ITEM 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read in conjunction with our financial statements and the related notes included in this Form 10-QSB.

Operating Results for the Nine Months Ended October 31, 2006 and 2005

Revenues. Our revenues for the nine months ended were $ 722,650 as compared to no revenues for the same nine month period ended October 31, 2005. This is the result of our company’s Acquisition of Moonlight Graham Inc. in February 2006.

Operational Expenses. Our operational expenses during the nine months ended October 31, 2006 increased to $2,391,875 as compared to $186 for the nine months ended October 31, 2005. This increase is the result of our company’s Acquisition of Moonlight Graham Inc.

Net Income (Loss). Our net loss during the nine months ended October 31, 2006  was $(1,855,704) as compared to $(42,001) during the nine months ended October 31, 2005. The change was because of the company’s Acquisition of Moonlight Graham Inc.

Changes in Balance Sheet. As of October 31, 2006, we had current assets of $289,816 as compared to $0 at January 31, 2006, total assets of $369,130  at October 31, 2006 as compared to $0 at January 31, 2006, total liabilities of $2,344,544  as compared to $924,124  at January 31, 2006 and stockholders' equity (deficit) at October 31, 2006 of ($1,975,414) as compared to ($924,154) at January 31, 2006. The decrease in assets, increase in liabilities and increase  in stockholders' (deficit) is the result of the company’s Acquisition of Moonlight Graham Inc.

Liquidity, Capital Resources and Cash Requirements. We have historically financed our operations through the sale of stock and loans from an officer. In the immediate future, we intend to finance our operations and any growth via acquisitions by issuing shares of our common stock under the exemption from registration offered by Regulation E under the Securities Act. Because we are regulated as a business development company and have made the appropriate filings with the Securities and Exchange Commission, we qualify for this exemption. Because we have access to this source of financing, we feel that we have sufficient cash and capital resources available to operate and grow our business for the next 12 months.

Operating Results for the Nine  Months Ended October 31, 2006 and 2005

Revenues. Our revenues for the nine months ended were $722,650 as compared to no revenues for the same nine month period ended October  31, 2005.. This is the result of our company’s Acquisition of Moonlight Graham Inc.

Operational Expenses. Our operational expenses during the nine months ended October 31, 2006 increased to $1,673,060  as compared to $186  for the nine months ended October 31, 2005. This increase is the result of our company’s Acquisition of Moonlight Graham Inc. which is an operating entity.  Expenses include stock issued for services of $375,000.

Interest expense for the nine months ended October 31, 2006 was $186,479 as compared to $41,815 for the nine month period ended October 31, 2005.  The increase is a result of increased advances to fund the ongoing operations of the Company.

Net Income (Loss). Our net loss during the nine months ended October,31 2006  was $(1,855,704)  as compared to $(42,001) during the nine months ended October 31, 2005. The change was because of the company’s Acquisition of Moonlight Graham Inc.

GENERAL INFORMATION

Denim Apparel Group is a reporting company under the federal securities laws. Our shares of common stock are publicly traded on the Pink Sheets under the symbol DPGP.PK We were organized under the laws of Nevada on March 17, 1999.

GENERAL OVERVIEW

We are designers, retailers, advertisers, marketers, and manufacturers or retro style apparel that looks for ways to capture the consumer’s imagination and engender their loyalty, they often think of a reliable axiom: “What’s old is always new, when presented in a fresh way.” As the present becomes more stressful and chaotic and we become increasingly anxious about the future, the past is something we can always count on.

The influence of retro-style can be observed in every category in the marketplace…from automobiles and home furnishings to sports equipment and consumer electronics.

The apparel category presents one of the most viable opportunities to marry the romance of the past with the sensibility of the shopper of today.

Licensing

The sheer size and diversity of the licensed merchandise category has catapulted the industry to an all time high last year of $l58 billion in retail sales worldwide, with over $90 billion of that total generated in the United States and Canada alone.

The licensing business has traditionally been dominated by character, entertainment, and sports properties, and annual volume shows no signs of slowing as the licensing of brands, art, food and fashion continues to fuel growth. The highest growth category in the licensing business over the past several years has been in the area of “brand” licensing - as corporations realize the value of their trademarks and logos for product extensions. Corporate America has come to understand the power of the classic associations their trademarks represent for consumers, and are seeking ways to use that power by leveraging their brand equity into the creation of licensed goods in categories and distribution channels outside their core business.

We have deep, emotional connections to certain brands; and like sports teams, movies, music, and iconic heroes of the past, these brands represent an essential part of the fabric of American life.

By effectively securing licenses with Major League Baseball, General Motors, Anheuser Busch, Universal Pictures and many others, Moonlight has created a proprietary niche in an industry continually looking for something to stand out and grab the customer’s attention. Upscale retailers can’t get enough.

Watching the industry carefully and sensing additional opportunity, Moonlight is now moving into the high growth area of corporate and brand licensing. With a sweeping General Motors license giving Moonlight rights to all Chevy, Pontiac, Buick and Cadillac logos and marks from 1953 through 1998, the company will further its claim to retro-Americana with a clever interpretation of car culture.

The bounty of opportunities is vast. Because most licensed brands and properties have not previously been offered in the better retail category, Moonlight Graham has a large menu from which to choose. Licensing has given Moonlight a key point of differentiation against apparel company competitors, who do not have the proprietary licensing rights already secured.

We look to utilize a major portion of our raise to expand the brand within the consumer & retailers mind.

Public Relations, advertising, a stronger trade show presence, a larger sales force and better promotional print materials are a few of the ways we plan to increase our exposure in the marketplace.

Existing Licensing Agreements

The following Licensing Agreements, already secured, allow Moonlight to produce and distribute proprietary products in upstairs department stores and specialty shops, to direct mail catalogues, in our own stores when applicable, and to the leagues and teams themselves at their stadiums, in their catalogues, on their web sites and in their team stores.

• Major League Baseball:

Rights to all 30 current MLB teams.

• Cooperstown Collection:

Rights to all defunct MLB teams (Brooklyn Dodgers, New York Giants) as well as over 70 Hall of Fame players (Yogi Berra, Ernie Banks, etc).

* General Motors:

Rights to all Chevrolet, Pontiac, Buick and Cadillac images, logos and marks from 1953 through 1998. Additional rights available if desired.

• Universal Pictures:

Rights to the comedy classic “Animal House”

* Anheuser Busch:

Vintage & current Budweiser, Bud Light and all other AB drinks.

* Cadbury Schweppes:

Rights to over 20+ current & vintage beverages, including Dr. Pepper, 7UP, Crush, Yoo Hoo and Squirt.

* Anthill:

Rights to over 50 Rock bands, including the Rolling Stones, Talking Heads, Blondie, Iggy Pop, Sting and Pink Floyd.

Retail Strategy and Execution

Moonlight Graham retail reflects the heart-tugging best of America’s past in a modern, clever way. A virtual emporium of Popular Culture, its innovative offering of apparel, accessories, giftware, collectibles, and period memorabilia would strike just the right mix of then and now. Filled with nostalgic graphics, contemporary and antique fixtures, and one-of-a-kind display props, the environment would allow shoppers to step back in time while still finding a decidedly contemporary approach to retail design and merchandising. A place that feels a lot like an old school Yankees knit or a Pink Floyd sweat shirt from Moonlight

Graham…

The ability to showcase one’s own line at retail allows the consumer to ”experience” the brand in it’s totality. No individual wholesale account will likely buy more than a fraction of the total line, therefore a showcase store provides the foremost opportunity to show the depth and breadth of the company’s offering in a ideally merchandised way.

• The MG store would allow us to incubate and monitor new product introductions, experiment with new styles and fabrications, extend into new product categories, etc. This is an invaluable learning and R&D tool.

• Our own stores would allow us to order and sell small amounts of competitor’s products. This, too, would provide first hand information in understanding new product opportunities, styles and categories that would compliment and grow the line.

• Dealing directly with Moonlight Graham customers would allow us to gain valuable feedback, build a strong database, drive traffic to our website, develop special incentive and customer loyalty and reward programs, etc.

• By showing how the line is optimally merchandised, the showcase store(s) will provide information that will ultimately prove invaluable to our current department and specialty store accounts, as well as to our sales reps. Anecdotal evidence abounds on brands such as Ralph Lauren, Lucky Brand, Tommy Bahama, Nike, and countless others who have increased their sales to department stores after opening their own stores and showcasing their lines in controlled, branded environments. These efforts often lead to department store shop-in-shops and expanded real estate.

• The stores provide multiple brand impressions in a tangible way, as well as provide the company with a public relations tool, a place to stage events, offer special promotions, present athlete signings and celebrity appearances, etc.

• Several success stories exist where apparel companies have gained significant distribution, grown their businesses through licensing, built strong consumer brands, and sold to much larger companies for impressive multiples. In most of these instances, a key to their strategy was the creation of signature retail stores.

• As Moonlight becomes a licensor, a key negotiating point will be our own retail outlets as well as our wholesale doors of distribution. This will greatly strengthen our position as a licensor

PRODUCTS MADE OR SOLD BY THE COMPANY

Moonlight Graham ( www.moonlightgraham.com ) produces a high end product line of men’s and children’s sportswear  featuring  the finest in vintage - retro designs utilizing the product licenses of Major League Baseball ( www.mlb.com ) Anheuser - Busch,  General Motors, Universal Studios and Cadbury - Schweppes.

MANUFACTURING

All Products manufactured is outsourced to a third party  

 COMPETITION

 Licensed brands such as Junk Food, BC Ethic, Earthtones Trading and Dragonfly

  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   have merged with Moonlight Graham a high fashion apparel Company and are  in the early stages of the growth of our company, which is involved primarily in the production and processing of high-fashion apparel. The merged in Financials provide a view of the operation of the company

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:

We will be adding new tiers of distribution in selling are product .There can be no assurance that we will be able to achieve any of these goals and develop a sufficiently large customer base 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 product line  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 apparel will continue to be fashionable. Should the trend steer away from high-fashion 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 that are no longer popular. In the past, apparel companies 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.

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 apparel 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 store, 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 apparel have historically been somewhat seasonal in nature with the largest sales generally occurring in the third and fourth quarters. Delays in scheduling or pickup of purchased products by our customers could negatively impact our net sales and results of operations for any given quarter. 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 apparel industry from other established companies. A number of our competitors have significantly greater financial, design, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the apparel industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, new companies may enter the markets in which we compete, further increasing competition in the apparel 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. 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.  The trading price of our common stock could be subject to wide fluctuations in response to many events or factors, including the following:

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. Financial difficulties with a customer could result in serious losses for our company.

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, 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 result in a negative public perception of us and/or employee allegations or court determinations that we are jointly liable for such improper practices.

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 January 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 January 31, 2007, which accelerates our compliance date to the annual report for the fiscal year ended January 31, 2007. 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.