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UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, DC 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2007ORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934For
the transition period from ____ to ____

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

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

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

Not Applicable(Former
name, former address and former fiscal year, if changed since last report)

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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 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

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares of
common stock, par value $0.001 per share, outstanding as of July 15, 2007 was
16,756,438.

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TABLE OF CONTENTS

|              |                                                                                                                                      |     
|------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ----
|              |                                                                                                                                      | Page
|              |                                                                                                                                      |     
|PART I        | FINANCIAL INFORMATION                                                                                                                |     
|              |                                                                                                                                      |     
|Item 1.       | Condensed Consolidated
  Financial Statements                                                                                        |     
|              |                                                                                                                                      |     
|              | Condensed Consolidated Balance Sheets as of March 31,
  2007 (unaudited) and July 1, 2006                                            | 1   
|              |                                                                                                                                      |     
|              | Condensed Consolidated Statements of Operations
  (unaudited) for the three and nine months ended March 31, 2007 and April 1,
  2006 | 2   
|              |                                                                                                                                      |     
|              | Condensed Consolidated Statements of Cash Flows
  (unaudited) for the nine months ended March 31, 2007 and April 1, 2006             | 3   
|              |                                                                                                                                      |     
|              | Notes to Condensed Consolidated Financial
Statements                                                                                 | 4   
|              |                                                                                                                                      |     
|Item 2.       | Managements Discussion
  and Analysis of Financial Condition and Results of Operation                                               | 30  
|              |                                                                                                                                      |     
|Item 3.       | Quantitative and
  Qualitative Disclosures about Market Risk                                                                         | 45  
|              |                                                                                                                                      |     
|Item 4.       | Controls and Procedures                                                                                                              | 46  
|              |                                                                                                                                      |     
|PART II       | OTHER INFORMATION                                                                                                                    |     
|              |                                                                                                                                      |     
|Item 1.       | Legal Proceedings                                                                                                                    | 47  
|              |                                                                                                                                      |     
|Item 6.       | Exhibits                                                                                                                             | 47  
|              |                                                                                                                                      |     
|SIGNATURES    |                                                                                                                                      | 48  
|              |                                                                                                                                      |     
|EXHIBIT INDEX |                                                                                                                                      |     

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TrueYou.Com Inc.Condensed Consolidated Balance Sheets

|                                                                                                                                                                |  |             |         |         |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ------- | - | -------- | -
|                                                                                                                                                                |  | As of       |        
|                                                                                                                                                                |  |             |        
|                                                                                                                                                                |  | March 31,   |         | July 1, |  
|                                                                                                                                                                |  |             |        
|In
  thousands, except share and per share amounts                                                                                                              |  | 2007        |         | 2006    |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|                                                                                                                                                                |  | (Unaudited) |         |         |   |         
|Assets:                                                                                                                                                         |  |             |         |         |   |         
|Current assets:                                                                                                                                                 |  |             |         |         |   |          |  
|Cash and cash equivalents                                                                                                                                       |  | $           | 1,851   |         | $ | 189      |  
|Restricted cash, current portion                                                                                                                                |  |             |        |         |   | 1,602    |  
|Accounts receivable, net                                                                                                                                        |  |             | 362     |         |   | 137      |  
|Inventories, net                                                                                                                                                |  |             | 2,383   |         |   | 2,214    |  
|Prepaid Interest                                                                                                                                                |  |             | 573     |         |   |         |  
|Other current assets                                                                                                                                            |  |             | 965     |         |   | 1,009    |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Total current assets                                                                                                                                            |  |             | 6,134   |         |   | 5,151    |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Property and equipment, net                                                                                                                                     |  |             | 11,199  |         |   | 12,981   |  
|Other assets                                                                                                                                                    |  |             | 891     |         |   | 855      |  
|Deferred financing costs, net                                                                                                                                   |  |             | 1,029   |         |   | 242      |  
|Restricted cash, non-current portion                                                                                                                            |  |             | 688     |         |   | 845      |  
|Goodwill                                                                                                                                                        |  |             |        |         |   | 18,072   |  
|Other intangibles, net                                                                                                                                          |  |             | 3,144   |         |   | 5,025    |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Total assets                                                                                                                                                    |  | $           | 23,085  |         | $ | 43,171   |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Liabilities and Shareholders deficit:                                                                                                                          |  |             |         |         |   |          |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Liabilities:                                                                                                                                                    |  |             |         |         |   |          |  
|Current liabilities:                                                                                                                                            |  |             |         |         |   |          |  
|Accounts payable                                                                                                                                                |  | $           | 7,761   |         | $ | 7,984    |  
|Accrued expenses and other current
liabilities                                                                                                                  |  |             | 22,892  |         |   | 16,449   |  
|Customer advances                                                                                                                                               |  |             | 8,615   |         |   | 8,273    |  
|Current portion of long term debt (net of debt
discount of $17.2
  million and $0 as of March 31, 2007, and July 1, 2006 respectively)                          |  |             | 30,611  |         |   | 5,839    |  
|Senior Debt Current (net of debt discount of $0.9
million as of  July 1, 2006)                                                                                  |  |             |        |         |   | 9,146    |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Total current liabilities                                                                                                                                       |  |             | 69,879  |         |   | 47,691   |  
|Convertible securities                                                                                                                                          |  |             | 32,322  |         |   | 197,565  |  
|Other long term liabilities                                                                                                                                     |  |             | 5,176   |         |   | 7,829    |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Total liabilities                                                                                                                                               |  |             | 107,377 |         |   | 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 as of March 31, 2007 and July 1, 2006,
  respectively |  |             | 17      |         |   | 15       |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Additional paid-in capital                                                                                                                                      |  |             | 2,414   |         |   | 4,347    |  
|                                                                                                                                                                |  |             |         |         |   |          |  
|Accumulated deficit                                                                                                                                             |  |             | (86,723 | )       |   | (214,276 | )
|                                                                                                                                                                |  |             |         |         |   |          |  
|                                                                                                                                                               
|Total shareholders deficit                                                                                                                                     |  |             | (84,292 | )       |   | (209,914 | )
|                                                                                                                                                                |  |             |         |         |   |          |  
|                                                                                                                                                               
|Total liabilities and shareholders
deficit                                                                                                                     |  | $           | 23,085  |         | $ | 43,171   |  
|                                                                                                                                                                |  |             |         |         |   |          |  

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

1

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TrueYou.Com Inc.
Condensed Consolidated Statements of Operations(unaudited)

|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|--------------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | ---------------- | - | --------------- | ---------- | - | - | ---------- | -
|                                                    |  | Three Months Ended |            | Nine Months Ended |  
|                                                    |  |                    |            |                   |  
|In thousands, except share and per share amounts    |  | March 31,
  2007   |            | April 1,
  2006   |   | March 31,
  2007 |   | April 1,
  2006 |           
|                                                    |  |                    |            |                   |   |                  |   |                 |           
|Revenues:                                           |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Service                                             |  | $                  | 5,162      |                   | $ | 6,492            |   | $               | 14,986     |   | $ | 18,446     |  
|Retail and wholesale products                       |  |                    | 1,960      |                   |   | 3,991            |   |                 | 6,575      |   |   | 7,355      |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Total Revenue                                       |  |                    | 7,122      |                   |   | 10,483           |   |                 | 21,561     |   |   | 25,801     |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Cost of Revenue:                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Service                                             |  |                    | 2,859      |                   |   | 3,945            |   |                 | 9,416      |   |   | 10,805     |  
|Retail and wholesale products                       |  |                    | 1,186      |                   |   | 1,233            |   |                 | 2,929      |   |   | 2,593      |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Total Cost of Revenue                               |  |                    | 4,045      |                   |   | 5,178            |   |                 | 12,345     |   |   | 13,398     |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Gross margin                                        |  |                    | 3,077      |                   |   | 5,305            |   |                 | 9,216      |   |   | 12,403     |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Stock based compensation (income) expense           |  |                    | (2,118     | )                 |   | (4               | ) |                 | (1,106     | ) |   | 146        |  
|Goodwill impairment                                 |  |                    | 18,072     |                   |   |                 |   |                 | 18,072     |   |   |           |  
|Intangibles impairment                              |  |                    | 626        |                   |   |                 |   |                 | 626        |   |   |           |  
|Selling, general and administrative expenses        |  |                    | 11,104     |                   |   | 10,989           |   |                 | 32,804     |   |   | 29,244     |  
|Depreciation and amortization                       |  |                    | 1,077      |                   |   | 873              |   |                 | 3,378      |   |   | 3,142      |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Total operating expenses                            |  |                    | 28,761     |                   |   | 11,858           |   |                 | 53,774     |   |   | 32,532     |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Operating loss                                      |  |                    | (25,684    | )                 |   | (6,553           | ) |                 | (44,558    | ) |   | (20,129    | )
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Interest expense, net                               |  |                    | 1,941      |                   |   | 348              |   |                 | 6,325      |   |   | 3,468      |  
|Registration rights penalties                       |  |                    |           |                   |   |                 |   |                 | 2,324      |   |   |           |  
|Loan default penalty                                |  |                    | 3,750      |                   |   |                 |   |                 | 3,750      |   |   |            |  
|Unrealized (gain) loss on convertible securities    |  |                    | (90,503    | )                 |   | 147,000          |   |                 | (184,509   | ) |   | 284,749    |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Income (loss) before income tax provision           |  |                    | 59,128     |                   |   | (153,901         | ) |                 | 127,552    |   |   | (308,346   | )
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Income tax provision                                |  |                    |           |                   |   |                 |   |                 |           |   |   |           |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Net income (loss)                                   |  |                    | 59,128     |                   |   | (153,901         | ) |                 | 127,552    |   |   | (308,346   | )
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Dividends on preferred stock                        |  |                    | 382        |                   |   | 407              |   |                 | 1,147      |   |   | 769        |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Net income (loss) applicable to common shareholders |  | $                  | 58,746     |                   | $ | (154,308         | ) | $               | 126,405    |   | $ | (309,115   | )
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Basic income (loss) per common share:               |  | $                  | 3.67       |                   | $ | (10.29           | ) | $               | 8.25       |   | $ | (20.61     | )
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Diluted income (loss) per common share:             |  | $                  | 2.94       |                   | $ | (10.29           | ) | $               | 6.32       |   | $ | (20.61     | )
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Weighted average common shares outstanding, basic   |  |                    | 15,993,371 |                   |   | 14,995,513       |   |                 | 15,325,686 |   |   | 14,995,513 |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  
|Weighted average common shares outstanding, diluted |  |                    | 20,000,000 |                   |   | 14,995,513       |   |                 | 20,000,000 |   |   | 14,995,513 |  
|                                                    |  |                    |            |                   |   |                  |   |                 |            |   |   |            |  

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

2

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TrueYou.Com Inc.
Consolidated Statements of Cash Flows

(Unaudited)

|                                                                                       |  |                   |          |          |   |          |  
|-------------------------------------------------------------------------------------- |  | ----------------- | -------- | -------- | - | -------- | -
|                                                                                       |  | Nine Months Ended |         
|                                                                                       | 
|In thousands                                                                           |  | March 31,         |          | April 1, |  
|                                                                                       | 
|                                                                                       |  | 2007              |          | 2006     |  
|Cash
  flows from operating activities:                                                |  |                   |          |          |   |          |  
|Net income (loss)                                                                      |  | $                 | 127,552  |          | $ | (308,346 | )
|Adjustments to reconcile net income (loss) to net
cash used in
  operating activities: |  |                   |          |          |   |          |  
|Depreciation and amortization                                                          |  |                   | 3,378    |          |   | 3,141    |  
|Loss on disposals                                                                      |  |                   | 1,318    |          |   |         |  
|Amortization of deferred financing costs                                               |  |                   | 232      |          |   | 66       |  
|Amortization of debt discount                                                          |  |                   | 2,089    |          |   |         |  
|Stock based compensation (income) expense                                              |  |                   | (1,106   | )        |   | 146      |  
|Loan default penalty                                                                   |  |                   | 3,750    |          |   |         |  
|Goodwill impairment                                                                    |  |                   | 18,072   |          |   |         |  
|Intangibles impairment                                                                 |  |                   | 626      |          |   |         |  
|Non-cash interest expense                                                              |  |                   | 2,139    |          |   | 1,478    |  
|Unrealized (gain) loss on convertible
securities                                       |  |                   | (184,510 | )        |   | 284,749  |  
|Changes
  in operating assets and liabilities:                                         |  |                   |          |          |   |          |  
|Inventories                                                                            |  |                   | (169     | )        |   | (384     | )
|Accounts receivable                                                                    |  |                   | (225     | )        |   | (722     | )
|Other current assets                                                                   |  |                   | (810     | )        |   | (437     | )
|Other assets                                                                           |  |                   | (36      | )        |   | (134     | )
|Accounts payable                                                                       |  |                   | (223     | )        |   | 337      |  
|Accrued expenses and other current
liabilities                                         |  |                   | 4,606    |          |   | 719      |  
|Customer advances                                                                      |  |                   | 342      |          |   | (209     | )
|Other long term liabilities                                                            |  |                   | (2,683   | )        |   | (635     | )
|                                                                                       |  |                   |          |          |   |          |  
|Net cash used in operating
activities                                                  |  |                   | (25,658  | )        |   | (20,231  | )
|Cash
  flows from investing activities:                                                |  |                   |          |          |   |          |  
|Capital expenditures                                                                   |  |                   | (1,659   | )        |   | (3,983   | )
|Purchase of intangible asset                                                           |  |                   |         |          |   | (84      | )
|                                                                                       |  |                   |          |          |   |          |  
|Net cash used in investing
activities                                                  |  |                   | (1,659   | )        |   | (4,067   | )
|Cash flows
  provided by financing activities:                                         |  |                   |          |          |   |          |  
|Cash overdraft                                                                         |  |                   |         |          |   | (163     | )
|Restricted cash                                                                        |  |                   | 1,759    |          |   | (1,094   | )
|Proceeds of issuance of debt                                                           |  |                   | 36,450   |          |   |         |  
|Repayment of long term debt                                                            |  |                   | (8,250   | )        |   | (900     | )
|Loan fees                                                                              |  |                   | (980     | )        |   |         |  
|Proceeds of issuance of TrueYou Series D Preferred
stock                               |  |                   |         |          |   | 14,964   |  
|Proceeds of issuance of KAAI Series G Preferred
stock                                  |  |                   |         |          |   | 10,058   |  
|Proceeds of issuance of KAAI Series F Preferred
stock                                  |  |                   |         |          |   | 4,754    |  
|                                                                                       |  |                   |          |          |   |          |  
|Net cash provided by financing
activities                                              |  |                   | 28,979   |          |   | 27,619   |  
|                                                                                       |  |                   |          |          |   |          |  
|Net increase in cash and
  cash equivalents                                            |  |                   | 1,662    |          |   | 3,321    |  
|Cash and cash equivalents
  - beginning of period                                      |  |                   | 189      |          |   | 173      |  
|                                                                                       |  |                   |          |          |   |          |  
|Cash and cash equivalents
  - end of period                                            |  | $                 | 1,851    |          | $ | 3,494    |  
|                                                                                       |  |                   |          |          |   |          |  
|Supplemental
  cash flow information                                                   |  |                   |          |          |   |          |  
|Non-cash financing activities:                                                         |  |                   |          |          |   |          |  
|Preferred stock dividends,
  net of preferred stock forfeitures                        |  | $                 | 1,147    |          | $ | 769      |  
|Reclassification of
  preferred stock into convertible securities                      |  |                   |         |          |   | 11,726   |  
|Beneficial conversion
  feature on preferred stock                                     |  |                   |         |          |   | 11,435   |  
|Exchange of KAAI accrued
  dividends for TrueYou Series B Preferred Stock              |  |                   |         |          |   | 464      |  
|Exchange of KAAI long term
  debt for TrueYou Series B Preferred Stock                 |  |                   |         |          |   | 19,205   |  
|Exchange of KAAI accrued
  interest for TrueYou Series B Preferred Stock               |  |                   |         |          |   | 1,598    |  
|Classification of KAAI warrants
  issued with KAAI Preferred stock as liabilities      |  |                   |         |          |   | 3,765    |  
|Issuance of common stock
  as settlement of liability                                  |  |                   | 352      |          |   |         |  
|Exchange of senior debt
  for subordinated debt                                        |  |                   | 1,750    |          |   |         |  
|Warrants issued with debt                                                              |  |                   | 19,267   |          |   |         |  

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

3

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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); and the
terms fiscal quarter and three months in this Quarterly Report on Form 10-Q
refer to the quarter ended March 31, 2007.

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 Subsequent Events Note 11).

The
Company adopted a plan to sell the spa/salons in May 2007 and, accordingly the
Company will present the operations of the stores 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
continuing operations for the 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 is being distributed through Sephora USA, Inc. stores and
the Companys own facilities.  After May 7, 2007 the Company continued to sell Cosmedicine through Sephora USA. The
Company is the owner of the Cosmedicine trademark. The Company co-brands its
trade name with the trade names of the salons and spas that it has
acquired.  The Companys salons and spas
share certain corporate resources such as senior management and administrative
services.  As of July 15, 2007, and as a
result of the sale of the spa/salons described above, the Company had 28 active
employees.  As of March 31, 2007 the
Company had 501 employees.

The
consolidated financial statements presented herein pertain to the Company and
its subsidiaries on a consolidated basis. All significant intercompany accounts
and transactions have been eliminated in consolidation.  The Company
considers that it operates in one segment for spa and salon domestic
operations.

The
accompanying condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial information.  In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statement presentation and should be read in
conjunction with the Companys audited consolidated financial statements and
related footnotes thereto for the fiscal year ended July 1, 2006 included in
the Companys Annual Report on Form 10-K filed with the Commission on February
6, 2007.

The
Companys quarterly results have included the operating results of the
spa/salons and the operating results for any quarter are therefore not
necessarily indicative of results that may be otherwise expected for the entire
year.

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 closest Saturday to the end of a month.

4

---



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 flows from operations.  As
of March 31, 2007, the Company had an accumulated deficit of $86.7 million and
a working capital deficiency of $63.7 million.   Included in the Companys
net deficit at March 31, 2007 is the remeasurement of convertible securities.
As of March 31, 2007, the Company remeasured the convertible securities
based upon an estimated fair value of $32.3 million, which is included in the
Consolidated Condensed Balance Sheet.
These factors raise substantial doubt about the Companys ability to continue
as a going concern. The Companys ability to continue as a going concern
is ultimately dependent on its ability to increase sales and reduce expenses
to a level that will allow it to operate profitably and sustain positive operating
cash flows and raise additional capital.
There have been no adjustments to the financial statements to reflect
the outcome of this uncertainty.  The
Company has had several recent financings, with the most recent being completed
on May 7, 2007 (see Subsequent Events Note 11).  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. Summary of Significant
Accounting Policies

Use of Estimates

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

Revenue
Recognition

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

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

5

---



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.  The Company categorizes the restricted cash as current or long
term based on the date the restriction is expected to lapse.

Inventories

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

Provisions
for Inventory Obsolescence

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

Property and
Equipment

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

6

---



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.

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 six
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 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 Note 4).  As a result, the Company
has recorded a charge of $0.6 million in its fiscal quarter ended March 31,
2007 to write-off all of these intangible assets.

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. If
the senior notes are redeemed, the unamortized

7

---



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.

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.

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 three months ended
March 31, 2007 consist of those related to: convertible preferred stock of
449.9 million, warrants 146.6 million, stock options 0.2 million, and
registration rights 11.4 million. 4.0 million of the securities were considered
to be common stock equivalents for the three months ended March 31, 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 three months ended April
1, 2006, 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.

Software Development Costs

The
Company incurs costs for the development of its Klinger 360° Best Practices Aesthetics System 
(the K360),
which is a comprehensive software and hardware practice management system that
facilitates the delivery of evidenced based best practices aesthetic services
that is to be sold, leased, or licensed to third parties in the future.  All software development costs have been
appropriately accounted for

8

---



in accordance with SFAS 86
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed.  All costs have been expensed as incurred as
technological feasibility has not yet been established.

Disclosures about Fair Value of Financial
Instruments

The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument 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.  The fair value of the
Common Stock is based on the price paid for a share of the stock closest to the
measurement date

Recently Issued
Accounting Standards

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

In
September 2006, the FASB issued SFAS 157, Fair Value Measurements.  SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This guidance
becomes effective for the first reporting period beginning after November 15,
2007.  The
Company is assessing the impact of the adoption of SFAS 157 on its 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 believe the impact of the adoption of SFAS 158 will not be
significant to the Companys consolidated financial statements.

9

---



3. Property and Equipment, net

Following
are the components of property and equipment included in the Consolidated
Balance Sheets as of March 31, 2007 and July 1, 2006:

|                                            |  |                  |        |                |   |        |  
|------------------------------------------- |  | ---------------- | ------ | -------------- | - | ------ | -
|(Dollars in thousands)                      |  | March 31,
  2007 |        | July 1,
  2006 |  
|                                            |  |                  |        |                |  
|                                            |  |                  |        |                |   |        |  
|Furniture
  and fixtures                    |  | $                | 2,798  |                | $ | 2,337  |  
|Machinery
  and equipment                   |  |                  | 3,311  |                |   | 3,078  |  
|Leasehold
  improvements                    |  |                  | 10,869 |                |   | 11,261 |  
|Capital
  lease assets                      |  |                  | 439    |                |   | 439    |  
|                                            |  |                  |        |                |   |        |  
|                                            |  |                  |        |                |   |        |  
|Total
  property and equipment              |  |                  | 17,417 |                |   | 17,115 |  
|                                            |  |                  |        |                |   |        |  
|Accumulated
  depreciation and amortization |  |                  | (6,218 | )              |   | (4,134 | )
|                                            |  |                  |        |                |   |        |  
|                                            |  |                  |        |                |   |        |  
|Total
  property and equipment, net         |  | $                | 11,199 |                | $ | 12,981 |  
|                                            |  |                  |        |                |   |        |  

Depreciation
expense for the three months ended March 31, 2007 and April 1, 2006 was $0.7
and $0.4 million, respectively, and for the nine months ended March 31, 2007
and April 1, 2006 was $2.1 and $1.4 million, respectively.

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 Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations
 for the three months ended March 31, 2007. The $0.5 million accrual is included in Accrued expenses and other
current liabilities in the Condensed Consolidated Balance Sheet as of March 31,
2007.

4. 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 believes
that there has been an impairment to its goodwill and intangible assets.  As of July 20, 2007, the closing price of
its Common Stock was $0.011.  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 has determined that its goodwill has 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, and customer relationships have been fully impaired due to the
default and related events discussed above.
As a result, the Company has recorded a charge of $0.6 million in its
fiscal quarter ended March 31, 2007 to write-off all of these intangible
assets.

10

---



5. Accrued Expenses and Other
Current Liabilities

The
table below sets forth the Companys accrued expenses and other current
liabilities as of March 31, 2007 and July 1, 2006.

|                                                       |  |           |        |        |   |        | 
|------------------------------------------------------ |  | --------- | ------ | ------ | - | ------ | 
|                                                       |  | March 31, |        | July1, |  
|(Amounts in
  thousands)                               |  | 2007      |        | 2006   |  
|                                                       |  |           |        |        |  
|                                                       |  |           |        |        |   |        | 
|Accrued interest                                       |  | $         | 3,778  |        | $ | 2,735  | 
|Accrued dividends                                      |  |           | 3,621  |        |   | 2,474  | 
|Accrued management Fees                                |  |           | 1,714  |        |   | 1,714  | 
|Due to Johns Hopkins  consulting fees
  (a)           |  |           | 3,209  |        |   | 1,300  | 
|Accrued registration penalties (b)                     |  |           | 3,871  |        |   | 1,547  | 
|Payroll, benefits and other                            |  |           | 6,699  |        |   | 6,679  | 
|                                                       |  |           |        |        |   |        | 
|Total Accrued Expenses and Other Current
  Liabilities |  | $         | 22,892 |        | $ | 16,449 | 
|                                                       |  |           |        |        |   |        | 

(a) The agreement was
terminated on May 7, 2007 (see Subsequent Events Note 11)

(b)  Registration Rights
Penalties

On
September 1, 2005, KAAI entered into an agreement with various stockholders
regarding the registration of the shares of common stock underlying the
securities they had 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 (see Subsequent Events Note 11).

11

---



Due
to the fact that the Company did not meet the effective date requirement by
June 3, 2006 or the Authorized Share Increase requirement, a non-operating
charge has been recorded for the combined estimated penalties of $0 and $2.3
million during the three months and nine months ended March 31, 2007. 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 for the quarter ended March 31, 2007.
The cumulative obligation of $3.9 million represents the aggregate registration
penalties payable through March 31, 2007 and is included in Accrued expenses
and other current liabilities on the Consolidated Balance Sheet.

6. Long-Term Debt and Other Long
Term Liabilities

The
Companys long-term debt and other long-term liabilities as of March 31, 2007
and July 1, 2006 consist of the following:

|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|------------------------------------------------------------------------ | ------------- | --------- | ------------------- | ---------- | ------------- | --------------------- | ----------- |  | ------ | ------- | 
|                                                                         |               |           |                     |            |               | Amounts
  Outstanding |            
|                                                                         |               |           |                     |            |               |                       |            
|(Dollars
in thousands)                                                   | MaturityDates |           | Interest
  Rate
  % |            | March 31,2007 |                       | July 1,2006 | 
|                                                                         |               |           |                     |            |               |                       |             | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|Senior
  debt (a)                                                        |               | 3/31/2009 |                     | 12%        |               | $                     |            |  | $      | 9,146   | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|Senior
  debt (b)                                                        |               | 6/30/2010 |                     | Prime + 2% |               |                       | 20,257      |  |        |        | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|Senior
  demand notes (c)                                                |               | Varies    |                     | Prime + 2% |               |                       | 4,000       |  |        |        | 
|                                                                        
|Subordinated
  debt (d)                                                  |               | 7/1/2010  |                     | 12%        |               |                       | 5,355       |  |        | 4,839   | 
|                                                                        
|Other
  long term debt                                                   |               |           |                     |            |               |                       |             |  |        |         | 
|Note payable                                                             |               | Varies    |                     | 5%         |               |                       | 1,000       |  |        | 1,000   | 
|                                                                        
|Other
  long term liabilities                                            |               |           |                     |            |               |                       |             |  |        |         | 
|Long term licensing obligation                                           |               | 12/1/2008 |                     | 6%         |               |                       | 3,210       |  |        | 3,818   | 
|Deferred construction allowance                                          |               |           |                     |            |               |                       | 115         |  |        | 130     | 
|Capital lease obligations                                                |               | Varies    |                     | 6%         |               |                       | 250         |  |        | 393     | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|Deferred
  Liability - Sephora                                           |               |           |                     |            |               |                       | 5,000       |  |        | 5,000   | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|Stock
  based awards                                                     |               |           |                     |            |               |                       | 30          |  |        |        | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|Convertible
  securities                                                 |               |           |                     |            |               |                       | 32,322      |  |        | 197,565 | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|Total                                                                    |               |           |                     |            |               |                       | 71,539      |  |        | 221,891 | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|Less
  current portion and amount included in other current liabilities* |               |           |                     |            |               | 34,041                |             |  | 16,497 |        
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 
|                                                                        
|Long-term
  portion                                                      |               |           |                     |            |               | $                     | 37,498      |  | $      | 205,394 | 
|                                                                         |               |           |                     |            |               |                       |             |  |        |         | 

*
Portion included in other current liabilities amounted to $3,430 and $1,512 at
March 31, 2007 and July 1, 2006, respectively.

(a) - Senior Debt - TICC

12

---



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 nine months ended
March 31, 2007.

(b) - Senior
Debt - Laurus

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

The
Company placed $2.5 million (the Interest Amount) of the proceeds in a
restricted account to be utilized to pre-fund interest for the first year of
the Laurus Note. Closing costs of $0.9 million were incurred by the Company
relating to this debt. These costs were recorded as deferred financing costs and
will be amortized to interest expense over the term of the note using
straight-line amortization. The balance of $21.6 was placed into a restricted
cash account which was released on July 11, 2006 when the Company satisfied the
conditions associated with the Laurus Note. The Company used $8.3 million to
pay off the existing senior debt held by TICC and an additional $0.1 million
representing unpaid interest and other costs owed to TICC. Also in conjunction
with the payoff of the senior debt and all related interest and fees was the
release of $1.6 million of restricted cash previously held for interest
payments. The restriction on the funds was removed in January 2007.

The
Laurus Note matures on June 30, 2010 and interest accrues at a rate per annum
equal to the prime rate, plus two percent (2%) per annum, payable monthly, in
arrears, and commenced on August 1, 2006. These payments are approximately $0.2
million per month. Commencing on August 1, 2007, the Company will make monthly
principal payments to Laurus in an amount equal to $0.4 million together with
any accrued and unpaid interest on such portion of the outstanding principal
amount plus any and all other unpaid amounts which are then owing under the
Laurus Note. The Companys payment obligations are guaranteed by the Companys
subsidiaries and are secured by all of the Companys and such subsidiaries
assets.

The
Company calculated a debt discount attributable to the value of these warrants
to be $10.3 million, which will be amortized over the term of the Laurus Note
using the effective interest method (see Note 9 for a discussion of assumptions
used to value the warrants). As of March 31, 2007, the Laurus Note carried a
debt discount of $8.5 million. For the three and nine months ended March 31,
2007, the Company recorded interest expense of $0.6 million and $1.8 million
respectively, related to the amortization of the debt discount. The warrants
have a 10-year term and an exercise price equal to $0.01 per share, and in
certain circumstances, may be exercised on a cashless basis. If, prior to the
fourteenth month anniversary of June 30, 2006, (i) the Companys obligations
under the Laurus Note have been reduced to $12.5 million or less, then the
series B warrants will automatically be cancelled and terminated; and (ii) the
Companys obligations under the Laurus Note have been reduced to zero, then the
series C warrants will automatically be cancelled and terminated. The Company
is obligated to file a registration statement with the Securities and Exchange
Commission covering the resale of the shares underlying the warrants. 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.

The
Company has also agreed to use its best efforts to amend its certificate of
incorporation to increase the number of authorized shares of its Common Stock
to such number as shall be sufficient to

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

Default on Senior Secured Debt

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. As a result of this default,
the Company has classified all the debt discussed above as current on its March
31, 2007 Consolidated Balance Sheet. The Company incurred a $3.8 million
penalty as a result of this default, which has been included in Current portion
of long term debt on the March 31, 2007 Condensed Consolidated Balance Sheet.

Refinancing

On
May 7, 2007 the Company entered into an Amended and Restated Securities
Purchase Agreement with Laurus pursuant to which the Company sold to Laurus a
Secured Term Note in the aggregate principal amount of $54,650,000. On the
Closing Date, the $25.0 million obligation of the Company to Laurus under the
June 30, 2006 note and an additional $3.8 million default penalty incurred in
the fiscal quarter ended March 31, 2007 was repaid (see Subsequent Events Note
11).

(c) 
SeniorDemand 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 are 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 rank 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.

The
Company, Laurus, and bridge lenders are negotiating to implement the
integration of these loans into an agreement consistent with that of the May
2007 loan documentation with Laurus (see Subsequent Events Note 11).

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 are due on demand and bear interest at the prime rate in effect from time
to time as reported in the Wall Street

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Journal plus
2% and also rank 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.

The
Company, Laurus, and bridge lenders are negotiating to implement the
integration of these loans into an agreement consistent with that of the May
2007 loan documentation with Laurus (see Subsequent Events Note 11).

(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 is subordinated to the Companys existing
senior indebtedness to Laurus under the Securities Purchase Agreement and the
Related Agreements.

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

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

Pursuant
to the Amended Subordinated Loan Agreement, the Company issued to the Amended
Subordinated Lenders warrants to purchase an aggregate of 30,658,597 shares of
Common Stock. These warrants have the same terms and rights, including
piggyback registration rights, as the warrants that were issued pursuant to the
Subordinated Loan Agreement described below. The Company calculated a debt
discount attributable to the value of these warrants of $3.2 million, which
will be amortized over the term of the note using the effective interest method
(see Note 9 for a discussion of assumptions used to value the warrants). As of
March 31, 2007, this note carried a debt discount of $3.1 million. For the
three and nine months ended March 31, 2007, the Company recorded interest
expense of $0.03 million and $0.09 million respectively, related to the
amortization of the debt discount.

On
May 7, 2007, each of the holders of the $4.8 million Subordinated Loan
converted their indebtedness into shares of a newly created Series E
Convertible Preferred Stock of the Company (see Subsequent Events Note 11).

$5.2 Million Subordinated Loan:

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

The
Subordinated Loan bears interest at 12% per annum compounded annually;
provided, however, the interest rate will increase to 14% per annum upon: (i)
the Companys failure to pay in full, on or prior to

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July 1, 2010,
the principal amount of the Subordinated Loan, plus all accrued interest, and
(ii) certain other specified events that would be considered an event of
default under the Subordinated Promissory Note. The principal balance and
accrued interest on the Subordinated Promissory Note is due on the earliest of
(i) July 1, 2010, and (ii) the first date on which any mandatory prepayment is
payable under the Subordinated Loan Agreement or the occurrence of any sale of
all or substantially all of the assets of the Company or its subsidiaries, or
merger, consolidation or other business combination involving the Company or
its subsidiaries if all senior indebtedness is first paid in full in cash in
connection with any such transaction (the Maturity Date).

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

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

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

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

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

Pursuant
to the Subordinated Loan Agreement, the Company issued to the Subordinated
Lenders warrants to purchase an aggregate of 32,947,771 shares of Common Stock
at an exercise price of $0.001 per share, subject to certain adjustments set
forth therein. The warrants expire on June 30, 2013. The Subordinated Lenders
are not entitled to 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 issued. The debt discount will be
amortized over the term of the loan using the effective interest method. As

16

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of March 31,
2007, this note carried a debt discount of $3.3 million. For the three and nine
months ended March 31, 2007, the Company recorded interest expense of $0.03
million and $0.1 million respectively, 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
converted their indebtedness into shares of a newly created Series E
Convertible Preferred Stock of the Company (see Subsequent Events Note 11).

$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. In the event the Subordinated
Secured Note is not repaid by April 30, 2007, the Company has agreed to issue
Laurus warrants with like terms to purchase an additional 8,750,000 shares of
Common Stock. Due to the fact that this debt was not repaid by April 30, 2007,
the Company will issue the additional warrants to Laurus.

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

The
Laurus Warrants have a 7-year term and an exercise price equal to $0.001 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

17

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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 will be amortized over the term of the loan using the effective
interest method. As of March 31, 2007, this note carried a debt discount of
$0.7 million. For the nine months ended March 31, 2007, the Company recorded
interest expense of $0.02 million related to the amortization of the debt
discount.

On
May 7, 2007, Laurus converted the $1.0 million loan into shares of a newly
created Series E Convertible Preferred Stock of the Company (see Subsequent
Events Note 11).

(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 is
subordinated to the Companys existing senior indebtedness to Laurus under the
Securities Purchase Agreement dated June 30, 2006 (the Securities Purchase
Agreement), and the Related Agreements referred to in the Securities Purchase
Agreement and ranks senior to the Companys $10.0 million of existing
subordinated indebtedness.

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

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

Pursuant
to the Senior Subordinated Loan Agreement, the Company issued to the Senior
Subordinated Lenders warrants to purchase an aggregate of 15,384,615 shares of
Common Stock at an exercise price of $0.001 per share. The warrants expire on
December 31, 2013. In the event the Laurus Note is not paid by April 30, 2007,
certain holders of such Warrants have agreed to contribute 8,750,000 Warrants
back to the Company and the Company has agreed to issue an additional 8,750,000
Warrants to Laurus. As the debt was not repaid by April 30, 2007, certain
holders will return 8,750,000 warrants to the Company which will be then be
issued to Laurus per the agreement. 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 will be amortized over the term of the loan using the
effective interest method. As of March 31, 2007, this note carried a debt
discount of $1.6 million. For the three and nine months ended March 31, 2007,
the Company recorded interest expense of $0.05 million and $0.06 million
respectively, related to the amortization of the debt discount.

On
May 7, 2007, each of the holders of the $3.0 million Senior Subordinated Loan
converted their indebtedness into shares of a newly created Series E
Convertible Preferred Stock of the Company (see Subsequent Events Note 11).

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Accrued Interest and Maturities of Other Long
Term Debt

Accrued
interest of $3.8 million and $2.7 million is included in accrued expenses as of
March 31, 2007 and July 1, 2006, respectively.

Concurrent
with the May 7, 2007 financing, various debt holders agreed to waive $1.2
million in accrued interest that is included in the March 31, 2007 Condensed
Consolidated Balance Sheet.

7. Commitments and Contingencies

Litigation

UBS Lawsuit

UBS
Securities, LLC commenced a lawsuit against the Company in the Supreme Court of
the State of New York, County of New York on September 18, 2006. The complaint
alleges that UBS was engaged to provide investment banking services to the
Company and that UBS is owed a fee of $1,750,000 with respect to a private
placement that was consummated in June, 2006, and funded in July 2006. By
order entered on May 25, 2007, the court granted UBSs motion for summary
judgment. On June 5, 2007 the court entered judgment against the Company in the
sum of $1,962,139.25, inclusive of interest and costs. A hearing on UBSs
request for attorneys fees will be held on September 5, 2007. In the event the Company is
required to pay this judgment in full, it would materially and adversely affect
the Company. The Company does
not believe the final settlement will exceed the amount accrued.

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 nine months
ended March 31, 2007 for this claim and $0.4 million is included
in Additional paid-in capital on the March 31, 2007 Consolidated Balance Sheet,
as a result of the issuance of the shares in the quarter ended March 31, 2007.

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.

Commitments

Acquisition of
Nouvisage Corp:

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

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

The
letter of intent was terminable by either party if the acquisition did not
close by January 10, 2007 (the Termination Date). Pursuant to the letter of
intent, the Sellers and Nouvisage had agreed not to solicit, initiate, or
encourage submission of or receive proposals or offers from another party until
the Termination Date. The board of directors of both the Company and Nouvisage
agreed to extend the Termination Date until March 1, 2007. As of July 15, 2007,
the parties have not extended the Termination Date further and the exclusive
period to negotiate has ended. Due to the end of the exclusivity period and the
recent sale of the spa/salons (see Subsequent Events Note 11 for a discussion
of the sale), it is unlikely that the acquisition will occur.

Upon
the signing of the letter of intent, the Company agreed to advance $300,000 to
Nouvisage. In accordance with this agreement, as of July 15, 2007 the Company
has advanced $300,000 to Nouvisage. Pursuant to the letter of intent, if the
acquisition does not close, Nouvisage has agreed to refund to the Company all
amounts paid to Nouvisage, except for documented transaction costs of up to
$75,000, in six equal monthly installments. Due to the Companys belief that
the collectibility of these advances is in doubt, the Company has recorded a
charge of $0.3 million in the quarter ended March 31, 2007, to fully reserve
for this receivable.

8. 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
March 31, 2007 and July 1, 2006, there were accrued and unpaid consulting fees
to L Capital of approximately $876,841.

On
December 20, 2005, the Company terminated the Consulting Agreement with L
Capital, and in accordance with this Agreement was 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 has been paid, (b) the $10.0 million in principal,
along with the related interest of our subordinated debt issued on July 11,
2006 has been paid and (c) the $4.0 million in principal, along with the
related interest of senior subordinated debt issued on December 22, 2006. Upon
the occurrence of all of the preceding, all accrued management fees will be due
and payable.

Concurrent
with the May 7, 2007 financing, L Capital waived the $876,841 in accrued
management fees included in the March 31, 2007 Condensed Consolidated Balance
Sheet.

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 March 31, 2007 and July 1, 2006,
there were accrued and unpaid consulting fees to KCO of approximately $837,433.

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On
December 20, 2005 the Company terminated the Advisory Agreement with KCO and in
accordance with this Agreement was 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 has been paid, (b) the $10.0 million in principal, along with
the related interest of our subordinated debt issued on July 11, 2006 has been
paid and (c) the $4.0 million in principal, along with the related interest of
senior subordinated debt issued on December 22, 2006. Upon the occurrence of
all of the preceding, all accrued management fees will be due and payable.

Concurrent
with the May 7, 2007 financing, KCO waived the $837,433 in accrued management
fees included in the March 31, 2007 Condensed Consolidated Balance Sheet.

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 $.001 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.

On
May 7, 2007, affiliates of Pequot converted their indebtedness into shares of a
newly created Series E Convertible Preferred Stock of the Company (see
Subsequent Events Note 11).

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. In the event the Laurus $1 million Senior
Subordinated Loan is not repaid by April 30, 2007, warrants to purchase
2,708,374 shares will be returned by Klinger Investments to the Company for
cancellation. Due to the fact that this debt was not repaid by
April 30, 2007, the Company will cancel the 2,708,374 warrants held by Klinger
Investments.

On
May 7, 2007, Klinger Investments, LLC converted its indebtedness into shares of
a newly created Series E Convertible Preferred Stock of the Company (see
Subsequent Events Note 11).

Loans by Laurus Master Fund Ltd.

Laurus
has loaned the Company $25,000,000 as Senior Secured Debt and $1 million as
Senior Subordinated Secured Debt as described in this Report and received 10
year warrants with an exercise price of $.01 per share to purchase a total of
50,885,093 shares of Common Stock and 7 year warrants with an exercise price of
$.001 per share to purchase a total of 10,000,000 shares of Common Stock. In
addition Laurus is entitled to receive warrants to purchase an additional
8,750,000 shares of Common Stock if the $1,000,000 Senior Subordinated Secured
Debt is not repaid by April 30, 2007. Due to the fact that this debt was not
repaid by April 30, 2007, the Company will issue the additional 8,750,000
warrants to Laurus. If prior to the 14th month anniversary of June
30, 2006, the Companys obligations to Laurus under the Senior Secured Debt
have been reduced to $12,500,000 or less, then warrants to purchase 6,839,394
shares of Common Stock will be automatically cancelled and terminated and if at
such time the Companys obligations

21

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have 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 incurred
in the fiscal quarter ended March 31, 2007 (see Subsequent Events Note 11).

Loan by Richard Rakowski

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. In the event the
Laurus $1 million Senior Subordinated Secured Loan is 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. Due to the fact that this debt
was not repaid by April 30, 2007, the Company will cancel the 3,541,666
warrants held by Mr. Rakowski. Mr. Rakowski has also personally guaranteed
certain obligations of the Company.

On
May 7, 2007, Mr. Rakowski converted his indebtedness into shares of a newly
created Series E Convertible Preferred Stock of the Company (see Subsequent
Events Note 11).

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. In the event the Laurus $1
million Senior Subordinated Secured Loan is 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. Due to the fact that this debt was not
repaid by April 30, 2007, the Company will cancel the 833,334 warrants held 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 converted his indebtedness from the July 11, 2006 and
December 22, 2006 financings into shares of a newly created Series E
Convertible Preferred Stock of the Company (see Subsequent Events Note 11).

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 $0.6 million and $2.0 million for the three and nine months ended
March 31, 2007
and $2.4 million for the three and nine months ended April 1, 2006. Due
to prepayments made by Sephora, as of March 31, 2007 the Company had a $0.3
million payable balance to Sephora which is included in Accounts receivable,
net in the Condensed Consolidated Balance Sheet.

22

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9. 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 must be submitted to the
stockholders of the Company for their approval within twelve months. 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 nine months ended March 31,
2007 have been granted under the 2006 Plan. 3,000,000 options were granted in
the three months ended March 31, 2007 to outside Board of Directors members.

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 26,996,147 shares of Common Stock
remained available for future award grants as of March 31, 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
78,003,853 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 $2.1
million and $0 for the three months ended March 31, 2007 and April 1, 2006,
respectively for stock options granted and the subsequent remeasurement. The
Company recognized compensation income of approximately $1.1 and compensation
expense $0.1 million for the nine months ended March 31, 2007 and April 1,
2006, respectively for stock options granted and the subsequent remeasurement.
In addition, as of March 31, 2007, there was approximately $.03 million in
unrecognized stock based compensation expense related to non-vested stock
options which is expected to be recorded in future periods over a weighted
average period of 1.7 years.

There
were new TrueYou options for the purchase of 58.1 million shares of Common
Stock granted during the nine months ended March 31, 2007. There were
additional TrueYou options to purchase 22.2 million shares of Common Stock
issued as an exchange for Advanced Aesthetics, Inc. options. There were no
options granted during the nine months ended April 1, 2006.

23

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The
weighted average fair value of the new employee options granted during the nine
months ended March 31, 2007 was $0.08. The fair value was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions for the nine months ended March 31, 2007 and April 1, 2006:

|                                 |  |                   |      |  |                 |    
|-------------------------------- |  | ----------------- | ---- |  | --------------- | ---
|                                 |  | Nine Months Ended
|                                 |  |                  
|Assumptions                      |  | March 31,
  2007  |      |  | April 1,
  2006
|                                 |  |                   |      |  |                
|                                 |  |                   |      |  |                 |    
|Expected dividend yield          |  |                   | None |  |                 | N/A
|Risk-free interest rate          |  |                   | 4.6  |  |                 | N/A
|Expected life of option
  grants |  |                   | 3.0  |  |                 | N/A
|Forfeiture rate                  |  |                   | 2.5% |  |                 | N/A
|Expected volatility              |  |                   | 50%  |  |                 | N/A

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 March 31, 2007. As of March 31, 2007 the weighted average
fair value was $0.002, the weighted average interest rate was 4.7%, the
forfeiture rate was 2.5%, and weighted average expected life was 2.7 years for
these stock options.

A
summary of the Companys stock option activity during the nine months ended March 31, 2007 is
follows:

|                                |  |                     |             |                                    |   |      | 
|------------------------------- |  | ------------------- | ----------- | ---------------------------------- | - | ---- | 
|                                |  | Options Outstanding |            
|                                |  |                     |            
|                                |  | Shares              |             | Weighted Average 
  Exercise Price |  
|                                |  |                     |             |                                    |  
|                                |  |                     |             |                                    |  
|Outstanding,
  July 1, 2006 (1) |  |                     | 22,220,942  |                                    | $ | 0.34 | 
|                                |  |                     |             |                                    |   |      | 
|Granted                         |  |                     | 80,301,262  |                                    |   | 0.27 | 
|Forfeited                       |  |                     | (2,297,409  | )                                  |   | 0.24 | 
|Cancelled                       |  |                     | (22,220,942 | )                                  |   | 0.34 | 
|Exercised                       |  |                     |            |                                    |   |     | 
|                                |  |                     |             |                                    |   |      | 
|                               
|Outstanding,
  March 31, 2007   |  |                     | 78,003,853  |                                    | $ | 0.27 | 
|                                |  |                     |             |                                    |   |      | 

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

As
of March 31, 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 3/31/07 |  | Weighted average 
  remaining 
  contractual life (in 
  years) |  | Weighted 
  average 
  exercise price |  | Number
  exercisable as 
  of 3/31/07 (1) |  | Weighted 
  average price | 
|                                       |  |                                                    |  |                                                                 |  |                                       |  |                                           |  |                           | 
|                                      
|Stock options issued @$0.19
  to $0.34 |  | 78,003,853                                         |  | 8.6                                                             |  | $0.27                                 |  | 58,499,043                                |  | $0.28                     | 

|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company does not have
  sufficient authorized common shares at March 31, 2007 to permit the exercise
  of the stock options. These options would be exercisable if sufficient
  authorized shares were available.

24

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Warrants

The Company
issued 139,876,075 warrants during the nine months ended March 31, 2007 which
were valued using the Black-Scholes option pricing model using the following
weighted average assumptions: risk-free rate of return  5.08%; term  8.1
years; volatility  50%; dividend yield  0.0%. The warrants were recorded as a
discount to debt.

Warrants
outstanding as of March 31, 2007 are as follows:

|                              |  |                      |             |                                    |   |       | 
|----------------------------- |  | -------------------- | ----------- | ---------------------------------- | - | ----- | 
|                              |  | Warrants Outstanding |            
|                              |  |                      |            
|                              |  | Shares               |             | Weighted Average 
  Exercise Price |  
|                              |  |                      |             |                                    |  
|                              |  |                      |             |                                    |   |       | 
|Outstanding,
  July 1, 2006   |  |                      | 63,638,769  |                                    | $ | 0.166 | 
|                              |  |                      |             |                                    |   |       | 
|Granted                       |  |                      | 139,876,075 |                                    |   | 0.004 | 
|Cancelled                     |  |                      |            |                                    |   |      | 
|Exercised                     |  |                      |            |                                    |   |      | 
|                              |  |                      |             |                                    |   |       | 
|                             
|Outstanding,
  March 31, 2007 |  |                      | 203,514,844 |                                    | $ | 0.055 | 
|                              |  |                      |             |                                    |   |       | 

At
March 31, 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 3/31/07 |  | Weighted
  average
  remaining
  contractual life
  (in years) |  | Weighted
  average
  exercise
  price |  | Number
  exercisable
  as of 3/31/07 (1) |  | Weighted
  average
  price | 
|                                   |  |                                                    |  |                                                                |  |                                       |  |                                          |  |                            | 
|                                  
|Warrants
  issued @ $.001 to $.230 |  | 203,514,844                                        |  | 6.4                                                            |  | varies                                |  | 203,514,844                              |  | varies                     | 

|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | The Company does not have
  sufficient authorized common shares at March 31, 2007 to permit the exercise
  of the warrants. These warrants would be exercisable if sufficient authorized shares were
  available.

10. 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
reporting period end based on fair value. The Company determines the fair value
of the convertible securities based on the number of shares common stock into
which they are convertible and the current fair value of the common stock on
the remeasurement date. Fair value of the Common Stock is determined based on
actual amounts paid for a share of Common Stock in a transaction closest to the
remeasurement date. The fair values of the Common Stock as of March 31, 2007
and July 1, 2006 were $0.05 and $0.39, respectively. The number of common
shares into which the convertible securities are convertible was 646,452,766
and 506,576,690 as of March 31, 2007 and July 1, 2006, respectively. As of
March 31, 2007, the Company remeasured the convertible securities based on an
estimated fair value of approximately $32.3 million and recorded an unrealized
gain of approximately $90.5 and $184.5 million for the three and nine months
ended March 31, 2007. As of April 1, 2006, the Company remeasured the
convertible securities based on an estimated fair value of approximately $349.6
million and recorded an unrealized loss of

25

---



approximately $147.0 million
and $284.7 million for the three and nine months ended April 1, 2006,
respectively.

11. Subsequent Events

Refinancing  Senior Debt

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 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 structuring expenses of $10,000 and escrow agent fees of $2,000.
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 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. 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.

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.

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 will calculate a debt discount
attributable to the value of these warrants which will be amortized over the
term of the Note using the effective interest method. As the determination of
the fair value of the warrants is finalized by the Company, an expense and
corresponding liability will be recorded, as required by EITF 00-19 due to the
insufficient number of shares authorized. The liability to be recorded

26

---



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 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.

Sale of Company Stores/salons

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. The operations sold to the Purchaser accounted for approximately 91% of the Companys revenue and 85% of gross margin for the nine month period ended March 31, 2007.

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 to 60 days. On July 25, 2007 the purchaser
filed for relief under Chapter 11 of the U.S. bankruptcy laws. The Company has not determined the effect, if any, of the GK Acquisition,
LLC bankruptcy on the accounting for the sale transaction.

The
parties also entered into various agreements in connection with the sale
including a transition services agreement pursuant to which the Company will
provide transitional services to the Purchaser as well as a Cosmedicine supply
agreement pursuant to which the Company will 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.

27

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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 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 results of
operations from the spas / stores will be classified as discontinued operations
beginning in the fourth quarter. As a result of this sale, the Company
anticipates a loss on sale of $4.1 million in the fourth quarter.

Conversion 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 converted their shares of Preferred Stock and indebtedness,
respectively, into shares of a newly created Series E Convertible Preferred
Stock of the Company. The conversion 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 converted into Series E
Convertible Preferred Stock of the Company.

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 shall be 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.

Consulting Agreement  Richard Rakowski

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.

Termination of Agreements  Johns Hopkins

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 dated November 23, 2003, as amended was
terminated effective April 13, 2007. Under the Agreement, KAA 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 will record a derecognition of the intangible asset of approximately
$3.7 million and liability of approximately $3.3 million in the fourth quarter.

28

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The
May 7, 2007 agreement also provides that the License and Management Agreement
between Johns Hopkins University and the Company 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. The Company paid $0.2 million as part of this agreement.

29

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ITEM 2. MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The
following discussion and analysis should be read in conjunction with our
attached unaudited condensed consolidated financial statements and notes
thereto included in this Report and our audited consolidated financial
statements and notes thereto for the fiscal year ended July 1, 2006, included
in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on February 6, 2007.

Unless
otherwise indicated in this Item 2, 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,,
Company, and us refer to TrueYou.Com Inc. and its consolidated subsidiaries
(including KAAI), as applicable; and the terms fiscal quarter and three
months in this Quarterly Report on Form 10-Q refer to the quarter ended March
31, 2007.

Forward-Looking Statements

Certain
of the statements set forth in this Form 10-Q constitutes 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.
Therefore, readers are cautioned that there also can be no assurance that the
forward-looking statements included in this Form 10-Q 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-Q.

Business Overview

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 Subsequent Events Note 11 of the March 31, 2007 Condensed
Consolidated Financial Statements).

The
Company adopted a plan to sell the spa/salons in May 2007 and, accordingly the
Company will present the operations of the stores as discontinued operations
beginning in the fourth quarter. The consolidated financial statements
presented herein include the results of operations for the spas/salons in
continuing operations for the periods presented.

We
offer both medical and non-medical services and products to customers. We
co-brand our trade name with the trade names of the salons and spas that we
acquired. We offer our Cosmedicine skin care products at retail through our own
location and at wholesale through Sephora stores and the internet. We are
developing and testing the Klinger 360° Best Practices Aesthetics System  (the
K360), which to our knowledge is the first comprehensive software and
hardware practice management system that facilitates the delivery of evidenced
based best practices aesthetic services. Our salons and spas share certain
corporate resources such as senior management and administrative services. As
of July 15, 2007, and as a result of the sale of the spa/salons described
above, the Company had 28 employees. As of March 31, 2007 the Company had 501
employees.

30

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KAAI
commenced business operations on June 29, 2003 when it acquired Dischino
Corporation. Dischino Corporation operated an established beauty salon and spa
in West Palm Beach, Florida. In December 2003, KAAI acquired three additional
facilities in the State of Florida. The first facility was a spa located in
Palm Beach Gardens, the second and third facilities were spas located in Boca
Raton. In April 2004, KAAI expanded operations by acquiring assets of the
Georgette Klinger Corporation which owned and operated nine salons throughout
the United States that offer spa and salon services. In 2006, we opened
our two new flagship locations, the NorthPark flagship in Dallas Texas, and the Chevy Chase flagship in
Chevy Chase, Maryland. As mentioned above, we sold all of our salon / stores on
May 7, 2007.

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

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

Our
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
March 31, 2007, we have an accumulated deficit of $86.7 million and a
working capital deficit of $63.7 million. Included in our net deficit at March
31, 2007 is the remeasurement of convertible securities. As of March 31, 2007,
the Company remeasured the convertible securities based upon an estimated fair
value of $32.3 million, which is included in the Consolidated Condensed Balance
Sheet. These factors raise substantial doubt about our ability to continue as
a going concern. Also, as a result of our losses, the opinion of our Independent
Registered Public Accountants on our audited financial statements for fiscal
year 2006 included an explanatory paragraph relating to going concern. A
going concern explanatory paragraph indicates that our auditors believe there
is 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.

On
May 7, 2007 we entered into an Amended and Restated Securities Purchase
Agreement with Laurus pursuant to which we sold to Laurus a Secured Term Note
in the aggregate principal amount of $54,650,000. On the Closing Date, our
$25.0 million obligation to Laurus under the June 30, 2006 note and an
additional $3.8 million default penalty incurred in the fiscal quarter ended
March 31, 2007 was repaid.

There
is no assurance that this recently completed financing will be sufficient to
fund operations until sales and profitability improve to the point that KAAI is
able to operate from internally generated cash flows.

31

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Current Trends and
Outlook

We
have recently completed some key initiatives that we believe will result in
improved operating performance and profitability. On May 7, 2007, we sold all
our stores/salons in an effort to improve profitability and cash flow. This
will also allow management to focus on our Cosmedicine skin care line. In April
2007, we entered into a marketing agreement with Home Shopping Network (HSN)
to promote and sell Cosmedicine products. Commencing in August of 2007, the
Company, expects to sell selected products of its Cosmedicine skin care line through
direct to consumer television programming on HSN. We have already participated
in Sephora shows on HSN. Cosmedicine is currently available in the United
States at Sephora stores, Sephoras website, Cosmedicine.com, HSN.com for
selected products, and spa locations formerly operated by the Company and which
have been sold to GK Acquisitions LLC. We believe that these markets will
provide excellent growth opportunities for our products.

As
discussed above, concurrent with the stores sale on May7, 2007, we
completed a refinancing with Laurus. This capital was critical to the
operations and will be a key to growing the Cosmedicine business.

Earlier
in the year, we had experienced significant challenges to raise sufficient
capital to service our ongoing debt obligations and continue our operations as
then conducted. As discussed below (see Future Liquidity and Capital Needs),
    on March 8, 2007 Laurus sent a notice of default relating to its $25.0 million
Secured Term Note and its $1.0 million Senior Subordinated Secured Term Note.
This default was one of the factors that ultimately led to the selling of the
stores. As a result of the this notice of default on the Senior Secured Debt
and the drop in the Company traded share price, we believe that there has been
an impairment to goodwill in our fiscal quarter ended March 31, 2007. As of
July 20, 2007, the closing price of the Companys Common Stock was $0.011.
The default and the limited capital options determined after the event left the
Company with no capacity to invest to maintain any remaining goodwill. 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, we recorded an $18.1
million expense in our fiscal quarter ended March 31, 2007 to write-off all of
our goodwill. We have also determined that intangible assets related to non-compete
agreements, trademark/trade names, and customer relationships have been fully
impaired due to the default and related events discussed above. As a result,
the Company has recorded a charge of $0.6 million in its fiscal quarter ended
March 31, 2007 to write-off all of these intangible assets.

On
February 8, 2007, we reached an agreement with the landlord at our Beverly
Hills store to surrender the leased property. Due to our limited capital and
revised business plan, we were unable to complete the remodeling and re-open
the store. As a result of this agreement, we recorded a net write-off of $0.6
million of net assets in the quarter ended March 31, 2007. We also recorded an
additional $0.5 million charge to record the estimated costs we may incur as a
result of surrendering the leased property. The $0.5 million accrual is
included in Accrued expenses and other current liabilities in the Condensed
Consolidated Balance Sheet as of March 31, 2007.

We
have had a significant net decline in revenues for the three and nine months
ended March 31, 2007 versus the three and nine months ended April 1, 2006 due
partially to declining revenues in most of our legacy stores, due to limited
capital. Our limited capital prevented us from making capital improvements,
retaining key personnel, and supplying needed products and supplies to the
stores / salons. Net revenues decreased 32% and 16% for the three and nine
months ended March 31, 2007, respectively, versus the comparable prior year
periods. We believe other reasons behind the decline in store / salon revenue
include our facility in Boca Raton which continues to have declining revenues
and profits. This decline is partially due to significant employee turnover at
this facility. We also permanently closed our Beverly Hills location, which had
been temporarily closed for renovations, due to the ongoing rent expense and
the significant capital investment it would have required to re-open it. The
declining revenue and cash flow were some of the key factors that ultimately
led to the sale of all our store / salons as discussed above. Revenue from our
Cosmedicine products also declined versus previous periods. Cosmedicine was
launched in the quarter ended April 1, 2006 and large orders were received to
stock the shelves. Replacement orders received in fiscal 2007 were smaller due
to the previously established base stock levels. We hope to add new consumers
through our Sephora and HSN agreements to create growth in our Cosmedicine
revenue in the future.

32

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Revenue Sources

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We derived revenue from
  the following sources during the periods:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Spa and Salon Services  Our salon offerings include services
  such as hair styling, coloring, texturizing, treatments, extensions, make-up
  artistry and manicure/pedicures. Our spa services include treatments such as
  facials, body treatments (exfoliation, wraps, cellulite treatments), waxing
  and massage therapy. Spa and salon service revenue represented 67% and 56% of
  our total operating revenues for the three months ended March 31, 2007 and
  April 1, 2006, respectively and 64% of our total operating revenues for the
  nine months ended March 31, 2007 and April 1, 2006.                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Spa and salon services are
  provided at all our operating stores.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Medical Services 
  Our medical offerings include injection services (Botox and Restylane),
  sclerotherapy (vein treatments), peels, microdermabrasion, permanent make-up,
  laser resurfacing and laser hair removal. Medical service revenue represented
  6% of our total operating revenues for the
  three months ended March 31, 2007 and April 1, 2006 and 6% and 8% of
  our total operating revenues for the
  nine months ended March 31, 2007 and April 1, 2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Historically we have
  offered on-site and off-site medical services. All dermatology related
  procedures are performed on-site. For the on-site procedures, medical
  providers utilize space in our stores, having been provided a separate
  medical area with its own entrance and medical accessories. Prior to August
  2006, we also offered off-site medical services. These services consisted of
  cosmetic surgeries that were performed by the medical practitioners at a
  third party participating hospital. The on-site medical facility would
  provide the initial consultation, with the surgery performed off-site by the
  medical practitioner. We bill and collect all revenues and pay all expenses
  related to the medical services and pay the medical practitioners for their
  services. We no longer offer any off-site medical services as we have
  discontinued offering cosmetic surgeries.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | To generate our revenues
  for our medical segment, we enter into medical practitioner fee contracts
  with our medical practitioners where they receive a percentage of the revenue
  generated from the performance of their services. Depending upon the medical
  provider and the type of service that is delivered, the percentage varies
  from 30-70% for medical revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In all cases, physicians
  are contracted as consultants and not as employees. In most cases, the nurse
  practitioners are hired as employees. We do not generate any revenues from
  referring individuals to medical providers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Retail Product Sales  Include sales of third party products
  and our Cosmedicine products through our own locations. Retail product sales
  revenue represented 19% and 15% of our total operating revenues for the three
  months ended March 31, 2007 and April 1, 2006, respectively and 21% and 19%
  of our total operating revenues for the nine months ended March 31, 2007 and
  April 1, 2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Our locations offer a
  variety of retail products including products for hair care, skin care, and
  make-up. Hair care product offerings include such brands as LOreal,
  Kerastase, and Bumble & Bumble. Skin care product offerings include such
  brands as DDF, Obagi, IS Clinical, MD Skincare, and La Therapie. Our make-up
  product offering consists of the brand NARS. Additionally many of our locations
  offer our private label skin care brands, Georgette Klinger and Cosmedicine.
  In general, different combinations of the products are offered at different
  locations. Our Cosmedicine products are sold at all our locations, however,
  and have become our largest retail brand, beginning in fiscal 2006.                                                                                                                                                                                       

33

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Wholesale
  Product Sales  Include sales of our Cosmedicine products at
  Sephora stores and through the internet. These products were launched in
  fiscal 2006 and represented 8% and 23% of our total operating revenues for
  the three months ended March 31, 2007 and April 1, 2006, respectively
  and 9% of our total operating revenues for the nine months ended March
  31, 2007 and April 1, 2006. Sephora,
  with whom we have a strategic relationship, is a subsidiary of LVMH, SA and L
  Capital is a private equity fund sponsored by LVMH, SA and, as a result,
  Sephora and L Capital are affiliates. Net revenue recognized on sales to
  Sephora was $0.6 million and $2.0 million for the three and nine months ended
  March 31, 2007 and $2.4 million for the three and nine months ended April 1,
  2006. Our decision to enter into a strategic alliance with Sephora was made
  independent of our relationship with L Capital.

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

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

Beginning
in fiscal year 2006, 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 closest Saturday to the end of a month.

Critical Accounting Estimates

Accounting
estimates and assumptions discussed in this section are those that we consider
to be the most critical to an understanding of our financial statements because
they inherently involve significant judgments and uncertainties. For all of
these estimates, we caution that future events rarely develop exactly as
forecast, and the best estimates routinely require adjustment.

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

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

34

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| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cosmedicine sales to
  Sephora  revenue is recognized as sales are made to Sephora. At the end of
  each quarter, an accrual is made for anticipated returns due to damages,
  store testers, and product with limited remaining code life.

Impairment
of Goodwill and Intangibles: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. As discussed above, as a result of the this
notice of default on the Senior Secured Debt and the drop in the Company traded
share price, we believe that there has been an impairment to goodwill in our
fiscal quarter ended March 31, 2007. As of May 30, 2007, the closing price of
the Companys Common Stock was $0.04. As a result, we recorded an $18.1
million expense in our fiscal quarter ended March 31, 2006 to write-off all of
our goodwill.

We have also determined that
intangible assets related to non-compete agreements, trademark/trade names, and customer relationships
have been fully impaired due to the default and related events discussed above. As a result, the Company has recorded a charge
of $0.6 million in its fiscal quarter ended
March 31, 2007 to write-off all of these intangible assets.

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

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

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

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

Convertible
Securities:We
remeasured our convertible securities in compliance with EITF 00-19, based on
the fair value of our Common Stock into which they are convertible, since there
are currently insufficient shares authorized to allow conversion. The fair
value of the Common Stock is based in the price paid for a share of the stock
closest to the measurement date. As of March 31, 2007 the closing price for our
Common Stock was $0.05. 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 $65 million. This fluctuation would result in an impact to our
net loss. As of July 20, 2007, the closing price of our Common Stock was
$0.011. 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

35

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after December 15, 2006. We
believe the impact of the adoption of FIN 48 will not be significant to the
Companys consolidated financial statements.

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

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 believe the impact of the adoption of SFAS 158 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.

Three Months
Ended March 31, 2007 and April 1, 2006

The
following table sets forth our operating revenues and cost of revenue data as a
percentage of net sales for the three months ended March 31, 2007 and April 1,
2006:

|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|----------------------- |  | ------------------ | ----- | ---------------- |  | --- | - | - | --------------- |  |  | ----------------------- | - | ---------------- | ------ | - |  | ---- | -
|In thousands            |  | Three Months Ended |       |                  |  |     |  
|                        |  |                    |       | March 31,
  2007 |  |     |   |   | April 1,
  2006 |  |  | Increase /
  (Decrease) |   | Percent
  Change |       
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |       
|Operating Revenues      |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|Services                |  | $                  | 5,162 |                  |  | 72  | % | $ | 6,492           |  |  | 62                      | % | $                | (1,330 | ) |  | (20% | )
|Retail and wholesale    |  |                    | 1,960 |                  |  | 28  | % |   | 3,991           |  |  | 38                      | % |                  | (2,031 | ) |  | (51% | )
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|Total Operating Revenue |  | $                  | 7,122 |                  |  | 100 | % | $ | 10,483          |  |  | 100                     | % | $                | (3,361 | ) |  | (32% | )
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|Cost of Revenue         |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|Services                |  | $                  | 2,859 |                  |  | 40  | % | $ | 3,945           |  |  | 38                      | % | $                | (1,086 | ) |  | (28% | )
|Retail and wholesale    |  |                    | 1,186 |                  |  | 17  | % |   | 1,233           |  |  | 12                      | % |                  | (47    | ) |  | (4%  | )
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|Total Cost of Revenue   |  | $                  | 4,045 |                  |  | 57  | % | $ | 5,178           |  |  | 49                      | % | $                | (1,133 | ) |  | (22% | )
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|Gross Margin            |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|Services                |  | $                  | 2,303 |                  |  | 32  | % | $ | 2,547           |  |  | 24                      | % | $                | (244   | ) |  | (10% | )
|Retail and wholesale    |  |                    | 774   |                  |  | 11  | % |   | 2,758           |  |  | 26                      | % |                  | (1,984 | ) |  | (72% | )
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |      |  
|Total Gross Margin      |  | $                  | 3,077 |                  |  | 43  | % | $ | 5,305           |  |  | 51                      | % | $                | (2,228 | ) |  | (42% | )

36

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Revenue

The
results of such sources for the three months ended March 31, 2007 and April 1,
2006 are as follows:

|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |     |   
|----------------------- |  | ------------------ | ----- | ---------------- |  | --- | - | - | --------------- |  |  | ----------------------- | - | ---------------- | ------ | - |  | --- | --
|In thousands            |  | Three Months Ended |       |                  |  |    
|                        |  |                    |       | March 31,
  2007 |  |     |   |   | April 1,
  2006 |  |  | Increase /
  (Decrease) |   | Percent
  Change |       
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |       
|Operating Revenues      |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |     |   
|Spa and salon services  |  | $                  | 4,758 |                  |  | 67  | % | $ | 5,911           |  |  | 56                      | % | $                | (1,153 | ) |  | (20 | %)
|Retail products         |  |                    | 1,379 |                  |  | 19  | % |   | 1,610           |  |  | 15                      | % |                  | (231   | ) |  | (14 | %)
|Wholesale products      |  |                    | 581   |                  |  | 8   | % |   | 2,381           |  |  | 23                      | % |                  | (1,800 | ) |  | (76 | %)
|Medical services        |  |                    | 404   |                  |  | 6   | % |   | 581             |  |  | 6                       | % |                  | (177   | ) |  | (30 | %)
|                        |  |                    |       |                  |  |     |   |   |                 |  |  |                         |   |                  |        |   |  |     |   
|Total Operating Revenue |  | $                  | 7,122 |                  |  | 100 | % | $ | 10,483          |  |  | 100                     | % | $                | (3,361 | ) |  | (32 | %)

Revenue
for the three months ended March 31, 2007 was $7.1 million compared to $10.5
million for the three months ended April 1, 2006, a decrease of $3.4 million.
All revenues during the two quarters were derived from the U.S. The significant
decrease in revenue was partially due to a $1.2 million decrease in service
revenue, comprised of spa and salon services. We experienced declining revenues
in most of our legacy stores, due to limited capital. Our limited capital
prevented us from making capital improvements, retaining key personnel, and
supplying needed products and supplies to the stores / salons. The decrease was
also due to the declining performance at the Boca Raton location. We also
experienced a $1.8 million decrease in wholesale product sales from the sale of
Cosmedicine products sold to Sephora and other customers for the three months
ended March 31, 2007 versus the three months ended April 1, 2006. Cosmedicine
was launched in the quarter ended April 1, 2006 and large orders were received
to stock the shelves. Replacement orders received in fiscal 2007 were smaller
due to the previously established base stock levels.

Cost of Revenue

Cost
of revenue decreased to $4.0 million for the three months ended March 1, 2007
from $5.2 million for the three months ended April 1, 2006, a decrease of $1.1
million. Cost of revenue represented 57% and 49% of operating revenues for the
three months ended March 31, 2007 and April 1, 2006, respectively. The increase
as a percentage was partially due to the higher cost of backbar usage in the
salons for the quarter ended March 31, 2007. These are products used only for
services provided at the salons and not sold at retail. In an effort to expand
our Cosmedicine line, we began increasing the use of these products for backbar
usage in our salons and reducing the usage of the Georgette Klinger backbar
products and those of third party vendors. While we believe the Cosmedicine
products provide additional benefits to customers, the cost of the Cosmedicine
backbar products is higher than Georgette Klinger or those purchased from third
party vendors.

Gross Margin

Gross
margin was 43% and 51% for the three months ended March 31, 2007 and April 1,
2006, respectively. The decline in gross margin was primarily due to the higher
cost of backbar usage discussed above and higher payroll and commission
structures which were partially offset by the launch of our Cosmedicine product
line.

37

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Operating Expenses

The
following table compares our operating expenses for the three months ended
March 31, 2007 and April 1, 2006:

|                                 |  |                    |        |                 |   |                         |   |                  |        |   |  |       |   
|-------------------------------- |  | ------------------ | ------ | --------------- | - | ----------------------- | - | ---------------- | ------ | - |  | ----- | --
|In thousands                     |  | Three Months Ended |        |                 |   |                         |  
|                                 |  |                    |        |                 |   |                         |  
|                                 |  | March 31,
  2007   |        | April 1,
  2006 |   | Increase /
  (Decrease) |   | Percent
  Change |       
|                                 |  |                    |        |                 |   |                         |   |                  |       
|Operating
  Expenses             |  |                    |        |                 |   |                         |   |                  |        |   |  |       |   
|Share based compensation income  |  | $                  | (2,118 | )               | $ | (4                      | ) | $                | (2,114 | ) |  | 52850 | % 
|Goodwill impairment              |  |                    | 18,072 |                 |   |                        |   |                  | 18,072 |   |  |      |   
|Intangibles impairment           |  |                    | 626    |                 |   |                        |   |                  | 626    |   |  |      |   
|Payroll                          |  |                    | 3,009  |                 |   | 3,792                   |   |                  | (783   | ) |  | (21   | %)
|Depreciation and amortization    |  |                    | 1,077  |                 |   | 873                     |   |                  | 204    |   |  | 23    | % 
|Loss on disposal of fixed assets |  |                    | 1,147  |                 |   |                        |   |                  | 1,147  |   |  |      |   
|Occupancy                        |  |                    | 1,672  |                 |   | 1,499                   |   |                  | 173    |   |  | 12    | % 
|Insurance                        |  |                    | 677    |                 |   | 765                     |   |                  | (88    | ) |  | (12   | %)
|Equipment leasing                |  |                    | 79     |                 |   | 97                      |   |                  | (18    | ) |  | (19   | %)
|Travel and entertainment         |  |                    | 294    |                 |   | 509                     |   |                  | (215   | ) |  | (42   | %)
|Professional fees                |  |                    | 2,438  |                 |   | 2,866                   |   |                  | (428   | ) |  | (15   | %)
|Office Expenses                  |  |                    | 127    |                 |   | 78                      |   |                  | 49     |   |  | 63    | % 
|Advertising and marketing        |  |                    | 850    |                 |   | 372                     |   |                  | 478    |   |  | 128   | % 
|Credit card fees                 |  |                    | 169    |                 |   | 141                     |   |                  | 28     |   |  | 20    | % 
|Postage and delivery             |  |                    | 95     |                 |   | 134                     |   |                  | (39    | ) |  | (29   | %)
|Telephone                        |  |                    | 127    |                 |   | 90                      |   |                  | 37     |   |  | 41    | % 
|Training and education           |  |                    | 22     |                 |   | 311                     |   |                  | (289   | ) |  | (93   | %)
|Management fees                  |  |                    |       |                 |   | 10                      |   |                  | (10    | ) |  | (100  | %)
|Other                            |  |                    | 398    |                 |   | 325                     |   |                  | 73     |   |  | 22    | % 
|                                 |  |                    |        |                 |   |                         |   |                  |        |   |  |       |   
|                                 |  |                    |        |                 |   |                         |   |                  |        |   |  |       |   
|Total Operating Expenses         |  | $                  | 28,761 |                 | $ | 11,858                  |   | $                | 16,903 |   |  | 143   | % 
|                                 |  |                    |        |                 |   |                         |   |                  |        |   |  |       |   

Operating
expenses were $28.8 million for the three months ended March 31, 2007 compared
to $11.9 million for the three months ended April 1, 2006, an increase of $16.9
million. The increase of 143.0% was primarily due to due to goodwill impairment
of $18.1 million and intangible asset impairment of $0.6 million (discussed
below), $2.1 million decrease in stock option expense under SFAS No. 123R
related mainly to the remeasurement at March 31, 2007, partially offset by the
$1.1 million in expenses incurred due to the closing and write-off of the
assets of the Beverly Hills location.

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, we believe that there
has been an impairment to the Companys goodwill. As of July 20, 2007, the
closing price of our Common Stock was $0.011. The default and the limited
capital options determined after the event left management 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, we have determined that
the Companys goodwill has been impaired and we have recorded a charge of $18.1
million in the fiscal quarter ended March 31, 2007 to write-off all of our
goodwill.

38

---



We
have also determined that intangible assets related to non-compete agreements,
trademark / trade names, and customer relationships have been fully impaired
due to the default and related events discussed above. As a result, we have
recorded a charge of $0.6 million in its fiscal quarter ended March 31, 2007 to
write-off all of these intangible assets.

Non-operating Expenses

The
following table compares our non-operating expenses for the three months ended
March 31, 2007 and April 1, 2006:

|                                                 |  |                    |         |                 |   |                         |  |                  |          |   |  |      |   
|------------------------------------------------ |  | ------------------ | ------- | --------------- | - | ----------------------- |  | ---------------- | -------- | - |  | ---- | --
|                                                 |  |                    |         |                 |   |                         | 
|In thousands                                     |  | Three Months Ended |         |                 |   |                         | 
|                                                 |  |                    |         |                 |   |                         | 
|                                                 |  | March 31,
  2007   |         | April 1,
  2006 |   | Increase /
  (Decrease) |  | Percent
  Change |         
|                                                 |  |                    |         |                 |   |                         |  |                  |         
|Non-operating
  (Income) Expenses                |  |                    |         |                 |   |                         |  |                  |          |   |  |      |   
|Interest expense, net                            |  | $                  | 1,941   |                 | $ | 348                     |  | $                | 1,593    |   |  | 458  | % 
|Unrealized (gain) loss on convertible
securities |  |                    | (90,503 | )               |   | 147,000                 |  |                  | (237,503 | ) |  | (162 | %)
|Loan default penalty                             |  |                    | 3,750   |                 |   |                        |  |                  | 3,750    |   |  |     |   
|                                                 |  |                    |         |                 |   |                         |  |                  |          |   |  |      |   
|                                                 |  |                    |         |                 |   |                         |  |                  |          |   |  |      |   
|Total Non-operating (Income) Expense             |  | $                  | (84,812 | )               | $ | 147,348                 |  | $                | (232,160 | ) |  | (158 | %)
|                                                 |  |                    |         |                 |   |                         |  |                  |          |   |  |      |   

Interest
Expense, net

Interest
expense was $1.9 million for the three months ended March 31, 2007 compared to
$0.3 million for the three months ended April 1, 2006, an increase of $1.6
million.

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 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
remeasures the convertible securities at the end of each reporting period based
on the share price of the True You Common Stock closest to the period end. At
July 1, 2006 the share price was multiplied by the number of common shares into
which the convertible securities were convertible, which was 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. No warrants were issued during the three months ended March 31, 2007.
As of March 31, 2007, the number of common shares into which the convertible
securities were convertible was 646,452,766 as of that date. The per share
trading value as of March 31, 2007 was $0.05, that resulted in an estimated
fair value of the convertible securities of $32.3 million. The Company recorded
an unrealized gain of $90.5 million for the three months ended March 31, 2007
and an unrealized loss of $147.0 million for the three months ended April 1,
2006.

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

39

---



Secured
Term Note issued as of June 30, 2006 and the Senior Subordinated Secured Term
Note issued as of December 22, 2006. As a result of this default, the Company
has classified all the debt discussed above as current on its March 31, 2007
Consolidated Balance Sheet. The Company incurred a $3.8 million penalty in May
2007 as a result of this default, and recorded the charge and related liability
in the quarter ended March 31, 2007, which is included in current portion of
long term debt on the Condensed Consolidated Balance Sheet.

Dividends Accrued on Preferred Stock

Dividends
accrued on preferred stock were $0.4 million for the three months ended March
31, 2007 and April 1, 2006, respectively.

Concurrent
with the May 7, 2007 financing, preferred shareholders waived $3.6 million in
accrued dividends fees included in the March 31, 2007 Condensed Consolidated
Balance Sheet.

Nine Months
Ended March 31, 2007 and April 1, 2006

The
following table sets forth our operating revenues and cost of revenue data as a
percentage of net sales for the nine months ended March 31, 2007 and April 1,
2006:

|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|----------------------- |  | ----------------- | ------ | --------------- |  | ----------------------- | - | ---------------- | ------ |  |  | --- | - | - | ------ | - |  | --- | --
|In thousands            |  | Nine Months Ended |        |                 |  |                         |  
|                        |  |                   |        |                 |  |                         |  
|                        |  | March 31,
  2007  |        | April 1,
  2006 |  | Increase /
  (Decrease) |   | Percent
  Change |       
|                        |  |                   |        |                 |  |                         |   |                  |       
|Operating
  Revenues    |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Services                |  | $                 | 14,986 |                 |  | 70                      | % | $                | 18,446 |  |  | 71  | % | $ | (3,460 | ) |  | (19 | %)
|Retail and wholesale    |  |                   | 6,575  |                 |  | 30                      | % |                  | 7,355  |  |  | 29  | % |   | (780   | ) |  | (11 | %)
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Total Operating Revenue |  | $                 | 21,561 |                 |  | 100                     | % | $                | 25,801 |  |  | 100 | % | $ | (4,240 | ) |  | (16 | %)
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Cost of
  Revenue       |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Services                |  | $                 | 9,416  |                 |  | 44                      | % | $                | 10,805 |  |  | 42  | % | $ | (1,389 | ) |  | (13 | %)
|Retail and wholesale    |  |                   | 2,929  |                 |  | 14                      | % |                  | 2,593  |  |  | 10  | % |   | 336    |   |  | 13  | % 
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Total Cost of Revenue   |  | $                 | 12,345 |                 |  | 57                      | % | $                | 13,398 |  |  | 52  | % | $ | (1,053 | ) |  | (8  | %)
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Gross
  Margin          |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Services                |  | $                 | 5,570  |                 |  | 26                      | % | $                | 7,641  |  |  | 30  | % | $ | (2,071 | ) |  | (27 | %)
|Retail and wholesale    |  |                   | 3,646  |                 |  | 17                      | % |                  | 4,762  |  |  | 18  | % |   | (1,116 | ) |  | (23 | %)
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Total Gross Margin      |  | $                 | 9,216  |                 |  | 43                      | % | $                | 12,403 |  |  | 48  | % | $ | (3,187 | ) |  | (26 | %)
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   

40

---



Revenue

The
results of such sources for the nine months ended March 31, 2007 and April 1,
2006 are as follows:

|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|----------------------- |  | ----------------- | ------ | --------------- |  | ----------------------- | - | ---------------- | ------ |  |  | --- | - | - | ------ | - |  | --- | --
|In thousands            |  | Nine Months Ended |        |                 |  |                         |  
|                        |  | March 31,
  2007  |        | April 1,
  2006 |  | Increase /
  (Decrease) |   | Percent
  Change |       
|                        |  |                   |        |                 |  |                         |   |                  |       
|Operating
  Revenues    |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Spa and salon services  |  | $                 | 13,765 |                 |  | 64                      | % | $                | 16,514 |  |  | 64  | % | $ | (2,749 | ) |  | (17 | %)
|Retail products         |  |                   | 4,570  |                 |  | 21                      | % |                  | 4,974  |  |  | 19  | % |   | (404   | ) |  | (8  | %)
|Wholesale products      |  |                   | 2,005  |                 |  | 9                       | % |                  | 2,381  |  |  | 9   | % |   | (376   | ) |  | (16 | %)
|Medical services        |  |                   | 1,221  |                 |  | 6                       | % |                  | 1,932  |  |  | 8   | % |   | (711   | ) |  | (37 | %)
|                        |  |                   |        |                 |  |                         |   |                  |        |  |  |     |   |   |        |   |  |     |   
|Total Operating Revenue |  | $                 | 21,561 |                 |  | 100                     | % | $                | 25,801 |  |  | 100 | % | $ | (4,240 | ) |  | (16 | %)

Revenue
for the nine months ended March 31, 2007 was $21.6 million compared to $25.8
million for the nine months ended April 1, 2006, a decrease of $4.2 million.
All revenues during the periods were derived from the U.S. The decrease in
revenue was primarily due to a $2.7 million decrease in service revenue, comprised
of spa and salon services, and the decrease of medical services of $0.7
million. We experienced declining revenues in most of our legacy stores, due to
limited capital. Our limited capital prevented us from making capital
improvements, retaining key personnel, and supplying needed products and
supplies to the stores / salons. The decrease was also due to the declining
performance at the Boca Raton location. Employee turnover and lack of
investment in the facility has led to a significant loss of the pre-existing
customer base. The decrease in spa and service revenue was $2.3 million for
this location versus the nine months ended April 1, 2006. In addition, we
decided to permanently close the Beverly Hills location that had been
temporarily closed for remodeling. There were no revenues from this location in
the nine months ended March 31, 2007 versus $0.3 million for the nine months
ended April 1, 2006.

Cost of Revenue

Cost
of revenue decreased to $12.3 million for the nine months ended March 31, 2007
from $13.4 million for the nine months ended April 1, 2006, a decrease of $1.1
million. Cost of revenue represented 57% and 52% of operating revenues for the
nine months ended March 31, 2007 and April 1, 2006, respectively. The primary
cause of the increase in the cost of revenue as a percentage of revenues was an
increase in the cost of backbar usage in the salons for the nine months ended
March 31, 2007.

Gross Margin

Gross
margin was 43% and 48% for the nine months ended March 31, 2007 and April 1,
2006, respectively. The decline in gross margin was due primarily to the higher
cost of backbar usage and higher payroll and commission structures which were
partially offset by the launch of our Cosmedicine product line.

41

---



Operating Expenses

The following table compares our operating expenses for the nine months
ended March 31, 2007 and April 1, 2006:

|                                          |  |                   |        |                 |   |                         |  |                  |        |   |  |      |   
|----------------------------------------- |  | ----------------- | ------ | --------------- | - | ----------------------- |  | ---------------- | ------ | - |  | ---- | --
|In thousands                              |  | Nine Months Ended |        |                 |   |                         |  |                  |       
|                                          |  |                   |        |                 |   |                         |  |                  |       
|                                          |  | March 31,
  2007  |        | April 1,
  2006 |   | Increase /
  (Decrease) |  | Percent
  Change |       
|                                          |  |                   |        |                 |   |                         |  |                  |       
|Operating
  Expenses                      |  |                   |        |                 |   |                         |  |                  |        |   |  |      |   
|Share based compensation (income) expense |  | $                 | (1,106 | )               | $ | 146                     |  | $                | (1,252 | ) |  | (858 | %)
|Goodwill impairment                       |  |                   | 18,072 |                 |   |                        |  |                  | 18,072 |   |  |     |   
|Intangibles impairment                    |  |                   | 626    |                 |   |                        |  |                  | 626    |   |  |     |   
|Payroll                                   |  |                   | 9,521  |                 |   | 9,459                   |  |                  | 62     |   |  | 1    | % 
|Depreciation and amortization             |  |                   | 3,377  |                 |   | 3,141                   |  |                  | 236    |   |  | 8    | % 
|Loss on disposal of fixed assets          |  |                   | 1,318  |                 |   | 35                      |  |                  | 1,283  |   |  | 3666 | % 
|Occupancy                                 |  |                   | 4,998  |                 |   | 4,071                   |  |                  | 927    |   |  | 23   | % 
|Insurance                                 |  |                   | 2,683  |                 |   | 1,912                   |  |                  | 771    |   |  | 40   | % 
|Equipment leasing                         |  |                   | 245    |                 |   | 197                     |  |                  | 48     |   |  | 24   | % 
|Travel and entertainment                  |  |                   | 1,335  |                 |   | 1,220                   |  |                  | 115    |   |  | 9    | % 
|Professional fees                         |  |                   | 7,712  |                 |   | 7,036                   |  |                  | 676    |   |  | 10   | % 
|Office Expenses                           |  |                   | 702    |                 |   | 371                     |  |                  | 331    |   |  | 89   | % 
|Advertising and marketing                 |  |                   | 1,925  |                 |   | 1,495                   |  |                  | 430    |   |  | 29   | % 
|Credit card fees                          |  |                   | 527    |                 |   | 427                     |  |                  | 100    |   |  | 23   | % 
|Postage and delivery                      |  |                   | 404    |                 |   | 319                     |  |                  | 85     |   |  | 27   | % 
|Telephone                                 |  |                   | 402    |                 |   | 292                     |  |                  | 110    |   |  | 38   | % 
|Training and education                    |  |                   | 212    |                 |   | 487                     |  |                  | (275   | ) |  | (56  | %)
|Management fees                           |  |                   |       |                 |   | 430                     |  |                  | (430   | ) |  | (100 | %)
|Other                                     |  |                   | 821    |                 |   | 1,494                   |  |                  | (673   | ) |  | (45  | %)
|                                          |  |                   |        |                 |   |                         |  |                  |        |   |  |      |   
|                                          |  |                   |        |                 |   |                         |  |                  |        |   |  |      |   
|Total Operating Expenses                  |  | $                 | 53,774 |                 | $ | 32,532                  |  | $                | 21,242 |   |  | 65   | % 
|                                          |  |                   |        |                 |   |                         |  |                  |        |   |  |      |   

Operating
expenses were $53.8 million for the nine months ended March 31, 2007 compared
to $32.5 million for the nine months ended April 1, 2006, an increase of $21.2
million. The increase of 65.0% was primarily due to goodwill impairment of
$18.1 million and intangible assets of $0.6 million (discussed below), an
increase of $1.3 million in losses on fixed asset disposals primarily due to
the closure of Beverly Hills; an increase of $0.7 million in professional fees
for accounting, legal, information technology, inventory management services,
software development, and public relations; a $0.9 million increase in
occupancy expenses due to the new leases on the flagship stores and headquarters
versus the prior leases on the old locations; a $0.8 million increase in
insurance due primarily to increased rates for property coverage due to
hurricane and earthquake exposure, and $0.4 million increase in advertising and
marketing due primarily to an agreement made to provide 1,760,925 shares of
Common stock to a vendor in settlement of a prior unfulfilled contract. These
were partially offset by a $1.3 million decrease in stock option expense under
SFAS No. 123R related primarily to the remeasurement at March 31, 2007.

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, we believe that there
has been an impairment to the Companys goodwill. As of July 20, 2007, the
closing price of our Common Stock was $0.011. The default and the limited
capital options determined after the event left management 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, we have determined that
the Companys goodwill has been impaired and we have recorded a charge of $18.1
million in the fiscal quarter ended March 31, 2007 to write-off all of our
goodwill.

We
have also determined that intangible assets related to non-compete agreements,
trademark / trade names, and customer relationships have been fully impaired
due to the default and related events discussed above. As a result, we have
recorded a charge of $0.6 million in its fiscal quarter ended March 31, 2007 to
write-off all of these intangible assets.

42

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Non-operating Expenses

The following table compares our non-operating expenses for the nine
months ended March 31, 2007 and April 1, 2006:

|                                                 |  |                   |          |                 |   |                         |  |                  |          |   |  |      |   
|------------------------------------------------ |  | ----------------- | -------- | --------------- | - | ----------------------- |  | ---------------- | -------- | - |  | ---- | --
|In thousands                                     |  | Nine Months Ended |          |                 |   |                         |  |                  |         
|                                                 |  |                   |          |                 |   |                         |  |                  |         
|                                                 |  | March 31,
  2007  |          | April 1,
  2006 |   | Increase /
  (Decrease) |  | Percent
  Change |         
|                                                 |  |                   |          |                 |   |                         |  |                  |         
|Non-operating
  (Income) Expenses                |  |                   |          |                 |   |                         |  |                  |          |   |  |      |   
|Interest expense, net                            |  | $                 | 6,325    |                 | $ | 3,468                   |  | $                | 2,857    |   |  | 82   | % 
|Unrealized (gain) loss on convertible
securities |  |                   | (184,509 | )               |   | 284,749                 |  |                  | (469,258 | ) |  | (165 | %)
|Loan default penalty                             |  |                   | 3,750    |                 |   |                        |  |                  | 3,750    |   |  |     |   
|Registration rights penalties                    |  |                   | 2,324    |                 |   |                        |  |                  | 2,324    |   |  |     |   
|                                                 |  |                   |          |                 |   |                         |  |                  |          |   |  |      |   
|                                                 |  |                   |          |                 |   |                         |  |                  |          |   |  |      |   
|Total Non-operating (Income) Expense             |  | $                 | (172,110 | )               | $ | 288,217                 |  | $                | (460,327 | ) |  | (160 | %)
|                                                 |  |                   |          |                 |   |                         |  |                  |          |   |  |      |   

Interest
Expense, net

Interest
expense was $6.3 million for the nine months ended March 31, 2007 compared to
$3.5 million for the nine months ended April 1, 2006. The increase of $2.9
million was caused primarily by the write-off the unamortized discount and
financing costs on the loan with Technology Investment Capital Corp of $0.9
million and $0.2 million, respectively, upon the early repayment. Interest
expense also increased due to the increase in debt levels in the nine months
ended March 31, 2007 versus April 1, 2006, due to the new financing.

Unrealized Loss
on Convertible Securities

During the
nine months ended March 31, 2007, the Company added 139,876,075 warrants issued
with debt. As of March 31, 2007, the number of common shares into which the
convertible securities were convertible was 646,452,766 as of that date. The
per share trading value as of March 31, 2007 was $0.05, which resulted in an
estimated fair value of the convertible securities of $32.3 million. The
Company recorded an unrealized gain of approximately $184.5.0 million for the
nine months ended march 31, 2007, compared to an unrealized loss of $284.7
million for the nine months ended April 1, 2006.

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. As a result of this default,
the Company has classified all the debt discussed above as current on its March
31, 2007 Consolidated Balance Sheet. The Company incurred a $3.8 million
penalty in May 2007 as a result of this default, and recorded the charge and
related liability in the quarter ended March 31, 2007, which is included in
current portion of long term debt on the Condensed Consolidated Balance Sheet.

Registration
Rights Penalties

The
Company incurred penalties of $2.3 million for the nine months March 31, 2007.
The penalties are due to failure to meet conditions included in registration
rights agreements with various stockholders.

43

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Dividends Accrued on Preferred Stock

Dividends
accrued on preferred stock were $1.1 million for the nine months ended March
31, 2007 as compared to $0.8 million for the nine months ended April 1, 2006.
The increase was due to the forfeiture of dividends accrued on preferred stock
which were converted into KAAIs common stock and subsequently exchanged for
TrueYou Series B Preferred Stock in the quarter ended December 31, 2005.

Financial Condition, Liquidity and Capital
Resources

Net
cash used in operating activities was $25.7 million and $20.2 million for the
nine months ended March 31, 2007 and April 1, 2006, respectively. This
deterioration of cash flows resulted primarily from an operating loss of $44.6
million for the nine months ended March 31, 2007 versus an operating loss of
$20.1 million for nine months ended April 1, 2006.

Net
cash used in investing activities was $1.7 million and $4.1 million for the
nine months ended March 31, 2007 and April 1, 2006, respectively. The decrease
is primarily due to a $2.6 million reduction in capital expenditures in the
three months ended March 31, 2007 versus the quarter ended April 1, 2006.

Cash
flows provided by financing activities were $29.0 million and $27.6 million for
the nine months ended March 31, 2007 and April 1, 2006, respectively. For the
nine months ended March 31, 2007, financing activities were primarily the $28.2
net increase in debt due to the new financing, offset by the $0.9 million debt
closing costs. For the nine months ended April 1, 2006, cash flows from
financing activities were primarily the result of the $14.9 million gross
issuance of TrueYou Series D Preferred Stock, $10.1 million gross issuance of
KAAI Series G Preferred Stock and $4.8 million gross from issuance of KAAI
Series F Preferred Stock, which was subsequently exchanged for Series H
Preferred Stock.

Future Liquidity and Capital Needs

Since
its inception, the Company has experienced operating losses and negative cash
flow from operations. As of March 31, 2007, we had a cumulative deficit of
$86.7 million and a working capital deficiency of $63.7 million. Included in
our net deficit at March 31, 2007 is the remeasurement of convertible
securities. As of March 31, 2007, we remeasured the convertible securities
based upon an estimated fair value of $32.3 million, which is included in the
Consolidated Condensed Balance Sheet. These factors raise substantial doubt
about our ability to continue as a going concern. Our ability to continue as
    a going concern is ultimately dependent on our ability to increase sales
    and reduce expenses to a level that will allow us to operate profitably and
    sustain positive operating cash flows and raise additional capital. The financial
statements do not include any adjustments to reflect the outcome of this
uncertainty. We have had several recent financings as described in this Report,
    with the most recent completed on May 7, 2007. There is no assurance that
    the recent refinancing will be sufficient to fund operations until sales
    and profitability improve to the point that the Company is able to operate
    from internally generated cash flows.

On
March 8, 2007, Laurus sent the Company a Notice of Default and Acceleration
accelerating the obligations due to Laurus under the $25.0 million Secured Term
Note issued as of June 30, 2006 and the $1.0 million Senior Subordinated
Secured Term Note issued as of December 22, 2006. The Company incurred a $3.8
penalty in May 2007 as a result of this default.

Our
principal future uses of funds are for debt service, working capital
requirements, and capital spending to execute our strategy. It is expected that
our net losses will continue through the foreseeable future.

44

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Financings Subsequent
to End of Fiscal Quarter

On
May 7, 2007 the Company entered into an Amended and Restated Securities
Purchase Agreement with Laurus pursuant to which the Company sold to Laurus a
Secured Term Note in the aggregate principal amount of $54,650,000. On the
Closing Date, the $25.0 million obligation of the Company to Laurus under the
June 30, 2006 note and an additional $3.8 million default penalty incurred in
the fiscal quarter ended March 31, 2007 was repaid.

Contractual Obligations

As
of March 31, 2007, our contractual obligations were as follows:

|                          |  |       |        |                    |                        |           |  |           |       |                     |  |       |  |       |  | 
|------------------------- |  | ----- | ------ | ------------------ | ---------------------- | --------- |  | --------- | ----- | ------------------- |  | ----- |  | ----- |  | 
|                          |  |       |        |                    | Payments Due by Period
|                          |  |      
|                          |  |       |        |                    |                        |           |  |           |       |                     |  |       |  |       |  | 
|Contractual Obligations   |  | Total |        | Less than
  1 Year |                        | 1-3 Years |  | 3-5 Years |       | More than
  5 Years | 
|                          |  |       |        |                    |                        |           |  |           |       |                     | 
|                          |  |       |        |                    |                        |           |  |           |       |                     |  |       |  |       |  | 
|Operating leases          |  |       | 22,640 |                    | 3,747                  |           |  |           | 8,690 |                     |  | 6,172 |  | 4,031 |  | 
|Capitalized leases        |  |       | 259    |                    | 207                    |           |  |           | 52    |                     |  |      |  |      |  | 
|Long-term debt (1)        |  |       | 44,039 |                    | 44,039                 |           |  |           |      |                     |  |      |  |      |  | 
|Consulting obligation (2) |  |       | 858    |                    | 237                    |           |  |           | 621   |                     |  |      |  |      |  | 
|                          |  |       |        |                    |                        |           |  |           |       |                     |  |       |  |       |  | 
|Totals                    |  |       | 67,796 |                    | 48,230                 |           |  |           | 9,363 |                     |  | 6,172 |  | 4,031 |  | 
|                          |  |       |        |                    |                        |           |  |           |       |                     |  |       |  |       |  | 

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

Off Balance Sheet
Arrangements

We
do not have any off balance sheet arrangements.

ITEM 3. 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 three and nine months ended March 31, 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. The fair value of the Common Stock is based on
the price paid for a share of the stock closest to the measurement date. As of
March 31, 2007 the closing price for our Common Stock was $0.05. 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 $65 million. This
fluctuation would result in an impact to our net loss. As of July 20, 2007, the
closing price of our Common Stock was $0.011. Convertible securities will
convert back to equity when there are a sufficient number of shares of Common
Stock authorized.

45

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ITEM 4. 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 has concluded
that the disclosure controls and procedures are not effective for the reasons
specified below.

Material Weaknesses

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

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

Remediation of Material Weaknesses

In
order to remediate these weaknesses, we have retained another accounting firm
in which members of that firms accounting staff have worked under the
supervision of our Chief Financial Officer. The Company has also retained an
information technology firm to upgrade operating, financial and accounting
systems which is expected to further improve the control environment. In
addition, On May 1, 2006, we appointed a new Chief Financial Officer and in August
2006 we hired a Controller. We are also working to integrate our inventory
system to improve our controls over inventory and related areas. We have made
progress to remediate identified internal control deficiencies and to establish
adequate internal controls over financial reporting during the nine months
ended March 31, 2007. The above remedial actions have not been in place long
enough to have been tested and will be assessed for their adequacy on a
continuous basis.

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

46

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PART II. OTHER INFORMATION

Item 1. Legal
Proceedings

UBS Lawsuit

UBS
Securities, LLC commenced a lawsuit against the Company in the Supreme Court of
the State of New York, County of New York on September 18, 2006. The complaint
alleges that UBS was engaged to provide investment banking services to the
Company and that UBS is owed a fee of $1,750,000 with respect to a private
placement that was consummated in June, 2006 and funded in July 2006. By
order entered on May 25, 2007, the court granted UBSs motion for summary
judgment. On June 5, 2007 the court entered judgment against the Company in the
sum of $1,962,139.25, inclusive of interest and costs. A hearing on UBSs
request for attorneys fees will be held on September 5, 2007. In the event the Company is
required to pay this judgment in full, it would materially and adversely affect
the Company. The Company does
not believe the final settlement will exceed the amount accrued.

Item 6. Exhibits

| |    |                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Exhibits:
  (see accompanying Exhibit Index included after the signature page of this
  Report for a list of exhibits filed in this Report).

47

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SIGNATURES

Pursuant to
the requirements 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.

|                     |                  |                                                      
|-------------------- | ---------------- | -----------------------------------------------------
|                     | TRUEYOU.COM INC.
|                     |                  |                                                      
|Date: August 7, 2007 | By:              | /s/ Matthew Burris                                   
|                     |                  |                                                      
|                     |                  | Matthew Burris                                       
|                     |                  | Chief Operating Officer and
  Chief Financial Officer

48

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EXHIBIT INDEX

|     |                                                                                                      | 
|---- | ---------------------------------------------------------------------------------------------------- | 
|     | Description                                                                                         
|     |                                                                                                     
|31.1 | Rule
  13a-14(a)/15d-14(a) Certification of Principal Financial Officer / Chief
  Operating Officer.
|     |                                                                                                     
|32.1 | Section 1350
  Certification of Principal Financial Officer / Chief Operating Officer.              

---