e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the quarterly report period ended March 31, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the transition period from o to o

Commission File Number: 000-51483

TRUE RELIGION APPAREL, INC.

(Exact name of registrant specified in its charter)


DELAWARE		98-0352633

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1525 Rio Vista Avenue Los Angeles CA 90023

(Address of Principal Executive Offices)

(323) 266-3072

Issuer’s telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the issuer (1) 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o Accelerated filer o Non-Accelerated filer þ

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
As of May 12, 2006 there were 22,723,532 common shares outstanding.

PART I — FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements

TRUE RELIGION APPAREL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


	March 31,		December 31,
	2006		2005
	(Unaudited)
ASSETS
Current Assets:
Cash	$	9,189,655	$	9,436,632
Marketable securities		12,034,172		5,970,486
Accounts receivable, net of allowances of $500,000 and $478,719, respectively		6,682,732		7,795,524
Due from factor, net of charge backs and other deductions		12,121,581		6,722,496
Vendor receivable		—		310,000
Inventory		11,290,234		10,052,748
Deferred tax asset		1,337,000		1,989,000
Stock subscription receivable		—		68,080
Prepaid expenses and other current assets		179,370		409,985


Total current assets		52,834,744		42,754,951

Property and equipment, net of accumulated depreciation		1,099,853		982,672
Deposits and other assets		190,605		254,068


TOTAL ASSETS	$	54,125,202	$	43,991,691


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	4,570,035	$	6,723,701
Accrued payroll, vacation and bonus expense		335,690		157,220
Accrued customer credits		51,313		91,000
Accrued incentive compensation — officer		308,171		355,321
Income taxes payable		2,802,534		1,237,443


Total current liabilities		8,067,743		8,564,685

Deferred tax liability		153,000		134,000

Total liabilities		8,220,743		8,698,685


Commitments and Contingencies (Note 8)		—		—

Stockholders’ Equity:
Preferred Stock, $.0001 par value, 20,000,000 shares authorized, 0 issued and outstanding, respectively		—		—
Common Stock, $.0001 par value, 80,000,000 shares authorized, 22,693,198 and 22,207,865 issued and outstanding, respectively		22,702		22,217
Additional paid in capital		15,709,011		11,569,224


Retained earnings		30,172,746		23,701,565


Total Stockholders’ Equity		45,904,459		35,293,006

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	54,125,202	$	43,991,691

The accompanying notes are an integral part of these financial statements

TRUE RELIGION APPAREL, INC.
CONSOLIDATED STATEMENTS OF INCOME

Three months ended March 31, 2006 and 2005


	Three months Ended
	March 31,
	2006			2005
	(unaudited)			(unaudited)
Sales	$	35,608,805		$	20,107,953
Cost of Sales		16,832,535			9,884,294


Gross Profit		18,776,270			10,223,659


Costs and Expenses:
Retail		113,375			—
Selling and shipping		3,873,880			1,877,083
General and administrative		4,220,683			1,839,645

		8,207,938			3,716,728


Net Income from Operations		10,568,332			6,506,931


Other (Income)/Expense:
Interest Income (net)		(74,849	)		3,111


Net Income before Provision for Income Taxes		10,643,181			6,503,820


Provision for Income Taxes		4,172,000			2,671,526


Net Income	$	6,471,181		$	3,832,294


Net Income per share — Basic	$	0.29		$	0.18

Net Income per share — Diluted	$	0.28		$	0.17

Weighted average shares outstanding — Basic		22,453,000			21,087,000

Weighted average shares outstanding — Diluted		23,432,000			23,130,000

The accompanying notes are an integral part of these financial statements

TRUE RELIGION APPAREL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)


	Three months ended			Three months ended
	March 31, 2006			March 31, 2005

	(unaudited)			(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,471,181		$	3,832,294
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for bad debt		93,019			—
Depreciation and amortization		78,378			33,521
Amortization of non-cash compensation expense-restricted stock		1,321,500			637,500
Employee option acceleration expense		84,800			—
Employee option expense		130,700			—
Deferred taxes		671,000			(140,341	)
Realized gain on securities		(17,329	)		—
Unrealized gain on marketable securities		9,791			—
Changes in assets and liabilities:
(Increase) Decrease in assets
Accounts Receivable		1,019,773			(1,597,457	)
Due from Factor		(5,399,086	)		(818,631	)
Inventory		(1,237,486	)		(1,342,535	)
Vendor receivable		310,000			—
Stock subscription receivable		42,583			—
Prepaid Expenses		256,113			29,155
Deposits and other assets		61,162			(47,306	)
Increase (Decrease) in liabilities
Accounts payable and accrued expenses		(49,665	)		272,785
Accrued payroll, vacation and bonus expenses		486,641			—
Accrued commissions payable		(355,322	)		51,805
Accrued customer credits		(39,687	)		16,000
Income taxes payable		1,982,090			271,068

Net cash provided by operating activities		5,920,156			1,197,858


CASH FLOWS (USED IN) INVESTMENT ACTIVITIES:
Purchase of equipment and trademarks		(193,258	)		(71,440	)
Purchase of marketable securities		(6,056,147	)		—

Net cash (used in) investing activities		(6,249,405	)		(71,440	)


CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from exercise of stock options		82,272			149,421

Net cash provided by financing activities		82,272			149,421


Net increase (decrease) in cash		(246,977	)		1,275,839
Cash, beginning of period	$	9,436,632		$	2,946,058


Cash, end of period	$	9,189,655		$	4,221,897


Supplemental disclosure of cash flow information:
Interest Paid	$	12,897		$	3,111
Taxes Paid	$	1,518,910		$	2,541,000

The accompanying notes are an integral part of these financial statements

TRUE RELIGION APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2006 (unaudited)

NOTE 1 — BASIS OF PRESENTATION

Description of Our Company

True Religion Apparel, Inc. designs, manufactures, markets and distributes high-fashion denim jeans and other apparel including skirts, shorts jackets, sweat suits, T-shirts and knitwear which are sold throughout the world. During the year ended December 31, 2005 United States sales were approximately 56% and foreign sales were approximately 44%. We consider our activities to be one business segment although we do have one retail store located in Manhattan Beach, California.

Reincorporation and Classes of Capital Stock

On August 18, 2005, our stockholders approved a reincorporation proposal to change the state of incorporation of the Company from Nevada to Delaware. To accomplish the reincorporation, the board unanimously adopted an Agreement and Plan of Merger, or Merger Agreement, which provided for the merger of our Company into our a wholly owned subsidiary, True Religion Apparel (Delaware), Inc., which was formed pursuant to the Delaware General Corporation Law, for this purpose. Our name after the merger remains “True Religion Apparel, Inc.” Our authorized capital stock after merger consists of (i) 80,000,000 shares of common stock, par value $0.0001 per share, and (ii) 20,000,000 shares of preferred stock, par value $0.0001 per share, none of the preferred stock is issued or outstanding. The reincorporation proposal resulted in decreasing the authorized number of shares of capital stock from 1,200,000,000 shares to 100,000,000 shares.

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The unaudited consolidated financial statements for the interim periods ended March 31, 2006 and 2005, include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments, and other accounting entries as described herein. The Consolidated Balance Sheet as of December 31, 2005, has been derived from the Company’s audited financial statements as of that date. However, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Financial results for the Company and apparel companies in general, are seasonal in nature. Historically, the Company’s third and fourth fiscal quarters have been more profitable than its first and second fiscal quarters. Operating results for the three months ended March 31, 2006, are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the True Religion Annual Report on Form 10-KSB for the year ended December 31, 2005.

Comprehensive Income

For the three months ended March 31, 2006 and 2005, comprehensive income consists only of net income and, therefore, a Statement of Other Comprehensive Income has not been included in these consolidated financial statements.

Fair Value of Financial Instruments

For certain of our financial instruments, none of which are held for trading, including accounts receivable, factored receivables and accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities.

Use of Estimates

The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates on an on-going basis, including those related to provisions for doubtful accounts, reserve for chargebacks, life and estimated value on property and equipment, inventories, valuation of stock, valuation of options, analysis of deferred tax asset and liabilities and provision for income taxes, commitments and contingencies and litigation. We base our estimates on

historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Principles of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Guru Denim, Inc. All material inter-company accounts have been eliminated in consolidation.

Revenue Recognition

The Company recognizes revenue upon the shipment of its product to its customers. The Company recognizes revenues in accordance with Staff Accounting Bulleting No. 104, “Revenue Recognition,” when all of the following conditions exist: (a) persuasive evidence of an arrangement exists in the form of an accepted purchase order; (b) delivery has occurred, based on shipping terms, or services have been rendered; (c) the Company’s price to the buyer is fixed or determinable, as documented on the accepted purchase order; and (d) collectibility is reasonably assured.

Orders delivered to the Company by phone, fax, mail or email are considered valid purchase orders and once accepted by the Company are deemed to be the final understanding between the Company and its customer as to the specific nature and terms of the agreed-upon sale transaction. Products are shipped and are considered delivered when (a) for FOB factory orders they leave the Company’s shipping dock or (b) for FOB customer dock orders upon confirmation of delivery.

The Company expenses shipping and handling costs as incurred and includes the expense in the costs of sales. The creditworthiness of customers is generally assessed prior to the Company accepting a customer’s first order. Shipping costs recovered from customers are recorded as freight revenue and included in net sales. At March 31, 2006, the Company recognized an estimated $500,000 reserve for future chargebacks and other deductions from factored receivables and $500,000 of allowances for doubtful accounts on non-factored accounts receivable.

Advertising

The Company expenses advertising costs, consisting primarily of placement in multiple publications, along with design and printing costs of sales materials when incurred. Advertising expense for the three months ended March 31, 2006 and 2005 amounted to $92,713 and $35,822, respectively.

Share-based Compensation

The Company has a single share-based compensation plan covering the majority of its employees. Prior to January 1, 2006, the Company accounted for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees” and related Interpretations. Accordingly, no compensation expense was recognized for fixed option plans because the exercise prices of Employee stock options equaled or exceeded the market prices of the underlying stock on the dates of grant. However, share-based compensation has been included in pro forma disclosures in the financial statement footnotes in prior periods.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, “Share-Based Payment” using the modified prospective transition method. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements.

The following illustrates the effect on net income and earnings per share if the Company had applied the fair value method of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), prior to January 1, 2006:


	Three Months Ended
	March 31, 2005
	(unaudited)

Net income, as reported	$	3,832,294
Less: pro forma stock option compensation expense, net of tax		(193,500	)

Pro forma net income	$	3,638,794

Earnings per share:
Basic — as reported	$	0.18
Basic — pro forma		0.17
Diluted — as reported		0.17
Diluted — pro forma		0.16

Stock Incentive Plan

On June 16, 2005, the Company’s Board of Directors approved the True Religion Apparel, Inc. 2005 Stock Incentive Plan, or 2005 Incentive Plan. The Board of Directors believes that the 2005 Incentive Plan will benefit the Company’s employees and stockholders by providing incentive based compensation and will encourage officers, directors, consultants and other key employees to attain high performance and encourage stock ownership in our company. The Company had two stock-based incentive programs, the 2004 Option Plan, and the 2004 Equity Plan. The 2004 Option Plan and the 2004 Equity Plan are referred to as the “prior plans.” The 2005 Incentive Plan is intended to amend and restate our prior plans and serve as the successor program to the prior plans. An additional 1,211,723 shares was reserved under the 2005 Incentive Plan. The 2005 Stock Incentive Plan and the prior plans do not call for a requisite service period in order to achieve vesting of a portion of the option grants. All option grants have a term of 10 years, with most requiring an additional 2-3 year service period in order to achieve full vesting of the grant.

There were no options granted under the fixed option plans during the three months ended March 31, 2006. There were no option grants during the year 2005. It is the intention of the Company to no longer issue option grants to its employees, officers and directors. In the future, the Company will issue restricted stock awards as incentive compensation to employees, officers and directors.

As of March 31, 2006, 2,688,277 shares of our common stock were available for issuance under the plan, and options to purchase 1,240,665 of these shares were outstanding. Since the inception of the prior plans, 1,233,001 shares of common stock have been issued upon the exercise of options granted under the prior plans at an average exercise price per share of $0.79.

Aggregated information regarding the Company’s fixed stock option plans is summarized below:


				Wtd. average		Wtd. average	Aggregate
	Options			exercise price		contractual term	intrinsic value
Outstanding December 31, 2005		1,358,664		$	1.46
Granted		0			—
Exercised		(83,333	)	$	0.99
Cancelled/Expired		0			—

Outstanding March 31, 2006		1,275,331		$	1.49


			Wtd. average		Wtd. average		Aggregate
	Options		exercise price		contractual term		intrinsic value
Vested during the period of January 1 - March 31, 2006		37,500	$	0.48		.25	$	674,625
Total Exercisable at March 31, 2006		979,000	$	1.74		1.67	$	10,120,801

The fair value of each option grant is estimated on the date of grant using a modified Black-Scholes option pricing model. The following weighted-average assumptions were used for grants made under the fixed option plans for the current and prior year:


	Three months ended			Year ended
	March 31, 2006			December 31, 2005
Expected stock volatility		112	%		93-143	%
Expected life of option (years)		10			2-10
Wtd-average risk-free interest rate		5	%		5	%
Expected dividend yield		0	%		0	%

The Black-Scholes option valuation model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of somewhat subjective assumptions including expected stock price volatility. For 2006 and 2005, the Company has relied on observations of both historical volatility trends as well as implied future volatility observations. For stock option grants, the Company utilized expected volatility based on the expected life of the option. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics, the actual vesting schedule of the grant, and assessed the expected risk tolerance of different option recipients. The risk-free interest rates used, were 5% for first quarter 2006 and 5% for all of 2005.

On January 4, 2006 the Company. granted 255,000 shares to three officer employees of Guru Denim, Inc. as long term incentive compensation. The grant of shares for each employee is structured such that 25% vested on January 4, 2006, 50% vests on January 4, 2007 and 25% vests on January 4, 2008. The FMV of each share was $16.86 on that date and the Company has valued the grant in the amount of $4,299,300.

On February 13, 2006 the Company. granted 20,000 shares to three employees of Guru Denim, Inc. as long term incentive compensation. The grant of shares for each employee is structured such that 25% vested on February 13, 2006, 50% vests on February 13, 2007 and 25% vests on February 13, 2008. The FMV of each share was $19.73 on that date and the Company has valued the grant in the amount of $394,600.

The shares not vested will be escrowed with the Company. In the event that the employee is not employed with the Company at the vesting date, the unvested shares are forfeited. In the event of a sale of the Company or change of control, all of the unvested shares become vested.

The Company consulted SFAS 123 (R) ‘Share Based Payments’ and is using the fair value method to determine the valuation of the restricted share awards and is measuring the awards at the dates of grant, January 4 and February 13, 2006 when the price of a common share was $16.86 and $19.73 respectively. As stated above the only condition attached to the shares is continued service with the Company. Under SFAS 123 (R) the fair value of stock based compensation is recognized over the employee’s service period. In this case the service periods are January 4, 2006-January 4, 2008 and February 13, 2006-February 13, 2008. The Company uses the straight line ensuring that at any point the vested portion is expensed.

Aggregated information regarding the Company’s restricted stock awards is summarized below:


			Wtd. Average		Wtd. average
	Options		Issue price		contractual term		Expense recorded
Issued and Outstanding December 31, 2005		27,000	$	13.50
Granted		302,000		17.00
Forfeited		0		—

Issued and Outstanding March 31, 2006		329,000	$	16.76

Vested during the period of January 1 - March 31, 2006		77,750	$	17.04		1.67	$	1,321,500
Total Unrestricted at March 31, 2006		77,750	$	17.04		1.67	$	1,321,500

As of March 31, 2005 there were no restricted stock awards outstanding.

The unaudited Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 reflects share-based compensation cost of $1,537,000 and $0, respectively. The $1,537,000 was comprised of $130,700 related to stock options, $84,800 related to the acceleration of the vesting provisions of certain options of a former employee and $1,321,500 related to vested restricted stock awards. The distribution of this expense was to general and administrative expense. The total tax benefit recognized from share-based compensation arrangements for the three months ended March 31, 2006 and 2005, was $417,000 and $372,260, respectively. The Company’s earnings before income taxes and net earnings for first quarter 2006 were reduced by $130,700 for expense related to the recognition of stock option expense in conformity with SFAS 123(R) and $84,800 related to the acceleration of the vesting provision of certain stock options which were exercised as of March 31, 2006, compared to the previous accounting method under APB 25. Net income per share, basic and diluted, was not reduced in first quarter 2006 compared to the previous accounting under APB 25. The Company currently estimates that share-based compensation expense will be approximately $3,527,000 for the full year 2006, before income taxes.

NOTE 2 — Due From Factor, Net of Chargebacks and Other Deductions

The Company uses the factor for credit administration and cash flow purposes. Under the factoring agreement, the factor purchases substantially all domestic trade sales invoices and assumes most of the credit risks with respect to such accounts for the factoring charge of 0.70% of the gross invoice amount of each account receivable. At March 31, 2006 items subject to recourse totaled approximately $90,000

The Company can draw advances from the factor based on a pre-determined percentage of accounts receivable sold. The Company is contingently liable to the factor for merchandise disputes and customer claims on receivables sold to the factor. The factor holds as security substantially all assets of the Company. The Company has extended the duration of its factoring agreement until December 31, 2006.

Due from factor, net of advances, as presented in the balance sheet at March 31, 2006 and December 31, 2005 is summarized below:


	March 31, 2006
	(unaudited)			December 31, 2005
Outstanding factored receivables	$	12,200,841		$	6,397,179
Matured Funds		—			20,666
Assignments in transit		420,740			989,953

		12,621,581			7,407,798
Funds advanced		—			(215,302	)
Reserves for chargebacks and other deductions		(500,000	)		(470,000	)

Due from factor, net of chargebacks, other deductions and advances	$	12,121,581		$	6,722,496

NOTE 3 — Inventory

Inventory at March 31, 2006 consisted of the following:


	March 31, 2006
	(unaudited)		December 31, 2005
Finished Goods	$	7,657,954	$	7,630,869
Work-in-Progress		3,632,280		2,421,879

	$	11,290,234	$	10,052,748

NOTE 4 — Property and Equipment

A summary is as follows:


	March 31, 2006
	(unaudited)		December 31, 2005
Computers and other equipment	$	521,080	$	464,029
Furniture and Fixtures		64,293		64,293
Leasehold Improvements		436,540		422,659
Trade Show booths		372,553		250,228

Total Property and equipment		1,394,466		1,201,209
Less: Accumulated depreciation		294,613		218,537

	$	1,099,853	$	982,672

Depreciation expense for the three months ended March 31, 2006 and 2005 were $78,378 and $33,521, respectively.

NOTE 5 — Accounts Payable — Major Vendors

Purchases from two suppliers amounted to $15,000,000 for the three months ended March 31, 2006. Included in accounts payable and accrued expenses is approximately $2,009,000 due to these suppliers.

NOTE 6 — Accrued Incentive Compensation

As part of their employment agreements, the Chief Executive Officer, Chief Financial Officer and Vice President — Women’s Design, are eligible to earn incentive compensation.

Pursuant to the CEO’s Agreement, Mr. Lubell will be eligible to earn an annual performance bonus in 2006 based on the Company’s earnings before interest and taxes and is calculated as net income plus interest expense plus tax expense (“EBIT”). If EBIT is between $36.8 million and $46 million, Mr. Lubell will receive an amount interpolated between 2% and 4% of EBIT. If EBIT is more than $46 million, Mr. Lubell will receive an amount equal to 4% of EBIT. If EBIT is less than $36.8 million, no bonus will be paid. The maximum amount of bonus payable will be $5 million. The amount of bonus and target performance goals in future years shall be determined by the Company’s compensation committee.

Pursuant to the CFO’s Agreement, Mr. Lesser will be eligible to earn an annual performance bonus in 2006 based on EBIT. If EBIT is between $36.8 million and $69 million, Mr. Lesser will receive an amount interpolated between 22.5% and 135% of his base salary. If EBIT is more than $69 million, Mr. Lesser will receive a maximum bonus of $337,500. If EBIT is less than $36.8 million, no bonus will be paid. The amount of bonus and target performance goals in future years will be determined by the Company’s compensation committee.

Pursuant to the VP — Women’s Design’s Agreement, Ms. Lubell will be eligible to earn an annual performance bonus in 2006 based on EBIT. If EBIT is between $36.8 million and $69 million, Ms. Lubell will receive an amount interpolated between 27.5% and 165% of her base salary. If EBIT is more than $69 million, Ms. Lubell will receive a maximum bonus of $495,000. If EBIT is less than $36.8 million, no bonus will be paid. The amount of bonus and target performance goals in future years will be determined by the Company’s compensation committee.

For the three months ended March 31, 2006 accrued incentive compensation totaled $308,171. No bonuses are paid prior to the final determination of the Company’s EBIT upon completion of the annual audit in 2007.

NOTE 7 — Common Stock

During the three months ended March 31, 2006, the Company issued approximately 83,333 shares of its common stock pursuant to the grant of options to purchase common stock to officers and employees at an average exercise price of $0.99 for a total cash consideration of approximately $82,000.

The Company received a tax benefit in the amount of $417,000 which has been credited to Additional Paid in Capital arising from the exercise by employees of 51,000 stock options during the three months ending March 31, 2006. The effect of these employee exercises creates taxable income for these employees and gives rise to a tax deduction for the Company and generates a tax saving to the Company, at the Company’s combined tax rate of approximately 43%, or approximately $417,000.

On January 4, 2006 True Religion Apparel, Inc. granted 255,000 shares to three officer employees of Guru Denim, Inc. as long-term incentive compensation. The grant of shares for each employee is structured such that 25% vested on January 4, 2006, 50% on January 4, 2007 and 25% on January 4, 2008. The fair market value of each share was $16.86 on January 4, 2006 and the Company has valued the grant in the amount of $4,299,300. The shares not vested will be escrowed with the Company. In the event that the employee or officer is not employed with the Company at the vesting date, the unvested shares are forfeited. In the event of a sale of the Company or change of control, all of the unvested shares become vested.

On February 13, 2006 True Religion Apparel, Inc. granted 20,000 shares to three employees of Guru Denim, Inc. as long-term incentive compensation. The grant of shares for each employee is structured such that 25% vests on February 13, 2006, 50% on February 13, 2007 and 25% on February 13, 2008. The fair market value of each share was $19.73 on that date and the Company has valued the grant in the amount of $394,600. The shares not vested will be escrowed with the Company. In the event that the employee or officer is not employed with the Company at the vesting date, the unvested shares are forfeited. In the event of a sale of the Company or change of control, all of the unvested shares become vested.

In accordance with SFAS 123 (R) “Share Based Payment” the Company will use the fair value method and measure the awards at the dates of grant, January 4 and February 13, 2006 when the price of a common share was $16.86 and $19.73 respectively. As stated above, the only condition attached to the shares is continued service with the Company. Under FAS 123 (R) the fair value of stock based compensation is recognized over the employee’s service period. In this case the service periods are estimated to be January 4, 2006 to January 4, 2008 and February 13, 2006 to February 13, 2008.

SFAS 123 (R) provides two methods for expensing awards with graded-vesting (multiple vesting periods) features and service conditions: the straight line method, expensed evenly over the number of periods or; the graded vesting method which is the approach in FASB Interpretation No. 28 ‘Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans’ “(FIN 28)”. Under graded vesting: in year one, the Company records 100% of the first tranche vested in year one; plus 50% of year two; 33% of year 3, etc. For awards with only service conditions and a graded vesting schedule, a Company can choose either method; however, in all cases, the amount of compensation cost that a Company recognizes at any point should be at least equal to the value of the award’s vested portion at that date. The Company chose to use the straight line ensuring that at each quarterly period the vested portion is expensed.

On January 4, 2006 the Company granted 27,000 shares to four independent directors and the Company Secretary of True Religion Inc. for future services from January 1, 2006 to December 31, 2007. The grant of shares for each director and the secretary is structured such that 50% vests on January 4, 2007 and 50% on January 4, 2008. The fair market value of each share was $16.86 on that date and the Company has valued the grant in the amount of $455,220. The Company will use the straight line method to account for the director’s compensation and record $56,900 in each of the eight quarters in the fiscal years ending 2006 and 2007. The shares not vested will be escrowed with the Company. In the event that the employee or officer is not employed with the Company at the vesting date, the unvested shares are forfeited. In the event of a sale of the Company or change of control, all of the unvested shares become vested.

On March 21, 2006 the Company issued 100,000 shares of the Company’s common stock to Joseph C. Canouse (“Canouse”) pursuant to the terms of a settlement agreement. In connection with the issuance of the Shares, on May 1, 2006 the Company filed a Form S-3 registration statement with the Securities and Exchange Commission for the registration of the resale of the Shares. The Company had previously taken a one-time, non-cash charge of $2.1 million in the fiscal fourth quarter of 2005 related to this issuance which represents the fair market value of the shares issued on the date of the settlement.

NOTE 8 — Commitments and Contingencies

In July 2004, the Company entered into a lease for approximately 20,000 square feet of combined office and warehouse space located at 1525 Rio Vista Avenue, Los Angeles, California, at a monthly rental rate of $15,500. The lease commenced July 1, 2004 and expires July 31, 2007. Guru Denim, Inc. conducts most of its executive and administrative functions in, and ships men’s True Religion Brand Jeans to its customers from, this facility.

On April 11, 2005 the Company entered into a Lease Agreement dated April 11, 2005 with Metlox LLC whereby it will lease approximately 888 square feet of retail space at the Metlox Center in Manhattan Beach, California for a five year term subject to an early cancellation option in the 36th month upon payment of an early cancellation fee equal to $10,231. The Company agreed to pay a base rent of approximately $4,800 per month, subject to adjustment during the term, plus the pro-rata share of certain pass-through items including taxes on common areas, insurance premiums and common area maintenance costs. The Company uses these leased premises as a retail store for the sale of its products. The Company took possession of the retail space on August 22, 2005.

On July 5, 2005, the Company entered into a lease for approximately 8,900 square feet of combined office and warehouse space located at 1557 Rio Vista Avenue, Los Angeles, California, at a monthly rental rate of $7,120. The lease commenced July 1, 2005 and expires July 31, 2007. Guru Denim, Inc. will conduct some of its executive and administrative functions in, and warehouse and ship women’s True Religion Brand Jeans from this facility.

The table below sets forth our lease obligations through 2010 (unaudited);


Year ending December 31,
2006	$	242,000
2007		228,000
2008		100,000
2009		51,000
2010		39,000

	$	660,000

On March 7, 2005 the Company entered into a web services site agreement with Onestop Internet, Inc. of Los Angeles, California to build, test, administer and maintain an E-commerce website to sell True Religion Brand Jeans on the Internet. Under the Agreement, Onestop has agreed to warehouse product inventory and be responsible for marketing, fulfillment and collection of funds. The Company will receive 75% of gross sales from sales of True Religion Brand Jeans, less credit card processing fees. During the three months ended March 31, 2006 and 2005 net proceeds from this distributor amounted to $236,494 and $0, respectively.

NOTE 9 — Concentrations of Certain Risks

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash, marketable securities and accounts receivable. The Company extends credit to customers located throughout North America, whose sales invoices have not been sold to the Company’s factor, based upon an evaluation of the customer’s financial condition and credit history (Note 2). The majority of the Company’s customers located outside of North America pay on a cash in advance basis. With more than 600 domestic retail and distribution account, we consider credit risk to be limited due to the Company’s large and diversified international and domestic customer base. For the three months ended March 31, 2006 the Company’s five largest customers comprised 37% of net sales.

Revenue and accounts receivable from significant customers, who in any one or more of the years shown accounted for 10% or more of the Company’s revenue for the three months ended March 31 were as follows:


	2005						2006
	% of			% of A/R,			% of			% of A/R,
	Revenue			Net			Revenue			Net
COMPANY A		30	%		76	%		10	%		70	%
COMPANY B		—			—			11			9

For the three months ended March 31, 2006, the Company’s credit losses for the periods presented have not exceeded management’s estimates. The Company’s Japanese distributor has accounted for approximately 10% of the Company’s net sales. The Company’s Japanese distributor provides checks for all shipments post dated for 14 days from the date of shipment. At March 31, 2006 this distributor owed approximately $5,100,000, representing approximately 75 days sales to this distributor, of which $1,600,000 has been collected through May 10, 2006. As of the date of this filing, the Company is in possession of a total of $4,132,000 in post dated checks from this distributor.

NOTE 10 — Legal Proceedings

Joseph C Canouse

On March 21, 2006, True Religion Apparel, Inc. (the “Company”) and Joseph C. Canouse (“Canouse”) entered into a Settlement Agreement and General Release that resolved all legal issues between Canouse and the Company related to a services agreement dated February 26, 2004. Under the settlement agreement, the Company agreed to pay Canouse $100,000 in cash and to issue to him 100,000 shares of the Company’s common stock (the “Shares”). Canouse agreed to dismiss his lawsuit against the Company and to release the Company from all claims arising out of or related to the circumstances that gave rise to the lawsuit. Canouse further agreed to be subject to a five-year standstill period during which he will not acquire or cause to be acquired any assets, businesses, securities, or rights of the Company, or options to acquire such rights, or take certain stockholder actions. In connection with the issuance of the Shares, on May 1, 2006 the Company filed a Form S-3 registration statement with the Securities and Exchange Commission for the registration of the resale of the Shares. The Company had previously taken a one-time, non-cash charge of $2.1 million in the fiscal fourth quarter of 2005 and had accrued $100,000 for the proposed legal settlement.

Indigo Group USA, Inc.

On April 28, 2005 Guru Denim, Inc., the wholly owned subsidiary of True Religion Apparel, Inc., terminated its Manufacturer’s Agreement dated September 15, 2004 with The Indigo Group USA, Inc. based upon The Indigo Group USA, Inc. failure to cure multiple defaults under the Manufacturer’s Agreement. The Indigo Group USA Inc. believes that it is not in breach of the Manufacturer’s Agreement and on April 29, 2005 Guru Denim, Inc. received a letter requesting the dispute go to arbitration, a provision under paragraph 11 of the agreement. The Indigo Group USA, Inc. contends that it lost $1.6 million in profits on 156,000 pairs of jeans not manufactured under the Agreement. Guru Denim, Inc. believes that The Indigo Group USA, Inc. failed to perform under the Agreement. Evidentiary proceedings in the matter took place in March 2006 and have been concluded. The Company has submitted a brief summarizing its defense of the matter to the arbitrator. The Company denies any liability in the matter and will continue to defend itself vigorously.

NOTE 11 — Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share (in millions except per share amounts):


	March 31, 2006
	(unaudited)		December 31, 2005
NUMERATOR:
Net income available to common stockholders	$	6,471,181	$	3,832,254

DENOMINATOR:
Weighted-average shares outstanding, basic		22,453,000		21,087,000
Dilutive effect of Employee stock options		979,000		2,043,000

Adjusted weighted-average shares outstanding, diluted		23,432,000		23,130,000

NET INCOME PER SHARE:
Basic	$	.29	$	.18
Diluted	$	.28	$	.17

NOTE 12 — Segment Information

The Company’s business units have been separated into two reportable segments, Wholesale and Retail Operations, as set forth in SFAS 131. True Religion Apparel, Inc. operates both its wholesale and retail business through its wholly owned subsidiary company, Guru Denim Inc. and oversees the operations of each business unit.

The accounting policies of each segment are the same as those described in the summary of significant accounting policies (Note 1). The wholesale division sells denim jeans and other apparel products bearing the True Religion Brand Jeans brand name at its normal list wholesale price and eliminates the internal sales. The retail division sells similar products at the Company’s wholly owned retail store in Manhattan Beach. California. There was only one business segment for the three months ended March 31, 2005. The Company evaluates the performance of each operating segment based on net income from operations, before income taxes, accounting changes, non-recurring items and interest income and expense.

Summarized financial information concerning the Company’s reportable segments is shown in the following table for the three months ended March 31, 2006 (unaudited):


	Wholesale		Retail Store		Eliminations*			Consolidated
Net Sales	$	35,506,427	$	437,748	$	(335,370	)	$	35,608,805
Gross Profit	$	18,801,190	$	225,960	$	(250,880	)	$	18,776,270
Net Income from Operations	$	6,358,596	$	112,585	$	—		$	6,471,181
Total Assets	$	53,265,901	$	859,301				$	54,125,202


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

Geographical information follows:


	Three months ended March 31,
	2006		2005
	(unaudited)		(unaudited)
Sales to external customers:
North America	$	27,122,567	$	11,595,648
Asia		4,487,792		6,766,094
Europe		3,623,128		1,628,846
All other geographic regions		375,318		117,365

Total sales to external customers	$	35,608,805	$	20,107,953

NOTE 13 — Subsequent Events

On April 12, 2006, the Company entered into an Employment Agreement effective as of April 24, 2006 with Michael Buckley (the “Agreement”), pursuant to which Mr. Buckley will serve as the Company’s President. A form of the Employment Agreement was filed on a Form 8-K Current Report on April 14, 2006.

Subsequent to the three months ended March 31, 2006, the Company issued 12,500 shares of its common stock pursuant to the exercise of options to purchase common stock to an officer of the Company at an average exercise price of $0.48 for a total cash consideration of approximately $6,000.

Lastly, on May 11, 2006, the Company issued 17,834 shares of its common stock pursuant to the exercise of options to purchase common stock to officers and employees of the Company at an average exercise price of $0.57 for a total cash consideration of approximately $10,000.

ITEM 2. Management’s Discussion and Analysis of Financial Condition or Plan of Operation.

THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION WHICH OUR MANAGEMENT BELIEVES IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. THIS DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND THE NOTES TO FINANCIAL STATEMENTS WHICH ARE INCLUDED IN THIS REPORT, AND WITH OUR COMPANY’S ANNUAL REPORT ON FORM 10-KSB FILED ON MARCH 31, 2006.

Overview

Through our wholly-owned subsidiary Guru Denim, Inc., we design, develop, manufacture, market, distribute and sell high fashion jeans and other apparel. We currently manufacture, market, distribute and sell apparel under the brand name “True Religion Brand Jeans” including jeans, skirts, denim jackets and tops in the United States, Canada, the United Kingdom, Europe, Mexico and Japan.

As disclosed in Note 1 in the Notes to the Unaudited Consolidated Financial Statements we implemented the Financial Accounting Standards Board’s Statement of Financial Accounting Standard No. 123R, “Share-Based Payments.” In the three months ended March 31, 2006, the total share-based compensation expense was $1,537,000, of which $130,700 was related to stock options, $84,800 related to the acceleration of the vesting provisions of certain options of a former employee and $1,321,500 related to restricted stock awards. The distribution of this expense was to general and administrative expense.

Financial Condition, Liquidity and Capital Resources

At March 31, 2006, we had a working capital surplus of $44,767,001.

At March 31, 2006, our total assets consisted of $54,125,202 of which $21,223,827 was cash and marketable securities.

At March 31, 2006, our total liabilities were $8,220,743.

Assets. Our current assets totaled $52,834,744 at March 31, 2006. Total assets were $54,125,202 at March 31, 2006. The increase in current assets is primarily due to the growth in factored receivables, accounts receivable, inventory and the generation of cash. At March 31, 2006, our assets consisted primarily; cash and marketable securities totaling $21,223,827, inventory of $11,290,234, net accounts receivable totaling $6,682,732, and amounts due from our factor of $12,121,581. Elevated first quarter inventory levels were a result of ongoing inventory build-up to support strong product demand in future quarters. We are comfortable with an inventory level range of

between $10 and $12 million as sales continue to increase. We had a sales order backlog of approximately $35 million at April 30, 2006; we believe that most of this backlog should ship in the second and third quarters of 2006.

Liabilities and Working Capital. Our current liabilities totaled $8,067,743 at March 31, 2006. This resulted in working capital of $44,767,001 at March 31, 2006. We had no long term debt. Liabilities primarily consist of; accounts payable and accrued expenses, income taxes payable and accrued compensation expenses. Accounts payable and accrued expenses were $4,570,035, down from $6,723,701 as of December 31, 2005, the decline is primarily attributable to the resolution of the Canouse litigation, which had previously been accrued, and the release of a $2.1 million related liability recorded in 2005.

Cash Requirements and Additional Funding. We generated financial growth primarily through cash flows provided by operating activities. Cash flows provided by operating activities for the three months ended March 31, 2006 generated $5,920,156 and $1,197,658 for the three months ended March 31, 2005. Cash and cash equivalents jumped by $4,967,958 (118%) from $4,221,697 at March 31, 2005 to $9,189,655 at March 31, 2006. The dramatic jump in cash, net of purchases of over $6,000,000 in marketable securities, is a reflection of the strong growth of the brand coupled with an increase in gross margins. Cash and cash equivalents decreased by $246,977 from $9,436,632 at December 31, 2005 to $9,189,655 at March 31, 2006. The decrease in cash is attributable solely to the ongoing transfer of surplus cash into marketable securities in order to realize a greater return on capital. We continue to generate cash from operating activities and we plan to be able to finance growth from operations. We plan to finance our capital expenditures, consisting of computers, furniture and equipment from operations. Cash generated by ongoing operations, plus cash and marketable securities as of March 31, 2006 is more than sufficient to sustain us for the coming twelve months.

Results of Operations

The Three Months Ended March 31, 2006 Compared to March 31, 2005

We recorded sales, net of intercompany eliminations; of $35,608,805 for the three months ended March 31, 2006 compared to $20,107,953 for the three months ended March 31, 2005, an increase of $15,500,852 (77%). All of these sales were of our True Religion Brand apparel. Gross profit for the three months ended March 31, 2006 was $18,776,270, or 53% compared to $10,223,659 or 51% for the same period in 2005. The gross margin percentage has stabilized within our target range of 50-52%. As we continue to roll-out retail stores we anticipate our gross margin to increase. We currently have two main contract manufacturers in Los Angeles plus a third contract manufacturer in Mexico and we believe we can meet our current production needs. The increase in sales and gross profit is due primarily to the growth of our brand and our markets. In the three months ended March 31, 2006, much of our sales were made in the United States, Japan, Canada, Europe and the United Kingdom. During the three months ended March 31, 2006 sales to department stores, including Bloomingdale’s, Nieman Marcus, Nordstrom and Saks Fifth Avenue, equaled 33% of sales made in the United States. Domestic sales continue to accelerate and major department stores expand their premium denim lines and True Religion captures an increasing percentage of that business. For the coming twelve month period, we anticipate domestic sales to continue to grow as additional market penetration is achieved in the South and Midwest sections of North America.

Retail expense increased from $0 to $113,375 representing the staffing and ongoing development of the True Religion retail model. Retail expenses primarily consist of: payroll expense, rent, depreciation/amortization and credit card fees. It is anticipated that as more retail outlets are opened, that retail expenses will continue to increase.

Selling and shipping expenses totaled $3,873,880 for the three months ending March 31, 2006, compared to $1,877,083 for the three months ended March 31, 2005, an increase of $1,996,797 (106%). The increase is attributable to the growth in sales volume (77%), coupled with the ongoing hiring of additional design, customer service and marketing personnel to provide a stronger management infrastructure to support continued high growth in the future. Components of our selling and shipping expenses include; sales commissions $2,196,037 during the three months ended March 31, 2006, versus $949,705 during the three months ended March 31, 2005 Salaries for design personnel, patternmakers, sample sewers, production staff, quality control staff and warehouse staff totaled $1,298,382 for the three months ended March 31, 2006, as opposed to $296,939 for the three months ended March 31, 2005 reflecting the ongoing addition of design professionals to grow the offerings of the True Religion apparel line.

General and administrative expenses for the three months ending March 31, 2006 totaled $4,220,683 as compared to $1,839,645 for the three months ended March 31, 2005 an increase of $2,341,038 (127%). The increase is partially comprised of legal fees associated with the case involving Mr. Canouse and the Indigo Group USA, as well as those expenses associated with ongoing compliance to the Sarbanes-Oxley Act of 2002. Recognition of stock compensation expense in associated with SFAS 123(R), including restricted stock compensation expense, increased by more than $1,400,000 compared with the same period in 2005. Salary to our executive officers, including unpaid bonus accruals, increased to approximately $683,000 during the three months ended March 31, 2006 from $400,000 for the three months ended March 31, 2005. The increase was primarily attributable to an increase in the salary levels of our officers partially offset by a modification of the bonus plans for those same individuals which resulted in a reduction in the calculation of bonus compensation.

The net income before income taxes for the three months ended March 31, 2006 increased to $10,643,181 from $6,503,820 for the three months ended March 31, 2005, an increase of $4,179,361 (64%). The increase in net income is due primarily to the large increase in sales of True Religion Brand Jeans, in North America at major department stores. Net income after provision for income taxes for the three months ended March 31, 2006 and 2005 was $6,471,181 and $3,832,294, respectively.

Off Balance-Sheet Arrangements

On December 20, 2004, Guru Denim Inc. entered into a factoring agreement with Merchant Factors Corp., a reseller of the factor services of the CIT Group, effective January 3, 2005. The factoring agreement with Merchant Factors Corp. is for a one year term and will automatically renew after the first year on a month-to-month basis unless terminated by Guru Denim on 60 days notice, which Guru Denim may give only after the end of the first year. On July 1, 2005 the Company agreed to extend the duration of its factor agreement with Merchant Factors Corp. to December 31, 2006 and Merchant Factors Corp. agreed to a change in the fees. Under the revised factoring agreement, the factor purchases substantially all domestic trade sales invoices and assumes most of the credit risks with respect to such accounts for the factoring charge of 0.70% (down from 0.75%) of the gross invoice amount of each account receivable and agreed to advance funds at a rate of prime plus 0.5% (down from 1.0%).

Merchant Factors Corp. has agreed to advance to Guru Denim up to 85% of those of Guru Denim’s net receivables as are pre-approved by them and Guru Denim has agreed:

•		to submit all sales to Merchant Factors Corp. for approval prior to shipment to the customer.

•		to assign to Merchant Factors Corp. all of its receivables that are acceptable to them, with full recourse to Guru Denim in the event of non-payment by its customer for any reason except a financial inability to pay (this exception only applies to customers whose credit has been approved by the factor in advance).

In addition, Guru Denim granted to Merchant Factors Corp. a security interest on all of its current and future receivables in order to secure payment to the factor of any amounts due from Guru Denim to them.

Our Plan for Operations in 2006

We have begun to demonstrate our leadership position to the market, both in the United States and overseas. The premium denim market remains highly competitive; however, we are beginning to increase our market share. Certain of our competitors have exited the higher end of the premium market and have announced lower prices and are targeting the low $100 range. In contrast, we have held our prices in the $170-$200+ range with no wholesale price erosion. Our brand continues to have strong broad-based appeal and has captured increased shelf space and square footage in major department and specialty stores.

We plan to continue selling denim and non-denim products under the label True Religion Brand Jeans. We plan to continue to broaden our product line during 2006 introducing a broader selection of skirts, t-shirts, knits and other sportswear, cotton twill pants for Summer. Later in the year, we will be showing a collection focusing on a down-filled parka and vests with corduroy-contrast yokes. We forecast 25% non-denim product sales for full year 2006 and achieved 22% for the three months ended March 31, 2006. For the full year 2006, we forecast that U.S. sales will account for approximately 60% of total sales, and international sales for approximately 40%, with our gross profit margin remaining in the 50-52% range.

Men’s sales for the quarter ending March 31, 2006 rose to 28.5% of total sales versus 26.5% in the first quarter of last year and we believe that what began as a women’s business featuring low-rise, well fitting jeans will continue to attract an increasing number of fashionable men.

During 2006, we are focusing on cleaner washes and narrow, skinny-leg styles denim bottoms, while continuing to develop exciting embroidery, patches and needlework on our existing Billy, Joey and Bobby products. We see the skinny-leg trend strong for the year 2006 but forecast a shift back to flairs and bell-bottoms in late 2007. We will evaluate licensing arrangements for product categories we are unable to produce ourselves and hope to finalize such arrangements by year-end.

As our business develops, we are building the technological and personnel infrastructure to be prepared for further fast growth. Most significantly this past quarter, we hired Michael Buckley, as President. Michael comes to us by way of Diesel^® and Ben Sherman^® and will help us achieve our mission of becoming a vertically-integrated global lifestyle brand.

In December 2005, we opened our first company-owned retail store selling the full line of True Religion Brand Jeans products in Manhattan Beach, California. The store has exceeded performance expectations in 2006. We are in active negotiations with other property owners and plan to open 3 or more stores during fiscal 2006. Using this direct sales channel boosts the gross margin to the range of 75-78% and the operating margin jumps from 26% to an estimated 45%.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.

Inventory is valued at the lower of cost or market, cost being determined by the first-in, first-out method. We continually evaluate our inventories by assessing slow moving current product as well as prior seasons’ inventory. Market value of non-current inventory is estimated based on historical sales trends for this category of inventory of our Company’s individual product lines, the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this type of inventory.

Revenue from product sales is recognized as title passes to the customer upon shipment. Sales returns have not been significant; however we have do accrue for estimated sales returns and other allowances in the period in which the related revenue is recognized.

Forward Looking Statements

Some statements in this Form 10-Q (or otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission, news releases, conferences, World Wide Web postings or otherwise) which are not historical facts may be “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about True Religion’s estimates, expectations, beliefs, intentions, or strategies for the future, and the assumptions underlying these forward-looking statements. True Religion uses the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar

expressions to identify these forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Factors that could cause these differences include, but are not limited to those set forth under Item 1. — Risk Factors in our Annual Report on Form 10-KSB for the year ended December 31, 2005. Caution should be taken not to place undue reliance on the Company’s forward-looking statements, which represent the Company’s views only as of the date this report is filed. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

RISK FACTORS

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

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

We are in the early stages of the growth of our Company, which is involved primarily in the production and processing of high-fashion denim apparel. As a result, we do not have a meaningful historical record of sales and revenues nor an established business track record.

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

	•		continue to successfully develop and operate production facilities or maintain existing or new agreements with third parties to perform these functions on our behalf; and

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

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

Our management believes that we can sustain our operations for the future from existing working capital and from operating revenue. The future of our company will depend upon our ability to continue to obtain adequate orders for our products, prompt payment for our products and, as and when needed, sufficient financing and continuing support from our factor, and to continue to maintain profitable operations. To the extent that we cannot achieve our plans and generate revenues which exceed expenses on a consistent basis and in a timely manner, our business, results of operations, financial condition and prospects could be materially adversely affected.

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

The novelty and the design of our True Religion Brand Jeans apparel is important to our success and competitive position, and the inability to continue to develop and offer such unique products to our customers could harm our business. We cannot be certain that high-fashion denim apparel will continue to be fashionable. Should the trend steer away from high-fashion denim apparel, sales could decrease and our business could be adversely affected. In addition, there are no assurances that our future designs will be successful, and any unsuccessful designs 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 strength of our brand. 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 of denim that are no longer popular. In the past, several denim companies including ours have experienced periods of rapid growth in revenues and earnings followed by periods of declining sales and losses. Our business may be similarly affected in the future.

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

We limit our marketing efforts to participation at trade shows where we showcase our products. We depend substantially upon third parties for several critical elements of our business including, among other things, sales and distribution activities. There can be no assurance that we or these third parties will be able to establish or maintain adequate sales and distribution capabilities, that we will be able to enter into agreements or relationships with third parties in additional territories on financially acceptable terms or that any third parties with whom we enter into such arrangements will be successful in selling or distributing our products. If they are not, our business could be negatively impacted. Also, if we are unable to maintain our relationships with these sales agents and distributors or if these sales agents and distributors begin selling our competitors products, then our ability to generate revenues through the sale of our products could be negatively impacted.

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

Our business depends on the general economic environment and levels of consumer spending that affect not only the ultimate consumer, but also retailers, our primary direct customers. Purchases of high-fashion denim tend to decline in periods of recession or uncertainty regarding future economic prospects, when consumer spending, particularly on discretionary items, declines. 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 or improve 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 economy or the occurrence of events that adversely affect the economy in general. Furthermore, in anticipation of continued increases in net sales, we have significantly expanded our infrastructure and workforce to achieve economies of scale. 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 quarterly revenues and operating results fluctuate as a result of a variety of factors, including seasonal fluctuations in demand for high-fashion denim, delivery date delays and potential fluctuations in our annualized tax rate, which may result in volatility of our stock price.

Our quarterly revenues 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 denim products have historically been somewhat seasonal in nature with the strongest sales generally occurring in the second and third quarters. Delays in scheduling or pickup of purchased products by our domestic customers could negatively impact our net sales and results of operations for any given quarter. Also, our annualized tax rate is based on projections of our domestic and international operating results for the year, which we review and revise as necessary at the end of each quarter, and it is highly sensitive to fluctuations in projected international earnings. 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 revenues or net income from levels expected by securities analysts and investors could cause a decrease in the trading price of our common stock.

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 denim industry from other established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the denim industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, new companies may enter the markets in which we compete, further increasing competition in the denim industry.

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.

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.

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

If current economic conditions do not improve, our business, financial condition, and results of operations could be adversely affected. Consumers are generally more willing to make discretionary purchases, including purchases of fashion products and high-end home products, during periods in which favorable economic conditions prevail.

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

Although we design and market our products, we outsource manufacturing to third party manufacturers. Outsourcing the manufacturing component of our business is common in the apparel industry, as we compete with other companies for the production capacity of our manufacturers. Because we are a small enterprise and many of the companies with which we compete have greater financial and other resources than we have, they may have an advantage in the competition for production capacity. We currently outsource our production to only three manufacturers. 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 be assured that this capacity will be available to us, or that if available it will be available on terms that are acceptable to us. If we cannot produce a sufficient quantity of our products to meet demand or delivery schedules, our customers might reduce demand, reduce the purchase price they are willing to pay for our products or replace our product with the product of a competitor, any of which could have a material adverse effect on our financial condition and operations.

Our stock price is highly volatile.

The trading price of our common stock has fluctuated significantly since our inception, and is likely to remain volatile in the future. For example, since June 23, 2003, our common stock has closed as low as $0.66 and as high as $24.36 per share. The trading price of our common stock could be subject to wide fluctuations in response to many events or factors, including the following:

	•		quarterly variations in our operating results;

	•		changes in financial estimates by securities analysts;

	•		changes in market valuations or financial results of high-fashion denim companies;

	•		announcements by us or our competitors of new products, or significant acquisitions, strategic partnerships or joint ventures;

	•		any deviation from projected growth rates in revenues;

	•		any loss of a major customer or a major customer order;

	•		additions or departures of key management or design personnel;

	•		any deviations in our net revenue or in losses from levels expected by securities analysts;

	•		activities of short sellers and risk arbitrageurs; and

	•		future sales of our common stock.

In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many high-fashion companies, which often has been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. As long as we continue to depend on a limited customer base and a limited number of products, there is substantial risk that our quarterly results will fluctuate.

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

We sell our product primarily to retail and distribution companies in the United States on open account with 30 to 45 day payment terms. In foreign markets, we try to obtain a letter of credit or wire transfer upon shipment, but these arrangements are not always possible. Financial difficulties with a customer could result in serious losses for our Company.

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, and our ability to continue to hire and retain there personnel. Mr. Lubell spends all of his working time working with our company and our wholly-owned subsidiary. It may be difficult to find sufficiently 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 person” life insurance on any of our directors or senior executive officers.

Government regulation and supervision could restrict our business.

Any negative changes to international trade agreements and regulations such as the North American Free Trade Agreement or any agreements affecting international trade such as those made by the World Trade Organization which result in a rise in trade quotas, duties, taxes and similar impositions or which has the result of limiting the countries from whom we can purchase our fabric or other component materials, or limiting the countries where we might market and sell our products, could have an adverse effect on our business.

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

The principal fabrics used in our business are cotton, synthetics, wools and blends. The prices we pay for these fabrics are dependent on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate significantly, depending on a variety of factors, including crop yields, weather, supply conditions, government regulation, economic climate and other unpredictable factors. Any raw material price increases could increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner.

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

While all manufacturers are contractually required to comply with such labor practices, we cannot control the actions or public perception of such manufacturers, nor can we assure that these manufacturers will conduct their businesses using ethical or legal labor practices. Apparel companies can be held jointly liable for the wrongdoings of the manufacturers of their products. While we do not control their employee’s employment conditions or the manufacturer’s business practices, and the manufacturers act in their own interest, they may act in a manner that results in a negative public perception of us and/or employee allegations or court determinations that we are jointly liable for such improper practices.

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

The loss of or inability to enforce our trademark “True Religion Brand Jeans” and the trademarked “Buddah” logo and other proprietary know-how and trade secrets could adversely affect our business.

We depend heavily on trade secrets and the design expertise of Jeffrey and Kymberly Lubell. If any of our competitors copies or otherwise gains access to our trade secrets or develops similar products independently, we would not be able to compete as effectively. The measures we take to protect our trade secrets and designs may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources. In addition, notwithstanding the rights we have secured in our intellectual property, other persons may bring claims against us that we have infringed on their intellectual property rights or claims that our intellectual property right interests are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate and therefore could have an adverse affect on our business.

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

As of March 31, 2006, Jeffrey Lubell, our Chairman of the Board and Chief Executive Officer, and his wife beneficially owned 38% of our outstanding common stock. Therefore, Mr. Lubell is effectively able to control matters requiring approval by our stockholders. Matters that require the approval of our stockholders include the election of directors and the approval of mergers or other business combination transactions. Mr. Lubell also has control over our management and affairs. As a result of such control, certain transactions are effectively not possible without the approval of Mr. Lubell, including, proxy contests, tender offers, open market purchase programs or other transactions that can give our stockholders the opportunity to realize a premium over the then-prevailing market prices for their shares of our common stock.

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

We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. We, like all other public companies, are incurring additional expenses and, to a lesser extent, diverting management’s time in an effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Beginning with the annual report for the fiscal year

ended December 31, 2007, our management is required under Section 404 to furnish a report regarding its internal controls over financial reporting. We will become an “accelerated filer” as of the beginning of the fiscal year ended December 31, 2006, which accelerates our compliance date to the annual report for the fiscal year ended December 31, 2006. We have implemented processes documenting and evaluating our system of internal controls. If, in the future, management identifies one or more material weaknesses, or our external auditors are unable to attest that our management’s report is fairly stated or to express an opinion on the effectiveness of our internal controls, this could result in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and/or subject us to sanctions or investigation by regulatory authorities.

We do not expect to declare or pay any dividends.

We have not declared or paid any dividends on our common stock since our inception, and we do not anticipate paying any such dividends for the foreseeable future.

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

Our success depends to a significant degree upon our ability to protect and preserve our intellectual property, including copyrights, trademarks, patents, service marks, trade dress, trade secrets and similar intellectual property. We rely on the intellectual property, patent, trademark and copyright laws of the United States and other countries to protect our proprietary rights. However, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States. The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. If it became necessary for us to resort to litigation to protect these rights, any proceedings could be burdensome and costly and we may not prevail.

We have obtained some U.S. and foreign trademark, patents and service mark registrations, and have applied for additional ones, but cannot guarantee that any of our pending applications will be approved by the applicable governmental authorities. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge these or other registrations. A failure to obtain trademark, patents or service mark registrations in the United States and in other countries could limit our ability to protect our trademarks, patents and service marks and impede our marketing efforts in those jurisdictions. The loss of such trademarks, patents and service marks, or the loss of the exclusive use of our trademarks, patents and service marks, could have a material adverse effect on our business, financial condition and results of operations. Accordingly, we devote substantial resources to the establishment and protection of our trademarks, patents and service marks on a worldwide basis and continue to evaluate the registration of additional trademarks, patents and service marks, as appropriate. We cannot assure that our actions taken to establish and protect our trademarks, patents and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violative of their trademark or other proprietary rights.

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

We cannot be certain that our products do not and will not infringe the intellectual property rights of others. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties by us or our customers in connection with their use of our products. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products. Moreover, we may need to redesign or rename some of our products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling our products.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates. As of March 31, 2006, we had funds invested in auction rate corporate paper, which we accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These investments were treated as available-for-sale under SFAS No. 115. The carrying value of these investments approximates fair market value. Due to the nature of this investment, we are not subject to significant market rate risk.

We have no outstanding debt at March 31, 2006, and are therefore not subject to material interest rate risk.

ITEM 4. Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our president, secretary and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this annual report, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company’s management, including our company’s principal executive officer and our company’s principal financial officer. Based upon that evaluation, our company’s management had concluded at December 31, 2005 that there was a material weakness in our company’s disclosure controls and procedures effective as of the end of the period covered by that report. The material weakness that our management had identified appears to be due to a lack of qualified personnel to work with our principal financial officer in accumulating and communicating information to our management in time to ensure timely disclosure as required by the securities laws. This weakness is due, in large part, to our rapid growth over the year ended December 31, 2005 and to date without a corresponding increase in personnel to address the additional workload. We have taken the following steps as of March 31, 2006 to correct this previously identified weakness:

	•		On October 26, 2005, hired a qualified executive assistant on a full-time basis to assist its principal financial officer in performing his duties.

	•		On March 10, 2006, extended an offer of employment to senior-level CPA with an extensive SEC reporting and compliance background. This individual started with the Company on April 17, 2006 in the role of Vice President — Finance and Accounting and will oversee the internal and external financial reporting and analysis.

Based on these two new hires and their ongoing contributions to the accounting and finance functions, we have deemed the previously identified material weakness to have been remediated.

Internal Control over Financial Reporting

The changes in the Company’s internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting have been discussed above. The Company has no plans to make further changes to its internal control environment during the remainder of 2006.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

Joseph C. Canouse

Under the settlement agreement, the Company agreed to pay Canouse $100,000 in cash and to issue to him 100,000 shares of the Company’s common stock (the “Shares”). Canouse agreed to dismiss his lawsuit against the Company and to release the Company from all claims arising out of or related to the circumstances that gave rise to the lawsuit. Canouse further agreed to be subject to a five-year standstill period during which he will not acquire or cause to be acquired any assets, businesses, securities, or rights of the Company, or options to acquire such rights, or take certain stockholder actions. In connection with the issuance of the Shares, on May 1, 2006 the Company filed a Form S-3 registration statement with the Securities and Exchange Commission for the registration of the resale of the Shares. The Company had previously taken a one-time, non-cash charge of $2.1 million in the fiscal fourth quarter of 2005 and had accrued $100,000 for the proposed legal settlement.

Indigo Group USA, Inc.

On April 28, 2005 Guru Denim, Inc., the wholly owned subsidiary of True Religion Apparel, Inc., terminated its Manufacturer’s Agreement dated September 15, 2004 with The Indigo Group USA, Inc., based upon The Indigo Group USA, Inc. failure to cure multiple defaults under the Manufacturer’s Agreement. The Indigo Group USA Inc. believes that it is not in breach of the Manufacturer’s Agreement and on April 29, 2005 Guru Denim, Inc. received a letter requesting the dispute go to Arbitration, a provision under paragraph 11 of the Agreement. The Indigo Group USA, Inc. contends that it lost $1.6 million in profits on 156,000 pairs of jeans not manufactured under the Agreement. Guru Denim, Inc. believes that The Indigo Group USA, Inc. failed to perform under the Agreement. Evidentiary proceedings in the matter took place in March 2006 and have been concluded. The Company has submitted a brief summarizing its defense of the matter to the arbitrator. The Company denies any liability in the matter and will continue to defend itself vigorously.

ITEM 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Part 1, Item 1 Risk Factors in our Annual Report on Form 10-K, for the year ended December 31, 2005.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company entered into a Settlement Agreement and General Release dated March 21, 2006 with Joseph C. Canouse, pursuant to which the Company issued 100,000 shares of its common stock and $100,000 in cash to Canouse in consideration of the dismissal of his lawsuit against the Company, a general release from all claims arising out of or related to the circumstances that gave rise to the lawsuit, and Canouse’s agreement to be subject to a five-year standstill period during which he will not acquire or cause to be acquired any assets, businesses, securities, or rights of the Company, or options to acquire such rights, or take certain stockholder actions. The issuances of such securities were effected in reliance upon exemptions from registration provided by Section 4(2) and Rule 506 of Regulation D promulgated under the Securities Act of 1933. Pursuant to such exemption, offers and sales of securities not involving a public offering may be made without registration under the Securities Act.

Subsequent to the three months ended March 31, 2006, the Company issued approximately 12,500 shares of its common stock pursuant to the exercise of options to purchase common stock to officers and employees at an average exercise price of $0.48 for a total cash consideration of approximately $6,000.

ITEM 3. Defaults Upon Senior Securities

None.

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

None.

ITEM 5. Other Information

None.

ITEM 6. Exhibits.

The following exhibits are either filed herewith or incorporated herein by reference:


Exhibit
Number		Description

(2)		Plan of Purchase, Sale, Reorganization, Arrangement, Liquidation or Succession

2.1		Agreement and Plan of Merger, dated August 18, 2005, by and between the Registrant and True Religion Apparel, Inc., a Nevada corporation and the Registrant’s predecessor in interest (incorporated by reference from our Form 8-K Current Report, filed August 22, 2005).

(3)		Articles of Incorporation and By-laws

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

3.4		Bylaw (incorporated by reference from our Form 8-K Current Report, filed August 22, 2005).

(4)		Instruments Defining the Rights of Security Holders, Including Indentures

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

(10)		Material Contracts

10.1		Settlement Agreement and Mutual General Release with The Indigo Group USA and Jeremy Lew (incorporated by reference from our Form 10-QSB Quarterly Report, filed on November 12, 2004)

10.2		Manufacturer’s Agreement with The Indigo Group, USA (incorporated by reference from our Form 10-QSB Quarterly Report, filed on November 12, 2004)

10.3		Discount Factoring Agreement dated December 20, 2004, between Merchant Factors Corp. and Guru Denim Inc. (incorporated by reference from our Form 10-KSB/A filed on April 6, 2005)

10.5		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)

10.6		Standard Single-Tenant Sublease dated July 5, 2005 between L.A. Fabric Imports, Inc. and Guru Denim, Inc. for 1557 Rio Vista Avenue, Los Angeles, California (incorporated by reference from our Form 10-Q Quarterly Report, filed August 15, 2005)

10.7		Form of Indemnification Agreement between True Religion Apparel, Inc. and its officers and directors. (incorporated by reference from our Form 10-QSB Quarterly Report Filed November 15, 2005)

10.8		Employment Agreement dated January 4, 2006, by and between True Religion Apparel, Inc. and Jeffrey Lubell (incorporated by reference from our Form 8-K Current Report filed January 10, 2006)

10.9		Employment Agreement dated January 4, 2006, by and between True Religion Apparel, Inc. and Charles Lesser (incorporated by reference from our Form 8-K Current Report filed January 10, 2006)

10.10		Employment Agreement dated January 4, 2006, by and between True Religion Apparel, Inc. and Kymberly Lubell (incorporated by reference from our Form 8-K Current Report filed January 10, 2006)

10.11		Employment Agreement dated April 12, 2006, by and between True Religion Apparel, Inc. and Michael Buckley (incorporated by reference from our Form 8-K Current Report filed April 14, 2006)

10.12		Lease Agreement dated May 28, 2004, by and among True Religion Apparel, Inc., Guru Denim, Inc. and Rio Vista Industrial Investments, LLC for 1525-1535 Rio Vista Avenue, Los Angeles, California (incorporated by reference from our Form 10-KSB Annual Report filed March 31, 2006)

10.13		Settlement Agreement and General Release dated March 21, 2006, by and between True Religion Apparel, Inc. and Joseph C. Canouse (incorporated by reference from our Form 10-KSB Annual Report filed March 31, 2006)

(32)		Section 906 Certifications


Exhibit
Number		Description

32.1		Certification of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.2		Certification of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	TRUE RELIGION APPAREL, INC.
	By:	/s/ JEFFREY LUBELL
		Jeffrey Lubell, President, CEO, and Director
		(Principal Executive Officer)



	By:	/s/ CHARLES A. LESSER
		Charles A. Lesser, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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PART I — FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk.
ITEM 4. Controls and Procedures.
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 1A. Risk Factors
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2