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|                                                       
|-------------------------------------------------------
|UNITED STATES                                          
|SECURITIES AND EXCHANGE COMMISSION                     
|WASHINGTON, DC 20549                                   
|FORM
 10-K                                             
|xANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF     
|THE SECURITIES EXCHANGE ACT OF 1934                    
|For the fiscal year ended June 30, 2007                
|OR                                                     
|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.)
|                                                      |                           |                                   
|232 Madison Ave, Suite 906
 New York, NY              |                           | 10016                             
|(Address
 of principal executive offices)             |                           | (Zip
 Code)                       
|                                                      |                           |                                   
|(212)500-5150                                        
|(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
November 2, 2007 was approximately $0.1 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
November 2, 2007 was 18,388,557.

DOCUMENTS INCORPORATED BY REFERENCE:

None

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TABLE OF CONTENTS

|         |                                                                                                                    |      | 
|-------- | ------------------------------------------------------------------------------------------------------------------ | ---- | 
|         |                                                                                                                    | Page
|PART I   |                                                                                                                    |      | 
|         |                                                                                                                    |      | 
|Item 1.  | Business                                                                                                           | 1    | 
|         |                                                                                                                    |      | 
|Item 1A. | Risk
 Factors                                                                                                      | 11   | 
|         |                                                                                                                    |      | 
|Item 1B. | Unresolved
 Staff Comments                                                                                         | 16   | 
|         |                                                                                                                    |      | 
|Item 2.  | Properties                                                                                                         | 16   | 
|         |                                                                                                                    |      | 
|Item 3.  | Legal
 Proceedings                                                                                                 | 17   | 
|         |                                                                                                                    |      | 
|Item 4.  | Submission
 of Matters to a Vote of Security Holders                                                               | 18   | 
|         |                                                                                                                    |      | 
|PART II  |                                                                                                                    |      | 
|         |                                                                                                                    |      | 
|Item 5.  | Market for
 the Registrants Common Equity, Related Stockholder Matters and Issuer
 Purchases of Equity Securities | 18   | 
|         |                                                                                                                    |      | 
|Item 6.  | Selected
 Financial Data                                                                                           | 19   | 
|         |                                                                                                                    |      | 
|Item 7.  | Managements
 Discussion and Analysis of Financial Condition and Results of Operation                              | 21   | 
|         |                                                                                                                    |      | 
|Item 7A. | Quantitative
 and Qualitative Disclosures about Market Risk                                                        | 31   | 
|         |                                                                                                                    |      | 
|Item 8.  | Financial
 Statements and Supplementary Data                                                                       | 32   | 
|         |                                                                                                                    |      | 
|Item 9.  | Changes in
 and Disagreements with Accountants on Accounting and Financial Disclosure.                             | 76   | 
|         |                                                                                                                    |      | 
|Item 9A. | Controls
 and Procedures                                                                                           | 76   | 
|         |                                                                                                                    |      | 
|Item 9B. | Other
 Information                                                                                                 | 77   | 
|         |                                                                                                                    |      | 
|PART III |                                                                                                                    |      | 
|         |                                                                                                                    |      | 
|Item 10. | Directors
 and Executive Officers of the Registrant                                                                | 78   | 
|         |                                                                                                                    |      | 
|Item 11. | Executive
 Compensation                                                                                            | 80   | 
|         |                                                                                                                    |      | 
|Item 12. | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters                   | 87   | 
|         |                                                                                                                    |      | 
|Item 13. | Certain
 Relationships and Related Transactions                                                                    | 89   | 
|         |                                                                                                                    |      | 
|Item 14. | Principal
 Accountant Fees and Services                                                                            | 92   | 
|         |                                                                                                                    |      | 
|PART IV  |                                                                                                                    |      | 
|         |                                                                                                                    |      | 
|Item 15. | Exhibits
 and Financial Statement Schedule                                                                         | 93   | 

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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, us,
and the Company refer to TrueYou.Com Inc. and its consolidated subsidiaries
(including KAAI), as applicable.

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PART I

ITEM 1. BUSINESS

Overview

General

On
May 7, 2007, the Company sold all of its spa/salons to GK Acquisition LLC, an
unaffiliated third party. The agreement provided that the sale transaction is
effective for accounting and profit/loss purposes as of April 1, 2007. The sale
was implemented by the sale of the equity interests of various subsidiary
entities of the Company as well as an assignment of leases. Prior to the sale,
we operated eleven spa/salons throughout the United States and offered both
cosmetic services and medical procedures to customers under one delivery system
and combined them with salon and spa services together under a single brand.
The Company adopted a plan to sell the spa/salons in May 2007 and, accordingly
the Company began presenting the operations of the stores as discontinued
operations in the fourth quarter of the current fiscal year. As a result of the
sale, the operations of the spa/salons are presented as discontinued operations
for all the periods presented. The Company had previously developed a skin care
line of products (Cosmedicine or Cosmedicine) which was being distributed
through Sephora USA, Inc. stores and the Companys own facilities. After May 7,
2007 the Company continues to sell Cosmedicine through Sephora USA, Home
Shopping Network, and JCPenney. Continuing operations presented in this Report
consist of our Cosmedicine line of clinical skin care products.

History of
TrueYou.Com Inc.

TrueYou.Com
Inc. 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

1

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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.

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 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. According to the terms of the agreement, since prior to the 14th
month anniversary of June 30, 2006, the Companys obligations to Laurus under
the Secured Term Note had been reduced to $12,500,000 or less, the warrants to
purchase 6,839,394 shares of Common Stock will be automatically cancelled and
terminated and since at that time the Companys obligations under this Note had
been reduced to zero, the 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. 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

2

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terms to the
terms of the Subordinated Loan Agreement. 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 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. According to the terms
of the agreement, since the Senior Subordinated Secured Note was not repaid by
April 30, 2007, TrueYou is required to issue to Laurus warrants with like terms
to purchase an additional 8,750,000 shares of Common Stock.

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 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. According to the terms of the agreement, since the
Senior Subordinated Secured Note was not repaid by April 30, 2007, certain of
the holders of such warrants are required to contribute 8,750,000 warrants back
to TrueYou and TrueYou is required to issue an additional 8,750,000 Warrants to
Laurus (see Certain Relationships and Related Transactions).

On
March 16, 2007, the Company executed four Senior Secured Notes in the aggregate
amount of $2,000,000 (North Sound Legacy International Ltd. $1,125,000, North
Sound Legacy Institutional Fund LLC $375,000, and, Seapine Investments, LLC
$375,000, each of whom is an existing stockholder of the Company, and Andrew D.
Lipman, a former director and existing stockholder $125,000). The Notes were
due on demand and bear interest at the prime rate in effect from time to time
as reported in the Wall Street Journal plus 2% and originally ranked pari
passu in payment and security with the $25,000,000 of senior
indebtedness of the Company issued to Laurus made as of June 30, 2006. Due to
the refinancing and repayment of the $25.0 million senior debt, the Company,
Laurus, and bridge lenders have entered into agreements for the integration of
these loans consistent with that of the May 2007 loan documentation with Laurus
discussed below.

On
March 27, 2007, the Company executed four additional Senior Secured Notes in
the aggregate amount of $2,000,000 (North Sound Legacy International Ltd.
$1,125,000, North Sound Legacy Institutional Fund LLC $375,000, and, Seapine
Investments, LLC $375,000, and Andrew D. Lipman $125,000). The Notes were due
on demand and bear interest at the prime rate in effect from time to time as
reported in the Wall Street Journal plus 2% and originally ranked pari
passu in payment and security with the $25,000,000 of senior
indebtedness of the Company issued to Laurus made as of June 30, 2006. Due to
the refinancing and repayment of the $25.0 million senior debt, the Company,
Laurus, and bridge lenders have entered into agreements for the integration of
these loans consistent with that of the May 2007 loan documentation with Laurus
discussed below.

On
May 7, 2007, the Company entered into an Amended and Restated Securities
Purchase Agreement with Laurus pursuant to which (i) the Company sold to Laurus
a Secured Term Note in the aggregate principal amount of $54,650,000; and (ii)
the Company issued to Laurus separate warrants to purchase up to 29,276,583,452
shares and 9,245,236,880 shares, respectively, of the Company Common Stock. On
the Closing Date, the obligations of the Company to Laurus under the June 30,
2006 note were repaid and the Company received $25,900,000 in new cash proceeds
from the note and placed $8,069,243 in

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a restricted
account to be utilized to prefund interest of the note. This prefunded interest
is presented as a discount to the Senior debt (net of discount) on the June 30,
2007 Consolidated Balance Sheet. The sum of $4,000,000 was wired to a Company
account and an additional $12,912,256 was deposited to a restricted account to
be disbursed to the Company in accordance with a Restricted Account Letter
Agreement dated May 4, 2007, which provides that the Company must meet certain
financial conditions including reaching settlements with creditors before
further money is released. In addition, $918,501 was applied to closing costs
incurred on the financing.

As
of June 30, 2007, the balance in the restricted account subject to the
agreement was $10.8 million and is included in Restricted cash in the
Consolidated Balance Sheet.

Exchange of Debt and Equity

On
May 7, 2007, each of the holders of the Companys Series C Preferred Stock,
Series D Preferred Stock and the holders of its Senior Subordinated
Indebtedness and Subordinated Indebtedness aggregating an original principal
amount of $14,038,710 and issued on May 9, 2006, July 11, 2006, and December
22, 2006 exchanged their shares of Preferred Stock and indebtedness,
respectively, for shares of a newly created Series E Convertible Preferred
Stock of the Company. The exchange was in connection with and as a condition to
the Laurus financing and the issuance of Warrants by the Company to Laurus. An
additional $1,000,000 of Subordinated Debt was also exchanged for Series E
Convertible Preferred Stock of the Company.

To
implement the exchange, on May 7, 2007, the Company created a new Series E
Convertible Preferred Stock. The Series E Preferred Stock is being utilized
because the Company does not have sufficient authorized shares of Common Stock
and ranks pari passu with the existing Common Stock and Series B
Preferred Stock of the Company. Holders of Series E Preferred Stock shall have
full voting rights and powers and equal to that of holders of Common Stock and
preferred B holders. The Series E Preferred Stock shall be initially
convertible into Common Stock at the rate of 1,000,000 shares of Common Stock
per one Preferred Share. These shareholders will also be entitled to dividends
on a pari passu basis with that of the Common Stock holders.

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

4

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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.

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.

Business Strategy

We
are focusing our resources on consumers skin care needs. Our goal is to
establish a trusted credible consumer brand in a market currently characterized
by a confusing array of product offerings and claims.

Our
market positioning and strategy is to bring measured outcomes and clinical
excellence into the personal appearance market. Our brand is designed to stand
for products which offer efficacy and reliability, for customers and consumers.
Our experience in the aesthetics market is now focused on our skin care brand
Cosmedicine.

Cosmedicine Products

Our
Company formulates and distributes its own line of clinical skin care products
that includes OTC skin care products. We currently market our products through
Sephora, Home Shopping Network (HSN), JCPenney, and the internet. We plan to
broaden our Cosmedicine offering to feature Cosmedicine Professional, which
we expect will include a line of RX grade products sold into medical offices
and Med Spa channels. We launched the Cosmedicine product line in January 2006.

[COSMEDICINE]

Distribution Channels

Sales channels
can significantly impact a brands consumer perception. We have several
exclusive arrangements with retailers whose consumer image we believe
reinforces the credible nature of our products.

5

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Sephora USA, Inc.

Sephora
USA (Sephora) is an upscale beauty retailer with 168 locations in the U.S.
and over 515 locations abroad. We have entered into an exclusive agreement with
Sephora that provides for the sale and development of our Cosmedicine skin care
line being distributed in Sephora stores, Sephora.com web site, Sephora
Stores-Within-a-Store in JCPenney and as part of Sephoras on-air strategic
alliance with HSN.

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 gross revenues relating to the sale of Cosmedicine products,
less allowances, discounts and returns, 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. We have recorded
$6.1 million in net revenues on a cumulative basis from January 1, 2006 to June
30, 2007. See Material Agreements-Agreement
with Sephoraand Certain Relationships and Related Party Transactions
 Sephora.

Home Shopping Network

HSN
operates one of the largest direct U.S. retail networks for the sale of
consumer products. We have entered into an exclusive agreement with HSN that
provides for the sale of Cosmedicine skin care products on our own Cosmedicine
shows on HSN and on the Sephora on HSN shows. HSN is required to order annual
minimum amounts to maintain the exclusive direct-to-consumer network sales
rights.

Skin Care Products Market

As
evidenced by the number of brands entering the market, we believe the industry
continues to grow as it did in the five years up to and including 2004. During
this period the market for professional skin care products grew at double digit
annual percentage rates. Skin care products are mainly distributed through
three retailer channels: Spas and Salons, Retail Stores, and Medical Care Providers.
While the Spas and Salons represented the majority of the sales, we see
continued growth in the other two retail formats.

Competition

Product
Manufacturers. We
currently face competition from numerous competitors including LOreal Group.
La Roche Posay (a division of LOreal Group) offers skin care products through
various distribution channels including 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.

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, Drugs, 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

6

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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, 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.

7

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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.

Material Agreements

Agreements
with Johns Hopkins Medicine

Termination
of Agreement

On
May 7, 2007, we entered into an agreement with Johns Hopkins Medicine, Johns
Hopkins University and Johns Hopkins Health Systems Corporation, pursuant to
which the Consulting and Services Agreement between Advanced Aesthetics, Inc.
and Johns Hopkins Medicine (Johns Hopkins) dated November 23, 2003, as
amended was terminated effective April 13, 2007. Under the Agreement, we were
required to pay Johns Hopkins $369,565 by July 31, 2007, and as of the
effective date, Johns Hopkins will no longer provide services to the Company.
We did make the payment by the required date. As a result of this agreement, we
have recorded a derecognition of the intangible asset of approximately $3.0
million and the liability of approximately $3.3 million in the fourth quarter
ended June 30, 2007.

The
May 7, 2007 agreement also provides that the License and Management Agreement
between Johns Hopkins University and a Company subsidiary, Klinger Advanced
Aesthetics, LLC, relating to the Companys Chevy Chase, Maryland facility is
terminated effective May 13, 2007, and that the Company shall pay Johns Hopkins
all amounts due under that agreement by May 21, 2007. Under the agreement we
paid $0.2 million due through March 31, 2007. This amount is included in Loss
from discontinued operations in the Consolidated Statement of Operations for
the year ended June 30, 2007. The subsidiary was sold to GK Acquisition
effective April 1, 2007.

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
sell its Cosmedicine products in Sephora retails stores, through its website,
any other retail channels. 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 gross
revenues relating to the sale of Cosmedicine products, less allowances,
discounts, and returns (Net Revenues) plus certain 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 $6.1 million in net revenues
on a cumulative basis from January 1, 2006 to June 30, 2007. See Certain
Relationships and Related Party Transactions  Sephora.

Agreement
with HSN

HSN operates
one of the largest direct U.S. retail networks for the sale of consumer
products. On April 2, 2007 KAAI entered into an exclusive marketing agreement
with HSN (Marketing Agreement) that

8

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provides for
the sale of Cosmedicine skin care products on our own Cosmedicine shows on HSN
and on the Sephora on HSN shows. HSN is required to order annual minimum amounts
to maintain the exclusive direct-to-consumer network sales rights. Under this
Marketing Agreement HSN (a) agreed to position KAAI as an aesthetics and
science of beauty expert, (b) will work with KAAI on development of skincare,
beauty, aesthetics and cosmetic products (Products), (c) will purchase the
Products from KAAI pursuant to HSNs Master Terms and Conditions for Purchase
Orders as modified by the Rider to the Master Terms, (d) will provide airtime
on HSNs television shopping programming (HSNs TV Programs) to KAAI for the
purpose of marketing, promotion and sale of the Products pursuant to the
following schedule of hours:

|                                    |         
|----------------------------------- | --------
|Year                                | Hours   
|                                    |         
|Year 1 of
 Agreement                | 30 hours
|                                    |         
|Year 2 of
 Agreement                | 60 hours
|                                    |         
|Year 3 of
 Agreement and thereafter | 80 hours

(e) will be
responsible for the distribution of HSNs TV Programs and for payment of all
associated fees and cable commissions, (f) may offer the Products online at its
HSN .com website, (g) will develop a mutually agreeable public relations strategy
(PR Strategy) with KAAI to assist in the promotion of the availability of the
Products at HSN, provided that each party will be solely responsible for their
respective costs in its execution of any mutually agreed to PR Strategy, (h)
will develop a mutually agreeable strategy to promote the Products through
Advanced Service Sales, (defined as video-on-demand, interactive television,
podcasts, and any similar means of sale or any successor media to such means),
and a mutually agreeable robust continuity program strategy, (i) will, at its
own cost and expense, be responsible for processing customer orders it receives
for Products, processing payments for customer orders, and for the fulfillment
of all customer orders, and (j) will, at its own cost and expense, be
responsible for customer service inquiries relating to customer orders and for
handling returns of customer orders.

Under
the agreement, HSN remits payments directly to the Company for products
ordered. The term of the agreement is two years, and unless terminated in
accordance with provisions in the agreement, shall renew for five successive
one year terms.

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 previously operated 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 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.

9

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Potter also
received 100,000 options to purchase KAAI common stock on February 1, 2005, at
a True You equivalent exercise price of $0.34 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 commencing on May 1, 2006. At June 30,
2007 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 became due in such amount as will be sufficient to pay in 108 equal
payments all principal and accrued interest. At June 30, 2007 the Company had a
note receivable balance of $0.1 million from Mr. Potter on the construction
loan which is included in other assets on the consolidated balance sheet.

Vendor agreements

During
    the year ended June 30, 2007, the Company negotiated with its vendors for
    reductions in accounts payable of approximately $1.1 million. Included in
    this amount were settlements with vendors that are also shareholders of the
    Company in the amount of $0.1 million, which have been reflected as a capital
    contribution and included in additional paid in capital.

Intellectual Property

We
consider trademark protection to be important to our business and we are the
owners of two remaining U.S. and foreign trademark applications/registrations.
These trademarks are:Cosmedicine and Truth is Beauty.

Due
to the sale of the stores / salons on May 7, 2007 we have disposed of various
trademarks including: KAAI, the KAAI logo, KAAI
Signature Services, Klinger Advanced Aesthetics, Georgette
Klinger, SkinState, Personal Aesthetics Blueprint,
Aesthetic
Concierge, Nth (K Logo) Service Services and The Place of Possibilities.

10

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Employees

On
October 26, 2007 and July 1, 2006, we had 20 and 535 employees, respectively.
Included in the headcount at July 1, 2006 are the employees of the stores /
salons that were sold as of May 7, 2007. 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 upon request through our corporate internet website www.cosmedicine.com
or to mburris@cosmedicine.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 develops 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 June 30, 2007 we had an accumulated net deficit of $91.8 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. 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 2007 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 may need additional capital to meet our
working capital requirements and debt service and will be required to curtail
our operations if it is not available.

Our
principal future uses of funds are for debt service and working capital
requirements to execute our strategy. It is expected that our net losses will
continue at least through the end of fiscal year 2009. Our need for additional
capital to finance our operations and growth will be greater if, among other
things, our revenue or expense estimates prove to be incorrect. We have had
several recent financings (see Item 1 of this Report) with the most recent
completed on May 7, 2007. But these financing may not be sufficient to
enable the Company to continue its operations and additional capital may be required. We may not be able

11

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to obtain financing in which
event we may be unable to continue our operations and/or implement our strategy.

Revenue from our Cosmedicine line of products
may not grow quickly enough to meet working capital and debt service requirements.

Our
future success relies 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 further penetrate the cosmetics
market and continue to grow our sales of Cosmedicine products at a rate
necessary to meet working capital and debt service needs. 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 HSN

Our
agreements and relationship with both Sephora and HSN provide us with key
differentiation versus existing and potential competitors. Our agreements grant
Sephora and HSN, 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 past 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 HSN terminates the Marketing Agreement our
Cosmedicine revenue can be negatively affected. 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.

We may be negatively affected by the recent
Chapter 11 Filing by GK Acquisition

On
July 25, 2007, the GK Acquisition, the purchaser of the stores / salons filed
for relief under Chapter 11 of the U.S. bankruptcy laws. There is no assurance
that the Purchaser will be able to fulfill various commitments included in the
Purchase and Sale Agreement. The outcome of this Chapter 11 filing is
uncertain, but we have considered it probable that GK Acquisition will not be
able to meet all of the commitments included in the Purchase and Sale
Agreement. While management believes it has appropriately reserved for any estimated
contingent liabilities, any required cash payments that are material could have
a significant adverse effect on the Company.

12

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

Demand
for our products is driven by consumers whose broad spending patterns are
affected by the state of the general economy. We do not provide
essential products and negative changes to economic conditions could lessen the
demand for our products.

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 Matthew Burris and Jane Terker, and upon our
ability to identify, hire, and retain additional sales, marketing, technical
and financial personnel. 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.

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

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 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 is
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.

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.

13

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Risks Related to Our Common Stock

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

We
are required to take 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 and Series E
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 and Series E 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.

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.

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.

There could be a change in control of the
Company if Laurus was to exercise enough of its outstanding Common Stock
warrants after the Company completes its planned Authorized Share Increase.

We
issued warrants to purchase 38,521,820,332 shares of Common Stock to Laurus as
part of the May 7, 2007 financing. If they were able to exercise these options,
they would own more than 50% of the Company and cause a change in control.

14

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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.                                                                     
|  |                                                                                                                                                                  | 
| | A large
 number of outstanding dilutive securities, including those issued with the
 recent financings                                                          

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 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.

15

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ITEM 1B. UNRESOLVED STAFF COMMENTS

N/A

ITEM 2. PROPERTIES

Corporate
Headquarters

Our
corporate headquarters are located in leased premises at 232 Madison Avenue,
Suite 906, New York, NY 10016.

Other Locations

As
a result of the sale of the stores/salons on May 7, 2007, we have disposed of
all eleven operating facilities.

On
February 8, 2007, the Company reached an agreement with the landlord at the
Beverly Hills salon to surrender the leased property. There have been no further
developments since the lease termination agreement. Previously, the Beverly
Hills location had been closed for remodeling.

The
following chart sets forth data regarding our facilities:

|                                         |  |                                                       |  |                           |  |                        
|---------------------------------------- |  | ----------------------------------------------------- |  | ------------------------- |  | -----------------------
|City                                     |  | Address                                               |  | Facility
  Size
  (sq/ft) |  | Lease Expiration
  Date
|                                         |  |                                                       |  |                           |  |                        
|New York
  (Corporate
  Headquarters)    |  | 232 Madison
  Avenue
  Suite 906
  New York, NY       |  | 3,700                     |  | 12/1/2014              
|                                        
|Connecticut
  (Corporate
  Headquarters) |  | Building 501
  Merritt 7 Corporate Park
  Norwalk, CT |  | 13,340                    |  | 9/21/2007*             

*The lease,
  which previously had an expiration date of December 31, 2015, was terminated
  in connection with our relocation to new headquarters in New York.

16

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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
alleged 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. On August 17, 2007 a settlement was reached with
UBS under which the Company was required to pay $1.0 million in full settlement
of the claim, no later than August 22, 2007. The Company made the required
payment within the period specified by the agreement. The Company recognized
expense of $1.75 million in the year ended July 1, 2006 to initially record a
liability for this contingency. During the year ended June 30, 2007 $0.75
million was recorded as income to reduce the liability to the settlement
amount. These amounts are included in Selling, general, and administrative
expenses in the Consolidated Statements of Operation. The Company had a payable
balance of $1.0 million as of June 30, 2007, with $0.5 million included in
Accounts payable and $0.5 million included in Accrued expenses and other
current liabilities in the Consolidated Balance sheet. The Company had a
payable balance of $1.75 million as of 7/1/06, with $0.5 million included in
Accounts payable and $1.25 million included in Accrued expenses and other
current liabilities in the Consolidated Balance sheet.

Employee Lawsuits

Eight
prior employees have commenced lawsuits against KAAI in the Superior Court of
New Jersey. The complaints allege that the employees were improperly terminated
due to age. The Company is contesting these claims, and does not believe
settlements of the claims will exceed the amount accrued and included in
Accrued expenses and other current liabilities.

Other Contingencies

Mandalay Agreement

A
vendor asserted a claim relating to an October 1, 2005 agreement that was
contested by the Company. An agreement between the parties was reached on
February 1, 2007 to settle the dispute by granting the vendor 1,760,925 shares
of Common Stock. The Company has recorded a marketing charge of $0.4 million
for the year ended June 1, 2007 for this claim and $0.4 million is included in
Additional paid-in capital on the June 30, 2007 Consolidated Balance Sheet, as
a result of the issuance of the shares in the quarter ended March 31, 2007.

GK Acquisition

On
or about July 25, 2007, the Purchaser of the spa /salons filed a bankruptcy
petition in the U.S. Bankruptcy Court, District of New Jersey (Newark).
Although no litigation between the parties has been commenced, the Purchaser
has served the Company with subpoenas seeking information relating to the sale
and other transactions, disputes have arisen with respect to the various
obligations of the parties, and such disputes may be the subject of litigation
in the future. We have complied in all respects to provide the information
requested.

General

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,

17

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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 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. As a
result of the recent financing transactions, the sale of the Klinger stores /
salons including the sale of the Klinger brand. and the major change in the
capitalization of the Company, the Company is currently considering its options
with respect to the foregoing amendment.

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 |  
|                                                      |  |      |      |     |  
|2008 Quarter Ended                                    |  |      |      |     |   |       | 
|First Quarter (July 1  September 29, 2007)           |  | $    | 0.03 |     | $ | 0.005 | 
|                                                      |  |      |      |     |   |       | 
|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  | 
|Third Quarter (December 31, 2006  March 31, 2007)    |  | $    | 0.28 |     | $ | 0.05  | 
|Fourth Quarter (April 1, 2007  June 30, 2007)        |  | $    | 0.06 |     | $ | 0.03  | 
|                                                      |  |      |      |     |   |       | 
|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  | 

18

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On
November 2, 2007, the last reported sale price the Companys Common Stock on
the Pink Sheets® was $0.005 per share. On October 23, 2007, there were 299
record holders of our Common Stock.

We
are authorized to issue 20,000,000 shares of Common Stock, of which 18,388,557
and 16,756,438 shares are issued and outstanding as of November 2, 2007 and
June 30, 2007, respectively. We are authorized to issue 1,000,000 shares of
preferred stock, par value $0.001 per share, of which (i) 5,000 are
designated as Series A Preferred Stock, (ii) 100,000 are designated as Series B
Convertible Preferred Stock, (iii) 50,000 are designated as Series C
Convertible Preferred Stock, (iv) 1,530 are designated as Series D
Convertible Preferred Stock, and (v) 500,000 are designated as Series E
Preferred Stock. 27,858.9673 shares of Series B Preferred Stock are issued and
outstanding as of November 2, 2007 and June 30, 2007. On November 1, 2007 we
also issued 8,301.278759 shares of Series E Preferred Stock as a result of the
exchange of Series C and D Preferred Stock and subordinated debt pursuant to
the May 7, 2007 financing.

On
May 7, 2007, and in accordance with letter agreements dated March 12, 2007,
each of the holders of the Companys Series C Preferred Stock (8,452.0222
shares), Series D Preferred Stock (1,530 shares) and the holders of its Senior
Subordinated Indebtedness and Subordinated Indebtedness aggregating a principal
amount of $14,038,710 exchanged their securities for shares of a newly created
Series E Convertible Preferred Stock of the Company. The exchange was in
connection with and as a condition to the Laurus financing and the issuance of
Warrants by the Company to Laurus as described in this Report. An additional
$1,000,000 of Subordinated Debt was also exchanged for Series E Convertible
Preferred Stock of the Company.

To
implement the exchange, on May 7, 2007, the Companys Board of Directors designated
a new Series E Convertible Preferred Stock. The Series E Preferred Stock is
being utilized because the Company does not have sufficient authorized shares
of Common Stock as described in this Report and previous SEC filings by the
Company and ranks pari passu with the existing Series B Preferred Stock of the
Company.

Previously,
in connection with the Share Exchange Agreement, we had 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, Series C Preferred Stock, and Series D
Preferred Stock will convert automatically into Common Stock. As mentioned
above, the Series C and D Preferred have been exchanged for Preferred Series E.
The Company intends to have the Series E Preferred Stock convert into Common
Stock at the time there are sufficient authorized shares.

Dividends

There
have been no dividends declared on our capital stock since the Company was
formed. Dividends at the rate of 4% per annum accrued on our shares of Series C
Preferred Stock and Series D Preferred Stock until their exchange for Series E
Preferred. The accrued dividends were also exchanged at that time. Under the
credit agreement that previously existed with TICC, we were prohibited from
paying any cash dividends without the consent of TICC. This restriction was
eliminated with the financing obtained on July 6, 2006 but a similar restriction is
contained in the Laurus senior debt financing. 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 four fiscal years in the period ended June 30, 2007 which
was derived from our audited financial

19

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statements. We have also
presented unaudited financial data from our predecessor company, Dischino
Corporation d/b/a Cosmo & Co., for the year ended March 31, 2003. All prior
years presented have been restated to reflect discontinued operations as a
result of the spa/salons sold on May 7, 2007. 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.

|                                                                                |  |                         |            |                                                                       |   |              |   |              |            |              |   |            |   |   |            |   |   |            |  
|------------------------------------------------------------------------------- |  | ----------------------- | ---------- | --------------------------------------------------------------------- | - | ------------ | - | ------------ | ---------- | ------------ | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                                                |  | TrueYou.Com, Inc.       |           
|                                                                                |  |                         |           
|In
  thousands, except share and per share amounts                              |  | Restated(unaudited)2003 |            | RestatedFor the Period
  From June 29
  [inception] to
  June 30,2003 |   | Restated2004 |   | Restated2005 |            | Restated2006 |   | 2007       |  
|Total revenue-net                                                               |  | $                       |           |                                                                       | $ |             |   | $            |           |              | $ |            |   | $ | 2,678      |   | $ | 3,596      |  
|Cost of revenue                                                                 |  |                         |           |                                                                       |   |             |   |              |           |              |   |           |   |   | 1,130      |   |   | 1,610      |  
|Operating costs and expenses:                                                   |  |                         |            |                                                                       |   |              |   |              |            |              |   |            |   |   |            |   |   |            |  
|Selling, general and administrative expenses:                                   |  |                         | 465        |                                                                       |   | 2,146        |   |              | 6,744      |              |   | 12,256     |   |   | 20,919     |   |   | 14,138     |  
|                                                                               
|Depreciation and amortization                                                   |  |                         | 1          |                                                                       |   |             |   |              | 118        |              |   | 261        |   |   | 217        |   |   | 649        |  
|                                                                               
|Total operating expenses:                                                       |  |                         | 466        |                                                                       |   | 2,146        |   |              | 6,862      |              |   | 12,517     |   |   | 21,136     |   |   | 14,787     |  
|                                                                               
|Income (loss) from operations                                                   |  |                         | (466       | )                                                                     |   | (2,146       | ) |              | (6,862     | )            |   | (12,517    | ) |   | (19,588    | ) |   | (12,801    | )
|Interest expense, net                                                           |  |                         |           |                                                                       |   |             |   |              | 2,086      |              |   | 3,865      |   |   | 3,829      |   |   | 24,763     |  
|Registration rights penalties                                                   |  |                         |           |                                                                       |   |             |   |              |           |              |   |           |   |   | 1,547      |   |   | 2,324      |  
|Loan default penalty                                                            |  |                         |           |                                                                       |   |             |   |              |           |              |   |           |   |   |           |   |   | 3,750      |  
|Unrealized (gain) loss on convertible securities                                |  |                         |           |                                                                       |   |             |   |              |           |              |   |           |   |   | 132,683    |   |   | (206,067   | )
|Income (loss) from operations before discontinued operations and
  income taxes |  |                         | (466       | )                                                                     |   | (2,146       | ) |              | (8,948     | )            |   | (16,382    | ) |   | (157,647   | ) |   | 162,429    |  
|Discontinued operations (net of $194 tax for the year ended March 31,
  2003):  |  |                         |            |                                                                       |   |              |   |              |            |              |   |            |   |   |            |   |   |            |  
|Income (loss) from operations                                                   |  |                         | 787        |                                                                       |   | (2,844       | ) |              | (4,886     | )            |   | (3,539     | ) |   | (14,058    | ) |   | (34,627    | )
|(Loss) on sale                                                                  |  |                         |           |                                                                       |   |             |   |              |           |              |   |           |   |   |           |   |   | (5,374     | )
|Income (loss) before income tax provision:                                      |  |                         | 321        |                                                                       |   | (4,990       | ) |              | (13,834    | )            |   | (19,921    | ) |   | (171,705   | ) |   | 122,428    |  
|Income tax provision:                                                           |  |                         |           |                                                                       |   |             |   |              |           |              |   |           |   |   |           |   |   |           |  
|Net Income (loss):                                                              |  |                         | 321        |                                                                       |   | (4,990       | ) |              | (13,834    | )            |   | (19,921    | ) |   | (171,705   | ) |   | 122,428    |  
|Dividends (forfeitures) on preferred stock:                                     |  |                         |           |                                                                       |   |             |   |              | 488        |              |   | 1,400      |   |   | 1,125      |   |   | (2,474     | )
|Net Income (loss) applicable to common shareholders:                            |  | $                       | 321        |                                                                       | $ | (4,990       | ) | $            | (14,322    | )            | $ | (21,321    | ) | $ | (172,830   | ) | $ | 124,902    |  
|                                                                                |  |                         |            |                                                                       |   |              |   |              |            |              |   |            |   |   |            |   |   |            |  
|Basic income (loss) per common share:                                           |  | $                       | 0.02       |                                                                       | $ | (0.33        | ) | $            | (0.96      | )            | $ | (1.42      | ) | $ | (11.53     | ) | $ | 7.97       |  
|                                                                                |  |                         |            |                                                                       |   |              |   |              |            |              |   |            |   |   |            |   |   |            |  
|Diluted income (loss) per common share:                                         |  | $                       | 0.02       |                                                                       | $ | (0.33        | ) | $            | (0.96      | )            | $ | (1.42      | ) | $ | (11.53     | ) | $ | 6.25       |  
|                                                                                |  |                         |            |                                                                       |   |              |   |              |            |              |   |            |   |   |            |   |   |            |  
|Weighted average common shares outstanding, basic:                              |  |                         | 14,995,513 |                                                                       |   | 14,995,513   |   |              | 14,995,513 |              |   | 14,995,513 |   |   | 14,995,513 |   |   | 15,680,585 |  
|                                                                                |  |                         |            |                                                                       |   |              |   |              |            |              |   |            |   |   |            |   |   |            |  
|Weighted average common shares outstanding, diluted:                            |  |                         | 14,995,513 |                                                                       |   | 14,995,513   |   |              | 14,995,513 |              |   | 14,995,513 |   |   | 14,995,513 |   |   | 20,000,000 |  

20

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Following
is selected balance sheet data as of June 30, 2007 and July 1, 2006 for the
TrueYou.Com, Inc.:

|                                      |  |      |         |      |   |          |  
|------------------------------------- |  | ---- | ------- | ---- | - | -------- | -
|In
  thousands                        |  | 2007 |         | 2006 |  
|                                      |  |      |        
|                                      |  |      |         |      |   |          |  
|Total assets                          |  | $    | 15,295  |      | $ | 43,171   |  
|Working capital (deficiency)          |  |      | (3,711  | )    |   | (42,540  | )
|Long term debt (less current portion) |  |      | 43,836  |      |   |         |  
|Total liabilities                     |  |      | 86,767  |      |   | 253,085  |  
|Shareholders deficit                 |  |      | (71,472 | )    |   | (209,914 | )

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 we, our, us, and
Company refer to TrueYou.Com Inc. and its consolidated subsidiaries
(including KAAI), as applicable.

Business Overview

We
have developed an over-the-counter skin care line of products called Cosmedicine.
We launched the products in January 2006 for exclusive retail distribution at
Sephora stores, HSN, JCPenney and their 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.

Consistent
with the prior fiscal year, 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 June 30, 2007, we have an accumulated deficit
of $91.8 million and a working capital deficit of $3.7 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 2007 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.

Discontinued operations

Previous
to the sale of the stores/salons on May 7, 2007 we offered both medical and
non-medical services and products to customers. These fully-integrated
facilities had featured 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. These operations are now presented as discontinued operations for
all periods presented.

21

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In
addition, we had developed the K360 system, a practice management system for
medical offices that perform aesthetic procedures. The K360 system had 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. We developed version 1.0 for the salons, but no longer operate it due
to the sale of the stores / salons. Development work on version 2.0 was halted
due to limited capital. While we believe that the K360 system has future value,
we have included all operating expense in discontinued operations due to the
significant impact the sale of the stores / salons has had on the future use of
the system by the Company. Due to the sale of the stores / salons we have
eliminated the use of the K360 system from ongoing operations and will have no
continuing involvement in utilizing the software.

In
consideration for the sale of the stores/salons, the Purchaser assumed $5.1
million of estimated gift card liabilities of the spa/salons as of April 1,
2007. The obligation to honor the gift cards has transferred to the Purchaser
as the gift cards can only be redeemed in the spa / salons we have sold. A
supply agreement included as part of the sales agreement provided for discounts
to be received by the Purchaser on future Cosmedicine purchases from the
Company if gift card redemptions on the transferred liability exceeded $5.1
million in the two years between May 7, 2007 and May 6, 2009. Due to our belief
that the possibility of redemptions exceeding this amount is remote, we
eliminated the entire obligation of $8.6 million that existed at the time of
the sale and included the resulting gain in Discontinued operations - Loss on
sale in the Consolidated Statement of Operations for the year ended June 30,
2007.

Current Trends and
Outlook

We
have streamlined the Company with the sale of our stores / salons during fiscal
2007. We will concentrate on our Cosmedicine products with a focus on
increasing the sales of these products and reducing fixed costs.

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. We intend to follow a growth plan to
add more products, sell in more channels, and begin selling internationally.

Revenue Sources

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently
 derive revenue from the following sources:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Wholesale Product Sales
  Include sales of our Cosmedicine products at Sephora stores, HSN, JCPenney,
 and through the internet. These products were launched in fiscal 2006 and
 represented 100% of our total operating revenues for the fiscal year ended
 June 30, 2007 due to the discontinued operations discussed below. 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 $3.4 million and $2.7 million for the years ended June 30, 2007 and July
 1, 2006, 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. 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 areas that will provide the greatest return.

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 2, 2006
and ended on June 30, 2007. Previously the Companys fiscal year was
the twelve month period ended July 1, 2006.

22

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Critical Accounting Policies and 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 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 type of product offerings:
| |                                                                                           |                                                                                                                                                                                                                                                   
| |                                                                                          | Cosmedicine
 sales  revenue is recognized as sales are made to Sephora, HSN, and
 JCPenney. 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. 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. In the year ended June 30, 2007, however,
we believe that events have occurred that indicate that goodwill has been fully
impaired. As a result, we have recorded a charge of $18.1 million in the year
ended June 30, 2007 to write-off all of the Companys goodwill. This has been
included in Discontinued operations  Loss from operations in the Consolidated
Statement of Operations for the year ended June 30, 2007.

Inventories:
Inventories at June 30, 2007 consist only of Cosmedicine products and
components for those products. Inventories at July 1, 2006 consisted
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. Since the Company does not have sufficient shares of common stock
authorized, it is required to treat the stock option awards as liability awards
and remeasure at each reporting period based upon fair value, utilizing the
Black-Scholes option pricing model.

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. Previous to the May 7, 2007 financing and sale
of the stores / salons the fair value of the Common Stock was 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 Common Stock was $0.39. After the stores
/salons sale and recent financing which included 38.5 billion warrants issued
along with the debt, the

23

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stock has no
longer traded on a regular basis and the trading price does not appear
indicative of its fair value. We have used an analytical approach to estimate the true fair value of the shares.
We divided the projected annual revenue of the Company by the market cap
calculated on a diluted basis. Utilizing this calculation, the
calculated fair value of the shares at June 30, 2007 was $0.00043 per share.
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 $4.7
billion. This fluctuation would result in an impact to our net loss.
Convertible securities will convert back to equity when there are a sufficient
number of shares of Common Stock authorized.

New Accounting Pronouncements

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 have evaluated the impact of the adoption of FIN 48, and
determined there is no impact on 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 originally became effective for the first
reporting period beginning after November 15, 2007. Subsequently the FASB partially deferred the
effective date for this pronouncement for one year for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial statements on
a nonrecurring basis. We are assessing the impact
of the adoption of SFAS 157 on the Companys consolidated financial statements.

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 have evaluated the impact of the adoption of SFAS 158, and determined
there is no impact on the Companys consolidated financial statements.

In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No.
115. SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. This guidance is effective as of the
beginning of the fiscal year for years beginning after November 15, 2007. We
believe the impact of the adoption of SFAS 159 will not be significant to 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.

24

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Years Ended June
30, 2007 and July 1, 2006

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

|                                                             |  |                |          |   |            |                          |  |   |          |   |        |    | 
|------------------------------------------------------------ |  | -------------- | -------- | - | ---------- | ------------------------ |  | - | -------- | - | ------ | -- | 
|                                                             |  |                |          |   | Year ended |                          |  |   |          |   |        |   
|In thousands                                                 |  | June 30,
 2007 |          |   |            | Restated
 July 1, 
 2006 |  |   |         
|                                                             |  |                |          |   |            |                          |  |   |         
|Revenues                                                     |  | $              | 3,596    |   | 100        | %                        |  | $ | 2,678    |   | 100    | %  | 
|                                                             |  |                |          |   |            |                          |  |   |          |   |        |    | 
|Cost of Revenue                                              |  |                | 1,610    |   | 45         | %                        |  |   | 1,130    |   | 42     | %  | 
|                                                             |  |                |          |   |            |                          |  |   |          |   |        |    | 
|Gross Margin                                                 |  |                | 1,986    |   | 55         | %                        |  |   | 1,548    |   | 58     | %  | 
|                                                             |  |                |          |   |            |                          |  |   |          |   |        |    | 
|Selling, general and administrative expenses                 |  |                | 14,138   |   | 393        | %                        |  |   | 20,919   |   | 781    | %  | 
|                                                             |  |                |          |   |            |                          |  |   |          |   |        |    | 
|Depreciation and amortization                                |  |                | 649      |   | 18         | %                        |  |   | 217      |   | 8      | %  | 
|                                                             |  |                |          |   |            |                          |  |   |          |   |        |    | 
|Total operating Expenses                                     |  |                | 14,787   |   | 411        | %                        |  |   | 21,136   |   | 789    | %  | 
|Operating loss                                               |  |                | (12,801  | ) | (356       | )%                       |  |   | (19,588  | ) | (732   | )% | 
|                                                             |  |                |          |   |            |                          |  |   |          |   |        |    | 
|Interest expense, net                                        |  |                | 24,763   |   | 689        | %                        |  |   | 3,829    |   | 143    | %  | 
|Registration rights penalties                                |  |                | 2,324    |   | 65         | %                        |  |   | 1,547    |   | 58     | %  | 
|Loan default penalty                                         |  |                | 3,750    |   | 104        | %                        |  |   |         |   |       |    | 
|Unrealized (gain) loss on convertible securities             |  |                | (206,067 | ) | (5,731     | )%                       |  |   | 132,683  |   | 4,955  | %  | 
|Income (loss) from operations before discontinued
operations |  |                | 162,429  |   | 4,517      | %                        |  |   | (157,647 | ) | (5,887 | )% | 
|Discontinued operations:                                     |  |                |          |   |            |                          |  |   |          |   |        |    | 
|Income (loss) from operations                                |  |                | (34,627  | ) | (963       | )%                       |  |   | (14,058  | ) | (525   | )% | 
|(Loss) on sale                                               |  |                | (5,374   | ) | (149       | )%                       |  |   |         |   |       |    | 
|Net income (loss)                                            |  |                | 122,428  |   | 3,405      | %                        |  |   | (171,705 | ) | (6,412 | )% | 
|(Forfeitures) / dividends on preferred stock                 |  |                | (2,474   | ) | (69        | )%                       |  |   | 1,125    |   | 42     | %  | 
|Net income (loss) applicable to common shareholders          |  | $              | 124,902  |   | 3,474      | %                        |  | $ | (172,830 | ) | (6,454 | )% | 

Net Revenue

Revenues
are presented net of allowances for estimated future returns or deductions for date
expired product, damaged product, or products utilized by retail customers for
testers. Operating net revenues increased $0.9 million, or 33.3% for the Year
ended June 30, 2007, to $3.6 million compared with $2.7 million for the year
ended July 1, 2006. The net revenues for the year ended July 1, 2006 only
include six months of sales as Cosmedicine was rolled out in January 2006.
Included in those fiscal 2006 sales were large orders received to stock the
retailers shelves. Replacement orders received in fiscal 2007 were smaller due
to the previously established base stock levels.

Gross Margin

Gross
margin increased $0.5 million, or 33.3% for the year ended June 30, 2007, to
$2.0 million compared with $1.5 million for the year ended July 1, 2006. This
increase is primarily due to the increase in net revenues mentioned above.
Gross margin was 55% and 58% for the years ended June 30, 2007 and July

25

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1, 2006,
respectively. Gross margin percentage was improved though more efficient
production and inventory procurement. This was offset by $0.2 million of bad
debt expense for sales to GK Acquisition made prior to their Chapter 11 filing.

Selling General and Administrative Expenses

Selling,
general and administrative expenses (SG&A) was $14.1 million for the year
ended June 30, 2007 compared to $20.9 million for the year ended July 1, 2006,
a decrease of $6.8 million. The decrease of 32.5% was primarily due to a
decrease of $4.8 million in professional fees for accounting, legal, information
technology, inventory management services, software development, and public
relations; $1.4 million decrease in stock based compensation expense due to the
fair value adjustment at June 30, 2007, and $0.4 million decrease in management
fees.

Depreciation and Amortization

Depreciation
and amortization was $0.6 million for the year ended June 30, 2007 compared to
$0.2 million for the year ended July 1, 2006. This increase of $0.4 million is
due primarily to accelerated depreciation expense in fiscal 2007 associated
with the impairment of assets related to the termination of the Norwalk,
Connecticut headquarters lease.

Operating Loss

Our
operating loss was $12.8 million for the year ended June 30, 2007 compared to
$19.6 million for the year ended July 1, 2006. The decrease in the operating
loss of $6.8 million is primarily due to the decrease in SG&A expense, as
discussed above, for the year ended June 30, 2007 compared to the year ended
July 1, 2006.

Interest Expense

Interest
expense was $24.8 million for the year ended June 30, 2007 compared to $3.8
million for the year ended July 1, 2006. The increase of $21.0 million in
interest expense is primarily due to the accelerated amortization of the debt
discount of $8.6 million, on subordinated debt, which was exchanged for KAAIs
Series E Preferred Stock and the acceleration of the remaining discount of $8.2
million on the Laurus senior debt upon repayment with the May 7, 2007
refinancing. We also incurred an additional $2.3 million of interest expense
due to the amortization of debt discounts for the year ended June 30, 2007
versus the year ended July 1, 2006. An additional cause of the increase was
the write-off the unamortized discount on the loan with Technology
Investment Capital Corp of $0.9 million. We also incurred an additional $1.0
million of interest expense due to the accelerated amortization of closing costs
due to the debt exchanges and repayments previously mentioned.

Registration Rights Penalties

Registration
rights penalties were $2.3 million for the year ended June 30, 2007 compared to
$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. On March 12, 2007, holders
of the registration rights described above, agreed to waive any additional
registration rights penalties incurred by the Company after December 30, 2006
concurrent with the May 7, 2007 financing

Unrealized (Gain) 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

26

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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 as of 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 were convertible, which were 506,576,690 as of that
date. 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.

After
the stores /salons sale and recent financing which included 38.5 billion
warrants issued along with the debt, the stock has no longer traded on a
regular basis and the trading price does not appear indicative of its fair
value. We have used an analytical approach to estimate the fair value of the
shares. We divided the projected annual
revenue of the Company by the market cap calculated on a diluted basis.
Utilizing this calculation, the calculated fair value of the shares at
June 30, 2007 was $0.00043. After the issuance of the warrants and exchange of
Series C Preferred, Series D Preferred, and subordinated debt, the number of
common shares into which the convertible securities were convertible was
47,305,203,611 as of June 30, 2007. The calculated share price multiplied by
the number of common shares into which the convertible securities are
convertible resulted in an estimated fair value of $20.3 million as of June 30,
2007. The Company recorded an unrealized gain of $206.1 million for the fiscal
year ended June 30, 2007.

Loan Default Penalty

On
March 8, 2007, Laurus, the holder of the Companys $25.0 million in principal
amount of Senior Secured Debt and also the holder of $1.0 million in principal
amount of Senior Subordinated Secured Debt, sent the Company a Notice of
Default and Acceleration accelerating the obligations due to Laurus under the
Secured Term Note issued as of June 30, 2006 and the Senior Subordinated
Secured Term Note issued as of December 22, 2006. The Company incurred a $3.8
million penalty in the year ended June 30, 2007 as a result of this default and
paid it out of the proceeds of the May 7, 2007 refinancing. In addition, at the
time of the refinancing, the $25.0 million of Senior Debt was repaid and the
$1.0 million of Senior Subordinated Secured Debt was exchanged for Series E
Preferred.

Loss on Discontinued Operations

As
a result of the stores / salons sale on May 7, 2007 we have reflected all of
the stores / salons activities as discontinued operations. Discontinued
operations also include expenses incurred related to our K360 system and
headquarters expenses related to any of the discontinued operations. We have
recorded a loss on discontinued operations of $34.6 million for the year ended
June 30, 2007 versus a loss of $14.1 million for the year ended July 1, 2006.
The increase of $20.5 million was caused primarily by the write-off of all of
the Companys $18.1 million of goodwill. Discontinued operations for the year
ended June 30, 2007 also includes a loss on sale of $5.4 million upon the sale
of the stores / salons.

Net Income (Loss)

We
had net income of $122.4 million for the fiscal year ended June 30, 2007 versus
a net loss of $171.7 million for the fiscal year ended July 1, 2006. The
increase of $294.1 million primarily resulted from revaluing our convertible
securities which resulted in an unrealized gain of $206.1 million for the year
ended June 30, 2007 versus an unrealized loss of $132.7 million for year ended
July 1, 2006, an improvement of $338.8 million. Also included is the decrease
of $6.8 million in SG&A expenses that are part of our $12.8 operating loss.
These were partially offset by an increase in discontinued operations loss from
operations of $20.5 million, a discontinued operations loss from sale of $5.4
million and an increase in interest expense of $21.0 million.

27

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Dividends Accrued (Forfeited) on Preferred
Stock

Dividends
forfeited on preferred stock were $2.5 million for the year ended June 30, 2007
as compared to dividends accrued of $1.1 million for the year ended July 1,
2006. The decrease was due to the forfeiture of dividends accrued on preferred
stock which was exchanged for our Series E Preferred Stock during the year
ended June 30, 2007. For the year ended June 30, 2006, the accrued dividends of
$1.1 million is net of 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.

Results of Operations

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:

|                                                    |  |                         |          |   |            |                           |  |   |         |   |  |     | 
|--------------------------------------------------- |  | ----------------------- | -------- | - | ---------- | ------------------------- |  | - | ------- | - |  | --- | 
|                                                    |  |                         |          |   | Year ended |                           |  |   |         |   |  |    
|In thousands                                        |  | Restated
 July 1,
 2006 |          |   |            | Restated
 June 30, 
 2005 |  |   |        
|                                                    |  |                         |          |   |            |                           |  |   |         |   |  |     | 
|Revenues                                            |  | $                       | 2,678    |   | 100        | %                         |  | $ |        |   |  |    | 
|                                                    |  |                         |          |   |            |                           |  |   |         |   |  |     | 
|Cost of Revenue                                     |  |                         | 1,130    |   | 42         | %                         |  |   |        |   |  |    | 
|                                                    |  |                         |          |   |            |                           |  |   |         |   |  |     | 
|Gross Margin                                        |  |                         | 1,548    |   | 58         | %                         |  |   |        |   |  |    | 
|                                                    |  |                         |          |   |            |                           |  |   |         |   |  |     | 
|Selling, general and administrative expenses        |  |                         | 20,919   |   | 781        | %                         |  |   | 12,256  |   |  | N/A | 
|                                                    |  |                         |          |   |            |                           |  |   |         |   |  |     | 
|Depreciation and amortization                       |  |                         | 217      |   | 8          | %                         |  |   | 261     |   |  | N/A | 
|Total operating Expenses                            |  |                         | 21,136   |   | 789        | %                         |  |   | 12,517  |   |  | N/A | 
|Operating loss                                      |  |                         | (19,588  | ) | (732       | )%                        |  |   | (12,517 | ) |  | N/A | 
|                                                    |  |                         |          |   |            |                           |  |   |         |   |  |     | 
|Interest expense, net                               |  |                         | 3,829    |   | 143        | %                         |  |   | 3,865   |   |  | N/A | 
|Registration rights penalties                       |  |                         | 1,547    |   | 58         | %                         |  |   |        |   |  | N/A | 
|Unrealized loss on convertible securities           |  |                         | 132,683  |   | 4,955      | %                         |  |   |        |   |  | N/A | 
|Loss from operations before discontinued operations |  |                         | (157,647 | ) | (5,887     | )%                        |  |   | (16,382 | ) |  | N/A | 
|Loss from discontinued operations                   |  |                         | (14,058  | ) | (525       | )%                        |  |   | (3,539  | ) |  | N/A | 
|Net loss                                            |  |                         | (171,705 | ) | (6,412     | )%                        |  |   | (19,921 | ) |  | N/A | 
|Dividends on preferred stock                        |  |                         | 1,125    |   | 42         | %                         |  |   | 1,400   |   |  | N/A | 
|Net loss applicable to common shareholders          |  | $                       | (172,830 | ) | (6,454     | )%                        |  | $ | (21,321 | ) |  | N/A | 

Net Revenue

Revenues
are presented net of allowances for estimated future returns or deductions for
date expired product, damaged product, or products utilized by retail customers
for testers. The net revenues for the year ended July 1, 2006 only include six
months of sales as Cosmedicine was rolled out in January 2006. Net revenues
include sales of our Cosmedicine products at Sephora stores and through the
internet. Included in those fiscal 2006 sales were large orders received to
stock the retailers shelves.

28

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Gross Margin

Gross
margin was $1.5 million and 58% for the year ended July 1, 2006.

Selling General and Administrative Expenses

Selling,
general and administrative expenses (SG&A) was $20.9 million for the year
ended July 1, 2006 compared to $12.3 million for the year ended June 30, 2005,
an increase of $8.6 million. The increase of 70% was primarily due to increases
in professional fees for accounting and legal and an increase in payroll due to
the addition of several senior management level officers and severance
expenses.

Depreciation and Amortization

Depreciation
and amortization was $0.2 million for the year ended July 1, 2006 compared to
$0.3 million for the year ended June 30, 2005.

Operating Loss

Our
operating loss was $19.6 million for the year ended July 1, 2006 compared to
$12.5 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. During the year ended
July 1, 2006, we began to incur expense related to our new Cosmedicine line.

Interest Expense

Interest
expense was $3.8 million for the year ended July 1, 2006 compared to $3.9
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. 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 were
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.

29

---



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, the increase of $8.6 million in SG&A expenses and the increase
of $10.5 million in the loss from discontinued operations.

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.

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.

Financial Condition, Liquidity and Capital
Resources

Net
cash used in operating activities was $37.2 and $22.3 million for the fiscal
years ended June 30, 2007 and July 1, 2006. This deterioration of cash flows
resulted primarily from a loss on discontinued operations of $34.6 for the year
ended June 30, 2007 compared to a loss of $14.1 million for the year ended July
1, 2006, and loss on sale from discontinued operations of $5.4 million for the
year ended June 30, 2007.

Net
cash used in investing activities was $1.7 million and $8.5 million for the
fiscal years ended June 30, 2007 and July 1, 2006, respectively. The
improvement is primarily due to a reduction in capital expenditures to $1.7
million in the year ended June 30, 2007 from $8.4 million in the year ended
July 1, 2006.

Cash
flows provided by financing activities were $39.6 and $30.8 million for the
fiscal years ended June 30, 2006 and July 1, 2006. For the year ended June 30,
2007, cash flows from financing activities were primarily the result of net
proceeds from debt financings of $58.0 million, offset by principal payments of
$8.3 million and restricted cash withheld by Laurus of $8.3 million. 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.

Future
Liquidity and Capital Needs

Since
its inception, the Company has experienced operating losses and negative cash
flow from operations. As of June 30, 2007, we had a cumulative deficit of $91.8
million and a working capital deficiency of $3.7 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 2007 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 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 May 7, 2007. As a result of this latest financing,
approximately 93% of our gross debt is held by Laurus as of June 30, 2007. In

30

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addition, these financings
may not be sufficient and there can be no assurance we will be able to
obtain sufficient capital to enable us to achieve our operational objectives.

Our
principal future uses of funds are for debt service and working capital
requirements to execute our strategy. It is expected that our net losses will
continue at least through the end of fiscal year 2009.

Contractual Obligations

As
of June 30, 2007, our contractual obligations were as follows:

|                                |   |        |  |   |                        |  |           |        |           |   |                    |  |   |     |  | 
|------------------------------- | - | ------ |  | - | ---------------------- |  | --------- | ------ | --------- | - | ------------------ |  | - | --- |  | 
|In thousands                    |   |        |  |   | Payments Due by Period | 
|                                |   |        |  |   |                        | 
|                                |   |        |  |   |                        |  |           |        |           |   |                    | 
|Contractual Obligations         |   | Total  |  |   | Less than
 1 Year      |  | 1-3 Years |        | 3-5 Years |   | More than
 5 Years | 
|                                |   |        |  |   |                        |  |           |        |           |   |                    | 
|                                |   |        |  |   |                        |  |           |        |           |   |                    |  |   |     |  | 
|Operating leases                | $ | 25     |  | $ | 25                     |  | $         |       |           | $ |                   |  | $ |    |  | 
|Operating leases guaranteed (1) |   | 2,654  |  |   | 894                    |  |           | 550    |           |   | 352                |  |   | 858 |  | 
|Long-term debt                  |   | 58,650 |  |   |                       |  |           | 58,650 |           |   |                   |  |   |    |  | 
|Consulting obligation (2)       |   | 806    |  |   | 237                    |  |           | 569    |           |   |                   |  |   |    |  | 
|Totals                          | $ | 62,135 |  | $ | 1,156                  |  | $         | 59,769 |           | $ | 352                |  | $ | 858 |  | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company had previously
 guaranteed six leases of its previously operated stores / salons. Due to the
 fact that the Purchaser of these stores / salons has filed for relief under
 Chapter 11 of the U.S. bankruptcy laws on July 25, 2007, the Company has
 recorded a charge and related liability of $2.4 million to recognize the
 present value of this potential lease guarantee liability which is included
 in Liabilities related to discontinued operations in the June 30, 2007
 Consolidated Balance Sheet.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(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.

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 June 30, 2007.

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. Previous to
the May 7, 2007 financing and sale of the stores / salons the fair value of the
Common Stock was based on the price paid 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. After the stores / salons sale and recent financing which included
38.5 billion warrants issued along with the debt, the stock has no longer
traded on a regular basis and its trading price does not appear indicative of
its fair value. We have used an analytical approach to approximate the true
fair value of the shares. The calculated fair value of the shares at June 30,
2007 was $0.00043. 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 $4.7 billion. This fluctuation would result in an impact to our
net loss. Convertible securities will convert back to equity when there are a
sufficient number of shares of Common Stock authorized.

31

---



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

|                                                                                                                     |   
|-------------------------------------------------------------------------------------------------------------------- | --
|Report of Independent Registered Public Accounting Firm                                                              | 33
|                                                                                                                     |   
|Consolidated Balance Sheets as of June 30, 2007 and July 1, 2006                                                     | 34
|                                                                                                                     |   
|Consolidated Statements of Operations for the years ended June
 30, 2007, July 1, 2006, and June 30, 2005            | 35
|                                                                                                                     |   
|Consolidated Statements of Cash Flows for the years ended June
 30, 2007, July 1, 2006, and June 30, 2005            | 36
|                                                                                                                     |   
|Consolidated Statements of Stockholders Deficit for the years
 ended June 30, 2007, July 1, 2006, and June 30, 2005 | 37
|                                                                                                                     |   
|Notes to Consolidated Financial Statements                                                                           | 38

32

---



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 June 30,
2007 and July 1, 2006, and the related consolidated statements of operations,
shareholders deficit and cash flows for each of the three years in the period
ended June 30, 2007. 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 June 30, 2007 and July 1, 2006 and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2007
in conformity with accounting principles generally accepted in the United
States of America.

As discussed in Note 4 to
the consolidated financial statements, the accompanying statements of
operations for the years ended July 1, 2006 and June 30, 2005 have been
restated to give effect to the Companys spa/salons discontinued operations.

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 raise 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
November 19,
2007

33

---



TrueYou.Com Inc.
Consolidated Balance Sheets

|                                                                                                                                                        |  |          |         |         |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------- | ------- | - | -------- | -
|                                                                                                                                                        |  | As of    |        
|                                                                                                                                                        | 
|                                                                                                                                                        |  | June 30, |         | July 1, |  
|                                                                                                                                                        |  |          |        
|In thousands, except share and per share amounts                                                                                                        |  | 2007     |         | 2006    |  
|                                                                                                                                                        | 
|Assets:                                                                                                                                                 |  |          |         |         |   |          |  
|Current assets:                                                                                                                                         |  |          |         |         |   |          |  
|Cash and cash equivalents                                                                                                                               |  | $        | 843     |         | $ | 189      |  
|Restricted cash, current portion                                                                                                                        |  |          | 10,776  |         |   | 1,602    |  
|Accounts receivable, net                                                                                                                                |  |          | 197     |         |   | 137      |  
|Inventories, net                                                                                                                                        |  |          | 1,311   |         |   | 2,214    |  
|Other current assets                                                                                                                                    |  |          | 752     |         |   | 1,009    |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Total current assets                                                                                                                                    |  |          | 13,879  |         |   | 5,151    |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Property and equipment, net                                                                                                                             |  |          | 52      |         |   | 12,981   |  
|Other assets                                                                                                                                            |  |          | 444     |         |   | 855      |  
|Deferred financing costs, net                                                                                                                           |  |          | 871     |         |   | 242      |  
|Restricted cash, non-current portion                                                                                                                    |  |          |        |         |   | 845      |  
|Goodwill                                                                                                                                                |  |          |        |         |   | 18,072   |  
|Other intangibles, net                                                                                                                                  |  |          | 49      |         |   | 5,025    |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Total assets                                                                                                                                            |  | $        | 15,295  |         | $ | 43,171   |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Liabilities
 and Shareholders deficit:                                                                                                                 |  |          |         |         |   |          |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Liabilities:                                                                                                                                            |  |          |         |         |   |          |  
|Current
 liabilities:                                                                                                                                   |  |          |         |         |   |          |  
|Accounts payable                                                                                                                                        |  | $        | 2,022   |         | $ | 7,984    |  
|Accrued expenses and other current
liabilities                                                                                                          |  |          | 9,712   |         |   | 16,449   |  
|Customer advances                                                                                                                                       |  |          |        |         |   | 8,273    |  
|Current portion of long term debt                                                                                                                       |  |          |        |         |   | 5,839    |  
|Senior debt current portion (net of debt discount of
$0.854 million
 as of July 1, 2006)                                                                |  |          |        |         |   | 9,146    |  
|Liabilities related to discontinued
 operations                                                                                                         |  |          | 5,856   |         |   |         |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Total current liabilities                                                                                                                               |  |          | 17,590  |         |   | 47,691   |  
|Convertible securities                                                                                                                                  |  |          | 20,341  |         |   | 197,565  |  
|Senior debt (net of discount of $6.752 million and
prepaid interest
 of $8.062 million as of June 30, 2007)                                             |  |          | 43,836  |         |   |         |  
|Other long term liabilities                                                                                                                             |  |          | 5,000   |         |   | 7,829    |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Total liabilities                                                                                                                                       |  |          | 86,767  |         |   | 253,085  |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Commitments
 and contingencies                                                                                                                          |  |          |         |         |   |          |  
|Shareholders
 deficit:                                                                                                                                 |  |          |         |         |   |          |  
|Common stock, par value $0.001, authorized
20,000,000; issued and
 outstanding 16,756,438 and 14,995,513 at June 30, 2007 and July, 2006,
 respectively |  |          | 17      |         |   | 15       |  
|Additional paid-in capital                                                                                                                              |  |          | 20,359  |         |   | 4,347    |  
|Accumulated deficit                                                                                                                                     |  |          | (91,848 | )       |   | (214,276 | )
|                                                                                                                                                        |  |          |         |         |   |          |  
|Total shareholders deficit                                                                                                                             |  |          | (71,472 | )       |   | (209,914 | )
|                                                                                                                                                        |  |          |         |         |   |          |  
|                                                                                                                                                        |  |          |         |         |   |          |  
|Total liabilities and shareholders
deficit                                                                                                             |  | $        | 15,295  |         | $ | 43,171   |  
|                                                                                                                                                        |  |          |         |         |   |          |  

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

34

---



TrueYou.Com Inc.
Consolidated Statements of Operations

|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|--------------------------------------------------------------------------------------- |  | --------------- | ---------- | -------------------------- | - | --------------------------- | - | - | ---------- | -
|                                                                                        |  | Year Ended      |           
|In
thousands, except share and per share amounts                                        |  | June 30,
  2007 |            | Restated 
  July 1,
  2006 |   | Restated 
  June 30,
  2005 |  
|                                                                                        |  |                 |           
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Revenues                                                                                |  | $               | 3,596      |                            | $ | 2,678                       |   | $ |           |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Cost of revenues                                                                        |  |                 | 1,610      |                            |   | 1,130                       |   |   |           |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Gross margin                                                                            |  |                 | 1,986      |                            |   | 1,548                       |   |   |           |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Selling, general and administrative expenses                                            |  |                 | 14,138     |                            |   | 20,919                      |   |   | 12,256     |  
|Depreciation and amortization                                                           |  |                 | 649        |                            |   | 217                         |   |   | 261        |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Total operating expenses                                                                |  |                 | 14,787     |                            |   | 21,136                      |   |   | 12,517     |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Operating loss                                                                          |  |                 | (12,801    | )                          |   | (19,588                     | ) |   | (12,517    | )
|Interest expense, net                                                                   |  |                 | 24,763     |                            |   | 3,829                       |   |   | 3,865      |  
|Registration rights penalties                                                           |  |                 | 2,324      |                            |   | 1,547                       |   |   |           |  
|Loan default penalty                                                                    |  |                 | 3,750      |                            |   |                            |   |   |           |  
|Unrealized (gain) loss on convertible securities                                        |  |                 | (206,067   | )                          |   | 132,683                     |   |   |           |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Income (loss) from operations before income tax provision and
  discontinued operations |  |                 | 162,429    |                            |   | (157,647                    | ) |   | (16,382    | )
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Income tax provision (benefit)                                                          |  |                 |           |                            |   |                            |   |   |           |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Income (loss) from operations before discontinued
operations                            |  |                 | 162,429    |                            |   | (157,647                    | ) |   | (16,382    | )
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Discontinued operations:                                                                |  |                 |            |                            |   |                             |   |   |            |  
|Loss from operations                                                                    |  |                 | (34,627    | )                          |   | (14,058                     | ) |   | (3,539     | )
|Loss from sale                                                                          |  |                 | (5,374     | )                          |   |                            |   |   |           |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Net income (loss)                                                                       |  |                 | 122,428    |                            |   | (171,705                    | ) |   | (19,921    | )
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|(Forfeitures) dividends on preferred stock                                              |  |                 | (2,474     | )                          |   | 1,125                       |   |   | 1,400      |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Net income (loss) applicable to common shareholders                                     |  | $               | 124,902    |                            | $ | (172,830                    | ) | $ | (21,321    | )
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Basic income (loss) per common share:                                                   |  | $               | 7.97       |                            | $ | (11.53                      | ) | $ | (1.42      | )
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Diluted income (loss) per common share:                                                 |  | $               | 6.25       |                            | $ | (11.53                      | ) | $ | (1.42      | )
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Weighted average common shares outstanding, basic                                       |  |                 | 15,680,585 |                            |   | 14,995,513                  |   |   | 14,995,513 |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  
|Weighted average common shares outstanding, diluted                                     |  |                 | 20,000,000 |                            |   | 14,995,513                  |   |   | 14,995,513 |  
|                                                                                        |  |                 |            |                            |   |                             |   |   |            |  

See accompanying Notes to Consolidated Financial Statements.

35

---



TrueYou.Com Inc.
Consolidated Statements of Cash Flows

|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | --------------- | -------- | -------------- | - | --------------- | - | - | ------- | -
|                                                                                                          |  | Year Ended      |         
|                                                                                                          | 
|In thousands                                                                                              |  | June 30,
  2007 |          | July 1,
  2006 |   | June 30,
  2005 |  
|                                                                                                          | 
|Cash flows from operating activities:                                                                     |  |                 |          |                |   |                 |   |   |         |  
|Net income (loss)                                                                                         |  | $               | 122,428  |                | $ | (171,705        | ) | $ | (19,921 | )
|Adjustments to reconcile net income (loss) to net
cash used in
  operating activities:                    |  |                 |          |                |   |                 |   |   |         |  
|Depreciation and amortization                                                                             |  |                 | 3,749    |                |   | 4,102           |   |   | 3,725   |  
|Loss
    on disposal of fixed assets                                                                      |  |                 | 12,097   |                |   | 112             |   |   |        |  
|Amortization of deferred financing costs                                                                  |  |                 | 1,313    |                |   | 88              |   |   |        |  
|Amortization of debt discount                                                                             |  |                 | 19,541   |                |   |                |   |   |        |  
|Goodwill impairment                                                                                       |  |                 | 18,072   |                |   |                |   |   |        |  
|Intangibles impairment                                                                                    |  |                 | 3,718    |                |   |                |   |   |        |  
|Stock based compensation (income) expense                                                                 |  |                 | (1,106   | )              |   | 795             |   |   | 236     |  
|Non-cash interest expense                                                                                 |  |                 | 1,502    |                |   | 1,544           |   |   | 542     |  
|Unrealized (income) loss on convertible
securities                                                        |  |                 | (206,067 | )              |   | 132,683         |   |   |        |  
|Changes in operating assets and liabilities:                                                              |  |                 |          |                |   |                 |   |   |         |  
|Inventories                                                                                               |  |                 | 903      |                |   | (237            | ) |   | (375    | )
|Accounts receivable                                                                                       |  |                 | (60      | )              |   | 107             |   |   |        |  
|Other current assets                                                                                      |  |                 | (24      | )              |   | (508            | ) |   | (196    | )
|Other assets                                                                                              |  |                 | 411      |                |   | (463            | ) |   | (117    | )
|Accounts payable                                                                                          |  |                 | (4,243   | )              |   | 4,343           |   |   | 2,715   |  
|Accrued expenses and other current
liabilities                                                            |  |                 | 1,654    |                |   | 7,471           |   |   | 3,550   |  
|Customer advances                                                                                         |  |                 | (8,273   | )              |   | (609            | ) |   | (1,143  | )
|Other long term liabilities                                                                               |  |                 | (2,858   | )              |   |                |   |   |        |  
|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|Net cash used in operating
activities                                                                     |  |                 | (37,243  | )              |   | (22,277         | ) |   | (10,984 | )
|Cash flows from investing activities:                                                                     |  |                 |          |                |   |                 |   |   |         |  
|Capital expenditures                                                                                      |  |                 | (1,659   | )              |   | (8,416          | ) |   | (1,197  | )
|Purchase of intangible asset                                                                              |  |                 |         |                |   | (127            | ) |   | (43     | )
|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|Net cash used in investing
activities                                                                     |  |                 | (1,659   | )              |   | (8,543          | ) |   | (1,240  | )
|Cash flows provided by financing activities:                                                              |  |                 |          |                |   |                 |   |   |         |  
|Cash overdraft                                                                                            |  |                 |         |                |   | (163            | ) |   | 163     |  
|Restricted cash                                                                                           |  |                 | (8,329   | )              |   | (850            | ) |   | 1,115   |  
|Proceeds of Issuance of long term debt net of
deferred financing
  costs                                  |  |                 | 56,135   |                |   | 4,839           |   |   |        |  
|Payment of long term debt                                                                                 |  |                 | (8,250   | )              |   |                |   |   |        |  
|Other long-term liabilities                                                                               |  |                 |         |                |   | (1,951          | ) |   | 4,484   |  
|Proceeds of issuance of TrueYou Series D Preferred
Stock                                                  |  |                 |         |                |   | 15,049          |   |   | (54     | )
|Proceeds of issuance of KAAI Series G Preferred
stock                                                     |  |                 |         |                |   | 10,058          |   |   |        |  
|Repayment of Sellers Note                                                                                |  |                 |         |                |   | (900            | ) |   |        |  
|Proceeds of issuance of KAAI Series F Preferred
stock                                                     |  |                 |         |                |   | 4,754           |   |   |        |  
|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|Net cash provided by financing
activities                                                                 |  |                 | 39,556   |                |   | 30,836          |   |   | 5,708   |  
|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                      |  |                 | 654      |                |   | 16              |   |   | (6,516  | )
|Cash and cash equivalents - beginning of year                                                             |  |                 | 189      |                |   | 173             |   |   | 6,689   |  
|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|Cash and cash equivalents - end of year                                                                   |  | $               | 843      |                | $ | 189             |   | $ | 173     |  
|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|                                                                                                          |  |                 |          |                |   |                 |   |   |         |  
|Supplemental cash flow information                                                                        |  |                 |          |                |   |                 |   |   |         |  
|Non-cash financing activities:                                                                            |  |                 |          |                |   |                 |   |   |         |  
|Accounts payable settlements with shareholders                                                            |  | $               | 120      |                | $ |                |   | $ |        |  
|Preferred stock dividends, net of preferred stock
forfeitures                                             |  |                 | (2,474   | )              |   | 1,125           |   |   | 1,400   |  
|Reclassification of preferred stock into convertible
securities                                           |  |                 |         |                |   | 28,166          |   |   |        |  
|Beneficial conversion feature on preferred stock                                                          |  |                 |         |                |   | 2,830           |   |   |        |  
|Write-off of minority interest - Series E Preferred                                                       |  |                 |         |                |   | 135             |   |   |        |  
|Exchange of KAAI debt for TrueYou Series E Preferred Stock                                                |  |                 | 12,489   |                |   |                |   |   |        |  
|Exchange of KAAI accrued dividends for TrueYou Series B Preferred
  Stock                                 |  |                 |         |                |   | 464             |   |   |        |  
|Forgiven management fees treated as contributed capital                                                   |  |                 | 1,714    |                |   |                |   |   |        |  
|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             |   |   |        |  
|Warrants issued with debt                                                                                 |  |                 | 7,026    |                |   |                |   |   |        |  
|Issuance of common stock as settlement of liability                                                       |  |                 | 352      |                |   |                |   |   |        |  
|Exchange of senior debt for subordinated debt                                                             |  |                 | 1,750    |                |   |                |   |   |        |  
|Exchange of old senior debt for new senior debt                                                           |  |                 | 25,000   |                |   |                |   |   |        |  
|Deferred licensing fees and related liability in connection with
  licensing agreements with John Hopkins |  |                 |         |                |   |                |   |   | 3,805   |  

See accompanying Notes to
Consolidated Financial Statements.

36

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TrueYou.Com
Inc.Consolidated Statements of Stockholders Deficit

|                                                                        |  |                     |      |              |  |            |  |                               |    |                      |   |        |   |   |          |   |   |          |  
|----------------------------------------------------------------------- |  | ------------------- | ---- | ------------ |  | ---------- |  | ----------------------------- | -- | -------------------- | - | ------ | - | - | -------- | - | - | -------- | -
|                                                                        |  |                     |      | Common Stock |  |            |  |                               |    |                      |  
|In thousands, except share amounts                                      |  |                     |      |              |  |            |  |                               |    |                      |  
|                                                                        |  | Minority 
 Interest |      | Shares       |  | Amount     |  | Additional
 Paid In 
 Capital |    | Accumulated
 Deficit |   | Total  |  
|                                                                       
|                                                                        |  |                     |      |              |  |            |  |                               |    |                      |   |        |   |   |          |   |   |          |  
|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 | )
|                                                                        |  |                     |      |              |  |            |  |                               |    |                      |   |        |   |   |          |   |   |          |  
|Reclassification of stock based
 compensation awards to liabilities     |  |                     |     |              |  |           |  |                               |   |                      |   | (1,135 | ) |   |         |   |   | (1,135   | )
|Dividends on preferred stock                                            |  |                     |     |              |  |           |  |                               |   |                      |   | (1,303 | ) |   |         |   |   | (1,303   | )
|Issuance of Common Stock  Mandalay
 settlement                         |  |                     |     |              |  | 1,760,925  |  |                               | 2  |                      |   | 350    |   |   |         |   |   | 352      |  
|Forgiven dividends on preferred stock                                   |  |                     |     |              |  |           |  |                               |   |                      |   | 3,777  |   |   |         |   |   | 3,777    |  
|Debt exchanged for preferred stock                                      |  |                     |     |              |  |           |  |                               |   |                      |   | 12,489 |   |   |         |   |   | 12,489   |  
|Shareholder settlements                                                 |  |                     |     |              |  |           |  |                               |   |                      |   | 120    |   |   |         |   |   | 120      |  
|Management fees forgiven by shareholders                                |  |                     |     |              |  |           |  |                               |   |                      |   | 1,714  |   |   |         |   |   | 1,714    |  
|Net income                                                              |  |                     |     |              |  |           |  |                               |   |                      |   |       |   |   | 122,428  |   |   | 122,428  |  
|                                                                        |  |                     |      |              |  |            |  |                               |    |                      |   |        |   |   |          |   |   |          |  
|                                                                       
|Balance at June 30, 2007                                                |  | $                   | 0    |              |  | 16,756,438 |  | $                             | 17 |                      | $ | 20,359 |   | $ | (91,848  | ) | $ | (71,472  | )
|                                                                        |  |                     |      |              |  |            |  |                               |    |                      |   |        |   |   |          |   |   |          |  

See accompanying Notes to
Consolidated Financial Statements.

37

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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

On
May 7, 2007, the Company entered into a Purchase and Sale Agreement pursuant to
which it sold all of its spa/salons to GK Acquisition LLC, an unaffiliated
third party (see Note 4). The Company adopted a plan to sell the spa/salons in
May 2007 and, accordingly the Company has presented the operations of the
spas/salons as discontinued operations beginning in the fourth quarter of the
current fiscal year. The consolidated financial statements presented herein
include the results of operations for the spas/salons in discontinued
operations for all periods presented.

Prior
to May 7, 2007 the Company offered both cosmetic services and medical
procedures to customers under one delivery system and combines them with 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
(Cosmedicine or Cosmedicine) which was being distributed through Sephora
USA, Inc. stores and the Companys own facilities. After May 7, 2007 the
Company continues to sell Cosmedicine through Sephora USA, Home Shopping Network
(HSN), JCPenney, and its website. The Company is the owner of the Cosmedicine
trademark. The Company co-branded its trade name with the trade names of the
salons and spas that it had acquired. The Companys salons and spas had
shared certain corporate resources such as senior management and administrative
services. As of October 26, 2007, and as a result of the sale of the spa/salons
described above, the Company had 20 active employees. The effective date of the
spa / salons was April 1, 2007. As of March 31, 2007 the Company had 501 employees.

The
consolidated financial statements presented herein pertain to the Company and
its subsidiaries (including KAAI). All significant intercompany accounts and
transactions have been eliminated in consolidation. Before the sale of the stores / salons, the
company had considered that it operated in one segment for spa and salon
domestic operations and Cosmedicine operations. After completion of the sale of
the stores / salons, the Companys remaining operation is its Cosmedicine line
of products.

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 18 and 20).

Beginning
in fiscal year 2006, the Company began 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 2, 2006 and ended on June 30, 2007. Previously The Companys
fiscal year was the twelve month period ended July 1, 2006.

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
June 30, 2007, the Company has an accumulated deficit of $91.8 million and a
working capital deficiency of $3.7 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

38

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dependent on its ability to
increase sales and reduce expenses to a level that will allow it to operate
profitably, sustain positive operating cash flows, raise additional capital,
and make required debt payments. 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 May
7, 2007. There is no assurance that the recent financings will be sufficient to
fund operations until sales and profitability improves such that the Company is
able to operate from internally generated cash flows.

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.

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.

Before
the sale of the stores / salons, discussed in Note 4, KAAIs operating presence
was 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 featured
cosmetic dermatology, spa services, salon care and retail products on-site and
cosmetic surgery and dentistry (discontinued in June 2005) which were performed
off-site. In 2006, the Company opened two new flagship stores; NorthPark in Dallas Texas and Chevy Chase in
Chevy Chase, Maryland.

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 has been accounted for as a reverse merger which 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. 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

39

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combinations, provisions for
inventory obsolescence, customer advances 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 from:

| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cosmedicine sales  When products are shipped, the price is fixed, and collection is
 reasonably assured. 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. It also includes other cash restricted
for use by terms of the existing Senior debt agreement. The Company classifies
restricted cash as current or long term based on the date the restriction is
expected to lapse.

Accounts
Receivable Reserve

The
Company periodically performs an evaluation of its composition of accounts
receivable and expected deductions and establishes an accounts receivable
reserve for specific customers. The reserve includes reserves for future
deductions related to damaged or obsolete product and product used by retailer
customers as testers. As of June 30, 2007 and July 1, 2006, net accounts
receivable included reserves of $1.6 million and $0.2 million, respectively, in
the Consolidated Balance Sheets.

Inventories

Inventories as of June 30, 2007 consist only
of Cosmedicine products and components for those products. Inventories as of
July 1, 2006 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, the Company estimates losses from
shrinkage due to lost or stolen inventory based on historical experience and
recorded as a reserve to reduce the inventory value by that estimate.

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.

40

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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
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.

Impairment of
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. In the quarter ended March 31, 2007,
however, the Company believes that events have occurred that indicate that
goodwill has been fully impaired (see Note 4). As a result, the Company has
recorded a charge of $18.1 million in its fiscal quarter ended March 31, 2007
to write-off all of its goodwill. This charge is included in Loss from
discontinued operations in the Consolidated Statement of Operations in the year
ended June 30, 2007.

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.

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 five
years.

Measurement of
Impairment of Long-Lived Assets and Intangible Assets Subject to Amortization

When
events and circumstances indicate that assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets, the Company records impairment losses with
respect to those assets.

The
impairment charge is determined based upon the amount by which the net book
value of the assets exceeds their estimated fair value. In determining the fair
value of the assets, the Company considers market trends, published values for
similar assets, recent transactions involving sales of similar assets or quotes
from third party appraisers. In making these determinations, the Company also
uses certain assumptions, including, but not limited to, the estimated
discounted future cash flows expected to be

41

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generated by
these assets, which are based on additional assumptions such as asset
utilization, length of service the asset will be used in the Companys
operations and estimated residual values.

In
the quarter ended March 31, 2007, the Company believes that events have
occurred that indicate that intangible assets related to non-compete
agreements, trademark / trade names, and customer relationships have been fully
impaired (see Notes 4 and 8). As a result, the Company has recorded a charge of
$0.7 million in its year ended June 30, 2007 to write-off all of these
intangible assets. This charge is included in Loss from discontinued operations
in the Consolidated Statement of Operations.

As
a result of the sales of the stores / salons on May 7, 2007 and the related
termination of the Johns Hopkins Agreement (see Note 13) the Company has
recorded income of $0.3 million in the year ended June 30, 2007 to write-off
this intangible asset and corresponding liability. This benefit is included in
Loss from discontinued operations in the Consolidated Statement of Operations.

Advertising
Costs

The
Company expenses advertising costs as incurred. Total advertising costs
incurred by the Company were $2.0 million, $0.9 million, and zero for the years
ended June
30, 2007, July 1, 2006, and June 30, 2005, respectively.

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 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.

Concentration of
Credit Risk and Significant Vendor

We are dependent on our relationships with
Sephora and HSN

Our
agreements grant Sephora and HSN, 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 past 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 HSN terminates the Marketing Agreement our Cosmedicine
revenue can be negatively affected. 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

42

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these
relationships could substantially decrease our differentiation from competitors
and could materially adversely affect the Company.

We have only one supplier for our Cosmedicine
products.

Atlantis
    Laboratories, Inc. (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.

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. Since the Company does not
have sufficient shares of common stock authorized, it is required to treat the
stock option awards as liability awards and remeasure at each reporting period
based upon fair value, utilizing the Black-Scholes option pricing model.

Income (Loss) Per Share

Basic
income (loss) per share represents the net income (loss) applicable to Common
Shareholders divided by the weighted average number of common shares
outstanding during the measurement period. Diluted income (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 securities that
were outstanding during the period. Potential dilutive common stock equivalents
for the year ended June 30, 2007 consist of those related to: convertible preferred
stock of 8.6 billion, warrants 37.6 billion, and registration rights 3.9
million. 4.3 million of the securities were considered to be common stock
equivalents for the year ended June 30, 2007. This represents the remaining
authorized shares of Common Stock that could be issued for the period, as the
Company has 20.0 million authorized shares. The remainder of the common stock
equivalents were not considered to be dilutive as there were not sufficient
authorized shares to issue additional Common Stock. For the years ended July 1,
2006 and June 30, 2005, the impact of any convertible securities 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.

43

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Software Development Costs

The
Company incurred costs for the development of its K360 software that was
anticipated to be sold, leased, or licensed to third parties in the future. All
software development costs had 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 had been expensed as incurred as technological
feasibility had not yet been established. As a result of the sale of the stores
/ salons and a revised business model, no future investments are expected for
further development of this software.

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.

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.
Previous to the May 7, 2007 financing and sale of the stores / salons the fair
value of the Common Stock was 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
Common Stock was $0.39. After the stores /salons sale and recent financing
which included 38.5 billion warrants issued along with the debt, the stock has
no longer traded on a regular basis and the trading price does not appear
indicative of its fair value. The Company has used an analytical approach to estimate the true fair value of the shares as
of June 30, 2007. The Company divided its projected annual revenue by its
market cap calculated on a diluted basis. Using this method, the
calculated fair value of the shares at June 30, 2007 was $0.00043 per share.

Supplemental
Cash Flow Information

The
aggregate interest payments amounted to $2.6 million, $1.1 million and $1.5
million for the years ended June 30, 2007, July 1, 2006, and June 30, 2005,
respectively.

Recently Issued
Accounting Standards

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. The Company has evaluated the impact of the adoption of FIN 48, and
determined there is no impact on its 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 originally became effective for the first
reporting period beginning after November 15, 2007. Subsequently the FASB partially
deferred the effective date for this pronouncement for one year for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. The Company is assessing
the impact of the adoption of SFAS 157 on the Companys
consolidated financial statements.

44

---



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 has evaluated the impact of the adoption of SFAS 158, and
determined there is no impact on its consolidated financial statements.

In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No.
115. SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. This guidance is effective as of the
beginning of the fiscal year for years beginning after November 15, 2007. The
Company believes the impact of the adoption of SFAS 159 will not be significant
to the Companys consolidated financial statements.

4. Discontinued operations

On
May 7, 2007, the Company entered into a Purchase and Sale Agreement pursuant to
which it sold all of its spa/salons to GK Acquisition LLC, an unaffiliated
third party (Purchaser). The agreement provides that the sale transaction is
effective for accounting and profit/loss purposes as of April 1, 2007. The sale
was implemented by the sale of the equity interests of various subsidiary
entities of the Company as well as an assignment of leases. The sale includes
all of the inventory, furniture, fixtures and equipment in the spa/salons and
business and includes all rights in and to the name Georgette Klinger and
various related intellectual property.

In
consideration for the sale, the Purchaser assumed certain liabilities including
certain accounts payable and accrued expenses and all outstanding gift card
liability of the spa/salons. The Company also has guaranteed the obligations of
certain leases assumed by GK Acquisition, LLC. In addition the Purchaser issued
a note to the Company in the amount of $150,000 due in 60 days. On July 25,
2007 the purchaser filed for relief under Chapter 11 of the U.S. bankruptcy
laws. Although no litigation between the parties has been commenced, the
Purchaser has served the Company with subpoenas seeking information relating to
the sale and other transactions, disputes have arisen with respect to the
various obligations of the parties, and such disputes may be the subject of
litigation in the future. We have complied in all respects to provide the
information requested. There is no assurance that the Purchaser will be able to
fulfill various commitments included in the Purchase and Sale Agreement. The
Company has fully reserved for the note receivable. While the Company has
appropriately reserved for any estimated contingent liabilities, any required
cash payments that are material could have a significant adverse effect on the
Company.

The
parties also entered into various agreements in connection with the sale
including a transition services agreement pursuant to which the Company would
provide transitional services to the Purchaser as well as a Cosmedicine supply
agreement pursuant to which the Company would supply the Purchaser with
Cosmedicine products. Pursuant to the transaction, the Company agreed not to
compete with the business sold for a period of three years. As a result of
non-performance by the Purchaser and notification served by the Company, the
Cosmedicine supply agreement has been considered void by the Company and the
$0.2 million of product sold in conjunction with this contract has been fully
reserved as a bad debt as of June 30, 2007.

In
connection with the sale, on May 7, 2007 the Company and Laurus entered into a
Waiver and Consent Agreement whereby Laurus released its security interest in
the assets sold in connection with the Purchase and Sale Agreement. As the
Company could not sell the stores without approval from Laurus, it

45

---



was not
committed to a plan to sell the stores until the fourth quarter of its 2007
fiscal year as the required approval from Laurus occurred at that time.

Accordingly,
the sale of the stores / salons and their results of operations have been
classified as discontinued operations in these financial statements. As a
result, our financial statements have been restated to reflect the stores /
salons as a discontinued operation in our consolidated statements of operations
for all periods presented. Statement of operations information presented in the
notes to consolidated financial statements have been restated to reflect
continuing operations for all periods presented.

The
following is a summary of the loss on sale from discontinued operations for the
year ended June 30, 2007:

|                                         |  |                  |        |  
|---------------------------------------- |  | ---------------- | ------ | -
|In thousands                             |  | Loss From
  Sale |       
|                                         |  |                  |       
|                                        
|Property
  and equipment (net)           |  | $                | 10,499 |  
|                                        
|Inventory                                |  |                  | 1,457  |  
|                                        
|Operating
  lease guarantees             |  |                  | 2,364  |  
|                                        
|Gift
  card liability                    |  |                  | (8,614 | )
|                                         |  |                  |        |  
|Termination
  of Johns Hopkins agreement |  |                  | (290   | )
|                                        
|Other                                    |  |                  | (42    | )
|                                         |  |                  |        |  
|                                        
|Total
  Loss From Sale                   |  | $                | 5,374  |  
|                                         |  |                  |        |  

The
following is a summary of financial information of our discontinued and
continuing operations for the 2007, 2006, and 2005 fiscal years:

|                                            |  |                             |          |              |   |            |   |   |          |  
|------------------------------------------- |  | --------------------------- | -------- | ------------ | - | ---------- | - | - | -------- | -
|In thousands                                |  | Year Ended 6/30/07          |         
|                                            |  |                             |         
|                                            |  | Continuing &
  Discontinued |          | Discontinued |   | Continuing |  
|                                            |  |                             |          |              |   |            |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|Revenues                                    |  | $                           | 22,793   |              | $ | 19,197     |   | $ | 3,596    |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|Cost of Revenue                             |  |                             | 13,241   |              |   | 11,631     |   |   | 1,610    |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|Gross margin                                |  |                             | 9,552    |              |   | 7,566      |   |   | 1,986    |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|Operating expenses                          |  |                             | 56,969   |              |   | 42,182     |   |   | 14,787   |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|Operating loss                              |  |                             | (47,417  | )            |   | (34,616    | ) |   | (12,801  | )
|                                            |  |                             |          |              |   |            |   |   |          |  
|Interest expense, net                       |  |                             | 24,774   |              |   | 11         |   |   | 24,763   |  
|Registration rights penalties               |  |                             | 2,324    |              |   |           |   |   | 2,324    |  
|Loan default penalty                        |  |                             | 3,750    |              |   |           |   |   | 3,750    |  
|Discontinued operations - loss on sale      |  |                             | 5,374    |              |   | 5,374      |   |   |         |  
|Unrealized (gain) on convertible securities |  |                             | (206,067 | )            |   |           |   |   | (206,067 | )
|                                            |  |                             |          |              |   |            |   |   |          |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|Income (loss) before income tax provision   |  |                             | 122,428  |              |   | (40,001    | ) |   | 162,429  |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|Income tax provision (benefit)              |  |                             |         |              |   |           |   |   |         |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|                                            |  |                             |          |              |   |            |   |   |          |  
|Net income (loss)                           |  | $                           | 122,428  |              | $ | (40,001    | ) | $ | 162,429  |  
|                                            |  |                             |          |              |   |            |   |   |          |  

46

---



|                                            |  |                              |          |              |   |                            |   |   |          |  
|------------------------------------------- |  | ---------------------------- | -------- | ------------ | - | -------------------------- | - | - | -------- | -
|In thousands                                |  | Year Ended 7/1/06            |         
|                                            |  |                              |         
|                                            |  | Consolidated
  (as Reported) |          | Discontinued |   | Continuing
  (as Restated) |  
|                                            |  |                              |          |              |   |                            |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Revenues                                    |  | $                            | 33,052   |              | $ | 30,374                     |   | $ | 2,678    |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Cost
  of Revenue                           |  |                              | 18,535   |              |   | 17,405                     |   |   | 1,130    |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Gross
  margin                              |  |                              | 14,517   |              |   | 12,969                     |   |   | 1,548    |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Operating
  expenses                        |  |                              | 48,004   |              |   | 26,867                     |   |   | 21,136   |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Operating
  loss                            |  |                              | (33,487  | )            |   | (13,898                    | ) |   | (19,588  | )
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Interest
  expense, net                     |  |                              | 3,988    |              |   | 159                        |   |   | 3,829    |  
|Registration
  rights penalties             |  |                              | 1,547    |              |   |                           |   |   | 1,547    |  
|Unrealized
  loss on convertible securities |  |                              | 132,683  |              |   |                           |   |   | 132,683  |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Loss
  before income tax provision          |  |                              | (171,705 | )            |   | (14,057                    | ) |   | (157,647 | )
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Income
  tax provision (benefit)            |  |                              |         |              |   |                           |   |   |         |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|                                            |  |                              |          |              |   |                            |   |   |          |  
|Net
  loss                                  |  | $                            | (171,705 | )            | $ | (14,057                    | ) | $ | (157,647 | )
|                                            |  |                              |          |              |   |                            |   |   |          |  

|                                   |  |                              |         |              |   |                            |   |   |         |  
|---------------------------------- |  | ---------------------------- | ------- | ------------ | - | -------------------------- | - | - | ------- | -
|In thousands                       |  | Year Ended 6/30/05           |        
|                                   |  |                              |        
|                                   |  | Consolidated
  (as Reported) |         | Discontinued |   | Continuing
  (as Restated) |  
|                                   |  |                              |         |              |   |                            |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Revenues                           |  | $                            | 32,933  |              | $ | 32,933                     |   | $ |        |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Cost
  of Revenue                  |  |                              | 16,601  |              |   | 16,601                     |   |   |        |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Gross
  margin                     |  |                              | 16,332  |              |   | 16,332                     |   |   |        |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Operating
  expenses               |  |                              | 32,227  |              |   | 19,710                     |   |   | 12,517  |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Operating
  loss                   |  |                              | (15,895 | )            |   | (3,378                     | ) |   | (12,517 | )
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Interest
  expense, net            |  |                              | 4,026   |              |   | 161                        |   |   | 3,865   |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Loss
  before income tax provision |  |                              | (19,921 | )            |   | (3,539                     | ) |   | (16,382 | )
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Income
  tax provision (benefit)   |  |                              |        |              |   |                           |   |   |        |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|                                   |  |                              |         |              |   |                            |   |   |         |  
|Net
  loss                         |  | $                            | (19,921 | )            | $ | (3,539                     | ) | $ | (16,382 | )
|                                   |  |                              |         |              |   |                            |   |   |         |  

47

---



In
addition, the Company has classified all remaining liabilities related to the
discontinued operations as Liabilities related to discontinued operations in
the June 30, 2007 Consolidated Balance Sheet. The following is a summary of those
remaining liabilities:

|                                                 |  |                                                  |       | 
|------------------------------------------------ |  | ------------------------------------------------ | ----- | 
|In
  thousands                                   |  | Liabilities Related to
  Discontinued Operations |      
|                                                 |  |                                                  |      
|                                                 |  |                                                  |       | 
|Accounts
  payable                               |  | $                                                | 1,599 | 
|Accrued
  expenses and other current liabilities |  |                                                  | 4,257 | 
|                                                 |  |                                                  |       | 
|                                                 |  |                                                  |       | 
|Liabilities
  related to discontinued operations |  | $                                                | 5,856 | 
|                                                 |  |                                                  |       | 

Impairment
of Goodwill and Intangible Assets

As
a result of the notice of default received on the Senior Secured Debt on March
8, 2007 and the drop in the Company traded share price, the Company has
recorded an impairment to its goodwill and intangible assets. The default and
the limited capital options determined after the event left the Company with no
capacity to make the investments necessary to support the business plan.
Planned spending was curtailed relating to any non-essential activities or
operations. This reduction in planned spending significantly reduced the
projected cash flows of the stores/salons and the Company overall. As a result,
the Company had determined that its goodwill had been impaired and has recorded
a charge of $18.1 million in its fiscal quarter ended March 31, 2007 to
write-off all of its goodwill. It has also determined that intangible assets
related to non-compete agreements, trademark / trade names, customer
relationships have been fully impaired due to the default and related events
discussed above. As a result, the Company had recorded a charge of $0.6 million
in its fiscal quarter ended March 31, 2007 to write-off all of these intangible
assets. Due to the sale of the stores / salons, the Company also recorded a
charge of $0.1 million in the year ended June 30, 2007 to write-off the
capitalized patent costs for its K360 software. These related charges for
goodwill and intangible impairment are included in Loss from discontinued
operations in the Consolidated Statement of Operations.

Johns
Hopkins Agreement

On
May 7, 2007, the Company entered into an agreement with Johns Hopkins Medicine,
Johns Hopkins University and Johns Hopkins Health Systems Corporation, pursuant
to which the Consulting and Services Agreement between Advanced Aesthetics, Inc.
and Johns Hopkins Medicine (Johns Hopkins) dated November 23, 2003, as
amended was terminated effective April 13, 2007. Under the Agreement, the
Company was required to pay Johns Hopkins $369,565 by July 31, 2007, and as of
the effective date, Johns Hopkins will no longer provide services to the
Company. The Company did make the payment by the required date. As a result of
this agreement, the Company has recorded a derecognition of the intangible
asset of approximately $3.0 million and the liability of approximately $3.3
million in the fourth quarter ended June 30, 2007. This net income of $0.3
million has been recorded in Loss from discontinued operations in the
Consolidated Statement of Operations.

48

---



5. Restricted Cash

Following
are the components of restricted cash included in the Consolidated Balance
Sheets as of June 30, 2007 and July 1, 2006:

|                                                                                                |  |      |        |      |   |       | 
|----------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ----- | 
|                                                                                                |  |      |        |      |   |       | 
|(Dollars in thousands)                                                                          |  | 2007 |        | 2006 |  
|                                                                                                |  |      |        |      |   |       | 
|                                                                                                |  |      |        |      |   |       | 
|Restricted cash subject to
  senior debt holder agreement                                       |  | $    | 10,776 |      | $ |      | 
|Escrow account for
  prefunded interest on senior debt                                          |  |      |       | (1)  |   | 1,602 | 
|Initial restricted
  certificate of deposit for Beverly Hills facility to collateralize lease   |  |      |       |      |   | 72    | 
|Secondary restricted
  certificate of deposit for Beverly Hills facility to collateralize lease |  |      |       |      |   | 78    | 
|Restricted certificate of
  deposit for Norwalk office to collateralize lease                   |  |      |       |      |   | 695   | 
|                                                                                                |  |      |        |      |   |       | 
|Total restricted cash                                                                           |  |      | 10,776 |      |   | 2,447 | 
|                                                                                                |  |      |        |      |   |       | 
|Less current portion                                                                            |  |      | 10,776 |      |   | 1,602 | 
|                                                                                                |  |      |        |      |   |       | 
|                                                                                               
|Total non-current
  restricted cash                                                             |  | $    |       |      | $ | 845   | 
|                                                                                                |  |      |        |      |   |       | 

|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At June 30, 2007, the
  Company had $8.1 million prefunded interest on senior debt. This prefunded
  amount is being treated as a discount and netted with the related senior
  debt.

As
of June 30, 2005, the Companys CEO at that time and current 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
$0.2 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 at that
time. As of June 30, 2007, the letter of credit on the Manhasset facility has
expired and the guarantee no longer exists.

6. Inventories

Following are the components of
inventory
included in the Consolidated Balance Sheets as of June 30, 2007 and July 1,
2006:

|                        |  |      |       |      |   |       |  
|----------------------- |  | ---- | ----- | ---- | - | ----- | -
|                        |  |      |       |      |   |       |  
|(Dollars in thousands)  |  | 2007 |       | 2006 |  
|                        |  |      |       |      |  
|                       
|Back bar supplies       |  | $    | 116   |      | $ | 508   |  
|Components              |  |      | 881   |      |   | 596   |  
|Finished goods          |  |      | 574   |      |   | 1,556 |  
|                        |  |      |       |      |   |       |  
|                       
|Total inventory         |  |      | 1,571 |      |   | 2,660 |  
|                        |  |      |       |      |   |       |  
|Inventory reserves      |  |      | (260  | )    |   | (446  | )
|                        |  |      |       |      |   |       |  
|                       
|Total inventories (net) |  | $    | 1,311 |      | $ | 2,214 |  
|                        |  |      |       |      |   |       |  

7. Property and Equipment, net

Following are the components of
property and
equipment included in the Consolidated Balance Sheets as of June 30, 2007 and
July 1, 2006:

49

---



|                                            |  |                 |      |                |   |        |  
|------------------------------------------- |  | --------------- | ---- | -------------- | - | ------ | -
|(Dollars
  in thousands)                    |  | June 30,
  2007 |      | July 1,
  2006 |  
|                                            |  |                 |      |                |  
|                                           
|Furniture
  and fixtures                    |  | $               | 174  |                | $ | 2,337  |  
|Machinery
  and equipment                   |  |                 | 238  |                |   | 3,078  |  
|Leasehold
  improvements                    |  |                 | 218  |                |   | 11,261 |  
|                                            |  |                 |      |                |   |        |  
|Capital
  lease assets                      |  |                 |     |                |   | 439    |  
|                                            |  |                 |      |                |   |        |  
|                                           
|Total
  property and equipment              |  |                 | 630  |                |   | 17,115 |  
|                                            |  |                 |      |                |   |        |  
|Accumulated
  depreciation and amortization |  |                 | (578 | )              |   | (4,134 | )
|                                            |  |                 |      |                |   |        |  
|                                           
|Total
  property and equipment, net         |  | $               | 52   |                | $ | 12,981 |  
|                                            |  |                 |      |                |   |        |  

Depreciation
expense for the years ended June 30, 2007, July 1, 2006, and June 30, 2005 was
$0.6 million, $0.2 million, and $0.3 million, respectively.

Impairment of property and equipment

Due
to the anticipated relocation of the Company headquarters, that subsequently
occurred in September 2007, the Company has determined that a portion of its
property and equipment had been fully impaired as of June 30, 2007. The Company
has recorded additional depreciation expense of $0.3 million to record this
impairment and is included in Depreciation and amortization in the Condensed
Consolidated Statement of Operations for the year ended June 30, 2007.

Closing of Beverly Hills Store

On
February 8, 2007, the Company reached an agreement with the landlord at the
Beverly Hills salon to surrender the leased property. Due to the limited
capital and a revised business plan, the Company was unable to complete the
remodeling and re-open the store. As a result of this agreement, the Company
recorded a charge of $0.6 million in the quarter ended March 31, 2007 to write-off
all of the net assets of the Beverly Hills facility, and an additional $0.5
million charge to record the estimated costs it may incur as a result of
surrendering the leased property. The $1.1 million expense associated with the
closure of the Beverly Hills store is included in Loss from discontinued
operations in the Condensed Consolidated Statement of Operations for the year
ended June 30, 2007. The remaining $0.3 million accrual is included in Accrued
expenses and other current liabilities in the Condensed Consolidated Balance
Sheet as of June 30, 2007.

8. 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 June 30, 2007, July 1, 2006, and June 30, 2005 was $15.0
thousand, $9.0 thousand, and $1.0 thousand respectively. The following table
provides additional information concerning intangible assets as of June 30,
2007 and July 1, 2006:

50

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|                                    |  |                 |     |                |   |        |  
|----------------------------------- |  | --------------- | --- | -------------- | - | ------ | -
|(Dollars
  in thousands)            |  | June 30,
  2007 |     | July 1,
  2006 |  
|                                    |  |                 |     |                |   |        |  
|                                    |  |                 |     |                |   |        |  
|Non-compete
  agreements            |  | $               |    |                | $ | 1,687  |  
|                                    |  |                 |     |                |   |        |  
|Trademark
  / trade name            |  |                 |    |                |   | 1,144  |  
|                                    |  |                 |     |                |   |        |  
|Customer
  relationships            |  |                 |    |                |   | 1,764  |  
|                                    |  |                 |     |                |   |        |  
|Licensing
  agreements              |  |                 |    |                |   | 5,247  |  
|Domain
  name                       |  |                 | 50  |                |   | 50     |  
|Patent                              |  |                 |    |                |   | 43     |  
|                                    |  |                 |     |                |   |        |  
|Sephora                             |  |                 | 43  |                |   | 43     |  
|                                    |  |                 |     |                |   |        |  
|                                    |  |                 |     |                |   |        |  
|Total
  property and equipment      |  |                 | 93  |                |   | 9,978  |  
|                                    |  |                 |     |                |   |        |  
|Accumulated
  amortization          |  |                 | (44 | )              |   | (4,953 | )
|                                    |  |                 |     |                |   |        |  
|                                   
|Total
  property and equipment, net |  | $               | 49  |                | $ | 5,025  |  
|                                    |  |                 |     |                |   |        |  

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

|                         |            |                        |   |   
|------------------------ | ---------- | ---------------------- | - | --
|(Dollars
  in thousands) |            | For the
  Years Ended, |  
|                         |            |                        |   |   
|                         | 2008       |                        | $ | 16
|                         | 2009       |                        |   | 15
|                         | 2010       |                        |   | 11
|                         | 2011       |                        |   | 7 
|                         | 2012       |                        |   |  
|                         | Thereafter |                        |   |  
|                         |            |                        |   |   
|                        
|                         |            |                        | $ | 49
|                         |            |                        |   |   

9. Accrued Expenses and Other Current
Liabilities

The
table below consists of the Companys accrued expenses and other current
liabilities as of June 30, 2007 and July, 1 2006.

|                                                       |  |                 |       |                |   |        | 
|------------------------------------------------------ |  | --------------- | ----- | -------------- | - | ------ | 
|(Amounts in thousands)                                 |  | June 30,
  2007 |       | July 1,
  2006 |  
|                                                       |  |                 |       |                |  
|                                                       |  |                 |       |                |   |        | 
|Accrued
  interest                                     |  | $               | 3,141 |                | $ | 2,735  | 
|Accrued
  dividends                                    |  |                 |      |                |   | 2,474  | 
|Accrued
  management Fees                              |  |                 |      |                |   | 1,714  | 
|Due
  to John Hopkins  consulting fees (a)            |  |                 |      |                |   | 1,300  | 
|Accrued
  registration rights penalties (b)            |  |                 | 3,808 |                |   | 1,547  | 
|Legal
  settlements                                    |  |                 | 500   |                |   | 1,250  | 
|Advertising                                            |  |                 | 750   |                |   |       | 
|Payroll,
  Benefits and Other                          |  |                 | 1,513 |                |   | 5,429  | 
|                                                       |  |                 |       |                |   |        | 
|Total
  Accrued Expenses and Other Current Liabilities |  | $               | 9,712 |                | $ | 16,449 | 
|                                                       |  |                 |       |                |   |        | 

(a) The agreement was terminated on May 7, 2007 (see Note 4).

51

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(b) 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 purchased. 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 a Registration
Statement on Form S-1 on 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), which the Company did not meet. 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
Company 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
penalty of 3% of the aggregate purchase price paid by such stockholders. In
addition, the agreement required the Company to put into effect the planned
authorized share increase, which would increase the number of authorized shares
of Common Stock that the Company is authorized to issue from 20,000,000 to
60,000,000 (Authorized Share Increase) 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 stockholders
and ongoing monthly charges of 1.5% of the aggregate purchase price paid by
such stockholders for each 30-day period or pro rata portion. Failure under
either of the obligations requires a cash payment.

On
March 12, 2007, holders of the
registration rights described above, agreed to waive any additional
registration rights penalties incurred by the Company after December 30, 2006
concurrent with the May 7, 2007 financing.

Due
to the fact that the Company did not meet the effective date requirement by
June 3, 2006 or the Authorized Share Increase requirement, an operating charge
has been recorded for the combined estimated penalties of $2.3 million and $1.5
million during the years ended June 30, 2007 and July 1, 2006, respectively.
This includes charges of $0.4 million per month. Due to the waiver received on
March 12, 2007 discussed above, the
Company did not record any additional penalties after December 30, 2006.
The cumulative obligation of $3.8 million represents the aggregate registration
penalties payable through June 30, 2007 and is included in Accrued expenses and
other current liabilities on the Consolidated Balance Sheet.

10. Long-Term Debt and Other Long
Term Liabilities

The
Companys long-term debt and other long-term liabilities as of June 30, 2007
and July 1, 2006 consist of the following:

52

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|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|----------------------------------------------------------------------- |  | --------------- | -------- | ----------------- |  | ------------------- |  | ----------- | ------ | - | - | ------- | -
|                                                                        |  |                 |          |                   |  | Amounts Outstanding | 
|(Dollars
 in thousands)                                                 |  | Maturity
 Dates |          | Interest Rate 
 % |  | June 30,2007        |  | July 1,2006 |       
|                                                                       
|Senior debt (a)                                                         |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Gross                                                                   |  |                 | 5/4/2010 |                   |  | 10.25%              |  | $           | 54,650 |   | $ |        |  
|Unamortized discount                                                    |  |                 |          |                   |  |                     |  |             | (6,752 | ) |   |        |  
|Prepaid interest                                                        |  |                 |          |                   |  |                     |  |             | (8,062 | ) |   |        |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Net                                                                     |  |                 |          |                   |  |                     |  |             | 39,836 |   |   |        |  
|Senior debt (b)                                                         |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|                                                                       
|Gross                                                                   |  |                 |          |                   |  | 12%                 |  |             |       |   |   | 10,000  |  
|Unamortized discount                                                    |  |                 |          |                   |  |                     |  |             |       |   |   | (854    | )
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Net                                                                     |  |                 |          |                   |  |                     |  |             |       |   |   | 9,146   |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Senior notes (c)                                                        |  |                 | Varies   |                   |  | 10.25%              |  |             | 4,000  |   |   |        |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Subordinated debt (d)                                                   |  |                 |          |                   |  | 12%                 |  |             |       |   |   | 4,839   |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Other long term debt                                                    |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Note payable                                                            |  |                 |          |                   |  | 5%                  |  |             |       |   |   | 1,000   |  
|Other long term liabilities                                             |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Long term licensing obligation                                          |  |                 |          |                   |  | 6%                  |  |             |       |   |   | 3,818   |  
|Deferred construction allowance                                         |  |                 |          |                   |  |                     |  |             |       |   |   | 130     |  
|Capital lease obligations                                               |  |                 |          |                   |  | 6%                  |  |             |       |   |   | 393     |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Deferred Liability  Sephora (See Note 13)                              |  |                 |          |                   |  |                     |  |             | 5,000  |   |   | 5,000   |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Convertible securities                                                  |  |                 |          |                   |  |                     |  |             | 20,341 |   |   | 197,565 |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Total                                                                   |  |                 |          |                   |  |                     |  |             | 69,177 |   |   | 221,891 |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Less current portion and amount included in
 other current liabilities* |  |                 |          |                   |  |                     |  |             |       |   |   | 16,497  |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  
|Long-term portion                                                       |  |                 |          |                   |  |                     |  | $           | 69,177 |   | $ | 205,394 |  
|                                                                        |  |                 |          |                   |  |                     |  |             |        |   |   |         |  

* Portion included in other current liabilities amounted to $0 and
$1,512 at June 30, 2007 and July 1, 2006, respectively.

(a) - Senior
Debt - Laurus

On
May 7, 2007 (the Closing Date), the Company entered into an Amended
and Restated Securities Purchase Agreement with Laurus (Purchaser)
pursuant to which (i) the Company sold to the Purchaser a Secured Term Note in
the aggregate principal amount of $54,650,000 (the Note); and (ii)
the Company issued to the Purchaser separate warrants to purchase up to 29,276,583,452
shares and 9,245,236,880 shares, respectively, of the Companys Common Stock,
par value $0.001 per share (the Common Stock).

On
the Closing Date, the obligations of the Company to Laurus under the June 30,
2006 note were repaid and the Company received $25,900,000 in new cash proceeds
from the Note and placed $8,069,243 in a restricted account to be utilized to
prefund interest of the Note. Other disbursements include a closing payment of
$906,500 to Laurus Capital Management, LLC, an affiliate of Laurus, Laurus due
diligence and

53

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structuring
expenses of $10,000 and escrow agent fees of $2,000. 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 sum of $4,000,000 was
wired to a Company account and an additional $12,912,257 was deposited to a
restricted account to be disbursed to the Company in accordance with the
Restricted Account Letter Agreement dated May 4, 2007, which provides that the
Company must meet certain financial conditions including reaching settlements
with creditors before further money is released.

The
Note matures on May 4, 2010. Upon the occurrence and during the continuance of
any event of default, however, Laurus may declare all obligations immediately
due and payable. Interest accrues on the unpaid principal amount of the Note at
a rate per annum equal to the prime rate published in The Wall Street Journal
(the Prime Rate), plus two percent (2%) per annum (such sum being referred to
as the Contract Rate). Interest is (i) calculated on the basis of a 360 day
year on the unpaid principal amount of the Note outstanding from time to time
during the applicable period; and (ii) payable monthly, in arrears, commencing
on May 1, 2007, on the first business day of each consecutive calendar month
thereafter through and including the Maturity Date, and on the Maturity Date,
whether by acceleration or otherwise. The Contract Rate may be increased by 2%
per annum in the event that sufficient shares of the Common Stock are not
authorized to allow the Purchaser to exercise all of the Warrants by December
31, 2007, as described in the Purchase Agreement, and shall remain at such
higher rate until such time as a sufficient number of such shares are
authorized. Based upon the prime rate, the interest rate on the debt at June
30, 2007 was 10.25%.

The
Company may prepay the Note by paying to the Purchaser a sum of money equal to
(i) one hundred percent (100%) of the principal amount outstanding at such time
together with accrued but unpaid interest thereon and any and all other sums
due, accrued or payable to Purchaser arising under the Note, the Purchase
Agreement or any other Related Agreement. 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.

In
connection with the issuance of the Warrants, the Company entered into a
Registration Rights Agreement dated May 4, 2007 with the Purchaser, pursuant to
which the Company agreed to file a registration statement with the Securities
and Exchange Commission covering the resale of the Warrant Shares within one
year and to cause the registration statement to become effective within 90 days
following the filing of such registration statement.

The
Warrants issued to the Purchaser have a 10-year term and an exercise price
equal to $.001 per share. The Company has calculated a debt discount
attributable to the value of these warrants of $7.0 million which will be
amortized over the term of the Note using the effective interest method. The
effective interest rate calculated on this debt amounted to 15.58%. The Company
has recorded the fair value of the warrants, as a discount and a corresponding
liability as required by EITF 00-19 due to the insufficient number of shares
authorized. As of June 30, 2007, this note carried a debt discount of $6.8
million. For the year ended June 30, 2007, the Company recorded interest
expense of $0.2 million related to the amortization of the debt discount. The
liability to be recorded for the securities will be adjusted to fair value at
each reporting period until the number of authorized shares is increased to
permit the exercise of these securities. Under the Purchase Agreement, if the
conditions set forth in the Purchase Agreement are met within three years, then
one of the warrants issued to Laurus will be returned to the Company. The
Company has agreed to issue a like warrant to Richard Rakowski, Chairman of the
Company if such warrants are returned to the Company. The conditions include
that all of the Companys obligations to Purchaser have been repaid and that
the Companys Total Debt (as defined) divided by the aggregate amount of EBITDA
(as defined) for a 12 month period has not exceeded 4.0 for four consecutive
months. If exercised in full, the Warrants issued to Laurus would constitute
approximately 75% of the issued and outstanding Common Stock of the Company on
a fully diluted basis provided however that such Warrants contain a blocker
provision pursuant to which Laurus cannot exercise such Warrants to acquire
more than 9.99% of the then outstanding shares of Common Stock of the Company
provided further that such limitation may be waived by the Holder on not less
than 61

54

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days prior
notice to the Company. The Warrants further provide that such limitation is
automatically null and void following notice to the Company upon the occurrence
and during the continuance of an Event of Default (as defined in the Purchase
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 (such amount, the Share Amount). If the Purchaser
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 to the Purchaser, 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 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. In the
event that effective date of the amendment authorizing the Share Amount does
not occur by December 31, 2007 as described in the Purchase Agreement, the
Contract Rate of the Note may be increased by 2% per annum and shall remain at
such higher rate until such time as the Share Amount is authorized.

(b) - Senior
Debt - TICC

On
July 6, 2006 the Company repaid $8.3 million of the senior debt from Technology
Investment Capital Corp. (TICC) with proceeds from a financing it completed
with Laurus Master Fund, Ltd. (Laurus), and the remaining $1.7 million
outstanding was converted into the $5.2 million subordinated loan discussed
below. As a result of the early repayment of the debt, the unamortized discount
of $0.9 million and unamortized financing costs of $0.2 million were written
off and recorded as interest expense upon repayment in the year ended June 30,
2007.

(c)  Senior
Demand Notes

March 16, 2007 - $2,000,000 Senior Secured Loans

On
March 16, 2007, the Company executed four Senior Secured Notes in the aggregate
amount of $2,000,000 (North Sound Legacy International Ltd. $1,125,000, North
Sound Legacy Institutional Fund LLC $375,000, and, Seapine Investments, LLC
$375,000, each of whom is an existing stockholder of the Company, and Andrew D.
Lipman, a former director and existing stockholder $125,000). The Notes were
due on demand and bear interest at the prime rate in effect from time to time
as reported in the Wall Street Journal plus 2% and ranked pari passu in payment
and security with the $25,000,000 of senior indebtedness of the Company issued
to Laurus made as of June 30, 2006. Based upon the prime rate, the interest
rate on the debt at June 30, 2007 was 10.25%. Due to the refinancing and
repayment of the $25.0 million senior debt, the Company, Laurus, and bridge
lenders have entered into agreements for the integration of these loans
consistent with that of the May 2007 loan documentation with Laurus discussed
above. 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.

March 27, 2007 - $2,000,000 Senior Secured Loans

On
March 27, 2007, the Company executed four additional Senior Secured Notes in
the aggregate amount of $2,000,000 (North Sound Legacy International Ltd.
$1,125,000, North Sound Legacy Institutional Fund LLC $375,000, and, Seapine
Investments, LLC $375,000, each of whom is an existing stockholder of the
Company, and Andrew D. Lipman, a former director and existing stockholder
$125,000). The Notes were due on demand and bear interest at the prime rate in
effect from time to time as reported in the Wall Street

55

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Journal plus
2% and also ranked pari passu in payment and security
with the $25,000,000 of senior indebtedness of the Company issued to Laurus
made as of June 30, 2006. Based upon the prime rate, the interest rate on the
debt at June 30, 2007 was 10.25%. Due to the refinancing and repayment of the
$25.0 million senior debt, the Company, Laurus, and bridge lenders have entered
into agreements for the integration of these loans consistent with that of the
May 2007 loan documentation with Laurus discussed above. 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.

(d) -
Subordinated Debt

$4.8 Million Subordinated Loan

On
July 11, 2006, the Company entered into an amended and restated loan agreement
(the Amended Subordinated Loan Agreement) in order to amend and restate the
provisions of its $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 $5.2 million Subordinated Loan
Agreement discussed below. Pursuant to a subordination agreement dated July 11,
2006, the Amended Subordinated Loan was subordinated to the Companys then
existing senior indebtedness to Laurus under the Securities Purchase Agreement
and the Related Agreements.

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 below. The Company had calculated a debt
discount attributable to the value of these warrants of $3.2 million, which was
originally amortized over the term of the note using the effective interest
method. As of May 7, 2007, this note carried a debt discount of $3.1 million.
Upon the exchange of the note discussed below, this discount was written off to
interest expense in the year ended June 30, 2007. For the year ended June 30,
2007, the Company recorded interest expense of $0.1 million related to the
amortization of the debt discount.

On
May 7, 2007, each of the holders of the $4.8 million Subordinated Loan
exchanged their indebtedness for shares of a newly created Series E Convertible
Preferred Stock of the Company (see Note 19).

$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 was subordinated to the
Companys then existing senior indebtedness to Laurus.

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 receive 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 $3.4 million which is
attributable to the value of the warrants

56

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issued. The
debt discount was originally amortized over the term of the loan using the
effective interest method. As of May 7, 2007, this note carried a debt discount
of $3.3 million. Upon the exchange of the note discussed below, this discount
was written off to interest expense in the year ended June 30, 2007. For the
year ended June 30, 2007, the Company recorded interest expense of $0.1 million
related to the amortization of the debt discount.

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.

On
May 7, 2007, each of the holders of the $5.2 million Subordinated Loan
exchanged their indebtedness for shares of a newly created Series E Convertible
Preferred Stock of the Company (see Note 19).

$4.0 Million Senior Subordinated Loans:

|    |                                               
|--- | ----------------------------------------------
|(i) | $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 Shares), of the Companys Common Stock. According to the terms of the
agreement, since the Subordinated Secured Note was not repaid by April 30,
2007, the Company is required to issue Laurus warrants with like terms to
purchase an additional 8,750,000 shares of Common Stock.

The
Laurus Warrants have a 7-year term and an exercise price equal to $0.001 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. The Company recorded a debt discount in the
amount of $0.7 million which is attributable to the value of the warrants
issued. The debt discount was originally amortized over the term of the loan
using the effective interest method. As of May 7, 2007, this note carried a
debt discount of $0.7 million. Upon the exchange of the note discussed below,
this discount was written off to interest expense in the year ended June 30,
2007. For the year ended 30, 2007, the Company recorded interest expense of $23
thousand related to the amortization of the debt discount.

On
May 7, 2007, Laurus exchanged the $1.0 million loan for shares of a newly
created Series E Convertible Preferred Stock of the Company (see Note 19).

57

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|     |                                       
|---- | --------------------------------------
|(ii) | $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
was subordinated to the Companys then 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.

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. According to the terms of the agreement, since the Senior
Subordinated Note was not repaid by April 30, 2007, certain holders of such
Warrants are required to contribute 8,750,000 Warrants back to the Company and
the Company is required to issue an additional 8,750,000 Warrants to Laurus.
The Company recorded a debt discount in the amount of $1.7 million which is
attributable to the value of the warrants issued. The debt discount was
originally amortized over the term of the loan using the effective interest
method. As of May 7, 2007, this note carried a debt discount of $1.6 million.
Upon the exchange of the note discussed below, this discount was written off to
interest expense in the year ended June 30, 2007. For the year ended June 30,
2007, the Company recorded interest expense of $0.1 million related to the
amortization of the debt discount.

On
May 7, 2007, each of the holders of the $3.0 million Senior Subordinated Loan
exchanged their indebtedness for shares of a newly created Series E Convertible
Preferred Stock of the Company (see Note 19).

Accrued Interest and Maturities of Other Long
Term Debt

Accrued
interest of $3.1 and $2.7 million is included in accrued expenses as of June
30, 2007 and July1, 2006, 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, |       
|                        |  |                              |        | 
|                       
|2008                    |  | $                            |       | 
|2009                    |  |                              |       | 
|2010                    |  |                              | 58,650 | 
|2011                    |  |                              |       | 
|2012                    |  |                              |       | 

11. Commitments and Contingencies

Litigation

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
alleged 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. On August 17, 2007 a settlement was reached with
UBS under which the Company was required to pay $1.0 million in full settlement
of the claim, no later than

58

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August 22, 2007. The Company made the
required payment within the period specified by the agreement. The Company
recognized expense of $1.75 million in the year ended July 1, 2006 to initially
record a liability for this contingency. During the year ended June 30, 2007
$0.75 million was recorded as income to reduce the estimated liability to the
    settlement amount. These amounts are included in Selling, general, and administrative
expenses in the Consolidated Statements of Operation. The Company had a payable
balance of $1.0 million as of June 30, 2007, with $0.5 million included in
Accounts payable and $0.5 million included in Accrued expenses and other
current liabilities in the Consolidated Balance sheet. The Company had a
payable balance of $1.75 million as of July 1, 2006, with $0.5 million included
    in Accounts payable and $1.25 million included in Accrued expenses and other
current liabilities in the Consolidated Balance sheet.

Employee Lawsuits

Eight
prior employees have commenced lawsuits against KAAI in the Superior Court of
New Jersey. The complaints allege that the employees were improperly terminated
due to age. The Company is contesting these claims, and does not believe
settlements of the claims will exceed the amount accrued and included in
Accrued expenses and other current liabilities.

Other Contingencies

Mandalay
Agreement

A vendor
asserted a claim relating to an October 1, 2005 agreement that was contested by
the Company. An agreement between the parties was reached on February 1, 2007
to settle the dispute by granting the vendor 1,760,925 shares of Common Stock.
The Company has recorded a marketing charge of $0.4 million for the year ended
June 1, 2007 for this claim and $0.4 million is included in
Additional paid-in capital on the June 30, 2007 Consolidated Balance Sheet, as
a result of the issuance of the shares in the quarter ended March 31, 2007.

GK Acquisition

On
or about July 25, 2007, the Purchaser of the spa /salons filed a bankruptcy
petition in the U.S. Bankruptcy Court, District of New Jersey (Newark).
Although no litigation between the parties has been commenced, the Purchaser
has served the Company with subpoenas seeking information relating to the sale
and other transactions, disputes have arisen with respect to the various
obligations of the parties, and such disputes may be the subject of litigation
in the future. We have complied in all respects to provide the information
requested.

General

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 had 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 $0.04
million and $0.5 million for the years ended June 30, 2007 and July 1, 2006, respectively.

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Capital Leases

The Company
had been committed under a non-cancelable capital lease for medical equipment
at four of its previously operated facilities. The term of the lease was two
years, expiring in April 2008. Capital lease assets totaled $0.4 million as of
July 1, 2006, net of depreciation, and capital lease obligations totaled $0.4
million as of that date. Since the leases were transferred as part of the
stores / salons sale on May 7, 2007, there is no obligation as of June 30,
2007.

Operating Leases

The
Company had been committed under non-cancelable operating leases for all twelve
of its previously operated store facilities and two corporate office locations.
The original terms of the leases ranged 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. As a result of the stores / salons sale on May 7, 2007, the Company
has transferred over the leases to the Purchaser. Subsequent to the sale of the
stores / salons, the Company continues to be a guarantor of six of the leases
of the facilities including: Dallas, Texas, Chevy Chase, Maryland, Manhattan,
New York, Manhasset Long Island, New York, Palm Beach, Florida, and Short
Hills, New Jersey. Due to the Chapter 11 filing by the Purchaser, the Company
has determined that it has a probable contingent liability per Statement of
Financial Accounting Standard No. 140
Accounting for Transfer and Servicing of Financial Assets and Extinguishment
of Liabilities. As a result, the Company has recorded an estimated expense of
$2.4 million in the year ended June 30, 2007 and the obligation is
included in Accrued expenses and other current liabilities on the Consolidated
Balance Sheet.

In addition
to the lease guarantees discussed above, total rent expense, including real
estate taxes, utilities, and other expenses in the Consolidated Statement of
Operations for the years ended June 30, 2007, July 1, 2006, and June 30, 2005
was $1.1 million, $0.5 million, and $0.5 million, respectively. Included in the
rent expense for the year ended June 30, 2007 is a $0.4 million
charge related to the early termination of the Norwalk, Connecticut headquarter
lease. The lease, which previously had an expiration date of December 31, 2015,
was terminated as of September 21, 2007 in connection with the Companys
relocation to its new headquarters in New York.

Except for
the lease guarantees mentioned above, as of June 30, 2007 the Company did not
have any future minimum lease payments due under existing non-cancelable leases
with remaining terms of greater than one year.

As of June
30, 2007 future minimum lease payments estimated to be due as a result of the
guarantees mentioned above with remaining terms of greater than one year are as
follows:

|                             |  |                            |       | 
|---------------------------- |  | -------------------------- | ----- | 
|(Dollars
  in thousands)     |  |                            |      
|                             |  |                            |      
|Fiscal
  Year                |  | Operating Lease
  Payments |      
|                             |  |                            |      
|                             |  |                            |      
|2008                         |  | $                          | 894   | 
|                             |  |                            |       | 
|2009                         |  |                            | 355   | 
|                             |  |                            |       | 
|2010                         |  |                            | 196   | 
|                             |  |                            |       | 
|2011                         |  |                            | 175   | 
|                             |  |                            |       | 
|2012                         |  |                            | 177   | 
|                             |  |                            |       | 
|Thereafter                   |  |                            | 857   | 
|                             |  |                            |       | 
|Total minimum lease payments |  | $                          | 2,654 | 
|                             |  |                            |       | 

60

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12. Related Party Transactions

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 May
7, 2007 and July 1, 2006, there were accrued and unpaid consulting fees to L
Capital of approximately $876,841.
Concurrent with the May 7, 2007 financing, L Capital forgave the $876,841 in
accrued management fees previously included in the Companys Condensed
Consolidated Balance Sheet. As a result, the Company has recorded the forgiven
management fee as a capital contribution in its Consolidated Balance Sheet as
of June 30, 2007.

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 had been paid and (c) the $4.0 million in principal, along with
the related interest of senior subordinated debt issued on December 22, 2006
has been paid. Upon the occurrence of all of the preceding, all accrued
management fees would have been 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 May 7, 2007 and July 1, 2006,
there were accrued and unpaid consulting fees to KCO of approximately $837,433.
Concurrent with the May 7, 2007
financing, KCO forgave the $837,433 in accrued management fees previously
included in the Companys Condensed Consolidated Balance Sheet. As a result,
the Company has recorded the forgiven management fee as a capital contribution
in its Consolidated Balance Sheet as of June 30, 2007.

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 has
been paid. Upon the occurrence of all of the preceding, all accrued management
fees would have been due and payable.

Loans by Affiliates of Pequot

Affiliates of Pequot, who collectively are
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

61

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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.

On
May 7, 2007, affiliates of Pequot exchanged their indebtedness for shares of a
newly created Series E Convertible Preferred Stock of the Company (see Note
18).

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 7 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. According to the
terms of the agreement, since the Laurus $1 million Senior Subordinated Loan
was not repaid by April 30, 2007, warrants to purchase 2,708,374 shares will be
returned by Klinger Investments to the Company for cancellation.

On
May 7, 2007, Klinger Investments, LLC exchanged its indebtedness for shares of
a newly created Series E Convertible Preferred Stock of the Company (see Note
18).

Loans by Laurus Master Fund
Ltd.

Laurus
had 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
$.001 per share to purchase a total of 10,000,000 shares of Common Stock.
According to the terms of the agreement, since the Senior Subordinated Secured
Debt was not repaid by April 30, 2007, the Company is required to issue an
additional 8,750,000 warrants to Laurus. In addition, since prior to the 14th
month anniversary of June 30, 2006, the Companys obligations to Laurus under
the Senior Secured Debt had been reduced to $12,500,000 or less, warrants
issued to Laurus to purchase 6,839,394 shares of Common Stock will be
automatically cancelled and terminated and since at such time the Companys
obligations had been reduced to zero, warrants to purchase an additional
6,693,875 shares of Common Stock will also be cancelled. As a result of the May
7, 2007 refinancing discussed below, the Company will cancel the combined
13,533,269 warrants held by Laurus, due to the prepayment.

On
May 7, 2007, the Company repaid the $25.0 million debt to Laurus as part of the
Senior Debt financing and an additional $3.8 million default penalty which was
incurred in the fiscal quarter ended March 31, 2007 (see Note 10).

Richard Rakowski

Loans

Richard
Rakowski, the Chairman and former Chief Executive Officer of the Company,
loaned the Company $850,000 as part of the Senior Subordinated Debt 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. According
to the terms of the agreement, since the Laurus $1 million Senior Subordinated Secured Loan was not
repaid by April 30, 2007, warrants to purchase 3,541,666 shares of Common Stock
will be returned to the Company for cancellation by Mr. Rakowski. Mr. Rakowski
had also personally guaranteed certain

62

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obligations of the Company. As of June 30,
2007 these guarantees no longer exist as the related letters of credit have
expired.

On
May 7, 2007, in connection with the Laurus financing, Mr. Rakowski exchanged
his indebtedness for shares of a newly created Series E Convertible Preferred
Stock of the Company (see Note 18).

Consulting Agreement

On
May 7, 2007, the Company entered into a Consulting Agreement with Richard
Rakowski, Chairman of the Company, pursuant to which Mr. Rakowski will provide
consulting services for the Company. He will receive a fee at the pro-rata
annual rate of $295,000 from May 1, 2007, to August 31, 2007. From September 1,
2007, to December 31, 2007, the equivalent annual fee will decrease to $175,000
and from January 1, 2008 and thereafter, the equivalent rate will decrease to
$125,000. In addition the Agreement provides that in the event that Mr.
Rakowski is successful in specified transactions involving the Company, he is
entitled to a success fee of 2.5% of the actual cash provided to the Company in
such transactions. The agreement may be terminated at any time by either party.

Loans by Andrew Lipman

Andrew
D. Lipman, a former Director, loaned the Company $150,000 in the July 11, 2006
$5.2 million Subordinated Debt Financing and received 7 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. According to
the terms of the agreement, since the Laurus $1 million Senior Subordinated Secured Loan was not
repaid by April 30, 2007, warrants to purchase 833,334 shares of Common Stock
will be returned to the Company for cancellation by Mr. Lipman. Mr. Lipman
loaned the Company a combined $250,000 in the combined $4.0 million Secured
Demand Note financings completed on March 16, 2007 and March 27, 2007.

On
May 7, 2007, Mr. Lipman exchanged his indebtedness from the July 11, 2006 and
December 22, 2006 financings for shares of a newly created Series E Convertible
Preferred Stock of the Company (see Note 18).

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 recorded
revenues of $3.4 million and $2.7 million for the years ended June 30, 2007 and
July 1,
2006, respectively. As of June 30, 2007 the Company had a $0.3 million
receivable balance from Sephora which is included in Accounts receivable, net
in the Condensed Consolidated Balance Sheet.

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.

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On
May 7, 2007, the notes payable to Judith and Tom Pyle were exchanged for shares
of a newly created Series E Convertible Preferred Stock of the Company (see
Note 19).

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. As a result of the store / salons sale on May 7,
2007, the Millennium software program will not be used for transactions after
April 1, 2007. The Company has recorded a charge of $0.1 million to expense the
remaining liability under this contract. This charge has been included in Loss
from discontinued operations for the year ended June 30, 2007.

13. Material Agreements

Agreements with Johns Hopkins Medicine

Termination
of Agreement

On
May 7, 2007, the Company entered into an agreement with Johns Hopkins Medicine,
Johns Hopkins University and Johns Hopkins Health Systems Corporation, pursuant
to which the Consulting and Services Agreement between Advanced Aesthetics,
Inc. and Johns Hopkins Medicine (Johns Hopkins) dated November 23, 2003, as
amended was terminated effective April 13, 2007. Under the Agreement, the
Company was required to pay Johns Hopkins $369,565 by July 31, 2007, and as of
the effective date, Johns Hopkins will no longer provide services to the
Company. The Company did make the payment by the required date. As a result of
this agreement, the Company has recorded a derecognition of the intangible
asset of approximately $3.7 million and the liability of approximately $3.3
million in the fourth quarter ended June 30, 2007. This net charge of $0.4
million has been recorded in Loss from discontinued operations in the
Consolidated Statement of Operations.

The
May 7, 2007 agreement also provides that the License and Management Agreement
between Johns Hopkins University and a Company subsidiary, Klinger Advanced
Aesthetics, LLC, relating to the Companys Chevy Chase, Maryland facility is
terminated effective May 13, 2007, and that the Company shall pay Johns Hopkins
all amounts due under that agreement by May 21, 2007. Under the agreement, the
Company paid $0.2 million due through March 31, 2007. The subsidiary was sold
to GK Acquisition effective April 1, 2007.

Agreement
with Sephora USA

See
Note 12 Related Party Transactions for a description of the Sephora agreement.

Agreement
with HSN

HSN
operates one of the largest direct U.S. retail networks for the sale of
consumer products. On April 2, 2007 KAAI entered into an exclusive marketing
agreement with HSN (Marketing Agreement) that provides for the sale of
Cosmedicine skin care products on our own Cosmedicine shows on HSN and on the
Sephora on HSN shows. HSN is required to order annual minimum amounts to
maintain the exclusive direct-to-consumer network sales rights. Under this
Marketing Agreement HSN (a) agreed to position KAAI as an aesthetics and
science of beauty expert, (b) will work with KAAI on development of skincare,
beauty, aesthetics and cosmetic products (Products), (c) will purchase the
Products from KAAI pursuant to HSNs Master Terms and Conditions for Purchases
Orders as modified by the Rider to the Master Terms, (d) will provide airtime
on HSNs television shopping programming (HSNs TV Programs) to KAAI for the
purpose of marketing, promotion and sale of the Products pursuant to the
following schedule of hours:

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|                                     |         
|------------------------------------ | --------
|Year                                 | Hours   
|                                     |         
|                                    
|Year 1 of
  Agreement                | 30 hours
|                                    
|Year 2 of
  Agreement                | 60 hours
|                                    
|Year 3 of
  Agreement and thereafter | 80 hours

(e) will be
responsible for the distribution of HSNs TV Programs and for payment of all
associated fees and cable commissions, (f) may offer the Products online at its
HSN .com website, (g) will develop a mutually agreeable public relations
strategy (PR Strategy) with KAAI to assist in the promotion of the
availability of the Products at HSN, provided that each party will be solely
responsible for their respective costs in its execution of any mutually agreed
to PR Strategy, (h) will develop a mutually agreeable strategy to promote the
Products through Advanced Service Sales, (defined as video-on-demand,
interactive television, podcasts, and any similar means of sale or any
successor media to such means), and a mutually agreeable robust continuity
program strategy, (i) will, at its own cost and expense, be responsible for
processing customer orders it receives for Products (Customer Orders),
processing payments for Customer Orders, and for the fulfillment of all
Customer Orders, and (j) will, at its own cost and expense, be responsible for
customer service inquiries relating to Customer Orders and for handling returns
of Customer Orders.

Under
the agreement, HSN remits payments directly to the Company for products
ordered. The term of the agreement is two years, but unless terminated in
accordance with provisions in the agreement, shall renew for five successive
one year terms.

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 previously operated 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 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 a True You equivalent
exercise price of $0.34 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

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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 commencing on May 1, 2006. At June 30,
2007 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. At June 30, 2007 the Company had a
note receivable balance of $0.1 million from Mr. Potter on the construction
loan which is included in other assets on the consolidated balance sheet.

Vendor agreements

During
    the year ended June 30, 2007, the Company negotiated with its vendors for
    reductions in accounts payable of approximately $1.1 million. Included in
    this amount were settlements with vendors that are also shareholders of the
    Company in the amount of $0.1 million, which have been reflected as a capital
    contribution and included in additional paid in capital.

14. Income Taxes

The
components of the deferred tax assets as of June 30, 2007 and July 1, 2006 are
as follows (in thousands):

|                                           |  |      |         |      |   |         |  
|------------------------------------------ |  | ---- | ------- | ---- | - | ------- | -
|                                           |  | 2007 |         | 2006 |  
|                                           |  |      |         |      |  
|                                          
|Net
  operating losses                     |  | $    | 54,774  |      | $ | 23,921  |  
|Accrued
  liabilities and reserves         |  |      | 1,858   |      |   | 1,163   |  
|Customer
  advances - gift cards           |  |      |        |      |   | 3,365   |  
|Accrued
  interest                         |  |      | 1,662   |      |   | 1,709   |  
|Accrued
  management fees                  |  |      |        |      |   | 697     |  
|Stock based
  compensation                 |  |      |        |      |   | 521     |  
|Property and
  equipment                   |  |      | 66      |      |   | 623     |  
|Amortization
  of goodwill and intangibles |  |      | 6,793   |      |   | 515     |  
|                                           |  |      |         |      |   |         |  
|                                           |  |      |         |      |   |         |  
|Total
  deferred tax assets                |  |      | 65,153  |      |   | 32,514  |  
|                                           |  |      |         |      |   |         |  
|Valuation
  allowance                      |  |      | (65,153 | )    |   | (32,514 | )
|                                           |  |      |         |      |   |         |  
|                                           |  |      |         |      |   |         |  
|Net deferred
  tax assets                  |  | $    |        |      | $ |        |  
|                                           |  |      |         |      |   |         |  

66

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The
Companys ability to utilize the cumulative Federal and State net operating
loss carryforwards of approximately $138.0 million at June 30, 2007 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 income (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 under FAS 109.

|                                                           |  |      |       |      |  |       |    |  |       |   
|---------------------------------------------------------- |  | ---- | ----- | ---- |  | ----- | -- |  | ----- | --
|                                                           |  | 2007 |       | 2006 |  | 2005  |   
|                                                           |  |      |       |      |  |       |   
|                                                           |  |      |       |      |  |       |    |  |       |   
|Statutory income tax
          benefit rate                |  |      | 35.0  | %    |  | (35.0 | )% |  | (35.0 | )%
|Unrealized (gain) loss on convertible
          securities |  |      | (66.3 | )%   |  | 31.8  | %  |  |      |   
|State income tax (net
          of federal benefit)        |  |      | 4.5   | %    |  | (5.7  | )% |  | (6.0  | )%
|Other                                                      |  |      | 0.1   | %    |  |      |    |  |      |   
|                                                           |  |      |       |      |  |       |    |  |       |   
|                                                           |  |      |       |      |  |       |    |  |       |   
|Subtotal                                                   |  |      | (26.7 | )%   |  | (8.9  | )% |  | (41.0 | )%
|Valuation allowance                                        |  |      | 26.7  | %    |  | 8.9   | %  |  | 41.0  | % 
|                                                           |  |      |       |      |  |       |    |  |       |   
|                                                           |  |      |       |      |  |       |    |  |       |   
|Total effective tax rate                                   |  |      | 0.0   | %    |  | 0.0   | %  |  | 0.0   | % 
|                                                           |  |      |       |      |  |       |    |  |       |   

15. 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.

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. The Certificate of Amendment will not be effective until the
information statement is approved by the SEC. It has not yet been approved by
the SEC.

67

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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, the Company
had 14,995,513 shares of Common Stock issued and outstanding. On February 8,
2007, the Company issued 1,760,925 shares of Common stock to a vendor as a
settlement of a disputed agreement. As a result, as of June 30, 2007, the
Company had 16,756,438 shares of Common Stock issued and outstanding. In
connection with the Share Exchange Agreement, the Company had previously 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.

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

On
May 7, 2007, the Board of Directors adopted a resolution to establish a series
of 500,000 shares of Series E Convertible Preferred Stock (Series E
Preferred). The Board of Directors also have the ability 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 of its
authorized but unissued preferred stock, 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 B Convertible Preferred Stock

General. As of June
30, 2007 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

68

---



shall be
distributed ratably to the holders of the Common Stock and the Series B
Preferred Stock and the Series E 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 Series E Preferred Stock and 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 May 6, 2007 the Company had 8,452.0222 shares of Series C Preferred Stock
issued and outstanding. Concurrent with the May 7, 2007 financing, all the
shares were exchanged for Series E Preferred. There are no shares of Series C
Preferred Stock issued and outstanding as of June 30, 2007.

Dividends. Dividends
on the Series C Preferred Stock accrued on a cumulative basis from December 20,
2005 and were compounded annually at a rate of 4% per annum. Upon the exchange of
Series C Preferred Stock for Series E Preferred on May 7, 2007, all accrued
dividends were forfeited by the holders.

Liquidation Preference.
In the event of a liquidation or dissolution, the holders of Series C Preferred
Stock were 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.

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 May 6, 2007, the
Company had 1,530 shares of Series D Preferred Stock issued and outstanding.
Concurrent with the May 7, 2007 financing, all the shares were exchanged for
Series E Preferred. There are no shares of Series D Preferred Stock presently
issued and outstanding as of June 30, 2007.

69

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Dividends. Dividends
on the Series D Preferred Stock accrued from December 22, 2005 at a rate of 4%
per annum. Upon the exchange of Series D Preferred Stock for Series E Preferred
on May 7, 2007, all accrued dividends were forfeited by the holders.

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 approximately 52,175 shares of Common Stock,
subject to adjustment for stock split and other events.

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.

Series E Convertible Preferred Stock

General. The Company
has authorized 500,000 shares of Series E Preferred Stock. As of June 30, 2007,
the Company had committed to issue 8301.278759 shares of Series E Preferred
Stock. These committed shares were issued on November 2, 2007.

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 E
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 E Preferred Stock had all of the outstanding Series E 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, the Series B
Preferred Stock and the Series E 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, each share of Series E Preferred Stock will
convert into 1,000,000 shares of Common Stock, subject to adjustment for stock
split and other events.

70

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

16. 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 had been issued under the subsidiary
(KAAI) 2003 stock option plan. Management has developed a new stock option plan
(The TrueYou.Com Inc. 2006 Stock Incentive Plan or the 2006 Plan) for the
Company that was approved by the Board of Directors (Board) of the Company in
the first quarter of fiscal year 2007. At that time, the Board also approved,
subject to shareholder approval, the exchanging of KAAI options for TrueYou
options under the 2006 Plan. The 2006 Plan was required to be submitted to the
stockholders of the Company for their approval within twelve months. The Board of
Directors approved a one-year extension to obtain this approval. The Company
believes that the approval of the 2006 Plan by the stockholders is perfunctory,
and as such has considered all options approved by the Board as granted. All
options granted by the Board in the year ended June 30, 2007 have been granted
under the 2006 Plan.

The
2006 Plan provides for awards of up to 105 million shares of TrueYou Common
Stock to employees and outside contractors in various forms. These include
non-qualified options, incentive stock options, and stock appreciation rights.
The 2006 Plan is administered by the Board, which also establishes the terms of
the awards. Non-qualified stock options have been the only form of awards
granted by the Board to date. A total of 32,090,269 shares of Common Stock
remained available for future award grants as of June 30, 2007.

Non-qualified
stock options granted under the 2006 Plan vest over a zero to four year period
and expire ten years from the date of grant. Options to acquire a total of
72,909,731 shares of Common Stock, net of forfeitures, have been granted by the
Board to employees and contractors under the Plan. Non-qualified stock options
may be granted at any price but, in general, are not granted with an exercise
price less than the fair market value of the stock on the date of grant.

Since
the Company does not have sufficient shares of common stock authorized, it is
required to treat the stock option awards as liability awards and remeasure at each
reporting period based upon fair value, utilizing the Black-Scholes option
pricing model. The Company recognized compensation income of approximately $0.6
million for the year ended June 30, 2007 and compensation expense of $0.4
million and $0.1 million for the years ended July 1, 2006 and June 30, 2005,
respectively for stock options granted and subsequent remeasurement. In
addition, as of June 30, 2007, there was approximately no unrecognized stock
based compensation expense related to non-vested stock options.

There
were new TrueYou options for the purchase of 58.1 million shares of Common
Stock granted during the twelve months ended June 30, 2007. There were
additional TrueYou options to purchase 22.2

71

---



million shares
of Common Stock issued as an exchange for Advanced Aesthetics, Inc. options.
There were no options granted during the twelve months ended July 1, 2006.

The
weighted average fair value of the new employee options granted during the
twelve months ended June 30, 2007 was $0.08. There were no options granted
during the year ended July 1, 2006. The weighted average fair value of the
employee options granted during the years ended June 30, 2005 was $0.59. The
fair value was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions for the year ended June 30, 2007 and
July 1, 2006:

|                                |  |                |           |               |  |               |  |  |          | 
|------------------------------- |  | -------------- | --------- | ------------- |  | ------------- |  |  | -------- | 
|                                |  | Year Ended     |           |               |  |              
|                                |  |                |           |               |  |              
|Assumptions                     |  | June 30,
 2007 |           | July 1,
 2006 |  | June 30,
2005 | 
|                                |  |                |           |               |  |               | 
|                                |  |                |           |               |  |               |  |  |          | 
|Expected dividend yield         |  |                |          |               |  | N/A           |  |  |         | 
|Risk-free interest rate         |  |                | 4.6%      |               |  | N/A           |  |  | 4.10%    | 
|Expected life of option
 grants |  |                | 3.0 years |               |  | N/A           |  |  | 6
 years | 
|Forfeiture rate                 |  |                | 9.2%      |               |  | N/A           |  |  | 2.5%     | 
|Expected volatility             |  |                | 50%       |               |  | N/A           |  |  | 30%      | 

The
Company also provides stock options to some of its outside contractors. These
options are subject to the provisions of EITF 96-8, which requires
remeasurement of the awards until performance is complete. As a result, these
awards were also revalued as of June 30, 2007. As of June 30, 2007 the weighted
average fair value was zero due to the significant drop in the Company
calculated share price, the weighted average interest rate was 4.9%, the
forfeiture rate was 9.2%, and weighted average expected life was 2.4 years for
these stock options.

A
summary of the Companys share option activity and related information during
the years ended June 30, 2007, July 1, 2006, and June 30, 2005 are as follows:

|                              |  |                     |             |                                   |   |      | 
|----------------------------- |  | ------------------- | ----------- | --------------------------------- | - | ---- | 
|                              |  | Options Outstanding |             |                                   |   |     
|                              |  |                     |            
|                              |  | Shares              |             | Weighted
 Average
 Exercise Price |  
|                              |  |                     |             |                                   |  
|                              |  |                     |             |                                   |   |      | 
|Outstanding, June 30, 2004    |  |                     | 9,202,523   |                                   | $ | 0.34 | 
|                              |  |                     |             |                                   |   |      | 
|Granted                       |  |                     | 21,739,626  |                                   |   | 0.34 | 
|Cancelled                     |  |                     | (1,958,134  | )                                 |   | 0.34 | 
|Exercised                     |  |                     |            |                                   |   |     | 
|                              |  |                     |             |                                   |   |      | 
|                              |  |                     |             |                                   |   |      | 
|Outstanding, June 30, 2005    |  |                     | 28,984,015  |                                   |   | 0.34 | 
|                              |  |                     |             |                                   |   |      | 
|Granted                       |  |                     |            |                                   |   |     | 
|Cancelled                     |  |                     | (6,763,073  | )                                 |   | 0.34 | 
|Exercised                     |  |                     |            |                                   |   |     | 
|                              |  |                     |             |                                   |   |      | 
|                              |  |                     |             |                                   |   |      | 
|Outstanding, July 1, 2006 (1) |  |                     | 22,220,942  |                                   |   | 0.34 | 
|                              |  |                     |             |                                   |   |      | 
|Granted                       |  |                     | 80,301,262  |                                   |   | 0.27 | 
|Forfeited                     |  |                     | (7,391,531  | )                                 |   | 0.24 | 
|Cancelled                     |  |                     | (22,220,942 | )                                 |   | 0.34 | 
|Exercised                     |  |                     |            |                                   |   |     | 
|                              |  |                     |             |                                   |   |      | 
|                              |  |                     |             |                                   |   |      | 
|Outstanding, June 30, 2007    |  |                     | 72,909,731  |                                   | $ | 0.27 | 
|                              |  |                     |             |                                   |   |      | 

|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|(1) | 1,892,850 KAAI options were
 exchanged for TrueYou options at an exchange rate of 11.73940981.

72

---



As
of June 30, 2007, 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 6/30/07 |  | Weighted average
 remaining
 contractual life (in
 years) |  | Weighted
 average
 exercise price |  | Number
 exercisable as
 of 6/30/07 (1) |  | Weighted
 average price | 
|                                      |  |                                                |  |                                                           |  |                                   |  |                                        |  |                         | 
|                                      |  |                                                |  |                                                           |  |                                   |  |                                        |  |                         | 
|Stock options issued @$0.19
 to $0.34 |  | 72,909,731                                     |  | 8.3                                                       |  | $  0.27                           |  | 59,771,118                             |  | $  0.27                 | 

|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company does not have
 sufficient authorized common shares at June 30, 2007 to permit the exercise
 of the stock options. These options would be exercisable if
 sufficient authorized shares were available.

Warrants

The
Company issued 38,661,696,408 warrants during the year ended June 30, 2007
which were valued using the Black-Scholes option pricing model using the
following weighted average assumptions: risk-free rate of return  4.65%; term
 10 years; volatility  50%; 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, 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 | 
|                           |  |                       |                |                                   |   |       | 
|Granted                    |  |                       | 38,661,696,408 |                                   |   | 0.001 | 
|Cancelled                  |  |                       |               |                                   |   |      | 
|Exercised                  |  |                       |               |                                   |   |      | 
|                           |  |                       |                |                                   |   |       | 
|                           |  |                       |                |                                   |   |       | 
|Outstanding, June 30, 2007 |  |                       | 38,725,335,177 |                                   | $ | 0.001 | 
|                           |  |                       |                |                                   |   |       | 

73

---



At June 30, 2007, 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 6/30/07 |  | Weighted
 average
 remaining
 contractual life
 (in years) |  | Weighted
 average
 exercise
 price |  | Number
 exercisable
 as of 6/30/07 |  | Weighted
 average
 price | 
|                                |  |                                                 |  |                                                            |  |                                    |  |                                    |  |                          | 
|                                |  |                                                 |  |                                                            |  |                                    |  |                                    |  |                          | 
|Warrants
 issued $.001 to $.230 |  | 38,725,335,177                                  |  | 9.8                                                        |  | varies                             |  | 38,725,335,177                     |  | varies                   | 

17. 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 approximately $3.0 thousand for each of the years
ended June 30, 2007, July 1, 2006, and June 30, 2005.

18. Exchange of Debt and Equity

On
May 7, 2007, each of the holders of the Companys Series C Preferred Stock,
Series D Preferred Stock and the holders of its Senior Subordinated
Indebtedness and Subordinated Indebtedness aggregating an original principal
amount of $14,038,710 and issued on May 9, 2006, July 11, 2006, and December
22, 2006 exchanged their shares of Preferred Stock and indebtedness,
respectively, for shares of a newly created Series E Convertible Preferred
Stock of the Company. The exchange was in connection with and as a condition to
the Laurus financing and the issuance of Warrants by the Company to Laurus. An
additional $1,000,000 of Subordinated Debt was also exchanged for Series E Convertible
Preferred Stock of the Company. As a result of these exchanges, the Company
recorded a contribution of capital on debt restructuring of $10.7 million as of
June 30, 2007 which is included in the Consolidated Balance Sheet.

To
implement the conversion, on May 7, 2007, the Company created a new Series E
Convertible Preferred Stock. The Series E Preferred Stock is being utilized
because the Company does not have sufficient authorized shares of Common Stock
and ranks pari passu with the existing Common Stock and Series B Preferred
Stock of the Company. Holders of Series E Preferred Stock shall have full
voting rights and powers and equal to that of holders of Common Stock and
preferred B holders. The Series E Preferred Stock is initially convertible into
Common Stock at the rate of one million shares of Common Stock per one
Preferred Share. These shareholders will also be entitled to dividends on a
pari passu basis with that of the Common Stock holders.

19. Convertible Securities

The
Company has insufficient shares of Common Stock authorized to allow for the
exercise of stock options or warrants, or allow the conversion of preferred
stock. As a result, under EITF 00-19, the Company is required to classify these
instruments as liabilities and remeasure the convertible securities at each

74

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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. Previous to the May 7, 2007 financing and sale of the stores / salons,
the fair value of the Common Stock was based in the price paid for a share of
the stock closest to the measurement date. The fair value of the Common Stock
as of July 1, 2006 was $0.39. The number of common shares into which the
convertible securities were 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. After the
stores /salons sale and recent financing which included 38.5 billion warrants
issued along with the debt, the stock has no longer traded on a regular basis
and the trading price does not appear indicative of its fair value. We have
used an analytical approach to approximate the true fair value of the shares.
The calculated fair value of the shares at June 30, 2007 was $0.00043. The
number of common shares into which the convertible securities were convertible
was 47,321,960,049 as of June 30, 2007. As of June 30, 2007, the Company
remeasured the convertible securities based on an estimated fair value of
approximately $20.3 million and recorded an unrealized gain of approximately
$206.1 million for the year ended June 30, 2007. Convertible securities will
convert back to equity when there are a sufficient number of shares of Common
Stock authorized.

20. Subsequent Event

On
July 18, 2007, Laurus exercised warrants to purchase an aggregate of 2,176,159
shares of the Common Stock, $0.001 par value, of the Company in a cashless
exercise at a price of $0.01 per share. The terms of the warrants provide that
if the fair market value of the common stock is greater than the exercise
price, Laurus may exercise the warrant on a cashless exercise basis resulting
in an issuance of net shares with no cash payment. The fair market value on the
date of the exercise was $0.04 per share. As a result of the cashless exercise,
in September 2007, the Company issued 1,632,119 shares of Common Stock to
Laurus and will withheld 540,040 shares of Common Stock in satisfaction of the
exercise price under the warrant.

21.
Selected Quarterly Financial Information (unaudited)

The following tables
summarize the fiscal 2007 and 2006 quarterly results. All prior quarters presented
    have been restated to reflect discontinued operations as a result of the
    spa/salons sold on May 7, 2007:

|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|---------------------------------- |  | ----------------------- | ------- | ------------------------ | - | ----------------------- | - | --------------- | ------- | - | - | ------- | -
|2007                               |  | Restated
First
 Quarter |         | Restated
Second
 Quarter |   | Restated
Third
 Quarter |   | Fourth
 Quarter |        
|                                   |  |                         |         |                          |   |                         |   |                 |        
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Total operating Revenues           |  | $                       | 904     |                          | $ | 520                     |   | $               | 581     |   | $ | 1,591   |  
|Income from continuing
 operations |  |                         | 30,262  |                          |   | 48,674                  |   |                 | 82,073  |   |   | 1,420   |  
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Loss from discontinued
 operations |  |                         | (6,601  | )                        |   | (3,911                  | ) |                 | (22,944 | ) |   | (6,545  | )
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Net income (loss)                  |  | $                       | 23,661  |                          | $ | 44,763                  |   | $               | 59,129  |   | $ | (5,125  | )
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Income (loss) per share:           |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Basic                              |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Continuing operations              |  | $                       | 1.99    |                          | $ | 3.22                    |   | $               | 5.11    |   | $ | 0.30    |  
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Discontinued operations            |  |                         | (0.
 44 | )                        |   | (0.
 26                 | ) |                 | (1.
 43 | ) |   | (0.
 39 | )
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Net income (loss)                  |  |                         | 1.55    |                          |   | 2.96                    |   |                 | 3.67    |   |   | (0.09   | )
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Diluted                            |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Continuing operations              |  | $                       | 1.99    |                          | $ | 3.22                    |   | $               | 4.08    |   | $ | 0.25    |  
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Discontinued operations            |  |                         | (0.44   | )                        |   | (0.26                   | ) |                 | (1.15   | ) |   | (0.33   | )
|                                   |  |                         |         |                          |   |                         |   |                 |         |   |   |         |  
|Net income (loss)                  |  |                         | 1.55    |                          |   | 2.96                    |   |                 | 2.94    |   |   | (0.08   | )

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|                                          |  |                |        |                 |   |                |   |                 |          |   |   |         |  
|----------------------------------------- |  | -------------- | ------ | --------------- | - | -------------- | - | --------------- | -------- | - | - | ------- | -
|                                          |  | Restated       |        | Restated        |   | Restated       |   | Restated        |         
|2006                                      |  | First
 Quarter |        | Second
 Quarter |   | Third
 Quarter |   | Fourth
 Quarter |         
|                                          |  |                |        |                 |   |                |   |                 |         
|                                          |  |                |        |                 |   |                |   |                 |         
|Total Operating Revenues                  |  | $              |       |                 | $ |               |   | $               | 2,381    |   | $ | 297     |  
|Income (loss) from
 continuing operations |  |                | (4,285 | )               |   | (145,247       | ) |                 | (151,124 | ) |   | 143,009 |  
|                                          |  |                |        |                 |   |                |   |                 |          |   |   |         |  
|Loss from discontinued
 operations        |  |                | (2,308 | )               |   | (2,605         | ) |                 | (2,777   | ) |   | (6,368  | )
|                                          |  |                |        |                 |   |                |   |                 |          |   |   |         |  
|Net income (loss)                         |  | $              | (6,593 | )               |   | (147,852       | ) | $               | (153,901 | ) | $ | 136,641 |  
|                                          |  |                |        |                 |   |                |   |                 |          |   |   |         |  
|Income (loss) per share:                  |  |                |        |                 |   |                |   |                 |          |   |   |         |  
|Basic and diluted                         |  |                |        |                 |   |                |   |                 |          |   |   |         |  
|Continuing operations                     |  |                | (0.32  | )               |   | (9.68          | ) |                 | (10.10   | ) |   | 9.51    |  
|Discontinued operations                   |  |                | (0.15  | )               |   | (0.17          | ) |                 | (0.19    | ) |   | .42     |  
|                                          |  |                |        |                 |   |                |   |                 |          |   |   |         |  
|                                          |  |                |        |                 |   |                |   |                 |          |   |   |         |  
|Net income (loss)                         |  | $              | (0.47  | )               | $ | (9.85          | ) | $               | (10.29   | ) | $ | 9.09    |  
|                                          |  |                |        |                 |   |                |   |                 |          |   |   |         |  

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 Financial Officer / Chief Operating Officer have
concluded that the disclosure controls and procedures are not effective for the
reasons specified below.

Material Weaknesses

On
November 16, 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.

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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.

The
material weaknesses identified by Amper were (A) inadequate resources in the
accounting functions; (B)
inadequate controls over computer information; and (C) 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, inventory management and valuation, and anti-fraud
    program. Examples of the issues identified include, among many others, 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 no whistle blower hotline.

Remediation of Material Weaknesses

We
have addressed some of the issues raised by Amper. For the year ended June 30,
2007, we have placed a strong emphasis on improving controls, reconciliations,
cash management, communication, inventory management, monitoring of financial
results, and application of accounting principles. Due to limited capital,
accounting resources continued to be an issue. As a result of the sale of the
stores / salons, many of the areas of concern will no longer exist in the
remaining operations.

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
June 30, 2007 that have materially affected, or are reasonable likely to
materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

77

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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 June 30, 2007.

|                     |  |     |  |                                                                     | 
|-------------------- |  | --- |  | ------------------------------------------------------------------- | 
|Name                 |  | Age |  | Position                                                            | 
|                     |  |     |  |                                                                     | 
|Richard Rakowski     |  | 55  |  | Chairman                                                            | 
|                     |  |     |  |                                                                     | 
|James O Crowley III |  | 53  |  | Chief Executive Officer
 and Director (1)                           | 
|                     |  |     |  |                                                                     | 
|Matthew Burris       |  | 44  |  | Chief Financial Officer
 and Chief Operating Officer (2)            | 
|                     |  |     |  |                                                                     | 
|Jane Terker          |  | 54  |  | Executive Vice President,
 Chief Marketing Officer and Director (3) | 
|                     |  |     |  |                                                                     | 
|Alan Panzer          |  | 46  |  | Director (4)                                                        | 

|                                                                                                                    | 
|------------------------------------------------------------------------------------------------------------------- | 
|(1) - Resigned, effective July
 1, 2007                                                                            
|                                                                                                                    | 
|(2) - Elected as a Director,
 effective September 12, 2007                                                         
|                                                                                                                    | 
|(3) - Resigned as a Director,
 effective February 19, 2007. Re-elected as a Director, effective September
 12, 2007
|                                                                                                                    | 
|(4) - Resigned, effective
 September 12, 2007                                                                      

Richard Rakowski Chairman

Richard
Rakowski was Chairman of KAAI from its formation in July 2003. He was Chief
Executive Officer of KAAI from November 1, 2004 until March 14, 2007. At that
time, he resigned as CEO while maintaining his position as Chairman. He is
currently the Founding Principal of Intersection, LLC, a strategy and
investment firm specializing in healthcare and renewable energy. He was also a
Principal of KCO from March 2002 until March 2007. Prior to joining KCO as a
Principal, Richard Rakowskis 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, Director

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). 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

78

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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.

James OCrowley III Chief Executive Officer, President,
and Director [Resigned effective, July 1, 2007]

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 [Resigned effective, September 12, 2007]

From
August 2000 until February 2007, Mr. Panzer served 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.

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 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 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 are reimbursed for out-of-pocket expenses in connection with
attendance at meetings of the Board of Directors.

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Board Meetings

The
Board of Directors met 14 times in fiscal 2007. 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 June 30, 2007 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) Matthew
Burris did not timely file his Form 4 in connection with an option grant on
September 18, 2006; (ii) Carolyn Aversano did not timely file her Form 4 in
connection with an option grant on September 18, 2006; (iii) each of Andrew
Lipman and Carla Kidd did not timely file their Form 4 in connection with
Warrants issued to them on July 11, 2006; (iv) each of Alastair J. Clemow, Alan
Panzer and James OCrowley did not timely file his initial Form 3 stating his
beneficial ownership of equity securities in the Company at the time he joined
the Board of Directors of the Company; and (v) Alastair J. Clemow did not
timely file his Form 4 in connection with an option grant on January 18, 2007.

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
Chief Financial Officer, Klinger Advanced Aesthetics, Inc., 232 Madison Avenue,
Suite 906, New York, NY 10016.

ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation Discussion and Analysis

General Philosophy and Objectives

We
have designed our executive compensation programs to attract, motivate and
retain key executives of superior ability. Our main objectives are to reward
individuals for their contributions to our performance and provide them with a
stake in our long-term success. Compensation programs for our executives are
constructed in an effort to reward them, in the short-term, for individual
performance and overall corporate performance through a combination of base
salary and discretionary bonuses, as well as with a longer term view of
enhancing shareholder value by tying a portion of their compensation directly
to the performance of our common stock.

General Executive Compensation Process

Our
board of directors reviews and expressly approves the compensation of our
executive officers, including each of the named executive officers. No member
of our board of directors participates in the determination of his or her
compensation. We presently do not have a compensation committee because our
management believes that until this point it has been premature at the early
stage of our management and

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business development to form
a compensation committee. Our board of directors approves the grant of all
stock options to our executive officers, including each of our named executive
officers.

Elements of Compensation

| |                                                                     |                                                                                                      
| | ------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------
| | The primary elements of
 our executive compensation are as follows:
| |                                                                     |                                                                                                      
| |                                                                    | An annual base salary.                                                                               
| |                                                                     |                                                                                                      
| |                                                                    | Bonus compensation.                                                                                  
| |                                                                     |                                                                                                      
| |                                                                    | A long-term incentive
 component, generally consisting of the grant of stock options.                
| |                                                                     |                                                                                                      
| |                                                                    | Retirement benefits by
 virtue of a 401(k) plan which is available generally to all of our employees.

We
do not objectively allocate compensation between currently paid and long-term
compensation, or among cash and non-cash compensation. Instead, our board of
directors believes that they should be able to maintain our overall objective
of attracting, motivating and retaining our key executives while at the same
time preserving discretion to increase or decrease variable compensation on a
year-to-year basis depending on individual and corporation performance, or, in
fact, not to pay any such compensation in any particular year if our board of
directors considers that to be appropriate.

Base Salary.Base salary provides an executive with basic
compensation, and reflects, in part, the skill, experience, and overall value
an individual brings to our business, as well as the individuals length of
service and historic performance. The base salary of our named executive
officers other than Mr. Burris and Ms. Terker are awarded in the discretion of
our board of directors. The base salary for Mr. Burris and Ms. Terker, as
discussed below, is set by the terms of each of their respective employment
agreements and our board of directors has retained the discretion to increase
those base salary levels in its discretion. Annual reviews are typically made
of the base salary of the named executive officers, and annual adjustments made
if our board of directors believes any adjustments are necessary. However, when
warranted by business considerations, such as profitability, gross margin
levels, and/or cash flow considerations, among others, annual increases in base
salary may not be made at all. The employment contract for Mr. Burris does
provide for an annual cost of living increase.

Bonuses.Cash bonuses for our named executive
officers, other than Mr. Burris and Ms. Terker, are awarded on a discretionary
basis. These bonuses are not based on any particular performance metric and are
discretionary based on a review of each executive officers performance during
the year. Our board of directors believes that retaining flexibility allows
them to consider a number of factors that an objective performance metric may
not allow. Cash bonuses will be paid to each of Mr. Burris and Ms. Terkers
based upon the achievement of the performance measures that are set forth in
their respective employment agreements. In addition, the employment contract
for Mr. Burris provides for a minimum bonus amount each year. Mr. Burris was awarded
this minimum cash bonus for 2007. In addition, Mr. Haddad, at the discretion of
our board of directors, was also awarded a cash bonus for 2007. We did not
award any cash bonus compensation to Mr. Rakowiski, Ms. Terker or Mr.
OCrowley, our former Chief Executive Officer for 2007.

Equity Compensation. We designed the long-term component of our
executive compensation to ensure a certain commonality between our executives
and our investors. We have in the past utilized stock options as the primary
method of providing long-term and equity-based compensation. Grants under our
2006 TrueYou Stock Option Plan, or the 2006 Plan, along with annual bonuses,
have been, and continue to be, the primary methods used by us to motivate our
executives, and to allow them to participate in the growth of stockholder value
through increases in the price of our shares of common stock, and to link their
interests with those of our stockholders. The 2006 Plan provides for the grant,
in the discretion of our board of directors, non-qualified options, incentive
stock options, and stock appreciation rights. Our board of directors may, in

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connection with the grant of
each option or award, establish one or more objective criteria (which may
include reference to revenues, margin, profits or other goals) to determine
whether the options or awards vest or otherwise will become exercisable, and/or
whether any amounts will become payable.

Other
than those disclosed in the executive compensation table, no options or other
awards were granted in fiscal 2007 to our executives. Our board of directors
considers the grant of options and awards from time to time during the year,
and also on an annual basis in connection with the determinations made by our
board of directors on overall compensation of our executives.

In
our May 7, 2007 financing a provision for awarding management stock equal to
10% of the company was included. This incentive has not been distributed among
management, but will probably be in fiscal 2008.

Perquisites and Other Benefits. We structure our other compensation to
provide competitive benefit packages to our executives. We often offer
perquisites to certain of our executives. The benefits are used as a retention
tool and as a relatively inexpensive method of rewarding our executives,
particularly when it is viewed as a part of our overall compensation program
that relies in great part on the discretion of our board of directors in
assessing individual and corporate performance.

The
only other benefits in which our executives may participate are plans that are
generally available to our employees, including health insurance and a 401(k)
plan, and do not discriminate in scope, term or operation in favor of our
executive officers. We do not offer any of our executives any pension or
retirement benefits that are not otherwise enjoyed by our employees in general,
including the annual Company contribution to participants accounts under our
401(k) plan.

Certain Accounting and Tax Considerations.We are aware that base salary, cash bonuses,
stock-based awards, and other elements of our compensation programs generate
charges to earnings under generally accepted accounting principles (including
as provided in SFAS 123R). We generally do not adjust compensation components
based on accounting factors. With respect to tax treatment, we will consider
the tax effect of types of compensation, including whether we should structure
incentive compensation to secure the deduction for the performance-based compensation
under Section 162(m) of the Internal Revenue Code of 1986, as amended, or the
Internal Revenue Code. Section 162(m) denies a deduction for compensation
paid to a named executive officer in a taxable year for compensation in excess
of $1,000,000 unless such excess amount meets the definition of
performance-based compensation. It is possible, however, that portions of any
future grants or awards may not qualify as performance-based compensation,
and, when combined with salary and other compensation to a named executive
officer, may exceed this limitation in any particular year.

Stock Ownership Guidelines

We
do not have formal stock ownership guidelines for our executive officers or
directors. Some of our executive officers have holdings in our common stock,
and some have held their shares for several years. We do not have a policy that
specifically prohibits our executive officers from hedging the risk of stock
ownership in our company; however, based on historical experience, we do not
believe that to be a significant risk for our company.

Report of Board of Directors

The
members of our board of directors have reviewed and discussed the Compensation
Discussion and Analysis section of this Annual Report on Form 10-K with management.
Based on such review and discussion, the members of our board of directors
recommended that the Compensation Discussion and Analysis section be included
in this Annual Report on Form 10-K with management.

| |                   | 
| | ----------------- | 
| | Respectfully,     | 
| |                   | 
| | Richard
 Rakowski | 
| | Matthew
 Burris   | 
| | Jane Terker       | 

82

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Executive
Compensation

Summary
Compensation Table

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                  |            
|                              |  |      |      |        |                      |         |                                          |            
|                              |  |      |      |        |                      |         | No. of Common Stock 
 Underlying Options |            
|Name and
 Principal Position  |  | Year |      | Salary |                      | Bonus   |                                          | TrueYou (1) |         | KAAI (2) | 
|                             
|Richard Rakowski              |  |      | 2007 |        | $                    |        |                                          | $           |        |          |  | 25,000,000 |  |  |        | 
|Chairman of the Board and     |  |      | 2006 |        |                      |        |                                          |             |        |          |  |           |  |  |        | 
|Chief Executive Officer (3)   |  |      | 2005 |        |                      | 199,583 |                                          |             |        |          |  | N/A        |  |  |        | 
|                              |  |      |      |        |                      |         |                                          |             |         |          |  |            |  |  |         | 
|James OCrowley               |  |      | 2007 |        | $                    | 187,500 |                                          | $           |        |          |  |           |  |  |        | 
|Chief Executive Officer (4)   |  |      | 2006 |        |                      | N/A     |                                          |             | N/A     |          |  | N/A        |  |  | N/A     | 
|                              |  |      | 2005 |        |                      | N/A     |                                          |             | N/A     |          |  | N/A        |  |  | N/A     | 
|                              |  |      |      |        |                      |         |                                          |             |         |          |  |            |  |  |         | 
|Matthew Burris                |  |      | 2007 |        | $                    | 350,000 |                                          | $           | 60,000  |          |  | 2,641,368  |  |  |        | 
|Chief Financial Officer       |  |      | 2006 |        |                      | 47,115  |                                          |             |        |          |  |           |  |  |        | 
|                              |  |      | 2005 |        |                      | N/A     |                                          |             | N/A     |          |  | N/A        |  |  | N/A     | 
|                              |  |      |      |        |                      |         |                                          |             |         |          |  |            |  |  |         | 
|Jane Terker                   |  |      | 2007 |        | $                    | 450,000 |                                          | $           |        |          |  | 2,347,882  |  |  |        | 
|Executive Vice President and  |  |      | 2006 |        |                      | 450,000 |                                          |             | 350,000 |          |  |           |  |  |        | 
|Chief Marketing Officer       |  |      | 2005 |        |                      | 216,345 |                                          |             | N/A     |          |  | N/A        |  |  | 150,000 | 
|                              |  |      |      |        |                      |         |                                          |             |         |          |  |            |  |  |         | 
|Wade Haddad                   |  |      | 2007 |        | $                    | 218,750 |                                          | $           | 25,000  |          |  | 469,577    |  |  |        | 
|Senior Vice President of Real |  |      | 2006 |        |                      | 185,000 |                                          |             | 50,000  |          |  |           |  |  |        | 
|Estate and Legal              |  |      | 2005 |        |                      | N/A     |                                          |             | N/A     |          |  | N/A        |  |  | N/A     | 
|                              |  |      |      |        |                      |         |                                          |             |         |          |  |            |  |  |         | 

|      |                                                                                                                                                                                                                                          
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)   | Shares subject to options granted under TrueYou 2006 Stock Option
 Plan.                                                                                                                                                                 
|      |                                                                                                                                                                                                                                          
|(2)   | Shares subject to options granted under KAAI 2003 Stock Option Plan.                                                                                                                                                                     
|      |                                                                                                                                                                                                                                          
|(3)   | Richard
 Rakowski was Chairman of KAAI from its formation in July 2003. He was Chief
 Executive Officer of KAAI from November 1, 2004 until March 14, 2007. At that
 time, he resigned as CEO while maintaining his position as Chairman.
|      |                                                                                                                                                                                                                                          
|(4) - | Resigned,
 effective July 1, 2007                                                                                                                                                                                                        

83

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2007 GRANTS OF
PLAN-BASED AWARDS

In
this table, we provide information concerning each grant of an award made to a
named executive officer for the fiscal year ended June 30, 2007. This includes
the awards under the 2006 Stock Option Plan.

|               |  |              |         |                                                                       |                                                                      |              |        |                                           |   |                                                                                              |  |   |  |                                                           |           |  |   |     |  |   |     |  |   |     | 
|-------------- |  | ------------ | ------- | --------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------ | ------ | ----------------------------------------- | - | -------------------------------------------------------------------------------------------- |  | - |  | --------------------------------------------------------- | --------- |  | - | --- |  | - | --- |  | - | --- | 
|               |  |              |         | Estimated
  Future Payouts
  Under
  Non-Equity Incentive Plan Awards |                                                                      |              |        |                                           |   | All Other
  Stock Awards:
  Number of
  Securities
  Underlying
  SSARs
  Compensation
  (#) |  |   |  | Grant
  Date
  Fair
  Value
  of
  SSAR
  Awards
  ($/sh) |          
|               |  |              |         |                                                                       | Estimated
  Future Payouts
  Under Equity Incentive Plan
  Awards(2) |              |        | Exercise
  Price
  of SSAR
  Awards
  ($) |   |                                                                                             
|               |  |              |         |                                                                       |                                                                      |              |        |                                          
|               |  |              |         |                                                                       |                                                                      |              |        |                                           |  
|               |  | Grant
  Date |         | Threshold
  Maximum
  ($)                                             |                                                                      | Target
  ($) |        |                                           |   |                                                                                              |  |  
|Name           |  |              |         |                                                                       | Threshold
  Maximum                                                  |              | Target |                                           |   |                                                                                              | 
|               |  |              |         |                                                                       |                                                                      |              |        |                                          
|              
|Richard        |  |              | 9/18/07 |                                                                       |                                                                      |             |        |                                           |  |                                                                                              |  |  |  |                                                           | 8,333,333 |  |   |    |  | $ | .22 |  | $ | .09 | 
|Rakowski       |  |              |         |                                                                       |                                                                      |              |        |                                           |   |                                                                                              |  |   |  |                                                           | 8,333,333 |  | $ | .30 |  | $ | .06 |  |   |     | 
|               |  |              |         |                                                                       |                                                                      |              |        |                                           |   |                                                                                              |  |   |  |                                                           | 8,333,333 |  | $ | .35 |  | $ | .05 |  |   |     | 
|               |  |              |         |                                                                       |                                                                      |              |        |                                           |   |                                                                                              |  |   |  |                                                           |           |  |   |     |  |   |     |  |   |     | 
|Matthew Burris |  |              | 9/18/07 |                                                                       |                                                                      |             |        |                                           |  |                                                                                              |  |  |  |                                                           | 2,641,368 |  |   |    |  | $ | .22 |  | $ | .13 | 
|               |  |              |         |                                                                       |                                                                      |              |        |                                           |   |                                                                                              |  |   |  |                                                           |           |  |   |     |  |   |     |  |   |     | 
|Jane Terker    |  |              | 9/18/07 |                                                                       |                                                                      |             |        |                                           |  |                                                                                              |  |  |  |                                                           | 2,347,882 |  |   |    |  | $ | .22 |  | $ | .13 | 
|               |  |              |         |                                                                       |                                                                      |              |        |                                           |   |                                                                                              |  |   |  |                                                           |           |  |   |     |  |   |     |  |   |     | 
|Wade Haddad    |  |              | 9/18/07 |                                                                       |                                                                      |             |        |                                           |  |                                                                                              |  |  |  |                                                           | 469,577   |  |   |    |  | $ | .22 |  | $ | .13 | 

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 were 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 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
June 1, 2006, TrueYou entered into a Separation Agreement and Mutual Release
with John Higgins, former president of TrueYou, pursuant to which Mr. Higgins
resigned as an officer and director of the TrueYou and its subsidiaries
effective June 30, 2006. The Separation Agreement provided, among other things,
that (i) TrueYou 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.

84

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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. 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 were
immediately exercisable upon such grant and the remainder of which vest
quarterly over the 3 year period following such grant.

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 James 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 agreed to pay Mr. OCrowley a
base salary of $375,000 per year. On March 14, 2007, Mr. OCrowley was
appointed as Chief Executive Officer of the Company.

On
June 21, 2007, TrueYou entered into a Separation Agreement and Mutual Release
with Mr. OCrowley, pursuant to which Mr. OCrowley resigned as Chief Executive
Officer, President, and director of TrueYou and its subsidiaries effective July
1, 2007. The Separation Agreement provided, among other things, that (i)
TrueYou pay Mr. OCrowley his base salary for a period of three months
following July 1, 2007. (ii) In accordance with understandings with its lenders
in connection with its refinancing implemented on May 7, 2007, management of
the Company may receive up to 10% of the equity of the Company. The Company
agrees that when, as, and if granted or issued to management of the Company,
Mr. OCrowley shall be given the election to receive one-tenth of the total of
10% (or 1% of the equity of the Company)

85

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when, as, and
if and on no less beneficial terms than the terms and conditions as granted or
issued to management of the Company. (iii) For a period terminating on the
earlier of (a) 18 months from September 30, 2007 or (b) such date as Mr. OCrowley
becomes eligible to participate in the medical benefits program of another
entity, the Company will pay towards the premiums for insurance continuation
pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA).

Option/SAR Grants in
Last Fiscal Year

The
Company granted stock options to its executive officers under TrueYous 2006
Stock Option Plan. A total of 80,301,262 options were granted under this plan
during the year ended June 30, 2007. As of June 30, 2007, options to
purchase a total of 72,909,731 shares were outstanding under TrueYous 2006
Stock Option Plan, and a total of 32,090,269 shares remained available for
grant under this plan.

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

During
fiscal year 2007, no options were exercised by our named executive officers.
The following table sets forth the number of shares of TrueYou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 June 30, 2007:

|                 |  |                                |   |                 |   |                                                                                                                         |  |                                                                                                      |            |  |  |           |  |   |   |  |   |   | 
|---------------- |  | ------------------------------ | - | --------------- | - | ----------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- | ---------- |  |  | --------- |  | - | - |  | - | - | 
|Name             |  | Shares
 Acquired
 on
 Exercise |   | Value
 Realized |   | Number of
 Shares of 
 Common Stock Underlying
 Unexercised Options/SARs
 at
 June 30, 2007
 Exercisable
 Unexercisable |  | Value of
 Unexercised 
 In-The-Money
 Options/SARS 
 at June 30, 2007(1)
 Exercisable
 Unexercisable |           
|                 |  |                                |   |                 |   |                                                                                                                         |  |                                                                                                      |           
|Richard Rakowski |  |                                | 0 |                 | $ | 0                                                                                                                       |  |                                                                                                      | 25,000,000 |  |  | 0         |  | $ |  |  | $ |  | 
|James
 OCrowley |  |                                |  |                 |   |                                                                                                                        |  |                                                                                                      |           |  |  |          |  |   |  |  |   |  | 
|Matthew
 Burris  |  |                                | 0 |                 |   | 0                                                                                                                       |  |                                                                                                      | 660,342    |  |  | 1,981,026 |  |   |  |  |   |  | 
|Jane Terker      |  |                                | 0 |                 |   | 0                                                                                                                       |  |                                                                                                      | 1,687,540  |  |  | 2,421,253 |  |   |  |  |   |  | 
|Wade Haddad      |  |                                | 0 |                 |   | 0                                                                                                                       |  |                                                                                                      | 117,394    |  |  | 352,183   |  |   |  |  |   |  | 

|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(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
September 18, 2006, 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. The Stock Option Plan allows the Company to grant nonqualified stock
options to employees, vendors and contractors that have affiliations with the
Company.

Under
the TrueYou 2006 Stock Option Plan, the Company is authorized to issue options
to acquire 105,000,000 shares of common stock of TrueYou for a term not to
exceed ten years from the date of grant.

The
KAAI 2006 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

86

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Pricing Model. The Board of Directors determines the TrueYou 2006 Stock
Option Plan participants and establishes the terms and conditions of each
option.

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 the Company as of June 30, 2007:

| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | 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 TrueYou.Com in care of Cosmedicine Companies, 232 Madison Ave., Suite
906, New York, NY 10016.

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 June 30, 2007, (ii) all
outstanding shares of Series B Preferred Stock and Series E 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
and Series E 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                                            |  |                                          |  |                           |     |  |  |  |      |       | 
|Laurus
  Master Fund, Ltd.335 Madison Avenue New York, NY 10017 |  |                                          |  | 1,632,119                 | (1) |  |  |  | 9.99 | % (1) | 
|                                                                |  |                                          |  |                           |     |  |  |  |      |       | 
|Directors & Named Executive Officers                            |  |                                          |  |                           |     |  |  |  |      |       | 
|Richard
  Rakowski                                              |  |                                          |  | 27,074,149                | (2) |  |  |  | *    |       | 
|Jane Terker                                                     |  |                                          |  | 4,108,793                 | (3) |  |  |  | *    |       | 
|Matthew
  Burris                                                |  |                                          |  | 2,641,368                 | (4) |  |  |  | *    |       | 
|James
  OCrowley                                               |  |                                          |  | 0                         |     |  |  |  | *    |       | 
|Alan Panzer                                                     |  |                                          |  | 0                         |     |  |  |  | *    |       | 
|All Directors
and Executive Officers as a group (5 persons)     |  |                                          |  | 0                         |     |  |  |  | *    |       | 

87

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

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based in
  part on a Schedule 13G filed by the securityholder on February 12, 2007. To
  the Companys knowledge, the securityholder beneficially owns: (i) 1,632,119
  shares of Common Stock, (ii) 37,351,824 shares of Common Stock underlying a
  warrant issued to the securityholder in June 2006 which is subject to 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 securityholder provides notice
  to the Company of not less than 61 days (the 4.99% Issuance Limitation),
  (iii) 11,145,000 shares of Common Stock underlying a warrant issued to the
  securityholder in July 2006 which is subject to the 4.99% Issuance
  Limitation, (iv) 10,000,000 shares of Common Stock underlying a warrant
  issued to the securityholder in December 2006 which is subject to 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 (the 9.99% Issuance Limitation) and (v)
  38,519,644,173 shares of Common Stock underlying warrants issued to the
  securityholder in May 2007 which are subject to the 9.99% Issuance
  Limitation. The Company is obligated to issue to Laurus an additional warrant
  to purchase 8,750,000 shares of Common Stock that will also be subject to the
  9.99% Issuance Limitation.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | 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 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, of which Mr. Rakowski is
  required to return to the Company Warrants to purchase 3,541,666 shares of
  Common Stock. 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), 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%.                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(3) | Consists of
  Options to purchase 4,108,793 shares of Common Stock, of which 1,687,540
  options are currently exercisable, subject to the Authorized Shares Increase,
  and the remaining 2,421,253 options are unvested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(4) | Consists of
  Options to purchase 2,641,368 shares of Common Stock, of which 660,342
  options are currently exercisable, subject to the Authorized Shares Increase,
  and the remaining 1,981,026 options are unvested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

88

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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.

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 May
7, 2007 and July 1, 2006, there were accrued and unpaid consulting fees to L
Capital of approximately $876,841.
Concurrent with the May 7, 2007 financing, L Capital forgave $876,841 in
accrued management fees previously included in the Companys Condensed
Consolidated Balance Sheet. As a result, the Company has recorded the forgiven
management fee as a capital contribution in its Consolidated Balance Sheet as
of June 30, 2007.

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 had been paid and (c) the $4.0 million in principal, along with
the related interest of senior subordinated debt issued on December 22, 2006
has been paid. Upon the occurrence of all of the preceding, all accrued
management fees would have been 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 May 7, 2007 and July 1, 2006,
there were accrued and unpaid consulting fees to KCO of approximately $837,433. Concurrent with the May 7, 2007 financing,
KCO forgave $837,433 in accrued management fees previously included in the
Companys Condensed Consolidated Balance Sheet. As a result, the Company has
recorded the forgiven management fee as a capital contribution in its
Consolidated Balance Sheet as of June 30, 2007.

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
has been paid. Upon the occurrence of all of the preceding, all accrued
management fees would have been due and payable.

89

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Loans by Affiliates of Pequot

Affiliates
of Pequot, who are collectively 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.

On
May 7, 2007, affiliates of Pequot exchanged their indebtedness for shares of a
newly created Series E Convertible Preferred Stock of the Company.

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 7 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. According
to the terms of the agreement, since the Laurus $1 million Senior Subordinated Loan was not repaid by
April 30, 2007, warrants to purchase 2,708,374 shares will be returned by
Klinger Investments to the Company for cancellation.

On
May 7, 2007, Klinger Investments, LLC exchanged its indebtedness for shares of
a newly created Series E Convertible Preferred Stock of the Company.

Loans by Laurus Master Fund
Ltd.

Laurus
had 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
$.001 per share to purchase a total of 10,000,000 shares of Common Stock. According
to the terms of the agreement, since the $1,000,000 Senior Subordinated Secured Debt was not repaid by
April 30, 2007, the Company is required to issue an additional 8,750,000
warrants to Laurus. In addition, since prior to the 14th month
anniversary of June 30, 2006, the Companys obligations to Laurus under the
Senior Secured Debt had been reduced to $12,500,000 or less, warrants to Laurus
to purchase 6,839,394 shares of Common Stock will be automatically cancelled
and terminated and since at such time the Companys obligations had been
reduced to zero, then warrants to purchase an additional 6,693,875 shares of
Common Stock will also be cancelled. As a result of the May 7, 2007 refinancing
discussed below, the Company will cancel the combined 13,533,269 warrants held
by Laurus, due to the prepayment.

On
May 7, 2007, the Company repaid the $25.0 million debt to Laurus as part of the
Senior Debt financing and an additional $3.8 million default penalty which was
incurred in the fiscal quarter ended March 31, 2007.

Richard Rakowski

Loans

Richard
Rakowski, the Chairman and former Chief Executive Officer of the Company,
loaned the Company $850,000 as part of the Senior Subordinated Debt 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.

90

---



According to
the terms of the agreement, since the Laurus $1 million Senior Subordinated Secured Loan was not repaid
by April 30, 2007, warrants to purchase 3,541,666 shares of Common Stock will
be returned to the Company for cancellation by Mr. Rakowski. Mr. Rakowski had
also personally guaranteed certain obligations of the Company. As of June 30,
2007 these guarantees no longer exist as the related letters of credit have
expired.

On
May 7, 2007, in connection with the Laurus financing, Mr. Rakowski exchanged
his indebtedness for shares of a newly created Series E Convertible Preferred
Stock of the Company.

Consulting Agreement

On
May 7, 2007, the Company entered into a Consulting Agreement with Richard
Rakowski, Chairman of the Company, pursuant to which Mr. Rakowski will provide
consulting services for the Company. He will receive a fee at the pro-rata
annual rate of $295,000 from May 1, 2007, to August 31, 2007. From September 1,
2007, to December 31, 2007, the equivalent annual fee will decrease to $175,000
and from January 1, 2008 and thereafter, the equivalent rate will decrease to
$125,000. In addition the Agreement provides that in the event that Mr.
Rakowski is successful in specified transactions involving the Company, he is
entitled to a success fee of 2.5% of the actual cash provided to the Company in
such transactions. The agreement may be terminated at any time by either party.

Loans by Andrew Lipman

Andrew
D. Lipman, a former Director, loaned the Company $150,000 in the July 11, 2006
$5.2 million Subordinated Debt Financing and received 7 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. According to
the terms of the agreement, since the Laurus $1 million Senior Subordinated Secured Loan was not
repaid by April 30, 2007, warrants to purchase 833,334 shares of Common Stock
will be returned to the Company for cancellation by Mr. Lipman. Mr. Lipman
loaned the Company a combined $250,000 in the combined $4.0 million Secured
Demand Note financings completed on March 16, 2007 and March 27, 2007.

On
May 7, 2007, Mr. Lipman exchanged his indebtedness from the July 11, 2006 and
December 22, 2006 financings for shares of a newly created Series E Convertible
Preferred Stock of the Company.

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 recorded
revenues of $3.4 million and $2.7 million for the years ended June 30, 2007 and
July 1,
2006, respectively. As of June 30, 2007 the Company had a $0.3 million
receivable balance from Sephora which is included in Accounts receivable, net
in the Condensed Consolidated Balance Sheet.

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 the assets of 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

91

---



Pyle in the
amount $.5 million and Thomas Pyle in the amount $.5 million, individually
under the same terms.

On
May 7, 2007, the notes payable to Judith and Tom Pyle were converted into
shares of a newly created Series E Convertible Preferred Stock of the Company.

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. As a result of the store / salons sale on May 7,
2007, the Millennium software program will not be used for transactions after
April 1, 2007. The Company has recorded a charge of $0.1 million to expense the
remaining liability under this contract.

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 and 13 of this Report.

ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES

Principal Accountant Fees and
Services

Our
independent public accounting firm for the fiscal years ended June 30, 2007 and
July 1, 2006 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).

|                     |  |      |     |      |   |     | 
|-------------------- |  | ---- | --- | ---- | - | --- | 
|                     |  | 2007 |     | 2006 |  
|                     |  |      |     |      |  
|                     |  |      |     |      |  
|Audit fees           |  | $    | 327 |      | $ | 775 | 
|Audit-Related
  fees |  |      |    |      |   | 151 | 
|Tax
  fees           |  |      |    |      |   |    | 
|All
  other fees     |  |      |    |      |   |    | 
|                     |  |      |     |      |   |     | 
|Total                |  | $    | 327 |      | $ | 926 | 
|                     |  |      |     |      |   |     | 

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

92

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES

| |    |                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Financial
 Statement Schedules:                                                                                                                                                           
| |    |                                                                                                                                                                                           
| |    | 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).

93

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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 November 20, 2007.

|                         |  |                   |                                                    | 
|------------------------ |  | ----------------- | -------------------------------------------------- | 
|                         |  | TRUEYOU.COM
 INC. |                                                   
|                         |  |                   |                                                    | 
|Date:
 November 20, 2007 |  | By:               | /S/
 Matthew Burris                                | 
|                         |  |                   |                                                    | 
|                         |  |                   | Matthew
 Burris                                    | 
|                         |  |                   | Chief
 Financial Officer / Chief Operating Officer | 

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on November 20, 2007 on behalf of
the Registrant and in the capacities indicated.

| |                       |           |                                                           |  |                   |       |  |  |  |      | 
| | --------------------- | --------- | --------------------------------------------------------- |  | ----------------- | ----- |  |  |  | ---- | 
| |                       | Signature |                                                           |  |                   | Title |  |  |  | Date | 
| |                       |           |                                                           |  |                   |       |  |  |  |      | 
| | /s/
 Richard Rakowski |           |                                                           |  |                  
| |                       |           |                                                           |  |                  
| | Richard
 Rakowski     |           | Chairman, Director                                        |  | November 20, 2007
| |                       |           |                                                           |  |                  
| | /s/
 Matthew Burris   |           | Chief Financial Officer /
 Chief                          |  |                  
| |                       |           |                                                           | 
| | Matthew
 Burris       |           | Operating Officer and
 Director                           |  |                  
| |                       |           |                                                           |  |                  
| |                       |           | (Principal Executive
 Financial and 
 Accounting Officer) |  | November 20, 2007
| |                       |           |                                                           |  |                  
| | /s/
 Jane Terker      |           | Executive Vice President,
 Chief                          |  |                  
| |                       |           |                                                           | 
| | Jane Terker           |           | Marketing Officer and
 Director                           |  | November 20, 2007

94

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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         |  | Certificate of Designation
  of Series E Preferred Stock, dated December 20, 2005. (11)                                                                                                
|            |  |                                                                                                                                                                                        
|3.8         |  | By-Laws of the Company
  (2).                                                                                                                                                          
|            |  |                                                                                                                                                                                        
|10.1        |  | Retail Alliance Agreement,
  dated December 2004, between KAAI and Sephora USA, LLC. (1)                                                                                               
|            |  |                                                                                                                                                                                        
|10.2        |  | Employment Agreement,
  dated January, 1, 2005, between KAAI and Jane Terker. (1)                                                                                                      
|            |  |                                                                                                                                                                                        
|10.3        |  | Consulting Agreement,
  dated April 4, 2006 between Klinger Advanced Aesthetics, Inc., Mark Potter
  and Atlantis Laboratories, Inc. (3)                                               
|            |  |                                                                                                                                                                                        
|10.4        |  | 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.
  (3)   
|            |  |                                                                                                                                                                                        
|10.5        |  | Promissory Note, dated
  April 4, 2006, issued by Mark Potter and Atlantis Laboratories, Inc. to
  Klinger Advanced Aesthetics, Inc. (3)                                               
|            |  |                                                                                                                                                                                        
|10.6        |  | Deed of Trust, Assignment
  of Rents and Security Agreement, dated April 4, 2006, between Mark Potter and
  Donald O. Walsh, as Trustee. (3)                                           
|            |  |                                                                                                                                                                                        
|10.7        |  | Construction Loan
  Agreement, dated April 4, 2006, between Klinger Advanced Aesthetics, Inc.,
  Mark Potter and Atlantis Laboratories, Inc. (3)                                       
|            |  |                                                                                                                                                                                        
|10.8        |  | Construction Loan
  Promissory Note, dated April 4, 2006, issued by Mark Potter and Atlantis
  Laboratories, Inc. to Klinger Advanced Aesthetics, Inc. (3)                             
|            |  |                                                                                                                                                                                        
|10.9        |  | 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. (3)

---



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.10       |  | Employment Agreement dated
  April 24, 2006 between the Company and Mathew Burris. (4)                                                                                                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.11       |  | Securities Purchase
  Agreement dated as of June 30, 2006, by and between the Company and Laurus
  Master Fund, Ltd. (5)                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.12       |  | Secured Term Note dated as
  of June 30,2006, issued by the Company to Laurus Master Fund, Ltd. (5)                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.13       |  | The Company and Certain of
  its Subsidiaries Master Security Agreement dated June 30, 2006 in favor of
  Laurus Master Fund, Ltd. (5)                                                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.14       |  | 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. (5)                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.15       |  | 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. (5)                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.16       |  | 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. (5)                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.17       |  | Registration Rights
  Agreement dated as of June 30, 2006, by and between the Company and Laurus
  Master Fund, Ltd. (5)                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.18       |  | Common Stock Purchase
  Warrant issued by the Company to Laurus Master Fund, Ltd. (5)                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.19       |  | Common Stock Purchase
  Warrant issued by the Company to Laurus Master Fund, Ltd. (5)                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.20       |  | Common Stock Purchase
  Warrant issued by the Company to Laurus Master Fund, Ltd. (5)                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.21       |  | Letter Agreement dated
  June 30, 2006, between the Company and Laurus Master Fund Ltd in connection
  with the Warrants. (5)                                                                                                                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.22       |  | 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. (6)                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.23       |  | 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. (6)

---



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.24       |  | 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. (6)                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.25       |  | 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. (6)                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.26       |  | 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. (6)                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.27       |  | 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. (6)                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.28       |  | 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.(6)                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.29       |  | The TrueYou.Com Inc. 2006
  Stock Incentive Plan. (7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.30       |  | Subordinated Securities
  Purchase Agreement dated December 22, 2006 between the Company and Laurus
  Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.31       |  | 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. (8)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.32       |  | Subordinated Secured Term
  Note dated December 22, 2006 issued by the Company to Laurus Master Fund,
  Ltd. (8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.33       |  | 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. (8)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.34       |  | Amended and Restated Registration Rights
  Agreement dated December 22, 2006, by and between TrueYou.com Inc. and Laurus
  Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.35       |  | Letter Agreement dated
  December 22, 2006 between the Company and Laurus Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.36       |  | Common Stock Purchase
  Warrant dated December 22, 2006 issued by TrueYou.com Inc. to Laurus Master Fund, Ltd. (8)                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.37       |  | 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.(8)                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.38       |  | 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.(8)                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.39       |  | 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.(8)                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.40       |  | 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.(8)                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.41       |  | 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.(8)                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.42       |  | Notice of Default and
  Acceleration from Laurus Master Fund, Ltd. dated March 8, 2007. (9)                                                                                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.43       |  | Secured Demand Note issued
  by TrueYou.Com Inc. in the sum of $1,125,000 to North Sound Legacy
  International Ltd. dated March 16, 2007. (10)                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.44       |  | Secured Demand Note issued
  by TrueYou.Com Inc. in the sum of $375,000 to North Sound Legacy
  Institutional Fund LLC dated March 16, 2007. (10)                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.45       |  | Secured Demand Note issued
  by TrueYou.Com Inc. in the sum of $1,125,000 to North Sound Legacy
  International Ltd. dated March 27, 2007. (10)                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.46       |  | Secured Demand Note issued
  by TrueYou.Com Inc. in the sum of $375,000 to North Sound Legacy
  Institutional Fund LLC dated March 27, 2007. (10)                                                                                                                                                                                                                                                                                                 

---



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.47       |  | Secured Demand Note issued
  by TrueYou.Com Inc. in the sum of $375,000 to Seapine Investments, LLC dated
  March 16, 2007. (10)                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.48       |  | Secured Demand Note issued
  by TrueYou.Com Inc. in the sum of $125,000 to Andrew D. Lipman dated March
  16, 2007. (10)                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.49       |  | Secured Demand Note issued
  by TrueYou.Com Inc. in the sum of $375,000 to Seapine Investments, LLC dated
  March 27, 2007. (10)                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.50       |  | Secured Demand Note issued
  by TrueYou.Com Inc. in the sum of $125,000 to Andrew D. Lipman dated March
  27, 2007. (10)                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.51       |  | Intercreditor and
  Collateral Agency Agreement dated March 16, 2007 among Laurus Master Fund,
  Ltd., North Sound Legacy International Ltd., North Sound Legacy Institutional
  Fund LLC, Andrew D. Lipman and Seapine Investments LLC. (10)                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.52       |  | Amended and Restated
  Intercreditor and Collateral Agency Agreement dated March 27, 2007 among
  Laurus Master Fund, Ltd., North Sound Legacy International Ltd., North Sound
  Legacy Institutional Fund LLC, Andrew D. Lipman and Seapine Investments LLC.
  (10)                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.53       |  | Form of Unconditional
  Guaranty and Security Agreement of TrueYou subsidiaries to North Sound Legacy
  International Ltd., North Sound Legacy Institutional Fund LLC, Andrew D.
  Lipman and Seapine Investments LLC. (10)                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.54       |  | Amended and Restated
  Securities Purchase Agreement dated as of May 4, 2007, including disclosure
  schedules, between Laurus Master Fund, Ltd. and TrueYou.Com Inc. (11)                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.55       |  | Amended and Restated Secured
  Term Note dated as of May 4, 2007 between Laurus Master Fund, Ltd. and
  TrueYou.Com Inc. (11)                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.56       |  | Laurus Master Fund, Ltd.
  Common Stock Purchase Warrant to purchase 9,245,236,880 shares of Common
  Stock dated May 4, 2007. (11)                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.57       |  | Laurus Master Fund, Ltd.
  Common Stock Purchase Warrant to purchase 29,276,583,452 shares of Common
  Stock dated as of May 4, 2007. (11)                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.58       |  | Registration Rights
  Agreement between TrueYou.Com Inc. and Laurus Master Fund, Ltd. dated as of
  May 4, 2007. (11)                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.59       |  | Reaffirmation,
  Ratification and Amendment Agreement dated as of May 4, 2007 among Laurus
  Master Fund, Ltd., TrueYou.Com Inc., 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 and Anushka Boca Sub,
  LLC. (11)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.60       |  | Restricted Account
  Agreement dated as of May 4, 2007 among North Fork Bank, TrueYou.Com Inc. and
  Laurus Master Fund, Ltd. (11)                                                                                                                                                                                                                                                                                 

---



|            |  |                                                                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                             
|10.61       |  | Side letter dated as of
  May 4, 2007 re warrants between TrueYou.Com Inc. and Laurus Master Fund, Ltd.
  (11)                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                             
|10.62       |  | Letter Agreement dated May
  4, 2007 between Laurus Master Fund, Ltd. and TrueYou.Com Inc. in connection
  with the restricted account. (11)                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                             
|10.63       |  | Purchase and Sale
  Agreement dated as of May 7, 2007 including exhibits and schedules among
  Advanced Aesthetics, LLC, Klinger Advanced Aesthetics, Inc. and GK Acquisition,
  LLC. (11)                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                             
|10.64       |  | Waiver and Consent dated
  as of May 7, 2007 between the Company and Laurus Master Fund Ltd. re waiver
  of Amended and Restated Securities Purchase Agreement dated May 4, 2007 and
  related documents in connection with the Purchase and Sale Agreement with GK
  Acquisition, LLC. (11)
|            |  |                                                                                                                                                                                                                                                                                             
|10.65       |  | Consulting Agreement dated
  as of May 4, 2007 between Klinger Advanced Aesthetics and Richard Rakowski.
  (11)                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                             
|10.66       |  | Form of March 12, 2007
  letter re conversion by holders of Series C Preferred Stock, Series D
  Preferred Stock and bridge lenders to TrueYou.Com Series E Convertible
  Preferred Stock. (11)                                                                                             
|            |  |                                                                                                                                                                                                                                                                                             
|14          |  | Code of Ethics. (2)                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                             
|21          |  | List of subsidiaries of
  the Company. (1)                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                             
|31.1        |  | Certification of Principal
  Executive Officer and Principal Financial Officer pursuant to Exchange Act
  Rules 13a-14(a) and 15d-14(a). (12)                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                             
|32.1        |  | Certification of Principal
  Executive Officer and 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. (12)                                                                        

---

|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(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 Current Report on Form 8-K filed with the
  Commission on April 21, 2006.      
|    |                                                                                                                             
|(4) | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on April 27, 2006.      
|    |                                                                                                                             
|(5) | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on July 6, 2006.        
|    |                                                                                                                             
|(6) | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on July 17, 2006.       
|    |                                                                                                                             
|(7) | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on September 21, 2006.  

---



|     |                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------
|(8)  | Incorporated
  by reference to the Companys Annual Report on Form 10-K filed with the
  Commission on February 6, 2007. 
|     |                                                                                                                          
|(9)  | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on March 14, 2007.   
|     |                                                                                                                          
|(10) | Incorporated
  by reference to the Companys Quarterly Report on Form 10-Q filed with the
  Commission on April 16, 2007.
|     |                                                                                                                          
|(11) | Incorporated
  by reference to the Companys Current Report on Form 8-K filed with the
  Commission on May 11, 2007.     
|     |                                                                                                                          
|(12) | Filed
  herewith.                                                                                                        

---