trademark. In addition, licensing partners may be required to allocate a portion of their sales revenues to advertise our products and share in the creative costs associated with these
products. Our licenses typically have three year terms and may grant the licensee conditional renewal options. We recognized $1.4 million in royalty revenue through our licensing business in
2008.

At
the end of 2008, our licensed merchandise categories were: footwear, fragrances, headwear, and swimwear. Two merchandise categories that were formerly licensed, handbags and
outerwear, were transitioned to in-house development, sourcing, and sales in 2008.

Marketing

Our initial marketing effort, which commenced in 2003 after our acquisition of Guru Denim, was focused on our products and emphasized
the fit, styling details and washes of our unique denim products. Beginning in 2004, we expanded our focus from the products to the brand of True Religion Apparel by distributing our products to
premier fashion retailers. This provided us with the exposure to build our brand. In 2005 we continued to focus our marketing efforts on building our brand by expanding our distribution, initially to
national premium specialty stores and boutiques, and then to our branded retail stores. These settings showcase our products to many of our target customers. In 2008, we continued to focus on building
our brand image by initiating a selected print advertising campaign to build brand awareness for our women's and men's denim, sportswear and licensed products as well as to generate awareness of our
growing number of branded retail stores. As we move into 2009, we intend to continue to build our brand image by presenting new merchandise images and adding a few select publications that present our
campaign.

Trademarks

We have 12 trademarks registered in the United States for "True Religion Brand Jeans" logos and marks. We have also secured
international trademark registrations in 25 countries and we continue to seek trademark registrations that we believe are necessary to protect the True Religion brand. Generally, our trademarks remain
valid and enforceable so long as we continue to use the marks in commerce and the required registration renewals are filed. We consider our trademarks as valuable assets in the marketing of our
products and seek to protect them from infringement worldwide.

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

Sources and Availability of Raw Materials

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

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for
the supply of our fabric, thread or other components, such high quality fabric is currently readily available from a number of suppliers, including mills located both in the United States and
abroad.

Design and Product Development

Our design team, which has 26 employees and is led by Jeffrey Lubell, Chief Executive Officer and Chief Merchant, is responsible for
the design and development of our products. We do not currently have a formal research and development effort but our design team plans to continue to develop new products. Our design team is diverse
in all our product categories and is known for designing leading fashion trends. Our washes are constantly in development to react to the demand for new and exciting product to consumers. The
development of our products from concept through manufacturing is engineered to be not only fashionable but durable as well.

Manufacturing

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

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

Quality Control

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

Government Regulation and Supervision

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

We
are committed to product quality and safety; we focus our efforts to adhere to all applicable Federal and state laws and regulations including Consumer Product Safety Improvement Act
("CPSIA"), and all Federal Trade Commission ("FTC") rules and regulations for product labeling. Labeling and advertising of our products is subject to regulation by the FTC. We use a government

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approved
third party testing lab to verify all federally mandated testing requirements for wearing apparel as applicable. We believe that we are in material compliance with these regulations.

Competition

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



Employees

As of December 31, 2008, we employed on a full or part-time basis a total of 809 employees, consisting of 599 in our
retail stores, 128 in design and production, and 82 general administrative.

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

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

Item 1A.    Risk Factors.

Risks Relating to Our Industry

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

Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending that affect not only the
ultimate consumer, but also retailers, our largest direct customers. Consumer spending recently has deteriorated significantly and may remain depressed, or be subject to further deterioration for the
foreseeable future. The worldwide apparel industry is heavily influenced by general economic cycles. Purchases of high-fashion apparel and accessories tend to decline in periods of
recession or uncertainty regarding future economic prospects, as disposable income declines. Many factors affect the level of consumer spending in the apparel industries, including, among others:
prevailing economic conditions, levels of employment, salaries and wage rates, energy costs, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic
conditions. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new retail
stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain our earnings from operations as a percentage of net sales. As
a result, our operating results may be adversely and materially affected by downward trends in the United States or global economy. Furthermore, in anticipation of continued increases in net sales, we

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have
significantly expanded our infrastructure and workforce. Because these expenses are fixed in the short term, our operating results and margins will be adversely impacted if we do not continue to
grow as anticipated.

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

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

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

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

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

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

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

The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products
are dependent in part on the market price for raw materialsprimarily cottonused to produce them. The price and availability of cotton may fluctuate

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substantially,
depending on a variety of factors, including demand, crop yields, weather, supply conditions, transportation costs, work stoppages, government regulation, economic climates and other
unpredictable factors. Increases in raw material costs, together with other factors, will make it difficult for us to sustain the wholesale gross margin level we have achieved in recent years and
result in a decrease of our profitability unless we are able to pass higher prices on to our wholesale and retail customers. Moreover, any decrease in the availability of cotton could impair our
ability to meet our production requirements in a timely manner.

Risks Related to Our Business

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

We have experienced rapid growth since our inception, and have increased our net sales from $27.7 million in 2004 to
$270.0 million in 2008. We anticipate that our future growth rate will depend upon various factors, including the strength of our brand image, the market success of our current and future
products, the success or our growth strategies, competitive conditions and our ability to manage our future growth. Future growth may place a significant strain on our management and operations. As we
continue to grow in our operations, our operational, administrative, financial and legal procedures and controls will need to be expanded. As a result, we may need to train and manage an increasing
number of employees, which could distract our management team from our business. Our future success will depend substantially on the ability of our management team to manage our anticipated growth. If
we are unable to anticipate or manage our growth effectively, our future operating results could be adversely affected.

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

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

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

Our growth strategy is dependent in part on our ability to open and operate new stores and the availability of suitable store locations
on acceptable terms. Although we operated 42 branded retail stores as of December 31, 2008, we historically have been primarily a wholesaler. We plan to open approximately 25 company-operated
branded retail and outlet stores in 2009. The success of this strategy is dependent upon, among other factors, the identification of suitable markets and sites for store locations, the negotiation of
acceptable lease terms, the hiring, training and retention of competent sales personnel, and making capital expenditures for these stores. We must also offer a broad product assortment, appropriately
manage retail inventory levels, install and operate effective retail systems, execute effective pricing strategies and integrate our stores into our overall business mix. An increase in the number of
branded company-operated stores will place increased demands on our operational, managerial and administrative resources and require us to further develop our retailing

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skills
and capabilities. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our existing stores.
The commitments associated with our expansion will increase our operating expenses may be costly to terminate, and these investments may be difficult to recapture if we decide to close a store or
change our strategy.

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

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

We
are in the process of replacing our current wholesale merchandise and financial management information systems with a system that is intended to improve integration, efficiency and
operations of our expanding business model. We are aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions, and believe we are
taking appropriate action to mitigate the risks through testing, training and staging implementation as well as ensuring appropriate commercial contracts with third-party vendors supplying replacement
technologies are in place. We cannot assure you that we will be able to successfully implement this new system, as planned or that they will occur without disruptions to operations. Information
technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

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

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

Our
dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A manufacturer's failure to ship products to us in
a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our wholesale customers. In addition, any interference with our ability to receive shipments
from those manufacturers, such as conditions at ports or issues that otherwise affect transportation and warehousing providers, could cause delayed delivery of product. Additionally, if we experience
a significant increase in demand, or if we need to replace any of the manufacturers that we currently use, we may have to expand our
third party manufacturing capacity. We cannot assure you that this capacity will be available to us, or available on terms that are acceptable to us. Failing to make timely deliveries may cause our
customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any
of which could harm our sales and margins.

9

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Table of Contents

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

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

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

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

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

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

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

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



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Table of Contents



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

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

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

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

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

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

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

We
require our licensing partners and suppliers to operate in compliance with applicable laws and regulations. While our code of conduct promotes ethical
business practices, we do not control our licensees or suppliers or their labor practices. The violation of labor or other laws by any of our licensees or suppliers, or divergence of a licensee's or
supplier's labor practices from those generally

11

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Table of Contents

accepted
as ethical in the United States, could interrupt or otherwise disrupt the shipment of our products, harm the value of our trademarks, damage our reputation or expose us to potential liability
for their wrongdoings.

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

Our quarterly sales and operating results have varied significantly in the past and can be expected to fluctuate in the future due to a
number of factors, many of which are beyond our control. For example, sales of our products have historically been somewhat seasonal in nature with the largest sales generally occurring in the second
half of the year. Delays in scheduling or pickup of products by our wholesale customers could negatively impact our net sales and results of operations for any given quarter. The timing of new store
openings and the amount of sales contributed by new stores could also impact our net sales and results of operations for any given quarter. We have granted restricted stock awards with a portion that
immediately vested or vested in the near future in the first quarter of 2006, 2007, 2008 and 2009 and the fourth quarter of 2006. The compensation expense for the awards that vest immediately caused
an increase in our selling, general and administrative expenses and reduced our net income and earnings per share in our quarterly income statements. Also, our annualized tax rate is based on
projections of our operating results for the year, which we review and revise as necessary at the end of each quarter. Any quarterly fluctuations in our annualized tax rate that may occur could have a
material impact on our quarterly operating results. As a result of these specific and other general factors, our operating results will likely vary from quarter to quarter and the results for any
particular quarter may not be necessarily indicative of results for the full year. Any shortfall in sales or net income from levels expected by securities analysts and investors could cause a decrease
in the trading price of our common stock.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

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

We
lease our retail store locations under non-cancelable operating lease agreements expiring on various dates through 2020. These facilities are located in the United States
and Japan. Many of the store lease agreements allow us to terminate the agreement, generally in the third or fourth year, if our sales do not meet a pre-determined level. As of
December 31, 2008, we had 42 stores open. We expect to open approximately 25 stores in 2009 and approximately 20 stores in 2010. At the end of 2008, our retail square footage, which includes
storage space at all stores, was approximately 80,000. Our retail stores range in size from 900 to 3,000 square feet.

Item 3.    Legal Proceedings.

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

12

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Table of Contents

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

The Annual Meeting of Stockholders was held on October 2, 2008.

Election of Directors

At the Annual Meeting of Stockholders, the stockholders voted to elect a Board of Directors to hold office until the next annual
meeting of stockholders and until their successors are elected and qualified. The results of the election of directors were as follows:

Number of SharesFor

WithheldJeffrey Lubell


18,779,409


320,893Joseph Coulombe


17,401,136


1,699,166G. Louis Graziadio, III


13,810,435


5,289,867Robert L. Harris, II


17,395,199


1,705,103Mark S. Maron


18,798,520


301,782


Approval of Executive Cash Incentive Bonus Plan

The vote was 15,658,882 for, 562,278 against, and there were 163,830 abstentions. There were 2,715,312 broker non-votes.

Ratification of appointment of independent registered public accounting firm

The vote was 19,059,236 for, 27,299 against, and there were 13,763 abstentions. There were no broker non-votes.

13

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Table of Contents

PART II.

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

Market Information

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

2008

2007High

Low

High

LowFirst Quarter

$
20.76

$
17.00

$
19.29

$
14.96Second Quarter

$
26.76

$
15.51

$
21.62

$
14.90Third Quarter

$
31.08

$
24.53

$
22.61

$
15.38Fourth Quarter

$
25.69

$
10.25

$
21.88

$
14.25


Holders

As of March 6, 2009 there were 59 record holders of our Common Stock.

Dividends

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

14

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Table of Contents

Stock Price Performance

The following graph compares, for each of the last five fiscal years, commencing on December 31, 2003 and ending
December 31, 2008, the cumulative total return of True Religion Apparel, Inc. common stock, Standard & Poor's 500 Index, Standard & Poor's Retail Index and
Standard & Poor's Apparel, Accessories & Luxury Goods Index. The Retail Index is comprised of 32 retail companies, representing a sector of the Standard & Poor's 500 Index. The
Apparel, Accessories & Luxury Goods Index is comprised of 19 companies, also representing a sector of the Standard & Poor's 500 Index. The cumulative total return of True Religion
Apparel, Inc. common stock assumes $100 invested on December 31, 2003 in our common stock and in each of the foregoing indices. The stock price performance graph is not necessarily
indicative of future stock price performance. The return on $100 invested in the S&P 500, the S&P 1500 Apparel Retail and the S&P 1500 Apparel, Accessories & Luxury Goods
Index over the 5 year period from December 2003 to December 2008 was $90, $78 and $86, respectively.

GRAPHIC



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Table of Contents



Transactions in Our Equity Securities

For the period covered by this report, we have not engaged in any transactions involving the sale of our unregistered equity securities
that were not disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K. We have not engaged in any sales of registered securities for which
the use of proceeds is required to be disclosed. This table provides certain information with respect to our purchases of shares of our common stock during the fourth quarter of 2008:

Period

Total Number
of Shares
Purchased (a)

Average
Price Paid
Per Share (a)

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan

Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the PlanOctober 1, 2008October 31, 2008


127,534

$
16.41





November 1, 2008November 30, 2008


1,458

$
15.56





December 1, 2008December 31, 2008




$






Total


128,992

$
16.40








---

Item 6.    Selected Financial Data.

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

For the Years Ended December 31,2008

2007

2006

2005

2004Statement of operations data(In Thousands):Net sales

$
270,000

$
173,256

$
140,489

$
103,219

$
27,667Operating income


68,876


47,142


34,977


31,470


6,299Provision for income taxes


25,570


21,100


14,035


13,126


2,464Net income


44,371


27,845


21,746


18,440


3,835Earnings per share:Basic

$
1.89

$
1.21

$
0.97

$
0.85

$
0.19Diluted

$
1.83

$
1.16

$
0.92

$
0.81

$
0.19Weighted number of shares
outstandingbasic


23,511


22,964


22,496


21,677


19,999Weighted number of shares
outstandingdiluted


24,270


23,949


23,608


22,657


20,494




As of December 31,2008

2007

2006

2005

2004Balance sheet data ($000's):Working capital

$
113,108

$
72,846

$
58,845

$
30,337

$
7,106Total assets

$
166,452

$
113,258

$
79,751

$
44,163

$
13,449Stockholders' equity

$
142,250

$
95,247

$
64,147

$
31,574

$
7,604


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Table of Contents

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

Executive Summary

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

Strategic Initiatives

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



2008 Highlights

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



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Table of Contents



2008 Compared to 2007

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

Years Ended December 31,2008

2007Amount

%

Amount

%

Change

%Net sales

$
270,000


100.0
%
$
173,256


100.0
%
$
96,744


55.8
%Gross profit


157,001


58.1
%

98,827


57.0
%

58,174


58.9
%Selling, general and administrative expenses


88,125


32.6
%

51,685


29.8
%

36,440


70.5
%Operating income


68,876


25.5
%

47,142


27.2
%

21,734


46.1
%Interest income, net


1,065


0.4
%

1,803


1.0
%

(738
)

(40.9
)%Provision for income taxes


25,570


9.5
%

21,100


12.2
%

4,470


21.2
%Net Income

$
44,371


16.4
%
$
27,845


16.1
%
$
16,526


59.3
%Net income per shareBasic

$
1.89




$
1.21




$
0.68


56.2
%Net income per shareDiluted

$
1.83




$
1.16




$
0.67


57.8
%


Net Sales

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

Years Ended December 31,

Change2008

2007

Amount

%U.S. Wholesale

$
153,235

$
111,390

$
41,845


37.6
%Consumer Direct


75,314


29,268


46,046


157.3
%International


40,044


31,728


8,316


26.2
%Other


1,407


870


537


61.7
%Total net sales

$
270,000

$
173,256

$
96,744


55.8
%


U.S.
Wholesale net sales increased 37.6% to $153.2 million. In 2008, our sales to "major" (e.g. Nordstrom, Bloomingdale's) accounts increased 58.1% from the prior year as
our consumers reacted favorably to the new jean groups that we introduced in 2008 and the updated styling of our on-going groups. We expect our net sales to majors will decrease by 3% to
5% in 2009 as consumers are impacted by the ongoing U.S. economic recession. We increased our net sales in 2008 to off-price retailers as we exited slower-moving styles and sold basic
styles made from prior season fabrics. Our net sales to these customers represented 13.7% of our net sales in 2008 and 10.8% of our net sales in 2007. We expect our net sales to off-price
retailers will decrease by 3% to 5% in 2009 as we will depend more on our outlet stores to sell our slower-moving styles. Our net sales to boutique customers decreased 11.4%, as the demand for our
2008 collection was tempered by the impact of the U.S. economic slowdown and our decision to not ship accounts that were past due or suspected of re-selling our merchandise. We expect that
our net sales to boutiques will continue to be below the prior year net sales levels as long as the U.S. economy is in a recession.

18

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Table of Contents

Consumer
Direct net sales increased by 157.3% to $75.3 million in 2008. The increase was primarily driven by new store openings. We opened 11 stores in 2007 and 27 stores in 2008,
bringing our total to 42 stores at the end of 2008. In addition to the store count increase, our Consumer Direct net sales benefited from the favorable reaction to our 2008 collections and the
expansion of our sportswear and licensed-product offerings, which comprised 24% of our retail store sales in 2008. We expect that this segment's net sales will increase by 60% to 65% in 2009 primarily
from the 27 stores opened in 2008 and the 25 stores that we expect to open in 2009.

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

Gross Profit

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

Years Ended December 31,

Change2008

2007

Amount

%U.S. Wholesale

$
78,670

$
60,007

$
18,663


31.1
%Consumer Direct


57,669


22,452


35,217


156.9
%International


19,255


15,498


3,757


24.2
%Other


1,407


870


537


61.7
%Total gross profit

$
157,001

$
98,827

$
58,174


58.9
%


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

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

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

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Table of Contents

Selling, General and Administrative Expenses

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

Years Ended December 31,

Change2008

2007

Amount

%U.S. Wholesale

$
31,218

$
23,602

$
7,616


32.3
%Consumer Direct


29,859


10,577


19,282


182.3
%International


2,494


780


1,714


219.8
%Other


24,554


16,726


7,828


46.8
%Total selling, general and administrative expenses

$
88,125

$
51,685

$
36,440


70.5
%


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

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

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

Operating Income

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

Years Ended December 31,

Change2008

2007

Amount

%U.S. Wholesale

$
47,452

$
36,405

$
11,047


30.3
%Consumer Direct


27,810


11,875


15,935


134.2
%International


16,761


14,718


2,043


13.9
%Other


(23,147
)

(15,856
)

(7,291
)

46.0
%Total operating income

$
68,876

$
47,142

$
21,734


46.1
%


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

20

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Table of Contents

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

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

Interest Income, net

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

Provision for Income Taxes

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

Net Income and Earnings Per Diluted Share

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

2007 Compared to 2006

The following table summarizes our results of operations for 2007 compared to 2006 (dollar amounts in thousands, except per share
data):

Years Ended December 31,2007

2006Amount

%

Amount

%

Increase

%Net sales

$
173,256


100.0
%
$
140,489


100.0
%
$
32,767


23.3
%Gross profit


98,827


57.0
%

75,013


53.4
%

23,814


31.7
%Selling, general and administrative expenses


51,685


29.8
%

40,036


28.5
%

11,649


29.1
%Operating income


47,142


27.2
%

34,977


24.9
%

12,165


34.8
%Interest income, net


1,803


1.0
%

530


0.4
%

1,273


240.2
%Provision for income taxes


21,100


12.2
%

14,035


10.0
%

7,065


50.3
%Net Income

$
27,845


16.1
%
$
21,746


15.5
%

6,099


28.0
%Net income per shareBasic

$
1.21




$
0.97




$
0.24


24.7
%Net income per shareDiluted

$
1.16




$
0.92




$
0.24


26.1
%


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Table of Contents

Net Sales

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

Years Ended December 31,

Change2007

2006

Amount

%U.S. Wholesale

$
111,390

$
97,219

$
14,171


14.6
%Consumer Direct


29,268


5,514


23,754


430.8
%International


31,728


37,669


(5,941
)

(15.8
)%Other


870


87


783


900.0
%Total net sales

$
173,256

$
140,489

$
32,767


23.3
%


U.S.
Wholesale net sales increased 14.6% to $111.4 million, driven by the increased sales of our men's merchandise and the introduction of new jean and sportswear groups in the
second half of 2007. Sales to boutique accounts increased as a percent of total sales to 47.9% in 2007 from 46.1% of US wholesale sales in 2006.

Consumer
Direct net sales increased by 430.8% to $29.3 million in 2007. The increase was driven by new store openings. We opened our first store in December of 2005, three stores
in 2006, and 11 stores in 2007, bringing our total to 15 stores at the end of 2007.

International
net sales decreased 15.8% to $31.7 million reflecting the planned restructuring of the key international markets in Japan and United Kingdom. Excluding these two
countries, international net sales increased 11.5%. In Japan, we reduced the credit we provided to our distributor and we continued to reposition the brand for long-term success. Our sales
into the United Kingdom were reduced in the first half of 2007 as we transitioned to a new distributor in that period.

Gross Profit

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

Years Ended December 31,

Change2007

2006

Amount

%U.S. Wholesale

$
60,007

$
51,590

$
8,417


16.3
%Consumer Direct


22,452


4,626


17,826


385.3
%International


15,498


18,710


(3,212
)

(17.2
)%Other


870


87


783


900.0
%Total gross profit

$
98,827

$
75,013

$
23,814


31.7
%


Overall
gross margin was positively impacted by segment mix shift, as our highest gross margin segment, Consumer Direct, increased net sales at the highest rate in 2007.

U.S.
Wholesale gross profit increased 16.5% to $60.0 million in 2007 compared to $51.6 million in 2006, and the gross margin increased to 53.9% in 2007 from 53.1% in 2006.

The
Consumer Direct gross profit increased 385.3% to $22.5 million in 2007 compared to $4.6 million in 2006, but the gross margin decreased to 76.7% in 2007 from 83.9% in
2006.

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Selling, General and Administrative Expenses

The following table summarizes selling, general & administrative expenses (SG&A) by segment (dollar amounts in thousands):

Years Ended December 31,

Change2007

2006

Amount

%U.S. Wholesale

$
23,602

$
19,153

$
4,449


23.2
%Consumer Direct


10,577


2,212


8,365


378.2
%International


780


587


193


32.9
%Other


16,726


18,084


(1,358
)

(7.5
)%Total selling, general and administrative expenses

$
51,685

$
40,036

$
11,649


29.1
%


U.S.
Wholesale SG&A increased to $23.6 million or 21.2% of U.S. Wholesale net sales in 2007, from $19.2 million, or 19.7% of U.S. Wholesale net sales in 2006. The U.S.
Wholesale SG&A expenses increased due to additional distribution costs associated with the segment's net sales increase, the expansion of our design department, and the relocation to a larger
distribution center.

The
Consumer Direct SG&A expenses increased $8.4 million to $10.6 million, or 36.1% of Consumer Direct net sales, in 2007, from $2.2 million, or 40.1% of Consumer
Direct net sales, in 2006. This increase was driven by the opening of 11 new branded retail stores in 2007.

Other
SG&A expenses decreased $1.4 million, from $18.1 million in 2006 to $16.7 in 2007. During 2007, we incurred severance and recruiting costs of $2.4 million as
we replaced two executives in the first quarter of 2007. In 2006, we incurred litigation settlement expenses of $2.1 million and investment bank fees of $0.9 million. As a percentage of
net sales, Other SG&A expenses in 2007 was 9.7%, a decrease from 2006's rate of 12.9%

Operating Income

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

Years Ended December 31,

Change2007

2006

Amount

%U.S. Wholesale

$
36,405

$
32,437

$
3,968


12.2
%Consumer Direct


11,875


2,414


9,461


391.9
%International


14,718


18,123


(3,405
)

(18.8
)%Other


(15,856
)

(17,997
)

2,141


11.9
%Total operating income

$
47,142

$
34,977

$
12,165


34.8
%


The
operating income increase was driven by increases in net sales and gross margin, partially offset by an increase in selling, general and administrative expenses. Operating margin,
representing operating income as a percentage of net sales, rose to 27.2% in 2007 from 24.9% in 2006. This 230 basis point improvement is attributable to increased net sales, as discussed above, and
the expansion of our Consumer Direct segment, which generates higher operating margins than our combined wholesale and corporate businesses.

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Table of Contents

Interest Income, net

Net interest income was $1.8 million in 2007 compared to $0.5 million in 2006. This increase was primarily due to the
growth in our cash and cash equivalents and investments balances in 2007 as compared to 2006.

Provision for Income Taxes

The effective tax rate was 43.1% for 2007 compared to 39.2% in 2006. This increase is primarily attributable to credits and other
benefits received in 2006 that were no longer available in 2007.

Net Income and Earnings Per Diluted Share

Net income was $27.8 million in 2007 compared to $21.7 million in 2006. This 28.0% increase is attributable to increased
net sales as well as significant operating income improvement, as discussed above. Earnings per diluted share increased 26.1% from $0.92 in 2006 to $1.16 in 2007.

Inflation

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

Financial Condition

Net cash provided by operating activities was $49.1 million in 2008 compared to $9.8 million in 2007. The
$39.3 million increase was primarily due to an increase in net income of $16.5 million and a decrease in cash used to purchase inventory of $7.1 million. The decrease in cash used
to purchase inventory is due to our managing our production schedules to carry less merchandise and to the selling off of prior season merchandise and slow-moving sportswear.

Net
cash used in investing activities was $12.7 million in 2008 compared to $24.4 million in 2007. This decrease of $11.7 million is due primarily to
$5.6 million in cash provided from the sale of investments in 2008 compared to $15.4 million of cash used for the net purchases of investments in 2007. This decrease was partially offset
by a capital expenditures increase of $9.4 million, primarily from the build-out of 27 branded retail stores in 2008.

Net
cash used in financing activities was $7.9 million in 2008 compared to net cash used of $1.6 million in 2007. In 2008, we paid $8.1 million when employees
elected to have us withhold common stock to satisfy their minimum statutory income tax withholdings on restricted share awards that vested and options that were exercised during the year compared to
$3.1 million in 2007.

Liquidity and Capital Resources

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

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Table of Contents

We
have investments in auction rate securities (ARS) which have experienced an illiquid market for much of 2008. In October 2008, we were notified that the two brokers who sold ARS to us
would purchase the ARS at a price of par plus accrued interest, and on November 11, 2008, we accepted the offers from these brokers. The first portion of the ARS, in the amount of
$4.9 million, was purchased by the broker in January 2009 at par plus accrued interest, and the second portion, in the amount of $5.0 million, is expected to be purchased by the broker
by July 2012, although we may instruct the broker to purchase these ARS beginning in June 2010. SeeItem 7A Quantitative and Qualitative Disclosures about Market
Risk.

Capital
expenditures for 2009 are expected to approximate $17.0 million.

Factoring Agreement

In December 2007, Guru Denim Inc., our wholly-owned subsidiary, entered into a collection factoring agreement with Merchant
Factors Corp. ("Merchant Factors"). The collection factoring agreement with Merchant Factors had an initial term of seven months, which expired in June 2008. Our factoring agreement may now be
terminated by either party upon 60 days notice. Guru Denim sells to Merchant Factors its domestic wholesale receivables that Merchant Factors chooses to approve for credit. Merchant Factors has
the right to reassign or resell the receivables to other business entities.

Guru
Denim pays a commission fee to Merchant Factors, which assumes the credit risk for all receivables that it purchases from Guru Denim.

Guru
Denim has granted to Merchant Factors, a security interest in all current and future trade receivables in order to secure payment of any amounts due to them from Guru Denim.

Tabular Disclosure of Contractual Obligations

The following table sets forth, as of December 31, 2008, our scheduled contractual cash obligations due for each of the periods
indicated below (dollar amounts in thousands):

Payment Due by PeriodContractual Obligations

Total

Less than One Year

1 - 3 Years

3 - 5 Years

More Than 5 YearsLong-term debt obligations

$


$


$


$


$
Operating lease obligations


131,377


10,852


26,394


26,354


67,777Purchase obligations


25,853


25,853








Total

$
157,230

$
36,705

$
26,394

$
26,354

$
67,777


Seasonality of Business

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

Critical Accounting Policies

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

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accounting
policies, including those discussed below, see Note 2Summary of Significant Accounting Policies in our consolidated financial statements provided under Part II,
Item 8 of this Annual Report on Form 10-K.

Sales Recognition

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

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

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

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

Uncollectible Accounts

Our U.S. Wholesale segment sells to Merchant Factors the accounts receivable that Merchant Factors has approved for credit. Merchant
Factors assumes the credit risk for these receivables. We sold receivables of $123.4 million to Merchant Factors in 2008. As of December 31, 2008, Merchant Factors owed us
$23.1 million, which will be paid to us shortly after our customers pay Merchant Factors.

At
times, our U.S. Wholesale customers place orders that exceed the credit that they have available from Merchant Factors. We evaluate those orders to consider if the customer is worthy
of additional credit based on our past experience with the customer. In the event we elect to sell merchandise to the customer on credit, we take the credit risk for the amounts that are above the
credit limit established by Merchant Factors. We also sell merchandise to select international distributors on credit. As of December 31, 2008, the amount of trade receivables for which we bear
the credit risk is $10.0 million.

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

Inventories

Slow-moving merchandise is typically sold at prices exceeding our cost in our outlet retail stores or to wholesale
customers who specialize in off-price merchandise. As of December 31, 2008, we recorded reserves for slow-moving inventory of $0.4 million based upon analysis of
balances on hand by style, recent sales trends, projected future sales, and historical markdown trends.

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Table of Contents

Stock-Based Compensation

Stock Options

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment("SFAS
No. 123(R)"), which requires us to measure the cost of employee and director services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. The costs are recognized over the period during which an employee or director is required to provide services
in exchange for the award.

Prior
to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees("APB 25"), to measure compensation costs for our stock-based compensation programs. Under APB 25, we recorded no compensation expense for stock options
granted to employees and directors if the options' strike price was equal to the closing market price of our common stock on the grant date. If the option price was below the closing market price of
our common stock on the grant date, we recognized compensation expense over the stock option's vesting period. Also, the vesting terms for some stock options granted in 2004 were later accelerated
which resulted in compensation expense in some cases. For stock options granted to employees and directors where the options' strike price was below the closing market price of our common stock on the
grant date, compensation expense was recognized for the difference between the strike price and the closing market price of our common stock on the grant date.

We
adopted SFAS No. 123(R) using the modified prospective method. Under this accounting method, 2006 stock-based compensation expense considered the unvested portion of all stock
options outstanding, calculated using the provisions of SFAS No. 123. As provided for under the modified prospective method, we did not restate our results for the periods prior to 2006.

Restricted Stock Compensation

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

Income Taxes

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

Effective
January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,Accounting for Uncertainty in Income
Taxes("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement of Financial
Accounting Standards No. 109,Accounting for Income Taxes.In accordance with FIN 48, we regularly evaluate the likelihood of recognizing
the benefit for income tax positions we have taken in various federal and state filings by considering all relevant facts, circumstances, and

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information
available. For those benefits that we believe it is more likely than not that the benefit will be sustained, we recognize the largest amount we believe is cumulatively greater than 50%
likely to be realized. The adoption of FIN 48 had no impact on our consolidated financial statements.

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

New Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-1
("FSP 157-1") and FASB Staff Position No. FAS 157-2 ("FSP FAS 157-2"), affecting implementation of SFAS 157. FSP FAS 157-1
excludes FASB Statement No. 13,Accounting for Leases("SFAS 13"), and other accounting pronouncements that address fair value
measurements under SFAS 13, from the scope of SFAS 157. FSP FAS 157-2 delays the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except for items that are recognized at fair value on a recurring basis, to fiscal years beginning after November 15, 2008. For all other items,
SFAS 157 was effective for us as of January 1, 2008. We have adopted SFAS 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 as of
January 1, 2008. The adoption did not have a material affect on our consolidated financial statements.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial
Liabilities("SFAS 159"). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 was
effective for us as of January 1, 2008. We did not change the measurement of our assets and liabilities as a result of SFAS 159: therefore, the adoption of SFAS 159 had no effect
on our consolidated financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007),Business combinations("SFAS 141(R)"). SFAS 141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain
specific acquisition-related items including expensing acquisition-related costs as incurred, valuing non-controlling interests (minority interests) at fair value at the acquisition date,
and expensing restructuring costs associated with an acquired business. SFAS 141(R) also includes a substantial number of new disclosure requirements. SFAS 141(R) is to be applied
prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Early adoption is not permitted. Generally, the effect of SFAS 141(R) will depend on
future acquisitions, if any.

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

Exchange Rate Risk

During 2008, we established a subsidiary in Japan. In the second half of 2008, we operated two outlet retail stores and operated a
wholesale business in Japan; all retail sales and some wholesale sales are denominated in Japanese Yen. Our Japan operating expenses are dominated in Japanese Yen. Because these operations are not
significant to our overall business, our exposure to fluctuations in the U.S. Dollar and Japanese Yen exchange rate is not considered material as of December 31, 2008. We received United States
dollars ("USD") for all other merchandise sales and licensing revenue during the year ended December 31, 2008. Merchandise purchases from contract manufacturers are denominated in USD.

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Table of Contents

Investments

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

Item 8.    Financial Statements and Supplementary Data.

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

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



Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.



As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the
supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the design and effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act of 1934 as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and
procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified
within the Commission's rules and forms. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.



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

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

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Table of Contents



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

Item 9B.    Other Information.

None.

PART III.

Item 10.    Directors, Executive Officers and Corporate Governance.

The information required under this item is included in the following sections of our Proxy Statement for our 2009 Annual Meeting of
Stockholders, which sections are incorporated by reference herein and will be filed within 120 days after the end of our fiscal year:



The
certifications of our Chief Executive Officer and Chief Financial Officer required pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits
to this Annual Report on Form 10-K and were included as exhibits to each of our quarterly reports on Form 10-Q.

Item 11.    Executive Compensation.

The information required under this item is included in the following sections of our Proxy Statement for our 2009 Annual Meeting of
Stockholders, which sections are incorporated by reference herein and will be filed within 120 days after the end of our fiscal year:



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

The information required under this item is included in the following sections of our Proxy Statement for our 2009 Annual Meeting of
Stockholders, which sections are incorporated by reference herein and will be filed within 120 days after the end of our fiscal year:



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Table of Contents

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

The information required under this item is included in the following sections of our Proxy Statement for our 2009 Annual Meeting of
Stockholders, which sections are incorporated by reference herein and will be filed within 120 days after the end of our fiscal year:



Item 14.    Principal Accountant Fees and Services.

The information required under this item is included in the following sections of our Proxy Statement for our 2009 Annual Meeting of
Stockholders, which sections are incorporated by reference herein and will be filed within 120 days after the end of our fiscal year:



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Table of Contents

PART IV.

Item 15.    Exhibits, Financial Statements Schedules.

(a)

(1)

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

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

EXHIBITSSee Exhibit Index below.


EXHIBIT INDEX

Exhibit No.

Description3.1

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

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

Specimen Common Stock Certificate (incorporated by reference from our Form 8-K Current Report, filed August 22, 2005).10.1

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).10.2

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).*10.3

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).10.4

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).10.5

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).10.6

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).*10.7

Lease Agreement by and among True Religion Apparel, Inc., Guru Denim, Inc. and Rio Vista Industrial Investments, LLC dated May 28, 2004 (incorporated by reference from our 10-KSB Annual Report,
filed on March 31, 2006).10.8

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


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Table of Contents

Exhibit No.

Description10.9

Standard Industrial/Commercial Single-Tenant LeaseGross dated May 17, 2006, among ADJ Enterprises, Ltd., Guru Denim, Inc. and the Company (incorporated by reference from our Form 8-K Current
Report, filed April 14, 2006).10.10

Amendment to Employment Agreement dated May 31, 2006, by and between Jeffrey Lubell and the Company (incorporated by reference from our Form 8-K Current Report, filed June 5, 2006).*10.11

Letter dated June 8, 2006, amending the terms of the Discount Factoring Agreement dated December 20, 2004, between Merchant Factors Corp. and Guru Denim, Inc. (incorporated by reference from our 10-Q/A
filed on August 15, 2006).10.12

Independent Contractor Agreement dated as of February 1, 2007, by and between Guru Denim, Inc. and L'Atelier (incorporated by reference from our Form 8-K Current Report filed on January 25,
2007).10.13

Employment Letter, dated March 7, 2007, by and between the Company and Peter Collins (incorporated by reference from our Form 8-K Current Report filed on March 8, 2007).*10.14

Release and Consulting Agreement, dated March 7, 2007, by and among Charles Lesser, the Company and Guru Denim, Inc. (incorporated by reference from our Form 8-K Current Report filed on March 8,
2007).*10.15

Amendment to the True Religion Apparel, Inc. 2005 Stock Incentive Plan (incorporated by reference from our Form 8-K Current Report filed on March 8, 2007).*10.16

Waiver and Release Agreement, dated March 14, 2007, by and among Kymberly Gold-Lubell, the Company and Guru Denim, Inc. (incorporated by reference from our Form 8-K Current Report filed on March 16,
 2007).*10.17

True Religion Apparel, Inc. Executive Cash Incentive Bonus Plan (incorporated by reference from our Form 8-K Current Report filed on April 3, 2008).*10.18

Amendment No. 2 to Employment Agreement by and between the Company and Jeffrey Lubell dated September 12, 2008 (incorporated by reference from our Form 8-K Current Report filed September 17,
2008).10.19

Letter Agreement, by and between the Company and Kelly Gvildys dated February 7, 2008.*10.20

Summary of Board of Directors Compensation.*10.21

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

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

Subsidiaries of the Company23.1

Consent of Independent Registered Public Accounting Firm, Stonefield Josephson, Inc.23.2

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

Powers of Attorney.31.1

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


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Exhibit No.

Description31.2

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

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

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


---

34

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Table of Contents

SIGNATURES

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

TRUE RELIGION APPAREL, INC.Dated: March 10, 2009

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


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

Name

Position

Date/s/ JEFFREY LUBELL Jeffrey Lubell

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

March 10, 2009/s/ PETER F. COLLINS Peter F. Collins

Chief Financial Officer (Principal Financial and Accounting Officer)

March 9, 2009/s/ JOSEPH H. COULOMBE Joseph H. Coulombe

Director

March 9, 2009/s/ G. LOUIS GRAZIADIO III G. Louis Graziadio III

Director

March 9, 2009/s/ ROBERT L. HARRIS, II Robert L. Harris, II

Director

March 6, 2009/s/ MARK S. MARON Mark S. Maron

Director

March 9, 2009Marcello Bottoli

Director

March     , 2009


35

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

PagesReport of Management on Internal Control Over Financial Reporting

F-2Reports of Independent Registered Public Accounting Firms

F-3Consolidated Balance Sheets as of December 31, 2008 and 2007

F-6Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006

F-7Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006

F-8Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006

F-9Notes to Consolidated Financial Statements

F-10Consolidated Financial Statement Schedule:Valuation and Qualifying Accounts as of December 31, 2008, 2007, and 2006

F-30


F-1

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Table of Contents

REPORT OF MANAGEMENT ON  INTERNAL CONTROL OVER FINANCIAL REPORTING

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

Our
management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal
control over financial reporting based on the framework inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on
this evaluation, our management concluded that our internal control over financial reporting was effective at December 31, 2008.

Our
internal control over financial reporting as of December 31, 2008 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as
stated in their report which, is included herein.

F-2

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the internal control over financial reporting of True Religion Apparel, Inc. and Subsidiaries ("the Company") as of December 31, 2008, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanyingReport of Management on Internal Control Over
Financial Reporting.Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended December 31, 2008, of the Company and our report dated March 9, 2009 expressed an unqualified opinion on those financial statements and financial statement
schedule.

/S/
DELOITTE & TOUCHE LLP
Los Angeles, California
March 9, 2009

F-3

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of True Religion Apparel, Inc. and Subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2008. Our audits also included the financial statement
schedule as of and for each of the two years in the period ended December 31, 2008 listed in Item 15(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of True Religion Apparel, Inc. and Subsidiaries as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 9, 2009 expressed an unqualified opinion on the Company's internal control over financial reporting.

/S/
DELOITTE & TOUCHE LLP
Los Angeles, California
March 9, 2009

F-4

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors
True Religion Apparel Inc. and Subsidiaries

We
have audited the accompanying consolidated statements of income, stockholders' equity and cash flows for the year ended December 31, 2006 of True Religion Apparel Inc.
and Subsidiaries. Our audit also included the financial statement schedule for the year ended December 31, 2006 listed in the index at Item 15(a)(2). These financial statements and the
financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on
our audit.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of True Religion Apparel, Inc. and Subsidiaries'
consolidated operations and their consolidated cash flows for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As
discussed in Note 2 to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (Revised), "Share Based
Payment".

/s/
Stonefield Josephson, Inc.
Los Angeles, California
March 23, 2007

F-5

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Table of Contents

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

December 31,2008

2007ASSETSCurrent Assets:Cash and cash equivalents

$
57,245

$
28,686Short-term investments


4,850


5,345Accounts receivable, net of allowances:From factor


23,060


14,709From customers


10,043


13,189Inventory


25,828


20,771Deferred income tax assets


6,498


4,707Prepaid expenses and other current assets


4,148


2,305Total current assets


131,672


89,712Property and equipment, net


28,006


11,579Long-term investments


4,990


10,200Deferred income tax assets





561Other assets


1,784


1,206TOTAL ASSETS

$
166,452

$
113,258LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable and accrued expenses

$
10,633

$
9,597Accrued salaries, wages and benefits


6,889


4,059Income taxes payable


1,042


3,210Total current liabilities


18,564


16,866Long-term deferred rent


4,536


1,145Long-term deferred income tax liabilities


1,102


Total long-term liabilities


5,638


1,145Total liabilities


24,202


18,011Commitments and contingencies (Notes 9 & 10)Stockholders' Equity:Preferred stock, $0.0001 par value, 20,000 shares authorized, none issued and outstanding, respectively





Common stock, $0.0001 par value, 80,000 shares authorized, 24,450 and 23,587 issued and outstanding, respectively


2


2Additional paid in capital


38,554


26,491Retained earnings


103,508


68,754Accumulated other comprehensive income, net of tax


186


Total stockholders' equity


142,250


95,247TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
166,452

$
113,258


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

F-6

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Table of Contents

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

Years Ended2008

2007

2006Net sales

$
270,000

$
173,256

$
140,489Cost of sales


112,999


74,429


65,476Gross profit


157,001


98,827


75,013Selling, general, and administrative expenses


88,125


51,685


40,036Operating income


68,876


47,142


34,977Other income:Interest income, net


(1,065
)

(1,803
)

(530
)Other income








(274
)Total other income


(1,065
)

(1,803
)

(804
)Income before provision for income taxes


69,941


48,945


35,781Provision for income taxes


25,570


21,100


14,035Net Income

$
44,371

$
27,845

$
21,746Earnings per share:Basic

$
1.89

$
1.21

$
0.97Diluted

$
1.83

$
1.16

$
0.92Weighted average shares outstanding:Basic


23,511


22,964


22,496Diluted


24,270


23,949


23,608


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

F-7

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Table of Contents

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

Years Ended2008

2007

2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
44,371

$
27,845

$
21,746Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


3,427


2,044


451Provision for bad debts and returns


1,117


(285
)

273Shares issued for third-party services








2,104Stock-based compensation


10,297


5,731


6,721Tax benefit from stock-based compensation


229


1,303


1,758Excess tax benefit from stock-based compensation


(229
)

(1,270
)

(1,612
)Deferred income taxes


(128
)

(2,636
)

(1,067
)Other


305





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


(8,811
)

(6,756
)

1,117Accounts receivable from customers


1,914


(4,828
)

(2,809
)Inventory


(4,377
)

(11,477
)

759Prepaid expenses and other current assets


(1,834
)

(1,608
)

(895
)Other assets


(448
)




Accounts payable and accrued expenses


(825
)

(29
)

2,395Accrued salaries, wages and benefits


2,831


2,150


1,873Income taxes payable


(2,168
)

(1,094
)

(1,156
)Long-term deferred rent


3,391


720


425Net cash provided by operating activities


49,062


9,810


32,083CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(18,187
)

(8,765
)

(4,468
)Purchases of investments





(17,505
)

(60,162
)Sales of investments


5,550


2,105


63,135Expenditures to establish trademarks


(81
)

(228
)

Net cash used in investing activities


(12,718
)

(24,393
)

(1,495
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options


25


198


244Statutory tax withholding payment for stock-based compensation


(8,110
)

(3,077
)

Excess tax benefit from stock-based compensation


229


1,270


1,612Net cash (used in) provided by financing activities


(7,856
)

(1,609
)

1,856Effect of exchange rate changes in cash


71





Net increase (decrease) in cash and cash equivalents


28,559


(16,192
)

32,444Cash and cash equivalents, beginning of year


28,686


44,878


12,434Cash and cash equivalents, end of year

$
57,245

$
28,686

$
44,878


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

F-8

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Table of Contents

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

Shares

Amount

Additional
Paid In
Capital

Other
Comprehensive
Income

Retained
Earnings

TotalBalance at January 1, 2006


22,208

$
2

$
9,332

$


$
22,240

$
31,574Net Income for the year ended December 31, 2006














21,746


21,746Stock-based compensation








6,721








6,721Issuance of common stock for litigation settlement


100





2,104








2,104Issuance of restricted shares


712














Exercise of stock options


234





244








244Tax benefit on stock-based compensation








1,758








1,758Balance at December 31, 2006


23,254


2


20,159





43,986


64,147Net Income for the year ended December 31, 2007














27,845


27,845Stock-based compensation








5,731








5,731Issuance of restricted shares


347














Exercise of stock options


272





198








198Retirement of common stock


(183
)










(3,077
)

(3,077
)Forfeiture of restricted shares


(103
)













Tax benefit on stock-based compensation








403








403Balance at December 31, 2007


23,587


2


26,491





68,754


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














44,371


44,371Other comprehensive income, net











186





186Stock-based compensation








10,297








10,297Issuance of restricted shares


659














Exercise of stock options


836





1,537








1,537Retirement of common stock


(583
)










(9,617
)

(9,617
)Forfeiture of restricted shares


(49
)













Tax benefit on stock-based compensation








229








229Balance at December 31, 2008


24,450

$
2

$
38,554

$
186

$
103,508

$
142,250


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

F-9

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Table of Contents

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

NOTE 1DESCRIPTION OF BUSINESS

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

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

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

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

Use of Estimates

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

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

Fair Value Measurements

Statement of Financial Accounting Standards No. 157,Fair Value Measurements("SFAS No. 157") was effective for us as of January 1, 2008. We have adopted SFAS No. 157 as amended by Financial Accounting Standards Board ("FASB") Staff Position No.
FAS 157-2, which allows for the delay of the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities.

F-10

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

SFAS
No. 157 requires certain disclosures regarding fair value based on the inputs used to measure fair value. The following is a list of defined levels in the fair value
hierarchy based on the data and/or methods used to determine fair value:



SFAS
No. 157 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair
value whenever possible. Our auction rate securities represent Level 3 investments, which are valued based on broker quotes as well as subsequent auctions, if any (see Note 3).

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial
Liabilities("SFAS No. 159"). SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS
No. 159 was effective for us as of January 1, 2008. We did not change the measurement of our assets and liabilities as a result of SFAS No. 159: therefore, the adoption of SFAS
No. 159 had no effect on our consolidated financial statements.

Sales Recognition

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

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

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

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

F-11

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Classification of Certain Costs and Expenses

We classify merchandise, inbound freight costs and out-bound shipping costs in cost of sales. Selling, general &
administrative expenses include merchandise design and pre-production, marketing and advertising, sales commissions, customer service, Consumer Direct expenses and general and
administrative expenses. Consumer Direct expenses include wages and commissions, retail occupancy costs, supplies and direct segment management costs. General and administrative expenses include wages
and performance compensation for our executive, finance, human resources, legal, and information systems departments, headquarters occupancy costs (including the portion used by the distribution
function), and professional service costs. Included in selling, general and administrative expenses in the accompanying consolidated statements of income are handling charges of $3.6 million,
$2.8 million and $2.2 million in 2008, 2007 and 2006, respectively.

Advertising Costs

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

Advertising
expenses amounted to $3.9 million, $1.2 million and $0.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Comprehensive Income

Comprehensive income for the year ended December 31, 2008, consists of net income, adjustments to available for sale securities
and cumulative translation adjustments. For the years ended December 31, 2007 and 2006, comprehensive income equals net income as we had no other comprehensive income items.

Net Income per Common Share

Net income per common share is determined in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Basic net income per common share is computed based upon the weighted average number of common shares outstanding, and diluted net income per common share is computed
based upon the weighted average number of common shares outstanding plus dilutive common share equivalents outstanding during the periods using the treasury stock method. Dilutive common share
equivalents consist of incentive stock options, non-qualified stock options and restricted stock awards, other than performance awards which are excluded from diluted shares outstanding
until the performance condition is achieved. Once the performance condition is achieved on performance awards, the shares are included in diluted common share equivalents retroactive to the grant
date.

F-12

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Years Ended December 31,2008

2007

2006Basic


23,511


22,964


22,496Dilutive effect of stock options and unvested restricted stock awards


759


985


1,112Diluted shares


24,270


23,949


23,608


As
of December 31, 2008, 2007 and 2006, additional unvested shares of approximately 0.8 million, 0.5 million and 0.7 million, respectively, were issuable upon
the vesting of restricted stock awards that were excluded from the basic share calculations.

Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment("SFAS
No. 123(R)"), which requires us to measure the cost of employee and director services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. The costs are recognized over the period during which an employee or director is required to provide services
in exchange for the award.

Prior
to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees("APB 25"), to measure compensation costs for our stock-based compensation programs. Under APB 25, we recorded no compensation expense for stock options
granted to employees and directors if the options' strike price was equal to the closing market price of our common stock on the grant date. If the option price was below the closing market price of
our common stock on the grant date, we recognized compensation expense over the stock option's vesting period. Also, the vesting terms for some stock options granted in 2004 were later accelerated
which resulted in compensation expense in some cases. For stock options granted to employees and directors where the options' strike price was below the closing market price of our common stock on the
grant date, compensation expense was recognized for the difference between the strike price and the closing market price of our common stock on the grant date.

We
adopted SFAS No. 123(R) using the modified prospective method. Under this accounting method, 2006 stock-based compensation expense considered the unvested portion of all stock
options outstanding, calculated using the provisions of SFAS No. 123. As provided for under the modified prospective method, we did not restate our results for the periods prior to 2006.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

based
conditions is recognized on an accelerated basis using the graded attribution method over the requisite service period.

Cash and Cash Equivalents

Cash equivalents consist of an investment in a U.S. Treasury only mutual fund.

Accounts Receivable

Our U.S. Wholesale segment sells to Merchant Factors Corp. ("Merchant Factors") the accounts receivable that Merchant Factors has
approved for credit. Merchant Factors assumes the credit risk for these receivables. We sold $123.4 million of receivables to Merchant Factors in 2008. As of December 31, 2008, Merchant
Factors owed us $23.1 million, which will be paid to us shortly after our customers pay Merchant Factors. As of December 31, 2008 and 2007, the reserve for expected chargebacks was
$0.4 million and $0.4 million, respectively. The factor assumes the credit risk for the receivables that it purchases from us.

At
times, our customers place orders that exceed the credit that they have available from Merchant Factors. We evaluate those orders to consider if the customer is worthy of additional
credit based on our past experience with the customer. In the event we elect to sell merchandise to the customer on credit, we take the credit risk for the amounts that are above the credit limit
established by Merchant Factors. We also still sell merchandise to select international distributors on credit. As of December 31, 2008, the amount of trade receivables for which we bear the
credit risk is $10.0 million.

Management
evaluates our accounts receivables to estimate if they will ultimately be collected. In performing this evaluation, significant judgment is used, including an analysis of
specific risks on a customer-by-customer basis for larger accounts. Based on this information, management provides a reserve for the estimated amounts believed to be
uncollectible. Based on historical losses, existing economic conditions and collection practices, our allowance for doubtful accounts has been estimated to be $0.3 million and
$0.2 million at December 31, 2008 and 2007, respectively. Our actual credit losses for the periods presented have not significantly exceeded management's estimates.

Concentration of Credit Risks

For the years ended December 31, 2008 and 2007 sales to one customer accounted for 15% and 12%, respectively, of our net sales.
As of December 31, 2008, our Accounts Receivable from Factor, in the amount of $23.1 million, was due from Merchant Factor, which uses the collection function of a U.S. based financial
institution to collect the receivables that Merchant Factor purchases from us. Certain of our U.S. Wholesale customers remit their payments for goods they purchase on credit to the financial
institution; the financial institution transfers the collections to Merchant Factor, and each week Merchant Factor transfers to us the moneys that it received in the prior week on these receivables.
If in the future Merchant Factor or the financial institution experience significant financial difficulty, they may withhold or delay payment to us on moneys collected from our U.S. Wholesale
customers.

Inventories

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Slow-moving
merchandise is typically sold at prices exceeding our cost in our outlet retail stores or to wholesale customers who specialize in off-price
merchandise. As of December 31, 2008, we recorded reserves for slow-moving inventory of $0.4 million based
upon analysis of balances on hand by style, recent sales trends, projected future sales, and historical markdown trends.

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

Property and Equipment, Net

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

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

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

Income Taxes

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

Effective
January 1, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes("FIN
No. 48"). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement of Financial Accounting Standards
No. 109,Accounting for Income Taxes.In accordance with FIN No. 48, we regularly evaluate the likelihood of recognizing the benefit for
income tax positions we have taken in various federal and state filings by considering all relevant facts, circumstances, and information available. For those benefits that we believe it is more
likely than not that the benefit will be sustained, we recognize the largest amount

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

we
believe is cumulatively greater than 50% likely to be realized. The adoption of FIN No. 48 had no impact on our consolidated financial statements.

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

Leases

We lease our corporate headquarters facility and all of our branded retail stores. All of these leases are classified as operating
leases and they expire at various dates through 2020. We have no significant individual or master lease agreements.

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

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

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

In
some lease agreements, we receive landlord incentives to reimburse us for leasehold improvements. These incentives are recorded as a deferred rent credit and recognized as a reduction
to rent expense on a straight-line basis over the lease term. At December 31, 2008 and 2007, this deferred rent balance was $4.8 million and $1.1 million,
respectively.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-1 ("FSP FAS 157-1") and FASB Staff Position
No. FAS 157-2 ("FSP FAS 157-2"), affecting implementation of SFAS No. 157. FSP FAS 157-1 excludes FASB Statement No. 13, Accounting for Leases("SFAS No. 13"), and other
accounting pronouncements that address fair value measurements under SFAS No. 13, from
the scope of SFAS No. 157. FSP FAS 157-2 delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities,
except for items that are recognized at fair value on a recurring basis, to fiscal years beginning after November 15, 2008. For all other items, SFAS No. 157 was effective for us as of
January 1, 2008. We have adopted SFAS No. 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 as of January 1, 2008. The adoption did not have
a material affect on our consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159, which permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159
was effective for us as of January 1, 2008. We did not change the measurement of our assets and liabilities as a result of SFAS

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

No. 159:
therefore, the adoption of SFAS No. 159 had no effect on our consolidated financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007),Business combinations("SFAS
No. 141(R)"). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment for certain
specific acquisition-related items including expensing acquisition-related costs as incurred, valuing non-controlling interests (minority interests) at fair
value at the acquisition date, and expensing restructuring costs associated with an acquired business. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS
No. 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Early adoption is not permitted. Generally, the effect
of SFAS No. 141(R) will depend on future acquisitions, if any.

NOTE 3CASH EQUIVALENTS AND INVESTMENTS

We hold $49.3 million of cash equivalents measured at fair value using quoted prices that represent Level 1 input under SFAS No. 157.

Our
investments consist of auction rate securities. Auction rate securities ("ARS") are variable rate bonds whose interest rate is periodically reset, typically every seven, 28, or
35 days. The underlying securities have contractual maturities from 2034 through 2042. As of December 31, 2008, we held eight auction rate securities with an aggregate par value of
$9.9 million and a fair value $7.4 million. These securities are collateralized by higher education funded student loans and seven of the eight are supported by the federal government as
part of the Federal Family Education Loan Program (FFELP). These securities have continued to pay their scheduled cash interest payments.

The
Dutch auction process that periodically resets the applicable interest rate was intended to provide liquidity to the holder of the auction rate securities by matching buyers and
sellers within a market context enabling the holder to gain immediate liquidity by selling such interests at par or rolling over their investment. If there was an imbalance between buyers and sellers,
the risk of a failed auction existed. All eight auction rate securities that we hold experienced failed auctions in the year ended December 31, 2008. In October 2008, we were notified that the
two brokers who sold ARS to us would purchase the ARS at a price of par plus accrued interest. We accepted the offers from these brokers providing them with rights related to our ARS (the "Rights").
The first portion of the ARS, with a par amount of $4.9 million, was purchased by the broker in January 2009 at par plus accrued interest, and the second portion, with a par amount of
$5.0 million, is expected to be purchased by the broker by July 2012, although the broker may purchase these at any time and we may instruct the broker to purchase these ARS beginning in June
2010.

Our
Rights related to our ARS represent firm commitments in accordance with Statement of Financial Accounting Standards No. 133,Accounting for Derivative
Instruments and Hedging Activities, which defines a firm agreement as an agreement with an unrelated party, binding on both parties and usually legally enforceable. The
enforceability of the Rights results in a put option and is recognized as a freestanding asset separate from the ARS. Upon acceptance of the offers from the brokers, we recorded $2.5 million as
the fair value of the put option asset with a corresponding credit to interest income, net in the accompanying consolidated statements of income. We have elected to measure the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3CASH EQUIVALENTS AND INVESTMENTS (Continued)

put
option at fair value under SFAS No. 159, which permits an entity to elect the fair value option for recognizing financial assets, in order to match the changes in the fair value of the ARS.
We expect that future changes in the fair value of the put option will approximate fair value movements in the related ARS.

Prior
to accepting the offers from the brokers, we recorded our ARS investments as available-for-sale and reported any unrealized gains or temporary unrealized
losses, net of taxes, as a component of accumulated other comprehensive income in the consolidated balance sheets. In connection with the acceptance of the offers from the brokers, we transferred our
ARS from investments available-for-sale to trading securities as allowed in rare circumstances by the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". At the time of transfer, we recognized unrealized losses on our ARS in the amount of
$2.5 million in interest income, net in the accompanying consolidated statements of income for the year ended December 31, 2008.

Our
auction rate securities, recorded at fair value using broker quotes, represent Level 3 inputs under SFAS No. 157. There were no changes in the composition of the
investments included in Level 3 investments during the fourth quarter of 2008. The following table provides a summary of changes in fair value of our Level 3 financial assets during the
year ended December 31, 2008 (amounts in thousands):

Auction Rate SecuritiesShort-Term

Long-TermBalance at December 31, 2007

$


$
Transfers to Level 3, including accrued interest


15,545


Realized interest included in income


(145
)

Net settlements


(5,550
)

Transfer to long-term


(5,000
)

5,000Unrealized loss included in interest income, net


(1,587
)

(886
)Fair market value of ARS


3,263


4,114Fair market value of put options


1,587


876Balance at December 31, 2008

$
4,850

$
4,990


NOTE 4ACCOUNTS RECEIVABLE

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

2008

2007Reserve for returns

$
474

$
317Reserve for chargebacks


439


385Reserve for bad debt


266


244Total

$
1,179

$
946


In
addition to the above reserves, we recorded an allowance for trade discounts of $0.8 million as of December 31, 2008 and $0.5 million as of December 31,
2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5INVENTORY

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

2008

2007Raw Materials

$
453

$
262Work-in-Progress


1,709


6,648Finished Goods


23,666


13,861Total

$
25,828

$
20,771


NOTE 6PROPERTY AND EQUIPMENT

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

2008

2007Computer systems and equipment

$
1,885

$
966Furniture and fixtures


2,777


892Leasehold improvements


22,252


9,868Machinery and equipment


1,544


894Trade show booths


897


801Construction in progress


4,670


74334,025


14,164Less: accumulated depreciation


6,019


2,585Property and equipment, net

$
28,006

$
11,579


Construction
in progress at December 31, 2008 and 2007 represents the capital expenditures associated with the construction in progress of leasehold improvements to be used in our
operations, primarily for new branded retail stores, and capital expenditures associated with the implementation of a new information technology system. When completed, these costs are transferred to
the appropriate property and equipment category and depreciated according to their useful life.

Depreciation
expense, which is included as a component of selling, general and administrative expenses in the accompanying consolidated statements of income, was $3.4 million,
$2.0 million and $0.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

NOTE 7LICENSING REVENUE

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

Each
licensee was also required to make non-refundable advance royalty payments which are to be credited against the first dollars of royalties that become due under the
agreement and the minimum royalty guarantee. These payments are recognized ratably as revenue over the first year (as defined) of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7LICENSING REVENUE (Continued)

the
license agreement as a component of net sales in the accompanying consolidated statements of income. The unearned minimum advance payments are included in other liabilities in the accompanying
consolidated balance sheets and total $0.1 million and $0.3 million at December 31, 2008 and 2007, respectively. We recognized licensing revenue of $1.4 million,
$0.9 million and $0.1 million for the years ended December 31, 2008, 2007 and 2006 as a component of net sales in the accompanying consolidated statements of income.

Future
minimum annual royalty and advertising contribution fees as of December 31, 2008 are summarized as follows (amounts in thousands):

Year ending

Royalties

Advertising
Contribution2009

$
2,484

$
6402010


3,840


9902011


2,175


4502012


855


2013


480


Thereafter





Total minimum royalty and advertising fees

$
9,834

$
2,080


NOTE 8STOCK-BASED COMPENSATION

On June 16, 2005, our Board of Directors approved the True Religion Apparel, Inc. 2005 Stock Incentive Plan (the "2005 Incentive Plan") which amended the 2004 Option Plan
and the 2004 Equity Plan (the "prior plans"). We have granted restricted stock awards and stock options under the 2005 Incentive Plan.

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

December 31,2008

2007

2006Restricted stock grants, net of estimated forfeitures

$
10,297

$
5,412

$
5,681Stock options





319


1,040Stock-based compensation expense, before tax benefits


10,297


5,731


6,721Tax benefits


2,732


1,162


1,882Stock-based compensation expense, net

$
7,565

$
4,569

$
4,839


Restricted Stock Awards

Shares awarded under the 2005 Incentive Plan entitle the shareholder to all the rights of common stock ownership except that the shares
may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period. The restriction period is determined by the Compensation

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NOTE 8STOCK-BASED COMPENSATION (Continued)

Committee
of the Board of Directors and may not exceed 10 years. Restricted stock awards have generally been granted with vesting periods of up to three years. All unvested restricted shares
are forfeited if the recipient of the restricted stock award no longer provides services, as defined, to us.

During
the years ended December 31, 2008 and 2007, we awarded 658,958 and 347,083 shares, respectively, of restricted stock to employees, officers and directors which vest over a
period of zero to three years. The fair value of these restricted shares, based on the price of our common stock at the
date of grant, was $12.0 million and $5.7 million, respectively. Our policy for attributing the value of graded vesting share-based payments is the straight-line single
option approach for grants with only service conditions and the graded attribution (accelerated) method for grants with performance conditions.

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

The
following table summarizes our restricted stock activities for the year ended December 31, 2008:

Shares

Weighted Average
Grant Date Fair
Value

Weighted Average
Remaining
Contractual Life
(Years)

Intrinsic
ValueNon-vested, beginning of year


547,916

$
16.67Granted


658,958

$
18.22Vested


(415,791
)
$
16.86Forfeitures


(39,117
)
$
18.44Non-vested, end of year


751,966

$
17.49


1.0

$
9,184


As
of December 31, 2008, the total unamortized stock-based compensation expense related to the restricted shares was $5.7 million, which is expected to be recognized over a
weighted average period of 1.0 year. As of December 31, 2007, the total unamortized stock-based compensation expense related to the restricted shares was $4.9 million, which was
expected to be recognized over a weighted average period of 1.3 years. As of December 31, 2006, the total unamortized stock-based compensation expense related to the restricted shares
was $5.8 million, which was expected to be recognized over a weighted average period of 2.1 years. The total fair value of restricted stock vested during the year ended
December 31, 2008, 2007 and 2006 was $7.0 million, $5.7 million and $1.4 million, respectively.

Stock Options

Stock options were granted under the prior plans. Option grants were for a term of five years and vested over a period of zero to three
years. We did not grant any new stock options during the years ended December 31, 2008, 2007 and 2006, and all options previously granted have been exercised.

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NOTE 8STOCK-BASED COMPENSATION (Continued)

The
following table summarizes our stock option activities for the year ended December 31, 2008:

Shares

Weighted Average
Exercise Price

Weighted Average
Remaining
Contractual Life
(Years)

Intrinsic
ValueOutstanding, beginning of year


836,665

$
1.83Exercised


(836,665
)
$
1.83Cancelled


Outstanding, end of year




$









In
2008, 2007 and 2006, we recognized zero, $0.3 million and $0.5 million, respectively of compensation expense for stock options that were granted and modified under
APB 25. Such expenses represents the intrinsic value of options modified for which an employee who terminated in 2007 would not have received such options had the vesting terms not been
accelerated.

During
the year ended December 31, 2008, options to acquire 836,665 shares of our common stock were exercised, of which 432,255 of these shares were withheld by us to meet the
related employee minimum statutory income tax withholding requirement of $5.3 million and exercise price of $1.5 million. During the year ended December 31, 2007, options to
acquire 271,667 shares of our common stock were exercised, of which 67,848 of these shares were withheld by us to meet the related employee minimum statutory income tax withholding requirement of
$1.3 million. During the year ended December 31, 2006, options to acquire 233,664 shares of our common stock were exercised. We did not withhold any shares in 2006. The minimum statutory
income tax withholding amounts are recorded as tax withholding payments for stock-based compensation as a financing activity in the accompanying 2008 and 2007 consolidated statements of cash flows.

The
total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $11.6 million, $4.6 million and $4.2 million,
respectively.

We
receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair value of stock at the date of exercise
over the exercise price of the options. We also receive a tax deduction that may be different than our financial statement expense for restricted stock when it vests. SFAS No. 123(R) requires
cash flows resulting from tax benefits in excess of the related stock-based compensation to be classified as part of cash flows from financing activities. In accordance with SFAS No. 123(R), we
reported $0.2 million, $1.3 million and $1.6 million, respectively, of excess tax benefits as financing cash flows for the years ended December 31, 2008, 2007 and 2006. The
total tax benefit realized from stock option exercises for the years ended December 31, 2008, 2007 and 2006 was $0.2 million, $1.3 million and $1.6 million, respectively.
Cash received from stock option exercises was less than $0.1 million, $0.2 million and $0.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.

NOTE 9COMMITMENTS AND CONTINGENCIES

Leases

We lease our headquarters facility and retail store locations under operating lease agreements expiring on various dates through May
2020. Some of these leases require us to make periodic

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NOTE 9COMMITMENTS AND CONTINGENCIES (Continued)

payments
for property taxes, utilities and common area operating expenses. Certain leases include lease incentives, rent abatements and fixed rent escalations, for which the effects are being recorded
and amortized over the initial lease term on a straight-line basis.

Of
our 69 retail leases, which include 67 retail stores in the U.S. and two in Japan, 62 retail store leases require payment of a percent of sales ranging from 4.0% to 7.5% if our net
sales at the retail store exceed a defined threshold. We have options to renew certain leases under various terms as specified within each lease agreement. We have no capitalized lease obligations. As
of December 31, 2008, we had entered into a total of 71 lease agreements. These include leases for the 42 stores that were open in the U.S. as of December 31, 2008, as well as 25 stores
that had not been opened yet, the two Japan retail stores and the offices in Vernon, California and Japan, for an aggregate of approximately 250,000 square feet of space, which consists of 120,000
square feet for our headquarters facility and 130,000 square feet of retail space.

Rent
expense was $9.3 million in 2008, $3.7 million in 2007 and $1.4 million in 2006 which includes contingent rental payments of $0.8 million,
$0.2 million and none in 2008, 2007 and 2006, respectively.

Future
minimum lease payments under these operating leases as of December 31, 2008 are summarized as follows (amounts in thousands):

Year ending2009

$
10,8522010


13,3042011


13,0902012


13,0492013


13,305Thereafter


67,777Total minimum lease payments

$
131,377


From
January 1, 2009 to March 9, 2009, we have not entered into any new retail leases.

NOTE 10LEGAL PROCEEDINGS

In 2005, we terminated a manufacturer's agreement because we believed that the other party had failed to cure defaults under the agreement. The other party disputed our position, and the
dispute was submitted to arbitration. In 2006, the arbitrator ruled in favor of the other party and awarded that party $2.0 million for damages, interest and costs. We recorded the cost of this
award in 2006 in selling, general and administrative expenses in the accompanying consolidated statement of income.

In
2006, we entered into a settlement agreement to resolve a dispute related to the termination of a 2004 services agreement. Under this settlement agreement, we agreed to issue to the
other party 100,000 shares of our common stock in March 2006 and agreed to pay $0.1 million. The cost of this settlement was recognized in the 2005 statement of income.

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

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11INCOME TAXES

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

2008

2007

2006Current income tax:Federal

$
22,475

$
18,591

$
11,757State and local


3,191


5,145


3,165Total current income tax expense


25,666


23,736


14,922Deferred income taxes:Federal


401


(2,219
)

(859
)State and local


(423
)

(417
)

(28
)Foreign


(74
)




Total deferred income tax benefit


(96
)

(2,636
)

(887
)Total income tax expense

$
25,570

$
21,100

$
14,035


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

2008

2007

2006Tax provision at statutory federal rate


35.0
%

35.0
%

35.0
%State income taxes, net of federal benefit


2.5


6.3


5.7Excess compensation under IRC Sec. 162(m)


1.2


3.0


3.0Domestic production deduction


(2.0
)

(1.7
)

(0.9
)Tax exempt interest


(0.3
)

(0.7
)

Interest exposure





0.7


Exclusion for export sales








(1.1
)California tax credit








(1.9
)Other


0.2


0.5


(0.5
)Effective tax rate


36.6
%

43.1
%

39.3
%


Deferred
income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts recorded for income tax purposes. The
major

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11INCOME TAXES (Continued)

components
of deferred tax assets and liabilities are as follows as of December 31 (amounts in thousands):

2008

2007Current deferred tax assets:Compensation

$
3,092

$
1,227Inventory


1,004


606Lease incentives





387Accrued interest


317


333Bad debt


105


100State taxes, net of federal benefits


1,454


1,912Other


526


142Total current deferred tax assets


6,498


4,707Long term deferred tax (liability) asset:Lease incentives


1,109


Fixed assets


(2,211
)

561Total long-term deferred tax (liability) asset


(1,102
)

561Total net deferred tax asset

$
5,396

$
5,268


Our
federal income tax return for 2005 through 2007 remains subject to examination, and our state income tax returns for 2004 through 2007 remain subject to examination. As of
December 31, 2008, our reserves for unrecognized tax benefits under FIN 48 are not material to the consolidated financial statements.

NOTE 12EARNINGS PER SHARE

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

2008

2007

2006Net income

$
44,371

$
27,845

$
21,746Basic shares


23,511


22,964


22,496Dilutive effect of unvested restricted stock awards and stock options


759


985


1,112Diluted shares


24,270


23,949


23,608Earnings per sharebasic

$
1.89

$
1.21

$
0.97Earnings per sharediluted

$
1.83

$
1.16

$
0.92


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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13COMPREHENSIVE INCOME

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

2008

2007

2006Net income

$
44,371

$
27,845

$
21,746Unrealized losses on investmentsUnrealized losses arising during year, net of taxes of $890


(1,583
)




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


1,583





Cumulative translation adjustment


186





Comprehensive income

$
44,557

$
27,845

$
21,746


NOTE 14SEGMENT INFORMATION

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

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14SEGMENT INFORMATION (Continued)

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

2008

2007

2006Net sales:U.S. Wholesale

$
153,235

$
111,390

$
97,219Consumer Direct


75,314


29,268


5,514International


40,044


31,728


37,669Other


1,407


870


87Total net sales

$
270,000

$
173,256

$
140,489Gross profit:U.S. Wholesale

$
78,670

$
60,007

$
51,590Consumer Direct


57,669


22,452


4,626International


19,255


15,498


18,710Other


1,407


870


87Total net sales

$
157,001

$
98,827

$
75,013Operating income:U.S. Wholesale

$
47,452

$
36,405

$
32,437Consumer Direct


27,810


11,875


2,414International


16,761


14,718


18,123Other


(23,147
)

(15,856
)

(17,997
)Total operating income

$
68,876

$
47,142

$
34,977Capital expendituresU.S. Wholesale

$
810

$
3,465

$
3,068Consumer Direct


15,540


5,300


1,400International


378





Other


1,459





Total capital expenditures

$
18,187

$
8,765

$
4,468Total assetsU.S. Wholesale

$
43,030

$
41,248Consumer Direct


36,603


10,167International


8,362


6,519Other


78,457


55,324Total assets

$
166,452

$
113,258


As
of December 31, 2008 and 2007, $164.9 million and $113.3 million, respectively, of our assets were located in the United States. Also, at December 31, 2008
and 2007, we had accounts receivable due from foreign distributors of $7.0 million and $6.4 million, respectively, and trademarks of $0.2 million and $0.2 million,
respectively, associated with foreign countries. The U.S. Wholesale segment had net sales to one customer, exceeding 10% of our net sales, that amounted to $39.2 million in 2008 and
$20.1 million in 2007. Our 2008 net sales categorized by gender were approximately as

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14SEGMENT INFORMATION (Continued)

follows:
women58%; men38%; and kids4%. Our 2007 net sales categorized by gender were approximately as follows: women59%; men37%; and
kids4%.

Retail
occupancy costs included in Consumer Direct expenses amount to $8.8 million, $3.3 million and $0.7 million, for the years ended December 31, 2008, 2007
and 2006, respectively.

NOTE 15QUARTERLY INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly financial information for the years ended December 31, 2008 and 2007 (amounts in thousands, except per share data):

Year ended December 31, 2008

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterNet sales

$
53,432

$
64,158

$
79,420

$
72,990Gross profit

$
30,485

$
36,888

$
46,364

$
43,264Net income

$
6,947

$
9,281

$
15,437

$
12,707Earnings per share:Basic

$
0.30

$
0.39

$
0.65

$
0.54Diluted

$
0.29

$
0.39

$
0.64

$
0.53




Year ended December 31, 2007

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterNet sales

$
36,242

$
35,857

$
48,443

$
52,714Gross profit

$
20,421

$
20,545

$
27,732

$
30,129Net income

$
5,159

$
4,990

$
8,783

$
8,913Earnings per share:Basic

$
0.23

$
0.22

$
0.38

$
0.39Diluted

$
0.22

$
0.21

$
0.37

$
0.37


NOTE 16SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended December 31, 2008, 2007 and 2006, we paid $27.4 million, $23.1 million and $15.1 million in taxes.

As
of December 31, 2008 and 2007, we had recognized the purchases of $2.4 million and $0.7 million of property and equipment that had not yet been paid for. These
purchases are included in "property and equipment, net" and the payment obligation in "accounts payable and accrued expenses" in the accompanying consolidated balance sheets.

During
the year ended December 31, 2006, we issued $2.1 million of common stock in exchange for services.

During
the year ended December 31, 2008, our Chairman and Chief Executive Officer exercised 833,333 options and elected to have 94,019 shares withheld to satisfy the exercise
price of $1.5 million. During the year ended December 31, 2007, there were no stock option exercises where the optionee elected to have shares withheld to satisfy the exercise price.

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Table of Contents

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 17SUBSEQUENT EVENTS

In the first quarter of 2009, the Compensation Committee of our Board of Directors approved restricted stock awards of up to 1,046,800 shares. 46,700 of these restricted shares vested
immediately. Up to 906,800 will vest in 2010 and 2011 if we achieve certain performance targets in 2009. The remaining 93,300 restricted shares will vest in the first quarter of 2010 and 2011.

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Table of Contents

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

Balance at
Beginning of
Period

Charged to
Costs and
Expenses

Deductions

Balance at
End of
Period2008Reserve for returns

$
317

$
298

$
(141
)
$
474Reserve for chargebacks

$
385

$
124

$
(70
)
$
439Reserve for bad debt

$
244

$
577

$
(555
)
$
2662007Reserve for returns

$
69

$
248

$


$
317Reserve for chargebacks

$
735

$


$
(350
)
$
385Reserve for bad debt

$
371

$
228

$
(355
)
$
2442006Reserve for returns

$
78

$


$
(9
)
$
69Reserve for chargebacks

$
470

$
265

$


$
735Reserve for bad debt

$
329

$
329

$
(287
)
$
371


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