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UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, DC 20549FORM 10-KxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT
OF 1934For the fiscal year ended July 1, 2006OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934

TrueYou.Com Inc.(Exact name
of registrant as specified in its charter)

|                                                              |  |                          |  |                                  
|------------------------------------------------------------- |  | ------------------------ |  | ---------------------------------
|Delaware                                                      |  | 000-51158                |  | 13-4024017                       
|(State or other jurisdiction of incorporation)                |  | (Commission File Number) |  | (IRS Employer Identification No.)
|                                                              |  |                          |  |                                  
|Building No. 501, Fifth Floor
  7 Corporate Park, Norwalk, CT |  |                          |  | 06851                            
|(Address of principal executive offices)                      |  |                          |  | (Zip Code)                       

(203)295-2121(Registrants
telephone number, including area code)

SECURITIES REGISTERED
PURSUANT TO SECTION 12(b) OF THE ACT:None

SECURITIES REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT:Common Stock, $0.001 Par Value(Title of
Class)

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

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

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form l0-K or any amendment to
this Form 10-K. o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
 Large accelerated filer o Accelerated filer o Non-accelerated
filer x

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

The
aggregate market value of the registrants Common Stock held by non-affiliates
based upon the closing sale price reported on the over counter market on the
Pink Sheets as of January 16, 2007 was approximately $3.3 million. In
determining this figure, registrant has assumed that all directors, executive
officers and persons known to it to beneficially own ten percent or more of
such Common Stock are affiliates. This assumption shall not be deemed
conclusive for any other purpose. The number of shares of common stock, par
value $0.001 per share, outstanding as of January 16, 2006 was 14,995,513.

DOCUMENTS INCORPORATED BY
REFERENCE:

None

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TABLE OF CONTENTS

|         |                                                                                                                      |  |     
|-------- | -------------------------------------------------------------------------------------------------------------------- |  | ----
|         |                                                                                                                      |  | Page
|         |                                                                                                                      |  |     
|PART I   |                                                                                                                      |  |     
|         |                                                                                                                      |  |     
|Item 1.  | Business                                                                                                             |  | 1   
|         |                                                                                                                      |  |     
|Item 1A. | Risk Factors                                                                                                         |  | 17  
|         |                                                                                                                      |  |     
|Item 1B. | Unresolved Staff Comments                                                                                            |  | 23  
|         |                                                                                                                      |  |     
|Item 2.  | Properties                                                                                                           |  | 23  
|         |                                                                                                                      |  |     
|Item 3.  | Legal Proceedings                                                                                                    |  | 25  
|         |                                                                                                                      |  |     
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                                  |  | 25  
|         |                                                                                                                      |  |     
|PART II  |                                                                                                                      |  |     
|         |                                                                                                                      |  |     
|Item 5.  | Market for the
  Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
  of Equity Securities |  | 26  
|         |                                                                                                                      |  |     
|Item 6.  | Selected Financial Data                                                                                              |  | 27  
|         |                                                                                                                      |  |     
|Item 7.  | Managements Discussion and Analysis of Financial Condition and
  Results of Operation                               |  | 28  
|         |                                                                                                                      |  |     
|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk                                                           |  | 43  
|         |                                                                                                                      |  |     
|Item 8.  | Financial Statements and Supplementary Data                                                                          |  | 44  
|         |                                                                                                                      |  |     
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and
  Financial Disclosure.                              |  | 88  
|         |                                                                                                                      |  |     
|Item 9A. | Controls and Procedures                                                                                              |  | 88  
|         |                                                                                                                      |  |     
|Item 9B. | Other Information                                                                                                    |  | 90  
|         |                                                                                                                      |  |     
|PART III |                                                                                                                      |  |     
|         |                                                                                                                      |  |     
|Item 10. | Directors and Executive Officers of the Registrant                                                                   |  | 91  
|         |                                                                                                                      |  |     
|Item 11. | Executive Compensation                                                                                               |  | 97  
|         |                                                                                                                      |  |     
|Item 12. | Security Ownership of
  Certain Beneficial Owners and Management and Related Stockholder Matters                     |  | 100 
|         |                                                                                                                      |  |     
|Item 13. | Certain Relationships and Related Transactions                                                                       |  | 104 
|         |                                                                                                                      |  |     
|Item 14. | Principal Accountant Fees and Services                                                                               |  | 108 
|         |                                                                                                                      |  |     
|PART IV  |                                                                                                                      |  |     
|         |                                                                                                                      |  |     
|Item 15. | Exhibits and Financial Statement Schedule                                                                            |  | 110 

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FORWARD LOOKING STATEMENTS
AND INFORMATION

Certain
of the statements set forth in this Form 10-K are Forward Looking Statements.  Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate, or imply future
results, performance or achievements, and may contain the words estimate,
project, intend, forecast, anticipate, plan, planning,
expect,
believe, will, will likely, should, could, would,
may or words or
expressions of similar meaning.  Readers
are cautioned that there also can be no assurance that the forward-looking
statements included in this Form 10-K will prove to be accurate and results may
differ materially.  In light of the
significant uncertainties inherent to the forward-looking statements included
herein, the inclusion of such information should not be regarded as a representation
or warranty by us or any other person that our objectives and plans will be
achieved in any specified time frame, if at all.  Thus, we cannot guarantee future results, levels of activity,
performance or achievements.  Moreover,
except to the extent required by applicable laws or rules, we do not undertake
any obligation to update any forward-looking statements or to announce
revisions to any of the forward-looking statements after the date of this Form
10-K.

Unless
otherwise indicated in this Report, references to TrueYou refer to
TrueYou.Com Inc.; references to KAAI refer to Klinger Advanced Aesthetics,
Inc. and its consolidated subsidiaries; references to the we, our, and us
refer to TrueYou.Com Inc. and its consolidated subsidiaries (including KAAI), as
applicable.

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PART
I

ITEM 1. BUSINESS

Overview

History of TrueYou.Com Inc.

TrueYou.Com
Inc. (TrueYou or Company) was organized on September 9, 1998 under the laws
of the State of Delaware by its former parent, United Network Technologies
Corp.  In January 1999, United Network
Technologies transferred all 100 shares of its common stock in the Company to
United Network Marketing Services, Inc., a wholly-owned subsidiary of United
Network Technologies.  In April 1999,
TrueYou effected a 33,300-to-1 stock split and amended its certificate of
incorporation to increase its authorized capital stock to 21,000,000 shares
consisting of 20,000,000 common shares and 1,000,000 preferred shares.
Immediately thereafter, United Network Marketing distributed all 3,330,000
shares of its common stock in TrueYou to its stockholders, rendering TrueYou a
stand alone business.

Until
December 20, 2005, TrueYou was a developer of Web-based, direct-to-direct
personal potential and professional development programs designed for
businesses.  TrueYous product
offerings, which consisted of sales productivity, work-life balance and
employee retention programs were designed to be delivered via the Internet or
corporate intranet in the form of three to five minute Best Steps Learning
Modules.  Such products were intended
for sale principally to large and middle market companies.  TrueYous Web site went live on the internet
in October 1999.

On
December 20, 2005, TrueYou signed a Share Exchange Agreement with Klinger
Advanced Aesthetics, Inc. (KAAI or Klinger) and the securityholders of
KAAI.  The Company entered into the
Share Exchange Agreement in order to enable the Company to exploit and develop
the business of Klinger which is described below.  Under the terms of the Share Exchange Agreement, TrueYou issued
to the KAAI securityholders:  (i)
27,858.9673 newly issued shares of its Series B Convertible Preferred Stock,
par value $0.001 per share (the Series B Preferred Stock), each of which is
convertible into 10,000 shares of TrueYou Common Stock, par value $.001 per
share (Common Stock), (ii) 8,452.0222 newly issued shares of its Series C
Convertible Preferred Stock, par value $0.001 per share (the Series C Preferred
Stock), each of which is convertible into 10,000 shares of Common Stock and
(iii) newly issued Warrants which terminate on September 21, 2010 and which
have an exercise price of $2,112.54 per share of Series B Preferred Stock and
which equates to an exercise price of $.211254 per share of TrueYou Common
Stock to purchase 3,969.0363 shares of its Series B Preferred Stock (the
Warrants).

On
December 22, 2005, affiliates of North Sound Capital LLC (North Sound) and
Valesco Capital Management LP invested $15.3 million in exchange for 1,530
newly issued shares of the Companys Series D Convertible Preferred Stock, par
value $0.001 per share (the Series D Preferred Stock), each of which is
convertible into approximately 52,175 shares of Common Stock ($0.191662 per
share), and Warrants exercisable until December 22, 2010 and which have an
exercise price of $2,108.28 per share which equates to an exercise price of
$.210828 per share of Common Stock, to purchase 2,394.8407 shares of Series B
Preferred Stock (the Series D Preferred Financing).  The shares of Series B Preferred Stock will automatically convert
into Common Stock after the Company amends its certificate of incorporation in
order to increase the number of shares of Common Stock it is authorized to
issue as described in Item 5 of this Report (the Authorized Share
Increase).  Subject to certain
restrictions, the shares of Series C Preferred Stock and Series D Preferred
Stock will automatically convert into Common Stock upon the consummation of an
underwritten public offering with gross proceeds to TrueYou of not less than
$30,000,000; provided that at such time a registration statement is effective
or such shares can be sold under Rule 144.
As a result

1

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of the
Share Exchange Agreement and the transactions contemplated thereby, KAAI became a subsidiary of
TrueYou.

Financings Subsequent to Share Exchange
Agreement

On
May 9, 2006, TrueYou entered into a loan agreement with some of its existing
shareholders, including North Sound, affiliates of Pequot Capital Management Inc.
(Pequot) and other affiliates of the Company (see Certain Relationships and
Related Transactions) pursuant to which the Company borrowed $4.8 million
which was used by the Company for capital expenditures and general working
capital. Pursuant to a Subordination Agreement dated May 9, 2006 with the
lenders and Technology Investment Capital Corp (TICC), this loan was
subordinated to the Companys then existing senior indebtedness of $10.0
million to TICC under the Note and Warrant Purchase Agreement, dated March 31,
2004, as amended.  The existing debt
with TICC had been obtained to help finance the acquisition of KAAI operations
(see History of Klinger Advanced Aesthetics, Inc. below for a discussion of
financings completed by KAAI prior to the Share Exchange Agreement).

On
July 6, 2006, TrueYou closed on a financing and issued to Laurus Master Fund,
Ltd. (Laurus), a Secured Term Note in the principal amount of $25.0 million
and issued to Laurus, series A warrants, series B warrants and series C
warrants to purchase up to 37,351,824 shares, 6,839,394 shares and 6,693,875
shares, respectively, of Common Stock.
The warrants have an exercise price of $.01 per share and may be
exercised for a period of up to 10 years from issuance.  If prior to the 14th month
anniversary of June 30, 2006, the Companys obligations to Laurus under the
Secured Term Note have been reduced to $12,500,000 or less, then warrants to
purchase 6,839,394 shares of Common Stock will be automatically cancelled and
terminated and if at such time the Companys obligations have been reduced to
zero, then warrants to purchase an additional 6,693,875 shares of Common Stock
will also be cancelled.

On
July 11, 2006, TrueYou entered into a loan agreement (the Subordinated Loan
Agreement) with subordinated lenders including affiliates of TrueYou (see
Certain Relationships and Related Transactions) for $5,200,000 (the
Subordinated Loan) which was used by the Company for capital expenditures,
general working capital and to pay all costs and expenses in connection with
the Subordinated Loan. Pursuant to a subordination agreement dated July 11,
2006, between the Subordinated Lenders and Laurus, the Subordinated Loan is
subordinated to the Companys senior indebtedness to Laurus under the Secured
Term Note.  TrueYou also issued 7 year
warrants to purchase a total of 32,947,771 shares of Common Stock with an
exercise price of $.001 per share to such lenders.

On
July 11, 2006, TrueYou also entered into an amended and restated loan agreement
in order to amend and restate the provisions of the $4.8 million loan received
on May 9, 2006 in order to conform its terms to the terms of the Subordinated
Loan Agreement. Pursuant to a subordination agreement dated July 11, 2006, this
amended subordinated loan is subordinated to our existing senior indebtedness
to Laurus.  Pursuant to the amended loan
agreement, TrueYou issued to such lenders (including affiliates) (see Certain
Relationships and Related Transactions) (the Amended Subordinated Lenders),
warrants to purchase an aggregate of 30,658,597 shares of Common Stock.  The warrants have an exercise price of $.001
per share and may be exercised for a period of 7 years from issue.

On
December 22, 2006, TrueYou entered into a subordinated securities purchase
agreement (the Laurus Purchase Agreement) with Laurus, pursuant to which
TrueYou issued to Laurus (i) a senior subordinated secured term note in the
principal amount of $1.0 million (the Senior Subordinated Secured Note); and
(ii) warrants to purchase up to 10,000,000 shares of Common Stock.  The warrants have an exercise price of $.001
per share and may be exercised for a period of 7 years.  In the event the Senior Subordinated Secured
Note is not repaid by April 30, 2007, TrueYou has agreed to issue Laurus
warrants with like terms to purchase an additional 8,750,000 shares of Common
Stock.

2

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On
December 22, 2006, the Company also entered into a loan agreement (the Senior
Subordinated Loan Agreement) with senior subordinated lenders, (including
affiliates of the Company, see Certain Relationships and Related
Transactions) pursuant to which the senior subordinated lenders loaned TrueYou
$3.0 million (the Senior Subordinated Loan).
Pursuant to a subordination agreement dated as of December 22, 2006,
between such subordinated lenders, the Amended Subordinated Lenders and Laurus, the Senior
Subordinated Loan is subordinated to the existing  senior indebtedness held by Laurus and ranks senior to $4.8
Million and $5.2 Million of subordinated indebtedness previously incurred by
the Company.  Pursuant to the Senior
Subordinated Loan Agreement, TrueYou issued to the senior subordinated lenders,
7 year warrants to purchase an aggregate of 15,384,615 shares of Common Stock
with an exercise price of $.001 per share. In the event the Laurus Note is not
paid by April 30, 2007, certain of the holders of such warrants have agreed to
contribute 8,750,000 warrants back to TrueYou and TrueYou has agreed to issue
an additional 8,750,000 Warrants to Laurus (see Certain Relationships and
Related Transactions).

History of Klinger Advanced Aesthetics, Inc.

KAAI
commenced business operations on June 29, 2003 as Advanced Aesthetics, Inc.
when it purchased the capital stock of the Dischino Corporation for cash,
shares of its series A convertible preferred stock and a secured subordinated
promissory note.  Dischino Corporation
operated an established, well-known, beauty salon and spa in West Palm Beach,
Florida.  In connection with and as part
of the financing of the Dischino acquisition, KAAI issued shares of its common
stock and series B preferred stock to investors, including
affiliates.  See Certain Relationships
and Related Transactions.  All of the
securities issued have been converted into shares of TrueYou under the Share
Exchange Agreement.

In
November 2003, KAAI acquired three additional facilities.  The first was the acquisition of a Palm
Beach Gardens spa and clinic facility for cash, shares of its series A
convertible preferred stock and a subordinated promissory note.  The second acquisition was of a similar
facility in Boca Raton, Florida for cash, shares of KAAIs series A convertible
preferred stock and assumption of indebtedness and a third facility located at
Boca Pointe in Boca Raton, Florida was acquired for cash and shares of KAAIs
series A convertible preferred stock.
Concurrent with the three acquisitions, KAAI entered into an agreement
with FCPR L Capital (L Capital), a private equity fund managed and
represented by L Capital Management SAS, a subsidiary of LVMH by LVMH Moët Hennessy Louis Vuitton S.A.
(LVMH), whereby L Capital
acquired a subordinated convertible promissory note in the amount of
$13,300,000 convertible into KAAIs common stock.  KAAI also entered into a Securityholders Agreement, Share
Transfer Agreement and other Agreements relating to KAAI.  See Certain Relationships and Related
Transactions.  Subsequently, L Capital
also acquired $8,200,000 in KAAIs series D preferred stock.  All of the securities issued to L Capital
have been converted into shares of TrueYou under the Share Exchange Agreement.

In
April 2004, KAAI expanded its operations by acquiring nine locations of
Georgette Klinger, Inc. for cash, assumption of indebtedness, the issuance of a
promissory note and the issuance of series A preferred stock.  Georgette Klinger is a well-established chain
of high-end beauty salons and clinics.
In conjunction with the transaction, KAAI borrowed $10 million from TICC
and used a portion of such borrowings to help finance the acquisition of the
Klinger operations.

On
July 7, 2005, KAAI closed a $5,000,000 financing with affiliates of Pequot
through the issuance of its series F preferred stock and warrants to purchase
600,000 shares of KAAIs common stock with an exercise price of $3.00 per
share.  On September 1, 2005, such
security holders exchanged their shares of series F preferred stock for new
shares of KAAIs series H preferred stock to conform the terms of this
preferred stock to the Series G issued on September 1, 2005 described
below.  All of these securities have
been converted into shares of TrueYou under the Share Exchange Agreement.

On
September 1, 2005, KAAI closed a $10,775,000 private placement financing with
affiliates of Pequot and others through the issuance of its series G preferred
stock and warrants to purchase 1,431,000 shares of KAAIs common stock with an
exercise price of $2.70 per share.
All of these securities have been converted into shares of TrueYou under
the Share Exchange Agreement.

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As
a result of the Share Exchange Agreement described above, on December 20, 2005
KAAI became a subsidiary of TrueYou.

On
January 9, 2006, KAAI changed its name from Advanced Aesthetics, Inc. to
Klinger Advanced Aesthetics, Inc.

The Companys Mission

Our
vision is to define the standard of care in the medical aesthetics arena
through a commitment to credible clinical excellence based on measured
outcomes.

We
offer medical and non-medical appearance-improvement (aesthetic) software,
products, services and retail concepts to aesthetic service and product
suppliers. A brief summary of each of the our business lines is included below:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Software - The Klinger 360° Best Practices Aesthetics System  (the
  K360) is to our knowledge the first comprehensive software and hardware
  practice management system that facilitates the delivery of evidenced based
  best practices aesthetic services.                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Products  We have
  designed an exclusive line that includes over the counter (OTC) skin care
  products (Cosmedicine TM or Cosmedicine) that have undergone scientific
  testing to assure accurate efficacy and safety claims.                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Services  We offer a
  branded line of protocol-driven aesthetic services (e.g., The Klinger
  Cosmedicine Facial) that is supported by the K360 system and back bar
  products that create measurable results in appearance improvement.  Back bar products are those products (hair
  color, skin care products, etc.) used in providing the services to clients
  that are not sold, and become part of the cost of services.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Retail Concepts &
  Flagship Locations  We operate two flagship stores that allow the
  marketplace to experience and validate the Companys software, product,
  services, and retail design concepts.                                                                                                                                                                                                                             

KAAI was formed to respond to consumers
desire for an aesthetics platform that delivers the following:

| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | Results 
  measurable benefits from a brand;                                                             
| |   |                                                                                                           
| |  | Convenience
   an end-to-end delivery
  system for aesthetic procedures;                                 
| |   |                                                                                                           
| |  | Products 
  line that includes OTC skin care products;                                                   
| |   |                                                                                                           
| |  | Confidence
   peace of mind about the quality and safety of services and products; and                   
| |   |                                                                                                           
| |  | Quality
   a facility that combines high quality procedures, professionals and client
  service and care.

We
believe that consumers, while highly intrigued by aesthetic services and
products, remain confused due to the highly fragmented nature of delivery
platforms, conflicting information and absence of standardized metrics.

Our
plan is fill this market gap, offering consumers a single, trusted brand and
delivery system for accessing services and products that deliver predictable
and measurable benefits.

Strategic Differentiation

Our
market positioning and strategy is to bring measured outcomes and clinical
excellence into the medical aesthetics market.
Our brand is designed to stand for products and services which offer
efficacy  and

4

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reliability, for customers
and consumers.  We bring together four
strategic assets and relationships that elevate our brand and enable strategic
differentiation from our competitors.
These assets and relationships include:

Johns
Hopkins Medicine

Johns
Hopkins Medicine, one of the nations most respected medical institutions
(Johns Hopkins), has a relationship with us to review and assess our process
for verifying the safety and clinical quality of our practitioners, protocols
and facilities.  We participate in the
Johns Hopkins Cosmetic Safety Program in our locations where they have found us
in compliance after visiting and reviewing the site.  Johns Hopkins in consultation with KAAI and the testing companies
consulted on how to design the clinical studies of the products and reviewed
the results provide by the testing companies on Cosmedicine.  Johns Hopkins approved the use of the Johns
Hopkins Medicine name as part of the marketing of our facilities, intellectual
property, and collateral materials.  In
return for its consulting services, Johns Hopkins receives fees from KAAI. See
Material Agreements-Agreements with Johns
Hopkins below.

Sephora USA, Inc.

Sephora
USA (Sephora) is an upscale beauty retailer with 137 locations in the U.S.
and over 450 locations abroad.  We have
entered into an exclusive agreement with Sephora that includes:

| |   |                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | sale and development of our Cosmedicine
  skin care line being distributed in Sephora stores,
  Sephora.com web site, Sephora Stores-Within-a-Store in JC Penny and as part
  of Sephoras on-air strategic alliance with The Home Shopping Network; and                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                      
| |  | development of the Skin PhysicalTM system
  being used in 11 Sephora stores as part of a beta test.  Klinger used its K360 technology to
  develop the Skin PhysicalTM system that is jointly owned by
  Sephora and Klinger, which is a proprietary skin care diagnostic system that
  is also used to promote the Klinger name and credibility as a leader in
  clinical skin care.

Sephora
paid us a performance deposit of $5 million in December 2004 for certain
exclusive distribution rights.  We are
required to return 50% of the deposit to Sephora when the net revenues of
Sephora relating to the sale of Cosmedicine products, plus certain Sephora
capital expenditures, equal $30 million.
We are required to return the remaining 50% when such revenues and
capital expenditures equal $60 million.
See Material Agreements-Agreement
with Sephoraand Certain Relationships and Related Party Transactions
 Sephora.

Georgette Klinger

In
2004 KAAI acquired the nine locations of Georgette Klinger, a 62-year old
venerable brand, which was an early innovator of facials that measurably
improve the health and appearance of facial skin.

Medical Advisory
Board

Our
Medical Advisory Board includes leaders from several professional associations
in the field of aesthetic medicine, including the
American Society of Plastic Surgeons and the American Society of Aesthetic
Plastic Surgeons.  Johns Hopkins
approves the medical protocols of our Medical Advisory Board.

Our
Medical Advisory Board
met once in fiscal 2006 and a representative from Johns Hopkins Medicine was
present at the meeting.  During Medical Advisory Board meetings, members review and
discuss our clinical policies to ensure practices are in accordance with
approved Johns Hopkins reviewed protocols.
The Medical Advisory Board
recommends changes where necessary.

5

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Johns
Hopkins also reviews the process by which we approve clinical practitioners.

Business Strategy

We
provide IP, technology, products, services and retail concepts focused on the
consumer appearance market.  As detailed
in our marketing discussion below, this market was estimated by the Monitor
Group to be more than $120 billion by 2007.
Our mission is to deliver superior, measurable results to clients
through the identification of best practices and utilization of superior
technologies to define the standard of care within the field of medical
aesthetics.  We believe that medical
aesthetics is currently an underserved market both in terms of unmet consumer
demand and untapped provider opportunities.
We currently provide opportunities for medical practitioners to provide
aesthetic medical services in our Florida locations and in our flagship
stores.  Our future plans include
solutions to enable a myriad of different providers (e.g., plastic surgeons,
dermatologists, and Med Spas) to offer standardized, premium-quality aesthetic
services and products to clients in a suitable setting.  Our service protocols have been reviewed by
our Medical Advisory Board and thought-leader medical institutions including
Johns Hopkins Medicine and UT Southwestern Medical Center, both of which
provide medical services in a Klinger flagship facility.  Johns Hopkins Medicine consulted on the
design and information analysis of tests performed on our Cosmedicine
products.  Our goal is to establish
Klinger as the standard of care in the medical aesthetics industry. The
implementation of this goal will center on the growth and development of the
following distinct but complementary business lines.

Technology and Protocol Driven Standard of Care  The K360
System

(K360 SYSTEM)

We
believe the K360 system is the first comprehensive software and hardware
practice management system that facilitates the delivery of evidenced based
best practices aesthetic services. It includes (i) science-based diagnostic
tools that identify the appropriate services and products specific to the needs
of each individual client, (ii) care delivery guidelines to insure accurate and
repeatable results, and (iii) the ability to capture standardized outcomes
data that drives quality, consistency and future data mining opportunities.
Beginning in fiscal 2007, we began licensing the software to a small number of
clients.  Our goal is to begin
generating a small amount of revenue on this software in 2007.  We believe that licensing the software will
serve as a catalyst for the sale of our products and services. The technology
was developed by Klinger with the assistance of technical providers such as
Avanade (a joint venture between Microsoft and Accenture) and tested for
accuracy and safety by Johns Hopkins Medicine, whose name appears on screens in
the software application. The system is web based, which supports
inter-connectivity between the Companys locations and licensees, including
Johns Hopkins Medicine and UT Southwestern Medical Center.

Branded Aesthetic Services

(KLINGER COSMEDICINE FACIAL)

Our Company develops branded
protocol-driven aesthetic services, including The Klinger Cosmedicine Facial
that are supported by the K360 system and back bar products that create
measurable results in appearance improvement.
Our flagship locations deliver these branded services and serve as the
development and beta sites for testing and refining such services in a true
retail environment.

Cosmedicine Products

(COSMEDICINE)

Our
Company formulates and distributes its own line of clinical skin care products
that includes OTC skin care products that have undergone scientific testing to
assure accurate efficacy and safety claims. Johns Hopkins Medicine assisted us
with several aspects of the product development including testing design
analysis. We

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currently market our
products through Company stores, Sephora, and the internet.  We are negotiating with pharma companies and
we plan to broaden our Cosmedicine offering to feature Cosmedicine
Professional, which we expect will include a line of RX grade products to
support the Companys MD and Med Spa channel strategy.  We will seek to market our products through
multiple high growth channels including our Company-owned stores, prestigious /
high-end retail locations, Direct-To-Consumer television broadcasts, Med Spas
and physicians offices. We have also developed a line of professional back bar
products that are designed to be used in conjunction with our proprietary
protocol-driven services that utilize best practices data and diagnostic tools
to address the specific needs of each client. We currently use these products
in our own locations.  We launched the
Cosmedicine product line in February 2006 for exclusive distribution in Sephora
and in our stores and also the back bar products that are used in our own
facilities.

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Retail Concepts &
Flagship Locations

(KLINGER)

We
operate two flagship locations that allow the marketplace to experience and validate
our software, product, services and retail design concepts. Our current
flagships are located in Dallas, Texas and Chevy Chase, MD at which medical
care is delivered by UT Southwestern Medical Center and Johns Hopkins Medicine,
respectively. The Dallas location is also adjacent with Sephora and designed to
allow internal customer traffic flow between both locations.  We also have nine legacy locations operating
throughout the country that offer our various products and services.

Operations

Stores / Locations

Our
locations include the NorthPark flagship in Dallas, Texas, the Chevy Chase
flagship in Chevy Chase, Maryland and nine other operating stores.  Taken together, our operating presence is
national in scope, with locations in key markets such as New York, Boca Raton,
Palm Beach Gardens, West Palm Beach, Dallas, Chevy Chase, Chicago and Short
Hills, among others.  The complete
listing of our store locations is as follows:

| |   |                                  
| | - | ---------------------------------
| |  | Dallas,
  Texas                  
| |  | Chevy Chase,
  Maryland          
| |  | Manhattan,
  New York,           
| |  | Manhasset
  Long Island, New York
| |  | Beverly
  Hills, California (A)  
| |  | Costa Mesa,
  California         
| |  | Boca Raton,
  Florida            
| |  | Palm Beach,
  Florida (B)        
| |  | Chicago,
  Illinois              
| |  | Short Hills,
  New Jersey        

(A)                 Currently closed for
renovations(B) There are currently three stores in Palm
Beach

Revenue Base

Spa and Salon Services  Our salon offerings include services such
as hair styling, coloring, texturizing, treatments, extensions, make-up
artistry and manicure/pedicures.  Our
spa services include treatments such as facials, body treatments (exfoliation,
wraps, cellulite treatments), waxing and massage therapy.  Spa and salon service revenue represented
65%, 69% and 77% of our total operating revenues for the fiscal years ended
July 1, 2006, June 30, 2005, and June 30, 2004, respectively.

Retail Product Sales  Include
sales of third party products, our Georgette Klinger line,  and our Cosmedicine products through our own
locations and internet sites. Retail product sales revenue represented 19%, 22%
and 16% of our total operating revenues for the fiscal years ended July 1,
2006, June 30, 2005, and June 30, 2004, respectively.

Wholesale Product Sales Include
sales of our Cosmedicine products at Sephora stores and Sephoras internet
site. These products were launched in fiscal 2006 and represented 8% of our
total operating revenues for the fiscal year ended July 1, 2006.

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Cosmetic Medical Services Our cosmetic medical offerings include injection
services (Botox and Restylane), sclerotherapy (vein treatments), peels,
microdermabrasion, permanent make-up, laser resurfacing and laser hair
removal. Medical service revenue
represented 8%, 9% and 7% of our total operating revenues for the fiscal years
ended July 1, 2006, June 30, 2005, and June 30, 2004, respectively.

The Market

In
2002, prior to the formation of KAAI, The Monitor Group was engaged to do a
market study of the aesthetics human appearance-improvement market. According
to the study provided, the highly fragmented aesthetics market generated over
$80 billion in domestic revenue in 2002.
The study further projected the market would reach $120 billion by
2007.

The
aesthetics market enjoys many favorable characteristics.  The market, particularly the more medically
oriented segments, are enjoying high growth.
According to The Monitor Group study, nationally, cosmetic surgery,
cosmetic dentistry and cosmetic dermatology were expected to grow at a combined
five year CAGR of 11% from 2002 to 2007.

We
believe this market growth is being driven by (i) aging demographics, (ii)
increasing public acceptance of aesthetic interventions, (iii) the emergence of
new, less invasive modalities, such as Botox, wrinkle fillers (e.g.,
Restylane) and lasers, (iv) the introduction of new over-the-counter active
product ingredients (e.g., alphahydroxy acid) and (iv) heavy
media interest and coverage of the industry.
The categorys relative recession-resistance represents another one of
the markets attractive features.
According to The Monitor Group, personal care services and products did
not suffer price erosion in the previous recession during the early 1990s, and
our target customers (primarily females, ages 35-50 with household income of
more than $50,000) exhibited the most resiliency in spending and the strongest
growth trajectory.

Despite
the markets considerable advantages, however, key market gaps remain.  While time-pressured consumers find
themselves increasingly curious about engaging in appearance improvement, management
believes that consumers remain confused and concerned
about which procedures to undergo, which products to use, what the results will
be and which providers to trust.  In
large measure, we believe, and our business model assumes, that this is because
the aesthetic market is highly fragmented and not configured to meet consumer
needs.

The
Monitor Group determined that approximately 90% of salons and spas are
solo-operations.  Furthermore,
management believes that aesthetic service providers usually limit their
services to their designated discipline (e.g. spa care, dentistry,
dermatology).  Thus, the consumer in
search of holistic appearance improvement must research and maintain complex
relationships with multiple providers, a dynamic which we believe has created
dissatisfaction, inefficiency and confusion.
While some providers have endeavored to deepen relationships with
clients by supplementing their offerings, they have done so on a limited
basis.  With insufficient business
training/acumen, the quality of these medical practitioners ancillary services
can be sub-par, which we believe has only magnified consumer frustration.

Moreover,
we believe most medical practitioners are not specifically trained to deliver
aesthetic treatments.  For example,
dermatologists are schooled in how to remove pre-cancerous moles, not artfully
inject wrinkle fillers.  In addition,
most providers make very limited use of diagnostics and outcomes tools and
measurements, so at best, consumers may be left with only subjective assurances
about the quality of the results for the treatments they undergo.  These dynamics drive a wide variety in
aesthetic outcomes (even from consumers visiting the same physician), which
only amplifies consumer anxiety.

Research
we conducted suggests that providers appreciate such consumer anxieties, and
that they also wish to provide more objectively measurable results and partake
in a more comprehensive offering.  We
conducted over eighty in-depth interviews with medical and dental practitioners
and over 90% agreed that

9

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their
fields were changing and that they were ill-equipped to respond effectively to
meet consumers broadening needs.  Our
integrated model aims to address provider concerns about their clients needs.

In
a series of customer focus groups commissioned by us as well as hundreds of
in-person interviews conducted in the Boca Raton, Palm Beach, Miami, and
Chicago markets, the vast majority of target consumers voiced a desire for a
trusted single resource they could depend on for all their appearance
improvement service and product needs.
They expressed strong emotional investment in the category, but said the
time pressures they faced coupled with the lack of trusted information and
decision support deterred them from participating more deeply and frequently in
the category.  In a Harris Interactive
national survey conducted on KAAIs behalf prior to its launch, nine in ten
consumers said the most critical catalyst for participating more heavily in the
category was being able to trust the quality of the providers.  Additionally, 70% rated a concierge that
could serve as a trusted information source about aesthetic enhancement as
extremely important.  Nearly half noted
that, given the brand promise, they would be predisposed to buy product from
KAAI although we realize that the results of consumer focus groups or surveys
do not ensure any actual purchases or results from these or other customers.

On
the retail side, despite a flurry of physician-brand over-the-counter
introductions (e.g., MD Skincare and N.V. Perricone M.D.), these products
have not, in our belief captured significant market share.  In other channels such as skin care, we
believe that there are consumer needs that have not been fulfilled.  We believe this creates an opportunity for
our Cosmedicine skin care line.

Competition

In
each type of product or service, (i) salons and spas (including medical), (ii)
skin care products, and (iii) diagnostic technology, we are faced with
competition.  Numerous competitors
currently compete with some sub-section of our product and services offerings
and might pose an increasing challenge if they were to expand their menu of
offerings.

MediSpas.
An
increasing number of companies are offering a limited combination of spa and
dermatology services, as well as retail products.  Some multi-site and/or regionally oriented competitors such as
SkinKlinic and Lumity focus their offerings on a combination of invasive (e.g.
Botox) and non-invasive (e.g., laser) dermatological aesthetic treatments and
products.

Spas.
Elizabeth Ardens Red Door is our largest national competitor.  Hotel chains and other regional and
supra-regional players may deepen their current offerings.  Furthermore Estee Lauder has now entered
into our niche.  Estee Lauder has made a
foray into the beauty service arena through its Aveda Spas.

Salons.
The
Salon market is the most fragmented service line with over 250,000 businesses
classifying themselves as beauty salons.
The largest competitor, Regis Corporation, has an approximate market
share of 2%.  According to published
reports, approximately 80% of salons have annual revenue of $0.5 million or
less.  Chain salons growth is increasing
and many are attempting to offer spa oriented services.

Product
Manufacturers.  We currently face competition from numerous
competitors including LOreal Group, which recently purchased La Roche
Posay.  La Roche Posay offers skin care
products through various distribution channels including dermatologist offices.  In addition, Valeant Pharmaceutical recently
launched its Kinerase skin care products in Sephora stores, as well as
dermatologist offices.

Furthermore,
several independent physician brand professional over-the-counter skin care
lines (e.g. Murad Skincare, N.V. Perricone, M.D., DDF Skincare) have achieved
distribution on a national scale.

10

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Diagnostic
software. We
currently face competition from numerous competitors who perform some of the
functions and attributes of our system such as NexTech, Inform solutions, Epic
System, and Canfield Mirror System.  We
believe that we are the only provider, however, that combines the functionality
of each of these niche providers into one integrated diagnostic solution. Our
system adds the unique and proprietary delivery of care protocols based on
industry best practices, decision support systems for product and service
recommendations based on algorithms derived from clinical outcomes, and a
centralized, dynamic outcomes database.

Certain Regulatory Matters

Although
not exhaustive, the following is a summary of certain regulatory matters that
may be applicable to the Company and its products and services.

FDA
Regulations

Many
products in our Cosmedicine skin care product line are subject to regulation by
the United States, Department of Health and Human Services, Food and Drug
Administration, the FDA.  The
Cosmedicine skin care product line consists of products that are regulated by
the FDA as cosmetics and may also be regulated as over-the-counter drugs.  The Food, Drug, and Cosmetic Act, (the FD&C Act), is the
federal law that governs cosmetics and drugs, defines cosmetics by their
intended use, as articles intended to be rubbed, poured, sprinkled, or sprayed
on, introduced into, or otherwise applied to the human body for cleansing,
beautifying, promoting attractiveness, or altering the appearance (i.e., skin
moisturizers).  Drugs are defined by
their intended use, as articles intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease and articles (other than food)
intended to affect the structure or any function of the body of man or other
animals.

Intended
use may be established in a number of ways.
Among them are:

| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Claims stated on the
  product labeling, in advertising, on the Internet, or in other promotional
  materials.                               
| |   |                                                                                                                                              
| |  | Consumer perception, which
  may be established through the products reputation.                                                            
| |   |                                                                                                                                              
| |  | Ingredients that may cause
  a product to be considered a drug because they have a well known (to the
  public and industry) therapeutic use.

Some
of our Cosmedicine skin care products may meet the definition of both cosmetics
and drugs.  This may happen when a
product has two intended uses, for example, moisturizers and makeup marketed
with sun-protection claims.  Such
products must comply with the requirements for both cosmetics and drugs.

FDA
Cosmetic Requirements

The
two most important FDA laws pertaining to cosmetics marketed in the United
States are the FD&C Act and the Fair Packaging and Labeling Act, (the FPLA).  FDAs legal authority over cosmetics is different from other
products regulated by the agency, such as drugs, biologics, and medical
devices.  With the exception of color
additives, cosmetic products and ingredients are not subject to FDA pre-market
approval authority.  The FD&C Act
prohibits the marketing of adulterated or misbranded cosmetics in interstate
commerce.  Violations of the Act
involving product composition 
whether they result from ingredients, contaminants, processing, packaging, or
shipping and handling  cause
cosmetics to be adulterated and subject to regulatory action.  Improperly labeled or deceptively packaged
products are considered misbranded and subject to regulatory action.  In addition,

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regulations prohibit or restrict the use of several ingredients in cosmetic
products and may require warning statements on the labels of certain types of
cosmetics.  Under the authority of the
FPLA, the Federal Trade Commission, (FTC) requires an ingredient declaration to
enable consumers to make informed purchasing decisions.  Cosmetics that fail to comply with the FPLA
are considered misbranded under the FD&C Act.

Cosmetic
firms are responsible for substantiating the safety of their products and
ingredients before marketing.  FDA may
take regulatory action if it has information showing that a cosmetic is
adulterated or misbranded.  FDA can and
does inspect cosmetic manufacturing facilities to assure cosmetic product safety and determine whether cosmetics
are adulterated or misbranded under the FD&C Act or FPLA.  The agency can pursue action through the
Department of Justice to remove adulterated and misbranded cosmetics from the
market.  To prevent further shipment of
an adulterated or misbranded product, the agency may request a federal district
court to issue a restraining order against the manufacturer or distributor of
the violative cosmetic.  Violative
cosmetics may be subject to seizure.  FDA
also may initiate criminal action against a person violating the law.

The
FD&C Act does not set forth any regulations that require specific Good
Manufacturing Practices (GMP) or registration requirements for cosmetics but
does so for drug products.  The FDA,
however, does maintain the Voluntary Cosmetic Registration Program for cosmetic establishments and
formulations that choose to register.

FTC
Regulations

As
described elsewhere in this Report, the packaging, labeling, marketing and
promotion of our products are subject to regulation by the Federal Trade
commission as well as various state governmental agencies.  These regulations apply directly to our
Cosmedicine line of products and could also be applied to other products and
services we offer.

Corporate
Practice Prohibitions

Many
states, including California,
Illinois, New Jersey, New York and Texas, have statutes that either expressly
prohibit or have been interpreted to prohibit what is known as the corporate
practice of medicine.  These laws are
designed to prevent interference in the medical decision-making process from
anyone who is not a licensed physician.
Most states that prohibit the corporate practice of medicine also have
similar restrictions in connection with the practice of nursing, and other
health professions.  Application of
these prohibitions varies from state to state.
Some states allow a business to exercise significant management
responsibilities over the day-to-day operation of a professional practice,
while other states restrict or prohibit such activities.

In
states with corporate practice prohibitions, we are unable to provide through
the Company, any services that may only be performed by licensed persons, or to
assert financial control of our allied professionals practices.  Furthermore, in those states, we are unable
to bill our clients directly for services performed by such professionals, and
are unable to include revenues from the performance of such services in our own
revenues.  The existence of these laws
has the effect of limiting the operations of the Company in states with
corporate practice limitations.

Licensing

We
are required to obtain licenses from various federal, state, and local agencies
to provide our services.  In addition,
every state imposes licensing requirements on the individual medical, dental,
and other healthcare providers with whom we may enter into arrangements.  States also impose licensing and other
requirements on many of the spa and salon services we offer.

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Federal
Physician Self-Referral Law

Provisions
of the Social Security Act commonly referred to as the Stark Law prohibit
referrals by a physician of Medicare patients to providers for certain
designated health services if the physician (or his or her immediate family
member) has an ownership interest in, or other financial relationship with, the
provider, unless an exception applies.

We
have arrangements with medical professionals under which we compensate various
physicians and other healthcare providers for services, which arrangements
could constitute financial relationships under the Stark Law definition.  We believe that all of our current provider
relationships comply with this law.

State
Fee-Splitting Laws

Many
states have statutes and regulations that either expressly prohibit or have
been interpreted to prohibit physicians and other healthcare providers from
sharing or splitting fees with unlicensed entities, such as us.  Other states have fee-splitting prohibitions
that apply when professional fees are shared with a referral source or even an
unaffiliated licensed professional.

Violations
of any of these state laws may result in censure, fines, loss of a healthcare
providers license, or even criminal penalties.  These statutes and regulations vary from state to state and are
often vague and subject to differing interpretations.

We
have not yet opened any Integrated Flagship facilities in California, Illinois,
New Jersey, or New York, but may do so.
Because of the corporate practice of medicine, fee-splitting and
self-referral prohibitions in those states, the  Company intends to enter into management or facility fee
arrangements with physicians (or professional entities owned by physicians) in
which we will provide office space and management services in exchange for fees
that are negotiated and determined in advance.
The physician or entity will be responsible for employing or contracting
with physicians, nurse practitioners and other healthcare professionals and
will be solely responsible for all aspects of diagnostic, clinical and other
medical services, including the selection, training, direction and supervision
of licensed professionals.  We intend to
make clear to the public that our facilities do not provide medical services
and that any medical service provided at our facilities is performed solely by
or under the supervision of an independent medical professional or practice.

In
Florida and Maryland, where we currently operate several facilities, there is
no corporate practice of medicine prohibition and, accordingly, we are able to
employ or contract with physicians, nurse practitioners and other medical
professionals and to hold ourselves out to the public as providing medical
services.  Under our current Florida
model, a portion of the total fees paid by the patient is retained by us as
compensation for the management services and office space that we provide.

Material Agreements

Agreements with
Johns Hopkins Medicine

On
November 21, 2003 KAAI entered into a Consulting Services Agreement
(Consulting Agreement) with Johns Hopkins Medicine (Johns Hopkins), acting through Johns Hopkins Health System
Corporation, and the Johns Hopkins University.
Under the Consulting Agreement, Johns Hopkins agreed to provide
consulting services to KAAI consisting of:
(i) review and assessment of our medical delivery protocol document and
(ii) consultation on the development of outcomes studies methodologies.  The Consulting Agreement also sets forth the
conditions for the use of the Johns Hopkins mark.  The term of the agreement is until November 21, 2008.  The Consulting Agreement
may be terminated
by either party at any time with 120 days written notice.

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The
consideration for the review and assessment services provided by Johns Hopkins
was $5,000 per day.  The consideration
under this original Consulting Agreement for the limited use of the Johns
Hopkins mark was $0.3 million per year, payable in quarterly installments, and 500
shares of KAAIs series E preferred stock.

As
of June 30, 2005, Johns Hopkins held a minority interest in KAAI constituting
shares of Series E Preferred Stock.  The
Series E Preferred Stock represented Johns Hopkins equity interest in
KAAI.  On May 4, 2006, Johns Hopkins
voluntarily forfeited all of its equity interest in KAAI shares of Series E
Preferred Stock.  The forfeited shares
constituted all issued and outstanding shares of Series E Preferred Stock and
as a result, as of July 1, 2006, no shares of Series E Preferred Stock of KAAI
are issued and outstanding. As a result of the forfeited shares, the Company
canceled these shares at the end if its fiscal year, ending July 1, 2006.

On
March 23, 2005, KAAI signed an amendment to the Consulting Services Agreement
(Amendment or Amended Agreement) with Johns Hopkins effective June 1,
2005.  The purpose of this Amendment was
to expand the oversight function that Johns Hopkins would perform for the
Company to include increased medical protocol review, medical facility design
and physician credentialing.  In
addition, the Amendment expanded use of the Johns Hopkins trade name by
KAAI.   For the increased oversight and
review services provided by Johns Hopkins, KAAI agreed to increase the
consideration paid to Johns Hopkins from $.3 million to $1.0 million in the
first year of the contract, $1.5 million in the second year of the contract and
$1.0 million annually thereafter until the term of the contract is reached.  The term of the Amended Agreement is until
June 1, 2010.  The Amended Agreement may
be terminated by either party at any time with 120 days of written notice.

In
December 2004 KAAI entered into a Services and Licensing Agreement with Johns
Hopkins, acting through Johns Hopkins Health System Corporation, and the Johns
Hopkins University.  Under the Services
and Licensing Agreement, Johns Hopkins agreed to provide the following services
to KAAI: (i) investigate current methods for skin care parameter testing at the
point of sale; (ii) where existing protocols and equipment for skin care
parameter testing do not exist or are not acceptable to Johns Hopkins, develop
acceptable methods to measure the condition of clients skin; (iii) create a
new testing methodology to validate skin care product efficacy; (iv) oversee
the ongoing testing of skin care products using the Johns Hopkins testing
standards; and (v) oversee the testing of 15 of our skin care products using
the agreed upon testing standards.  This
Services and Licensing Agreement was subject to the satisfaction of certain
conditions, which KAAI had to satisfy by October 31, 2005.  The conditions include: (i) written
agreement by Johns Hopkins and KAAI on: (A) the parameters for research and
academic freedom as opposed to work for hire as noted in the agreement; (B) the
amount of royalty fees,  guaranteed  annual fees and equity as noted the
agreement; (C) the buyout or additional stock to be  provided  Johns Hopkins at
the end of the term of the agreement; and (D) an appropriate scope of coverage
for product and/or contractual liability insurance to be maintained by KAAI;
(ii) final approval by internal Johns Hopkins committees  for
the Permitted Statement (as defined in the agreement); and (iii)  documentation of the matters described in
(i) and (ii) by an amendment to the agreement.
On November 10, 2005, the period by which KAAI was required to satisfy the
conditions was extended to December 31, 2005.
On January 3, 2006, the parties extended such period until March 31,
2006.  In March 2006, the parties
extended such period to June 30, 2006.
On June 21, 2006, the period was extended to September 30, 2006.  The term of the servicing and licensing
agreement was to be 5 years after the satisfaction of the conditions.  KAAI and Johns Hopkins have not sought
further extension of the time period to satisfy the conditions in the Services
and Licensing Agreement and do not intend to continue that Agreement.  Therefore, unless changed by current
negotiations, we do not anticipate that there will be any reference to Johns
Hopkins on our Cosmedicine products packaging after our existing packaging is
used up.  Packaging that has already
been printed with the reference to Johns Hopkins will be used until existing
inventories are depleted.  Johns Hopkins
is currently branded on our K360 software and we do expect that to continue in
the future.  In addition, the Johns Hopkins
name is used in the marketing of our medical services as the name appears on
the doors of our on-site medical facilities.
Even though we do not

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intend to continue the
Services and Licensing Agreement, the existing Consulting Services Agreement
previously discussed, is still in full force and effect.

We
have an alliance with John Hopkins, widely acknowledged to be among the most
respected medical institutions in the US.
John Hopkins has agreed to review and assess our process for verifying
the safety and clinical quality of our practitioners, protocols and facilities;
it also approves the medical protocols of our Medical Advisory Board and
provides consulting on the scientific testing of our Cosmedicine product
line.  John Hopkins approved the use of
the John Hopkins Medicine name as part of the marketing of our facilities,
intellectual property and certain collateral materials as described in the
Consulting Services Agreement and Amendment.

Johns
Hopkins Medicines role with KAAI is to provide aesthetic-improvement clients
with information regarding performance and safety claims. The relationship is
designed to provide consulting services on aspects of our medical services
business, and on the safety and performance of our skin care product line.
KAAIs goal is to help establish consistent, safe delivery of medical aesthetic
services in its centers, to create objective testing of the effects of our skin
care products, and to focus on measurable elements of skin health.

Agreement with
Sephora USA

In
December 2004 KAAI entered into a Retail Alliance Agreement with Sephora USA,
LLC (Sephora).  Pursuant to the
agreement KAAI granted Sephora the rights to:
(i) sell its Cosmedicine products in Sephora retails stores, through its
website and any other retail channels, (ii) utilize certain of KAAIs
intellectual property and methods in order to operate the KAAI stores in
Sephora stores, (iii) develop with KAAI the adjacent KAAI facilities and (iv)
sublease retail space from us for the purpose of constructing and operating a
Sephora store within KAAI centers.  The
term of the agreement is until December 31, 2010.

Upon
execution of the agreement, Sephora deposited a performance deposit in an
amount of $5.0 million with an escrow agent, which was subsequently paid to
KAAI.  If Sephora, pursuant to the terms
of the agreement, terminates the agreement with KAAI it may have the right to
recoup a portion of the $5.0 million performance deposit.  Sephora will also have the right to earn back
its performance deposit if the arrangement is successful.  KAAI will be required to return to Sephora
50% of the performance deposit at such time that the Net Revenues of Sephora
relating to the sale of Cosmedicine products plus Sephora Capital Expenditures
(each as defined in the agreement) equals $30 million and the remaining
performance deposit at such time that such Net Revenues plus Capital
Expenditures equals $60 million.  We
have recorded $2.7 million in net revenues on a cumulative basis as of July 1,
2006.  See Certain Relationships and Related
Party Transactions  Sephora.

Agreements with Mark Potter and Atlantis Laboratories

On
April 4, 2006, KAAI entered into a Consulting Agreement (the Consulting
Agreement) with Mark Potter and Atlantis Laboratories, Inc. (Atlantis and
together with Mr. Potter, the Formulators). The Formulators have developed,
formulated and produced skin care products for our Cosmedicine product line.
Under the Consulting Agreement, the Formulators agreed to use their best
efforts to provide all services necessary to (i) expand the number of product
types in our over-the-counter Cosmedicine line, (ii) formulate and develop an
enhanced version of (a) Cosmedicine, (b) a foundation cosmetic line, (c) a hair
care product line and (d) a cosmetics line, and (ii) have such products  produced and shipped by Atlantis for sale at
our spa and salon  facilities and other
outlets.

The
Consulting Agreement also contains a non-competition clause that provides,
among other things, that (i) the formulas developed by the Formulators for KAAI
are proprietary and may not be used by the Formulators for any purpose other
than on behalf of KAAI and may not be utilized in products sold to

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anyone other than KAAI and
(ii) except for limited exceptions, the Formulators will not directly or
indirectly acquire or own any interest in any entity engaged in the business
conducted by KAAI. Mr. Potter is to be paid an annual consulting fee of
$207,000  in equal  monthly
installments of $17,250. In addition, KAAI granted Mr. Potter on
September 18, 2006, an option to purchase the TrueYou equivalent of 150,000
shares of KAAI common stock at an exercise price of $0.22 per share, vesting
over a period of three years. Mr. Potter also received 100,000 options to
purchase KAAI common stock on February 1, 2005, at an exercise price of $4.00
per share, vesting over four years.  The
initial term of the Consulting Agreement is five years.

In
connection with the Consulting Agreement, on April 12, 2006, KAAI entered into
a formula agreement with the Formulators and JPMorgan Chase Bank, N.A., as
escrow agent. Pursuant to the formula
agreement,  the  Formulators
agreed that all  existing  and future formula,  manufacturing  procedures  and  specifications, along with  specific details of all
raw material
suppliers and specifications for the raw materials relating to the products to
be purchased by us from the Formulators are to be deposited with the escrow
agent. In the event of certain specified events and/or contingencies, the
escrow agent is required to deliver such formulas, manufacturing procedures and
specifications to KAAI.

Pursuant
to the Consulting Agreement, KAAI agreed to loan up to a total of $1,100,000 to
Mr. Potter for the purchase of land in Conroe, Texas and construction of a
laboratory and manufacturing facility to manufacture and supply the Cosmedicine
line of products.  On April 17, 2006,
KAAI made a loan of $392,200 to the Formulators for the purchase of the
property evidenced by a promissory note. Under the promissory note, the
principal sum of $392,200 with interest at the rate of 6-1/2% per annum is
payable in 120 monthly installments of principal and interest in the amount of
$4,453.00 each with the first installment due on May 1, 2006.  At July 1, 2006 the Company had a note
receivable balance of $0.4 million from Mr. Potter which is included in other
assets on the consolidated balance sheet.

In
connection with the foregoing, KAAI also entered into a construction loan
agreement dated April 4, 2006 with the Formulators pursuant to which the
Formulators executed a $650,000 construction loan promissory note to KAAI for
the development of a laboratory and manufacturing facility to be operated by
Atlantis on the Property. Under the terms of the construction loan agreement,
we are to  make  advances
to the  Formulators  under
the  construction  loan promissory note from time to time in
connection  with the  construction  on the property.  The
amount of each advance will be determined by KAAI.  The unpaid principal balance on the construction loan promissory
note bears interest at a rate of 6-1/2% per annum. Monthly  installments of  interest only on the outstanding
principal  balance will be
due  commencing on the first day of the
month  following  the initial
advance and  continuing  on the first day of each subsequent month up
to and including April 1, 2007.
Commencing May 1, 2007, and continuing through April 1, 2016,
installment payments of principal and interest will be due in such amount as
will be  sufficient  to pay in 108 equal  payments all principal and accrued interest.

Intellectual Property

We
consider trademark protection to be important to our business and we are the
owners of numerous U.S. and foreign trademark applications/registrations.  Significant trademarks include:  KAAI, the KAAI
logo, KAAI
Signature Services, Klinger Advanced Aesthetics, Cosmedicine, Georgette
Klinger, SkinState, Personal Aesthetics Blueprint,
Aesthetic
Concierge, Truth is Beauty, Nth (K Logo) Service Services and The
Place of
Possibilities.

We
also consider patent protection to be important to our business and we are the
owners of pending U.S. patent applications and related foreign applications
covering systems and methods relating to aesthetic improvement. In March 2006,
we filed a provisional patent application for the grant of a patent for our
K360 system and filed permanent applications in June 2006.

16

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Employees

On
January 15, 2006 and July 1, 2006, we had 542 and 535 employees,
respectively.  We consider our relations
with our employees to be satisfactory.
We believe our future will depend in large part on our ability to
attract and retain highly skilled employees.

Available Information

All
of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, and all amendments to those reports, filed with or
furnished to the Securities and Exchange Commission (the SEC), are available
free of charge through our corporate internet website, www.klinger.com,
as soon as reasonably practicable after we have electronically filed such
material with, or furnished it to, the SEC.

The
information on this website is not, and shall not be deemed to be, part of this
Report or incorporated into any other filings we make with the SEC.

ITEM 1A. RISK FACTORS

You
should carefully consider each of the following Risk Factors and all other
information in this Report. These Risk Factors are not the only ones facing the
Company. Our operations could also be impaired by additional risks and
uncertainties. If any of the following risks and uncertainties develop into
actual events, our business, financial condition and results of operations
could be materially and adversely affected.

Risks Related to the Company

We have a history of
large operating losses.

As
of July 1, 2006 we had an accumulated net deficit of $214.3 million.  These losses result, in part, from our high
corporate expenses in connection with the establishment of the business,
unrealized losses on convertible securities and the limited revenues we had
during the same periods.  We believe
that our corporate expenses, as a percent of revenue, will decrease going
forward as a result of revenue increases, however, there are no assurances that
we will be able to significantly grow our revenue, reduce our corporate
expenses or become profitable in the future.
These factors raise doubt about our ability to continue as a going
concern.  Also, as a result of our losses,
the opinion of our Independent Registered Public Accountants on our audited financial
statements for fiscal year 2006 has included an explanatory paragraph relating
to going concern consideration.  A
going concern consideration explanatory paragraph indicates that our auditors
have substantial doubt about our ability to continue as a going concern for at
least a reasonable period of time.  Our
ability to continue as a going concern ultimately depends on our ability to
increase sales and reduce expenses to a level that will allow us to operate
profitably and sustain positive operating cash flows, and raise additional
capital.  We have been
unsuccessful to date in implementing a business plan which enables us to
operate profitably.

We  need additional capital to meet our working
capital requirements and debt service and will be required to curtail our
operations and / or  our planned
expansion if it is not available.

Our
principal future uses of funds are for debt service, working capital
requirements and capital spending to execute our strategy.  It is expected that our net losses will
continue at least through the end of fiscal year 2008.  In addition, subject to our ability
to raise additional capital, we expect to spend approximately $2.2 million
during fiscal year 2007 to continue to develop an information technology
infrastructure, and continue to develop our proprietary diagnostics products.  Our
need for additional capital to finance our operations
and growth will be greater if, among other things, our revenue or expense
estimates

17

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prove to be incorrect.  We
have had several recent financings (see Item I of this Report) with the most
recent completed on December 22, 2006.
These financing are not sufficient to enable the Company to
continue its operations and
additional capital is required and is currently being sought.  We
may not be able to obtain financing in which event we may be unable to
continue our operations and/or implement our strategy.

Our
Cosmedicine line of products may not be successful.

Our
future success relies in part on the continued development and success of our
Cosmedicine product line.  At such time
as our existing packaging is used, our Cosmedicine products will no longer
include any reference to Johns Hopkins.
There is no guarantee that we will be able to successfully penetrate the
cosmetics market and profitably sell our Cosmedicine products.  If we fail to do so our results of
operations will be adversely affected.

We
have only one supplier for our Cosmedicine products.

Atlantis
is our only supplier of Cosmedicine and is the owner of all of the rights to
the intellectual property developed in connection with such formulations.  We have entered into a Formula Agreement
with Atlantis under which all formulas, manufacturing procedures, and raw material
suppliers and specifications for the raw materials were deposited with an
Escrow Agent. In the event of certain specified events and/or contingencies,
the Escrow Agent is required to deliver such formulas, manufacturing procedures
and specifications to KAAI.  If we were
ever to default under the agreement, we would lose these rights.  In addition, we cannot be certain that even
if the Escrow Agent delivered such formulas to us that we would be able to
successfully manufacture our Cosmedicine products.  Loss of the formulations and/or problems with our supplier which
impairs our ability to provide Cosmedicine products could adversely affect our
financial results.

We are dependent on
our relationships with Sephora and Johns Hopkins

Our
agreements and relationship with both Sephora and Johns Hopkins provide us with
key differentiation versus existing and potential competitors.  Our agreements grant Sephora and Johns
Hopkins, respectively, the right to terminate their agreement with us for a
variety of reasons.  The Sephora
agreement provides that if Mr. Richard Rakowski, Chairman and Chief Executive
Officer stops serving at any time prior to December 31, 2007, Sephora may
terminate the agreement except that if it is a result of death or disability,
such termination will not occur so long as KAAI designate a qualified
replacement within 90 days.  If Johns Hopkins terminates the Consulting
Agreement, our medical services revenue can be negatively affected.  Medical services revenue represented 8% of
our operating revenues in fiscal 2006.  If Sephora terminates their agreement with us
in addition to a negative affect on our revenues, under certain circumstances
we may have to reimburse a portion of the upfront $5 million performance
deposit we received from them.  In
addition, the loss of either or both of these relationships could substantially
decrease our differentiation from competitors and could materially adversely
affect the Company.

The demand for our
products and services may be adversely affected by changes in the economy.

Demand
for our services and products is driven by consumers whose broad spending
patterns are affected by the state of the general economy. Over recent years,
the overall market for cosmetic medical procedures and spa services has grown,
and demand for other services has not declined.  However, we do not provide essential and
basic services and negative changes to economic conditions could lessen the
demand for our services and products.

18

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We depend on our
senior management and key employees, the loss of which could adversely affect
our operations.

Our
success depends to a large degree upon the skills of our senior management team
and current key employees, such as Richard Rakowski and Matthew Burris, and
upon our ability to identify, hire, and retain additional sales, marketing,
technical and financial personnel, including managers for each of our retail
outlets.  We may be unable to retain our
existing key personnel or attract and retain additional key personnel.  We do not maintain key person life insurance
for any of our officers or key employees.
Due to our reliance on our senior management and key employees, the loss
of any of our key executives or the failure to attract, integrate, motivate,
and retain additional key employees could have a material adverse effect on our
business, operating results and financial condition.  In addition, several members of our senior management have
recently joined us and may need to spend a significant amount of time learning
our business model and management system while performing their regular
duties.  The integration of new
executives or any new personnel could disrupt our ongoing operations.

We
also rely on the medical practitioners and aesthetics professionals who will
deliver our services.  These
professionals are not subject to long-term employment contracts and a loss of
these professionals would affect our ability to deliver our services and
execute our business plan.

Government
regulation may affect our ability to carry out our business plan and may change
from time to time.

The
U.S. healthcare industry, including aspects of our business, is highly
regulated, and regulatory agencies are vested with broad discretion in
interpreting applicable laws and regulations.
The interpretation of these laws also varies from state to state.  While we believe that our operations are
conducted so as to comply in all material respects with the healthcare laws
that apply to our operations in each state, our arrangements and current and
proposed activities have not been examined by federal or state authorities for
compliance with applicable laws and regulations, and no governmental opinions
have been sought or received.
Furthermore, there can be no assurance that the regulatory environment
in which we operate will not change significantly in the future, requiring us
to restructure our arrangements.  Our
revenues, and those of our allied professionals, could be adversely affected by
unanticipated changes in applicable laws.

In
addition, a current regulatory proposal by the FDA Center for Drug Evaluation
and Research (CDER) relating to required labeling could raise barriers to
both entry and remaining in the skin care market. Additionally legislation
relating to cosmetics is sporadically proposed and new legislation could impact
the marketability and profitability of some cosmetic ingredients and/or
products, which may include our Cosmedicine line of products.

We
are required to obtain licenses from various federal, state, and local
authorities for our facilities and certain of the healthcare services that will
be offered by or through us.  In
addition, every state imposes licensing requirements on the individual medical
providers and other professionals with whom we have or intend to enter into
contractual arrangements.  If we and
these individuals cannot obtain and maintain all required licenses, our
operations may suffer.

We are subject to
corporate practice of medicine prohibitions.

Many
states, including California, Illinois, New Jersey, New York and Texas, have
statutes that either expressly prohibit or have been interpreted to prohibit
what is known as the corporate practice of medicine.  These laws are designed to prevent
interference in the medical decision-making process from anyone who is not a
licensed physician.  Most states that
prohibit the corporate practice of medicine also have similar restrictions in
connection with the practice of nursing, and other health professions.  Application of these prohibitions varies
from state to state.  Some states may
allow a business to exercise significant management responsibilities over the
day-to-day operation of a professional practice, while other states restrict or
prohibit such activities.

19

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In
states with corporate practice prohibitions, we will be unable to provide
through the Company any services that may only be performed by licensed
persons, or to assert financial control of our allied professionals
practices.  Furthermore, in those
states, we may be unable to bill our clients directly for services performed by
such professionals, and will be unable to include revenues from the performance
of such services in our own revenues.
This is the case in our Maryland and Texas locations and our operations
were developed accordingly.  If a state
in which we operate determines that we are engaged in the corporate practice of
a profession, we might be required to restructure or cease such operations and
be subject to penalties as well.  The
need to comply with corporate practice prohibitions may also increase our
administrative costs or even make allied professionals in certain states
unwilling to enter into contractual relationships with us.

We are subject to
fee-splitting prohibitions.

Many
states we have operations in, including California, Illinois, New Jersey, New
York and Texas, have statutes and regulations that either expressly prohibit or
have been interpreted to prohibit physicians and other healthcare providers
from sharing or splitting fees with unlicensed entities, such as us.  Other states have fee-splitting prohibitions
that apply when professional fees are shared with a referral source, even an
unaffiliated licensed professional.
Violations of these state laws may result in censure, fines, loss of a
healthcare providers license, or even criminal penalties.  These statutes and regulations vary from
state to state and are often vague and subject to differing
interpretations.  If a state in which we
operate determines that our financial arrangements with allied professionals
constitute fee-splitting, we might be required to restructure or cease such
operations, and we and/or our allied professionals might be subject to
penalties as well.

We are exposed to
possible liability in excess of insurance coverage.

Each
licensed professional with whom we establish a relationship is required to
carry general liability and professional liability (malpractice) insurance to
cover potential lawsuits and claims.  As
a result of our association with such professionals, we may be named as a
co-defendant in any suit brought against them and, even if we are not
ultimately subject to liability, we may incur significant costs in defending
such a suit.  While we do not practice a
profession and thus cannot purchase malpractice insurance for ourselves, we require
our allied professionals to name us as an additional insured under their own
malpractice policies, if permitted by the insurance carriers.  We also carry insurance coverage for our
directors and officers, as well as general liability insurance, in amounts that
we anticipate will adequately cover potential liability exposure.  Still, large, unforeseen damage awards may
exceed our coverage.  It is also
possible that coverage may not continue to be available to us on satisfactory
terms.  Successful claims against us or
our allied professionals could have a material adverse impact on our business
and financial condition.

We are subject to
regulation by the FDA.

The
Federal Food, Drug and Cosmetic Act, and the regulations promulgated
thereunder, and other federal and state statutes govern, among other things,
the testing, manufacture, safety, labeling, storage, recordkeeping, advertising
and promotion of cosmetic products.  Our
Cosmedicine skin care product line will be regulated by the United States
Department of Health and Human Services, or FDA.  Our Cosmedicine skin care product line consists of products that
are subject to regulation by the FDA as cosmetics and may also be regulated as
over-the-counter drugs.  If they will be
regulated as over-the-counter drugs they may require additional approvals and
testing.  The process of obtaining and
maintaining regulatory approvals for the manufacturing or marketing of our
Cosmedicine products could be costly and time-consuming and is subject to
unanticipated delays.  Regulatory requirements
ultimately imposed could also adversely affect our ability to test, manufacture
or market products.

20

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We are subject to
regulation by Federal Trade Commission.

The
FTC, together with other governmental agencies have enacted regulations that
prohibit the advertising, packaging, labeling, promotion and similar marketing
of any cosmetic which include any false or misleading claim and that any
representation with respect to the efficacy of such product must have a
competent and reliable basis.  We will
make every effort to advertise, package, label, promote and otherwise market
our products in compliance with applicable regulations of the FTC and
applicable state laws.  However,
determination of compliance is subject to wide interpretation and we can make
no assurance that a governmental agency will not challenge the manner and
method by which we market our products.

Risks Related to Our Common Stock

Plans to increase
the authorized number of shares and effect a reverse stock split could have an
adverse effect on the market value of our Common Stock.

We
have taken steps to increase the number of shares of Common Stock the Company
is authorized to issue so that we would have sufficient shares of Common Stock
available for the conversion of all outstanding shares of Preferred Stock and
the exercise of all outstanding Series B Preferred Warrants and Common Stock
Warrants into Common Stock.  The shares
reserved for issuance are currently greater than those authorized.  Increasing the Authorized Shares would
facilitate the conversion of the Preferred Stock, Series B Preferred Warrants
and Common Stock Warrants issued in connection with the Share Exchange
Agreement, Series D Preferred Financing, senior debt financing and subordinated
debt financings.  Such conversion into
Common Stock will create dilution to existing Common Stock holders.

In
addition, we have taken steps to initiate a reverse stock split.  The effect of this reverse split when implemented
will be to increase the price of the Common Stock (at least initially) and may
also result in a reduced number of shareholders of the Common Stock.  A higher stock price, if coupled with
improved results in performance could make it easier for the Company to list
its securities on a different trading market.
The traditional effect of a reverse stock split, an increase in price,
may be offset due to the substantial number of additional shares of Common
Stock available in the market place as a result of the conversion described
above.

Certain
provisions of our charter documents and Delaware law could discourage potential
acquisition proposals and could deter, delay or prevent a change in control of
our company that our stockholders consider favorable and could depress the
market value of our Common Stock.

Our
certificate of incorporation grants our Board of Directors authority to issue
additional shares of preferred stock.
The preferred stock, if issued, could have liquidation, dividend and
other rights superior to the rights of our Common Stock.  Potential issuances of preferred stock may
delay or prevent a change in control of our Company, discourage bids for the
Common Stock, and adversely affect the market price and the voting and other
rights of the holders of our Common Stock.

We
are a Delaware corporation subject to the provisions of Section 203 of the
Delaware General Corporation Law, an anti-takeover law.  Generally, this statute prohibits a
publicly-held Delaware corporation from engaging in a business combination with
an interested stockholder for a period of three years after the date of the
transaction in which such person became an interested stockholder, unless the
business combination is approved in a prescribed manner.  A business combination includes a merger,
asset sale or other transaction resulting in a financial benefit to the
stockholder.  We anticipate that the provisions
of Section 203 may encourage parties interested in acquiring us to negotiate in
advance with our board of directors because the stockholder approval
requirement would be avoided if a majority of the directors then in office
approve either the business combination or the transaction that results in the
stockholder becoming an interested stockholder.

21

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Future sales of
our Common Stock could depress our market price and diminish the value of your
investment.

Future
sales of shares of our Common Stock or securities that are convertible into
Common Stock, could adversely affect the market price of our Common Stock.  If our principal stockholders sell a large
number of shares, or if we issue a large number of shares, the market price of
our Common Stock could significantly decline.
Moreover, the perception in the public market that our principal
stockholders might sell shares of Common Stock could depress the market for our
Common Stock.

Our Common Stock
price could be volatile, which could result in substantial losses for
investors.

Our
Common Stock price could be subject to volatility.  Fluctuations in the price of our Common Stock could be rapid and
severe and could leave investors little time to react. Factors that could
affect the market price of our Common Stock include:

| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the limited amount of our
  Common Stock held by our non-affiliates;                                                                                              
| |   |                                                                                                                                                                   
| |  | quarterly variations in
  our operating results;                                                                                                                  
| |   |                                                                                                                                                                   
| |  | general conditions in our
  industry or in the securities market;                                                                                                 
| |   |                                                                                                                                                                   
| |  | changes in the markets
  expectations about our earnings;                                                                                                        
| |   |                                                                                                                                                                   
| |  | changes in financial
  estimates and recommendations by securities analysts concerning our Company
  or the consumer products industry in general;                
| |   |                                                                                                                                                                   
| |  | operating and stock price
  performance of other companies that investors deem comparable to us;                                                                  
| |   |                                                                                                                                                                   
| |  | news reports relating to
  trends in our markets;                                                                                                                 
| |   |                                                                                                                                                                   
| |  | changes in laws and
  regulations affecting our business;                                                                                                         
| |   |                                                                                                                                                                   
| |  | sales of substantial
  amounts of Common Stock by our directors, executive officers or principal
  stockholders or the perception that such sales could occur; and
| |   |                                                                                                                                                                   
| |  | general economic and
  political conditions such as recessions and acts of war or terrorism.                                                                      

Volatility
in the price of our Common Stock could be exacerbated by the relatively small
number of shares of our Common Stock that are publicly traded.  Fluctuations in the price of our Common
Stock could contribute to a loss of  all
or part of any investment in our Common Stock.

Because our shares
are deemed penny stocks, you may have difficulty selling them in the
secondary trading market.

The
Commission has adopted regulations which generally define a penny stock to be
any equity security that has a market price (as therein defined) less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions.  Additionally, if
the equity security is not registered or authorized on a national securities
exchange or NASDAQ, the equity security also would constitute a penny
stock.  As our Common Stock falls
within the definition of penny stock, these regulations require the delivery,
prior to any transaction involving our Common Stock, of a risk disclosure
schedule explaining the penny stock market and the risks associated with it.  Disclosure is also required to be made about
compensation payable to both the broker-dealer and the registered
representative and current quotations for the securities.  In addition, monthly statements are required
to be sent disclosing recent price information for

22

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the penny
stocks. The ability of broker/dealers to sell our Common Stock and the ability
of shareholders to sell our Common Stock in the secondary market would be
limited. As a result, the market liquidity for our Common Stock would be
severely and adversely affected. We can provide no assurance that trading in
our Common Stock will not be subject to these or other regulations in the
future, which would negatively affect the market for our Common Stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

N/A

ITEM 2. PROPERTIES

Corporate
Headquarters

Our
corporate headquarters are located in leased premises at Building No 501, Fifth
Floor, 7 Corporate Park, Norwalk, CT 06851.

Integrated Flagships

Our
locations include the NorthPark flagship in Dallas Texas, the Chevy Chase
flagship in Chevy Chase, Maryland and nine other operating legacy stores. The
flagship locations offer a variety of spa / salon services, skin care products,
and cosmetic medical services provided by medical offices owned and operated by
Johns Hopkins and UT Southwestern.

Other Locations

In
addition to the two company flagship locations, we have nine other operating
facilities, and one location, Beverly Hills, that has been closed for
remodeling.

The
following chart sets forth data regarding our facilities:

|                                 |  |                                                                                           |  |                          |  |                         
|-------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ------------------------ |  | ------------------------
|City                             |  | Address                                                                                   |  | Facility Size 
  (sq/ft) |  | Lease Expiration 
  Date
|                                
|Costa
  Mesa
  (Spa Facility)    |  | South
  Coast Plaza, Level 2
  3333
  Bristol Street Costa Mesa,
  CA                     |  | 3,365                    |  | 1/31/2008               
|                                 |  |                                                                                           |  |                          |  |                         
|Beverly
  Hills
  (Spa Facility) |  | 131
  South Rodeo Drive,
  Beverly
  Hills, CA                                            |  | 6,630                    |  | 9/30/2015               
|                                 |  |                                                                                           |  |                          |  |                         
|Dallas-OLD
  (Spa Facility)      |  | Inwood
  Village Shopping Center 
  5560
  West Lovers LaneSuites 250
  & 252, Dallas, TX |  | 6,856                    |  | 7/26/2006
  (1)         
|                                 |  |                                                                                           |  |                          |  |                         
|Short
  Hills
  (Spa Facility)   |  | The
  Mall at Short Hills
  1200
  Morris Turnpike,Suite A-139Short
  Hills, NJ           |  | 3,475                    |  | 8/31/2008               
|                                 |  |                                                                                           |  |                          |  |                         
|Manhasset
  (Spa Facility)       |  | 1950
  Northern Blvd.
  Space
  A-2Manhasset,
  NY                                        |  | 6,313                    |  | 2/27/2007               

23

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|                                             |  |                                                                              |  |        |  |                
|-------------------------------------------- |  | ---------------------------------------------------------------------------- |  | ------ |  | ---------------
|Chicago
  (Spa Facility)                     |  | Water
  Tower Place
  Level
  3835 North
  Michigan AvenueChicago, IL        |  | 4,779  |  | 12/31/2012     
|                                             |  |                                                                              |  |        |  |                
|Washington
  (Spa Facility)                  |  | Chevy
  Chase Pavilion
  5335
  Wisconsin Ave. N.W.Washington,
  DC          |  | 5,551  |  | 8/31/2006
  (1)
|                                             |  |                                                                              |  |        |  |                
|Palm
  Beach
  (Spa Facility)                |  | The
  Esplande 
  Store
  No. 211150 Worth
  Ave.Palm Beach,
  FL            |  | 2,739  |  | 5/31/2010      
|                                             |  |                                                                              |  |        |  |                
|Hasbrouck
  Heights
  (Office)               |  | 500
  Route 17, Suite 307 
  Hasbrouck
  Heights, NJ                         |  | 2,260  |  | 9/30/2006
  (1)
|                                             |  |                                                                              |  |        |  |                
|Palm
  Beach Gardens
  (Spa Facility)        |  | 5530-5540
  PGA Blvd.
  PGA
  Commons, Suite 200Palm Beach
  Gardens, FL     |  | 10,003 |  | 9/22/2008      
|                                             |  |                                                                              |  |        |  |                
|West
  Palm Beach
  (Spa Facility)           |  | 2511
  South Dixie Highway
  West
  Palm Beach, FL                           |  | 10,732 |  | 6/30/2008      
|                                             |  |                                                                              |  |        |  |                
|Boca
  Raton
  (Spa Facility)                |  | Building
  H
  6853
  S.W. 18th StreetBoca Raton,
  FL                       |  | 3,455  |  | 1/31/2008      
|                                             |  |                                                                              |  |        |  |                
|Boca
  Raton
  (Spa Facility)                |  | Building
  H
  6877
  S.W. 18th StreetBoca Raton,
  FL                       |  | 7,923  |  | 2/29/2008      
|                                             |  |                                                                              |  |        |  |                
|New
  York (Spa)                             |  | 501
  Madison Ave.
  New
  York, NY                                          |  | 13,800 |  | 4/30/2013      
|                                             |  |                                                                              |  |        |  |                
|New
  York (office)                          |  | 501
  Madison Ave.
  New York, NY                                            |  | 3,800  |  | 4/30/2013      
|                                             |  |                                                                              |  |        |  |                
|Connecticut
  
  (Corporate 
  Headquarters) |  | Building
  501
  Merritt
  7 Corporate ParkNorwalk, CT                       |  | 13,340 |  | 12/31/2015     
|                                             |  |                                                                              |  |        |  |                
|Chevy
  Chase Collection 
  (Spa Facility)   |  | The
  Collection, Level 2
  5481
  Wisconsin AvenueChevy
  Chase, MD         |  | 6475   |  | 5/31/2021      
|                                             |  |                                                                              |  |        |  |                
|Dallas
  (Spa
  Facility)                    |  | NorthPark
  Center 
  8687
  North Central Expwy, Suite
  2R1-2236Dallas, TX |  | 5116   |  | 6/15/2016      

|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) |  Lease was terminated at expiration of the lease
  due to a move to a new location.

24

---



ITEM 3. LEGAL PROCEEDINGS

UBS Lawsuit

UBS
Securities, LLC commenced a lawsuit against KAAI in the Supreme Court of the
State of New York, County of New York on September 18, 2006. The complaint
alleges that UBS was engaged to provide investment banking services to KAAI and
that UBS is owed a fee of $1,750,000 with respect to a private placement that
was consummated in June, 2006. In the event we are unsuccessful in defending
the lawsuit, it would have a material adverse effect on KAAI.

Other Contingencies

We
are a party to a number of legal actions, proceedings or claims. While any
action, proceeding or claim contains an element of uncertainty, management
believes that the outcome of such actions, proceedings or claims will not have
a material adverse effect on the business, financial condition or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS

On
March 22, 2006, the Companys Board of Directors approved and recommended that
the stockholders of the Company approve an amendment to our Certificate of
Incorporation (the Certificate of Amendment) to (i) change the Companys name
from TrueYou.Com Inc. to Klinger Advanced Aesthetics, Inc., (ii) increase the
number of authorized shares of Common Stock that we are authorized to issue
from 20,000,000 to 60,000,000, and (iii) implement a reverse stock split
whereby each twenty-five (25) shares of our issued and outstanding Common Stock
will be combined into one (1) share of Common Stock.

On
March 23, 2006 the Certificate of Amendment was approved by: (A) the holders of
a majority of the Companys outstanding stock entitled to vote with respect to
an amendment of the Companys certificate of incorporation, (B) the holders of
more than 50% of the outstanding shares of Series C Preferred Stock, in
accordance with the Certificate of Designation of the Series C Preferred Stock;
and (C) the holders of more than 75% of the outstanding shares of Series D
Preferred Stock, in accordance with the Certificate of Designation of the
Series D Preferred Stock. On March 23, 2006 we filed with the Commission a
preliminary Information Statement on Schedule 14C (the Information Statement)
in connection with the proposed Amendment. On May 2, 2006, we received comments
from the Commission with respect to the Information Statement. We reviewed the
Commissions comments and submitted a revised Information Statement in response
to such comments on October 4, 2006. On November 1, 2006, we received
additional comments from the Commission with respect to the Information
Statement. We will revise our document accordingly and submit it to the
Commission for further review. Upon completion of the Commissions review, we
will file a definitive Information Statement and mail it to our shareholders in
accordance with the Exchange Act. The Certificate of Amendment may not be filed
until at least 20 calendar days after the definitive Information Statement is
mailed to the stockholders of the Company. Following the expiration of such
20-day period, the Company will file the Certificate of Amendment with the
Delaware Secretary of State, which will become effective on the date of such
filing.

25

---



PART
II

ITEM 5. MARKET FOR REGISTRANTS
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND
POLICY

The
Companys Common Stock has been traded under the symbol TUYU.PK on the Pink
Sheets® since September 1, 2005. The table below sets forth the reported high
and low closing sale prices of our Common Stock, as reported by the Pink
Sheets® during the period indicated.

|                                                        |  |      |      |     |   |      | 
|------------------------------------------------------- |  | ---- | ---- | --- | - | ---- | 
|                                                        |  | High |      | Low |  
|                                                        |  |      |      |     |  
|2007 Quarter Ended                                      |  |      |      |     |   |      | 
|First
  Quarter (July 2  September 30, 2006)           |  | $    | 0.35 |     | $ | 0.12 | 
|Second
  Quarter (October 1 - December 30, 2006)        |  | $    | 0.34 |     | $ | 0.16 | 
|                                                        |  |      |      |     |   |      | 
|2006 Quarter Ended                                      |  |      |      |     |   |      | 
|First
  Quarter (September 1  October 1, 2005)         |  | $    | 0.04 |     | $ | 0.04 | 
|Second
  Quarter (October 2 - December 31, 2005)        |  | $    | 0.51 |     | $ | 0.04 | 
|Third
  Quarter (January 1, 2006 through April 1, 2006) |  | $    | 1.15 |     | $ | 0.20 | 
|Fourth
  Quarter (April 2, 2006 through July 1, 2006)   |  | $    | 0.80 |     | $ | 0.34 | 

On
January 16, 2007, the last reported sale price the Companys Common Stock on
the Pink Sheets® was $0.22 per share. On January 16, 2007, there were 302
record holders of our Common Stock, 27 record holders of our Series B Preferred
Stock, 22 record holders of our Series C Preferred Stock and 5 record holders
of our Series D Preferred Stock.

We
are authorized to issue 20,000,000 shares of Common Stock, of which 14,995,513
shares are issued and outstanding. We are authorized to issue 1,000,000 shares
of preferred stock, par value $0.001 per share, of which 27,858.7673 shares of
Series B Preferred Stock, 8,452.0222 shares of Series C Preferred Stock and
1,530 shares of Series D Preferred Stock are issued and outstanding. In
connection with the Share Exchange Agreement, we agreed with certain of our
shareholders that we would amend our Certificate of Incorporation to increase
the number of shares of authorized Common Stock so that all of the shares of
our Series B Preferred Stock will convert automatically into Common Stock. In
addition, we have agreed with the holders of our Series C and Series D
Preferred Stock that we would amend our Certificate of Incorporation to
increase the number of shares of authorized Common Stock so that we would have
sufficient shares of Common Stock available to fully convert our Series C and
Series D Preferred Stock.

On
March 22, 2006, the Companys Board of Directors approved and recommended that
the stockholders of the Company approve an amendment to our Certificate of
Incorporation (the Certificate of Amendment) to (i) change the Companys name
from TrueYou.Com Inc. to Klinger Advanced Aesthetics, Inc., (ii) increase the
number of authorized shares of Common Stock that we are authorized to issue
from 20,000,000 to 60,000,000, and (iii) implement a reverse stock split
whereby each twenty-five (25) shares of our issued and outstanding Common Stock
will be combined into one (1) share of Common Stock.

On
March 23, 2006 the Certificate of Amendment was approved by: (A) the holders of
a majority of the Company s outstanding stock entitled to vote with respect to
an amendment of the Companys certificate of incorporation; (B) the holders of
more than 50% of the outstanding shares of Series C Preferred Stock, in
accordance with the Certificate of Designation of the Series C Preferred Stock;
and (C) the holders of more than 75% of the outstanding shares of Series D
Preferred Stock, in accordance with the Certificate of

26

---



Designation of
the Series D Preferred Stock. The Certificate of Amendment may not be filed until at least 20
calendar days after the definitive Information Statement is mailed to the
stockholders of the Company. Following the expiration of such 20-day period,
the Company will file the Certificate of Amendment with the Delaware Secretary
of State, which will become effective on the date of such filing. The Certificate
of Amendment will not be effective until the information statement is approved
by the SEC.

Dividends

There
have been no dividends declared on our capital stock since the Company was
formed. Dividends at the rate of 4% per annum accrue on our shares of Series C
Preferred Stock and Series D Preferred Stock. Under the credit agreement that
existed with TICC, we were prohibited from paying any cash dividends without
the consent of TICC. This restriction was eliminated with the new financing
obtained after fiscal year-end but a similar restriction is contained in the Laurus $25 Million
senior debt financing. These
accrued dividends may also be converted into Common Stock. It is not
anticipated that any dividends will be declared for the foreseeable future on
our Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

The table appearing below sets forth our selected financial data as of
the end of and for each of the three fiscal years in the period ended June 30,
2006 which was derived from our audited financial statements. We have also
presented unaudited financial data from our predecessor company, Dischino
Corporation d/b/a Cosmo & Co., for the periods ended March 31, 2002 and
2003. This information should be read together with the discussion in Managements
Discussion and Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and notes to those statements
included elsewhere herein.

|                                                               |  |                     |            |                     |   |                                                                     |  |      |            |      |   |            |   |   |            |   |   |            |  
|-------------------------------------------------------------- |  | ------------------- | ---------- | ------------------- | - | ------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                               |  | Predecessor         |            | TrueYou.Com, Inc.   |  
|                                                               |  |                     |            |                     |  
|In
  thousands, except share and per share amounts             |  | (unaudited) 
  2002 |            | (unaudited) 
  2003 |   | For the Period 
  From June 29 
  [inception] to 
  June 30,
  2003 |  | 2004 |            | 2005 |   | 2006       |  
|                                                               |  |                     |            |                     |   |                                                                     |  |      |            |      |   |            |   |   |            |   |   |            |  
|Total revenue-net                                              |  | $                   | 2,754      |                     | $ | 3,304                                                               |  | $    |           |      | $ | 13,309     |   | $ | 32,933     |   | $ | 33,052     |  
|Cost of revenue                                                |  |                     | 1,413      |                     |   | 1,696                                                               |  |      |           |      |   | 7,608      |   |   | 16,601     |   |   | 18,535     |  
|Operating costs and expenses:                                  |  |                     |            |                     |   |                                                                     |  |      |            |      |   |            |   |   |            |   |   |            |  
|Selling, general and administrative
expenses:                  |  |                     | 971        |                     |   | 1,082                                                               |  |      | 4,990      |      |   | 15,683     |   |   | 28,502     |   |   | 43,902     |  
|Depreciation and amortization                                  |  |                     | 6          |                     |   | 11                                                                  |  |      |           |      |   | 1,679      |   |   | 3,725      |   |   | 4,102      |  
|                                                               |  |                     |            |                     |   |                                                                     |  |      |            |      |   |            |   |   |            |   |   |            |  
|Total operating expenses:                                      |  |                     | 977        |                     |   | 1,093                                                               |  |      | 4,990      |      |   | 17,362     |   |   | 32,227     |   |   | 48,004     |  
|Income (loss) from operations                                  |  |                     | 364        |                     |   | 515                                                                 |  |      | (4,990     | )    |   | (11,661    | ) |   | (15,895    | ) |   | (33,487    | )
|Interest expense (income), net                                 |  |                     |           |                     |   |                                                                    |  |      |           |      |   | 2,173      |   |   | 4,026      |   |   | 3,988      |  
|Registration rights penalties                                  |  |                     |           |                     |   |                                                                    |  |      |           |      |   |           |   |   |           |   |   | 1,547      |  
|Unrealized loss on convertible securities                      |  |                     |           |                     |   |                                                                    |  |      |           |      |   |           |   |   |           |   |   | 132,683    |  
|Income (loss) before income tax provision:                     |  |                     | 364        |                     |   | 515                                                                 |  |      | (4,990     | )    |   | (13,834    | ) |   | (19,921    | ) |   | (171,705   | )
|Income tax provision:                                          |  |                     | 137        |                     |   | 194                                                                 |  |      |           |      |   |           |   |   |           |   |   |           |  
|Net Income (loss):                                             |  |                     | 227        |                     |   | 321                                                                 |  |      | (4,990     | )    |   | (13,834    | ) |   | (19,921    | ) |   | (171,705   | )
|Dividends on preferred stock:                                  |  |                     |           |                     |   |                                                                    |  |      |           |      |   | 488        |   |   | 1,400      |   |   | 1,125      |  
|Net Income (loss) applicable to common shareholders:           |  | $                   | 227        |                     | $ | 321                                                                 |  | $    | (4,990     | )    | $ | (14,322    | ) | $ | (21,321    | ) | $ | (172,830   | )
|                                                               |  |                     |            |                     |   |                                                                     |  |      |            |      |   |            |   |   |            |   |   |            |  
|Basic and diluted income (loss) per common share:              |  | $                   | 0.01       |                     | $ | 0.02                                                                |  | $    | (0.33      | )    | $ | (0.96      | ) | $ | (1.42      | ) | $ | (11.53     | )
|Weighted average common shares outstanding, basic and
diluted: |  |                     | 14,995,513 |                     |   | 14,995,513                                                          |  |      | 14,995,513 |      |   | 14,995,513 |   |   | 14,995,513 |   |   | 14,995,513 |  

27

---



Following
is selected balance sheet data as of July 1, 2006 and June 30, 2005 for the
TrueYou.Com, Inc.:

|                               |  |      |          |      |   |         |  
|------------------------------ |  | ---- | -------- | ---- | - | ------- | -
|                               |  | 2006 |          | 2005 |  
|                               |  |      |         
|Total assets                   |  | $    | 43,171   |      | $ | 36,963  |  
|Working
  capital (deficiency) |  |      | (42,540  | )    |   | (19,222 | )
|Total
  liabilities            |  |      | 253,085  |      |   | 72,772  |  
|Shareholders
  deficit        |  | $    | (209,914 | )    | $ | (35,809 | )

ITEM 7. 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 Notes thereto.

Unless
otherwise indicated in this Item 7, references to TrueYou refer to TrueYou.Com
Inc.; references to KAAI refer to Klinger Advanced Aesthetics, Inc. and its
consolidated subsidiaries; references to the we, our, and us refer to
TrueYou.Com Inc. and its consolidated subsidiaries (including KAAI), as
applicable.

Business Overview

We
offer both medical and non-medical services and products to customers. We
co-brand our trade name with the trade names of the salons and spas that we
acquired. Our salons and spas share certain corporate resources such as senior
management and administrative services. We had 542 employees as of January 15,
2006 and 535 employees on July 1, 2006, respectively.

KAAI
commenced business operations on June 29, 2003 when it acquired Dischino
Corporation. Dischino Corporation operated an established beauty salon and spa
in West Palm Beach, Florida. In December 2003, KAAI acquired three additional
facilities in the State of Florida. The first facility was a spa located in
Palm Beach Gardens, the second and third facilities were spas located in Boca
Raton. In April 2004, KAAI expanded operations by acquiring assets of the
Georgette Klinger Corporation which owned and operated nine salons throughout
the United States that offer spa and salon services.

In
2006, we opened our two new flagship locations, the NorthPark flagship in
Dallas Texas, and the Chevy Chase flagship in Chevy Chase, Maryland. These
locations are the models that showcase our business strategy and are used to
advertise all our products and services. They have been developed as fully
integrated properties, in a new format which offers cosmetic dermatology, spa
and salon services, retail products, and the K360 system in a luxurious upscale
setting (the KAAI Model). These locations are located in key markets.

These
fully-integrated facilities feature cosmetic dermatology, skin care, cosmetic
medical consultations, hair care, spa and salon services, and retail products
on site, and cosmetic medical services provided by medical offices operated by
Johns Hopkins and UT Southwestern. All of our medical treatments and providers
are reviewed and approved by our Medical Advisory Board. We also participate in
the Johns Hopkins Cosmetic Safety Program in locations where they have visited
the site and confirmed that we are in compliance with their specifications.
Johns Hopkins Medicine provides clinical and safety oversight for our

28

---



medical
services. We have rights to use the Johns Hopkins Medicine name in this regard
and approved language is used in our facilities and diagnostic software.

We
have developed an over-the-counter skin care line of products called
Cosmedicine. Johns Hopkins consulted on the design and information analysis of
tests performed on Cosmedicine products. In return for its consulting services,
Johns Hopkins receives fees from KAAI. We launched the products in February
2006 for exclusive retail distribution at Sephora stores, KAAI locations and on
our respective websites. All Cosmedicine products are being developed and
formulated for us by Atlantis Laboratories. Atlantis Laboratories is an
independent developer and manufacturer of bulk skin care products. We believe
that going forward, revenues generated from sales of our Cosmedicine products
will be a significant percentage of our aggregate revenues.

In
addition, we have developed the K360 system, a practice management system for
medical offices that perform aesthetic procedures. The K360 system has been
designed to provide a series of unique tools that we believe will improve the
quality, safety and predictability of aesthetic services performed in a medical
setting. The K360 system has a series of functions, each of which is guided by
standardized protocols to optimize standardization. Beginning in July 2006, we
began licensing the software to a small number of clients. Our goal is to begin
generating a small amount of revenue on this software in 2007.

Our
financial statements have been prepared on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Since our inception, we have experienced
substantial operating losses and negative cash flow from operations. As of
July 1, 2006, we have an accumulated deficit of $214.3 million and a
working capital deficit of $42.5 million. Included in our net deficit at July
1, 2006 is the remeasurement of convertible securities which resulted in an
additional liability in the amount $132.7 million. These factors raise
substantial doubt about our ability to continue as a going concern. Also, as a
result of our losses, the opinion of our Independent Registered Public
Accountants on our audited financial statements for fiscal year 2006 has
included an explanatory paragraph relating to going concern. A going concern
explanatory paragraph indicates that our auditors have substantial doubt about
our ability to continue as a going concern for at least a reasonable period of
time. Our ability to continue as a going concern ultimately depends on our
ability to increase sales and reduce expenses to a level that will allow us to
operate profitably and sustain positive operating cash flows and raise
additional capital.

Current Trends and
Outlook

We
have had slower consolidated growth due to some facilities experiencing losses.
We believe the reasons behind this trend include our facility in Boca Raton
that has not fully recovered from hurricane damage that was sustained in October,
2005. This includes significant employee turnover at this facility as a result
of the damage sustained. There is no clear indication if the facility will
return to prior revenue levels without significant resources added. We have
also closed our Beverly Hills facility for renovations and have not yet
determined to reopen it. These losses were offset in fiscal 2006 with the
launch of our Cosmedicine products. With our launch of Cosmedicine at exclusive
retail distribution at Sephora stores, KAAI locations and on our respective
websites, we believe that revenues generated from sales of our Cosmedicine
products will be a significant percentage of our aggregate revenues going
forward.

Our
vision is to define the standard of care in the medical aesthetics arena
through a commitment to clinical excellence based upon measured outcomes. Our
strategy is to leverage the Companys credible brand identity and technologies
to establish Klinger as the standard of care in the medical aesthetics industry.
The implementation of this strategy will center on the growth and development
of opportunities relating to our complementary business offerings. These
strategies include the following:

29

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Optimize the
  K360 system. The plan is to license the software to clients for a modest fee
  and to have it serve as the catalyst for the sale of our products and
  licensed services.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Continue the
  development of branded protocol-driven aesthetic services that are supported
  by the K360 system and back bar products that create measurable results in
  appearance improvement. Beginning in July 2006, we began licensing the
  software to clients for a fee. The Companys flagship locations deliver these
  branded services and serve as the development and beta sites for testing and
  refining such services in a true retail environment.                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | We are
  negotiating with pharma companies and we seek to broaden our Cosmedicine
  offering to feature Cosmedicine Professional, which we expect will include
  a line of RX grade products to support the Companys MD and Med Spa channel
  strategy. In addition, to facilitate our Med Spa channel strategy, we entered
  into a letter of intent to acquire Nouvisage Corp. on September 12, 2006.
  Although the transaction is still being negotiated, and a definitive
  acquisition agreement has not yet been entered into, this combination of
  resources, if implemented, could provide another market for our Cosmedicine
  products.

Revenue Sources

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently
  derive revenue from the following sources:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Spa and Salon Services
   Our salon offerings include services such as hair styling, coloring,
  texturizing, treatments, extensions, make-up artistry and manicure/pedicures.
  Our spa services include treatments such as facials, body treatments
  (exfoliation, wraps, cellulite treatments), waxing and massage therapy. Spa
  and salon service revenue represented 65%, 69% and 77% of our total operating
  revenues for the fiscal years ended July 1, 2006, June 30, 2005, and June 30,
  2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Spa and salon
  services are provided at all our operating stores.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Medical Services 
  Our medical offerings include injection services (Botox and Restylane),
  sclerotherapy (vein treatments), peels, microdermabrasion, permanent make-up,
  laser resurfacing and laser hair removal. Medical service revenue represented
  8%, 9% and 7% of our total operating revenues for the fiscal years ended July
  1, 2006, June 30, 2005, and June 30, 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Historically
  we have offered on-site and off-site medical services. All dermatology
  related procedures are performed on-site. For the on-site procedures, medical
  providers utilize space in our stores, having been provided a separate
  medical area with its own entrance and medical accessories. Prior to August
  2006, we also offered off-site medical services. These services consisted of
  cosmetic surgeries that were performed by the medical practitioners at a
  third party participating hospital. The on-site medical facility would
  provide the initial consultation, with the surgery performed off-site by the
  medical practitioner. We bill and collect all revenues and pay all expenses
  related to the medical services and pay the medical practitioners for their
  services. We no longer offer any off-site medical services as we have discontinued
  offering cosmetic surgeries.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | To generate
  our revenues for our medical segment, we enter into medical practitioner fee
  contracts with our medical practitioners where they receive a percentage of
  the revenue generated from the performance of their services. Depending upon
  the medical provider and the type of service that is delivered, the
  percentage varies from 30-70% for medical revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

30

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In all
  cases, physicians are contracted as consultants and not as employees. In most
  cases, the nurse practitioners are hired as employees. In addition, we do not
  generate any revenues from referring individuals to medical providers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | A majority
  of our medical revenue is derived from our Florida facilities. As such, we
  have spent considerable legal and consulting costs to ensure that we comply
  with applicable state and federal regulations. Any location that provides
  medical services is planned to ensure it meets all state and federal
  regulations. This includes utilizing all physicians as third party
  consultants.                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Retail Product Sales
   Include sales of third party products and our Cosmedicine products through
  our own locations. Retail product sales revenue represented 19%, 22% and 16%
  of our total operating revenues for the fiscal years ended July 1, 2006, June
  30, 2005, and June 30, 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Our
  locations offer a variety of retail products including products for hair
  care, skin care, and make-up. Hair care product offerings include such brands
  as LOreal, Kerastase, and Bumble & Bumble. Skin care product offerings
  include such brands as DDF, Obagi, IS Clinical, MD Skincare, and La Therapie.
  Our make-up product offering consists of the brand NARS. Additionally many of
  our locations offer our private label skin care brands, Georgette Klinger and
  Cosmedicine. In general, different combinations of the products are offered
  at different locations. Our Cosmedicine products are sold at all our
  locations, however, and have become our largest retail brand in fiscal 2006.               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Wholesale
  Product Sales Include sales of our Cosmedicine products at
  Sephora stores and through the internet. These products were launched in
  fiscal 2006 and represented 8% of our total operating revenues for the fiscal
  year ended July 1, 2006. Sephora, with whom we have a strategic relationship,
  is a subsidiary of LVMH, SA and L Capital is a private equity fund sponsored
  by LVMH, SA and, as a result, Sephora and L Capital are affiliates. Net
  revenue recognized on sales to Sephora were $2.7 million and $0 for the years
  ended July 1, 2006 and June 30, 2005, respectively. Our decision to enter
  into a strategic alliance with Sephora was made independent of our
  relationship with L Capital.

We
manage our business by evaluating net revenue, gross margin, and liquidity.
There is a close review of performance by location in these key areas to
determine if resources need to be added or shifted to improve performance. We
benchmark the facilities against each other to utilize data from high
performing locations to assist those that are under performing. Key personnel
are often deployed to the locations that show negative trends in these
statistics. A close review of the operations is also performed to determine
current cash position and future capital needs. Capital is tightly managed and
utilized in those operations that will provide the greatest return.

We
encounter a variety of challenges that may affect our business. These factors
include weather, including hurricanes which have adversely impacted our
facilities in Florida, and our dependence on individuals to provide services to
our clients who leave the Company and take clients with them.

Beginning
in fiscal year 2006, we are following the standard fiscal year of the retail
industry, which is a 52 or 53 week period, with the end of a period being the
last Saturday of the month. Our most recent fiscal year started on July 1, 2005
and ended on July 1, 2006.Previously The Companys fiscal year was
the twelve month period ended June 30.

Critical Accounting Estimates

Accounting
estimates and assumptions discussed in this section are those that we consider
to be the most critical to an understanding of our financial statements because
they inherently involve significant

31

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judgments and
uncertainties. For all of these estimates, we caution that future events rarely
develop exactly as forecast, and the best estimates routinely require
adjustment.

Revenue
Recognition: We record revenue based on the following
types of product and service offerings:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Company run stores, medical, and internet
  sales - revenue is recognized for services rendered
  or product sold at the time when the service is performed or the item sold.
  When a gift card is purchased for a future service or product, the value of
  the card is recorded as a liability. In the past, we offered paper gift
  cards. For these paper cards, the entire liability remains on the balance
  sheet until the earlier of redemption or 36 months, for non-escheatable
  states. It is ours and our predecessors historical experience that the
  likelihood of redemption after 36 months is remote. After 36 months, 80% of
  the remaining liability is relieved and recorded as other income. After 48
  months, any remaining 10% of the liability is relieved and recorded as other
  income. After 60 months, the last 10% of the remaining liability is relieved
  and recorded as other income. For escheatable states, the liability remains
  on the books until escheatment. Currently the only type of gift cards offered
  are electronic cards. The recording of the sale is the same as paper gift
  cards. But for electronic cards, the entire liability remains on the books
  for the first year, less any redemptions. After the first year, the liability
  is reduced by five dollars per month as an inactivity fee and recorded to
  other income.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Cosmedicine
  sales to Sephora  revenue is recognized as sales are made to Sephora. At the
  end of each quarter, an accrual is made for anticipated returns due to
  damages, store testers, and product with limited remaining code life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Impairment
of Goodwill:We review long-lived assets to be held
and used whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be fully recoverable. In addition, we review
goodwill for impairment at least on an annual basis. Measurement of an
impairment loss is based on the fair value of the asset compared to its
carrying value.

Inventories:
Inventories consist principally of hair care and skin care products held either
for retail sale or for use in salon, spa and medical services. Inventories are
stated at the lower of cost or market on a first-in, first-out basis. Further,
on a quarterly basis, we estimate losses from shrinkage due to lost or stolen
inventory based on historical experience and reduce the inventory value by that
estimate.

Provisions
for Inventory Obsolescence:We record provisions for estimated obsolescence of inventory.
Our estimates consider the cost of inventory, forecasted demand, the shelf life
of the inventory and our historical experience. If there are changes to these
estimates, additional provisions for inventory obsolescence may be necessary.

Stock
Based Compensation: We estimate the cost of stock
based compensation using the Black-Scholes Option Pricing Model. Inherent in
that model are assumptions including the volatility of our Common Stock,
forfeiture rate, and the length of time which we expect an option to remain
outstanding.

Deferred
Income Taxes: We review our provision for income taxes
at least quarterly and make a determination as to the likelihood of our ability
to use the income tax benefit of our net operating losses. We then make a
determination as to an appropriate allowance to reduce the value of this asset.

Convertible
Securities:We remeasured our convertible securities
in compliance with EITF 00-19, based on the fair value of our Common Stock into
which they are convertible, since there are currently insufficient shares
authorized to allow conversion. The fair value of the Common Stock is based in
the price paid for a share of the stock closest to the measurement date. As of
July 1, 2006 the closing price for our

32

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Common Stock
was $0.39. Changes in the price paid for a share of our Common Stock can have a
significant impact on the amount recorded for the convertible securities. For
example, the movement up or down in the price of our Common Stock by $0.10 will
cause the balance of convertible securities to fluctuate by approximately $51
million. This fluctuation would result in an impact to our net loss. As of
January 16, 2007, the closing price of our Common Stock was $0.22. Convertible
securities will convert back to equity when there are a sufficient number of
shares of Common Stock authorized.

New Accounting Pronouncements

In
June 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections
(FAS 154). FAS 154 replaces APB Opinion No. 20, Accounting Changes and FAS
No. 3, Reporting Accounting Changes in Interim Financial Statements. FAS 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle. FAS 154 also requires that a change in method of
depreciating or amortizing a long-lived non-financial asset be accounted for
prospectively as a change in estimate, and correction of errors in previously
issued financial statements should be termed a restatement. FAS 154 is
effective for accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005.

In
June 2005, the FASBs Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 05-6, Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a Business
Combination. EITF 05-6 requires leasehold improvements purchased after the
beginning of the initial lease term to be amortized over the shorter of the
assets useful life or a term that includes the original lease term plus any
renewals that are reasonably assured at the date the leasehold improvements are
purchased. This guidance was effective for reporting periods beginning after
June 29, 2005. The adoption of this guidance did not have a material impact on
the Companys consolidated financial statements.

In
October 2005, the FASB issued FASB Staff Position (FSP) 13-1, Accounting for
Rental Costs Incurred during the Construction Period. FSP 13-1 requires rental
costs associated with ground or building operating leases that are incurred
during a construction period be recognized as rental expense. FSP 13-1 becomes
effective for the first reporting period beginning after December 15, 2005. We
have evaluated the impact of the adoption of FSP 13-1, and determined there is
no impact on the Companys consolidated financial statements.

In
June 2006, FASB issued FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements
in accordance with FASB Statement No. 109, Accounting
for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This guidance is effective for fiscal years beginning after
December 15, 2006. We believe the impact of the adoption of FIN 48 will not be
significant to the Companys consolidated financial statements.

In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This guidance becomes effective for the first
reporting period beginning after November 15, 2007. We are assessing the impact of the
adoption of SFAS 157 on the Companys consolidated financial statements.

33

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In
September 2006, the FASB issued SFAS 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment of FASB Statements
No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income. This guidance is
effective as of the end of the fiscal year for years ending after December 15,
2006. We are assessing the impact of the adoption of SFAS 158 on the Companys
consolidated financial statements.

Results of Operations

The
following discussion should be read in conjunction with our Financial
Statements and the Notes thereto.

Years Ended July
1, 2006 and June 30, 2005

The
following table sets forth our income statement data as a percentage of net
sales for the periods indicated below:

34

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|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|---------------------------------------------- |  | -------------- | -------- | - |  | ---------------- | -- | - | ------- | - |  | --- | --
|                                               |  | Year ended     |          |   |  |                 
|                                               |  |                |          |   |  |                 
|In thousands                                   |  | July 1,
  2006 |          |   |  | June 30, 
  2005 |    |   |        
|                                               |  |                |          |   |  |                  |    |   |        
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Revenues                                       |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Service                                        |  | $              | 23,978   |   |  | 73               | %  | $ | 25,731  |   |  | 78  | % 
|Retail and wholesale                           |  |                | 9,074    |   |  | 27               | %  |   | 7,202   |   |  | 22  | % 
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Total Revenue                                  |  |                | 33,052   |   |  | 100              | %  |   | 32,933  |   |  | 100 | % 
|                                              
|Cost of Revenue                                |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Service                                        |  | $              | 13,987   |   |  | 42               | %  | $ | 13,715  |   |  | 41  | % 
|Retail and wholesale                           |  |                | 4,548    |   |  | 14               | %  |   | 2,886   |   |  | 9   | % 
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Total Cost of Revenue:                         |  |                | 18,535   |   |  | 56               | %  |   | 16,601  |   |  | 50  | % 
|                                              
|Gross Margin                                   |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Service                                        |  | $              | 9,991    |   |  | 30               | %  | $ | 12,016  |   |  | 37  | % 
|Retail and wholesale                           |  |                | 4,526    |   |  | 14               | %  |   | 4,316   |   |  | 13  | % 
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Total Gross Margin                             |  |                | 14,517   |   |  | 44               | %  |   | 16,332  |   |  | 50  | % 
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Selling, general and
  administrative expenses |  |                | 43,902   |   |  | 133              | %  |   | 28,502  |   |  | 87  | % 
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Depreciation and
  amortization                |  |                | 4,102    |   |  | 12               | %  |   | 3,725   |   |  | 11  | % 
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Total operating Expenses                       |  |                | 48,004   |   |  | 145              | %  |   | 32,227  |   |  | 98  | % 
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|                                              
|Operating loss                                 |  |                | (33,487  | ) |  | (101             | )% |   | (15,895 | ) |  | (48 | )%
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Interest expense, net                          |  |                | 3,988    |   |  | 12               | %  |   | 4,026   |   |  | 12  | % 
|Registration rights
  penalties                |  |                | 1,547    |   |  | 5                | %  |   |        |   |  |    |   
|Unrealized loss on
  convertible securities    |  |                | 132,683  |   |  | 401              | %  |   |        |   |  |    |   
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|                                              
|Net loss                                       |  |                | (171,705 | ) |  | (519             | )% |   | (19,921 | ) |  | (61 | )%
|Dividends on preferred
  stock                 |  |                | 1,125    |   |  | 3                | %  |   | 1,400   |   |  | 4   | % 
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   
|Net loss applicable to
  common shareholders   |  | $              | (172,830 | ) |  | (523             | )% | $ | (21,321 | ) |  | (65 | )%
|                                               |  |                |          |   |  |                  |    |   |         |   |  |     |   

Revenue

The
results of such sources for the years ended July 1, 2006 and June 30, 2005 are
as follows:

|                       |  |                |        |  |  |                  |   |   |        |  |  |     |  
|---------------------- |  | -------------- | ------ |  |  | ---------------- | - | - | ------ |  |  | --- | -
|                       |  | Year Ended     |        |  |  |                 
|                       |  |                |        |  |  |                 
|In thousands           |  | July 1,
  2006 |        |  |  | June 30, 
  2005 |   |   |       
|                       |  |                |        |  |  |                  |   |   |       
|                       |  |                |        |  |  |                  |   |   |        |  |  |     |  
|Revenues               |  |                |        |  |  |                  |   |   |        |  |  |     |  
|Spa and Salon Services |  | $              | 21,460 |  |  | 65               | % | $ | 22,845 |  |  | 69  | %
|Retail Products        |  |                | 6,396  |  |  | 19               | % |   | 7,187  |  |  | 22  | %
|Wholesale Products     |  |                | 2,678  |  |  | 8                | % |   |       |  |  |    |  
|Medical Services       |  |                | 2,518  |  |  | 8                | % |   | 2,901  |  |  | 9   | %
|                       |  |                |        |  |  |                  |   |   |        |  |  |     |  
|Total Revenue          |  | $              | 33,052 |  |  | 100              | % | $ | 32,933 |  |  | 100 | %
|                       |  |                |        |  |  |                  |   |   |        |  |  |     |  

35

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Revenue
for the year ended July 1, 2006 was $33.1 million compared to $32.9 million for
the year ended June 30, 2005, an increase of $0.2 million. All revenues during
the two years were derived from the U.S. The slight increase in revenue was
primarily due to the retail and wholesale product sales increase of $1.9
million, totaling $9.1 million for the year ended July 1, 2006, compared to
$7.2 million for the year ended June 30, 2005, from the launch of our
Cosmedicine product line in our salons and facilities and Sephora stores. This
was mostly offset by a $1.7 million decrease in service revenue, comprised of
spa and salon services and medical services totaling $24.0 million and $25.7
million for the years ended July 1, 2006 and June 30, 2005, respectively. The
decrease was primarily due to the remodeling and damages sustained in the Boca
Raton location from the major hurricane which hit in October 2005. We have also
experienced significant employee turnover in the Boca Raton, FL facility due to
damage sustained by the hurricane at this facility. The combination of damages
and employee turnover led to a significant loss of the pre-existing customer
base. The decrease in spa and service revenue was $1.6 million for this
location. In addition, the closing of the Beverly Hills location for remodeling
caused a reduction in spa and service revenue of $0.2 million.

Cost of Revenue

Cost
of revenue increased to $18.5 million for the year ended July 1, 2006 from
$16.6 million for the year ended June 30, 2005, an increase of $1.9 million. A
significant portion of the increase was the direct costs of Cosmedicine product
sold to Sephora, with cost of revenue of $1.1 million for the year ended July
1, 2006. Payroll costs, including commissions also increased by $1.1 million in
fiscal 2006. The commission compensation plans in place in the nine original
Georgette Klinger facilities were raised to levels similar with the balance of
our facilities at the end of the third quarter in 2005. These commissions are
incentives to employees and are included in cost of revenue.

Gross Margin

Gross
margin was 44% for the year ended July 1, 2006 compared to 50% for the year
ended June 30, 2005. The decline in gross margins was due to higher payroll and
commission structures which were partially offset by the launch of our
Cosmedicine product line.

Selling General and Administrative Expenses

Selling,
general and administrative expenses (SG&A) was $43.9 million for the year
ended July 1, 2006 compared to $28.5 million for the year ended June 30, 2005,
an increase of $15.4 million. The increase of 54.0% was primarily due to an
increase of $6.9 million in professional fees for accounting, legal,
information technology, inventory management services, software development,
and public relations; a $2.9 million increase in payroll due to the addition of
several senior management level officers and severance expenses; $1.2 million
increase in occupancy expenses, and $1.2 million in travel and entertainment.

SG&A
expenses represented 133% of total revenue for the year ended July 1, 2006
compared to 87% for the year ended June 30, 2005. While this expense is very
high as a percentage of sales, we believe this level of spending is necessary
to develop and implement our business plan. In addition, a significant portion
of the legal and accounting expense increases were due to the high turnover in management
and the accounting staff, resulting in high utilization of third party
resources.

Depreciation and Amortization

Depreciation
and amortization was $4.1 million for the year ended July 1, 2006 compared to
$3.7 million for the year ended June 30, 2005. This increase is due primarily
to increased amortization expense in fiscal 2006 associated with the Johns
Hopkins Consulting Services Agreement.

36

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Operating Loss

Our
operating loss was $33.5 million for the year ended July 1, 2006 compared to
$15.9 million for the year ended June 30, 2005. The increase in the operating
loss is primarily due to the increase in SG&A expense for the year ended
July 1, 2006 compared to the year ended June 30, 2005, without a corresponding
increase in revenues

Interest Expense

Interest
expense was $4.0 million for the year ended July 1, 2006 compared to $4.0
million for the year ended June 30, 2005. Net Interest was flat from year to
year. There were increases in interest expense due to the accelerated amortization of the debt
discount on senior subordinated debt, which was converted into KAAIs common
stock and subsequently exchanged for Series B Preferred Stock, of $1.0 million
coupled with imputed interest expense on the Johns Hopkins Consulting Services
Agreement. This was offset by increases in interest income due to the
investment of available cash balances.

Registration Rights Penalties

The
Company incurred penalties of $1.5 million for the year ended July 1, 2006. The
penalties are due to failure to meet conditions included in registration rights
agreements with various stockholders

Unrealized Loss on Convertible Securities

On December 20, 2005,
as a result of the Share Exchange Agreement, the Company recorded the
convertible securities at $65 million, which represented the carrying amount of
the convertible securities issued under the arrangement. Since the securities
issued are convertible into common shares and the Company did not have sufficient
authorized shares to allow for that conversion, under EITF 00-19 the Company
was required to reclassify these amounts as liabilities and remeasure them to
fair value at each reporting period end. The Company remeasured the convertible
securities during the year as of December 31, 2006, April 1, 2006 and July 1,
2006 based on the share price of the Trueyou Common Stock closest to the period
end. The share price was multiplied by the number of common shares into which
the convertible securities are convertible, which was 506,576,690 as of each of
those dates. The per share trading value as of July 1, 2006 was $0.39, which
resulted in an estimated fair value of the convertible securities of $197.6
million as of that date. The Company recorded an unrealized loss of
approximately $132.7 million for the fiscal year ended July 1, 2006.

Net Loss

Our net loss increased to $171.7 million from $19.9 million for the fiscal years ended July 1, 2006 and June 30, 2005, respectively. This increase in our net loss primarily resulted from revaluing our convertible securities which resulted in an unrealized loss of approximately $132.7 million for year ended July 1, 2006. Also included is a $1.5 million accrual for registration rights penalties and the increase of $15.4 million in SG&A expenses that are part of our $33.5 operating loss.

Dividends Accrued on Preferred Stock

Dividends accrued on preferred stock were $1.1 million for the year ended July 1, 2006 as compared to $1.4 million for the year ended June 30, 2005. The decrease was due to the forfeiture of dividends accrued on preferred stock which was converted into KAAIs common stock and subsequently exchanged for our Series B Preferred Stock.

37

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Net Loss Applicable to Common Stockholders

Our
net loss applicable to common stockholders for the year ended July 1, 2006 was
$172.8 million compared to $21.3 million for the year ended June 30, 2005.
Included is a $33.5 million operating loss, $4.0 million in interest expense,
$1.5 million in registration rights penalties and a $132.7 million unrealized
loss on convertible securities.

Results of Operations

Fiscal year 2005 compared to fiscal year
2004

The
following table sets forth our income statement data as a percentage of net
sales for the periods indicated below:

|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|-------------------------------------------------------- |  | ---------------------- | ------- | - |  | ---------------------- | -- | - | ------- | - |  | ---- | --
|                                                         |  | Year ended             |         |   |  |                       
|                                                         |  |                        |         |   |  |                       
|In thousands, except share
        and per share amounts |  | June 30, 
        2005 |         |   |  | June 30, 
        2004 |    |   |        
|                                                         |  |                        |         |   |  |                        |    |   |        
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Revenues                                                 |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Service                                                  |  | $                      | 25,731  |   |  | 78                     | %  | $ | 11,185  |   |  | 84   | % 
|Retail                                                   |  |                        | 7,202   |   |  | 22                     | %  |   | 2,124   |   |  | 16   | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Total Revenue                                            |  |                        | 32,933  |   |  | 100                    | %  |   | 13,309  |   |  | 100  | % 
|                                                        
|Cost of Revenue                                          |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Service                                                  |  | $                      | 13,715  |   |  | 41                     | %  | $ | 6,372   |   |  | 48   | % 
|Retail                                                   |  |                        | 2,886   |   |  | 9                      | %  |   | 1,236   |   |  | 9    | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Total Cost of Revenue:                                   |  |                        | 16,601  |   |  | 50                     | %  |   | 7,608   |   |  | 57   | % 
|                                                        
|Gross Margin                                             |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Service                                                  |  | $                      | 12,016  |   |  | 37                     | %  | $ | 4,813   |   |  | 36   | % 
|Retail                                                   |  |                        | 4,316   |   |  | 13                     | %  |   | 888     |   |  | 7    | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Total Gross Margin                                       |  |                        | 16,332  |   |  | 50                     | %  |   | 5,701   |   |  | 43   | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Selling, general and administrative expenses             |  |                        | 28,502  |   |  | 87                     | %  |   | 15,683  |   |  | 118  | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Depreciation and amortization                            |  |                        | 3,725   |   |  | 11                     | %  |   | 1,679   |   |  | 13   | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Total operating Expenses                                 |  |                        | 32,227  |   |  | 98                     | %  |   | 17,362  |   |  | 131  | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|                                                        
|Operating loss                                           |  |                        | (15,895 | ) |  | (48                    | )% |   | (11,661 | ) |  | (88  | )%
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Interest expense, net                                    |  |                        | 4,026   |   |  | 12                     | %  |   | 2,173   |   |  | 16   | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|                                                        
|Net loss                                                 |  |                        | (19,921 | ) |  | (61                    | )% |   | (13,834 | ) |  | (104 | )%
|Dividends on preferred stock                             |  |                        | 1,400   |   |  | 4                      | %  |   | 488     |   |  | 4    | % 
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   
|Net loss applicable to common shareholders               |  | $                      | (21,321 | ) |  | (65                    | )% | $ | (14,322 | ) |  | (108 | )%
|                                                         |  |                        |         |   |  |                        |    |   |         |   |  |      |   

38

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Revenue

The results of such sources for the years ended June 30, 2005 and June 30, 2004 are as follows:

|                       |  |                  |        |  |  |                  |   |   |        |  |  |     |  
|---------------------- |  | ---------------- | ------ |  |  | ---------------- | - | - | ------ |  |  | --- | -
|                       |  | Year Ended       |        |  |  |                 
|                       |  |                  |        |  |  |                 
|In thousands           |  | June 30, 
  2005 |        |  |  | June 30, 
  2004 |   |   |       
|                       |  |                  |        |  |  |                  |   |   |       
|                       |  |                  |        |  |  |                  |   |   |        |  |  |     |  
|Revenues               |  |                  |        |  |  |                  |   |   |        |  |  |     |  
|Spa and Salon Services |  | $                | 22,845 |  |  | 69               | % | $ | 10,265 |  |  | 77  | %
|Retail Products        |  |                  | 7,187  |  |  | 22               | % |   | 2,127  |  |  | 16  | %
|Medical Services       |  |                  | 2,901  |  |  | 9                | % |   | 917    |  |  | 7   | %
|                       |  |                  |        |  |  |                  |   |   |        |  |  |     |  
|Total Revenue          |  | $                | 32,933 |  |  | 100              | % | $ | 13,309 |  |  | 100 | %
|                       |  |                  |        |  |  |                  |   |   |        |  |  |     |  

Revenue
for fiscal year 2005 was $32.9 million compared to $13.3 million for fiscal
year 2004, an increase of 147%. The increase was due primarily to a full year
of operations during fiscal year 2005 after acquisitions at various dates
during fiscal year 2004. Fiscal year 2004 included only seven months of revenue
from the Anushka and Wild Hare Salon, Inc. (Wild Hare) facilities and two
months of revenue from the Georgette Klinger facilities. In addition, revenue
from medical services increased 200% to $2.9 million for fiscal year 2005 from
$0.9 million for fiscal year 2004. This increase was a result of managements
execution of its strategy to expand these services. West Palm Beach and Palm
Beach Gardens Florida facilities offered a full range of medical services for
fiscal year 2005. The Boca Raton facility offered dermatology services for
fiscal year 2005. For fiscal year 2005, management had not expanded medical
services into the Georgette Klinger locations. Retail sales increased 265% for
fiscal year 2005 over fiscal year 2004 to $7.2 million from $2.1 million for
fiscal years 2005 and 2004 respectively. This increase was due to a full year
of sales at our Anushka, Wild Hare and Georgette Klinger facilities. The
increase in revenue was partially offset by prolonged and unusual hurricane
activity in the Florida area in addition to the defection of several
high-producing stylists following the installation of new unit managers.

Cost of Revenue

Cost
of revenue increased to $16.6 million for fiscal year 2005 from $7.6 million
for fiscal year 2004. The increase was primarily due to a full year of
operations for the acquired facilities for the fiscal year ended June 30, 2005
compared to a partial year for the fiscal year ended June 30, 2004. Cost of
revenue decreased as a percentage of net sales due to a full year of the
Georgette Klinger operations which had a lower cost of revenue than the other
facilities which was partially offset by higher cost of revenue in the Florida
facilities due to higher commission structures for new service providers.

Gross Margin

Gross
margins for fiscal years 2005 and 2004 were $16.3 million and $5.7 million,
respectively. The gross margin as a percentage of net sales was 50% for fiscal
year 2005 compared to 43% for fiscal year 2004. This increase was due to the
full year of the Georgette Klinger facility acquisition which was partially
offset by gross margin losses in the Florida facilities due to higher
commission structures for new service providers. The retail gross margin
increased to 63% for fiscal year 2005 over 60% for fiscal year 2004 as a result
of managements focus on selling a higher priced assortment of merchandise.

Selling, General and
Administrative Expenses

For
fiscal year 2005, SG&A increased to $28.5 million from $15.7 million in
fiscal year 2004, an increase of 82%. This increase was due primarily to us
having a full year of expenses for fiscal year 2005 for acquired businesses
coupled with the addition of several senior management level officers. While
this expense is high as a percentage of sales at 87%, we believe this level of
spending is necessary to develop and implement our business plan. In addition,
we incurred expenses associated with the development of Cosmedicine.

39

---



For
fiscal year 2005, SG&A expenses are represented as payroll, 36%;
professional fees, 15%; rent and occupancy, 17%; insurance, 9%; advertising, 5%
with the remainder of expenses representing leases, travel and entertainment,
office expenses and other expenses incurred in the normal course of business.

Depreciation and
Amortization Expense

For
fiscal years 2005 and 2004, depreciation and amortization expense was $3.7
million and $1.7 million, respectively. This increase is due primarily to a
full year of depreciation on acquired assets in fiscal year 2005 as opposed to
the partial year in fiscal year 2004. In addition, a full year of amortization
expense in fiscal year 2005 was associated with the Johns Hopkins trademark
agreement.

Operating Loss

The
operating loss for the Company for fiscal years 2005 and 2004 was $15.9 million
and $11.7 million, respectively. The operating loss increased primarily as
higher gross profit was offset by significantly higher SG&A expenses.

Interest Expense, Net

Interest
expense increased to $4.0 million for fiscal year 2005 from $2.2 million for
fiscal year 2004, an increase of $1.8 million. This increase was due primarily
to a full year of interest expense on the TICC note versus only two months for
fiscal year 2004.

Dividends Accrued on
Preferred Stock

Dividends
accrued on Preferred Stock were $1.4 million and $0.5 million for fiscal years
2005 and 2004, respectively, an increase of 187%. The increase was primarily
due to a full year of dividends accrued on KAAIs series D preferred stock in
fiscal year 2005, compared to only three months that such series D preferred
stock was outstanding during fiscal year 2004.

Seasonality

Our
operations have historically been seasonal, with higher revenues generally
generated in the first half of our fiscal year (July through December) as a
result of increased demand for our services and products during the holiday
season from the end of November through the end of December. Furthermore, we
have historically discounted certain of our products during the month of
August, which has further skewed revenues into the first half of the fiscal
year. The products are not discounted below cost.

Financial Condition, Liquidity and Capital
Resources

Net
cash used in operating activities was $22.3 million and $11.0 million for the
fiscal years ended July 1, 2006 and June 30, 2005, respectively. This deterioration
of cash flows resulted primarily from an operating loss of $33.5 million for
the year ended July 1, 2006. We were able to partially mitigate the cash used
in operating activities by paying vendors on longer terms. Vendors are now on
terms that cannot be further extended.

Net
cash used in investing activities was $8.5 million and $1.2 million for the
fiscal years ended July 1, 2006 and June 30, 2005, respectively. The increase
is primarily due to facility renovations, information technology and accounting
systems for our facilities.

40

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Cash flows provided by financing activities were $30.8 million and $5.7 million for the fiscal years ended July 1, 2006 and June 30, 2005, respectively. For the year ended July 1, 2006, cash flows from financing activities were primarily the result of the issuance of our Series D Preferred Stock in the amount of $15.0 million
gross, $10.1 million gross from the issuance of KAAI Series G Preferred Stock
and $4.8 million gross from issuance of KAAI Series F Preferred Stock.

On
February 21, 2006, we entered into an amendment and consent with TICC, which
provided for amendments to the following financial covenants to which we were
subject through the end of fiscal year 2007, pursuant to the note and warrant
Purchase Agreement dated March 31, 2004, as amended: Minimum Consolidated
EBITDA, Consolidated Total Debt to Consolidated EBITDA, Consolidated Senior
Debt Ratio, Minimum Unit EBITDAR, Minimum Unit Fixed Charge Ratio, and Minimum
Unrestricted Cash Balance. The new covenants were substantially lower
than the covenants set forth in our prior agreement with TICC. In
consideration for the new covenants, we increased our escrow account for TICC
interest payments by $1.0 million to cover interest through the end of fiscal
year 2007. As of July 1, 2006 approximately $1.6 million has been deposited in
the TICC escrow account.

In
addition, on June 30, 2006, the Company obtained a covenant compliance waiver
and amendment under the senior debt agreement with TICC. The Company obtained a
waiver for the Consolidated Senior Debt to Consolidated EBITDA ratio covenant
test for all periods July 1, 2006 through March 31, 2007. In addition, the
Company obtained amended covenants for the Unit EBITDAR, Unit Fixed Coverage
Ratio and minimum cash required covenant tests. As discussed below, we received
additional financing in July 2006 that allowed us to repay this debt and
eliminate all the related covenants.

Future Liquidity and Capital Needs

Since
its inception, the Company has experienced operating losses and negative cash
flow from operations. As of July 1, 2006, we had a cumulative deficit of $214.3
million and a working capital deficiency of $42.5 million. Included in our net
deficit at July 1, 2006 is the remeasurement of convertible securities which
resulted in an additional liability in the amount $132.7 million. These factors
raise substantial doubt about our ability to continue as a going concern. Our
ability to continue as a going concern is ultimately dependent on our ability
to increase sales and reduce expenses to a level that will allow us to operate
profitably and sustain positive operating cash flows and raise additional
capital. The financial statements do not include any adjustments to reflect the
outcome of this uncertainty. We have had several recent financings as described in this Report, with the most
recent completed on December
22, 2006. But these financings are not sufficient and we are currently seeking to raise additional capital.
However, there can
be no assurance we will be able to obtain sufficient capital to enable us to
achieve our operational objectives. We need to obtain capital to continue to
invest in the core growth assets. Failure to raise such capital will severely
limit our ability to grow and service our ongoing debt obligations and may result in our inability to
continue our operations as presently conducted.

Our
principal future uses of funds are for debt service, working capital
requirements, and capital spending to execute our strategy. It is expected that
our net losses will continue at least through the end of fiscal year 2008. In
addition, subject to our raising sufficient additional capital, we expect to
spend approximately $2.2 million during fiscal year 2007 to refurbish our
facilities, develop an information technology infrastructure, and develop our
proprietary diagnostics products.

Financings Subsequent
to Year End

On
July 6, 2006, TrueYou closed on a financing and issued to Laurus Master Fund,
Ltd. a Secured Term Note in the aggregate principal amount of $25.0 million. We
also placed $2.5 million in a restricted account to be utilized to prefund
interest for the first year of the Note. The balance of the $25.0 million was
to be used for Lauruss closing payment of $900,000, Lauruss due diligence and
structuring expenses of $40,000 and escrow agent fees of

41

---



$4,000. In addition, this capital will be utilized for the purposes: (i) to fund our operating losses until the end of fiscal year 2007; (ii) for the above mentioned capital spending purposes; and (iii) the repayment of our TICC debt.

Our
  Senior Debt, represents our TICC commitment in the amount $9.1 million, net of
  discount, as of July 1, 2006. We repaid this debt with the additional financing
  received on July 7, 2006. Therefore, we have reclassified this debt from a
  long-term liability to a short-term liability on our Consolidated Balance
  Sheet.

On
July 11, 2006, we entered into a Subordinated Loan Agreement with subordinated
lenders for $5.2 Million to be used for capital expenditures, general working
capital and to pay all costs and expenses in connection with the Subordinated
Loan.

On
July 11, 2006, we entered into an amended and restated loan agreement with
Amended Subordinated Lenders in order to amend and restate the provisions of
the $4.8 million loan that we received on May 9, 2006 in order to conform its
terms to the terms of the Subordinated Loan Agreement. The proceeds of the loan
were used for capital expenditures, general working capital and to pay all
costs and expenses in connection with the Loan.

On
December 22, 2006, we entered into the Laurus Purchase Agreement with Laurus,
pursuant to which we issued to Laurus a senior subordinated secured term note
in the principal amount of $1.0 million.

On
December 22, 2006, we entered into a Senior Subordinated Loan Agreement with
senior subordinated lenders, pursuant to which the senior subordinated lenders
loaned us $3.0 million.

Contractual Obligations

As
of July 1, 2006, our contractual obligations were as follows:

|                          |  |                          |  |                    |           |             |  |             |  |                     |         |  |  |         |  | 
|------------------------- |  | ------------------------ |  | ------------------ | --------- | ----------- |  | ----------- |  | ------------------- | ------- |  |  | ------- |  | 
|                          |  | Payments
  Due by Period | 
|                          |  |                          |  |                    |           |             |  |             |  |                     |         | 
|                          |  |                          |  |                    |           |             |  |             |  |                     |        
|                          |  | Total                    |  | Less
  than 1 Year |           | 1-3
  Years |  | 3-5
  Years |  | More
  than 5 Years |        
|                          |  |                          |  |                    |           |             |  |             |  |                     |        
|                          |  |                          |  |                    |           |             |  |             |  |                     |         |  |  |         |  | 
|Operating leases          |  | $ 29,469                 |  |                    | $   4,137 |             |  | $ 10,637    |  |                     | $ 8,761 |  |  | $ 5,934 |  | 
|Capitalized leases        |  | 414                      |  |                    | 207       |             |  | 207         |  |                     |        |  |  |        |  | 
|Long-term debt (1)        |  | 15,839                   |  |                    | 15,839    |             |  |            |  |                     |        |  |  |        |  | 
|Consulting obligation (2) |  | 1,176                    |  |                    | 348       |             |  | 621         |  |                     | 207     |  |  |        |  | 
|                          |  |                          |  |                    |           |             |  |             |  |                     |         |  |  |         |  | 
|Totals                    |  | $ 46,898                 |  |                    | $ 20,531  |             |  | $ 11,465    |  |                     | $ 8,968 |  |  | $ 5,934 |  | 
|                          |  |                          |  |                    |           |             |  |             |  |                     |         |  |  |         |  | 

|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not
  include letters of credit securing lease obligations.                                                                   
|    |                                                                                                                                    
|(2) | Includes
  contracted services with our Formulator for Cosmedicine, and consulting
  agreements with accounting and IT consultants.

Off Balance Sheet
Arrangements

We
do not have any off balance sheet arrangements.

42

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows. We are exposed to market risk associated with changes in interest rates. Our cash resources earned interest at variable rates and, therefore, our return on these funds is affected by fluctuations in interest rates. There have been no changes in interest rates that would have a material impact on our consolidated financial position, results of operations or cash flows for the year ended July 1, 2006.

Convertible Securities:We remeasured our convertible securities in compliance with EITF 00-19, based on the fair value of our Common Stock into which they are convertible, since there are currently insufficient shares authorized to allow conversion. The fair value of the Common Stock is based on the pricepaid for a
  share of the stock closest to the measurement date. As of July 1, 2006 the
  closing price for our Common Stock was $0.39. Changes in the price paid for a
  share of our Common Stock can have a significant impact on the amount recorded
  for the convertible securities. For example, the movement up or down in the
  price of our Common Stock by $0.10 will cause the balance of convertible
  securities to fluctuate by approximately $51 million. This fluctuation would
  result in an impact to our net loss. As of January 16, 2007, the closing price
  of our Common Stock was $0.22. Convertible securities will convert back to
  equity when there are a sufficient number of shares of Common Stock authorized.

43

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|                                                                                                                      |   
|--------------------------------------------------------------------------------------------------------------------- | --
|ITEM 8.
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                 |   
|                                                                                                                      |   
|Report of Independent
  Registered Public Accounting Firm                                                             | 45
|                                                                                                                      |   
|Consolidated Balance
  Sheets as of July 1, 2006 and June 30, 2005                                                    | 46
|                                                                                                                      |   
|Consolidated Statements of
  Operations for the years ended July 1, 2006, June 30, 2005 and June 30, 2004             | 48
|                                                                                                                      |   
|Consolidated Statements of
  Cash Flows for the year ended July 1, 2006, June 30, 2005 and June 30, 2004              | 49
|                                                                                                                      |   
|Consolidated Statements of
  Stockholders Deficit for the year ended July 1, 2006, June 30, 2005 and June
  30, 2004 | 50
|                                                                                                                      |   
|Notes to Consolidated
  Financial Statements                                                                          | 51

44

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

The Board of Directors and
Stockholders 
TrueYou.Com Inc.

We have audited the
consolidated balance sheets of TrueYou.Com Inc. and subsidiaries as of July 1,
2006 and June 30, 2005, and the related consolidated statements of operations,
shareholders deficit and cash flows for the years ended July 1, 2006, June 30,
2005 and June 30, 2004. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of TrueYou.Com Inc. and subsidiaries
as of July 1, 2006 and June 30, 2005 and the results of their operations and
their cash flows for the years ended July 1, 2006, June 30, 2005 and June 30,
2004 in conformity with accounting principles generally accepted in the United
States of America.

The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred operating losses and negative
cash flows from operations since inception, and has a working capital deficiency,
which raises substantial doubt about the Companys ability to continue as a
going concern. Managements plans with respect to this uncertainty are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ Amper,
Politziner & Mattia, P.C.

Edison, New Jersey 
January 25, 2007

45

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TrueYou.Com Inc.Consolidated Balance Sheets

|                                                                                           |  |         |         |          |   |        | 
|------------------------------------------------------------------------------------------ |  | ------- | ------- | -------- | - | ------ | 
|                                                                                           |  | As of   |        
|                                                                                           |  |         |        
|                                                                                           |  | July 1, |         | June 30, |  
|                                                                                           |  |         |         |          |  
|In
  thousands, except share and per share amounts                                         |  | 2006    |         | 2005     |  
|                                                                                           |  |         |         |          |   |        | 
|Assets:                                                                                    |  |         |         |          |   |        | 
|Current assets:                                                                            |  |         |         |          |   |        | 
|Cash and cash equivalents                                                                  |  | $       | 189     |          | $ | 173    | 
|Restricted cash, current portion                                                           |  |         | 1,602   |          |   | 1,228  | 
|Accounts receivable, net                                                                   |  |         | 137     |          |   | 244    | 
|Inventories, net                                                                           |  |         | 2,214   |          |   | 1,977  | 
|Other current assets                                                                       |  |         | 1,009   |          |   | 501    | 
|                                                                                           |  |         |         |          |   |        | 
|Total current assets                                                                       |  |         | 5,151   |          |   | 4,123  | 
|                                                                                           |  |         |         |          |   |        | 
|Property and equipment, net                                                                |  |         | 12,981  |          |   | 6,561  | 
|Other assets                                                                               |  |         | 855     |          |   | 392    | 
|Deferred financing costs, net                                                              |  |         | 242     |          |   | 330    | 
|Restricted cash, non-current portion                                                       |  |         | 845     |          |   | 369    | 
|Goodwill                                                                                   |  |         | 18,072  |          |   | 18,072 | 
|Other intangibles, net                                                                     |  |         | 5,025   |          |   | 7,116  | 
|                                                                                           |  |         |         |          |   |        | 
|Total assets                                                                               |  | $       | 43,171  |          | $ | 36,963 | 
|                                                                                           |  |         |         |          |   |        | 
|                                                                                           |  |         |         |          |   |        | 
|Liabilities
  and Shareholders deficit:                                                   |  |         |         |          |   |        | 
|                                                                                           |  |         |         |          |   |        | 
|Liabilities:                                                                               |  |         |         |          |   |        | 
|Current liabilities:                                                                       |  |         |         |          |   |        | 
|Cash overdraft                                                                             |  | $       |        |          | $ | 163    | 
|Accounts payable                                                                           |  |         | 7,984   |          |   | 3,641  | 
|Accrued expenses and other current
liabilities                                             |  |         | 16,449  |          |   | 9,915  | 
|Deferred revenue                                                                           |  |         | 8,273   |          |   | 8,882  | 
|Current portion of long term debt                                                          |  |         | 5,839   |          |   | 744    | 
|Senior Debt Current (net of debt discount of $0.854
million as of
  July 1, 2006)          |  |         | 9,146   |          |   |       | 
|                                                                                           |  |         |         |          |   |        | 
|Total current liabilities                                                                  |  |         | 47,691  |          |   | 23,345 | 
|                                                                                           |  |         |         |          |   |        | 
|Senior debt (net of debt discount of $1.164 million
as of June 30,
  2005)                 |  |         |        |          |   | 8,836  | 
|Senior subordinated debt (net of debt discount
$1.234 million as of
  June 30, 2005)       |  |         |        |          |   | 12,066 | 
|Other long term debt (net of current
portion)                                              |  |         |        |          |   | 7,061  | 
|Convertible securities                                                                     |  |         | 197,565 |          |   | 11,684 | 
|Other long term liabilities                                                                |  |         | 7,829   |          |   | 9,780  | 
|                                                                                           |  |         |         |          |   |        | 
|Total liabilities                                                                          |  |         | 253,085 |          |   | 72,772 | 
|                                                                                           |  |         |         |          |   |        | 
|                                                                                           |  |         |         |          |   |        | 
|Minority Interest in KAAI                                                                  |  |         |        |          |   | 135    | 
|                                                                                           |  |         |         |          |   |        | 
|Commitments and
  contingencies                                                            |  |         |         |          |   |        | 
|Shareholders
  deficit:                                                                   |  |         |         |          |   |        | 
|Common stock, par value $0.001, authorized
20,000,000; issued and
  outstanding 14,995,513 |  |         | 15      |          |   | 15     | 
|                                                                                           |  |         |         |          |   |        | 
|Additional paid-in capital                                                                 |  |         | 4,347   |          |   | 3,782  | 

46

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|                                                   |  |         |          |          |   |         |  
|-------------------------------------------------- |  | ------- | -------- | -------- | - | ------- | -
|                                                   |  | As of   |         
|                                                   |  |         |         
|                                                   |  | July 1, |          | June 30, |  
|                                                   |  |         |          |          |  
|In
  thousands, except share and per share amounts |  | 2006    |          | 2005     |  
|                                                   |  |         |          |          |   |         |  
|Accumulated deficit                                |  |         | (214,276 | )        |   | (39,741 | )
|                                                   |  |         |          |          |   |         |  
|                                                   |  |         |          |          |   |         |  
|Total shareholders deficit                        |  |         | (209,914 | )        |   | (35,809 | )
|                                                   |  |         |          |          |   |         |  
|                                                   |  |         |          |          |   |         |  
|Total liabilities and shareholders
deficit        |  | $       | 43,171   |          | $ | 36,963  |  
|                                                   |  |         |          |          |   |         |  

The accompanying notes are an integral part of the condensed
consolidated financial statements

47

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TrueYou.Com Inc.Consolidated Statements of Operations

|                                                                |  |         |            |            |   |            |   |   |            |  
|--------------------------------------------------------------- |  | ------- | ---------- | ---------- | - | ---------- | - | - | ---------- | -
|                                                                |  |         |            | Year Ended |   |            |   |  
|                                                                |  | July 1, |            | June 30,   |   | June 30,   |  
|In thousands, except share and per share
  amounts              |  | 2006    |            | 2005       |   | 2004       |  
|                                                               
|Revenues:                                                       |  |         |            |            |   |            |   |   |            |  
|Service                                                         |  | $       | 23,978     |            | $ | 25,731     |   | $ | 11,185     |  
|Retail and wholesale products                                   |  |         | 9,074      |            |   | 7,202      |   |   | 2,124      |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Total Revenue                                                   |  |         | 33,052     |            |   | 32,933     |   |   | 13,309     |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Cost of Revenue:                                                |  |         |            |            |   |            |   |   |            |  
|Service                                                         |  |         | 13,987     |            |   | 13,715     |   |   | 6,372      |  
|Retail and wholesale products                                   |  |         | 4,548      |            |   | 2,886      |   |   | 1,236      |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Total Cost of Revenue                                           |  |         | 18,535     |            |   | 16,601     |   |   | 7,608      |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Gross margin                                                    |  |         | 14,517     |            |   | 16,332     |   |   | 5,701      |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Selling, general and
  administrative expenses                  |  |         | 43,902     |            |   | 28,502     |   |   | 15,683     |  
|Depreciation and
  amortization                                 |  |         | 4,102      |            |   | 3,725      |   |   | 1,679      |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Total operating expenses                                        |  |         | 48,004     |            |   | 32,227     |   |   | 17,362     |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Operating loss                                                  |  |         | (33,487    | )          |   | (15,895    | ) |   | (11,661    | )
|Interest expense, net                                           |  |         | 3,988      |            |   | 4,026      |   |   | 2,173      |  
|Registration rights
  penalties                                 |  |         | 1,547      |            |   |           |   |   |           |  
|Unrealized loss on
  convertible securities                     |  |         | 132,683    |            |   |           |   |   |           |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Loss before income tax
  provision                              |  |         | (171,705   | )          |   | (19,921    | ) |   | (13,834    | )
|                                                                |  |         |            |            |   |            |   |   |            |  
|Income tax provision
  (benefit)                                |  |         |           |            |   |           |   |   |           |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Net loss                                                        |  |         | (171,705   | )          |   | (19,921    | ) |   | (13,834    | )
|                                                                |  |         |            |            |   |            |   |   |            |  
|Dividends on preferred
  stock                                  |  |         | 1,125      |            |   | 1,400      |   |   | 488        |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Net loss applicable to
  common shareholders                    |  | $       | (172,830   | )          | $ | (21,321    | ) | $ | (14,322    | )
|                                                                |  |         |            |            |   |            |   |   |            |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Basic and diluted loss per
  common share:                      |  | $       | (11.53     | )          | $ | (1.42      | ) | $ | (0.96      | )
|                                                                |  |         |            |            |   |            |   |   |            |  
|                                                                |  |         |            |            |   |            |   |   |            |  
|Weighted average common
  shares outstanding, basic and diluted |  |         | 14,995,513 |            |   | 14,995,513 |   |   | 14,995,513 |  
|                                                                |  |         |            |            |   |            |   |   |            |  

See accompanying Notes to Consolidated Financial Statements.

48

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TrueYou.Com Inc.Consolidated Statements of Cash Flows

|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ---------- | -------- | -------- | - | -------- | - | - | ------- | -
|                                                                                                          |  | Year Ended |         
|                                                                                                          |  |            |         
|                                                                                                          |  | July 1,    |          | June 30, |   | June 30, |  
|In thousands                                                                                              |  | 2006       |          | 2005     |   | 2004     |  
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Cash flows from operating activities:                                                                     |  |            |          |          |   |          |   |   |         |  
|Net loss                                                                                                  |  | $          | (171,705 | )        | $ | (19,921  | ) | $ | (13,834 | )
|Adjustments to reconcile net loss to net cash used
in operating
  activities:                             |  |            |          |          |   |          |   |   |         |  
|Depreciation and amortization                                                                             |  |            | 4,102    |          |   | 3,725    |   |   | 1,679   |  
|Loss on disposal                                                                                          |  |            | 112      |          |   |         |   |   |        |  
|Amortization of deferred financing costs                                                                  |  |            | 88       |          |   |         |   |   |        |  
|Stock based compensation expense                                                                          |  |            | 795      |          |   | 236      |   |   | 253     |  
|Non-cash interest expense                                                                                 |  |            | 1,544    |          |   | 542      |   |   | 229     |  
|Unrealized Loss on Convertible Securities                                                                 |  |            | 132,683  |          |   |         |   |   |        |  
|Changes in operating assets and liabilities:                                                              |  |            |          |          |   |          |   |   |         |  
|Inventories                                                                                               |  |            | (237     | )        |   | (375     | ) |   | 236     |  
|Accounts receivable                                                                                       |  |            | 107      |          |   |         |   |   |        |  
|Other current assets                                                                                      |  |            | (508     | )        |   | (196     | ) |   | (267    | )
|Other assets                                                                                              |  |            | (463     | )        |   | (117     | ) |   | 86      |  
|Accounts payable                                                                                          |  |            | 4,343    |          |   | 2,715    |   |   | (20     | )
|Accrued expenses and other current
liabilities                                                            |  |            | 7,471    |          |   | 3,550    |   |   | 3,852   |  
|Deferred revenue                                                                                          |  |            | (609     | )        |   | (1,143   | ) |   | 242     |  
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Net cash used in operating
activities                                                                     |  |            | (22,277  | )        |   | (10,984  | ) |   | (7,544  | )
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Cash flows from investing activities:                                                                     |  |            |          |          |   |          |   |   |         |  
|Capital expenditures                                                                                      |  |            | (8,416   | )        |   | (1,197   | ) |   | (3,944  | )
|Purchase of intangible asset                                                                              |  |            | (127     | )        |   | (43      | ) |   |         |  
|Business acquisition, net of cash
acquired                                                                |  |            |         |          |   |         |   |   | (11,064 | )
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Net cash used in investing
activities                                                                     |  |            | (8,543   | )        |   | (1,240   | ) |   | (15,008 | )
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Cash flows provided by financing activities:                                                              |  |            |          |          |   |          |   |   |         |  
|Cash overdraft                                                                                            |  |            | (163     | )        |   | 163      |   |   |        |  
|Restricted cash                                                                                           |  |            | (850     | )        |   | 1,115    |   |   | (2,712  | )
|Proceeds of Issuance of long term debt net of
deferred financing
  costs                                  |  |            | 4,839    |          |   |         |   |   | 22,860  |  
|Redemption of long term debt                                                                              |  |            |         |          |   |         |   |   | (800    | )
|Other long-term liabilities                                                                               |  |            | (1,951   | )        |   | 4,484    |   |   | (264    | )
|Proceeds of issuance of TrueYou Series D Preferred
Stock                                                  |  |            | 15,049   |          |   | (54      | ) |   | 8,200   |  
|Proceeds of issuance of KAAI Series G Preferred
stock                                                     |  |            | 10,058   |          |   |         |   |   |        |  
|Proceeds of issuance of KAAI Series E Preferred
stock                                                     |  |            |         |          |   |         |   |   | 135     |  
|Repayment of Sellers Note                                                                                |  |            | (900     | )        |   |         |   |   |        |  
|Proceeds of issuance of KAAI Series F Preferred
stock                                                     |  |            | 4,754    |          |   |         |   |   |        |  
|Redemption of series B Preferred stock                                                                    |  |            |         |          |   |         |   |   | (825    | )
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Net cash provided by financing
activities                                                                 |  |            | 30,836   |          |   | 5,708    |   |   | 26,594  |  
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                      |  |            | 16       |          |   | (6,516   | ) |   | 4,042   |  
|Cash and cash equivalents - beginning of year                                                             |  |            | 173      |          |   | 6,689    |   |   | 2,647   |  
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Cash and cash equivalents - end of year                                                                   |  | $          | 189      |          | $ | 173      |   | $ | 6,689   |  
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|                                                                                                          |  |            |          |          |   |          |   |   |         |  
|Supplemental cash flow information                                                                        |  |            |          |          |   |          |   |   |         |  
|Non-cash financing activities:                                                                            |  |            |          |          |   |          |   |   |         |  
|Issuance of preferred stock and debt for acquisition of
businesses                                        |  | $          |         |          | $ |         |   | $ | 5,180   |  
|Other business acquisitions                                                                               |  |            |         |          |   |         |   |   | 2,416   |  
|Preferred stock dividends, net of preferred stock
forfeitures                                             |  |            | 1,125    |          |   | 1,400    |   |   | 488     |  
|Reclassification of preferred stock into convertible
securities                                           |  |            | 28,166   |          |   |         |   |   |        |  
|Beneficial conversion feature on preferred stock                                                          |  |            | 2,830    |          |   |         |   |   | 996     |  
|Write-off of minority interest - Series E Preferred                                                       |  |            | 135      |          |   |         |   |   |        |  
|Exchange of KAAI accrued dividends for TrueYou Series B Preferred
  Stock                                 |  |            | 464      |          |   |         |   |   |        |  
|Exchange of KAAI long term debt for TrueYou Series B Preferred
Stock                                      |  |            | 19,205   |          |   |         |   |   |        |  
|Exchange of KAAI accrued interest for TrueYou Series B Preferred
  Stock                                  |  |            | 1,598    |          |   |         |   |   |        |  
|Classification of KAAI warrants issued with KAAI Preferred stock as
  liabilities                         |  |            | 935      |          |   |         |   |   |        |  
|Purchase of property and equipment  capital leases                                                       |  |            |         |          |   |         |   |   | 286     |  
|Deferred licensing fees and related liability in connection with
  licensing agreements with John Hopkins |  |            |         |          |   | 3,805    |   |   | 1,498   |  

See accompanying Notes to Consolidated Financial Statements.

49

---



TrueYou.Com Inc.Consolidated Statements of Stockholders Deficit

|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|------------------------------------------------------------------------ |  | ---------------------- | ---- | ------ | -------------- | ---------- |  | ---------------------------------- | -- | ------------------ | - | ------ | - | - | -------- | - | - | -------- | -
|                                                                         |  |                        |      |        | Common
  Stock |            |  |                                    |    |                    |   |        |   |   |         
|In thousands, except
  share amounts                                     |  | Minority
  
  Interest |      | Shares |                | Amount     |  | Additional
  
  Paid In 
  Capital |    | AccumulatedDeficit |   | Total  |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Balance at June 30, 2003                                                 |  | $                      | 135  |        |                | 14,995,513 |  | $                                  | 15 |                    | $ | 959    |   | $ | (4,990   | ) | $ | (3,881   | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Issuance of warrants attached to Senior Debt                             |  |                        |     |        |                |           |  |                                    |   |                    |   | 1,553  |   |   |         |   |   | 1,553    |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Stock based compensation expense                                         |  |                        |     |        |                |           |  |                                    |   |                    |   | 253    |   |   |         |   |   | 253      |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Issuances of stock options for intangible
assets                         |  |                        |     |        |                |           |  |                                    |   |                    |   | 57     |   |   |         |   |   | 57       |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Beneficial conversion associated with senior subordinated
  debt         |  |                        |     |        |                |           |  |                                    |   |                    |   | 1,616  |   |   |         |   |   | 1,616    |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Beneficial conversion associated with series D preferred
  stock         |  |                        |     |        |                |           |  |                                    |   |                    |   | 996    |   |   | (996     | ) |   |         |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Dividends on preferred stock                                             |  |                        |     |        |                |           |  |                                    |   |                    |   | (488   | ) |   |         |   |   | (488     | )
|                                                                        
|Net loss                                                                 |  |                        |     |        |                |           |  |                                    |   |                    |   |       |   |   | (13,834  | ) |   | (13,834  | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Balance at June 30, 2004                                                 |  | $                      | 135  |        |                | 14,995,513 |  | $                                  | 15 |                    | $ | 4,946  |   | $ | (19,820  | ) | $ | (14,724  | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Stock based compensation expense                                         |  |                        |     |        |                |           |  |                                    |   |                    |   | 236    |   |   |         |   |   | 236      |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Dividends on preferred stock                                             |  |                        |     |        |                |           |  |                                    |   |                    |   | (1,400 | ) |   |         |   |   | (1,400   | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Net loss                                                                 |  |                        |     |        |                |           |  |                                    |   |                    |   |       |   |   | (19,921  | ) |   | (19,921  | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Balance at June 30, 2005 
  (As restated)                                |  | $                      | 135  |        |                | 14,995,513 |  | $                                  | 15 |                    | $ | 3,782  |   | $ | (39,741  | ) | $ | (35,809  | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Write-minority interest                                                  |  |                        | (135 | )      |                |           |  |                                    |   |                    |   | 135    |   |   |         |   |   |         |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Dividends on preferred stock                                             |  |                        |     |        |                |           |  |                                    |   |                    |   | (1,125 | ) |   |         |   |   | (1,125   | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Issuance costs related to KAAI series G preferred
stock                  |  |                        |     |        |                |           |  |                                    |   |                    |   | (717   | ) |   |         |   |   | (717     | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Issuance costs related to KAAI series H preferred
stock                  |  |                        |     |        |                |           |  |                                    |   |                    |   | (246   | ) |   |         |   |   | (246     | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Beneficial conversion associated with KAAI series G
  preferred stock    |  |                        |     |        |                |           |  |                                    |   |                    |   | 1,073  |   |   | (1,073   | ) |   |         |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Beneficial conversion associated with KAAI series H
  preferred stock    |  |                        |     |        |                |           |  |                                    |   |                    |   | 462    |   |   | (462     | ) |   |         |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Beneficial conversion associated with TrueYou Series D
  Preferred Stock |  |                        |     |        |                |           |  |                                    |   |                    |   | 1,295  |   |   | (1,295   | ) |   |         |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Issuance costs related to TrueYou Series D Preferred
Stock               |  |                        |     |        |                |           |  |                                    |   |                    |   | (172   | ) |   |         |   |   | (172     | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Classification of KAAI series B warrants as
liabilities                  |  |                        |     |        |                |           |  |                                    |   |                    |   | (935   | ) |   |         |   |   | (935     | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Stock based compensation expense                                         |  |                        |     |        |                |           |  |                                    |   |                    |   | 795    |   |   |         |   |   | 795      |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Net loss                                                                 |  |                        |     |        |                |           |  |                                    |   |                    |   |       |   |   | (171,705 | ) |   | (171,705 | )
|                                                                        
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  
|Balance at July 1, 2006                                                  |  | $                      | 0    |        |                | 14,995,513 |  | $                                  | 15 |                    | $ | 4,347  |   | $ | (214,276 | ) | $ | (209,914 | )
|                                                                         |  |                        |      |        |                |            |  |                                    |    |                    |   |        |   |   |          |   |   |          |  

See accompanying Notes to Consolidated
Financial Statements.

50

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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Unless
otherwise indicated: references in these Notes to TrueYou refer to
TrueYou.Com Inc.; references to KAAI refer to Klinger Advanced Aesthetics,
Inc. and its consolidated subsidiaries; references to the Company, refer to
TrueYou.Com Inc. and its consolidated subsidiaries (including KAAI).

1. Basis of Presentation

The
consolidated financial statements presented herein pertain to the Company and
its subsidiaries (including KAAI) on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated in consolidation. The Company considers that it operates in one
segment for spa and salon domestic operations. In fiscal 2006, the Company completed
a reverse merger that was treated as a capital transaction, which requires.
Equity to be restated to reflect the merger as of the earliest period
presented. As a result, transactions in the Companys Preferred Stock have been
reflected in Convertible Securities as of the earliest period-end presented.
(see Notes 14 and 17).

Beginning
in fiscal year 2006, the Company is following the standard fiscal year of the
retail industry, which is a 52 or 53 week period, with the end of a period
being the last Saturday of a month. The Companys most recent fiscal year
started on July 1, 2005 and ended on July 1, 2006. Previously The Companys
fiscal year was the twelve month period ended June 30.

Going
Concern Disclosure: The accompanying
financial statements have been prepared on the going concern basis which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Since its inception, the Company has experienced
operating losses and negative cash flow from operations. As of July 1, 2006,
the Company has an accumulated deficit of $214.3 million and a working capital
deficiency of $42.5 million. Included in the Companys net deficit at July 1,
2006 is the remeasurement of convertible securities which resulted in an
additional liability in the amount $132.7 million. These factors raise
substantial doubt about the Companys ability to continue as a going concern.
The Companys ability to continue as a going concern is ultimately dependent on
its ability to increase sales and reduce expenses to a level that will allow it
to operate profitably and sustain positive operating cash flows and raise
additional capital. There have been no adjustments to the financial statements
to reflect the outcome of this uncertainty. The Company has had several recent
financings, with the most recent being completed on December 22, 2006. But
these financings were not sufficient and additional capital will be required.
Management plans include raising additional capital, and executing the
expansion plans per the business plan. However, there can be no assurance that
these sources will provide sufficient cash inflows to enable the Company to
achieve its operational objectives.

2. Background

KAAI
was formed under the name Advanced Aesthetics, Inc. (AAI) in 2003 by
principals of Kidd & Company, LLC (KCO), a Greenwich, Connecticut based
principal investment firm. On January 9, 2006, Advanced Aesthetics, Inc.
changed its name to Klinger Advanced Aesthetics, Inc.

The
Company offers both cosmetic services and medical procedures to customers under
one delivery system and brings cosmetic surgery, cosmetic dentistry
(discontinued in June 2005) and dermatology, and salon and spa services
together under a single brand, giving clients access to top service providers,
unique treatments and predictable results in a state of the art environment.
The Company has developed a skin care line of products called Cosmedicine
(Cosmedicine or Cosmedicine) which is being distributed through Sephora USA,
Inc. stores and the Companys own facilities. The Company is the owner of the
Cosmedicine trademark. The Company co-brands its trade name with the trade
names of the salons and spas that it has

51

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acquired. The Companys
salons and spas share certain corporate resources such as senior management and
administrative services. As of January 15, 2007 and July 1, 2006, the Company
had 542 and 535 employees, respectively.

KAAI
commenced business operations on June 29, 2003 when it acquired Dischino
Corporation. Dischino operated an established, well-known, beauty salon and spa
in West Palm Beach, Florida. In November 2003, AAI acquired three additional
facilities. The first was the acquisition of a Palm Beach Gardens spa and a
similar facility in Boca Raton (Anushka acquisitions), and a third facility
located at Boca Pointe in Boca Raton, Florida. In April 2004, AAI expanded
operations by acquiring nine locations of Georgette Klinger, Inc., a
well-established chain of high-end spas and beauty salons.

KAAIs
operating presence is national in scope, with locations in key markets such as
New York (NY), Costa Mesa (CA), Boca Raton (FL), Palm Beach Gardens (FL), West
Palm Beach (FL), Dallas (TX), Chicago (IL), and Short Hills (NJ). Its original
flagship facilities in West Palm Beach and Palm Beach Gardens in Florida
feature cosmetic dermatology, spa services, salon care and retail products
on-site and cosmetic surgery and dentistry (discontinued in June 2005) which
are performed off-site. In 2006, the Company opened two new stores; NorthPark
in Dallas Texas and Chevy Chase in Chevy Chase, Maryland. These two new
locations are now considered the flagships of the Company.

On
December 20, 2005, the Company entered into a Share Exchange Agreement (the
Share Exchange Agreement) with KAAI and securityholders of KAAI (the KAAI
Securityholders) pursuant to which KAAI Securityholders received newly issued
preferred securities of TrueYou in exchange for their securities of KAAI.

The
share exchange of a private operating company, KAAI, into a non-operating
public shell corporation, TrueYou, with nominal net assets or liabilities resulted
in the shareholders of KAAI having actual operating control of the combined
company after the transaction, and the shareholders of TrueYou continuing only
as passive investors.

The
transaction is considered to be a capital transaction in substance, rather than
a business combination. That is, the transaction is equivalent to the issuance
of stock by the private company for the net monetary assets of the shell
corporation, accompanied by a recapitalization. Accordingly, the outstanding
shares of KAAI have been restated in the balance sheet and the statement of
stockholders deficit to give effect to the Share Exchange Agreement. The
restated shares have been used in the computation for loss per share. The
historical balance sheet as of June 30, 2005 is that of KAAI.

3. Summary of Significant Accounting Policies

Use
of Estimates

In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. The more significant management
estimates are the valuation of goodwill and other intangibles, useful lives of
property and equipment and intangible assets, fair value of assets acquired in
business combinations, provisions for inventory obsolescence, deferred revenue
expirations and various contingencies. Actual results could differ from those
estimates. Changes in facts and circumstances may result in revised estimates,
which are recorded in the period in which they become known.

Revenue
Recognition

The
Company records revenue based on the following types of product and service
offerings:

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Company run
stores, medical, and internet sales- revenue is recognized for services
rendered or product sold at the time when the service is performed or the
item sold. When a gift card is purchased for a future service or product, the
value of the card is recorded as a liability. In the past, we offered paper
gift cards. For these paper cards, the entire liability remains on the balance
sheet until the earlier of redemption or 36 months, for non-escheatable
states. It is ours and our predecessors historical experience that the
likelihood of redemption after 36 months is remote. After 36 months, 80% of
the remaining liability is relieved and recorded as other income. After 48
months, any remaining 10% of the liability is relieved and recorded as other
income. After 60 months, the last 10% of the remaining liability is relieved
and recorded as other income. For escheatable states, the liability remains
on the books until escheatment. Currently the only type of gift cards offered
are electronic cards. The recording of revenue is the same as paper gift
cards. But for electronic cards, the entire liability remains on the books
for the first year, less any redemptions. After the first year, the liability
is reduced by five dollars per month as an inactivity fee and recorded to
other income.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Cosmedicine sales to Sephora
   revenue is recognized as sales are made to Sephora. At the end of each
  quarter, an accrual is made for anticipated returns due to damages, store
  testers, and product with limited remaining code life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Comprehensive
Income

The
Company has no significant other comprehensive income items. Therefore the net
income of the Company is equal to comprehensive income.

Cash
and Cash Equivalents

Cash
and cash equivalents consist of cash and investments with maturities of ninety
days or less.

Restricted
Cash

Restricted
cash represents an escrow account for prefunded interest on senior debt and
certificates of deposit to collateralize leases.

Inventories

Inventories
consist principally of hair care and skin care products held either for retail
sale or for use in salon, spa and medical services. Inventories are stated at
the lower of cost or market on a first-in, first-out basis.

Provisions
for Inventory Obsolescence

The
Company records provisions for estimated obsolescence of inventory. The
Companys estimates consider the cost of inventory, forecasted demand, the
shelf life of the inventory and our historical experience. If there are changes
to these estimates, additional provisions for inventory obsolescence may be
necessary.

Property
and Equipment

Property
and equipment are carried at cost,
less accumulated depreciation and amortization. Property, equipment and
improvements to leased premises are depreciated using the straight-line method

53

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over the estimated useful
lives of the assets or when applicable, the term of the lease, whichever is
shorter. Estimated useful lives generally range from 5 to 15 years for
leasehold improvements and 3 to 7 years for fixtures and equipment. Repair and
maintenance expenses, which do not improve or extend the life of the respective
assets, are charged directly to expense as incurred. The Company capitalizes
all property and equipment purchases in excess of $1,000. The assets and
related depreciation and amortization accounts are adjusted for property
retirements and disposals with the resulting gain or loss included in the
Companys Consolidated Statements of Operations. Fully depreciated assets
remain in the accounts until retired from service.

Goodwill

Goodwill
is tested for impairment annually or more frequently in accordance with the
provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. Fair values are estimated based on the
Companys best estimate of the expected present value of future cash flows and
compared with the corresponding carrying value of the reporting unit, including
goodwill. The Company considers its consolidated operations to be a single
reporting unit when it tests for goodwill impairment due to the similar
customer base and use of the Klinger name for its products and services, and
the way in which management reviews the operations and allocates its resources.
The Company tested for goodwill at July 1, 2006 and determined that the
estimated fair value of the reporting unit exceeded its carrying amount,
indicating no impairment of goodwill. A similar review will be conducted
annually in June, or more frequently if indicators of potential impairment
exist.

The
Companys impairment review process is based on a discounted future cash flow
approach that uses estimates of revenues, driven by assumed growth rates,
estimated future gross margin and expense rates, as well as acquisition
integration and maturation, and appropriate discount rates. These estimates are
consistent with the plans and estimates that are used to manage the underlying
business. Charges for impairment of goodwill may be incurred in the future if
the Company fails to achieve its assumed revenue growth rates or assumed gross
margin, or if interest rates increase significantly.

Intangible
Assets

Certain
intangible asset amounts are based on purchase price allocations associated
with acquisitions and are based upon valuations conducted by independent
appraisers.

All
intangible assets, other than goodwill, have been assigned an estimated finite
useful life, and are amortized on a straight line basis over the number of
years that approximate their respective useful lives (ranging from two to six
years).

Debt
Issue Costs

Debt
costs and transaction fees, which are directly associated with the issuance of
senior notes, are recorded on the balance sheet as deferred financing costs and
amortized (charged to interest expense) using the straight line method over the
term of the related notes. Senior notes must be repaid before subordinated
notes receive any principal payments. If the senior notes are redeemed, the
unamortized debt issuance costs and transaction fees related to the senior
notes being redeemed will be charged to expense in that period.

Income
Taxes

The
Company provides for federal and state income taxes currently payable, as well
as for those deferred due to temporary differences between reporting income and
expenses for financial statement purposes versus tax purposes. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable
to differences between the carrying amount of assets and liabilities for
financial

54

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reporting purposes and the
amounts used for income tax purposes. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recoverable or
settled. Realization of deferred tax assets is ultimately dependent upon future
taxable income. The effect of a change in tax rates is recognized as income or
expense in the period of the change.

Stock-Based
Compensation

In
December 2004, the FASB issued SFAS No. 123(R), Share Based Payment. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods and services. It focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions (employee stock options). The
statement requires the measurement of the cost of employee services received in
exchange for an award of equity instruments (such as employee stock options) at
fair value on the grant date. That cost will be recognized over the period
during which an employee is required to provide services in exchange for the
award (the requisite service period). The Company adopted FAS 123R,
Share-Based payment, effective for its year ended June 30, 2004, applying the
modified retrospective method. Inherent in that model are assumptions including
the volatility of our Common Stock, forfeiture rate, and the length of time
which we expect an option to remain outstanding

Loss
Per Share

Basic
loss per share represents the net loss applicable to Common Shareholders
divided by the weighted average number of common shares outstanding during the
measurement period. Diluted loss per share represents the net loss applicable
to Common Shareholders divided by the weighted average number of common shares
outstanding during the measurement period while also giving effect to all
potentially dilutive common shares that were outstanding during the period.
Potentially dilutive common securities consist of stock options of 1.9 million,
2.5 million and 0.8 million outstanding, for the year ended July 1, 2006 and
for the years ended June 30, 2005 and June 30, 2004, respectively and warrants
of 63.6 million, 13.6 million and 13.6 million outstanding, for the year ended
July 1, 2006 and for the years ended June 30, 2005 and June 30, 2004,
respectively. The impact of these options and warrants would be anti-dilutive
due to either losses incurred during the period or out-of-the-money options and
are not included in the diluted loss per share calculation.

Software
Development Costs

The
Company incurs costs for the development of its K360 software that is to be
sold, leased, or licensed to third parties in the future. All software
development costs have been appropriately accounted for in accordance with SFAS
86 Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed. All
costs are expensed as incurred as technological feasibility has not yet been
established.

Disclosures
about Fair Value of Financial Instruments

The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:

Cash and
short-term investments

For
those short-term instruments, the carrying amount is a reasonable estimate of
fair value.

55

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Convertible Securities

The company remeasures its
convertible securities in compliance with EITF 00-19, based on the fair value
of its Common Stock into which they are convertible, since there are currently
insufficient shares authorized to allow conversion. The fair value of the
Common Stock is based on the price paid for a share of the stock closest to the
measurement date

Recently
Issued Accounting Standards

In
June 2005, the Financial Accounting Standards Board (FASB) issued SFAS 154,
Accounting Changes and Error Corrections. (FAS 154). FAS 154 replaces APB
Opinion No. 20, Accounting Changes and FAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. FAS 154 requires that a voluntary change in
accounting principle be applied retrospectively with all prior period financial
statements presented on the new accounting principle. FAS 154 also requires
that a change in method of depreciating or amortizing a long-lived
non-financial asset be accounted for prospectively as a change in estimate, and
correction of errors in previously issued financial statements should be termed
a restatement. FAS 154 is effective for accounting changes and correction of
errors made in fiscal years beginning after December 15, 2005.

In
June 2005, the FASBs Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 05-6, Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a Business
Combination. EITF 05-6 requires leasehold improvements purchased after the
beginning of the initial lease term to be amortized over the shorter of the
assets useful life or a term that includes the original lease term plus any
renewals that are reasonably assured at the date the leasehold improvements are
purchased. This guidance was effective for reporting periods beginning after
June 29, 2005. The adoption of this guidance did not have a material impact on
the Companys consolidated financial statements.

In
October 2005, the FASB issued FASB Staff Position (FSP) 13-1, Accounting for
Rental Costs Incurred during the Construction Period. FSP 13-1 requires rental
costs associated with ground or building operating leases that are incurred
during a construction period be recognized as rental expense. FSP 13-1 becomes
effective for the first reporting period beginning after December 15, 2005. We
have evaluated the impact of the adoption of FSP 13-1, and determined there is
no impact on the Companys consolidated financial statements.

In
June 2006, FASB issued FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements
in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This guidance is effective for fiscal years
beginning after December 15, 2006. KAAI believes the impact of the adoption of
FIN 48 will not be significant to the Companys consolidated financial
statements.

In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This guidance becomes effective for the first
reporting period beginning after November 15, 2007. The Company is assessing the impact of the adoption of SFAS 157 on the
Companys consolidated financial statements.

56

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In
September 2006, the FASB issued SFAS 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment of FASB Statements
No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income. This guidance is
effective as of the end of the fiscal year for years ending after December 15,
2006. The Company is assessing the impact of the adoption of SFAS 158 on the
Companys consolidated financial statements.

4. Restricted Cash

Following
are the components of restricted cash included in the Consolidated Balance
Sheets as of July 1, 2006 and June 30, 2005:

|                                                                                                |  |      |       |      |   |       | 
|----------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | 
|                                                                                                |  |      |      
|(Dollars in thousands)                                                                          |  | 2006 |       | 2005 |  
|                                                                                                |  |      |      
|                                                                                                |  |      |       |      |   |       | 
|Escrow account for
  prefunded interest on senior debt                                          |  | $    | 1,602 |      | $ | 1,228 | 
|Restricted certificate of
  deposit for Manhasset facility to collateralize lease               |  |      |      |      |   | 200   | 
|Initial restricted
  certificate of deposit for Beverly Hills facility to collateralize lease   |  |      | 72    |      |   | 72    | 
|Secondary restricted
  certificate of deposit for Beverly Hills facility to collateralize lease |  |      | 78    |      |   | 78    | 
|Restricted certificate of
  deposit for Boca Raton facility to collateralize lease              |  |      |      |      |   | 19    | 
|Restricted certificate of
  deposit for Norwalk office to collateralize lease                   |  |      | 695   |      |   |      | 
|                                                                                                |  |      |       |      |   |       | 
|                                                                                                |  |      |       |      |   |       | 
|Total restricted cash                                                                           |  |      | 2,447 |      |   | 1,597 | 
|                                                                                                |  |      |       |      |   |       | 
|Less current portion                                                                            |  |      | 1,602 |      |   | 1,228 | 
|                                                                                                |  |      |       |      |   |       | 
|                                                                                                |  |      |       |      |   |       | 
|Total non-current
  restricted cash                                                             |  | $    | 845   |      | $ | 369   | 
|                                                                                                |  |      |       |      |   |       | 

As
of June 30, 2005, the Companys CEO and Chairman of the Board, Richard
Rakowski, had personally guaranteed the letter of credit and restricted
certificate of deposit for the Manhasset facility in the amount of $.2 million.
As of July 1, 2006, the certificate of deposit was no longer required to
collateralize the lease, as it had been released by the lessor. The letter of
credit was still required along with the related guarantee.

5. Inventories

Following
are the components of inventory included in the Consolidated Balance Sheets as
of July 1, 2006 and June 30, 2005:

57

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|                        |  |      |       |      |   |       |  
|----------------------- |  | ---- | ----- | ---- | - | ----- | -
|                        |  |      |      
|(Dollars in thousands)  |  | 2006 |       | 2005 |  
|                        |  |      |      
|                        |  |      |       |      |   |       |  
|Back bar supplies       |  | $    | 508   |      | $ | 271   |  
|Components              |  |      | 596   |      |   | 485   |  
|Finished goods          |  |      | 1,556 |      |   | 1,400 |  
|                        |  |      |       |      |   |       |  
|                        |  |      |       |      |   |       |  
|Total inventory         |  |      | 2,660 |      |   | 2,156 |  
|                        |  |      |       |      |   |       |  
|Inventory reserves      |  |      | (446  | )    |   | (179  | )
|                        |  |      |       |      |   |       |  
|                        |  |      |       |      |   |       |  
|Total inventories (net) |  | $    | 2,214 |      | $ | 1,977 |  
|                        |  |      |       |      |   |       |  
|                        |  |      |       |      |   |       |  

6. Property and Equipment, net

Following
are the components of property and equipment included in the Consolidated
Balance Sheets as of July 1, 2006 and June 30, 2005:

|                                            |  |      |        |      |   |        |  
|------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                            |  |      |       
|(Dollars in thousands)                      |  | 2006 |        | 2005 |  
|                                            |  |      |       
|                                            |  |      |        |      |   |        |  
|Furniture and fixtures                      |  | $    | 2,337  |      | $ | 1,489  |  
|Machinery and equipment                     |  |      | 3,078  |      |   | 1,666  |  
|Leasehold improvements                      |  |      | 11,261 |      |   | 5,628  |  
|Capital lease assets                        |  |      | 439    |      |   | 286    |  
|                                            |  |      |        |      |   |        |  
|                                            |  |      |        |      |   |        |  
|Total property and
  equipment              |  |      | 17,115 |      |   | 9,069  |  
|                                            |  |      |        |      |   |        |  
|Accumulated depreciation
  and amortization |  |      | (4,134 | )    |   | (2,508 | )
|                                            |  |      |        |      |   |        |  
|                                            |  |      |        |      |   |        |  
|Total property and
  equipment, net         |  | $    | 12,981 |      | $ | 6,561  |  
|                                            |  |      |        |      |   |        |  

Depreciation
expense for the years ended July 1, 2006, June 30, 2005, and 2004 was $1.9,
$1.9 million, and $0.6 million, respectively.

7. Intangible Assets

All
intangible assets, other than goodwill, have been assigned an estimated finite
useful life, and are amortized on a straight line basis over the number of
years that approximate their respective useful lives (ranging from two to six
years). Total amortization expense related to amortizable intangible assets for
the years ended July 1, 2006, June 30, 2005, and 2004 was $2.2, $1.8 million,
$1.0 million respectively. The following table provides additional information
concerning intangible assets as of July 1, 2006 and June 30, 2005:

58

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|                         |  |            |       |            |   |                          |  |          |       |                         |   |       |  |   |       |  |   |       |  |  |           | 
|------------------------ |  | ---------- | ----- | ---------- | - | ------------------------ |  | -------- | ----- | ----------------------- | - | ----- |  | - | ----- |  | - | ----- |  |  | --------- | 
|                         |  | Gross Cost |       | Gross Cost |   | Accumulated Amortization |  | Net Cost |       | Estimated
  Useful Life |  
|(Dollars in
  thousands) |  | 2006       |       | 2005       |   | 2006                     |  | 2005     |       | 2006                    |   | 2005  |  |  
|                         |  |            |       |            |   |                          |  |          |       |                         |   |       |  |   |       |  |   |       |  |  |           | 
|Non-compete agreements   |  | $          | 1,687 |            | $ | 1,687                    |  | $        | 1,591 |                         | $ | 1,115 |  | $ | 96    |  | $ | 572   |  |  | 2-3 years | 
|Trademark / trade name   |  |            | 1,144 |            |   | 1,110                    |  |          | 947   |                         |   | 577   |  |   | 197   |  |   | 533   |  |  | 3 years   | 
|Customer relationships   |  |            | 1,764 |            |   | 1,764                    |  |          | 917   |                         |   | 564   |  |   | 847   |  |   | 1,200 |  |  | 5 years   | 
|Licensing agreements     |  |            | 5,247 |            |   | 5,247                    |  |          | 1,476 |                         |   | 513   |  |   | 3,771 |  |   | 4,734 |  |  | 5 years   | 
|Domain Name              |  |            | 50    |            |   | 50                       |  |          | 9     |                         |   | 13    |  |   | 41    |  |   | 37    |  |  | 2-5 years | 
|Patent                   |  |            | 43    |            |   |                         |  |          |      |                         |   |      |  |   | 43    |  |   |      |  |  | 20 years  | 
|Sephora                  |  |            | 43    |            |   | 43                       |  |          | 13    |                         |   | 4     |  |   | 30    |  |   | 39    |  |  | 6 years   | 
|                         |  |            |       |            |   |                          |  |          |       |                         |   |       |  |   |       |  |   |       |  |  |           | 
|Total                    |  | $          | 9,978 |            | $ | 9,901                    |  | $        | 4,953 |                         | $ | 2,786 |  | $ | 5,025 |  | $ | 7,115 |  |  |           | 

The following
table provides the amortization expense to be incurred over the next five
years:

|                         |            |                        |   |       | 
|------------------------ | ---------- | ---------------------- | - | ----- | 
|                         |            |                        |   |      
|(Dollars
  in thousands) |            | For
  the Years Ended, |  
|                         |            |                        |  
|                         |            |                        |   |      
|                         | 2007       |                        | $ | 1,602 | 
|                         | 2008       |                        |   | 1,343 | 
|                         | 2009       |                        |   | 1,132 | 
|                         | 2010       |                        |   | 906   | 
|                         | 2011       |                        |   | 10    | 
|                         | Thereafter |                        |   | 32    | 
|                         |            |                        |   |       | 
|                         |            |                        |   |       | 
|                         |            |                        | $ | 5,025 | 
|                         |            |                        |   |       | 

8. Accrued Expenses and Other Current
Liabilities

The
table below consists of the Companys accrued expenses and other current
liabilities as of July, 1 2006 and June 30, 2005.

|                                                     |  |                |        |                 |   |       | 
|---------------------------------------------------- |  | -------------- | ------ | --------------- | - | ----- | 
|(Amounts
  in thousands)                             |  | July 1,
  2006 |        | June 30,
  2005 |  
|                                                     | 
|                                                     |  |                |        |                 |   |       | 
|Accrued interest                                     |  | $              | 2,735  |                 | $ | 3,654 | 
|Accrued dividends                                    |  |                | 2,474  |                 |   | 1,853 | 
|Accrued management Fees                              |  |                | 1,714  |                 |   | 1,305 | 
|Due to John Hopkins  consulting fees                |  |                | 1,300  |                 |   |      | 
|Accrued
  registration penalties (a)                 |  |                | 1,547  |                 |   |      | 
|Payroll, Benefits and Other                          |  |                | 6,679  |                 |   | 3,103 | 
|                                                     | 
|Total Accrued Expenses and Other Current Liabilities |  | $              | 16,449 |                 | $ | 9,915 | 
|                                                     | 

(a)  Registration Rights Penalties

On
September 1, 2005, KAAI entered into an agreement with various stockholders
regarding the registration of the shares of common stock underlying the
securities they had acquired from KAAI. The agreement, which was assumed by the
Company in connection with the Share Exchange Agreement, included an obligation
to file a resale registration statement covering the shares by February 18,
2006, which was 60 days after the closing date of the Share Exchange Agreement
(the Filing Date). The Company did meet this requirement as it filed an S-1
on

59

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January 24,
2006. In addition, the agreement required that the registration statement be
declared effective by June 3, 2006 (105 days after the Filing Date). Failure
under either of the obligations under the original agreement required a cash
payment. On December 20, 2006, an amendment to the agreement was signed which
required the payment of damages through the issuance of warrants to purchase
shares of Common stock, at an exercise price of $0.001 per share. The number of
Common Stock warrants to be issued for each period is calculated by dividing
the liquidated damages of 1% of the aggregate purchase price paid by such stockholder
for each 30-day period or pro rata portion
to the holders, by the higher of (A) the average closing
trading price of the Common Stock during the 30-day period immediately before
the last day of the relevant period and (B) $0.211254. The shareholders may
also elect to receive a portion of the damages in cash.

On
December 22, 2005, the Company entered into an agreement with certain
stockholders regarding the registration of the shares of common stock
underlying the securities they had acquired from the Company. The agreement
included an obligation to file a resale registration statement covering the
shares by January 21, 2006 which was 30 days after the December 22, 2005
closing date of the sale of securities to such stockholders. Due to the fact
that the Company did not meet this requirement, it is subject to a one-time
filing penalty of 3% of the aggregate purchase price paid by such stockholder. In addition, the agreement required the Company to effect the
Authorized share Increase described in this Report by May 1, 2006 which was 130
days after the closing date of the sale of securities to such stockholders. Due
to the fact that the Company did not meet this requirement it may be subject to
a one time penalty of 3% of the aggregate purchase price paid by such stockholder
and ongoing monthly charges of 1.5% of the aggregate purchase price paid by such stockholder
for each 30-day period or pro rata portion. Failure under either of the
obligations requires a cash payment.

Due
to the fact that the Company did not meet the effective date requirement by
June 3, 2006 or the authorized share increase requirement, a non-operating
charge has been recorded for the combined estimated penalties of $1.5 million
during the fourth quarter of the year ended July 1, 2006. This includes one
time charges of $0.9 million and monthly charges of $0.4 per month. There is no
maximum included in the agreement and penalties will continue to accrue for each
agreement until the Company is able to achieve compliance. The obligation of
$1.5 million represents the registration penalties through July 1, 2006 and is
included in Accrued expenses and other current liabilities on the Consolidated
Balance Sheet. In addition, the Company has estimated that additional penalties
to be incurred subsequent to July 1, 2006, until the event is cured to be $4.7
million.

9. Long-Term Debt and Other Long
Term Liabilities

The
Companys long-term debt and other long-term liabilities as of July 1, 2006 and
June 30, 2005 consist of the following:

|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|--------------------------------------------------------------------- |  | ---------- |  | --------------- |  | ------------------- | ------- | ---- | - | ------
|                                                                      |  |            |  |                 |  | Amounts Outstanding
|                                                                      |  | Maturity   |  |                 |  |                    
|(Dollars in thousands)                                                |  | Dates      |  | Interest Rate % |  | 2006                |         | 2005
|                                                                      |  |            |  |                 |  |                     |         |     
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Senior debt (a)                                                       |  | 3/31/2009  |  | 12%             |  | $                   | 9,146   |      | $ | 8,836 
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Senior subordinated debt
  (b)                                        |  | 11/4/2010  |  | 10%             |  |                     |        |      |   | 12,066
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Other long term debt                                                  |  |            |  |                 |  |                     |         |      |   |       
|Note payable (c)                                                      |  | Varies     |  | 5%
  - 15%      |  |                     | 5,839   |      |   | 7,805 
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Other long term liabilities                                           |  |            |  |                 |  |                     |         |      |   |       
|Long term consulting obligation                                       |  | 12/1/2008  |  | 6%              |  |                     | 3,818   |      |   | 4,555 
|Deferred construction allowance                                       |  |            |  |                 |  |                     | 130     |      |   | 170   
|Capital lease obligations                                             |  | Varies     |  | 6%              |  |                     | 393     |      |   | 55    
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Deferred Liability                                                    |  |            |  |                 |  |                     |         |      |   |       
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Sephora                                                               |  | 12/31/2010 |  |                 |  |                     | 5,000   |      |   | 5,000 
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Convertible Securities                                                |  |            |  |                 |  |                     | 197,565 |      |   | 11,684
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Total                                                                 |  |            |  |                 |  |                     | 221,891 |      |   | 50,171
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Less current portion and amount included in other current
liabilities |  |            |  |                 |  |                     | 16,497  |      |   | 744   
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|                                                                      |  |            |  |                 |  |                     |         |      |   |       
|Long-term portion                                                     |  |            |  |                 |  | $                   | 205,394 |      | $ | 49,427
|                                                                      |  |            |  |                 |  |                     |         |      |   |       

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(a) - Senior
Debt

On
April 1, 2004, the Company borrowed $10.0 million from TICC under a 12% senior
note due on March 31, 2009. The proceeds were used to finance the Georgette
Klinger acquisition and for general working capital purposes. As part of the
agreement, $2.4 million of interest expense was pre-funded and placed into an
escrow account for the purpose of paying the first two years of interest
expense on the note. In addition, 618,789 warrants with an exercise price of
$.01 were issued in conjunction with the note. These warrants contain
anti-dilution provisions in the event that the Company issues more equity in
the future below a specified price. As of July 1, 2006 and June 30, 2005, this
note carried a debt discount of $0.9 million and $1.2 million respectively. The
debt discount was attributable to the value associated with the detachable
warrants issued in conjunction with the Senior Debt. The debt discount is amortized
to interest expense and recorded over the term of the note. For the years ended
July 1, 2006 and June 30, 2005, the Company recorded interest expense of $0.3
million related to the amortization of the debt discount.

The
senior note agreement contained covenants, including limitations on incurrence
of debt, granting of liens, capital expenditures, mergers and consolidations.
In addition, the Company could not exceed specified fixed charge coverage,
total debt-to-profit, senior debt-to-profit and debt-to-equity ratios. These covenants applied in some cases to the
unit level operations and in other cases to the consolidated operations, all
effective for periods subsequent to June 30, 2004. On June 30, 2006, the
Company obtained a covenant compliance waiver and amendment under the senior
debt agreement with TICC. The Company obtained a waiver for the Consolidated
Senior Debt to Consolidated EBITDA ratio covenant test for all periods through
March 31, 2007. In addition, the Company obtained amended covenants for the
Unit EBITDAR, Unit Fixed Coverage Ratio and minimum cash required covenant
tests.

The
senior note was collateralized by the assets as outlined in the Pledge and
Security agreement dated April 1, 2004. The collateral for this note included
financial instruments, goods (inventory, equipment, fixtures, etc.), deposit
accounts, letter of credit rights, investment securities and general intangible
assets.

Subsequent
to year-end, the Company repaid the senior debt with proceeds from a financing
it completed on July 6, 2006 (see subsequent events Note 19). As a result, the
senior subordinated debt was reclassed to current liabilities as of July 1,
2006. All covenants were eliminated as a result of the payment of the debt. The
unamortized discount was recorded as interest expense upon repayment.

(b) - Senior
Subordinated Debt

On
November 4, 2003, the Company borrowed $13.3 million from L Capital under a
subordinated convertible promissory note due on November 4, 2010. This note was
subordinated to the senior debt borrowed from TICC. The proceeds from this note
were utilized for three purposes: 1) to purchase three salon and spa facilities
in the Florida market, 2) complete renovation and expansion of two salon and
spa facilities and 3) general working capital needs of the Company. The three
salon and spa facilities acquired

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were 1) Wild Hare Salon in Boca Raton, FL, 2) Anushka Boca Spa in Boca
Raton, FL and 3) Anushka Spa and Sanctuary in Palm Beach Gardens, FL.

The
Company was obligated to pay interest at a rate of 10% per annum with a minimum
of $66,500 payable quarterly in cash. The remainder of the interest could be
deferred at the option of the Company until either the maturity of the note or
the conversion of the note to common stock. On December 20, 2005, the note was
converted to equity as part of the Share Exchange Agreement. The interest
continues to accrue on the accrued interest portion that was not converted, at
a rate of 7.5%. As of July 1, 2006 and June 30, 2005, the Company had $2.6
million and $1.9 million, respectively, of accrued interest on the Consolidated
Balance Sheet related to this note. Accumulated but unpaid interest shall only
be paid to the extent necessary, upon the occurrence of an exit event, to
increase the internal rate of return of the investor to a 25% annual return
with respect to its investment in the Company. The note and any unpaid interest were previously
convertible into 5,966,444 shares of KAAI common stock at the option of the
note holder.

The
Company originally recognized a debt discount in the amount of $1.6 million due
to beneficial conversion features associated with this note. The discount remaining
as of December 20, 2005 was written off upon conversion. As of June 30, 2005,
this note carried a debt discount of $1.2 million. The debt discount is
amortized to interest expense and recorded over the term of the note. The
Company recorded interest expense of $1.2 million and $0.2 million for each of
the years ended July 1, 2006 and June 30, 2005, respectively, related to the
combined write-off and amortization of the debt discount.

(c) - Other
Long Term Debt

On
June 29, 2003, the Company executed a promissory note for $5.9 million to KCO
due on July 1, 2010. KCO paid expenses and deposits for
acquisitions on behalf of AAI in connection with the formation and
capitalization of the Company. The
Company was obligated for 6% interest for the first year and 12% thereafter,
compounded annually, through the term of the note. The Company utilized the
effective interest method to calculate interest expense for this loan. The
interest can be accrued or paid at the option of the Company. The Company had
chosen to accrue the interest until such time that the cash flow from
operations could support payment of the interest to the note holder. On
December 20, 2005, the note and related interest of $1.6 million was converted
to equity as part of the Share Exchange Agreement. As a result of the use of
this method, $0.4 million and $0.7 million of non-cash interest expense related
to this note was recorded for each of the years ending July 1, 2006 and June
30, 2005, respectively.

On
June 29, 2003, the Company executed a secured note for $1.3 million to Cosmo
Dischino due on June 30, 2006. The note was issued to Cosmo Dischino as part of
the acquisition consideration to purchase the Dischino Corporation. The Company
was obligated for 5% interest for the first year, 10% interest for the second
year and 15% interest thereafter through the term of the note. The Company
utilized the effective interest method to calculate interest expense for this
loan. All interest was compounded annually and payable quarterly. This note
payable was secured and collateralized by the fixed assets of the West Palm
Beach facility as outlined in Schedule A of the Security Agreement dated July
1, 2003. On December 1, 2003 the Company pre-paid $0.8 million in principal
back to the note holder. In July 2005, the Company repaid the
remaining balance of the secured note
issued in the amount of $0.5 million. As of July 1, 2006 and June 30, 2005, the
principal balance of $0 and $0.5 million remained outstanding, respectively. As
a result of this repayment, $0 and $0.1 million of non-cash interest expense
related to this note was recorded in each of the years ended July 1, 2006 and
June 30, 2005, respectively.

On
November 26, 2003, the Company executed a note to the shareholders of Anushka
Palm Beach Gardens for $0.4 million due on May 25, 2005. The note was issued to
the shareholders of Anushka Palm Beach Gardens as part of the acquisition
consideration to purchase the Anushka Spa and Sanctuary in Palm Beach Gardens,
FL. The Company was obligated for 5% interest annually through the term of the
note. All interest is compounded annually and payable quarterly. In July 2005,
the Company redeemed the balance of

62

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the note
payable issued to the shareholders of Anushka Palm Beach Gardens in the amount
of $0.4 million. As of July 1, 2006 and
June 30, 2005, the principal balance of $0 and $0.4 million remained
outstanding, respectively.

On
April 23, 2004, the Company executed a note to the Pyle Group for $1.0 million
due on April 23, 2007. The note was issued to the Pyle Group as part of the
acquisition consideration to purchase Georgette Klinger Inc. The Company is
obligated for 5% interest annually through the term of the note. All interest
is compounded annually and payable quarterly. As of June 30, 2005, the note was
reissued to Judith Pyle in the amount $.5 million and Thomas Pyle in the amount
$.5 million, individually under the same terms.

Bridge Financings:

On
May 9, 2006, we entered into a Loan Agreement with some of our existing
shareholders, pursuant to which the Lenders loaned the Company $4,838,710 to be
used by the Company for capital expenditures and general working capital.
Unamortized closing costs relating to this loan were $0.3 million as of July 1,
2006, and are included in Other current assets on the Consolidated Balance
Sheet. Pursuant to a Subordination Agreement dated May 9, 2006 with the Lenders
and TICC, the Loan was subordinated to the Companys then existing senior
indebtedness to TICC under the Note and Warrant Purchase Agreement, dated March
31, 2004, as amended. Subsequent to year end, the senior debt to TICC was
repaid (see subsequent events Note 19).

Accrued Interest and Maturities of Other Long
Term Debt

Accrued
interest of $2.7 and $3.6 million is included in accrued expenses as of July1,
2006 and June 30, 2005, respectively.

Aggregate
maturities of debt, gross of debt discounts for the next five years, are as
follows:

|                       |  |                                |        | 
|---------------------- |  | ------------------------------ | ------ | 
|(Dollars in thousands) |  | For the Years
  Ended June 30, |       
|                      
|                       |  |                                |        | 
|2007                   |  | $                              | 15,839 | 
|2008                   |  |                                |       | 
|2009                   |  |                                |       | 
|2010                   |  |                                |       | 
|2011                   |  |                                |       | 

10. Commitments and Contingencies

Litigation

UBS Lawsuit

UBS
Securities, LLC commenced a lawsuit against the Company in the Supreme Court of
the State of New York, County of New York on September 18, 2006. The complaint
alleges that UBS was engaged to provide investment banking services to the
Company and that UBS is owed a fee of $1,750,000 with respect to a private
placement that was consummated in June, 2006. In the event the Company was
unsuccessful in defending the lawsuit, it would have a material adverse effect
on the Company. The Company does not believe a loss from an unfavorable outcome
will exceed the amount accrued.

63

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Other Contingencies

The
Company is a party to a number of legal actions, proceedings or claims. While
any action, proceeding or claim contains an element of uncertainty, management
believes that the outcome of such actions, proceedings or claims will not have
a material adverse effect on the business, financial condition or results of
operations.

Employment Agreements

The
Company has entered into employment agreements with certain former owners of
companies which were acquired in the year ended June 30, 2004. Under the terms
of the agreements these employees and certain senior executives are entitled to
severance benefits should their employment be involuntarily terminated. The
obligation under these contracts for severance benefits is approximately $0.5
million and $1.4 million for the years ended July 1, 2006 and June 30, 2005,
respectively. Further, the Company entered into an agreement with another
former owner of an acquired company whereby the employee is entitled to a
guaranteed salary until such time as a note for $1.3 million is repaid by the
Company to the employee. In addition, should the note not be repaid within 18
months of its execution, the employee is entitled to a minimum salary of twice
his guaranteed salary until such time as the note is repaid in full. The note
was repaid in July, 2005 and no liability remains as of July 1, 2006.

Capital Leases

The
Company is committed under a non-cancelable capital lease for medical equipment
at four of the twelve operating facilities. The term of the lease is two years
and expires in April 2008. The lease has a bargain purchase options that the
Company expects to exercise at the termination of the lease. Capital lease
assets totaled $0.4 million and $0.3 million as of July 1, 2006 and June 30,
2005, respectively, net of depreciation, and capital lease obligations totaled
$0.4 million and $0.1 million, respectively.

Operating Leases

The
Company is committed under non-cancelable operating leases for all twelve of
its store facilities and two corporate office locations. The original terms of
the leases range from one to fifteen years with many leases renewable for an
additional three to five year term at the option of the Company. Certain leases
contain escalation provisions and percentage rent provisions.

Total
rent expense, including real estate taxes, utilities, and other expenses in the
Consolidated Statement of Operations for the years ended July 1, 2006 and June
30, 2005 was $6.0 million and $4.7 million, respectively.

As
of July 1, 2006 future minimum lease payments (excluding percentage rents based
upon revenues) due under existing non-cancelable leases with remaining terms of
greater than one year are as follows:

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|                                           |  |                            |        |                          |   |                        |  |   |        | 
|------------------------------------------ |  | -------------------------- | ------ | ------------------------ | - | ---------------------- |  | - | ------ | 
|                                           |  | (Dollars in thousands)     |       
|                                           |  |                            |       
|                                          
|                                           |  |                            |        |                          |   |                        | 
|Fiscal year                                |  | Operating lease
  payments |        | Capital lease
  payments |   | Total lease
  payments | 
|                                           |  |                            |        |                          |   |                        | 
|2007                                       |  | $                          | 4,137  |                          | $ | 207                    |  | $ | 4,344  | 
|2008                                       |  |                            | 4,086  |                          |   | 207                    |  |   | 4,293  | 
|2009                                       |  |                            | 3,292  |                          |   |                       |  |   | 3,292  | 
|2010                                       |  |                            | 3,259  |                          |   |                       |  |   | 3,259  | 
|2011                                       |  |                            | 3,203  |                          |   |                       |  |   | 3,203  | 
|Thereafter                                 |  |                            | 11,492 |                          |   |                       |  |   | 11,492 | 
|                                           |  |                            |        |                          |   |                        |  |   |        | 
|                                           |  |                            |        |                          |   |                        |  |   |        | 
|Total minimum lease payments               |  | $                          | 29,469 |                          |   | 414                    |  | $ | 29,883 | 
|                                           |  |                            |        |                          |   |                        |  |   |        | 
|                                           |  |                            |        |                          |   |                        |  |   |        | 
|Less: Imputed interest                     |  |                            |        |                          |   | 22                     |  |   |        | 
|                                           |  |                            |        |                          |   |                        |  |   |        | 
|                                           |  |                            |        |                          |   |                        |  |   |        | 
|Present value of capital lease obligations |  |                            |        |                          | $ | 392                    |  |   |        | 
|                                           |  |                            |        |                          |   |                        |  |   |        | 

11. Related Party Transactions

General

In
connection with the formation and capitalization of KAAI, KCO advanced an
aggregate of approximately $5.9 million to KAAI. In addition, affiliates of
KCO, including Seapine Investments, LLC (Seapine), trusts for the benefit of
the children of William and Carla Kidd (Kidd Trusts), Richard Rakowski, a
director and Chief Executive Officer of the Company and Andrew D. Lipman, a
director of the Company (all of the foregoing herein collectively KCO
Affiliates) and other unrelated parties, invested an aggregate of $2 million
to capital KAAI and received 2,725 shares of KAAIs series B preferred stock,
9,288,609 shares of common stock and warrants to acquire 376,384 shares of
common stock of KAAI at an exercise price of $.01 per share. All of these
securities were exchanged for TrueYou securities in the Share Exchange
Agreement. See also Loans by Klinger Investments below which describes
transactions with such entity, which entity is solely owned by William J. Kidd.
See also Loans by Richard Rakowski and Loans by Andrew Lipman below.

In
November 2003, in connection with the transactions involving KAAI and L
Capital, KCO received a note from KAAI in the sum of $5,905,085 (which
represented the amount originally advanced plus interest) and agreed that
payment of such note would be based on future performance of KAAI. On December
20, 2005 and in connection with the Share Exchange Agreement, the $7,346,195.53
of principal and interest outstanding under the KCO note was converted into
2,938,478 shares of KAAI common stock ($2.25 per share), which was subsequently
converted into 3,571.1976 shares of our Series B Preferred Stock upon the
closing of the Share Exchange Agreement.

In
November 2003, L Capital invested $13,300,000 and received a subordinated
convertible promissory note (convertible into 5,966,444 shares of the common
stock of KAAI) and entered into a Securityholders Agreement and Registration
Rights Agreement with KAAI and KCO. The agreements provide that the KCO
Investors and L Capital vote their shares for specified nominees as directors
of KAAI and for certain approval rights for specified transactions of KAAI
(e.g., significant acquisitions, capital expenditures, material contracts,
specified borrowings and others), as well as rights to cause the sale of KAAI.
L Capital also entered into a Share Transfer Agreement with the KCO Affiliates
and other affiliates of KCO (collectively the KCO Investors) whereby certain
of the shares of common stock of KAAI owned

65

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by the KCO
Investors is required to be delivered to L Capital if L Capital does not, upon
the sale or liquidation of KAAI, a change of control of KAAI, a public offering
of at least $25,000,000 and other events, receive an investment rate of return
of 25% on its investment in KAAI (the L Capital IRR test).

In
June 2004, L Capital invested an additional $8.2 million and acquired shares of
the series D convertible preferred stock of KAAI and concurrently entered into
an amendment to the Share Transfer Agreement with the KCO Investors which
increased the number of shares of the common stock of KAAI owned by the KCO Investors
which could be delivered to L Capital. Under the revised Share Transfer
Agreement described below, an aggregate of 40,853,733 shares of Common Stock of
the Company may be delivered to L Capital in the event the L Capital IRR test
is not met. The subordinated convertible promissory note and the series D
convertible preferred stock were converted into KAAI common stock (at $2.25 per
share), which were subsequently converted into 11,322.6643 shares of our Series
B Preferred Stock upon the closing of the Share Exchange Agreement on December
20, 2005.

Under
the Securityholders Agreement, the parties also agreed on restrictions on the
transfer of their securities, rights of first offer, tag-along rights as well
as preemptive rights. Under the Securityholders Agreement, the KCO Investors
have the right, until November 2008, to cause the sale of KAAI, provided that
the L Capital IRR test is met; and if not, after November 2008, L Capital has
the right to cause the sale of KAAI.

On
December 20, 2005, the parties amended the Share Transfer Agreement and the
Securityholders Agreement. The amended agreements provide that the KCO
Investors and L Capital vote their shares for specified nominees as directors
of the Company and for certain approval rights for specified transactions of
the Company (e.g., significant acquisitions, capital expenditures, material
contracts, specified borrowings and others), as well as rights to cause the
sale of the Company. On December 20, 2005, L Capital converted its promissory
note and its shares of KAAIs series D preferred stock into shares of common
stock of KAAI (at $2.25 per share), which were subsequently converted into
11,322.6643 shares of our Series B Preferred Stock upon the closing of the
Share Exchange Agreement. Unpaid and accrued interest on the L Capital note and
accrued and unpaid dividends on the shares of KAAIs series D preferred stock
were not paid or converted and remain as outstanding obligations of the Company
and bear interest at a rate of 7.5% per annum. To the extent necessary, upon
the occurrence of certain events (such as a sale or liquidation of the Company
or other event as referred to above), if L Capital does not realize the L
Capital IRR test, we might be required to pay a portion or all of such unpaid
and accrued interest and dividends to L Capital. The KCO Investors have also
agreed with L Capital, that they will not sell any of their shares of the
Company s Series B Preferred Stock and the Companys Common Stock into which
the Series B Preferred Stock are convertible, until such time as L Capital has
realized the L Capital IRR test.

L Capital
Consulting Services Agreement

On
November 25, 2003 KAAI entered into a Consulting Services Agreement with L
Capital pursuant to which L Capital performed consulting services for KAAI.
Under the Agreement, KAAI was required to pay L Capital an annual consulting
fee, payable in quarterly installments in arrears, equal to the higher of (a)
$445,000 and (b) 1% of our gross revenues plus $20,000 for such year. As of
July 1, 2006 and December 20, 2005, there were accrued and unpaid consulting
fees to L Capital of approximately $876,841.

On
December 20, 2005, we terminated the Consulting Agreement with L Capital, and
in accordance with this Agreement were obligated to pay all accrued and unpaid
consulting fees within one year of termination. On December 19, 2006 a new
agreement was signed which deferred this payment until (a) the $25.0 million in
principal, along with the related interest of our senior debt issued on July 6,
2006 to Laurus Master Fund Ltd. has been paid, (b) the $10.0 million in
principal, along with the related interest of our subordinated debt issued on
July 11, 2006 has been paid and (c) the $4.0 million in principal, along with
the

66

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related
interest of senior subordinated debt issued on December 22, 2006. Upon the
occurrence of all of the preceding, all accrued management fees will be due and
payable.

KCO Advisory
Services Agreement

On
November 25, 2003 KAAI entered into an Advisory Services Agreement with KCO
pursuant to which KCO performed advisory services for the Company. Under the
Agreement KAAI was required to pay KCO an annual advisory fee, payable in
quarterly installments in arrears, equal to the higher of (a) $425,000 and (b)
1% of our gross revenues for such year. As of December 20, 2005, there were
accrued and unpaid consulting fees to KCO of approximately $837,433.

On
December 20, 2005 we terminated the Advisory Agreement with KCO and in
accordance with this Agreement were obligated to pay all accrued and unpaid
advisory fees within one year of termination. On December 19, 2006 a new
agreement was signed which deferred this payment until (a) the $25.0 million in
principal, along with the related interest of our senior debt issued on July 6,
2006 to Laurus Master Fund Ltd. has been paid, (b) the $10.0 million in
principal, along with the related interest of our subordinated debt issued on
July 11, 2006 has been paid and (c) the $4.0 million in principal, along with
the related interest of senior subordinated debt issued on December 22, 2006.
Upon the occurrence of all of the preceding, all accrued management fees will
be due and payable.

Loans by Affiliates of Pequot

Affiliates
of Pequot, holders of more than 5% of the Common Stock of the Company, hold 7
year warrants with an exercise price of $.01 per share, to purchase an
aggregate of 14,654,807 shares of the Common Stock of the Company which
warrants were received in connection with the $5.2 million Subordinated Debt
financing on July 11, 2006 and the $4.8 Million Subordinated Debt financing on
May 9, 2006 in which such affiliates loaned the Company an aggregate of
$2,312,903. Such affiliates also loaned monies to and received securities of
KAAI as described in Item 1 of this Report. All of such securities have been
converted into securities of TrueYou under the Share Exchange Agreement.

Loans by Klinger Investments

Klinger
Investments, LLC, an entity owned by William J. Kidd, the spouse of Carla G.
Kidd, the sole Manager of Seapine Investments, LLC, a holder of more than 5% of
the Common Stock of the Company and a 50% owner of Kidd & Company, LLC,
loaned the Company $2,275,269 as part of the July 11, 2006 $5.2 Million
Subordinated Debt financing and May 9, 2006 $4.8 Million Subordinated Debt financing
and $650,000 in the $4 Million December 22, 2006 Senior Subordinated financing
and received 10 year warrants with an exercise price of $.001 per share to
purchase an aggregate of 14,416,354 shares of Common Stock and 7 year warrants
to purchase an aggregate of 2,904,762 shares of Common Stock. In the event the
Laurus $1 Million Senior Subordinated Loan is not repaid by April 22, 2007,
warrants to purchase 2,708,374 shares will be returned by Klinger Investments
to the Company for cancellation.

Loans by Laurus Master Fund
Ltd.

Laurus
has loaned the Company $25,000,000 as Senior Secured Debt and $1 Million as
Senior Subordinated Secured Debt as described in this Report and received 10
year warrants with an exercise price of $.01 per share to purchase a total of
50,885,093 shares of Common Stock and 7 year warrants with an exercise price of
$.01 per share to purchase a total of 10,000,000 shares of Common Stock. In
addition Laurus is entitled to receive warrants to purchase an additional
8,750,000 shares of Common Stock if the $1,000,000 Senior Subordinated Secured
Debt is not repaid by April 22, 2007. If prior to the 14th month
anniversary of June 30, 2006, the Companys obligations to Laurus under the
Senior Secured Debt have been reduced to $12,500,000 or less, then warrants to
purchase 6,839,394 shares of Common Stock will be

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automatically cancelled and terminated and if
at such time the Companys obligations have been reduced to zero, then warrants
to purchase an additional 6,693,875 shares of Common Stock will also be
cancelled.

Loan by Richard Rakowski

Richard
Rakowski, a Director and Chief Executive Officer of the Company, loaned the
Company $850,000 as part of the Senior Subordinated financing on December 22,
2006 and received 7 year warrants with an exercise price of $.001 per share to
purchase 3,798,534 shares of Common Stock. In the event the Laurus $1 Million
Senior Subordinated Secured Loan is not repaid by April 22, 2007, warrants to
purchase 3,541,666 shares of Common Stock will be returned to the Company for
cancellation by Mr. Rakowski. Mr. Rakowski has also personally guaranteed
certain obligations of the Company.

Loans by Andrew Lipman

Andrew
D. Lipman, a Director, loaned the Company $150,000 in the July 11, 2006 $5.2
Million Subordinated Debt Financing and received 10 year warrants with an
exercise price of $.001 per share to purchase 950,416 shares of Common Stock
and loaned the Company $200,000 in the December 22, 2006 Senior Subordinated
financing and received 7 year warrants with an exercise price of $.001 per
share to purchase 893,773 shares of Common Stock. In the event the Laurus $1
Million Senior Subordinated Secured Loan is not repaid by April 22, 2007,
warrants to purchase 833,334 shares of Common Stock will be returned to the
Company for cancellation by Mr. Lipman.

Sephora

Sephora,
with whom the Company has a strategic relationship, is a subsidiary of LVMH. L Capital Management SAS, which
manages and represents L Capital, is also a subsidiary of LVMH, and as a result L Capital
Management SAS and sephora are affiliates. The Companys decision to enter into a contract
with Sephora was made independent of its relationship with L Capital. The
company has recorded $2.7 million in net revenues on a cumulative basis as of
July 1, 2006. (see Note 12)

Alan Gelband

On
June 1, 1999, the Company entered into a consulting agreement with Alan
Gelband, a former director of the Company. Pursuant to the agreement, Mr.
Gelband provides the Company with general management services for a fee of
$10,000 per month. This agreement terminated on February 28, 2003. In July
2004, Mr. Gelband converted the $415,000 consulting fee due him into 4,150,000
shares of the Companys Common Stock.

The
Company owed the Alan Gelband Company Defined Contribution Pension Plan &
Trust an amount of $250,266. This consisted of a $220,000 loan made to the
Company on February 14, 2003 and accrued interest through July 2004 of
$30,266. In July 2004 the Company converted this debt into 1,000,000 shares of
Common Stock.

During
2004, Alan Gelband individually made three separate loans to the Company. These
loans, together with interest accrued thereon, were in the aggregate amount of
$5,870 as of July 2004. Alan Gelband converted this debt into 58,700 shares of
the Companys Common Stock in July 2004.

An
amount equal to $41,487.00 in consulting fees was paid to the Alan Gelband
Company on November 29, 2005 for consulting services provided by the Alan
Gelband Company prior to the Closing of the Share Exchange Agreement and for
the establishment of a reserve to pay down certain accounts payable and other
miscellaneous expenses of the Company that accrued prior to the closing of the
Share Exchange Agreement.

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Also
in July 2004, the Alan Gelband Company Defined Contribution Pension Plan and
Trust purchased 1,000 shares of the Companys Series A Preferred Stock. On
December 20, 2005, the 1,000 shares of Series A Preferred Stock was converted
into 2,000,000 shares of Common Stock.

The Companys
office, until December 20, 2005, located at 750 Third Avenue, Suite 1600, New
York, New York 10017 was provided free of charge by Alan Gelband Co., Inc., an
investment banking firm controlled by Mr.Gelband.

Pyle Group

On
April 23, 2004, the Company executed a note to the Pyle Group for $1.0 million
due on April 23, 2007. The note was issued to the Pyle Group as part of the
acquisition consideration to purchase Georgette Klinger Inc. The Company is
obligated for 5% interest annually through the term of the note. All interest
is compounded annually and payable quarterly. As of June 30, 2005, the note was
reissued to Judith Pyle in the amount $.5 million and Thomas Pyle in the amount
$.5 million, individually under the same terms.

The
Company has an existing application service provider contract with the Pyle
Group. Services include troubleshooting of the Companys Millennium software
program used to record revenue and inventory activity. Fees under the contact
are $0.2 million per year.

West Palm Beach Facility Lease

The
Company leases its West Palm Beach facility from Christal Inc. The majority
owner of Christal Inc. was an employee at the West Palm Beach facility. Total
rent expense to this related party amounted to $0.3 million for the years ended
July 1, 2006 and June 30, 2005.

12. Material Agreements

Agreements with Johns Hopkins Medicine

On
November 21, 2003 AAI entered into a Consulting Services Agreement (Consulting
Agreement) with Johns Hopkins Medicine (Johns Hopkins), acting through Johns
Hopkins Health System Corporation, and the Johns Hopkins University. Under the
Consulting Agreement, Johns Hopkins agreed to provide consulting services to
AAI consisting of: (i) review and assessment of its medical delivery protocol
document and (ii) consultation on the development of outcomes studies
methodologies. The Consulting Agreement also sets forth the conditions for the
use of the Johns Hopkins Trademark. The term of the agreement is until November
21, 2008. The Consulting Agreement may be terminated by either party at any
time with 120 days of written notice.

The
consideration for the review and assessment services provided by Johns Hopkins
is $5,000 per day. The consideration under this original Consulting Agreement
for the limited use of the Johns Hopkins mark was $0.3 million per year payable
in quarterly installments and 500 shares of the Companys series E preferred
Stock.

As
of June 30, 2005, Johns Hopkins held a minority interest in KAAI constituting
shares of Series E Preferred Stock. The Series E Preferred Stock represented
Johns Hopkins equity interest in KAAI. On May 4, 2006, Johns Hopkins voluntarily
forfeited all of its equity interest in KAAI shares of Series E Preferred
Stock. The forfeited shares constituted all issued and outstanding shares of
Series E Preferred Stock and as a result, as of July 1, 2006, no shares of
Series E Preferred Stock of KAAI are issued and outstanding. As a result of the
forfeited shares, the Company canceled these shares at the end if its fiscal
year, ending July 1, 2006.

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On
March 23, 2005, AAI signed an amendment to the Consulting Services Agreement
(Amendment or Amended Agreement) with Johns Hopkins, effective June 1,
2005. The purpose of this Amendment was to expand the oversight function that
Johns Hopkins would perform for the Company to include increased medical
protocol review, medical facility design and physician credentialing. In
addition, the Amendment expanded the use by the Company of the Johns Hopkins
trade name. For the increased oversight and review services provided by Johns
Hopkins, the Company agreed to increase the consideration paid to Johns Hopkins
from $.3 million to $1.0 million in the first year of the contract, $1.5
million in the second year of the contract and $1.0 million annually thereafter
until the term of the contract is reached. The term of the Amended Agreement is
until June 1, 2010. The Amended Agreement may be terminated by either party at
any time with 120 days of written notice. The Johns Hopkins Amended Agreement
is carried on the balance sheet at the present value of all future payments to
Johns Hopkins and amortized over the term of the agreement. The carrying value
of this asset was $3.8 million as of July 1, 2006 and $4.7 million as of June
30, 2005. The amount is reported as a component of Intangible Assets.

In
December 2004 KAAI entered into a Services and Licensing Agreement with Johns
Hopkins, acting through Johns Hopkins Health System Corporation, and the Johns
Hopkins University (the Johns Hopkins Agreement). Under the Services and
Licensing Agreement, Johns Hopkins agreed to provide the following services to
KAAI: (i) investigate current methods for skin care parameter testing at the
point of sale; (ii) where existing protocols and equipment for skin care
parameter testing do not exist or are not acceptable to Johns Hopkins, develop
acceptable methods to measure the condition of clients skin; (iii) create a
new testing methodology to validate skin care product efficacy; (iv) oversee
the ongoing testing of skin care products using the Johns Hopkins testing
standards; and (v) oversee the testing of 15 of KAAIs skin care products using
the agreed upon testing standards. This Services and Licensing Agreement was
subject to the satisfaction of certain conditions, which KAAI had to satisfy by
October 31, 2005. The conditions include: (i) written agreement by Johns Hopkins
and KAAI on: (A) the parameters for research and academic freedom as opposed to
work for hire as noted in the agreement; (B) the amount of royalty fees,
guaranteed annual fees and equity as noted the agreement; (C) the buyout or
additional stock to be provided Johns Hopkins at the end of the term of the
agreement; and (D) an appropriate scope of coverage for product and/or
contractual liability insurance to be maintained by KAAI; (ii) final approval
by internal Johns Hopkins committees for the Permitted Statement (as defined in
the agreement); and (iii) documentation of the matters described in the (i) and
(ii) by an amendment to the agreement. The date by which conditions need to be
met were extended due to negotiations on use of the John Hopkins name. On November
10, 2005, the period by which KAAI was required to satisfy the conditions was
extended to December 31, 2005. On January 3, 2006, the parties extended such
period until March 31, 2006. In March 2006, the parties extended such period to
June 30, 2006. On June 21, 2006, the period by which KAAI was required to
satisfy the conditions was extended to September 30, 2006. The term of the
Services and Licensing agreement was to be 5 years after the satisfaction of
the conditions. KAAI and Johns Hopkins have not sought further extension of the
time period to satisfy the conditions in the Services and Licensing Agreement
and do not intend to continue that Agreement. Therefore, unless changed by
current negotiations, we do not anticipate that there will be any reference to
Johns Hopkins on our Cosmedicine products packaging after our existing
packaging is used up. Packaging that has already been printed with the
reference to Johns Hopkins will be used until existing inventories are
depleted. Johns Hopkins is currently branded on our K360 software and we do
expect that to continue in the future. In addition, the Johns Hopkins name is
used in the marketing of our medical services as the name appears on the doors
of our on-site medical facilities. Even though we do not intend to continue the
Services and Licensing Agreement, the existing Consulting Services Agreement
previously discussed, is still in full force and effect.

We
have an alliance with John Hopkins, widely acknowledged to be among the most
respected medical institutions in the US. John Hopkins has agreed to review and
assess our process for verifying the safety and clinical quality of our
practitioners, protocols and facilities; it also approves the medical protocols
of our Medical Advisory Board and provides consulting on the scientific testing
of our Cosmedicine product line. John Hopkins approved the use of the John
Hopkins Medicine name as part of the marketing of our

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facilities,
intellectual property and certain collateral materials as described in the
Consulting Services Agreement and Amendment.

Johns
Hopkins Medicines role with KAAI is to provide aesthetic-improvement clients
with information regarding performance and safety claims. The relationship is
designed to provide consulting services on aspects of our medical services
business, and on the safety and performance of our skin care product line.
KAAIs goal is to help establish consistent, safe delivery of medical aesthetic
services in its centers, to create objective testing of the effects of our skin
care products, and to focus on measurable elements of skin health.

Agreement with Sephora USA

In
December 2004, the Company entered into a Retail Alliance Agreement with
Sephora USA, LLC. (Sephora). Pursuant to the agreement the Company granted Sephora
the rights to: (i) sell its Cosmedicine products in the Sephora retails stores,
through its website and any other retail channels, (ii) to utilize certain of
its intellectual property and methods in order to operate the AAI stores within
the Sephora stores, (iii) develop with the Company the adjacent AAI facilities
and (iv) sublease retails space from the Company for the purpose of
constructing and operating a Sephora store within the Companys centers. The
term of the agreement is until December 31, 2010.

Upon
execution of the agreement, Sephora deposited a performance deposit in an
amount of $5 million with an escrow agent, which was subsequently paid to the
Company. If Sephora, pursuant to the terms of the agreement, terminates the
agreement with the Company it may have the right to recover a portion of the $5
million performance deposit. Sephora will also have the right to earn back its
performance deposit if the arrangement is successful. The Company will be
required to return to Sephora 50% of the performance deposit at such time that
the Net Revenues of Sephora relating to the sale of Cosmedicine products plus
Sephora Capital Expenditures (each as defined in the agreement) equals $30
million and the remaining performance deposit at such time that such Net
Revenues plus Capital Expenditures equals $60 million. The Company has
recorded $5 million as other long term liabilities on the Consolidated Balance
Sheet as of July 1, 2006 and June 30, 2005. The Company has recorded $2.7
million in net revenues on a cumulative basis as of July 1, 2006 (see Note 11).

Agreements with Mark Potter and Atlantis
Laboratories

On
April 4, 2006, the Company entered into a Consulting Agreement (the Consulting
Agreement) with Mark Potter and Atlantis Laboratories, Inc. (Atlantis and
together with Mr. Potter, the Formulators). The Formulators have developed,
formulated and produced skin care products for the Companys Cosmedicine
product line. Under the Consulting Agreement, the Formulators agreed to use their
best efforts to provide all services necessary to (i) expand the number of
product types in the Companys over-the-counter Cosmedicine line, (ii)
formulate and develop an enhanced version of (a) Cosmedicine, (b) a foundation
cosmetic line, (c) a hair care product line and (d) a cosmetics line, and (ii)
have such products produced and shipped by Atlantis for sale at the Companys
spa and salon facilities and other outlets.

The
Consulting Agreement also contains a non-competition clause that provides, among
other things, that (i) the formulas developed by the Formulators for the
Company are proprietary and may not be used by the Formulators for any purpose
other than on behalf of the Company and may not be utilized in products sold to
anyone other than the Company and (ii) except for limited exceptions, the
Formulators will not directly or indirectly acquire or own any interest in any
entity engaged in the business conducted by the Company. Mr. Potter is to be
paid an annual consulting fee of $207,000 in equal monthly installments of
$17,250. In addition, the Company granted Mr. Potter on September 18, 2006 an
option to purchase the TrueYou equivalent of 150,000 shares of KAAI common
stock at an exercise price of $0.22 per share, vesting over a period of three
years. Mr. Potter also received 100,000 options to purchase KAAI common

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stock on
February 1, 2005, at an exercise price of $4.00 per share, vesting over four
years. The Company has calculated compensation expense using variable
accounting under FAS 123R, and has recorded cummulative expense of $131,129 as
of July 1, 2006. The initial term of the Consulting Agreement is five years.

In
connection with the Consulting Agreement, on April 12, 2006, the Company
entered into a Formula Agreement (the Formula Agreement) with the Formulators
and JPMorgan Chase Bank, N.A., as Escrow Agent (the Escrow Agent). Pursuant
to the Formula Agreement, the Formulators agreed that all existing and future
formula, manufacturing procedures and specifications, along with specific
details of all raw material suppliers and specifications for the raw materials
relating to the products to be purchased by the Company from the Formulators
are to be deposited with the Escrow Agent. In the event of certain specified
events and/or contingencies, the Escrow Agent is required to deliver such
formulas, manufacturing procedures and specifications to the Company.

Pursuant
to the Consulting Agreement, the Company agreed to loan up to a total of
$1,100,000 to Mr. Potter for the purchase of land in Conroe, Texas (Property)
and construction of a laboratory and manufacturing facility to manufacture and
supply the Cosmedicine line of products. On April 17, 2006, KAAI made a loan of
$392,200 to the Formulators for the purchase of the Property evidenced by a
Promissory Note (the Promissory Note). Under the Promissory Note, the
principal sum of $392,200 with interest at the rate of 6-1/2% per annum is
payable in 120 monthly installments of principal and interest in the amount of
$4,453.00 each with the first installment due on May 1, 2006. At July 1, 2006
the Company had a note receivable balance of $0.4 million from Mr. Potter which
is included in other assets on the consolidated balance sheet.

In
connection with the foregoing, the Company also entered into a Construction
Loan Agreement dated April 4, 2006 with the Formulators (the Construction Loan
Agreement) pursuant to which the Formulators executed a $650,000 Construction
Loan Promissory Note (Construction Loan Promissory Note) to the Company for
the development of a laboratory and manufacturing facility to be operated by
Atlantis on the Property. Under the terms of the Construction Loan Agreement,
the Company is to make advances to the Formulators under the Construction Loan
Promissory Loan from time to time in connection with the construction on the
Property. The amount of each advance will be determined by the Company. The
unpaid principal balance on the Construction Loan Promissory Note bears
interest at a rate of 6-1/2% per annum. Monthly installments of interest only
on the outstanding principal balance will be due commencing on the first day of
the month following the initial advance and continuing on the first day of each
subsequent month up to and including April 1, 2007. Commencing May 1, 2007, and
continuing through April 1, 2016, installment payments of principal and
interest will be due in such amount as will be sufficient to pay in 108 equal
payments all principal and accrued interest.

13. Income Taxes

The
components of the deferred tax assets as of July 1, 2006 and June
30, 2005 are as follows (in thousands):

|                                           |  |      |         |      |   |         |  
|------------------------------------------ |  | ---- | ------- | ---- | - | ------- | -
|                                           |  | 2006 |         | 2005 |  
|                                           |  |      |         |      |  
|                                           |  |      |         |      |   |         |  
|Net
  operating losses                     |  | $    | 23,921  |      | $ | 10,648  |  
|Accrued
  liabilities and reserves         |  |      | 1,163   |      |   | 1,136   |  
|Deferred revenue - gift
  cards            |  |      | 3,365   |      |   | 3,629   |  
|Accrued
  interest                         |  |      | 1,709   |      |   | 941     |  
|Accrued
  management fees                  |  |      | 697     |      |   | 533     |  
|Stock based
  compensation                 |  |      | 521     |      |   | 199     |  
|Property and
  equipment                   |  |      | 623     |      |   | 295     |  
|Amortization
  of goodwill and intangibles |  |      | 515     |      |   | 289     |  
|                                           |  |      |         |      |   |         |  
|                                           |  |      |         |      |   |         |  
|Total
  deferred tax assets                |  |      | 32,514  |      |   | 17,670  |  
|Valuation
  allowance                      |  |      | (32,514 | )    |   | (17,670 | )
|                                           |  |      |         |      |   |         |  
|                                           |  |      |         |      |   |         |  
|Net deferred
  tax assets                  |  | $    |        |      | $ |        |  
|                                           |  |      |         |      |   |         |  

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The
Companys ability to utilize the cumulative Federal and State net operating loss
carryforwards of approximately $59.0 million at July 1, 2006 against future
income will expire on June 30, 2023, and may be subject to certain limitations
upon a change in control as defined by section 382 of the Internal Revenue
Code of 1986.

The
provision for income taxes differs from the amount of income tax determined by
applying the applicable statutory rate to the loss before income taxes. This
difference, as shown in the following table, is due to a full reserve of our
benefit for the utilization of net operating losses since utilization can not
be determined to be more likely than not.

|                                            |  |      |       |      |  |       |    |  |       |   
|------------------------------------------- |  | ---- | ----- | ---- |  | ----- | -- |  | ----- | --
|                                            |  | 2006 |       | 2005 |  | 2004  |   
|                                            |  |      |       |      |  |       |   
|                                            |  |      |       |      |  |       |    |  |       |   
|Statutory
  income tax benefit rate         |  |      | (35.0 | )%   |  | (35.0 | )% |  | (35.0 | )%
|Unrealizd
  loss on convertible securities  |  |      | 31.8  | %    |  |      |    |  |      |   
|State income
  tax (net of federal benefit) |  |      | (5.7  | )%   |  | (6.0  | )% |  | (6.0  | )%
|                                            |  |      |       |      |  |       |    |  |       |   
|                                            |  |      |       |      |  |       |    |  |       |   
|                                            |  |      |       |      |  |       |    |  |       |   
|Subtotal                                    |  |      | (8.9  | )%   |  | (41.0 | )% |  | (41.0 | )%
|Valuation
  allowance                       |  |      | 8.9   | %    |  | 41.0  | %  |  | 41.0  | % 
|                                            |  |      |       |      |  |       |    |  |       |   
|                                            |  |      |       |      |  |       |    |  |       |   
|Total
  effective tax rate                  |  |      | 0.0   | %    |  | 0.0   | %  |  | 0.0   | % 
|                                            |  |      |       |      |  |       |    |  |       |   

14. Common and Preferred Stock

General

The
Companys certificate of incorporation authorizes 20,000,000 shares of Common
Stock, $.001 par value per share, and 1,000,000 shares of Preferred Stock
$0.001, par value per share.

On
March 22, 2006, the Companys Board of Directors approved and recommended that
the stockholders of the Company approve an amendment to the Companys
Certificate of Incorporation (the Certificate of Amendment) to (i) change the
Companys name from TrueYou.Com Inc. to Klinger Advanced Aesthetics, Inc., (ii)
increase the number of authorized shares of Common Stock that the Company is
authorized to issue from 20,000,000 to 60,000,000 and (iii) implement a reverse
stock split whereby each twenty-five (25) shares of our issued and outstanding
Common Stock will be combined into one (1) share of Common Stock.

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On
March 23, 2006 the Certificate of Amendment was approved by: (A) the holders of
a majority of the Companys outstanding stock entitled to vote with respect to
an amendment of the Companys certificate of incorporation; (B) the holders of
more than 50% of the outstanding shares of Series C Preferred Stock, in
accordance with the Certificate of Designation of the Series C Preferred Stock;
and (C) the holders of more than 75% of the outstanding shares of Series D
Preferred Stock, in accordance with the Certificate of Designation of the
Series D Preferred Stock. On March 23, 2006 the Company filed with the
Commission a preliminary Information Statement in connection with the proposed
Amendment.

Common Stock

Prior
to the closing of the Share Exchange Agreement, KAAI had 12,995,513 shares of
common stock issued and outstanding. In connection with the closing of the
Share Exchange Agreement, 2,000 of the Companys shares of Series A Preferred Stock
were converted into 2,000,000 shares of Common Stock. Subsequently, upon the
closing of the Share Exchange Agreement on December 20, 2005 and as of March
21, 2006, the Company had 14,995,513 shares of Common Stock issued and
outstanding. In connection with the Share Exchange Agreement, the Company
agreed with certain of our shareholders that the Company would amend our
Certificate of Incorporation to increase the number of shares of authorized
Common Stock so that all of the shares of our Series B Preferred Stock will
convert automatically into Common Stock. In addition, the Company has agreed
with the holders of our Series C Preferred Stock and Series D Preferred Stock
that it would amend its Certificate of Incorporation to increase the number of
shares of authorized Common Stock so that the Company would have sufficient
shares of Common Stock available to fully convert our Series C and Series D
Preferred Stock.

The
holders of Common Stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. The holders of Common Stock are entitled to
receive ratably any dividends that may be declared on the Common Stock from
time to time by the board of directors in its discretion out of funds legally
available for that purpose. In the event of the Companys liquidation,
dissolution or winding up, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment in full of liabilities and
preferential payments, if any, to holders of Preferred Stock. The Common Stock
has no preemptive or conversion rights. There are no conversion or redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are fully paid and nonassessable.

Preferred Stock

Subject
to the approval rights of the holders of currently outstanding shares of Series
C Preferred Stock and Series D Preferred Stock, the Companys board of
directors has the authority, without further action by the stockholders, to issue
up to 1,000,000 shares of Preferred Stock, par value $0.001 per shares, in one
or more series and to fix the designations, powers, preferences, privileges,
rights, qualifications, limitations and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, any or all of which may be greater than the rights of
the Common Stock. The Companys board of directors, without approval of the
holders of Common Stock, can issue Preferred Stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of Common Stock. Preferred Stock could thus be issued quickly with
terms calculated to delay or prevent a change of control or make removal of
management more difficult. The issuance of Preferred Stock may have the effect
of decreasing the market price of the Common Stock, and may adversely affect
the voting and other rights of the holders of Common Stock.

Series A Convertible Preferred Stock

Prior
to the closing of the Share Exchange Agreement, KAAI had 2,000 shares of Series
A Preferred Stock issued and outstanding, which were converted, in connection
with the closing of the Share Exchange

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Agreement,
into 2,000,000 shares of TrueYou Common Stock. There are no shares of Series A
Preferred Stock presently issued and outstanding.

Dividends. Only
dividends that are declared by our Board of Directors shall accrue and be paid
with respect to the Series A Preferred Stock.

Liquidation Preference.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up, the holders of Series A Preferred Stock are entitled to receive $50
with respect to each share and upon receipt of such liquidation preference the
holders of Series A Preferred Stock shall not be entitled to any further
participation in any distribution of assets of the Company with respect to the
Series A Preferred Stock held by them.

Conversion. The
holders of Series A Preferred Stock have the right to convert their shares into
1,000 shares of our Common Stock, subject to adjustment for stock split and
other events.

Voting Rights. The
Series A Preferred Stock votes with the Common Stock on an as converted Common
Stock basis.

Series B Convertible Preferred Stock

General. As of
December 20, 2005, following the closing of the Share Exchange Agreement, and
as of March 21, 2006 the Company had 27,858.9673 shares of Series B Preferred
Stock issued and outstanding.

Dividends. In the
event that the Company declares or pays dividends to the holders of Common
Stock, the Company also has to declare or pay to the holders of the Series B
Preferred Stock at the same time, the dividends which would have been declared
and paid with respect to the Common Stock issuable upon conversion of the
Series B Preferred Stock had all of the outstanding Series B Preferred Stock
been converted immediately prior to the record date for such dividend.

Liquidation. In the
event of the liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, after any payments shall be made or any assets shall
be distributed to the holders of the Series C Preferred Stock and Series D
Preferred Stock, the assets of the Company legally available for distribution
shall be distributed ratably to the holders of the Common Stock and the Series
B Preferred Stock on an as-converted to Common Stock basis.

Conversion. Upon the
amendment of our Certificate of Incorporation to increase the number of shares
of the Companys Common Stock (the Authorized Shares Increase), each share of
Series B Preferred Stock will convert into 10,000 shares of Common Stock,
subject to adjustment for stock split and other events.

Voting Rights. The
Series B Preferred Stock votes with the Common Stock on an as-converted to
Common Stock basis.

Series C Convertible Preferred Stock

General. As of
December 20, 2005, following the closing of the Share Exchange Agreement, and
as of March 21, 2006 the Company had 8,452.0222 shares of Series C Preferred
Stock issued and outstanding.

Dividends. Dividends
on the Series C Preferred Stock accrue and are cumulative from December 20,
2005 and be compounded annually at a rate of 4% per annum until paid. Upon
conversion of any share of Series C Preferred Stock into Common Stock, the
holder of the Series C Preferred Stock shall be entitled to receive payment of
all accrued and unpaid dividends in the form of such number of additional
shares of Common

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Stock equal to
(i) the amount of such accrued and unpaid dividends, divided by (ii) the then
applicable conversion price of the Series C preferred Stock.

Liquidation Preference.
In the event of a liquidation or dissolution, the holders of Series C Preferred
Stock are entitled, to receive $1,916.62 with respect to each share (subject to
adjustment for stock split or other events) plus all accumulated but unpaid
dividends whether or not declared and shall thereafter share in any remaining
amounts on an as-converted basis with the holders of the Common Stock and the
other series of Preferred Stock (other than the Series B Preferred Stock).

Conversion. Each
share of Series C Preferred Stock is convertible at the option of the holder
thereof, at such time as the Company shall have effected the Authorized Share
Increase, into 10,000 shares of Common Stock, subject to adjustment for stock
split and other events. At such time as (i) the Company shall have effected the
Authorized Share Increase, (ii) the shares of Common Stock issuable upon
conversion of the Series C Preferred Stock are registered for resale on Form
S-1 or other applicable registration statement with the Commission which
registration statement shall have been declared effective by the SEC or such
shares may be sold without restrictions pursuant to Rule 144(k) promulgated by
the SEC, and (iii) the Company shall have closed a sale of Common Stock by the
Company in an underwritten public offering in which the aggregate gross
proceeds of the offering to the Company are at least $30,000,000, each
outstanding share of Series C Preferred Stock shall automatically convert into
shares of Common Stock.

Voting Rights. The
Series C Preferred Stock votes with the Common Stock as a class on an
as-converted to Common Stock basis. Consent of the holders of a majority of the
outstanding Series C Preferred Stock is required for the Company to take
certain actions which could adversely affect the rights of the holders of the
Series C Preferred Stock.

Redemption. Each
holder of Series C Preferred Stock shall have the right, but not the obligation,
to require the Company to redeem any or all of such holders Series C Preferred
Stock upon the earliest to occur of: (i) the sale of all or substantially all
of the assets of the Company, (ii) a merger, consolidation or other business
combination and (iii) a change of control of the Company.

Series D Convertible Preferred Stock

General. As of
December 22, 2005, following the closing of the Series D Preferred Financing
with North Sound described in Item 1 of this Report, and as of March 21, 2006
the Company had 1,530 shares of Series D Preferred Stock issued and
outstanding.

Dividends. Dividends
on the Series D Preferred Stock accrue from December 22, 2005 at a rate of 4%
per annum. Until paid, the right to receive dividends on the Series D Preferred
Stock shall accumulate and shall be payable semi-annually in arrears in cash or
in Common Stock (at the Companys option) which Common Stock shall be valued
based upon the average closing price of the underlying Common Stock for a
period of 5 consecutive trading days ending on the business day prior to the
date of such dividend, or, if there is no such trading price, fair market value
as determined by the Board.

Liquidation Preference.
In the event of a liquidation or dissolution, the holders of Series D Preferred
Stock are entitled to receive $10,000 with respect to each share (subject to
adjustment for stock split or other events) plus all accumulated but unpaid
dividends whether or not declared and shall thereafter share in any remaining
amounts on an as-converted basis with the holders of the Common Stock and other
series of Preferred Stock (other than the Series B Preferred Stock).

Conversion. Each
share of Series D Preferred Stock is convertible at the option of the holder
thereof, at any time following such time as the Company shall have effected the
Authorized Share Increase, into

76

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approximately
52,175 shares of Common Stock, subject to adjustment for stock split and other
events. At such time as (i) the Company shall have effected the Authorized
Share Increase, (ii) the shares of Common Stock issuable upon conversion of the
Series D Preferred Stock are registered for resale on Form S-1 or other
applicable registration statement with the Commission which registration
statement shall have been declared effective by the SEC or such shares may be
sold without restrictions pursuant to Rule 144(k) promulgated by the SEC, and
(iii) the Company shall have closed a sale of Common Stock in an underwritten
public offering in which the aggregate gross proceeds of the
offering to the Company are at least $30,000,000, each outstanding share of
Series D Preferred Stock shall automatically convert into shares of Common
Stock.

Voting Rights. The
Series D Preferred Stock votes with the Common Stock as a class on an as-converted
to Common Stock basis. The number of shares of our Series D Preferred Stock
that shall be entitled to such voting rights is limited to the extent necessary
to ensure that, following such conversion, the number of shares of our Common
Stock then beneficially owned by each holder and any holder and any other
persons or entities whose beneficial ownership of common stock would be
aggregated with the holders for purposes of the Securities and Exchange Act of
1934, as amended, does not exceed 4.99% of the total number of shares of our
common stock then outstanding. Consent of the holders of at least 75% of the
outstanding Series D Preferred Stock is required for the Company to take
certain actions which could adversely affect the rights of the holders of the
Series D Preferred Stock.

Redemption. Each
holder of Series D Preferred Stock shall have the right, but not the
obligation, to require the Company to redeem any or all of such holders Series
D Preferred Stock upon the earliest to occur of: (i) the sale of all or
substantially all of the assets of the Company, (ii) a merger, consolidation or
other business combination and (iii) a change of control of the Company.

15. Stock-Based Compensation Plan and Warrants

Stock Options

In
December 2004, the FASB issued SFAS No. 123(R), Share Based Payment. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods and services. It focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions (employee stock options). The
statement requires the measurement of the cost of employee services received in
exchange for an award of equity instruments (such as employee stock options) at
fair value on the grant date. That cost will be recognized over the period
during which an employee is required to provide services in exchange for the
award (the requisite service period). The Company adopted FAS 123R,
Share-Based payment, applying the modified retrospective method.

All
existing stock options as of July 1, 2006 have been issued under the subsidiary
(KAAI) 2003 stock option plan. Management has developed a new stock option plan
for the Company that was approved by the Board of Directors of the Company in
the first quarter of fiscal year 2007. At that time, the Board of Directors
also approved the exchanging of KAAI options for TrueYou options under the new
stock incentive plan. The Plan must be submitted to the stockholders of the
Company for their approval within twelve months.

The
Company recognized approximately $0.8 million, $0.2 million, and $0.3 million
for the years ended July 1, 2006 and June 30, 2005, and June 30, 2004, respectively
for stock options granted. In addition, as of July 1, 2006, there was
approximately $0.3 million in unrecognized stock based compensation expense
related to non-vested stock options which is expected to be recorded in future
periods over a weighted average period of two years.

77

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Stock
options are granted at an exercise price of not less than fair market value,
which was determined as of the grant date utilizing the Black-Scholes Option
Pricing Model for any options granted though June 30, 2005. There were no
options granted during the year ended July 1, 2006. A total of 107,150 options
remained available for future grants as of July 1, 2006

The
weighted average fair value of the employee options granted during the years
ended June 30, 2005 and June 30, 2004 was $0.59 and $0.52, respectively. The
fair value was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:

|                                 |  |      |  |           |  |          
|-------------------------------- |  | ---- |  | --------- |  | ---------
|Assumptions                      |  | 2006 |  | 2005      |  | 2004     
|                                 |  |      |  |           |  |          
|                                 |  |      |  |           |  |          
|Expected dividend yield          |  | N/A  |  | None      |  | None     
|Risk-free interest rate          |  | N/A  |  | 4.10%     |  | 3.91%    
|Expected life of option
  grants |  | N/A  |  | 6
  years |  | 6
  years
|Forfeiture rate                  |  | N/A  |  | 2.5%      |  | 2.5%     
|Expected volatility              |  | N/A  |  | 30%       |  | 30%      

The
Company also provides stock options to some of its outside contractors. These
options are subject to variable accounting and were revalued as of July 1,
2006. As of July 1, 2006 the weighted average fair value was $1.61, the
weighted average interest rate was 5.1%, the forfeiture rate was 2.5%, and
weighted average remaining life was 1.6 years for these stock options.

A
summary of the Companys share option activity and related information during
the years ended July 1, 2006 and June 30, 2005 are as follows:

|                           |  |                       |           |                                     |   |      | 
|-------------------------- |  | --------------------- | --------- | ----------------------------------- | - | ---- | 
|                           |  | Options
  Outstanding |          
|                           |  |                       |          
|                           |  | Shares                |           | Weighted
  Average
  Exercise Price |  
|                           |  |                       |           |                                     |  
|                           |  |                       |           |                                     |   |      | 
|Outstanding, June 30, 2003 |  |                       |          |                                     | $ |     | 
|                           |  |                       |           |                                     |   |      | 
|Granted                    |  |                       | 1,700,900 |                                     |   | 4.00 | 
|Cancelled                  |  |                       | (917,000  | )                                   |   | 4.00 | 
|Exercised                  |  |                       |          |                                     |   |     | 
|                           |  |                       |           |                                     |   |      | 
|                           |  |                       |           |                                     |   |      | 
|Outstanding, June 30, 2004 |  |                       | 783,900   |                                     |   | 4.00 | 
|                           |  |                       |           |                                     |   |      | 
|Granted                    |  |                       | 1,851,850 |                                     |   | 4.00 | 
|Cancelled                  |  |                       | (166,800  | )                                   |   | 4.00 | 
|Exercised                  |  |                       |          |                                     |   |     | 
|                           |  |                       |           |                                     |   |      | 
|                           |  |                       |           |                                     |   |      | 
|Outstanding, June 30, 2005 |  |                       | 2,468,950 |                                     |   | 4.00 | 
|                           |  |                       |           |                                     |   |      | 
|Granted                    |  |                       |          |                                     |   |     | 
|Cancelled                  |  |                       | (576,100  | )                                   |   | 4.00 | 
|Exercised                  |  |                       |          |                                     |   |     | 
|                           |  |                       |           |                                     |   |      | 
|                           |  |                       |           |                                     |   |      | 
|Outstanding, July 1, 2006  |  |                       | 1,892,850 |                                     | $ | 4.00 | 
|                           |  |                       |           |                                     |   |      | 

78

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As
of July 1, 2006, the weighted average exercise prices and remaining contractual
lives of stock options are as follows:

|                            |  |                                                  |  |                                                                 |  |                                     |  |                                      |  |                          |  |  |  |  |  | 
|--------------------------- |  | ------------------------------------------------ |  | --------------------------------------------------------------- |  | ----------------------------------- |  | ------------------------------------ |  | ------------------------ |  |  |  |  |  | 
|                            |  | Options outstanding                              |  | Options exercisable                                             | 
|                            |  |                                                  |  |                                                                 | 
|Range of exercise prices    |  | Number of
  options
  outstanding
  as of 7/1/06 |  | Weighted average 
  remaining 
  contractual life 
  (in years) |  | Weighted
  average
  exercise price |  | Number 
  exercisable as
  of 7/1/06 |  | Weighted
  average price | 
|                            |  |                                                  |  |                                                                 |  |                                     |  |                                      |  |                          | 
|                            |  |                                                  |  |                                                                 |  |                                     |  |                                      |  |                          |  |  |  |  |  | 
|Stock options issued @$4.00 |  | 1,892,850                                        |  | 7.97                                                            |  | $
  4.00                            |  | 1,144,586                            |  | $
  4.00                 | 

Warrants

The
Company issued 50,019,026 warrants during the year ended July 1, 2006 which
were valued using the Black-Scholes option pricing model using the following
weighted average assumptions: risk-free rate of return  4.11%; term  5 years;
volatility  30%; dividend yield  0.0%. The warrants were recorded as a
discount to preferred stock.

Warrants
outstanding as of year end are as follows:

|                           |  |                        |            |                                     |   |       | 
|-------------------------- |  | ---------------------- | ---------- | ----------------------------------- | - | ----- | 
|                           |  | Warrants
  Outstanding |           
|                           |  |                        |           
|                           |  | Shares                 |            | Weighted
  Average
  Exercise Price |  
|                           |  |                        |            |                                     |  
|                           |  |                        |            |                                     |   |       | 
|Outstanding, June 30, 2003 |  |                        |           |                                     | $ |      | 
|                           |  |                        |            |                                     |   |       | 
|Granted                    |  |                        | 13,619,743 |                                     |   | 0.001 | 
|Cancelled                  |  |                        |           |                                     |   |      | 
|Exercised                  |  |                        |           |                                     |   |      | 
|                           |  |                        |            |                                     |   |       | 
|                           |  |                        |            |                                     |   |       | 
|Outstanding, June 30, 2004 |  |                        | 13,619,743 |                                     |   | 0.001 | 
|                           |  |                        |            |                                     |   |       | 
|Granted                    |  |                        |           |                                     |   |      | 
|Cancelled                  |  |                        |           |                                     |   |      | 
|Exercised                  |  |                        |           |                                     |   |      | 
|                           |  |                        |            |                                     |   |       | 
|                           |  |                        |            |                                     |   |       | 
|Outstanding, June 30, 2005 |  |                        | 13,619,743 |                                     |   | 0.001 | 
|                           |  |                        |            |                                     |   |       | 
|Granted                    |  |                        | 50,019,026 |                                     |   | 0.212 | 
|Cancelled                  |  |                        |           |                                     |   |      | 
|Exercised                  |  |                        |           |                                     |   |      | 
|                           |  |                        |            |                                     |   |       | 
|                           |  |                        |            |                                     |   |       | 
|Outstanding, July 1, 2006  |  |                        | 63,638,769 |                                     | $ | 0.166 | 
|                           |  |                        |            |                                     |   |       | 

79

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At
July 1, 2006, the exercise prices and remaining contractual lives of warrants
are as follows:

|                                 |  |                                                   |            |                                                                |  |                                       |  |                                     |        |                            |  |            |  |  |        | 
|-------------------------------- |  | ------------------------------------------------- | ---------- | -------------------------------------------------------------- |  | ------------------------------------- |  | ----------------------------------- | ------ | -------------------------- |  | ---------- |  |  | ------ | 
|                                 |  | Warrants outstanding                              |            | Warrants exercisable                                           | 
|                                 |  |                                                   |            |                                                                | 
|                                 |  |                                                   |            |                                                                |  |                                       |  |                                     |        |                            |  |            |  |  |        | 
|Range of exercise prices         |  | Number of
  warrants
  outstanding
  as of 7/1/06 |            | Weighted
  average
  remaining
  contractual life
  (in years) |  | Weighted
  average
  exercise
  price |  | Number
  exercisable
  as of 7/1/06 |        | Weighted
  average
  price | 
|                                 |  |                                                   |            |                                                                |  |                                       |  |                                     |        |                            | 
|                                 |  |                                                   |            |                                                                |  |                                       |  |                                     |        |                            |  |            |  |  |        | 
|Warrants issued @ $.001 to $.230 |  |                                                   | 63,638,769 |                                                                |  | 4.8                                   |  |                                     | varies |                            |  | 63,638,769 |  |  | varies | 

16. Retirement Plan

401(k) Plan

Participants
in the KAAI 401(k) Plan may contribute up to 50% of their annual compensation
to their 401(k) Plan on a pre-tax basis, subject to aggregate limits under the
Code.  The Company provides on behalf of
participants of the KAAI Plan, who make elective compensation deferrals, a
matching contribution at the rate of 50% of employee contributions up to 2% of
participant pretax compensation. Employee contributions in the KAAI 401(k) Plan
are vested at all times and the Companys matching contributions are subject to
a five-year vesting provision. The Company recognized compensation expense
associated with the KAAI 401(K) Plan for matching contributions of $0.008
million for the year ended July 1, 2006, and $0.029 million and $0.003 million
for the years ended June 30, 2005 and June 30, 2004, respectively.

17. Share Exchange Agreement

On
December 20, 2005, the Company entered into the Share Exchange Agreement (the Share
Exchange Agreement) with KAAI and KAAI securityholders, pursuant to which KAAI
Securityholders received newly issued preferred securities of the Company in
exchange for their securities of KAAI.

The
transaction is considered to be a capital transaction in substance, rather than
a business combination.  That is, the
transaction is equivalent to the issuance of stock by the private company for
the net monetary assets of the shell corporation, accompanied by a
recapitalization.

Accordingly,
the outstanding shares of KAAI have been restated on the balance sheet and the
statement of stockholders deficit to give effect to the Share Exchange
Agreement as of June 30, 2005.  The
restated shares have been used in the computation for loss per share to
preserve comparability of those figures. The historical financial statements
prior to the December 20, 2005 Share Exchange Agreement are those of KAAI.

The
following table shows the effect of reclassifying the Common Stock and
Preferred Stock as if the Share Exchange Agreement took place on June 30, 2005:

|                                                                                                |  |   |        | 
|----------------------------------------------------------------------------------------------- |  | - | ------ | 
|(Amounts in thousands)                                                                          |  |   |        | 
|                                                                                                |  |   |        | 
|KAAI Common Stock                                                                               |  | $ | 93     | 
|KAAI Series A Preferred
  Stock                                                                 |  |   | 2,130  | 
|KAAI Series B Preferred
  Stock                                                                 |  |   | 965    | 
|KAAI Series C Preferred
  Stock                                                                 |  |   | 350    | 
|KAAI Series D Preferred
  Stock                                                                 |  |   | 8,146  | 
|                                                                                                |  |   |        | 
|Amount reclassified to
  convertible securities in the liabilities section of the balance sheet |  | $ | 11,684 | 
|                                                                                                |  |   |        | 

80

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A
note payable of $5,905 (long term portion $5,161, short term $744), classified
under seller notes payable, along with accrued interest thereon of $1,598, was
converted into KAAIs common stock, which was subsequently exchanged for Series
B Preferred Stock of the Company.  In
addition, the senior subordinated note payable for $12,066 along with accrued
debt discount thereon of $1,234, was converted into KAAIs common stock and
subsequently exchanged for Series B Preferred Stock.

As
of December 20, 2005, under the terms of the Share Exchange Agreement, shares
of series A preferred stock, series B preferred stock, series C preferred stock
and series D preferred stock of KAAI, the outstanding senior subordinated debt,
other long term debt, accrued interest on the other long term debt and certain
accrued dividends, which immediately prior to the consummation of the Share
Exchange Agreement were converted into KAAIs common stock, were exchanged for
Series B Preferred Stock of the Company.
The outstanding shares of Series G Preferred Stock and Series H
Preferred Stock of KAAI were exchanged for Series C Preferred Stock of the
Company.

The
following table reflects the amounts of KAAI securities that were converted
into common stock of KAAI and subsequently exchanged for securities of the
Company under the Share Exchange Agreement:

|                                                                               |  |   |        | 
|------------------------------------------------------------------------------ |  | - | ------ | 
|(Amounts in thousands)                                                         |  |   |        | 
|                                                                              
|Securities exchanged for
  Series B Convertible Preferred Stock of the Company |  |   |        | 
|Note payable, Kidd & Company                                                   |  | $ | 5,905  | 
|Accrued Interest on note payable                                               |  |   | 1,598  | 
|Senior subordinated debt (gross)                                               |  |   | 13,300 | 
|KAAI common stock                                                              |  |   | 93     | 
|KAAI series A convertible preferred stock                                      |  |   | 2,130  | 
|KAAI series B convertible preferred stock                                      |  |   | 965    | 
|KAAI series C convertible preferred stock                                      |  |   | 350    | 
|KAAI series D convertible preferred stock                                      |  |   | 8,146  | 
|Accrued preferred dividends on KAAI preferred stock                            |  |   | 464    | 
|                                                                               |  |   |        | 
|Subtotal of securities
  exchanged for Series B Preferred Stock of the Company |  | $ | 32,951 | 
|                                                                               |  |   |        | 
|                                                                               |  |   |        | 
|Securities exchanged for
  Series C Preferred Stock of the Company             |  |   |        | 
|KAAI series G redeemable convertible preferred stock                           |  | $ | 9,702  | 
|KAAI series H redeemable convertible preferred stock                           |  |   | 4,538  | 
|                                                                               |  |   |        | 
|Total securities exchanged
  for Series C Preferred Stock of the Company       |  | $ | 14,240 | 
|                                                                               |  |   |        | 

On
December 22, 2005, affiliates of North Sound and Valesco Capital Management, LP
invested $15.3 million in exchange for 1,530 newly issued shares of our Series
D Preferred Stock together with the Series B Preferred Stock and the Series C
Preferred Stock, the Preferred Stock).
Issuance costs associated with the round of financing amounted to
approximately $0.4 million.  The Company
also issued warrants to purchase 2,395 shares of Series B Preferred Stock with
the Series D Preferred stock, which were valued using the Black-Scholes option
pricing model using the following assumptions:
risk-free rate of return  4.36%; term  5 years; volatility  30%;
dividend yield  0.0%.  The value
ascribed to the warrant was $1.3 million.
As a result of the value being allocated to the warrants, a beneficial
conversion feature resulted on the Series D Preferred Stock.  The total beneficial conversion feature was
approximately $30 million but was recorded only to the extent of the carrying
value of the Preferred Stock, in the amount $13.9 million.  The value ascribed to the warrant in the
amount $1.3 million was accreted as a dividend and recorded immediately as an
increase in additional paid in capital and an increase in accumulated deficit.

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The
shares of Series B Preferred Stock will automatically convert into Common Stock
after the Company amends its Certificate of Incorporation in order to increase
the number of shares of Common Stock it is authorized to issue.  Subject to certain restrictions, the shares
of Series C Preferred Stock and Series D Preferred Stock will automatically
convert into Common Stock upon the consummation of an underwritten public
offering with gross proceeds to us of not less than $30 million.

Since
the Company does not have sufficient number of authorized shares of Common
Stock to allow for the conversion of the Preferred Stock into Common Stock or
the exercise of warrants for Series B Preferred Stock that may ultimately be
converted into Common Stock, in accordance with EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, the Company has reclassified these instruments to
liabilities.

The
following table shows the effect of reclassifying the Preferred Stock and
warrants:

|                                                                                                                |  |   |        | 
|--------------------------------------------------------------------------------------------------------------- |  | - | ------ | 
|(Amounts in thousands)                                                                                          |  |   |        | 
|                                                                                                               
|Series B Preferred Stock of the Company                                                                         |  | $ | 32,951 | 
|Series C Preferred Stock of the Company                                                                         |  |   | 14,240 | 
|Series D Preferred Stock of the Company (as restated)                                                           |  |   | 13,926 | 
|                                                                                                                |  |   |        | 
|Warrants to purchase Series B Preferred Stock issued to the holders
  of Series B Preferred Stock               |  |   | 935    | 
|Warrants to purchase Series B Preferred Stock issued to the holders
  of Series C Preferred Stock               |  |   | 1,535  | 
|Warrants to purchase Series B Preferred Stock issued to the holders
  of Series D Preferred Stock (as restated) |  |   | 1,295  | 
|                                                                                                                |  |   |        | 
|Amount reclassified to convertible securities in the liabilities
  section of the balance sheet                 |  | $ | 64,882 | 
|                                                                                                                |  |   |        | 

18. Convertible Securities

Under
EITF 00-19, the Company is required to remeasure the convertible securities at
each reporting period end based on fair value.   The Company determines the fair value of the convertible
securities based on the number of shares common stock into which they are
convertible and the current fair value of the common stock on the remeasurement
date.   Fair value of the Common Stock
is determined based on actual amounts paid for a share of Common Stock in a
transaction closest to the remeasurement date.
The fair values of the Common Stock as of July 1, 2006 was $0.39.  The number of common shares into which the
convertible securities are convertible was 506,576,690 as of July 1, 2006.   As of July 1, 2006, the Company remeasured
the convertible securities based on an estimated fair value of approximately
$198 million and recorded an unrealized loss of approximately $133 million for
the year ended July 1, 2006.

19. Subsequent Events

Laurus Senior Debt Financing:

On July 6, 2006, TrueYou closed on a financing and issued to Laurus Master Fund, Ltd. (Laurus) a Secured Term Note in the aggregate principal amount of $25.0 million (the Laurus Note) and issued to Laurus series A warrants, series B warrants and series C warrants to purchase up to 37,351,824 shares, 6,839,394 shares and 6,693,875 shares, respectively, of our common stock.

82

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The
Company also placed $2.5 million (the Interest Amount) in a restricted
account to be utilized to pre-fund interest for the first year of the Laurus
Note.  Closing costs of $0.9 million
were incurred by the Company relating to this debt.  These costs were recorded as deferred financing costs and will be
amortized to interest expense over the term of the note using straight-line
amortization. The balance of $21.6 was placed into a restricted cash account
which was released on July 11, 2006 when the Company satisfied the conditions
associated with the Laurus Note.  The Company
used $8.3 to pay off the existing senior debt held by Technology Investments
Capital Corporation (TICC), and an additional $0.1 million representing
unpaid interest and other costs owed to TICC.
The remaining $1.7 million of principal outstanding on the senior debt
to TICC was loaned to the Company as a part of the $5.2 million subordinated
loan discussed below.  In conjunction
with the payoff of the senior debt, the Company charged $0.2 of the net
remaining deferred financing costs and unamortized debt discount of $0.9 to
interest expense.   Also in conjunction
with the payoff of the senior debt and all related interest and fees was the
release of $1.6 million of restricted cash previously held for interest
payments.

The
Laurus Note matures on June 30, 2010 and interest accrues at a rate per annum
equal to the prime rate, plus two percent (2%) per annum, payable monthly, in
arrears, commencing on August 1, 2006.
Commencing on August 1, 2007, the Company will make monthly payments to
Laurus in an amount equal to $416,666.67 together with any accrued and unpaid
interest on such portion of the outstanding principal amount plus any and all
other unpaid amounts which are then owing under the Note.  The Companys payment obligations are
guaranteed by the Companys subsidiaries and are secured by all of the
Companys and such subsidiaries assets.

The
Company calculated a debt discount attributable to the value of these warrants
of $10.3 million, which will be amortized over the term of the note using the effective
interest method.  The warrants have a
10-year term and an exercise price equal to $0.01 per share, or in certain
circumstances, may be exercised on a cashless basis.  If, prior to the fourteenth month anniversary of June 30, 2006,
(i) the Companys obligations under the Note have been reduced to $12.5 million
or less, then the series B warrants will automatically be cancelled and
terminated; and (ii) the Companys obligations under the Note have been reduced
to zero, then the series C warrants will automatically be cancelled and
terminated.  The Company is obligated to
file a registration statement with the Securities and Exchange Commission
covering the resale of the shares underlying the warrants.

The
Company has also agreed to use its best efforts to amend its certificate of
incorporation to increase the number of authorized shares of our Common Stock
to such number as shall be sufficient to permit the exercise in full of the
warrants.  If Laurus notifies the
Company at any time prior to the effective date of such amendment that it
desires to exercise the warrants prior to such effective date, the Company will
promptly issue, in exchange for the warrants, substitute warrants exercisable
to purchase that number of shares of its series B convertible preferred stock
that are, upon authorization of the Share Amount, immediately convertible into
the number of shares of our Common Stock that would then have been issuable
upon exercise of the warrants in full if its certificate of incorporation had
then provided for sufficient authorized shares of its Common Stock to satisfy
such exercise, and otherwise containing substantially the same terms and
provisions as the warrants.

$5.2 Million
Subordinated Loan:

On
July 11, 2006, the Company entered into a loan agreement (the Subordinated
Loan Agreement) with subordinated lenders for $5.2 million (the Subordinated
Loan) to be used by the Company for capital expenditures, general
working capital and to pay all costs and expenses in connection with the
Subordinated Loan. Pursuant to a subordination agreement dated July 11, 2006,
between the Subordinated Lenders and Laurus, the Subordinated Loan is
subordinated to the Companys existing senior indebtedness to Laurus.

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The
Subordinated Loan bears interest at 12% per annum compounded annually;
provided, however, the interest rate will increase to 14% per annum upon: (i)
the Companys failure to pay in full, on or prior to July 1, 2010, the principal
amount of the Subordinated Loan, plus all accrued interest, and (ii) certain
other specified events that would be considered an event of default under the
Subordinated Promissory Note. The principal balance and accrued interest on the
Subordinated Promissory Note is due on the earliest of (i) July 1, 2010, and
(ii) the first date on which any mandatory prepayment is payable under the
Subordinated Loan Agreement or the occurrence of any sale of all or
substantially all of the assets of the Company or its subsidiaries, or merger,
consolidation or other business combination involving the Company or its
subsidiaries if all senior indebtedness is first paid in full in cash in
connection with any such transaction (the Maturity Date).

Subject
to prior payment in full of all senior indebtedness, the Subordinated Loan is
subject to voluntary prepayment at any time and mandatory prepayment upon the
occurrence of a change in control of the Company.

In
the event that the Company consummates an equity financing at any time prior to
the Maturity Date, each Subordinated Lender may elect to convert the entire
principal amount due to such Subordinated Lender under the Promissory Note
(along with accrued interest thereon and all other amounts then due thereunder)
into such number of securities issued in the equity financing (in the event any
warrants or other property or rights are issued or granted in the financing,
together with the proportionate number of such warrants and other property or
rights) that is equal to (i) the principal amount of the Subordinated
Promissory Note (along with accrued interest thereon and all other amounts then
due) being converted divided by (ii) the lowest price per share of the
securities to be issued in the financing. However, if the securities and the
related warrants, if any, to be issued in the financing do not contain
provisions prohibiting the aggregate ownership percentage by the holder thereof
from exceeding 4.99% of the total number of shares of the Companys common
stock, par value $0.001 per share (the Common Stock) then issued and
outstanding, then any Subordinated Lender may elect to receive securities that
are otherwise identical in all respects to those purchased in the financing but
that contain the foregoing restriction on aggregate ownership.

Additionally,
the Company agreed that if it consummated one or more equity financings or
indebtedness junior to the Companys senior indebtedness after the date of such
financing with proceeds in excess of $10.0 million in the aggregate, then
two-thirds of all proceeds in excess of $10.0 shall be proportionately applied
to prepay pari passu, the
Subordinated Loan and the obligations of the Company under the Amended
Subordinated Loan (as defined in (b) below).
This
provision has been amended so that no such prepayment can be made until the
Senior Debt issued to Laurus on July 11, 2006 as well as the $4 Million of
Senior Subordinated Debt issued on December 22, 2006 (including interest and
all other obligations due) have been paid.

The
obligations of the Company under the Subordinated Loan Agreement and
Subordinated Promissory Note are guaranteed by each of the Companys
subsidiaries.

The
Subordinated Promissory Note ranks pari
passu with the Amended Subordinated Promissory Note.

Pursuant to the Subordinated Loan Agreement, the Company issued to the Subordinated Lenders warrants to purchase an aggregate of 32,947,771 shares of Common Stock at an exercise price of $0.001 per share, subject to certain adjustments set forth therein. The warrants expire on June 30, 2013. The Subordinated Lenders are not entitled to received shares of Common Stock upon exercise of the warrants if such receipt would cause such Subordinated Lender to be deemed to beneficially own in excess of 4.99% of the outstanding shares of Common Stock on the date of issuance of such shares. Such provision may by waived by any Subordinated Lender upon 61 days prior written notice to the Company. The Company recorded a debt discount in the amount of $3.6 million which is attributable to the value of the warrants issued. The debt discount will be amortized over the term of the loan using the effec





tive interest method.

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The
Company granted each Subordinated Lender piggyback registration rights with
respect to the shares of Common Stock issuable upon exercise of the warrants,
in accordance with the terms of a registration rights agreement. The Company
has agreed to use its best efforts to cause its certificate of incorporation to
be amended to increase the number of authorized shares of Common Stock to such
number as shall be sufficient to permit the exercise in full of the warrants. If
any Subordinated Lender notifies the Company at any time prior to the effective
date of such amendment that it desires to exercise its warrants prior to such
effective date, the Company will promptly issue to such Subordinated Lender, in
exchange for its warrants, substitute warrants exercisable to purchase that
number of shares of its Series B Convertible Preferred Stock that are, upon
authorization of the number as shall be sufficient to permit the exercise in
full of the warrants, immediately convertible into the number of shares of
Common Stock that would then have been issuable upon exercise of the warrants
in full if the certificate of incorporation of the Company had then provided
for sufficient authorized shares of Common Stock to satisfy such exercise, and
otherwise containing substantially the same terms and provisions as the
warrants.

Amended and Restated $4.8 Million
Subordinated Loan:

On
July 11, 2006, the Company entered into a amended and restated loan agreement
(the Amended Subordinated Loan Agreement) with Pequot Healthcare Fund, L.P.,
Pequot Healthcare Offshore Fund, Inc., Premium Series PCC Limited -Cell 32,
Pequot Diversified Master Fund, Ltd., Pequot Healthcare Institutional Fund,
L.P., North Sound Legacy Institutional Fund LLC, North Sound Legacy
International Ltd. and Klinger Investments LLC (collectively, the Amended
Subordinated Lenders) in order to amend and restate the provisions of the $4.8
million loan (the Amended Subordinated Loan) that the Company received from
the Amended Subordinated Lenders on May 9, 2006 in order to conform its terms
to the terms of the Subordinated Loan Agreement. Pursuant to a subordination
agreement dated July 11, 2006, the Amended Subordinated Loan is subordinated to
the Companys existing senior indebtedness to Laurus under the Securities
Purchase Agreement and the Related Agreements

The
Amended Subordinated Loan is evidenced by an amended and restated subordinated
promissory note dated July 11, 2006 (the Amended Subordinated Promissory
Note). The terms of the Amended Subordinated Promissory Note are identical to
the terms of the Subordinated Promissory Note except that interest on the
Amended Subordinated Promissory Note accrues from May 9, 2006.

The
Amended Subordinated Promissory Note ranks pari
passu with the Subordinated Promissory Note.

Pursuant
to the Amended Subordinated Loan Agreement, the Company issued to the Amended
Subordinated Lenders warrants to purchase an aggregate of 30,658,597 shares of
Common Stock. These warrants have the same terms and rights, including
piggyback registration rights, as the warrants that were issued pursuant to the
Subordinated Loan Agreement described above.

$4.0 Million Senior Subordinated Loans:

|    |                                              
|--- | ---------------------------------------------
|(a) | $1.0 Million Senior Subordinated Secured Loan

The Company entered into a Subordinated Securities Purchase Agreement (the Laurus Purchase Agreement) with Laurus dated as of December 22, 2006, pursuant to which the Company issued to Laurus (i) a Subordinated Secured Term Note in the principal amount of $1.0 million (the Subordinated Secured Note); and (ii) warrants (the Laurus Warrants) to purchase up to 10,000,000 shares (the Warrant

85

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Shares), of the Company common stock, par value $0.001 per share
(the Common Stock). In the event the Subordinated Secured Note is not repaid
by April 30, 2007, the Company has agreed to issue Laurus warrants with like
terms to purchase an additional 8,750,000 shares of Common Stock.

The
Senior Subordinated Secured Note matures on December 22, 2009 or earlier upon a
change of control or other specified events. Interest will accrue on the unpaid
principal amount of the Note at a rate per annum equal to twelve percent (12%)
per annum. Interest in the amount of six percent (6 %) per annum shall accrue
and subject to the provisions of that certain Subordination Agreement among the
Company, Laurus and Subordinated Lenders to the Company dated December 22, 2006
(Subordination Agreement), shall be payable monthly, in arrears, commencing
on February 1, 2007 and on the first day of each consecutive calendar month
thereafter. Interest in the amount of six percent (6 %) per annum shall accrue
but not be payable during the period commencing on the date of issuance and
ending on the maturity date of the Note (unless accelerated under certain
circumstances). The interest rate may be increased by 2% per annum in the event
that sufficient shares of the Common Stock are not authorized to allow Laurus
to exercise all of the Laurus Warrants by the six-month anniversary of the date
of the Laurus Purchase Agreement, and shall remain at such higher rate until
such time as a sufficient number of such shares are authorized.

The
Laurus Warrants have a 7-year term and an exercise price equal to $0.01 per
share. The Laurus Warrants also provide that if the fair market value of one
share of Common Stock is greater than the exercise price Laurus may choose to
exercise the warrant on a cashless exercise basis resulting in an issuance of
net shares with no cash payment.

|    |                                      
|--- | -------------------------------------
|(b) | $3.0 Million Senior Subordinated Loan

The
Company entered into a loan agreement dated as of December 22, 2006 (the
Senior Subordinated Loan Agreement) with Senior Subordinated Lenders,
pursuant to which the Senior Subordinated Lenders loaned the Company $3.0
million (the Senior Subordinated Loan). Pursuant to a Subordination Agreement
dated as of December 22, 2006, between such Subordinated Lenders, previous
subordinated lenders to the Company and Laurus, the Senior Subordinated Loan is
subordinated to the Companys existing senior indebtedness to Laurus under the
Securities Purchase Agreement dated June 30, 2006 (the Securities Purchase
Agreement), and the Related Agreements referred to in the Securities Purchase
Agreement and ranks senior to the Companys $10.0 million of existing
subordinated indebtedness.

The
Senior Subordinated Loan is evidenced by a senior subordinated promissory note
dated December 22, 2006 (the Senior Subordinated Note) and bears interest at
annual rate equal to twelve percent (12%) per annum of which 6% shall be paid
in cash monthly, commencing 30 days from the closing (subject to the provisions
of the Subordination Agreement) and the balance of 6% paid in kind and paid on
the maturity date. The principal balance and accrued interest on the Senior
Subordinated Note is due on December 31, 2009

In
the event that the Company consummates an equity financing at any time prior to
the maturity date of the Senior Subordinated Note, each Senior Subordinated
Lender may elect to convert the entire principal amount and accrued interest
due to such Senior Subordinated Lender under the Senior Subordinated Note into
equity on
the same basis as in the equity offering.

Pursuant to the Senior Subordinated Loan Agreement, the Company issued to the Senior Subordinated Lenders warrants to purchase an aggregate of 15,384,615 shares of Common Stock at an exercise price of $0.001 per share. The warrants expire on December 31, 2013. In the event the Laurus Note is not paid by April 30, 2007, certain holders of such Warrants have agreed to contribute 8,750,000 Warrants back to the Company and the Company has agreed to issue an additional 8,750,000 Warrants to Laurus. (See Certain Relationships and Related Transactions).

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Acquisition of Nouvisage Corp:

On
September 12, 2006, the Company entered into a letter of intent to acquire
Nouvisage Corp. (Nouvisage). Pursuant to the letter of intent, the
transaction will be structured as an acquisition of all of the capital stock of
Nouvisage in exchange for newly issued shares of Series B Preferred Stock of
the Company, par value $0.001 per share (the Shares), each of which is
convertible into 10,000 shares of Common Stock of the Company, par value $0.001
per share The acquisition is intended to qualify as a tax-free exchange under
the Internal Revenue Code of 1986.

The
purchase price for the Shares will be $6.5 million, subject to adjustment (the
Purchase Price) and will be paid in Shares pro rata to the stockholders of
Nouvisage (the Sellers) at the closing of the acquisition (the Closing).

The
letter of intent may be terminated by either party if the acquisition did not
close by January 10, 2007 (the Termination Date). Pursuant to the letter of
intent, the Sellers and Nouvisage had agreed not to solicit, initiate, or
encourage submission of or receive proposals or offers from another party until
the Termination Date. The board of directors of both the Company and Nouvisage
have agreed to extend the Termination Date until March 1, 2007.

The
obligations of the parties to close the acquisition are subject to certain
closing conditions, including (i) the satisfactory completion by the Company of
its legal and financial due diligence, (ii) the approval by the board of
directors of the Company, (iii) the closing of a financing of at least $19.0
million in gross proceeds to the Company, (iv) the execution of an employment
agreement between the Company and John Buckingham, the Chief Executive Officer
of Nouvisage (the Employment Agreement), and (v) the completion of an audit
of the financial statements of Nouvisage for the three years ended June 30,
2006 and a review of any interim financial statements. Pursuant to the letter
of intent, the parties agreed to negotiate in good faith a stock purchase agreement,
a registration rights agreement, the Employment Agreement and such other
agreements as may be appropriate or desirable to the parties. The parties also
agreed to negotiate a Strategic Alliance Agreement.

Upon
the signing of the letter of intent, the Company agreed to advance $75,000 to
Nouvisage and agreed to advance an additional $225,000 prior to the Closing,
which amounts were to be paid in four installments based on the occurrence of
certain specified events. In accordance with this agreement, as of January 15,
2007 the Company has advanced $300,000 to Nouvisage. If the Company does
acquire Nouvisage, this advance will be applied to the purchase price. In
addition, Nouvisage agreed to provide security of its obligations through the
issuance of promissory notes which will allow the holder to convert such
promissory notes into an aggregate of 17% of Nouvisages common ownership if
not repaid. Pursuant to the letter of intent, if the acquisition does not
close, Nouvisage has agreed to refund to the Company all amounts paid to
Nouvisage, except for documented transaction costs of up to $75,000, in six
equal monthly installments.

20. Selected Quarterly Financial Information (unaudited)

The
following tables summarize the fiscal 2006 and 2005 quarterly results:

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|                         |  |                 |        |                  |   |                 |   |                  |          |   |   |         |  
|------------------------ |  | --------------- | ------ | ---------------- | - | --------------- | - | ---------------- | -------- | - | - | ------- | -
|2006                     |  | First
  Quarter |        | Second
  Quarter |   | Third
  Quarter |   | Fourth
  Quarter |         
|                         |  |                 |        |                  |   |                 |   |                  |         
|                         |  |                 |        |                  |   |                 |   |                  |          |   |   |         |  
|Total Operating Revenues |  | $               | 7,765  |                  | $ | 7,553           |   | $                | 10,483   |   | $ | 7,251   |  
|                         |  |                 |        |                  |   |                 |   |                  |          |   |   |         |  
|Operating loss           |  |                 | (5,492 | )                |   | (8,084          | ) |                  | (6,553   | ) |   | (13,358 | )
|                         |  |                 |        |                  |   |                 |   |                  |          |   |   |         |  
|Net income (loss)        |  | $               | (6,593 | )                | $ | (147,852        | ) | $                | (153,901 | ) | $ | 136,641 |  
|Income (loss) per share: |  |                 |        |                  |   |                 |   |                  |          |   |   |         |  
|                         |  |                 |        |                  |   |                 |   |                  |          |   |   |         |  
|Basic and diluted        |  | $               | (0.47  | )                | $ | (9.85           | ) | $                | (10.29   | ) | $ | 9.08    |  
|                         |  |                 |        |                  |   |                 |   |                  |          |   |   |         |  

|                         |  |                 |        |                  |   |                 |   |                  |        |   |   |        |  
|------------------------ |  | --------------- | ------ | ---------------- | - | --------------- | - | ---------------- | ------ | - | - | ------ | -
|2005                     |  | First
  Quarter |        | Second
  Quarter |   | Third
  Quarter |   | Fourth
  Quarter |       
|                         |  |                 |        |                  |   |                 |   |                  |       
|                         |  |                 |        |                  |   |                 |   |                  |        |   |   |        |  
|Total Operating Revenues |  | $               | 7,707  |                  | $ | 8,330           |   | $                | 8,802  |   | $ | 8,094  |  
|                         |  |                 |        |                  |   |                 |   |                  |        |   |   |        |  
|Operating loss           |  |                 | (3,425 | )                |   | (4,572          | ) |                  | (3,134 | ) |   | (4,764 | )
|                         |  |                 |        |                  |   |                 |   |                  |        |   |   |        |  
|Net loss                 |  | $               | (4,352 | )                |   | (5,555          | ) | $                | (4,198 | ) | $ | (5,816 | )
|                         |  |                 |        |                  |   |                 |   |                  |        |   |   |        |  
|Loss per share:          |  |                 |        |                  |   |                 |   |                  |        |   |   |        |  
|                         |  |                 |        |                  |   |                 |   |                  |        |   |   |        |  
|Basic and
  diluted      |  | $               | (0.31  | )                | $ | (0.40           | ) | $                | (0.31  | ) | $ | (0.40  | )
|                         |  |                 |        |                  |   |                 |   |                  |        |   |   |        |  

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Internal Controls

Our
management, with the participation of our principal executive officer and
principal financial officer, have evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)
as of the end of the period covered by this report. Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that the
disclosure controls and procedures are not effective for the reasons specified
below.

Material Weaknesses

On
January 25, 2007, our independent registered public accounting firm, Amper,
Politziner, and Mattia, P.C. (Amper) noted in a letter to management, a copy
of which was presented to our Board, certain matters involving internal
controls that they consider to be material weaknesses and significant deficiencies.
However, Amper was not engaged to perform an audit of our internal controls
over financial reporting. Accordingly, Amper has not expressed an opinion on
the effectiveness of our internal controls over financial reporting.

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The
material weaknesses identified by Amper were (A) inadequate resources in the
accounting functions; (B) inadequate controls over cash management; (C)
inadequate controls over computer information; and (D) inadequate anti-fraud
program. More specifically, Amper identified among other things, material
weaknesses in the processes and procedures associated with our preparation and
review of account reconciliations, monitoring of financial results, application
of accounting principles, control over cash management, communication between
departments, inventory management and valuation, vendor management and
segregation of duties, and anti-fraud program. Examples of the issues
identified include, among many others, inadequate segregation of duties,
insufficient staffing in the accounting department, failure to reconcile or
analyze accounts, lack of effective review of the reconciliations and analysis
that are prepared and, in some instances, poor design of controls and poor
compliance with existing policies and procedures, and no whistle blower
hotline.

Previous Restatement of Financial Statements:

During
the fiscal year ended July 1, 2006, we became aware of certain transactions
that should have been recorded in earlier quarters during the current fiscal
year. After review of the transactions, management decided to make adjustments
to record these transactions in the proper period and included those
restatements in a footnote of the April 1, 2006 quarterly financial statement.

On
February 13, 2006, our Board of Directors, upon the recommendation of our
management, concluded that the audited financial statements of KAAI for the
fiscal year ended June 30, 2005 should no longer be relied upon and should be
restated. Our Boards conclusion was based on a finding by our management of an
error in accounting causing an under accrual of accrued expenses relating to
management fees and to accrued bonuses payable.

In
addition, as a result of the errors that led to the conclusion that our 2005
Audited Financial Statements cannot be relied upon, our management concluded
that our unaudited financial statements for the quarter ended October 1, 2005
should no longer be relied upon and should be restated. On February 20, 2006,
our Board met and discussed the foregoing with management and our independent
registered public accounting firm, Amper, Politziner & Mattia, P.C. Our
Board of Directors concurred with the recommendation of management.

As
a result of the above, the consolidated balance sheets as of June 30, 2005,
October 1, 2005, and December 31, 2005 and the related consolidated statements
of operations, cash flows and stockholders equity were restated and filed on
February 27, 2006.

Previous Management Letter from our
Independent Registered Public Accountants:

Independently,
on January 12, 2006, we received a letter from Amper indicating that KAAI had
material weaknesses in the design and operation of its internal control over
financial reporting with respect to the process of preparing and reviewing
annual and interim financial statements, and related timely account analysis
and reconciliations. Weaknesses identified resulted from inadequate resources
in the financial reporting area and lack of appropriate technical training of
such resources relating to the preparation of financial statements and
disclosures and the accounting for significant transactions.

Remediation of Material Weaknesses

In order to remediate these weaknesses, we have retained another accounting firm in which members of that firms accounting staff have worked under the supervision of our Chief Financial Officer. The Company has also retained an information technology firm to upgrade operating, financial and accounting systems which is expected to further improve the control environment. In addition, On May 1, 2006, we appointed a new Chief Financial Officer and in August 2006 we hired a Controller. We are also working to

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integrate our
inventory system to improve our controls over inventory and related areas. The
above remedial actions have not been in place long enough to have been tested
and will be assessed for their adequacy on a continuous basis.

Except
as described above, there have not been any changes in our internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) since the beginning of the fiscal year ended
July 1, 2006 that have materially affected, or are reasonable likely to
materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The
following table sets forth the names and ages of each of our executive officers
and directors as of December 31, 2006.

|                     |  |     |  |                                                                         
|-------------------- |  | --- |  | ------------------------------------------------------------------------
|Name                 |  | Age |  | Position                                                                
|                     |  |     |  |                                                                         
|Richard Rakowski     |  | 54  |  | Chairman and Chief
  Executive Officer                                  
|                     |  |     |  |                                                                         
|Matthew Burris       |  | 44  |  | Chief Financial Officer
  and Chief Operating Officer                   
|                     |  |     |  |                                                                         
|Jane Terker          |  | 54  |  | Executive Vice President,
  Chief Marketing Officer and Director        
|                     |  |     |  |                                                                         
|Carolyn Aversano     |  | 37  |  | Executive Vice President
  of Marketing, Merchandising and Education (1)
|                     |  |     |  |                                                                         
|Andrew D. Lipman     |  | 39  |  | Director                                                                
|                     |  |     |  |                                                                         
|Stephen H. Coltrin   |  | 61  |  | Director                                                                
|                     |  |     |  |                                                                         
|Daniel Piette        |  | 61  |  | Director (2)                                                            
|                     |  |     |  |                                                                         
|Philippe Franchet    |  | 41  |  | Director (2)                                                            
|                     |  |     |  |                                                                         
|James O Crowley III |  | 53  |  | Director (3)                                                            
|                     |  |     |  |                                                                         
|Alan Panzer          |  | 46  |  | Director (3)                                                            
|                     |  |     |  |                                                                         
|Alastair J. Clemow   |  | 55  |  | Director (3)                                                            

(1) - Resigned, effective
January 12, 2007

(2) - Resigned, effective
December 28, 2006

(3) - Elected, effective
December 29, 2006

Richard Rakowski  Chairman and Chief Executive Officer

Richard
Rakowski has been Chairman and Chief Executive Officer of KAAI since its
formation in July 2003. He is also a Principal of KCO since March 2002. Prior
to joining KCO as a Principal in March 2002, Richard Rakowskis diverse 26-year
career spanned manufacturing, consulting, business development, marketing,
entrepreneurship and the Presidency of American Healthways, Inc. (NASDAQ: AMHC)
from June 2001 to March 2002. From 1992 until 2001, Mr. Rakowski was a founder
of New Paradigm Ventures, a consulting and investment firm in the health-care
and food industry market. He was also a partner at Marketing Corporation of
America. Mr. Rakowskis background also includes process control consulting
work for Fortune 500 Companies in the U.S. and abroad. He holds a BA from City
University of New York.

Matthew Burris  Chief Financial Officer and Chief Operating Officer

Matthew
Burris joined KAAI in May 2006. From December 2002 to April 2006, Mr. Burris
served as Vice President and Group Finance Director for the Non-Apparel
reporting segment of Liz Claiborne, Inc., a wholesaler and retailer of branded
apparel and accessories products (Liz Claiborne).

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During his tenure at Liz
Claiborne, Mr. Burris held the additional positions of Vice President, Group
Operations Director for the Accessories division and Vice President, Group
Finance Director for DKNY; the Donna Karan licensed apparel division. From
August 2001 through December 2002, Mr. Burris served as Vice President and
Chief Financial Officer for Standard Automotive Corporation, a manufacturer of
precision parts for the aerospace, nuclear, and defense industries and truck
trailers and truck bodies. From October 1999 through August 2001, Mr. Burris
served as Vice President, Chief Financial Officer and Director of Creative
Solutions Group, Inc., a manufacturer of point of purchase display units. Mr.
Burris holds a BS, magna cum laude, in finance and international management
from Georgetown University School of Business and an MBA from New York
University, Stern School of Business.

Jane Terker Executive Vice President, Chief Marketing Officer and
Director

Jane
Terker has over 30 years experience as a management executive and business
builder. Immediately prior to joining KAAI, Ms. Terker co-founded and served
from December 2001 to July 2004 as President and Chief Operating Officer of
Cradle Holdings, Inc., a company created to acquire and reposition prestige
beauty brands for maximum growth and profitability. From May 1992 to March 1998
Ms. Terker also founded, developed and served as President of the Donna Karan
Beauty Company. Ms. Terker also founded and ran JTP Associates from March 1998 to November 2001, which was a
product consulting company with clients including J Crew, MD Skincare, Linda
Cantello Beauty, CCSI inshop.com and Kiss My Face. Earlier in her career, Ms.
Terker held various marketing and retail executive roles at Esmark, LOreal and
Glemby International. She holds a BA, magna cum laude, from New York University
and also attended Columbia Universitys Executive Education Program.

Carolyn Aversano  Executive Vice President of Marketing, Merchandising
and Education [Resigned effective, January 12, 2007]

Carolyn
Aversano joined KAAI in June 2005. Prior to joining KAAI, Ms. Aversano worked
for Sephora as a Strategic Development Consultant from July 2004 to June 2005.
From July 1999 to April 2003, Ms. Aversano was a member of the startup team for
beauty retailer Gloss.com, which was acquired by the Estee Lauder Companies in
2000. At Estee Lauder Companies she oversaw the e-commerce businesses of the
various Estee Lauder Companies brands including Estee Lauder, Origins,
Prescriptives, Stila, La Mer, Jo Malone and Kate Spade. Ms. Aversano holds a BS
degree in marketing from New York University.

Andrew D. Lipman Director

Andrew
Lipman was Vice President and one of the founding principals of KCO. Prior to
co-founding KCO in 1996, Mr. Lipman served as a Vice President of the firms
predecessor, Kidd, Kamm & Company. Earlier in his career, Mr. Lipman was a
management and strategic consultant with The George Group and Andersen
Consulting. He holds a BS in Electrical Engineering from Union College.

Stephen H. Coltrin 
Director

Stephen
H. Coltrin founded Coltrin & Associates, Inc. in 1982. In addition to
serving as a member of our Board of Directors, Mr. Coltrin also currently
serves as a Vice Chairman on the Board of Directors for the International Radio
and Television Society Foundation, on the National Advisory Board of Americas
Freedom Festival at Provo, and on the Advisory and Advancement Council of the
Utah State University Journalism & Communication Department. Mr. Coltrin
received a BS in psychology from Brigham Young University.

Daniel Piette  Director [Resigned effective, December 28, 2006]

Daniel
Piette co-founded L Capital in June 2001 and serves both as the President of L
Capital Management and as a member of the Supervisory Committee of the L
Capital fund. Additionally, he is a member of Moët Hennessy Louis Vuitton LVMH
Groups Executive Committee. He is also co-founder,

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Chairman and CEO of LV Capital. Mr. Piette
joined LVMH in 1990 as Group Executive Vice President. Mr. Piette started his
career focus in the fashion luxury sector as the Brand Operating Officer for
the DMC Group. Earlier in his career, Mr. Piette held the post of Executive
Vice President of Manurhin. He was also a manager at the Bosch Company and a
consultant at Arthur D. Little. Mr. Piette graduated from ESSEC in Paris and
also holds an MBA from Columbia Business School.

Philippe Franchet Director[Resigned effective, December 28, 2006]

Philippe
Franchet joined L Capital in September 2001 as a director of L Capital
Management. Prior to L Capital, Mr. Franchet was from June 2000 until June 2001
the Senior Vice President, leading investments for Europatweb, an Internet
investment group formed by Bernard Arnault. Prior to Europatweb, Mr. Franchet
was from January 1998 until June 2000 the Head of Private Equity Investments
for the Lazard Groups two public investment holding companies, Azeo and
Eurafrance (now Eurazeo). While at the Lazard Group, Mr. Franchet and his team
invested approximately FF 500 million in over 15 transactions across a variety
of sectors in countries including France, the UK, the US and Japan. Earlier in
his career, Mr. Franchet was a consultant with McKinsey & Co. and a financial
derivatives market trader with Credit Lyonnais. Mr. Franchet holds an MSEE from
ENST in Paris and an MBA from Harvard Business School.

James OCrowley III
 President

From
April 2002 to December 2006, Mr. OCrowley organized and led an equity-backed
team seeking to acquire technology-oriented divisions from Motorola and also
was a consultant to select companies. From March 2001 to February 2002 Mr.
OCrowley served as President, Chief Executive officer and Director of Standard
Automotive Corporation, an AMEX listed company. Mr. OCrowley received an MBA
degree from Harvard Business School in 1978 and a BS degree in accounting and
administration from the University of Kansas in 1976.

Alan Panzer  Director

Since
August 2000, Mr. Panzer has been serving as the President of United States
Surgical Corporation and from April 2003 to October 2006, he served as the
President of Valleylab, both units of Tyco Healthcare. Mr. Panzer received a BS
degree from St. Johns University in 1984.

Alastair J. Clemow 
Director

Since
July 2004, Mr. Clemow has been serving as President and Chief Executive officer
of Nexgen Spine Inc., a medical device company. From October 2002 to March 2004
he served as President and Chief Executive Officer of Gelifex Inc., a medical
device company. Since July, 2000, Mr. Clemow has also been serving as a
principal of Tanton Technologies. Dr. Clemow served in numerous positions with
Johnson & Johnson from 1981 to 2000, including Vice President of Worldwide
Business Development for Ethicon Endo-Surgery Inc., Vice President of New
Business Development for Johnson & Johnson Professional Inc., and Director
of Research and Development of Johnson & Johnson Orthopedics. Mr. Clemow
received an MBA degree from Columbia University in 1991 and a PhD degree in
Metallurgy from the University of Surrey, Guildford in 1978.

Other
Key Employees

The following employees who are not our
executive officers are instrumental to our business:

Wade Haddad  Senior Vice President of Real Estate and Legal

Wade
Haddad, age 39, has been responsible for overseeing KAAIs legal affairs and
the site selection, lease negotiation, store design and construction of KAAIs
locations since July 2005. Prior to joining KAAI, Mr. Haddad worked for
Bieri Company, a specialty retail real estate consulting firm, as the

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Director of
Leasing, where he managed real estate strategies on behalf of landlord and
tenant clients for Bieri Company from March 2002 to July 2005. From May 1999 to
February 2002, Mr. Haddad worked with The Taubman Company, a national
developer of regional shopping centers, as a Leasing Agent, where he
represented the landlord in lease negotiations with retail tenants on behalf of
The Taubman Company. Mr. Haddad holds a BA in Political Economy from Princeton
University and a JD, magna cum laude, from the University of Detroit School of
Law.

Michael S. Rodriguez
Senior Vice President, Business Development

Michael
Rodriguez, age 37, serves as the Senior Vice President of Business Development
of KAAI since September 2003. Prior to joining KAAI, Mr. Rodriquez founded and
ran three business consulting companies in the healthcare and financial service
sectors, Three Realms, LLC, Impact Partners, LLC, and Broadband Digital, Inc.
from April 2000 to September 2003. From May 1995 to April 2000, Mr. Rodriquez
worked with Visa USA where he was employed in senior management roles in
operations, marketing, and business development. From June 1991 to May 1995,
Mr. Rodriquez worked with GE Capital. Mr. Rodriguez holds a BA in Finance and
Economics from Southern Methodist University and is also a graduate of the GE
Capital Management Development Program.

Medical Advisory Board

We
have a Medical Advisory Board that includes leaders in the medical aesthetics
industry. In addition to Johns Hopkins approval of medical protocols, the
Medical Advisory Board includes the following
members effective as of January 15, 2007:

Dr. Kaveh Alizadeh 
Medical Director and member of the Medical
Advisory Board

Dr.
Alizadeh is currently a partner and vice president of Long Island Plastic
Surgical Group,the largest and
oldest continuously running practice in North America. He is also the Vice
Chairman of Plastic Surgery and Director of Microsurgery at Winthrop University
Hospital, and the curriculum director for the Nassau University Plastic Surgery
Residency Program. Prior to joining Long Island Plastic Surgical Group, Dr. Alizadeh
pursued a year of training in cancer reconstruction and cosmetic surgery at the
Memorial Sloan Kettering Cancer Center in 1999. Between 1993 and 1999, he
carried out specialty training in surgery and subspecialty training in Plastic
and Reconstructive Surgery at the University of Chicago Hospitals. Dr. Alizadeh
earned his medical degree from Cornell University Medical College.

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Dr. Rod Rohrich  Chairman of Medical Advisory Board

Dr.
Rod Rohrich is Professor and Chairman, Department of Plastic Surgery, Crystal
Charity Ball Distinguished Chair in Plastic Surgery and Warren and Betty
Woodward Chair in Plastic and Reconstructive Surgery at the University of Texas
Southwestern Medical Center in Dallas, Texas. Dr. Rohrich earned his medical
degree from Baylor College of Medicine in Houston, TX. He completed residencies
in General Surgery and Plastic and Reconstructive Surgery at the University of
Michigan Medical Center in Ann Arbor, MI. Dr. Rohrich also completed a
Fellowship in Hand and Microsurgery at Massachusetts General Hospital in
Boston, MA and a Pediatric Fellowship at Oxford University in Oxford, England.
Dr. Rohrich is board certified in plastic surgery. He has served as President
of the American Society of Plastic Surgery and has served on the Board of
Directors of the American Society of Plastic Surgery, the Plastic Surgery
Educational Foundation, and the American Society for Aesthetic Plastic Surgery.
He serves on the Board of the Aesthetic Society Education and Research Foundation.
He is a member of numerous other professional societies. Dr. Rohrich is the
editor-in-chief of Plastic and Reconstructive Surgery, the most prestigious
scientific journal in the world in plastic surgery. He is the author or
co-author of more than 400 articles and book chapters, five books and has made
more than 1500 presentations nationally and internationally.

Dr. Victor Martel

Dr.
Victor Martel has a private cosmetic dental practice in Palm Beach, Florida. He
lectures nationally on the topics of Aesthetic Dentistry and Occlusion. Dr.
Martel received his dental degree at the University of Medicine and Dentistry
of New Jersey. Dr. Martel serves on the Board of Directors for the Atlantic
Coast Dental Research Clinic, the Florida Academy of Cosmetic Dentistry, and is
a faculty member of The Dawson Center for Advanced Dental Studies.

Dr. Jeffrey Kenkel

Dr.
Kenkel is an Associate Professor and Vice Chairman of the Department of Plastic
Surgery at the University of Texas Southwestern Medical Center, one of only
three departments in plastic surgery in the United States. Dr. Kenkel is also
Chief of Plastic Surgery at the Dallas VA Medical Center. He is also published
in various medical journals and texts and has presented at many national and
local meetings. Dr. Kenkels special interests include aesthetic and
reconstructive breast surgery, aesthetic surgery of the face, traditional and
ultrasound-assisted liposuction/body contouring, burn reconstruction, and skin care,
including chemical peels and microdermabrasion.

Dr. Craig Vander Kolk

Craig
A. Vander Kolk, M.D., has twenty years of experience at Johns Hopkins including
a position as Professor of Plastic Surgery. Recently Dr. Vander Kolk relocated
his practice to Mercy Medical Center. He has been appointed Associate Director
of the Center for Plastic and Reconstructive Surgery in the Weinberg Center for
Womens Health and Medicine at Mercy. His expertise includes; facial surgery
(including cosmetic surgery), reconstruction of cleft lip and palate, and
general cosmetic procedures such as breast augmentation, tummy tuck and
liposuction. An established speaker and author of numerous medical papers and
textbooks, Dr. Vander Kolk is internationally recognized for research and
developments in craniofacial and aesthetic plastic surgery.

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Board of Directors

Our
directors are elected by our stockholders or by the Board of Directors to fill
a vacancy. They serve until the next meeting of our stockholders
or until their successors have been duly elected and qualified or until their
earlier resignation or removal.

We
presently do not have an audit committee, compensation committee, or nominating
committee. We do not have a an audit committee charter or a charter governing
the nominating process as our management believes that until this point it has
been premature at the early stage of our management and business development to
form an audit, compensation, or nominating committee. However, the new
management plans to form an audit, compensation, and nominating committee in
the near future. Until these committees are established, these decisions will
continue to be made by the Board of Directors. Although the Board of Directors
has not established any minimum qualifications for director candidates, when
considering potential director candidates, the Board considers the candidates
character, judgment, skills and experience in the context of the needs of the
Company and the Board of Directors.

Director Compensation

All
directors, except for directors of L Capital are reimbursed for out-of-pocket expenses in connection with
attendance at meetings of the Board of Directors.

Board Meetings

The
Board of Directors met four times in fiscal 2006. Each Director attended at
least 75% of the aggregate of the total number of meetings of the Board (held
during the period for which he has been a director).

Section 16(a) Beneficial Ownership Reporting Compliance

Section
16(a) of the Exchange Act requires certain of the Companys executive officers,
as well as the Companys directors and persons who own more than ten percent
(10%) of a registered class of the Companys equity securities, to file reports
of ownership and changes in ownership with the SEC. Based solely on the
Companys review of the copies of such reports received by the Company, the
Company believes that during the fiscal year ended July 1, 2006 all executive
officers, directors and ten percentage beneficial owners of the Companys
equity securities complied with their filing requirements under Section 16(a)
for all reportable transactions during the last fiscal year, except that (i) Stephen H. Coltrin failed to file, and both Daniel Piette and Philippe Franchet did not timely file
their initial Form 3 stating their initial ownership of equity securities of
the Company at the time of the Share Exchange of KAAI and TrueYou and (ii)
Matthew Burris did not timely file his initial Form 3 stating his beneficial
ownership of equity securities in the Company at the time he joined the Company
as an executive officer.

Code of Conduct

We
have adopted a code of conduct that applies to all of our Directors, officers
(including our Chief Executive Officer and Chief Financial Officer) and
employees. The code of conduct was filed as Exhibit to our Form 10-SB dated
February 10, 2005 and is incorporated herein by reference. Any person who
wishes to obtain a copy of the code of conduct may do so by writing to c/o the
Secretary, Klinger Advanced Aesthetics, Inc., 501 Merritt 7 Norwalk, CT 06851.

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ITEM 11. EXECUTIVE COMPENSATION

The
following table sets forth all cash compensation earned in the most recent
three years by our Chief Executive Officer and each of our other four most
highly compensated executive officers serving as of the last day of the past
fiscal year (the Named Executive Officers). The compensation arrangements for
each of these officers that are currently in effect are described under the
caption Employment Arrangements,
Termination of Employment Arrangements and Change in Control Arrangements
below.

|                                                                                           |      |  |                  |  |                     |                           |                                           |  
|------------------------------------------------------------------------------------------ | ---- |  | ---------------- |  | ------------------- | ------------------------- | ----------------------------------------- | -
|                                                                                           |      |  |                  |  | Annual Compensation |                           | Long-Term
   Compensation                 |  
|                                                                                           |      |  |                  |  |                     |                           |                                           |  
|Name and
   Principal Position                                                             |      |  |                  |  |                     |                           | No. of Common Stock
   Underlying Options |  
|                                                                                           | Year |  | Salary           |  | Bonus               |                           | TrueYou                                   |  
|                                                                                           |      |  |                  |  |                     |                           |                                           |  
|Richard Rakowski
   Chairman of the Board and
   Chief Executive Officer                   |      |  | 2006
   20052004 |  | $                   |  
   199,583373,846      |                                           | $
|                                                                                           |      |  |                  |  |                     |                           |                                           |  
|Jane Terker
   Executive Vice President and
   Chief Marketing Officer                     |      |  | 2006
   20052004 |  | $                   | 450,000
   216,345N/A     |                                           | $
|                                                                                           |      |  |                  |  |                     |                           |                                           |  
|Wade Haddad
   Senior Vice President of Real
   Estate and Legal                           |      |  | 2006
   20052004 |  | $                   | 185,000
   N/AN/A         |                                           | $
|                                                                                           |      |  |                  |  |                     |                           |                                           |  
|Carolyn Aversano
   Executive Vice President of
   Marketing, Merchandising, and Education |      |  | 2006
   20052004 |  | $                   | 196,154
   N/A           |                                           | $
|                                                                                           |      |  |                  |  |                     |                           |                                           |  
|Dave Jordan
   Former Chief Financial Officer                                              |      |  | 2006
   20052004 |  | $                   | 185,146
   144,500200,000 |                                           | $

|    |                                                                       
|--- | ----------------------------------------------------------------------
|(1) | Shares subject to options
  granted under KAAI 2003 Stock Option Plan.

Employment Arrangements, Termination of
Employment Arrangements and Change in Control Arrangements

KAAI
entered into an Employment Agreement with Jane Terker, effective January 1,
2005, pursuant to which KAAI employed Ms. Terker as the President of our
Cosmedicine division. KAAI agreed to pay Ms. Terker a base salary of $450,000
per year. In addition, KAAI agreed to pay Ms. Terker bonuses in the aggregate
maximum amount of $550,000 based on achieving certain performance measures.
KAAI also granted Ms. Terker an option to purchase 150,000 shares of KAAIs
common stock at an exercise price of $4.00 per share, vesting daily over a
period of four years. On September 18, 2006, these options have been converted into
options to acquire 1,760,912 shares of TrueYou Common Stock with an exercise
price per share of $0.22. In addition, on September 18, 2006, the Company
granted Ms. Terker an option to purchase 2,347,882 shares of TrueYou Common
Stock at an exercise price per share of $0.22. 586,970 of the options vested on
the date of grant. The remaining 1,760,912 options vest over a period of three
years. KAAI also

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agreed that
based on the EBITDA contributed by the sale of the Cosmedicine products, it
will grant Ms. Terker additional options to purchase up to 160,000 shares of
KAAIs common stock. If Ms. Terker is terminated without cause, or if Ms.
Terker terminates the agreement for good reason (each as defined in the
agreement) we will be required to pay Ms. Terker her accrued and unpaid base
salary plus six months salary. In addition, a portion of her unvested options
will vest.

On
January 9, 2005, KAAI entered into a letter agreement with John Higgins, former
president of TrueYou pursuant to which Mr. Higgins agreed to serve as KAAIs
President and a member of our Board of Directors commencing on January 17,
2005. Pursuant to the agreement, Mr. Higgins was paid a base salary of $250,000
per year and will be eligible for a bonus of up to 60% of his base salary. KAAI
also agreed to grant Mr. Higgins an option to purchase 400,000 shares of its
common stock vesting monthly over a three year period. If Mr. Higgins
employment is terminated other than for cause within the first year of his
employment he will be entitled to 6 months of severance; thereafter, he will be
entitled to 9 months of severance. Effective January 1, 2006, Mr. Higgins base
salary was increased to $330,000 per year and his severance was increased to 12
months.

On
June 1, 2006, TrueYou entered into a Separation Agreement and Mutual Release
with John Higgins pursuant to which Mr. Higgins resigned as an officer and
director of the TrueYou and its subsidiaries effective June 30, 2006. The
Separation Agreement provides, among other things, that (i) TrueYou will pay
Mr. Higgins his base salary for a period of twelve months following June 30,
2006 with such payments to be reduced by any compensation he receives from any
subsequent employer, (ii) Mr. Higgins will retain 200,000 options to purchase
the common stock of KAAI, such options to be exercised within three years from
June 30, 2006 or two years after such options are exchanged into options of
TrueYou, whichever is later.

On
June 1, 2005 KAAI entered into a letter agreement with Carolyn Aversano,
pursuant to which Ms. Aversano agreed to serve as its Executive Vice President
of Marketing, Merchandising and Education commencing on June 20, 2005. Pursuant
to the agreement, Ms. Aversano is paid a base salary of $200,000 per year and
will be eligible for a bonus of up to 30% of her base salary. KAAI also agreed
to grant Ms. Aversano an option to purchase 50,000 shares of its common stock
vesting over a four year period. On September 18, 2006, these options have been converted into
options to acquire 586,971 shares of TrueYou Common Stock with an exercise
price per share of $0.34. Ms. Aversano has recently resigned from the Company,
effective January 12, 2007.

On
April 24, 2006, TrueYou entered into an Employment Agreement with Matthew
Burris to serve as Executive Vice President, Chief Financial Officer and Chief
Operating Officer of TrueYou and each of its subsidiaries. Pursuant to the
Employment Agreement, Mr. Burris is entitled to receive a base salary of
$350,000 per year with annual review for increase. In addition, Mr. Burris is
eligible to receive an annual incentive bonus, which is targeted at 60% of his
Base Salary, provided, however, that Mr. Burris will receive a minimum annual
bonus payment of $60,000 per year, payable at the beginning of July of each
calendar year during the employment term. The minimum annual bonus payment due
on July 1, 2006 will be payable on the later of July 1, 2006 or the date on
which the Company consummates a financing transaction of no less than
$20,000,000. In addition, the Company will, on an annual basis, commencing with
the fiscal year beginning July 1, 2006, review Mr. Burris performance, and in
the sole and absolute discretion of the Company, pay Mr. Burris a bonus of up
to $150,000. In connection with his employment, Mr. Burris, in accordance with
the terms and conditions of the stock incentive plan adopted by TrueYou, was
granted options on September 18, 2006 to purchase 2,641,368 shares of Common
Stock of TrueYou, at an exercise price of $0.22 per share, of which options to
purchase 293,485 shares of Common Stock are immediately exercisable upon such
grant and the remainder of which vest quarterly over the 3 year period
following such grant.

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In
the event of termination of employment by Mr. Burris for Good Reason (as
defined in the Employment Agreement) or in the event of a Change of Control (as
defined in the Employment Agreement), all stock options held by Mr. Burris will
automatically and immediately become fully vested and fully exercisable and
remain exercisable for their full term. If TrueYou terminates Mr. Burris
employment without Cause or if Mr. Burris terminates his employment for Good
Reason, he is entitled to receive a lump-sum cash payment from TrueYou in an
amount equal to his Base Salary and the Minimum Annual Bonus no later than 7
days following such termination provided, however, that TrueYou may elect, in
its sole discretion, to make such payments ratably over a 12 month period after
the date of such termination in the event that TrueYou has a cash balance equal
to or greater than $5,000,000 on the date of such termination; provided further, however, that if such payments
are subject to Section 409A of the Internal Revenue Code (the Code), the
immediately preceding proviso will not apply; provided further, that upon the
occurrence of such cash balance falling below $5,000,000 at any time after the
date of such termination, then all such payments shall be made in a lump-sum no
later than 7 days after such occurrence. During the 12 month period immediately
following such termination, Mr. Burris will receive (i) continuation of all
employee benefits and fringe benefits (Continued Benefits) and (ii) at
TrueYous expense, reasonable executive outplacement services and
administrative support. In addition, Mr. Burris will receive: (a) payment of unpaid
Base Salary through the date of such termination; (b) accrued but unused
vacation days; (c) any unpaid or minimum bonuses earned through the date of
termination; (d) any compensation previously deferred (to the extent allowed
under the Plan through which it is deferred); (e) reimbursement for any
unreimbursed fees or expenses; and (f) all other payments, benefits and rights
under any benefit, compensation, incentive, equity or fringe benefit plan,
program or arrangement or grant, (collectively referred to herein as Rights).
In addition, the Employment Agreement provides that Mr. Burris will not compete
with TrueYou during the term of his employment and for 12 months thereafter.

On
December 29, 2006, our board of directors elected Mr. OCrowley to serve as a
member of the board of directors and Mr. OCrowley was then elected by the
board of directors as President of TrueYou. TrueYou has discussed financial
arrangements with Mr. OCrowley for his service as President as follows: Mr. OCrowley
would receive a base salary of $375,000 a year and options to purchase
4,000,000 shares of TrueYou Common Stock at fair market value under our 2006
option plan and transition expenses in connection with his relocation to
Norwalk, Connecticut. The foregoing proposed compensation arrangement has not
yet been approved by our board of directors.

Option/SAR Grants in
Last Fiscal Year

KAAI
granted stock options to its executive officers under KAAIs 2003 Stock Option
Plan. As of July 1, 2006, options to purchase a total of 1,892,850 shares
were outstanding under KAAIs 2003 Stock Option Plan, and a total of 107,150
shares remained available for grant under KAAIs 2003 Stock Option Plan.

There
were no options granted in the year ended July 1, 2006.

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

During
fiscal year 2006, no options were exercised by our named executive officers.
The following table sets forth the number of shares of KAAIs common stock
underlying unexercised stock options granted to each of our Named Executive
Officers and the number and value of unexercised options held by each of the
Named Executive Officers at July 1, 2006:

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|                 |  |                                   |  |                  |  |                                                                                                                          |   |                                                                                                       |  |  |        |  |  |        |  |  |   |   |  |  |  |   |   |  | 
|---------------- |  | --------------------------------- |  | ---------------- |  | ------------------------------------------------------------------------------------------------------------------------ | - | ----------------------------------------------------------------------------------------------------- |  |  | ------ |  |  | ------ |  |  | - | - |  |  |  | - | - |  | 
|Name             |  | Shares
  Acquired
  on
  Exercise |  | Value
  Realized |  | Number of Shares of
  Common Stock Underlying
  Unexercised Options/SARs
  at July 1, 2006
  Exercisable
  Unexercisable |   | Value of Unexercised
  In-The-Money
  Options/SARS
  at July 1, 2006(1)
  Exercisable
  Unexercisable | 
|                 |  |                                   |  |                  |  |                                                                                                                          |   |                                                                                                       |  |  |        |  | 
|Richard Rakowski |  | 0                                 |  |                  |  | $                                                                                                                        | 0 |                                                                                                       |  |  |       |  |  |       |  |  | $ |  |  |  |  | $ |  |  | 
|Wade Haddad      |  | 0                                 |  |                  |  |                                                                                                                          | 0 |                                                                                                       |  |  |       |  |  |       |  |  |   |  |  |  |  |   |  |  | 
|Jane Terker      |  | 0                                 |  |                  |  |                                                                                                                          | 0 |                                                                                                       |  |  | 56,198 |  |  | 93,802 |  |  |   |  |  |  |  |   |  |  | 
|Carolyn Aversano |  | 0                                 |  |                  |  |                                                                                                                          | 0 |                                                                                                       |  |  | 12,500 |  |  | 37,500 |  |  |   |  |  |  |  |   |  |  | 
|Dave Jordan      |  | 0                                 |  |                  |  |                                                                                                                          | 0 |                                                                                                       |  |  | 75,000 |  |  |       |  |  |   |  |  |  |  |   |  |  | 

|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents aggregate
  excess of market value of the shares under options as of July 1, 2006 over
  the exercise price of the options.

Stock-Based
Incentive Plans

Stock Options

On
July 1, 2003, the shareholders of KAAI adopted the KAAI 2003 Stock Option Plan
which allows KAAI to grant nonqualified stock options to employees, vendors and
contractors that have affiliations with the company.

Under
the KAAI 2003 Stock Option Plan, KAAI is authorized to issue options to acquire
2,000,000 shares of common stock of KAAI for a term not to exceed ten years
from the date of grant.

The
KAAI 2003 Stock Option Plan contains restrictions on transferability, time of
exercise, exercise price and on disposition of any shares acquired through
exercise of the options. Stock options are granted at not less than fair market
value, which is determined as of the grant date utilizing the Black-Scholes
Option Pricing Model. The Board of Directors determines the KAAI 2003 Stock
Option Plan participants and establishes the terms and conditions of each
option.

Subsequent
to year-end, the Company adopted a new 2006 TrueYou stock option plan as an
alternative to the KAAI 2003 Stock Option Plan and the exchange of the existing
KAAI options with new TrueYou options to purchase Common Stock of the Company.

ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS

The
following table sets forth certain information with respect to the beneficial
ownership of the equity of TrueYou (herein sometimes called Company) as of December
31, 2006:

| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | each
  securityholder known by TrueYou to be the beneficial owner of more than 5% of
  the Companys outstanding securities;
| |   |                                                                                                                             
| |  | each of our
  directors and Named Executive Officers; and                                                                   
| |   |                                                                                                                             
| |  | all
  directors and Named Executive Officers as a group.                                                                    

Unless
otherwise specified, the address of each of the persons set forth below is in
care of Klinger Advanced Aesthetics, Inc., Building No 501, Fifth Floor, 7
Corporate Park, Norwalk, CT 06851.

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Beneficial
ownership is calculated in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934. For purposes of this table except as otherwise specified
in the footnotes: (i) shares subject to stock options, warrants or convertible
securities are considered beneficially owned only to the extent
currently exercisable or exercisable within 60 days after December 31, 2006,
(ii) all outstanding shares of Series B Preferred Stock (as the substantial
equivalent of Common Stock) are assumed to have been converted into Common
Stock and (iii) the outstanding shares of Series B Preferred Stock (as the
substantive equivalent of Common Stock) are deemed to be outstanding for the
purpose of computing the percentage of the underlying shares of Common Stock by
all holders listed below.

|                                                                                         |  |                                            |        |                             |       |      
|---------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------ | --------------------------- | ----- | -----
|Name and
  Address of
  Beneficial Owner                                                 |  | Amount and
  Nature
  Beneficial Ownership |        | Percent of
  Common
  Stock
|                                                                                         |  |                                            |        |                            
|                                                                                         |  |                                            |        |                             |       |      
|5% Beneficial Owners                                                                     |  |                                            |        |                             |       |      
|                                                                                         |  |                                            |        |                             |       |      
|Affiliates of Pequot Capital Management Inc.
  500 Nayala Farm Road
  Westport, CT 06880 |  | 90,487,165                                 | (1)    |                             | 85.8  | % (1)
|                                                                                         |  |                                            |        |                             |       |      
|FCPR L Capital 
  c/o L Capital Management SAS22, avenue Montaigne75008 Paris, France    |  | 113,226,643                                | (2)    |                             | 38.57 | %    
|                                                                                         |  |                                            |        |                             |       |      
|Seapine Investments, LLC
  c/o Kidd & Company, LLC10 Glenville StreetGreenwich, CT 06831 |  | 91,075,998                                 | (3)(4) |                             | 30.68 | %    
|                                                                                         |  |                                            |        |                             |       |      
|Kidd & Company, LLC
  10 Glenville StreetGreenwich, CT 06831                             |  | 38,473,906                                 | (5)    |                             | 13.10 | %    
|                                                                                         |  |                                            |        |                             |       |      
|Laurus Master Fund, Ltd.
  152 West 57th
  StreetNew York, NY 10019                      |  | 1,498,051                                  | (6)    |                             | 9.99  | % (6)
|                                                                                         |  |                                            |        |                             |       |      
|Directors
  & Named Executive Officers                                                   |  |                                            |        |                             |       |      
|                                                                                         |  |                                            |        |                             |       |      
|Richard Rakowski                                                                         |  | 27,074,149                                 | (7)    |                             | 8.49  | %    
|                                                                                         |  |                                            |        |                             |       |      
|Andrew Lipman                                                                            |  | 8,754,554                                  | (8)    |                             | 3.0   | %    
|                                                                                         |  |                                            |        |                             |       |      
|Jane Terker                                                                              |  | 1,540,798                                  | (9)    |                             | 0.5   | %*   
|                                                                                         |  |                                            |        |                             |       |      
|Matthew Burris                                                                           |  | 489,142                                    | (10)   |                             |       | *    
|                                                                                         |  |                                            |        |                             |       |      
|Stephen H. Coltrin                                                                       |  | 0                                          |        |                             | 0     | %    
|                                                                                         |  |                                            |        |                             |       |      
|James OCrowley                                                                          |  | 0                                          |        |                             | 0     | %    
|                                                                                         |  |                                            |        |                             |       |      
|Alastair Clemons                                                                         |  | 0                                          |        |                             | 0     | %    

101

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|                                                               |  |                                            |      |                             |       |  
|-------------------------------------------------------------- |  | ------------------------------------------ | ---- | --------------------------- | ----- | -
|Name and
  Address of
  Beneficial Owner                       |  | Amount and
  Nature
  Beneficial Ownership |      | Percent of
  Common
  Stock
|                                                               |  |                                            |      |                            
|                                                               |  |                                            |      |                             |       |  
|Alan Panzer                                                    |  | 0                                          |      |                             | 0     | %
|                                                               |  |                                            |      |                             |       |  
|Carolyn Aversano                                               |  | 293,486                                    | (11) |                             |       | *
|                                                               |  |                                            |      |                             |       |  
|Wade Haddad                                                    |  | 117,394                                    | (12) |                             |       | *
|                                                               |  |                                            |      |                             |       |  
|All
  Directors and Executive Officers as a group (10 persons) |  | 41,036,325                                 |      |                             | 12.87 | %

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|*   | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(1) | Based on a Schedule 13G filed by the securityholders on January 10,
  2006. Consists of (i) 6,443.9891 shares of Series C Preferred Stock issued
  and outstanding, which are convertible into 64,439,891 shares of Common
  Stock, (ii) 1,878.3056 shares of Series B Preferred Stock into which Series B
  Preferred Warrants which mature on September 21, 2010 and which are
  concurrently exercisable at an exercise price of $2,112.54 per share of Series
  B Preferred Stock and which equates to an exercise price of $21.1254 per
  share of TrueYou Common Stock and (iii) 726.4218 shares of Series B Preferred
  Stock into which a Common Stock Warrants
  which can be exercised until March 31, 2011 at an exercise of $.001 per share
  and which are currently exercisable. Does not include 14,654,807 shares of
  Common Stock underlying a 7 year warrant with an exercise price of $.001 per
  share issued in connection with a subordinated debt financing on June 11,
  2006 (the Subordinated Debt Financing Warrant). The Subordinated Debt
  Financing Warrant contains an issuance limitation prohibiting the
  securityholder from exercising those securities to the extent that such
  exercise would result in beneficial ownership by the securityholder of more
  than 4.99% of the shares of Common Stock then issued and outstanding unless
  the holders provide notice to the Company of not less than 61 days (the
  4.99% Issuance Limitation).                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(2) | Consists of 11,322.6643 shares of Series B Preferred Stock issued
  and outstanding, which are convertible into 113,226,643 shares of Common
  Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | Consists of (i) 8,784.6111 shares of Series B Preferred Stock
  issued and outstanding, which are convertible into 87,846,111 shares of
  Common Stock, and (ii) 322.9887 shares of Series B Preferred Stock into which
  a Series B Preferred Warrant which may be exercised until September 21, 2010
  and which is currently exercisable. The Series B Warrant has an exercise
  price of $.001 per share. Carla Kidd, as the sole Manager of Seapine
  Investments, LLC, has voting power with respect to these shares. Carla Kidd
  and William J. Kidd, her spouse, are the owners of Kidd & Company, LLC
  (KCO). Does not include shares of Series B Preferred Stock held in trusts
  for the benefit of the children of Carla and William Kidd. Does not include
  14,416,354 shares of Common Stock underlying a Subordinated Debt Financing
  Warrant that contains the 4.99% Issuance Limitation and 2,904,762 shares of
  Common Stock underlying 7 year warrants with an exercise price of $.001 per
  share issued on December 22, 2006 (the December 2006 Warrants) that contain
  the 4.99% Issuance Limitation issued to Klinger Investments, LLC, which Mr.
  Kidd, as sole Manager of Klinger Investments, LLC, has sole voting power. Pursuant
  to a Letter Agreement dated December 22, 2006 between Laurus Master Fund Ltd.
  (Laurus) and certain securityholders (the Laurus Letter Agreement), if a
  $1,000,000 Senior Subordinated loan made by Laurus to the Company is not
  repaid by April 22, 2007, then the securityholder will contribute back to the
  Company, December 2006 Warrants to purchase 2,708,334 shares of Common Stock.

102

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | 2,957.9390 shares of
  Series B Preferred Stock beneficially owned by the securityholder are subject
  to certain rights in favor of FCPRL Capital (L Capital), pursuant to an
  Amended and Restated Share Transfer Agreement, dated December 20, 2005, among
  the Company, L Capital and certain other stockholders signatory thereto (the
  Share Transfer Agreement). Pursuant to the Share Transfer Agreement, if
  certain specified events such as a liquidation, sale of substantially all of
  the assets of the Company or a public offering result in L Capital achieving
  an internal rate of return on its investment of less than 25% with respect to
  its investment in the Company, then a number of these shares shall be
  delivered to L Capital such that when combined with the value of other shares
  of capital stock of the Company owned by L Capital would provide L Capital
  with an internal rate of return on its investment of 25%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(5) | Consists of 3,847.3906
  shares of Series B Preferred Stock issued and outstanding, which are
  convertible into 38,473,906 shares of Common Stock. Mr. William Kidd owns 50%
  of KCO. Does not include 14,416,354 shares of Common Stock underlying a
  Subordinated Debt Financing Warrant and 2,904,762 shares of Common Stock
  underlying December 2006 Warrants that are subject to the 4.99% Issuance
  Limitation issued to Klinger Investments, LLC, which Mr. Kidd, as sole
  Manager of Klinger Investments, LLC, has sole voting power. Pursuant to the
  Laurus Letter Agreement, if a $1,000,000 Senior Subordinated loan made by
  Laurus to the Company is not repaid by April 22, 2007, then the
  securityholder will contribute back to the Company December 2006 Warrants to
  purchase 2,708,334 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(6) | Based solely on a Schedule
  13G filed by the securityholder on December 29, 2006. To the Companys
  knowledge, the securityholder beneficially owns (i) 37,351,824 shares of
  Common Stock underlying a warrant issued to the securityholder on June 30,
  2006 (the June 2006 Warrant) which is subject to the 4.99% Issuance
  Limitation and (ii) 10,000,000 shares of Common Stock underlying a December
  2006 Warrant. The December 2006 Warrant contains an issuance limitation
  prohibiting the securityholder from exercising those securities to the extent
  that such exercise would result in beneficial ownership by the securityholder
  of more than 9.99% of the shares of Common Stock then issued and outstanding
  unless the securityholder provides notice to the Company of not less than 61
  days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(7) | Consists of (i) 200.059
  shares of Series B Preferred Stock issued and outstanding, which are
  convertible into 2,000,590 shares of Common Stock, (ii) 7.3559 shares of
  Series B Preferred Stock into which a Series B Preferred Warrant is currently
  exercisable. 67.3631 shares of Series B Preferred Stock beneficially owned by
  the securityholder are subject to certain rights in favor of L Capital as
  described below and (iii) Options to purchase 25,000,000 shares of Common
  Stock, which are currently exercisable, subject to the Authorized Shares
  Increase. Does not include 3,798,534 shares of Common Stock underlying
  December 2006 Warrants that contain the 4.99% Issuance Limitation. Pursuant
  to the Laurus Letter Agreement, if a $1,000,000 Senior Subordinated loan made
  by Laurus to the Company is not repaid by April 22, 2007, then the
  securityholder will contribute back to the Company, December 2006 Warrants to
  purchase 3,541,666 shares of Common Stock. Pursuant to the Share Transfer
  Agreement, if certain specified events such as a liquidation, sale of
  substantially all of the assets of the Company or a public offering result in
  L Capital achieving an internal rate of return on its investment of less than
  25% with respect to its investment in the Company, then a number of these
  shares shall be delivered to L Capital such that when combined with the value
  of other shares of the capital stock of the Company owned by L Capital would
  provide L Capital with an internal rate of return on its investment of 25%.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(8) | Consists of (i) 597.5113
  shares of Series B Preferred Stock owned by the Lipman Family Limited
  Partnership, which are convertible into 5,975,113 shares of Common Stock,
  (ii) 69.0191 shares of Series B Preferred Stock owned by Andrew Lipman, which
  are convertible into 690,191 shares of Common Stock, (iii) 24.506 shares of
  Series B Preferred Stock into which a Series B Preferred                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

103

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | Warrant is currently
  exercisable (iv) 950,416 shares of Common Stock underlying a Subordinated
  Debt Financing Warrant and (v) 893,773 shares of Common Stock underlying
  December 2006 Warrants that are subject to the 4.99% Issuance Limitation.
  224.4340 shares of Series B Preferred Stock beneficially owned by the securityholder
  are subject to certain rights in favor of L Capital as described below.
  Pursuant to the Laurus Letter Agreement, if a $1,000,000 Senior Subordinated
  loan made by Laurus to the Company is not repaid by April 22, 2007, then the
  securityholder will contribute back to the Company, December 2006 Warrants to
  purchase 833,334 shares of Common Stock. Pursuant to the Share Transfer
  Agreement, if certain specified events such as a liquidation, sale of
  substantially all of the assets of the Company or a public offering result in
  L Capital achieving an internal rate of return on its investment of less than
  25% with respect to its investment in the Company, then a number of these
  shares shall be delivered to L Capital such that when combined with the value
  of other shares of the capital stock of the Company owned by L Capital would
  provide L Capital with an internal rate of return on its investment of 25%.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(9)  | Consists of Options to
  purchase 4,108,794 shares of Common Stock, of which 1,540,798 options are
  currently exercisable, subject to the Authorized Shares Increase, and the
  remaining 2,567,996 options are unvested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(10) | Consists of Options to
  purchase 2,641,368 shares of Common Stock, of which 489,142 options are
  currently exercisable, subject to the Authorized Shares Increase, and the
  remaining 2,152,226 options are unvested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(11) | Consists of Options to
  purchase 1,173,942 shares of Common Stock, of which 293,486 options are
  currently exercisable, subject to the Authorized Shares Increase, and the
  remaining 880,457 options are unvested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(12) | Consists of Options to
  purchase 469,577 shares of Common Stock, of which 117,394 options are
  currently exercisable, subject to the Authorized Shares Increase, and the
  remaining 352,183 options are unvested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except
as set forth below, none of the Companys directors or officers, nor any person
who beneficially owns, directly or indirectly, 5% of the voting securities of
the Company, nor any of the Companys promoters, nor any relative or spouse of
any of the foregoing persons has any material interest, direct or indirect, in
any transaction since July 1, 2004 or in any presently proposed transaction
which, in either case, has affected, or will materially affect the Company.
None of the Companys directors or officers is indebted to the Company.

General

In
connection with the formation and capitalization of KAAI, KCO advanced an
aggregate of approximately $5.9 million to KAAI. In addition, affiliates of
KCO, including Seapine Investments, LLC (Seapine), trusts for the benefit of
the children of William and Carla Kidd (Kidd Trusts), Richard Rakowski, a director
and Chief Executive Officer of the Company and Andrew D. Lipman, a director of the Company (all of the
foregoing herein collectively
KCO Affiliates) and other unrelated parties, invested an aggregate of $2.0
million in capital of
KAAI and received 2,725 shares of KAAIs series B preferred stock, 9,288,609
shares of common stock and warrants to acquire 376,384 shares of common stock
of KAAI at an exercise price of $.01 per share. All of these securities were
exchanged for TrueYou securities in the Share Exchange Agreement. See also
Loans by Klinger Investments below which describes transactions with

104

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such entity, which entity is solely owned by
William J. Kidd. See also Loans by Richard Rakowski and Loans by Andrew
Lipman below.

In
November 2003, in connection with the transactions involving KAAI and L
Capital, KCO received a note from KAAI in the sum of $5,905,085 (which
represented the amount originally advanced plus interest) and agreed that
payment of such note would be based on future performance of KAAI. On December
20, 2005 and in connection with the Share Exchange Agreement, the $7,346,195.53
of principal and interest outstanding under the KCO note was converted into
2,938,478 shares of KAAI common stock ($2.25 per share), which was subsequently
converted into 3,571.1976 shares of our Series B Preferred Stock upon the
closing of the Share Exchange Agreement.

In
November 2003, L Capital invested $13,300,000 and received a subordinated
convertible promissory note (convertible into 5,966,444 shares of the common
stock of KAAI) and entered into a Securityholders Agreement and Registration
Rights Agreement with KAAI and KCO. The agreements provide that the KCO
Investors and L Capital vote their shares for specified nominees as directors
of KAAI and for certain approval rights for specified transactions of KAAI
(e.g., significant acquisitions, capital expenditures, material contracts,
specified borrowings and others), as well as rights to cause the sale of KAAI. L
Capital also entered into a Share Transfer Agreement with the KCO Affiliates
and other affiliates of KCO (collectively the KCO Investors) whereby certain
of the shares of common stock of KAAI owned by the KCO Investors is required to
be delivered to L Capital if L Capital does not, upon the sale or liquidation
of KAAI, a change of control of KAAI, a public offering of at least $25,000,000
and other events, receive an investment rate of return of 25% on its investment
in KAAI (the L Capital IRR test).

In
June 2004, L Capital invested an additional $8.2 million and acquired shares of
the series D convertible preferred stock of KAAI and concurrently entered into
an amendment to the Share Transfer Agreement with the KCO Investors which
increased the number of shares of the common stock of KAAI owned by the KCO
Investors which could be delivered to L Capital. Under the revised Share
Transfer Agreement described below, an aggregate of 40,853,733 shares of Common
Stock of the Company may be delivered to L Capital in the event the L Capital
IRR test is not met. The subordinated convertible promissory note and the
series D convertible preferred stock were converted into KAAI common stock (at
$2.25 per share), which were subsequently converted into 11,322.6643 shares of
our Series B Preferred Stock upon the closing of the Share Exchange Agreement
on December 20, 2005.

Under
the Securityholders Agreement, the parties also agreed on restrictions on the
transfer of their securities, rights of first offer, tag-along rights as well
as preemptive rights. Under the Securityholders Agreement, the KCO Investors
have the right, until November 2008, to cause the sale of KAAI, provided that
the L Capital IRR test is met; and if not, after November 2008, L Capital has
the right to cause the sale of KAAI.

On
December 20, 2005, the parties amended the Share Transfer Agreement and the
Securityholders Agreement. The amended agreements provide that the KCO
Investors and L Capital vote their shares for specified nominees as directors
of the Company and for certain approval rights for specified transactions of
the Company (e.g., significant acquisitions, capital expenditures, material contracts,
specified borrowings and others), as well as rights to cause the sale of the
Company. On December 20, 2005, L Capital converted its promissory note and its
shares of KAAIs series D preferred stock into shares of common stock of KAAI
(at $2.25 per share), which were subsequently converted into 11,322.6643 shares
of our Series B Preferred Stock upon the closing of the Share Exchange
Agreement. Unpaid and accrued interest on the L Capital note and accrued and
unpaid dividends on the shares of KAAIs series D preferred stock were not paid
or converted and remain as outstanding obligations of the Company and bear
interest at a rate of 7.5% per annum. To the extent necessary, upon the
occurrence of certain events (such as a sale or liquidation of the Company or
other event as referred to above), if L Capital does not realize the L Capital
IRR test, we might be required to pay a portion or all of such unpaid and
accrued interest and dividends to L Capital. The KCO

105

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Investors have
also agreed with L Capital, that they will not sell any of their shares of the
Company s Series B Preferred Stock and the Companys Common Stock into which
the Series B Preferred Stock are convertible, until such time as L Capital has
realized the L Capital IRR test.

L Capital Consulting Services Agreement

On
November 25, 2003 KAAI entered into a Consulting Services Agreement with L
Capital pursuant to which L Capital performed consulting services for KAAI. Under
the Agreement, KAAI was required to pay L Capital an annual consulting fee,
payable in quarterly installments in arrears, equal to the higher of (a)
$445,000 and (b) 1% of our gross revenues plus $20,000 for such year. As of
July 1, 2006 and December 20, 2005, there were accrued and unpaid consulting
fees to L Capital of approximately $876,841.

On
December 20, 2005, we terminated the Consulting Agreement with L Capital, and
in accordance with this Agreement were obligated to pay all accrued and unpaid
consulting fees within one year of termination. On December 19, 2006 a new
agreement was signed which deferred this payment until (a) the $25.0 million in
principal, along with the related interest of our senior debt issued on July 6,
2006 to Laurus Master Fund Ltd. has been paid, (b) the $10.0 million in
principal, along with the related interest of our subordinated debt issued on
July 11, 2006 has been paid and (c) the $4.0 million in principal, along with
the related interest of senior subordinated debt issued on December 22, 2006. Upon
the occurrence of all of the preceding, all accrued management fees will be due
and payable.

KCO Advisory Services Agreement

On
November 25, 2003 KAAI entered into an Advisory Services Agreement with KCO
pursuant to which KCO performed advisory services for the Company. Under the
Agreement KAAI was required to pay KCO an annual advisory fee, payable in
quarterly installments in arrears, equal to the higher of (a) $425,000 and (b)
1% of our gross revenues for such year. As of December 20, 2005, there were
accrued and unpaid consulting fees to KCO of approximately $837,433.

On
December 20, 2005 we terminated the Advisory Agreement with KCO and in
accordance with this Agreement were obligated to pay all accrued and unpaid
advisory fees within one year of termination. On December 19, 2006 a new
agreement was signed which deferred this payment until (a) the $25.0 million in
principal, along with the related interest of our senior debt issued on July 6,
2006 to Laurus Master Fund Ltd. has been paid, (b) the $10.0 million in
principal, along with the related interest of our subordinated debt issued on
July 11, 2006 has been paid and (c) the $4.0 million in principal, along with
the related interest of senior subordinated debt issued on December 22, 2006. Upon
the occurrence of all of the preceding, all accrued management fees will be due
and payable.

Loans by Affiliates of Pequot

Affiliates
of Pequot, holders of more than 5% of the Common Stock of the Company, hold 7
year warrants with an exercise price of $.01 per share, to purchase an
aggregate of 14,654,807 shares of the Common Stock of the Company which
warrants were received in connection with the $5,000,000 Subordinated Debt
financing on July 11, 2006 and the $4.8 Million Subordinated Debt financing on
May 9, 2006 in which such affiliates loaned the Company an aggregate of
$2,312,903. Such affiliates also loaned monies to and received securities of
KAAI as described in Item 1 of this Report. All of such securities have been
converted into securities of TrueYou under the Share Exchange Agreement.

Loans by Klinger Investments

Klinger
Investments, LLC, an entity owned by William J. Kidd, the spouse of Carla G.
Kidd, the sole Manager of Seapine Investments, LLC, a holder of more than 5% of
the Common Stock of the Company and a 50% owner of Kidd & Company, LLC,
loaned the Company $2,275,269 as part of the July 11, 2006 $5.0

106

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Million Subordinated Debt financing and May
9, 2006 $4.8 Million Subordinated Debt financing and $650,000 in the $4 Million
December 22, 2006 Senior Subordinated financing and received 10 year warrants
with an exercise price of $.001 per share to purchase an aggregate of 14,416,354
shares of Common Stock and 7 year warrants to purchase an aggregate of
2,904,762 shares of Common Stock. In the event the Laurus $1 Million Senior Subordinated
Loan is not repaid by April 22, 2007, warrants to purchase 2,708,374 shares
will be returned by Klinger Investments to the Company for cancellation.

Loans by Laurus Master Fund
Ltd.

Laurus
has loaned the Company $25,000,000 as Senior Secured Debt and $1 Million as
Senior Subordinated Secured Debt as described in this Report and received 10
year warrants with an exercise price of $.01 per share to purchase a total of
50,885,093 shares of Common Stock and 7 year warrants with an exercise price of
$.01 per share to purchase a total of 10,000,000 shares of Common Stock. In
addition Laurus is entitled to receive warrants to purchase an additional
8,750,000 shares of Common Stock if the $1,000,000 Senior Subordinated Secured
Debt is not repaid by April 22, 2007. If prior to the 14th month
anniversary of June 30, 2006, the Companys obligations to Laurus under the
Senior Secured Debt have been reduced to $12,500,000 or less, then warrants to
purchase 6,839,394 shares of Common Stock will be automatically cancelled and
terminated and if at such time the Companys obligations have been reduced to
zero, then warrants to purchase an additional 6,693,875 shares of Common Stock
will also be cancelled.

Loan by Richard Rakowski

Richard
Rakowski, a Director and Chief Executive Officer of the Company, loaned the
Company $850,000 as part of the Senior Subordinated financing on December 22,
2006 and received 7 year warrants with an exercise price of $.001 per share to
purchase 3,798,534 shares of Common Stock. In the event the Laurus $1 Million
Senior Subordinated Secured Loan is not repaid by April 22, 2007, warrants to
purchase 3,541,666 shares of Common Stock will be returned to the Company for
cancellation by Mr. Rakowski. Mr. Rakowski has also personally guaranteed
certain obligations of the Company.

Loans by Andrew Lipman

Andrew
D. Lipman, a Director, loaned the Company $150,000 in the July 11, 2006 $5
Million Subordinated Debt Financing and received 10 year warrants with an
exercise price of $.001 per share to purchase 950,416 shares of Common Stock
and loaned the Company $200,000 in the December 22, 2006 Senior Subordinated
financing and received 7 year warrants with an exercise price of $.001 per
share to purchase 893,773 shares of Common Stock. In the event the Laurus $1
Million Senior Subordinated Secured Loan is not repaid by April 22, 2007,
warrants to purchase 833,334 shares of Common Stock will be returned to the
Company for cancellation by Mr. Lipman.

Sephora

Sephora,
with whom the Company has a strategic relationship, is a subsidiary of LVMH and
L Capital. L Capital Management SAS, which manages and represents L Capital, is also
a subsidiary of LVMH, and as a result L Capital Management SAS and Sephora are affiliates.
The Companys decision to enter into a contract
with Sephora was made independent of its relationship with L Capital. We have
recorded $2.7 million in net revenues on a cumulative basis as of July 1, 2006.

Alan Gelband

On
June 1, 1999, the Company entered into a consulting agreement with Alan
Gelband, a former director of the Company. Pursuant to the agreement, Mr.
Gelband provides the Company with general management services for a fee of
$10,000 per month. This agreement terminated on February 28, 2003. In

107

---



July 2004, Mr.
Gelband converted the $415,000 consulting fee due him into 4,150,000 shares of
the Companys Common Stock.

The
Company owed the Alan Gelband Company Defined Contribution Pension Plan &
Trust an amount of $250,266. This consisted of a $220,000 loan made to the
Company on February 14, 2003 and accrued interest through July 2004 of
$30,266. In July 2004 the Company converted this debt into 1,000,000 shares of
Common Stock.

During
2004, Alan Gelband individually made three separate loans to the Company. These
loans, together with interest accrued thereon, were in the aggregate amount of
$5,870 as of July 2004. Alan Gelband converted this debt into 58,700 shares of
the Companys Common Stock in July 2004.

An
amount equal to $41,487.00 in consulting fees was paid to the Alan Gelband
Company on November 29, 2005 for consulting services provided by the Alan
Gelband Company prior to the Closing of the Share Exchange Agreement and for
the establishment of a reserve to pay down certain accounts payable and other
miscellaneous expenses of the Company that accrued prior to the closing of the
Share Exchange Agreement.

Also
in July 2004, the Alan Gelband Company Defined Contribution Pension Plan and
Trust purchased 1,000 shares of the Companys Series A Preferred Stock. On
December 20, 2005, the 1,000 shares of Series A Preferred Stock was converted
into 2,000,000 shares of Common Stock.

The Companys office, until December 20, 2005, located at 750 Third Avenue, Suite
1600, New York, New York 10017 was provided free of charge by Alan Gelband Co.,
Inc., an investment banking firm controlled by Mr. Gelband.

Pyle Group

On
April 23, 2004, the Company executed a note to the Pyle Group for $1.0 million
due on April 23, 2007. The note was issued to the Pyle Group as part of the
acquisition consideration to purchase Georgette Klinger Inc. The Company is
obligated for 5% interest annually through the term of the note. All interest
is compounded annually and payable quarterly. As of June 30, 2005, the note was
reissued to Judith Pyle in the amount $.5 million and Thomas Pyle in the amount
$.5 million, individually under the same terms.

The
Company has an existing application service provider contract with the Pyle
Group. Services include troubleshooting of the Companys Millennium software
program used to record revenue and inventory activity. Fees under the contact
are $0.2 million per year.

West Palm Beach Facility Lease

The
Company leases its West Palm Beach facility from Christal Inc. The majority
owner of Christal Inc. was an employee at the West Palm Beach facility. Total
rent expense to this related party amounted to $0.3 million for the years ended
July 1, 2006 and June 30, 2005.

Other

Reference
is also made to the agreements and transactions with the management of the
Company described in Item 11 of this Report and the compensatory arrangements
referred to therein and the information contained in Item 12 of this Report.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

108

---



Principal Accountant Fees and Services

Our
independent public accounting firm for the fiscal years ended July 1, 2006 and
June 30, 2005 was Amper, Politziner & Mattia, P.C. (Amper). Services
provided to us by Amper for each of the fiscal years are described below
(dollars in thousands).

|                   |  |      |     |      |   |     | 
|------------------ |  | ---- | --- | ---- | - | --- | 
|                   |  | 2006 |     | 2005 |  
|                   |  |      |     |      |  
|                   |  |      |     |      |   |     | 
|Audit fees         |  | $    | 775 |      | $ | 483 | 
|                   |  |      |     |      |   |     | 
|Audit-Related fees |  |      | 151 |      |   |    | 
|                   |  |      |     |      |   |     | 
|Tax fees           |  |      |    |      |   |    | 
|All other fees     |  |      |    |      |   |    | 
|                   |  |      |     |      |   |     | 
|Total              |  | $    | 926 |      | $ | 483 | 
|                   |  |      |     |      |   |     | 

Audit
related fees in 2006 include fees related to the restatement and filing of the
Form S-1.

109

---



PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

| |    |                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Financial Statement
  Schedule:                                                                                                                                                              
| |    |                                                                                                                                                                                              
| |    | All schedules have been
  omitted because they are not applicable, not required or the information is
  included elsewhere in the Consolidated Financial Statements or Notes thereto.        
| |    |                                                                                                                                                                                              
| | 2. | Exhibits: (see
  accompanying Exhibit Index included after the signature page of this Report
  for a list of exhibits filed or furnished with or incorporated by reference
  in this Report).

110

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized on February 5, 2007.

|                       |                  |  |                        
|---------------------- | ---------------- |  | -----------------------
|                       | TRUEYOU.COM INC.
|                       |                  |  |                        
|Date: February 5, 2007 | By:              |  | /S/ Matthew Burris     
|                       |                  | 
|                       |                  |  | Matthew Burris         
|                       |                  |  | Chief Financial Officer

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on February 5, 2007 on behalf of the
Registrant and in the capacities indicated.

99

|                       |  |                                                                  |  |                 
|---------------------- |  | ---------------------------------------------------------------- |  | ----------------
|Signature              |  | Title                                                            |  | Date            
|                       |  |                                                                  |  |                 
|/s/ Richard Rakowski   |  | Chairman, Chief
  Executive Officer                              |  | February 5, 2007
|                       |  |                                                                  |  |                 
|Richard Rakowski       |  |                                                                  |  |                 
|                       |  |                                                                  |  |                 
|/s/ Matthew Burris     |  | Chief Financial
  Officer                                        |  | February 5, 2007
|                       |  |                                                                  |  |                 
|Matthew Burris         |  |                                                                  |  |                 
|                       |  |                                                                  |  |                 
|/s/ Jane Terker        |  | Executive Vice
  President, Chief Marketing Officer and Director |  | February 5, 2007
|                       |  |                                                                  |  |                 
|Jane Terker            |  |                                                                  |  |                 
|                       |  |                                                                  |  |                 
|/s/ Andrew D. Lipman   |  | Director                                                         |  | February 5, 2007
|                       |  |                                                                  |  |                 
|Andrew D. Lipman       |  |                                                                  |  |                 
|                       |  |                                                                  |  |                 
|/s/ Stephen H. Coltrin |  | Director                                                         |  | February 5, 2007
|                       |  |                                                                  |  |                 
|Stephen H. Coltrin     |  |                                                                  |  |                 
|                       |  |                                                                  |  |                 
|                       |  | President                                                        |  | February 5, 2007
|                       |  |                                                                  |  |                 
|James O Crowley III   |  |                                                                  |  |                 
|                       |  |                                                                  |  |                 
|                       |  | Director                                                         |  | February 5, 2007
|                       |  |                                                                  |  |                 
|Alan Panzer            |  |                                                                  |  |                 
|                       |  |                                                                  |  |                 
|                       |  | Director                                                         |  | February 5, 2007
|                       |  |                                                                  |  |                 
|Alastair J. Clemow     |  |                                                                  |  |                 

111

---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                    
|2.1         |  | Share
  Exchange Agreement, dated December 20, 2005 by and among the Company and
  certain shareholders of KAAI. (1)                                                                                               
|            |  |                                                                                                                                                                                                                    
|3.1         |  | Certificate
  of Incorporation of the Company. (2)                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                    
|3.2         |  | Certificate
  of Amendment to Certificate of Incorporation of the Company, dated April 7,
  1999. (2)                                                                                                              
|            |  |                                                                                                                                                                                                                    
|3.3         |  | Certificate
  of Designation of Series A Preferred Stock, dated July 13, 2004. (2)                                                                                                                                 
|            |  |                                                                                                                                                                                                                    
|3.4         |  | Certificate
  of Designation of Series B Preferred Stock, dated December 20, 2005. (1)                                                                                                                             
|            |  |                                                                                                                                                                                                                    
|3.5         |  | Certificate
  of Designation of Series C Preferred Stock, dated December 20, 2005. (1)                                                                                                                             
|            |  |                                                                                                                                                                                                                    
|3.6         |  | Certificate
  of Designation of Series D Preferred Stock, dated December 20, 2005. (1)                                                                                                                             
|            |  |                                                                                                                                                                                                                    
|3.7         |  | By-Laws of
  the Company (2).                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                    
|10.1        |  | Form of
  Subscription Agreement among the holders of KAAI Series G Preferred Stock and
  KAAI. (1)                                                                                                                
|            |  |                                                                                                                                                                                                                    
|10.2        |  | Form of
  Registration Rights Agreement among KAAI and the holders of KAAI Series G
  Preferred Stock and the KAAIs Series H Preferred Stock. (1)                                                                 
|            |  |                                                                                                                                                                                                                    
|10.3        |  | Form of
  Common Stock Purchase Warrant among the holders of KAAI Series G Preferred
  Stock and KAAI Series H Preferred Stock and KAAI. (1)                                                                       
|            |  |                                                                                                                                                                                                                    
|10.4        |  | Securities
  Purchase Agreement, dated November 4, 2003, between L Capital and KAAI. (1)                                                                                                                           
|            |  |                                                                                                                                                                                                                    
|10.5        |  | Amended and
  Restated Escrow Agreement, dated December 20, 2005, among KAAI, Troutman
  Sanders LLP and certain shareholders of KAAI. (1)                                                                         
|            |  |                                                                                                                                                                                                                    
|10.6        |  | Amended and
  Restated Securityholders Agreement, dated December 20, 2005, among KAAI, L
  Capital and certain shareholders of KAAI. (1)                                                                           
|            |  |                                                                                                                                                                                                                    
|10.7        |  | Registration
  Rights Agreement, dated November 25, 2003, between L Capital and KAAI. (1)                                                                                                                          
|            |  |                                                                                                                                                                                                                    
|10.8        |  | Subordinated
  Convertible Promissory Note, dated November 26, 2003, issued by KAAI in favor
  of L Capital in the principal amount of $13,300,000. (1)                                                            
|            |  |                                                                                                                                                                                                                    
|10.9        |  | Consulting
  Services Agreement, dated November 21, 2003, between KAAI and Johns Hopkins
  Medicine, acting through Johns Hopkins Health System Corporation and The
  Johns Hopkins University. (1)                
|            |  |                                                                                                                                                                                                                    
|10.10       |  | First
  Amendment to Consulting Services Agreement, dated March 23, 2005, between
  KAAI and Johns Hopkins Medicine, acting through Johns Hopkins Health System
  Corporation and The Johns Hopkins University. (1)

---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.11       |  | Services and
  Licensing Agreement, dated December 2004, between KAAI and Johns Hopkins
  Medicine, acting through Johns Hopkins Health System Corporation and The
  Johns Hopkins University. (1)                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.12       |  | Retail
  Alliance Agreement, dated December 2004, between KAAI and Sephora USA, LLC.
  (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.13       |  | Registration
  Rights Agreement, dated November 25, 2003, between KAAI and Lord &
  Foursight, LLC. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.14       |  | Registration
  Rights Agreement, dated November 25, 2003, between KAAI and The Robert and
  Catherine Amoroso Irrevocable Trust. (1)                                                                                                                                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.15       |  | Registration
  Rights Agreement, dated November 25, 2003, between KAAI and Forele Ltd, Inc.
  (1)                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.16       |  | Asset
  Purchase Agreement, dated April 23, 2004, among KAAI, Advanced K, LLC,
  Georgette Klinger, Inc., Thomas F. Pyle, Jr. and Judith D. Pyle. (1)                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.17       |  | Registration
  Rights Agreement, dated April 23, 2003, between KAAI and Georgette Klinger,
  Inc. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.18       |  | Note and
  Warrant Purchase Agreement, dated March 31, 2004, among KAAI, Anushka PBG
  Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC, Wild Hare
  Acquisition Sub, LLC, Dischino Corporation, Advanced K, LLC and Technology
  Investment Capital Corp. (1)                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.19       |  | Promissory
  Note in the principal amount of $10,000,000, dated March 31, 2004, delivered
  by KAAI, Anushka PBG Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC,
  Wild Hare Acquisition Sub, LLC, Dischino Corporation and Advanced K, LLC in
  connection with the Note and Warrant Purchase Agreement dated March 31, 2004
  among KAAI, Anushka PBG Acquisition Sub, LLC, Anushka Boca Acquisition Sub,
  LLC, Wild Hare Acquisition Sub, LLC, Dischino Corporation, Advanced K, LLC
  and Technology Investment Capital Corp. (1)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.20       |  | Pledge and
  Security Agreement, dated March 31, 2004, among Technology Capital Investment
  Corp., KAAI, Anushka PBG Acquisition Sub, LLC, Anushka Boca Acquisition Sub,
  LLC, Wild Hare Acquisition Sub, LLC, Dischino Corporation and Advanced K,
  LLC, et al. (1)                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.21       |  | Guaranty
  Agreement, dated March 31, 2004, among Technology Capital Investment Corp.,
  KAAI, Anushka PBG Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC,
  Wild Hare Acquisition Sub, LLC, Dischino Corporation and Advanced K, LLC, et
  al. (1)                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.22       |  | Securityholders
  Agreement, dated March 31, 2004, between KAAI and Technology Investment
  Capital Corp. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.23       |  | Common Stock
  Purchase Warrant, dated December 20, 2005, between the Company and Technology
  Investment Capital Corp. (1)                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.24       |  | Registration
  Rights Agreement, dated March 31, 2004, between KAAI and Technology
  Investment Capital Corp. (1)                                                                                                                                                                                                                                                                                                                                                                                                                              

---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                      
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                      
|10.25       |  | Letter
  Agreement, dated July 11, 2005, among KAAI, Anushka PBG Acquisition Sub, LLC,
  Anushka Boca Acquisition Sub, LLC, Wild Hare Acquisition Sub, LLC, Dischino
  Corporation, Advanced K, LLC and Technology Investment Capital Corp. (1)                                      
|            |  |                                                                                                                                                                                                                                                                                      
|10.26       |  | Form of
  Warrant to Purchase Common Stock of the Company issued to certain
  stockholders of KAAI. (1)                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                      
|10.27       |  | Registration
  Rights Agreement, dated June 30, 2003, between KAAI and each of Jon Lauck,
  John ONeil, Steve Kenny, John True and Marissa A. Timm Revocable Trust U/A/D
  May 20, 1997. (1)                                                                                        
|            |  |                                                                                                                                                                                                                                                                                      
|10.28       |  | Registration
  Rights Agreement, dated June 30, 2003, between KAAI and Cosmo Dischino Living
  Trust Dated January 9, 2002. (1)                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                      
|10.29       |  | Employment
  Agreement, dated January, 1, 2005, between KAAI and Jane Terker. (1)                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                      
|10.30       |  | Letter
  Agreement, dated January 9, 2005, between KAAI and John Higgins. (1)                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                      
|10.31       |  | Letter
  Agreement, dated June 1, 2005, between KAAI and Carolyn Aversano. (1)                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                      
|10.32       |  | Limited
  Waiver and Amendment, dated October 26, 2005, among KAAI, Anushka PBG
  Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC, Wild Hare
  Acquisition Sub, LLC, Dischino Corporation, Advanced K, LLC and Technology
  Investment Capital Corp. (1)                     
|            |  |                                                                                                                                                                                                                                                                                      
|10.33       |  | Amendment to
  Note and Warrant Purchase Agreement, dated November 29, 2005, among KAAI,
  Anushka PBG Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC, Wild
  Hare Acquisition Sub, LLC, Dischino Corporation, Advanced K, LLC and
  Technology Investment Capital Corp. (1)
|            |  |                                                                                                                                                                                                                                                                                      
|10.34       |  | Limited
  Waiver and Amendment, dated December 20, 2005, among KAAI, Anushka PBG
  Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC, Wild Hare
  Acquisition Sub, LLC, Dischino Corporation, Advanced K, LLC and Technology Investment
  Capital Corp. (1)                    
|            |  |                                                                                                                                                                                                                                                                                      
|10.35       |  | Side Tax
  Letter, dated December 20, 2005, between KAAI and L Capital. (1)                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                      
|10.36       |  | Form of
  Exchange Agreement among the holders of KAAI Series F Preferred Stock and
  KAAI Series H Preferred Stock. (1)                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                      
|10.37       |  | Amended and Restated
  Share Transfer Agreement, dated December 20, 2005, among KAAI and certain
  shareholders of KAAI. (1)                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                      
|10.38       |  | Consulting
  Services Agreement, dated November 25, 2003, between L Capital and KAAI. (1)                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                      
|10.39       |  | Amendment to
  Consulting Services Agreement, dated December 20, 2005, between L Capital and
  KAAI. (1)                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                      
|10.40       |  | Advisory
  Services Agreement, dated November 25, 2003, between Kidd & Company, LLC
  and KAAI. (1)                                                                                                                                                                                  

---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.41       |  | Amendment to
  Advisory Services Agreement, dated December 20, 2005, between Kidd & Company,
  LLC and KAAI. (1)                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.42       |  | Tie-In
  Letter Agreement, dated December 16, 2005, among KAAI, L Capital and Kidd
  & Company, LLC. (1)                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.43       |  | Preferred
  Stock and Warrant Purchase Agreement, dated December 22, 2005, among the
  Company and the Purchasers signatory thereto. (1)                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.44       |  | Investor
  Rights Agreement, dated December 22, 2005, among the Company and the
  Investors signatory thereto. (1)                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.45       |  | Form of
  Stock Purchase Warrant of the Company. (1)                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.46       |  | Amendment
  and Consent, dated February 21, 2006, among the Company, KAAI, Anushka PBG
  Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC, Wild Hare
  Acquisition Sub, LLC, Dischino Corporation, Advanced K, LLC and Technology
  Investment Capital Corp. (3)                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.47       |  | Consulting
  Agreement, dated April 4, 2006 between Klinger Advanced Aesthetics, Inc.,
  Mark Potter and Atlantis Laboratories, Inc. (4)                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.48       |  | Formula
  Agreement, dated April 4, 2006 between Klinger Advanced Aesthetics, Inc.,
  Mark Potter, Atlantis Laboratories, Inc. and JPMorgan Chase Bank, N.A., as
  Escrow Agent. (4)                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.49       |  | Promissory
  Note, dated April 4, 2006, issued by Mark
  Potter and Atlantis Laboratories, Inc. to Klinger Advanced Aesthetics,
  Inc. (4)                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.50       |  | Deed of
  Trust, Assignment of Rents and Security Agreement, dated April 4, 2006,
  between Mark Potter and Donald O. Walsh, as Trustee. (4)                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.51       |  | Construction
  Loan Agreement, dated April 4, 2006, between Klinger Advanced  Aesthetics, Inc., Mark Potter and Atlantis
  Laboratories, Inc. (4)                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.52       |  | Construction
  Loan Promissory Note, dated April 4, 2006, issued by Mark Potter and Atlantis
  Laboratories, Inc. to Klinger Advanced Aesthetics, Inc. (4)                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.53       |  | Construction
  Deed of Trust, Security Agreement, Assignment of Leases and Rents, and
  Fixture Filing, dated April 4, 2006, between Mark Potter and Donald O. Walsh,
  as Trustee. (4)                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.54       |  | Employment
  Agreement dated April 24, 2006 between the Company and Mathew Burris. (5)                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.55       |  | Loan
  Agreement dated May 9, 2006 between the Company and Pequot Healthcare Fund,
  L.P., Pequot Healthcare Offshore Fund, Inc., Premium Series PCC Limited -
  Cell 32, Pequot Diversified Master Fund, Ltd., Pequot Healthcare
  Institutional Fund, L.P., North Sound Legacy Institutional Fund LLC, North
  Sound Legacy International Ltd. and Klinger Investments LLC. (6)

---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.56       |  | Subordinated
  Promissory Note dated May 9, 2006 issued by the Company to Pequot Healthcare
  Fund, L.P., Pequot Healthcare Offshore Fund, Inc., Premium Series PCC Limited
  - Cell 32, Pequot Diversified Master Fund, Ltd., Pequot Healthcare
  Institutional Fund, L.P., North Sound Legacy Institutional Fund LLC, North
  Sound Legacy International Ltd. and Klinger Investments LLC. (6)                                                                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.57       |  | Consent and
  Amendment dated May 9, 2006 between the Company, Klinger Advanced Aesthetics,
  Inc., Anushka PBG Acquisition Sub, LLC, Anushka Boca  Acquisition  Sub, LLC, Wild Hare Acquisition Sub, LLC, DiSchino Corporation,
  and Technology Investment Capital Corp. (6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.58       |  | Subordination
  Agreement dated May 9, 2006 between the Company, Klinger Advanced Aesthetics,
  Inc., Advanced Aesthetics Sub, Inc., Advanced Aesthetics,  LLC, Klinger Advanced Aesthetics, LLC,
  Anushka PBG, LLC, Anushka Boca, LLC, Wild Hare, LLC,  DiSchino Corporation, Anushka PBG
  Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC, Wild Hare
  Acquisition Sub, LLC, Pequot Healthcare Fund, L.P., Pequot Healthcare
  Offshore Fund, Inc., Premium Series PCC Limited  Cell 32, Pequot Diversified
  Master Fund, Ltd., Pequot Healthcare Institutional Fund, L.P., North Sound
  Legacy Institutional Fund LLC, North Sound Legacy International Ltd., Klinger
  Investments LLC and Technology Investment Capital Corp. (6)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.59       |  | Separation
  Agreement and Mutual Release dated June 1, 2006 between the Company and John
  Higgins. (7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.60       |  | Securities
  Purchase Agreement dated as of June 30, 2006, by and between the Company and
  Laurus Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.61       |  | Secured Term
  Note dated as of June 30, 2006, issued by the Company to Laurus Master Fund,
  Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.62       |  | The Company
  and Certain of its Subsidiaries Master Security Agreement dated June 30, 2006
  in favor of Laurus Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.63       |  | Stock Pledge
  Agreement dated as of June 30, 2006, among Laurus Master Fund, Ltd., the
  Company, Klinger Advanced Aesthetics, Inc., Advanced Aesthetics Sub, Inc.,
  Advanced Aesthetics, LLC, Anushka PBG, LLC, Anushka Boca, LLC and Wild Hare,
  LLC. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.64       |  | Intellectual
  Property Security Agreement dated as of June 30, 2006, by the Company,
  Klinger Advanced Aesthetics, Inc., Klinger Advanced Aesthetics, Inc., Klinger
  Advanced Aesthetics, LLC and Advanced Aesthetics, LLC, in favor of Laurus
  Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.65       |  | Subsidiary
  Guarantee dated June 30, 2006, by Klinger Advanced Aesthetics, Inc., Advanced
  Aesthetics Sub, Inc., Advanced Aesthetics, LLC, Klinger Advanced Aesthetics,
  LLC, Anushka PBG, LLC, Anushka Boca, LLC, Wild Hare, LLC, Dischino
  Corporation, Anushka PGA Acquisition Sub, LLC, Anushka Boca Acquisition Sub,
  LLC and Wild Hare Acquisition Sub, LLC in favor of Laurus Master Fund, Ltd.
  (8)                                                                                                                                                                                                                                                                                                                                  

---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.66       |  | Registration
  Rights Agreement dated as of June 30, 2006, by and between the Company and
  Laurus Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.67       |  | Common Stock
  Purchase Warrant issued by the Company to Laurus Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.68       |  | Common Stock
  Purchase Warrant issued by the Company to Laurus Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.69       |  | Common Stock
  Purchase Warrant issued by the Company to Laurus Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.70       |  | Letter
  Agreement dated June 30, 2006, between the Company and Laurus Master Fund Ltd
  in connection with the Warrants. (8)                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.71       |  | Amended and
  Restated Loan Agreement dated as of July 11, 2006, by and among TrueYou.Com,
  Inc. and Klinger Investments LLC, Pequot Healthcare Fund, L.P., Pequot
  Healthcare Offshore Fund, Inc., Premium Series PCC Limited  Cell 32, Pequot
  Diversified Master Fund, Ltd., Pequot Healthcare Institutional Fund, L.P.,
  North Sound Legacy Institutional Fund LLC, and North Sound Legacy
  International Ltd. (10)                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.72       |  | Loan
  Agreement dated as of July 11, 2006, by and among TrueYou.Com, Inc. and
  Klinger Investments LLC, Pequot Healthcare Fund, L.P., Pequot Healthcare
  Offshore Fund, Inc., Premium Series PCC Limited - Cell 32, Pequot Diversified
  Master Fund, Ltd., Pequot Healthcare Institutional Fund, L.P., North Sound
  Legacy Institutional Fund LLC, North Sound Legacy International Ltd.,
  Technology Investment Capital Corp., Andrew D. Lipman and Jon Lauck. (10)                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.73       |  | Amended and
  Restated Subordinated Promissory Note dated July 11, 2006, issued by
  TrueYou.Com, Inc. to Klinger Investments LLC, Pequot Healthcare Fund, L.P.,
  Pequot Healthcare Offshore Fund, Inc., Premium Series PCC Limited - Cell 32,
  Pequot Diversified Master Fund, Ltd., Pequot Healthcare Institutional Fund,
  L.P., North Sound Legacy Institutional Fund LLC and North Sound Legacy
  International Ltd. (10)                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.74       |  | Subordinated
  Promissory Note dated July 11, 2006, issued by TrueYou.Com, Inc. to and
  Klinger Investments LLC, Pequot Healthcare Fund, L.P., Pequot Healthcare
  Offshore Fund, Inc., Premium Series PCC Limited - Cell 32, Pequot Diversified
  Master Fund, Ltd., Pequot Healthcare Institutional Fund, L.P., North Sound
  Legacy Institutional Fund LLC, North Sound Legacy International Ltd.,
  Technology Investment Capital Corp., Andrew D. Lipman and Jon Lauck. (10)                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.75       |  | Subordination
  Agreement dated as of July 11, 2006, by and among Klinger Investments LLC,
  Pequot Healthcare Fund, L.P., Pequot Healthcare Offshore Fund, Inc., Premium
  Series PCC Limited - Cell 32, Pequot Diversified Master Fund, Ltd., Pequot
  Healthcare Institutional Fund, L.P., North Sound Legacy Institutional Fund
  LLC, North Sound Legacy International Ltd., Technology Investment Capital
  Corp., Andrew D. Lipman and Jon Lauck and Laurus Master Fund, Ltd, and
  acknowledged and agreed to by TrueYou.Com, Inc. (10)

---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.76       |  | Form of
  Common Stock Purchase Warrant issued by TrueYou.Com, Inc to each of Klinger Investments
  LLC, Pequot Healthcare Fund, L.P., Pequot Healthcare Offshore Fund, Inc.,
  Premium Series PCC Limited - Cell 32, Pequot Diversified Master Fund, Ltd.,
  Pequot Healthcare Institutional Fund, L.P., North Sound Legacy Institutional
  Fund LLC, North Sound Legacy International Ltd., Technology Investment
  Capital Corp., Andrew D. Lipman and Jon Lauck. (10)                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.77       |  | Form of
  Letter Agreement between TrueYou.Com, Inc. and Klinger Investments LLC,
  Pequot Healthcare Fund, L.P., Pequot Healthcare Offshore Fund, Inc., Premium
  Series PCC Limited - Cell 32, Pequot Diversified Master Fund, Ltd., Pequot
  Healthcare Institutional Fund, L.P., North Sound Legacy Institutional Fund
  LLC, North Sound Legacy International Ltd., Technology Investment Capital
  Corp., Andrew D. Lipman and Jon Lauck, in connection with the warrants. (10)                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.78       |  | Letter of
  Intent dated September 12, 2006, between the Company and Nouvisage Corp. (11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.79       |  | The
  TrueYou.Com Inc. 2006 Stock Incentive Plan. (12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.80       |  | Subordinated
  Securities Purchase Agreement dated December 22, 2006 between the Company and
  Laurus Master Fund, Ltd. (14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.81       |  | Subordination Agreement dated
  December 22, 2006, by and among Klinger Investments LLC, Pequot Healthcare
  Fund, L.P., Pequot Healthcare Offshore Fund, Inc., Premium Series PCC Limited
  - Cell 32, Pequot Diversified Master Fund, Ltd., Pequot Healthcare
  Institutional Fund, L.P., North Sound Legacy Institutional Fund LLC, North
  Sound Legacy International Ltd., Technology Investment Capital Corp., Jon
  Lauck, Vicis Capital Master Fund LLC, Klinger Investments LLC, Andrew D.
  Lipman, Richard Rakowski, Gerard DeBiasi, James Benedict, Dan Richardson,
  Amal Devani, CSFN I LLC, John Brugmann and Laurus Master Fund, Ltd. (14)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.82       |  | Subordinated
  Secured Term Note dated December 22, 2006 issued by the Company to Laurus
  Master Fund, Ltd. (14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.83       |  | Reaffirmation,
  Ratification and Amendment Agreement dated December 22, 2006 by and between
  the Company, Klinger Advanced Aesthetics, Inc., Advanced Aesthetics Sub,
  Inc., Advanced Aesthetics, LLC, Klinger Advanced Aesthetics, LLC, Anushka
  PBG, LLC, Anushka Boca LLC, Wild Hare LLC, Dischino Corporation, Anushka PBG
  Acquisition Sub, LLC, Anushka Boca Sub, LLC, Wild Hare Acquisition Sub LLC
  and Laurus Master Fund, Ltd. (14)                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.84       |  | Amended and Restated
  Registration Rights Agreement dated December 22, 2006, by and between
  TrueYou.com Inc. and Laurus Master Fund, Ltd. (14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.85       |  | Letter
  Agreement dated December 22, 2006 between the Company and Laurus Master Fund,
  Ltd. (14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.86       |  | Common Stock
  Purchase Warrant dated December 22, 2006 issued by TrueYou.com
  Inc. to Laurus Master Fund, Ltd. (14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.87       |  | Loan
  Agreement dated December 22, 2006 among the Company and Vicis Capital Master
  Fund LLC, Klinger Investments LLC, Andrew D. Lipman, Richard Rakowski, Gerard
  DeBiasi, James Benedict, Dan Richardson, Amal Devani, CSFN I LLC and John
  Brugmann. (14)                                                             
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.88       |  | Registration
  Rights Agreement dated December 22, 2006 among the Company and Vicis Capital
  Master Fund LLC, Klinger Investments LLC, Andrew D. Lipman, Richard Rakowski,
  Gerard DeBiasi, James Benedict, Dan Richardson, Amal Devani, CSFN I LLC and
  John Brugmann. (14)                                              
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.89       |  | Senior
  Subordinated Lenders Side Warrant Letter dated December 22, 2006 among the
  Company, Klinger Investments LLC, Vicis Capital Master Fund LLC, Andrew D.
  Lipman, Richard Rakowski, Gerard DeBiasi, James Benedict, Dan Richardson,
  Amal Devani, CSFN I LLC and John Brugmann. (14)                               
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.90       |  | Senior
  Subordinated Promissory Note dated December 22, 2006 issued by the Company to
  Vicis Capital Master Fund LLC, Klinger Investments LLC, Andrew D. Lipman,
  Richard Rakowski, Gerard DeBiasi, James Benedict, Dan Richardson, Amal
  Devani, CSFN I LLC  and John
  Brugmann. (14)                                  
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.91       |  | Form of
  Common Stock Purchase Warrant dated December 22, 2006 issued by TrueYou.Com,
  Inc to each of Vicis Capital Master Fund LLC, Klinger Investments LLC, Andrew
  D. Lipman, Richard Rakowski, Gerard DeBiasi, James Benedict, Dan Richardson,
  Amal Devani. and John Brugmann. (14)                                 
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.92       |  | Amendment
  and Consent, dated February 21, 2006, among the Company, KAAI, Anushka PBG
  Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC, Wild Hare
  Acquisition Sub, LLC, Dischino Corporation, Advanced K, LLC and Technology
  Investment Capital Corp. (3)                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.93       |  | Senior Subordinated Security Agreement dated as of December 22,
    2006 issued by the Company and each of its subsidiaries to Vicis Capital
    Master Fund LLC, Klinger Investments LLC, Andrew D. Lipman, Richard Rakowski,
Gerard DeBiasi, James Benedict, Dan Richardson, Amal Devani, CSFN I LLC and
John Brugmann (14)
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.94       |  | Letter Agreement dated December 20, 2006 with Pequoi Master
Fund LP and affiliates re Amendment of Registration Rights Agreement (14)                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                              
|14          |  | Code of
  Ethics. (2)                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                              
|16.01       |  | Letter from
  Livingston, Wachtell & Co., LLP dated February 16, 2006. (13)                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                              
|21          |  | List of
  subsidiaries of the Company. (1)                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                              
|31.1        |  | Certification of Principal
  Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
  15d-14(a). (14)                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                              
|31.2        |  | Certification of Principal
  Financial Officer pursuant to Exchange Act
  Rules 13a-14(a) and 15d-14(a). (14)                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                              
|32.1        |  | Certification of Principal
  Executive Officer pursuant to Exchange Act Rules 13a-14(b) and
  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
  States Code. (14)                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                              
|32.1        |  | Certification of Principal
  Financial Officer pursuant to Exchange Act
  Rules 13a-14(b) and 15d-14(b) and Section 1350 of Chapter
  63 of Title 18 of the United States Code. (14)                                                                                                                                         

|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|   
|   
|(1) | Incorporated
  by reference to the Companys Current Report on Form 8-K, filed with the
  Commission on December 23, 2005.

---



|     |                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------
|(2)  | Incorporated
  by reference to the Companys initial filing of Form 10-SB, filed with the
  Commission on February 10, 2005.
|     |                                                                                                                             
|(3)  | Incorporated
  by reference to the Companys Quarterly Report with the Commission on Form
  10-Q filed on February 21, 2006.
|     |                                                                                                                             
|(4)  | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on April 21, 2006.      
|     |                                                                                                                             
|(5)  | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on April 27, 2006.      
|     |                                                                                                                             
|(6)  | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on May 15, 2006.        
|     |                                                                                                                             
|(7)  | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on June 6, 2006.        
|     |                                                                                                                             
|(8)  | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on July 6, 2006.        
|     |                                                                                                                             
|(9)  | Incorporated
  by reference to the Companys Quarterly Report on Form 10-Q filed with the
  Commission on July 12, 2006.    
|     |                                                                                                                             
|(10) | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on July 17, 2006.       
|     |                                                                                                                             
|(12) | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on September 21, 2006.  
|     |                                                                                                                             
|(13) | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on February 21, 2006.   
|     |                                                                                                                             
|(14) | Filed
  herewith.                                                                                                           

---