UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 29, 2007OR[   ] TRANSITION 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.)
|                                              
|232 Madison Ave, Suite 906                     |  |                          |  |                                  
|New York, NY                                   |  |                          |  | 10016                            
|(Address of principal executive offices)       |  |                          |  | (Zip Code)                       

(212)500-5150(Registrants telephone number, including area code)

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

______________

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 [  ] 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 [  ] Accelerated filer [  ] 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 [  ] No [x]

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares of common stock, par value $0.001 per share, outstanding as of January 11, 2008 was 18,388,557.

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TABLE OF CONTENTS

|              |  |                                                                                                                                  |  | Page
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I        |  | FINANCIAL INFORMATION                                                                                                            |  |     
|              |  |                                                                                                                                  |  |     
|Item 1.       |  | Condensed Consolidated Financial Statements                                                                                      |  |     
|              |  |                                                                                                                                  |  |     
|              |  | Condensed Consolidated Balance Sheets as of September 29, 2007 (unaudited) and June 30, 2007                                     |  | 1   
|              |  |                                                                                                                                  |  |     
|              |  | Condensed Consolidated Statements of Operations (unaudited) for the three months ended
September 29, 2007 and September 30, 2006 |  | 2   
|              |  |                                                                                                                                  |  |     
|              |  | Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended September 29, 2007 and September 30, 2006 |  | 3   
|              |  |                                                                                                                                  |  |     
|              |  | Notes to Condensed Consolidated Financial Statements                                                                             |  | 4   
|              |  |                                                                                                                                  |  |     
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                                             |  | 22  
|              |  |                                                                                                                                  |  |     
|Item 3.       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                       |  | 29  
|              |  |                                                                                                                                  |  |     
|Item 4.       |  | Controls and Procedures                                                                                                          |  | 30  
|              |  |                                                                                                                                  |  |     
|PART II       |  | OTHER INFORMATION                                                                                                                |  |     
|              |  |                                                                                                                                  |  |     
|Item 1.       |  | Legal Proceedings                                                                                                                |  | 31  
|              |  |                                                                                                                                  |  |     
|Item 6.       |  | Exhibits                                                                                                                         |  | 32  
|              |  |                                                                                                                                  |  |     
|SIGNATURES    |  |                                                                                                                                  |  | 33  
|              |  |                                                                                                                                  |  |     
|EXHIBIT INDEX |  |                                                                                                                                  |  |     

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TrueYou.Com Inc.Condensed Consolidated Balance Sheets

|                                                                                                                                                                                   |  |   | As of         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------------- | -
|                                                                                                                                                                                   |  |   | September 29, |  
|In thousands, except share and per share amounts                                                                                                                                   |  |   | 2007          |  
|                                                                                                                                                                                   |  |   |               |  
|                                                                                                                                                                                   |  |   | (Unaudited)   |  
|                                                                                                                                                                                  
|Assets:                                                                                                                                                                            |  |   |               |  
|Current assets:                                                                                                                                                                    |  |   |               |  
|Cash and cash equivalents                                                                                                                                                          |  | $ | 89            |  
|Restricted cash, current portion                                                                                                                                                   |  |   | 7,820         |  
|Accounts receivable, net                                                                                                                                                           |  |   | 5             |  
|Inventories, net                                                                                                                                                                   |  |   | 1,358         |  
|Other current assets                                                                                                                                                               |  |   | 454           |  
|                                                                                                                                                                                   |  |   |               |  
|Total current assets                                                                                                                                                               |  |   | 9,726         |  
|                                                                                                                                                                                  
|Property and equipment, net                                                                                                                                                        |  |   | 37            |  
|Other assets                                                                                                                                                                       |  |   | 430           |  
|Deferred financing costs, net                                                                                                                                                      |  |   | 794           |  
|Other intangibles, net                                                                                                                                                             |  |   | 46            |  
|                                                                                                                                                                                   |  |   |               |  
|Total assets                                                                                                                                                                       |  | $ | 11,033        |  
|                                                                                                                                                                                   |  |   |               |  
|                                                                                                                                                                                  
|Liabilities and Shareholders' deficit:                                                                                                                                             |  |   |               |  
|                                                                                                                                                                                  
|Liabilities:                                                                                                                                                                       |  |   |               |  
|Current liabilities:                                                                                                                                                               |  |   |               |  
|Accounts payable                                                                                                                                                                   |  | $ | 1,115         |  
|Accrued expenses and other current liabilities                                                                                                                                     |  |   | 8,964         |  
|Liabilities related to discontinued operations                                                                                                                                     |  |   | 4,944         |  
|                                                                                                                                                                                   |  |   |               |  
|Total current liabilities                                                                                                                                                          |  |   | 15,023        |  
|                                                                                                                                                                                  
|Convertible securities                                                                                                                                                             |  |   | 20,813        |  
|Senior debt (net of discount of $6.3 and $6.8 million and prepaid interest of

      $6.8 and $8.1 million as of September 29, 2007 and June 30, 2007,

      respectively)        |  |   | 45,548        |  
|Deposit - Sephora                                                                                                                                                                  |  |   | 5,000         |  
|                                                                                                                                                                                   |  |   |               |  
|Total liabilities                                                                                                                                                                  |  |   | 86,384        |  
|                                                                                                                                                                                  
|Commitments and contingencies                                                                                                                                                      |  |   |               |  
|Shareholders' deficit:                                                                                                                                                             |  |   |               |  
|Common stock, par value $0.001, authorized 20,000,000; issued and
    
    outstanding 18,388,557 and 16,756,438 as of September 29, 2007 and
    
    June 30, 2007, respectively |  |   | 18            |  
|Additional paid-in capital                                                                                                                                                         |  |   | 20,358        |  
|Accumulated deficit                                                                                                                                                                |  |   | (95,727       | )
|                                                                                                                                                                                   |  |   |               |  
|Total shareholders' deficit                                                                                                                                                        |  |   | (75,351       | )
|                                                                                                                                                                                   |  |   |               |  
|Total liabilities and shareholders' deficit                                                                                                                                        |  | $ | 11,033        |  
|                                                                                                                                                                                   |  |   |               |  

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)

|                                                                                      |  |   | 3 Months Ended |  
|------------------------------------------------------------------------------------- |  | - | -------------- | -
|                                                                                      |  |   |                |  
|In thousands, except share and per share amounts                                      |  |   | September 29,  |  
|                                                                                      |  |   | 2007           |  
|                                                                                      |  |   |                |  
|Revenues                                                                              |  | $ | 2,035          |  
|                                                                                      |  |   |                |  
|Cost of revenues, net                                                                 |  |   | 718            |  
|                                                                                      |  |   |                |  
|                                                                                     
|Gross margin                                                                          |  |   | 1,317          |  
|                                                                                      |  |   |                |  
|Stock based compensation expense                                                      |  |   | -              |  
|Selling, general and administrative expenses                                          |  |   | 2,755          |  
|Depreciation and amortization                                                         |  |   | 27             |  
|                                                                                      |  |   |                |  
|Total operating expenses                                                              |  |   | 2,782          |  
|                                                                                      |  |   |                |  
|Operating loss                                                                        |  |   | (1,465         | )
|                                                                                      |  |   |                |  
|Interest expense, net                                                                 |  |   | 1,942          |  
|Registration rights penalties                                                         |  |   | -              |  
|Unrealized (gain) loss on convertible securities                                      |  |   | 472            |  
|                                                                                      |  |   |                |  
|                                                                                     
|Income (loss) from operations before income tax provision and
discontinued operations |  |   | (3,879         | )
|                                                                                      |  |   |                |  
|Income tax provision (benefit)                                                        |  |   | -              |  
|                                                                                      |  |   |                |  
|                                                                                     
|Income (loss) from operations before discontinued operations                          |  |   | (3,879         | )
|                                                                                      |  |   |                |  
|Discontinued operations:                                                              |  |   |                |  
|Loss from operations                                                                  |  |   | -              |  
|                                                                                      |  |   |                |  
|                                                                                     
|Net income (loss)                                                                     |  |   | (3,879         | )
|                                                                                      |  |   |                |  
|Dividends on preferred stock                                                          |  |   | -              |  
|                                                                                      |  |   |                |  
|                                                                                     
|Net income (loss) applicable to common shareholders                                   |  | $ | (3,879         | )
|                                                                                      |  |   |                |  
|                                                                                     
|Basic income (loss) per common share:                                                 |  |   |                |  
|Continuing operations                                                                 |  | $ | (0.21          | )
|                                                                                      |  |   |                |  
|Discontinued operations                                                               |  | $ | -              |  
|                                                                                      |  |   |                |  
|Net income (loss)                                                                     |  | $ | (0.21          | )
|                                                                                      |  |   |                |  
|                                                                                     
|Diluted income (loss) per common share:                                               |  |   |                |  
|Continuing operations                                                                 |  | $ | (0.21          | )
|                                                                                      |  |   |                |  
|Discontinued operations                                                               |  | $ | -              |  
|                                                                                      |  |   |                |  
|Net income (loss)                                                                     |  | $ | (0.21          | )
|                                                                                      |  |   |                |  
|                                                                                      |  |   |                |  
|Weighted average common shares
    outstanding, basic                                 |  |   | 18,086,970     |  
|                                                                                      |  |   |                |  
|                                                                                      |  |   |                |  
|Weighted average common shares
    outstanding, diluted                               |  |   | 18,086,970     |  
|                                                                                      |  |   |                |  

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)

|                                                                         |  |   | Three Months Ended |  
|------------------------------------------------------------------------ |  | - | ------------------ | -
|In thousands                                                             |  |   | September 29,      |  
|                                                                         |  |   | 2007               |  
|                                                                         |  |   |                    |  
|Cash flows from operating activities:                                    |  |   |                    |  
|Net income (loss)                                                        |  | $ | (3,879             | )
|Adjustments to reconcile net income (loss) to net cash used in operating |  |   |                    |  
|activities:                                                              |  |   |                    |  
|Depreciation and amortization                                            |  |   | 27                 |  
|Loss on disposals                                                        |  |   | -                  |  
|Reserve for customer
allowances                                          |  |   | 411                |  
|Amortization of deferred financing costs                                 |  |   | 77                 |  
|Amortization of debt discount                                            |  |   | 483                |  
|Stock based compensation expense                                         |  |   | -                  |  
|Non-cash interest expense                                                |  |   | 1,229              |  
|Unrealized loss (gain) on convertible securities                         |  |   | 472                |  
|Changes in operating assets and liabilities:                             |  |   |                    |  
|Inventories                                                              |  |   | (47                | )
|Accounts receivable                                                      |  |   | (219               | )
|Other current assets                                                     |  |   | 298                |  
|Other assets                                                             |  |   | 14                 |  
|Accounts payable                                                         |  |   | (1,894             | )
|Accrued expenses and other current liabilities                           |  |   | (673               | )
|Customer advances                                                        |  |   | -                  |  
|Other long term liabilities                                              |  |   | -                  |  
|                                                                         |  |   |                    |  
|Net cash used in operating activities                                    |  |   | (3,701             | )
|                                                                        
|Cash flows from investing activities:                                    |  |   |                    |  
|Capital expenditures                                                     |  |   | (9                 | )
|Release of restricted cash                                               |  |   | 2,956              |  
|                                                                         |  |   |                    |  
|Net cash provided by (used in) investing activities                      |  |   | 2,947              |  
|                                                                        
|Cash flows provided by financing activities:                             |  |   |                    |  
|Proceeds of issuance of debt                                             |  |   | -                  |  
|Repayment of long term debt                                              |  |   | -                  |  
|Loan fees                                                                |  |   | -                  |  
|                                                                         |  |   |                    |  
|Net cash provided by financing activities                                |  |   | -                  |  
|                                                                        
|Net increase (decrease) in cash and cash equivalents                     |  |   | (754               | )
|Cash and cash equivalents - beginning of period                          |  |   | 843                |  
|                                                                         |  |   |                    |  
|Cash and cash equivalents - end of period                                |  | $ | 89                 |  
|                                                                         |  |   |                    |  
|                                                                        
|Supplemental cash flow information                                       |  |   |                    |  
|Non-cash financing activities:                                           |  |   |                    |  
|Preferred stock dividends, net of preferred stock forfeitures            |  | $ | -                  |  
|Warrants exercise effected through a cashless exercise                   |  |   | 1                  |  
|Converted senior debt to subordinated debt                               |  |   | -                  |  
|Warrants issued with debt                                                |  |   | -                  |  

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 September 29, 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 Note 3).  The
consolidated financial statements presented herein include the results of operations for the spas/salons in discontinued operations for all periods presented.

The Company has developed a skin care line of products (Cosmedicine or Cosmedicine) which is being distributed through Sephora USA (Sephora), Home Shopping Network
(HSN), JCPenney, and Sephoras and HSNs respective websites. The Company is the owner of the Cosmedicine trademark. As of December 19, 2007 the Company had 20 employees.

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

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 June 30, 2007 included in the Companys Annual Report on Form 10-K filed with the Commission on November 20, 2007.  The results of operations for the thirteen weeks ended September 29, 2007
are not necessarily indicative of results of operations to be expected for the entire fiscal year.

The Company follows 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.

Going Concern Disclosure:The accompanying financial statements have been prepared on the going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has experienced operating losses and negative cash flow from operations. As of September 29, 2007, the Company has an accumulated deficit
of $95.7 million and a working capital deficiency of $5.3 million. These factors raise substantial doubt about the Companys ability to continue as a going concern. The Companys ability to continue as a going concern is ultimately
dependent on its ability to increase sales and reduce expenses to a level that will allow it to operate profitably, sustain positive operating cash flows, raise additional capital, and make required debt payments. There have been no adjustments to
the financial statements to reflect the outcome of this uncertainty. The Company has had several recent financings, with the most recent being completed on May 7, 2007. There is

4

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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 convertible securities, determination of returns and allowances, provisions for inventory obsolescence, and various contingencies. Actual results could differ from
those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.

Revenue Recognition

The Company records revenue from Cosmedicine sales when products are shipped, the price is fixed, and collection is reasonably assured. At the end of each quarter, an accrual is made for
anticipated returns due to damages, returns, store testers, and product with limited remaining code life.

Comprehensive Income

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

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash represents cash restricted for use by terms of the existing Senior debt agreement. The Company classifies restricted cash as current or long term based on the date the
restriction is expected to lapse or the cash to be used.

Accounts Receivable Reserve

The Company periodically performs an evaluation of its composition of accounts receivable and expected deductions and establishes an accounts receivable reserve for specific customers. The
reserve includes amounts for future deductions related to damaged or obsolete product, product used by retailer customers as testers, and returns. Provisions for these reserves are recorded as a reduction to revenue. As of September 29, 2007 and
June 30, 2007, net accounts receivable included reserves of $1.8 million and $1.6 million, respectively, in the Consolidated Balance Sheets.

In addition, the Company also has a co-op advertising arrangement with one of its customers, under which disbursements for advertising due to the customer are offset against the receivable from
the customer. Provisions recorded for this obligation are reflected as an expense.

The following is a summary of the activity related to accounts receivable and related reserve accounts for the three months ended September 29, 2007:

5

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|In thousands               |  |   | Balance at |   |  |   |          |  |   | Charged to |   |  |   |          |   |  |   | Reserve    |   |  |   | Advertising |   |  |   |       |   |  |   | Balance at |  
|-------------------------- |  | - | ---------- | - |  | - | -------- |  | - | ---------- | - |  | - | -------- | - |  | - | ---------- | - |  | - | ----------- | - |  | - | ----- | - |  | - | ---------- | -
|                           |  |   | Beginning  |   |  |   | Invoiced |  |   | Costs and  |   |  |   | Cash     |   |  |   | Deductions |   |  |   | Deductions  |   |  |   |       |   |  |   | End        |  
|                           |  |   | of Period  |   |  |   | Amounts  |  |   | Expenses   |   |  |   | Received |   |  |   | Applied    |   |  |   | Applied     |   |  |   | Other |   |  |   | of Period  |  
|                           |  |   |            |   |  |   |          |  |   |            |   |  |   |          |   |  |   |            |   |  |   |             |   |  |   |       |   |  |   |            |  
|                          
|Accounts receivable        |  | $ | 1,816      |   |  | $ | 2,489    |  | $ | -          |   |  | $ | (1,363   | ) |  | $ | (593       | ) |  | $ | (516        | ) |  | $ | (60   | ) |  | $ | 1,773      |  
|Accounts receivable        |  |   |            |   |  |   |          |  |   |            |   |  |   |          |   |  |   |            |   |  |   |             |   |  |   |       |   |  |   |            |  
|reserves                   |  |   | (1,619     | ) |  |   | -        |  |   | (411       | ) |  |   | -        |   |  |   | 593        |   |  |   | -           |   |  |   | (331  | ) |  |   | (1,768     | )
|                           |  |   |            |   |  |   |          |  |   |            |   |  |   |          |   |  |   |            |   |  |   |             |   |  |   |       |   |  |   |            |  
|Net accounts receivable    |  | $ | 197        |   |  | $ | 2,489    |  | $ | (411       | ) |  | $ | (1,363   | ) |  | $ | -          |   |  | $ | (516        | ) |  | $ | (391  | ) |  | $ | 5          |  
|                           |  |   |            |   |  |   |          |  |   |            |   |  |   |          |   |  |   |            |   |  |   |             |   |  |   |       |   |  |   |            |  
|                          
|                          
|Co-op advertising reserves |  | $ | (750       | ) |  |   | $ -      |  | $ | (338       | ) |  |   | $ -      |   |  | $ | -          |   |  | $ | 516         |   |  | $ | (136  | ) |  | $ | (708       | )
|                           |  |   |            |   |  |   |          |  |   |            |   |  |   |          |   |  |   |            |   |  |   |             |   |  |   |       |   |  |   |            |  

Inventories

Inventories consist principally of Cosmedicine products and components for those products. 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.

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. Repairs 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.

Intangible Assets

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

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

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

The impairment charge is determined based upon the amount by which the net book value of the assets exceeds their estimated fair value. In determining the fair value of the assets, the Company considers market trends, published values for similar assets, recent transactions involving sales of similar assets or

6

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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.

Advertising Costs

The Company expenses advertising costs as incurred. Total advertising costs incurred by the Company were $0.6 million and $0.5 million for the three months ended September 29, 2007 and
September 30, 2006, respectively.

Debt Issue Costs

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

Income Taxes

The Company provides for federal and state income taxes currently payable, as well as for those deferred due to temporary differences between reporting income and expenses for financial
statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amount of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled.
Realization of deferred tax assets is ultimately dependent upon future taxable income. The effect of a change in tax rates is recognized as income or expense in the period of the change.

Concentration of Credit Risk and Significant Vendor

We are dependent on our relationships with Sephora and HSN

Our agreements grant Sephora and HSN, respectively, the right to terminate their agreement with us for a variety of reasons. If HSN terminates the Marketing Agreement our Cosmedicine revenue
can be negatively affected. If Sephora terminates their agreement with us in addition to a negative impact to our revenues, under certain circumstances we may have to reimburse a portion of the upfront $5 million performance deposit we received
from them. In addition, the loss of either or both of these relationships could substantially decrease our differentiation from competitors and could materially adversely affect the Company.

We have only one supplier for our Cosmedicine products.

Atlantis Laboratories, Inc. (Atlantis) is our only supplier of Cosmedicine and is the owner of all of the rights to the intellectual property developed in connection with such
formulations. We have entered into a Formula Agreement with Atlantis under which all formulas, manufacturing procedures, and raw material suppliers and specifications for the raw materials were deposited with an Escrow Agent. In the event of certain
specified events and/or contingencies, the Escrow Agent is required to deliver such formulas, manufacturing procedures and specifications to KAAI. If we were ever to default under the agreement, we would lose these rights.  In addition, we cannot be
certain that even if the Escrow Agent delivered such

7

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formulas to us that we would be able to successfully manufacture our Cosmedicine products. Loss of the formulations and/or problems with our supplier which impairs our ability to provide Cosmedicine products could adversely
affect our financial results.

Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment. This statement established 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 determines fair value of awards through the use of the use of the Black-Scholes option pricing model. Inherent in that model are assumptions including the volatility of our Common
Stock, forfeiture rate, and the length of time which we expect an option to remain outstanding. Since the Company does not have sufficient shares of common stock authorized, it is required to treat the stock option awards as liability awards and
remeasure at each reporting period based upon fair value.

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 September 29, 2007 consist of those related to: convertible preferred stock of 8.6 billion and registration rights of 3.9
million. None of the securities were considered to be common stock equivalents for the three months ended September 29, 2007 due to the net loss of the Company for that period. Potential dilutive common stock equivalents for the three months ended
September 30, 2006 consist of those related to: convertible preferred stock of 446.6 million, warrants 130.4 million, stock options 38.6 million, and registration rights 7.6 million. 5.0 million of the securities were considered to be common stock
equivalents for the three months ended September 30, 2006. 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.

Disclosures about Fair Value of Financial Instruments

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

Cash and Short-term investments

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

Convertible Securities

The Company remeasures its convertible securities in compliance with EITF 00-19, based on the fair value of its Common Stock into which they are convertible, since there are currently
insufficient shares authorized to allow conversion. Previous to the May 7, 2007 financing and sale of the stores / salons the fair

8

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value of the Common Stock was based on the price paid for a share of the stock closest to the measurement date. As of September 30, 2006 the closing price for our Common Stock was $0.28. After the stores /salons sale
and recent financing which included warrants to purchase 38.5 billion shares of Common Stock issued along with the debt, the stock is no longer traded on a regular basis and the trading price does not appear indicative of its fair value. The Company
has used an analytical approach to estimate the fair value of the shares as of September 29, 2007 and June 30, 2007. The Company used its projected next twelve months revenue to estimate its market cap. The estimated market cap was then divided by
the number of common shares calculated on a diluted basis. Using this method, the calculated fair value of the shares at September 29, 2007 and June 30, 2007 was $0.00044 and $0.00043 per share, respectively.

Supplemental Cash Flow Information

The aggregate interest payments amounted to $1.3 million and $0.7 million for the three months ended September 29, 2007, and September 30, 2006, respectively.

Recently Issued Accounting Standards

In June 2006, FASB issued FIN 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This guidance is effective for fiscal years beginning after December 15, 2006. The Company has evaluated the impact of the
adoption of FIN 48, and determined there is no impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. This guidance originally became effective for the first reporting period beginning after November 15, 2007.Subsequently the FASB partially deferred the effective date for this pronouncement for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. The Company is assessing the impact of the adoption of SFAS 157 on the Companys consolidated financial statements.

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

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

9

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3. Discontinued operations

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

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

The parties also entered into various agreements in connection with the sale including a transition services agreement pursuant to which the Company would provide transitional services to the
Purchaser as well as a Cosmedicine supply agreement pursuant to which the Company would supply the Purchaser with Cosmedicine products. Pursuant to the transaction, the Company agreed not to compete with the business sold for a period of three
years. As a result of non-performance by the Purchaser and notification served by the Company, the Cosmedicine supply agreement has been considered void by the Company and the $0.2 million of product sold in conjunction with this contract has
been fully reserved as a bad debt as of September 29, 2007 and June 30, 2007.

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

The following is a summary of financial information of our discontinued and continuing operations for the three months ended September 30, 2006:

|In thousands, except share and per share amounts |  |   |               |   |  |   |              |   |  |   |               |  
|------------------------------------------------ |  | - | ------------- | - |  | - | ------------ | - |  | - | ------------- | -
|                                                 |  |   |               |   |  |   |              |   |  |   |               |  
|                                                 |  |   | Consolidated  |   |  |   |              |   |  |   | Continuing    |  
|                                                 |  |   | (as Reported) |   |  |   | Discontinued |   |  |   | (as Restated) |  
|                                                 |  |   |               |   |  |   |              |   |  |   |               |  
|Revenues                                         |  | $ | 7,262         |   |  | $ | 6,358        |   |  | $ | 904           |  
|Cost of Revenue                                  |  |   | 3,983         |   |  |   | 3,630        |   |  |   | 353           |  
|                                                 |  |   |               |   |  |   |              |   |  |   |               |  
|Gross margin                                     |  |   | 3,279         |   |  |   | 2,728        |   |  |   | 551           |  
|Operating expenses                               |  |   | 16,318        |   |  |   | 9,329        |   |  |   | 6,989         |  
|                                                 |  |   |               |   |  |   |              |   |  |   |               |  
|Operating loss                                   |  |   | (13,039       | ) |  |   | (6,601       | ) |  |   | (6,438        | )

10

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|Interest expense, net                       |  |   | 2,674   |   |  |   | -      |   |  |   | 2,674   |  
|------------------------------------------- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|Registration rights penalties               |  |   | 1,162   |   |  |   | -      |   |  |   | 1,162   |  
|Unrealized (gain) on convertible securities |  |   | (40,536 | ) |  |   | -      |   |  |   | (40,536 | )
|                                            |  |   |         |   |  |   |        |   |  |   |         |  
|Income (loss) before income tax provision   |  |   | 23,661  |   |  |   | (6,601 | ) |  |   | 30,262  |  
|Income tax provision (benefit)              |  |   | -       |   |  |   | -      |   |  |   | -       |  
|                                            |  |   |         |   |  |   |        |   |  |   |         |  
|Net income (loss)                           |  | $ | 23,661  |   |  | $ | (6,601 | ) |  | $ | 30,262  |  
|                                            |  |   |         |   |  |   |        |   |  |   |         |  

In addition, the Company
has classified all remaining liabilities related to the discontinued operations
as Liabilities related to discontinued operations in the September 29, 2007 and
June 30, 2007 Consolidated Balance Sheets. The following is a summary of those
remaining liabilities:

|                                               |  |               | Liabilities Related to Discontinued
|---------------------------------------------- |  | ------------- | -----------------------------------
|In thousands                                   |  |               | Operations                         
|                                               |  |               |                                    
|                                              
|                                               |  | September 29, |                                    
|                                               |  | 2007          |                                    
|                                               |  |               |                                    
|                                               |  | (Unaudited)   |                                    
|Accounts payable                               |  |               | 612                                
|Accrued expenses and other current liabilities |  |               | 4,332                              
|                                               |  |               |                                    
|                                              
|Liabilities related to discontinued operations |  | $             | 4,944                              
|                                               |  |               |                                    

4. Inventories

Following are the components
of inventory included in the Consolidated Balance Sheets as of September 29,
2007 and June 30, 2007:

|(Dollars in thousands)  |  |   | September 29, |   |  |   | June 30, |  
|----------------------- |  | - | ------------- | - |  | - | -------- | -
|                        |  |   | 2007          |   |  |   | 2007     |  
|                        |  |   |               |   |  |   |          |  
|                        |  |   | (Unaudited)   |   |  |   |          |  
|Back bar supplies       |  | $ | 105           |   |  | $ | 116      |  
|Components              |  |   | 792           |   |  |   | 881      |  
|Finished goods          |  |   | 704           |   |  |   | 574      |  
|                        |  |   |               |   |  |   |          |  
|Total inventory         |  |   | 1,601         |   |  |   | 1,571    |  
|Inventory reserves      |  |   | (243          | ) |  |   | (260     | )
|                        |  |   |               |   |  |   |          |  
|Total inventories (net) |  | $ | 1,358         |   |  | $ | 1,311    |  
|                        |  |   |               |   |  |   |          |  

5. Accrued Expenses and Other Current Liabilities

The table below consists of the Companys accrued expenses and other current liabilities as of September 29, 2007 and June 30, 2007:

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|                                                     |  |   | September 29, |  |   | June 30,
|---------------------------------------------------- |  | - | ------------- |  | - | --------
|(Amounts in thousands)                               |  |   | 2007          |  |   | 2007    
|                                                     |  |   |               |  |   |         
|                                                     |  |   | (Unaudited)   |  |   |         
|Accrued interest                                     |  | $ | 3,354         |  | $ | 3,141   
|Accrued registration rights penalties (a)            |  |   | 3,808         |  |   | 3,808   
|Legal settlements                                    |  |   | -             |  |   | 500     
|Advertising                                          |  |   | 708           |  |   | 750     
|Payroll, benefits and other                          |  |   | 1,094         |  |   | 1,513   
|                                                     |  |   |               |  |   |         
|Total accrued expenses and other current liabilities |  | $ | 8,964         |  | $ | 9,712   
|                                                     |  |   |               |  |   |         

(a) 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 signed on December 20, 2005 between TrueYou, KAAI and the security holders of KAAI (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. The cumulative obligation of $1.1 million represents the aggregate registration penalties payable through September 29, 2007 and is included in Accrued expenses and other current liabilities on
the Consolidated Balance Sheets.

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. The cumulative obligation of $2.7 million represents the aggregate
registration penalties payable through September 29, 2007 and is included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.

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 Note 6).

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Due to the fact that the Company did not meet the effective date requirement by June 3, 2006 or the Authorized Share Increase requirement, an operating charge has been recorded for the combined
estimated penalties of $2.3 million and $1.5 million during the years ended June 30, 2007 and July 1, 2006, respectively. This includes charges of $0.4 million per month. Due to the waiver received on March 12, 2007 discussed above, the
Company did not record any additional penalties after December 30, 2006. The cumulative obligation of $3.8 million represents the aggregate registration penalties payable through September 29, 2007 for the combined agreements discussed above and
is included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.

6. Long-Term Debt and Other Long Term Liabilities

The Companys long-term debt and other long-term liabilities as of September 29, 2007 and June 30, 2007 consist of the following:

|                        |  |          |  |               |  |   | Amounts Outstanding |  
|----------------------- |  | -------- |  | ------------- |  | - | ------------------- | -
|(Dollars in thousands)  |  | Maturity |  | Interest Rate |  |   | September 29,       |  
|                        |  | Dates    |  | %             |  |   | 2007                |  
|                        |  |          |  |               |  |   |                     |  
|                       
|Senior debt (a)         |  |          |  |               |  |   |                     |  
|Gross                   |  | 5/4/2010 |  | 9.75
% and    |  | $ | 54,650              |  
|                        |  |          |  | 10.25%,       |  |   |                     |  
|                        |  |          |  | respectively  |  |   |                     |  
|Unamortized discount    |  |          |  |               |  |   | (6,269              | )
|Prepaid interest        |  |          |  |               |  |   | (6,833              | )
|                        |  |          |  |               |  |   |                     |  
|Net                     |  |          |  |               |  |   | 41,548              |  
|                       
|                       
|Senior demand notes (b) |  | Varies   |  | 9.75% and     |  |   | 4,000               |  
|                        |  |          |  | 10.25%,       |  |   |                     |  
|                        |  |          |  | respectively  |  |   |                     |  
|                       
|                       
|Deposit - Sephora       |  |          |  |               |  |   | 5,000               |  
|                       
|                       
|Convertible securities  |  |          |  |               |  |   | 20,813              |  
|                        |  |          |  |               |  |   |                     |  
|                       
|Total                   |  |          |  |               |  | $ | 71,361              |  
|                        |  |          |  |               |  |   |                     |  

(a) - Senior Debt - Laurus

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

On the Closing Date, the obligations of the Company to Laurus under the June 30, 2006 note were repaid and the Company received $25,900,000 in new cash proceeds from the Note and placed
$8,069,243 in a restricted account to be utilized to prefund interest of the Note.  Other disbursements include a closing payment of $906,500 to Laurus Capital Management, LLC, an affiliate of Laurus, Laurus due diligence and
structuring expenses of $10,000 and escrow agent fees of $2,000. These costs were recorded as deferred financing costs and will be amortized to interest expense over the term of the note using straight-line

13

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

The Note matures on May 4, 2010. Upon the occurrence and during the continuance of any event of default, however, Laurus may declare all obligations immediately due and payable. Interest
accrues on the unpaid principal amount of the Note at a rate per annum equal to the prime rate published in The Wall Street Journal (the Prime Rate), plus two percent (2%) per annum (such sum being referred to as the
Contract Rate). Interest is (i) calculated on the basis of a 360 day year on the unpaid principal amount of the Note outstanding from time to time during the applicable period; and (ii) payable monthly, in arrears, commencing on May 1,
2007, on the first business day of each consecutive calendar month thereafter through and including the Maturity Date, and on the Maturity Date, whether by acceleration or otherwise. The Contract Rate may be increased by 2% per annum in the event
that sufficient shares of the Common Stock are not authorized to allow the Note 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 has not yet authorized additional shares to meet this requirement, but the Note Purchaser has not notified the Company of an increase to the contract rate. Based upon the prime rate, the
interest rate on the debt at September 29, 2007 and June 30, 2007 was 9.75% and 10.25%, respectively.

The Company may prepay the Note by paying to the Note 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 the Note Purchaser arising under the Note, the Purchase Agreement or any other Related Agreement. The Companys payment obligations are guaranteed by the
Companys subsidiaries and are secured by all of the Companys and such subsidiaries assets.

In connection with the issuance of the Warrants, the Company entered into a Registration Rights Agreement dated May 4, 2007 with the Note 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 Note Purchaser have a 10-year term and an exercise price equal to $.001 per share. The Company has calculated a debt discount attributable to the value of these
warrants of $7.0 million which will be amortized over the term of the Note using the effective interest method. The effective interest rate calculated on this debt amounted to 15.58% . The Company has recorded the fair value of the warrants, as
a discount and a corresponding liability as required by EITF 00-19 due to the insufficient number of shares authorized. As of September 29, 2007 and June 30, 2007, this Note carried a debt discount of $6.3 million and $6.8 million,
respectively. For the three months ended September 29, 2007, the Company recorded interest expense of $0.5 million related to the amortization of the debt discount. The liability to be recorded for the securities will be adjusted to fair value
at each reporting period until the number of authorized shares is increased to permit the exercise of these securities. Under the Purchase Agreement, if the conditions set forth in the Purchase Agreement are met within three years, then
9,245,236,880 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 the Note 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

14

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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 Note 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 Note Purchaser, in exchange for the Warrants, substitute warrants exercisable to purchase that number of shares of its Series B Convertible Preferred Stock that are, upon
authorization of the Share Amount, immediately convertible into the number of shares of Common Stock that would then have been issuable upon exercise of the Warrants in full if the certificate of incorporation of the Company had then provided for
sufficient authorized shares of Common Stock to satisfy such exercise, and otherwise containing substantially the same terms and provisions as the Warrants. In the event that effective date of the amendment authorizing the Share Amount does not
occur by December 31, 2007 as described in the Purchase Agreement, the Contract Rate of the Note may be increased by 2% per annum and shall remain at such higher rate until such time as the Share Amount is authorized.

(b)  Senior Demand Notes

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

On March 16, 2007, the Company executed four Senior Secured Notes in the aggregate amount of $2,000,000 (North Sound Legacy International Ltd. $1,125,000, North Sound Legacy
Institutional Fund LLC $375,000, and, Seapine Investments, LLC $375,000, each of whom is an existing stockholder of the Company, and Andrew D. Lipman, a former director and existing stockholder $125,000 (bridge lenders)). The
Notes were due on demand and bear interest at the prime rate in effect from time to time as reported in the Wall Street Journal plus 2% and rankedpari passuin payment
and security with the $25,000,000 of senior indebtedness of the Company issued to Laurus made as of June 30, 2006. Based upon the prime rate, the interest rate on the debt at September 29, 2007 and June 30, 2007 was 9.75% and 10.25%,
respectively. Due to the refinancing and repayment of the $25.0 million senior debt, the Company, Laurus, and bridge lenders have entered into agreements for the integration of these loans consistent with that of the May 2007 loan documentation
with Laurus discussed above. The Companys payment obligations are guaranteed by the Companys subsidiaries and are secured by all of the Companys and such subsidiaries assets.

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

On March 27, 2007, the Company executed four additional Senior Secured Notes in the aggregate amount of $2,000,000 (North Sound Legacy International Ltd. $1,125,000, North Sound Legacy
Institutional Fund LLC $375,000, and, Seapine Investments, LLC $375,000, each of whom is an existing stockholder of the Company, and Andrew D. Lipman, a former director and existing stockholder $125,000). The Notes were due on demand and
bear interest at the prime rate in effect from time to time as reported in the Wall Street Journal plus 2% and also rankedpari passuin payment and security with the
$25,000,000 of senior indebtedness of the Company issued to Laurus made as of June 30, 2006. Based upon the prime rate, the interest rate on the debt at September 29, 2007 and June 30, 2007 was 9.75% and 10.25%, respectively. Due to the
refinancing and repayment of the $25.0 million senior debt, the Company, Laurus, and bridge lenders have entered into agreements for the integration of these loans consistent with that of the May 2007 loan documentation with Laurus discussed
above. The Companys payment obligations are guaranteed by the Companys subsidiaries and are secured by all of the Companys and such subsidiaries assets.

15

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Accrued Interest and Maturities
      of Other Long Term Debt

Accrued
    interest of $3.4 million and $3.1 million is included in accrued
    expenses as of September 29, 2007 and June 30, 2007, respectively.

7. Commitments and Contingencies

Litigation

UBS Lawsuit

UBS
    Securities, LLC commenced a lawsuit against KAAI in the Supreme Court of
    the State of New York, County of New York on September 18, 2006. The complaint
    alleged that UBS was engaged to provide investment banking services to KAAI
    and that UBS is owed a fee of $1,750,000 with respect to a private placement
    that was consummated in June, 2006. On August 17, 2007 a settlement was reached
    with UBS under which the Company was required to pay $1.0 million in
    full settlement of the claim, no later than August 22, 2007. The Company
    made the required payment within the period specified by the agreement. The
    Company had a payable balance of $1.0 million as of June 30, 2007, with $0.5
    million included in Accounts payable and $0.5 million included in Accrued
    expenses and other current liabilities in the Consolidated Balance sheet.
    No liability remained as of September 29, 2007.

Employee Lawsuits

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

Other Contingencies

GK Acquisition

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

General

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

8. Related Party Transactions

16

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Richard Rakowski

Loans

Richard
    Rakowski, the Chairman and former Chief Executive Officer of the Company,
    loaned the Company $850,000 as part of a Senior Subordinated Debt financing
    on December 22, 2006 and received 7 year warrants with an exercise price
    of $.001 per share to purchase 3,798,534 shares of Common Stock. According
    to the terms of the agreement, since the Laurus $1 million Senior Subordinated
    Secured Loan was not repaid by April 30, 2007, warrants to purchase 3,541,666
    shares of Common Stock will be returned to the Company for cancellation by
    Mr. Rakowski. Mr. Rakowski had also personally guaranteed certain obligations
    of the Company. As of September 29, 2007 these guarantees no longer exist
    as the related letters of credit have expired.

On May
    7, 2007, in connection with the Laurus financing, Mr. Rakowski exchanged
    his indebtedness for shares of a newly created Series E Convertible Preferred
    Stock of the Company (see Note 10).

Consulting Agreement

On May
    7, 2007, the Company entered into a Consulting Agreement with Richard Rakowski,
    Chairman of the Company, pursuant to which Mr. Rakowski will provide consulting
    services for the Company. He received 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 decreased 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.

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 recorded revenues of $0.9 million for the
    three months ended September 29, 2007 and September 30, 2006. As of September
    29, 2007 and June 30, 2007 the Company had a $0 and $0.3 million
    receivable balance, respectively, from Sephora which is included in Accounts
    receivable, net in the Condensed Consolidated Balance Sheets.

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

17

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Incentive Plan or the 2006
    Plan) for the Company that was approved by the Board of Directors (Board)
    of the Company in the first quarter of fiscal year 2007. At that time, the
    Board also approved, subject to shareholder approval, the exchanging of KAAI
    options for TrueYou options under the 2006 Plan. The 2006 Plan was required
    to be submitted to the stockholders of the Company for their approval within
    twelve months. The Board of Directors approved a one-year extension to obtain
    this approval. The Company has approved all option grants and believes that
    the approval of the 2006 Plan by the stockholders will occur when voted upon.
    All options granted by the Board in the three months ended September 30,
    2006 had been granted under the 2006 Plan. No options were granted during
    the three months ended September 29, 2007.

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 35,911,447 shares of Common Stock
    remained available for future award grants as of September 29, 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
    69,088,553 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 expense of zero
    and $2.1 million for the three months ended September 29, 2007 and September
    30, 2006, respectively for stock options granted and subsequent remeasurement.
    In addition, as of September 29, 2007, there was no unrecognized stock based
    compensation expense related to non-vested stock options.

There
    were new TrueYou options for the purchase of 55.1 million shares of Common
    Stock granted during the three months ended September 30, 2006. There were
    additional TrueYou options to purchase 22.2 million shares of Common Stock
    issued as an exchange for Advanced Aesthetics, Inc. options.

The
    weighted average fair value of the new employee options granted during the
    three months ended September 30, 2006 was $0.08. There were no options
    granted during the three months ended September 29, 2007. The fair value
    was estimated using the Black-Scholes option pricing model with the following
    weighted average assumptions for the three months ended September 29, 2007
    and September 30, 2006:

|                               | Three
            Months Ended
|------------------------------ | ------------------------------
|                               | September
            29,     
|Assumptions                    | 2007                          
|                               |                               
|Expected dividend yield        | None                          
|Risk-free interest rate        | 4.1%                          
|Expected life of option grants | N/A                           
|Forfeiture rate                | 5.2%                          
|Expected volatility            | 50%                           

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 September 29, 2007. As of September 29, 2007 the weighted
    average fair value was zero due to the significant drop in the Company calculated
    share price,

18

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the weighted average interest rate
    was 4.1%, the forfeiture rate was 2.5%, and weighted average expected life
    was 2.1 years for these stock options.

A summary
    of the Companys stock option activity during the three months ended
    September 29, 2007 is follows:

|                                        | Options
          Outstanding
|--------------------------------------- | -----------------------------
|                                        | Shares                       
|                                        |                              
|                                        |                              
|                                        |                              
|Outstanding, June 30,
        2007      | 72,909,731                   
|                                        |                              
|Granted                                 | -                            
|Forfeited                               | (3,821,178)                  
|Exercised                               | -                            
|                                        |                              
|                                        |                              
|Outstanding, September
        29, 2007 | 69,088,553                   
|                                        |                              
|                                       

As of
    September 29, 2007, the weighted average exercise prices and remaining contractual
    lives of stock options are as follows:

|                                              |  | Options
          outstanding |  | Options
          exercisable
|--------------------------------------------- |  | ----------------------------- |  | -----------------------------
|                                              |  |                               |  |                              
|                                              |  |                               |  |                              
|                                              |  | Number of                     |  | Weighted average             
|                                              |  | options                       |  | remaining                    
|                                              |  | outstanding                   |  | contractual life (in         
|Range of exercise prices                      |  | as of 9/29/07                 |  | years)                       
|                                              |  |                               |  |                              
|                                              |  |                               |  |                              
|Stock options issued @ $0.19
        to $0.34 |  | 69,088,553                    |  | 8.0                          

|(1) | The Company does not have sufficient authorized
        common shares at September 29, 2007 to permit the exercise of the stock
        options. These options would be exercisable if sufficient authorized
        shares were available.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Warrants

The
    Company issued 114,491,460 warrants during the three months ended September
    30, 2006 which were valued using the Black-Scholes option pricing model using
    the following weighted average assumptions: risk-free rate of return  5.19%;
    term  8.3 years; volatility  50%; dividend yield  0.0%
    . The warrants were recorded as a discount to debt. No warrants were issued
    during the three months ended September 29, 2007

Warrants
    outstanding as of September 29, 2007 are as follows:

|                                        | Warrants
          Outstanding
|--------------------------------------- | ------------------------------
|                                        |                               
|                                        | Shares                        
|                                        |                               
|                                        |                               
|Outstanding, June 30,
        2007      | 38,725,335,177                
|                                        |                               
|Granted                                 | -                             
|Cancelled                               | -                             
|Exercised                               | (2,176,159                    
|                                        |                               
|                                        |                               
|Outstanding, September
        29, 2007 | 38,723,159,018                
|                                        |                               



19




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At September
    29, 2007, the exercise prices and remaining contractual lives of warrants
    are as follows:

|                                         |  | Warrants
          outstanding |  | Warrants
          exercisable
|---------------------------------------- |  | ------------------------------ |  | ------------------------------
|                                         |  |                                |  |                               
|                                         |  |                                |  |                               
|                                         |  |                                |  | Weighted                      
|                                         |  | Number of                      |  | average                       
|                                         |  | warrants                       |  | remaining                     
|                                         |  | outstanding                    |  | contractual life              
|Range of exercise
          prices       |  | as of 9/29/07                  |  | (in years)                    
|                                         |  |                                |  |                               
|                                         |  |                                |  |                               
|Warrants
        issued @ $.001 to $.230 |  | 38,723,159,018                 |  | 9.5                           

|(1) | The Company does not have sufficient authorized
        common shares at September 29, 2007 to permit the exercise of the warrants.
        These warrants would be exercisable if sufficient authorized shares were
        available.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Warrants Exercise

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

10. Exchange of Debt and Equity

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

To implement the conversion, on May
    7, 2007, the Company created a new Series E Convertible Preferred Stock.
    The Series E Preferred Stock is being utilized because the Company does not
    have sufficient authorized shares of Common Stock and rankspari
    passuwith 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 equal to that of holders of
    Common Stock and Preferred B holders. The Series E Preferred Stock is initially
    convertible into Common Stock at the rate of one million shares of Common
    Stock per one Preferred Share. These shareholders are also entitled to dividends
    on apari passubasis
    with that of the Common Stock holders.



20

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11. 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. Previous to the May 7, 2007 financing and
    sale of the stores / salons, the fair value of the Common Stock was based
    on the price paid for a share of the stock closest to the measurement date.
    The fair value of the Common Stock as of September 30, 2006 was $0.28.
    The number of common shares into which the convertible securities were convertible
    was 621,068,151 as of September 30, 2006. As of September 30, 2006, the Company
    remeasured the convertible securities based on an estimated fair value of
    approximately $173.9 million and recorded an unrealized gain of approximately $40.5
    million for the three months ended September 30, 2006. After the stores /salons
    sale and recent financing which included warrants to purchase 38.5 billion
    shares of Common Stock, issued along with the debt, the stock is no longer
    traded on a regular basis and the trading price does not appear indicative
    of its fair value. The Company has used an analytical approach to approximate
    the estimated fair value of the shares. The calculated fair value of the
    shares at September 29, 2007 was $0.00044. The number of common shares
    into which the convertible securities were convertible was 47,303,027,452
    as of September 29, 2007. As of September 29, 2007, the Company remeasured
    the convertible securities based on an estimated fair value of approximately $20.8
    million and recorded an unrealized loss of approximately $0.5 million
    for the three months ended September 29, 2007. Convertible securities will
    convert back to equity when there are a sufficient number of shares of Common
    Stock authorized.

12. Subsequent Events

L Capital Exchange of Accrued
        Interest

On November
    30, 2007, FCPR L Capital (L Capital) agreed to exchange the $2.6
    million of accrued interest owed to it by the Company for 1,019.69 shares
    of Series E Preferred Stock of the Company. The accrued interest is included
    in Accrued expenses and other current liabilities in the Consolidated Balance
    Sheets at September 29, 2007 and June 30, 2007.

21

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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 June 30, 2007, included in our
    2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission
    on November 20, 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, us,
    and Company 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 September 29, 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

We have
    developed an over-the-counter skin care line of products called Cosmedicine.
    We launched the products in January 2006 for exclusive retail distribution
    at Sephora stores, HSN, JCPenney and their respective websites. All Cosmedicine
    products are being developed and formulated for us by Atlantis Laboratories.
    Atlantis Laboratories is an independent developer and manufacturer of bulk
    skin care products.

Consistent
    with the prior fiscal year, our financial statements have been prepared on
    the going concern basis, which contemplates the realization of assets and
    the satisfaction of liabilities in the normal course of business. Since our
    inception, we have experienced substantial operating losses and negative
    cash flow from operations. As of September 29, 2007, we have an accumulated
    deficit of $95.7 million and a working capital deficit of $5.3 million.
    These factors raise substantial doubt about our ability to continue as a
    going concern. Also, as a result of our losses, among other factors, the
    opinion of our Independent Registered Public Accountants on our audited financial
    statements for fiscal year 2007 has included an explanatory paragraph relating
    to going concern. A going concern explanatory paragraph indicates
    that our auditors have substantial doubt about our ability to continue as
    a going concern for at least a reasonable period of time. Our ability to
    continue as a going concern ultimately depends on our ability to increase
    sales

22

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and reduce expenses to a level that
    will allow us to operate profitably and sustain positive operating cash flows
    and raise additional capital.

Discontinued operations

Previous
    to the sale of the stores/salons on May 7, 2007 we offered both medical and
    non-medical services and products to customers. These fully-integrated facilities
    had featured cosmetic dermatology, skin care, cosmetic medical consultations,
    hair care, spa and salon services, and retail products on site, and cosmetic
    medical services provided by medical offices operated by Johns Hopkins and
    UT Southwestern. These operations are now presented as discontinued operations
    for all periods presented.

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

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

Current Trends and Outlook

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

We seek
    to broaden our Cosmedicine offering to feature Cosmedicine Professional,
    which we expect will include a line of RX grade products to support the Companys
    MD and Med Spa channel strategy. We intend to follow a growth plan to add
    more products, sell in more channels, and begin selling internationally.

Revenue Sources

We currently
    derive revenue fromwholesale
    product sales of our Cosmedicine products at Sephora stores, HSN, JCPenney,
    and through the internet. These products were launched in fiscal 2006 and
    represented 100% of our total operating revenues for the three months ended
    September 29, 2007 due to the discontinued operations discussed below. Sephora,
    with whom we have a strategic relationship, is a subsidiary of LVMH, SA and
    L Capital is a private equity fund sponsored by LVMH, SA and, as a result,
    Sephora and L Capital are affiliates. Net revenue recognized on sales to
    Sephora was $0.9 million or 45.2% of net revenue for the three months
    ended September 29, 2007 and $0.9 million or 100.0% of net revenue for the
    three months ended September 30, 2006.

23

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We manage
    our business by evaluating net revenue, gross margin, and liquidity. A close
    review of the operations is also performed to determine current cash position
    and future capital needs. Capital is tightly managed and utilized in those
    areas that will provide the greatest return.

We are
    following the standard fiscal year of the retail industry, which is a 52
    or 53 week period, with the end of a period being the last Saturday of the
    month. Our most recent fiscal year started on July 2, 2006 and ended on June
    30, 2007. Previously the Companys fiscal year was the twelve month
    period ended July 1, 2006.

Critical Accounting Policies and
      Estimates

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

Revenue
      Recognition: Revenue is recognized
      in connection with our Cosmedicine sales as sales are made to Sephora,
      HSN, and JCPenney. At the end of each quarter, an accrual is made for anticipated
      returns due to damages, store testers, returns, and product with limited
      remaining code life.

Inventories:Inventories
    consist principally of Cosmedicine products and components for those products.
    Inventories are stated at the lower of cost or market on a first-in, first-out
    basis.

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

Stock
      Based Compensation:We estimate the
      cost of stock based compensation using the Black-Scholes Option Pricing
      Model. Inherent in that model are assumptions including the volatility
      of our Common Stock, forfeiture rate, and the length of time which we expect
      an option to remain outstanding. Since the Company does not have sufficient
      shares of common stock authorized, it is required to treat the stock option
      awards as liability awards and remeasure at each reporting period based
      upon fair value, utilizing the Black-Scholes option pricing model.

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

Convertible
      Securities:We remeasured our convertible
      securities in compliance with EITF 00-19, based on the fair value of our
      Common Stock into which they are convertible, since there are currently
      insufficient shares authorized to allow conversion. Previous to the May
      7, 2007 financing and sale of the stores / salons the fair value of the
      Common Stock was based on the price paid for a share of the stock closest
      to the measurement date. As of September 30, 2006 the closing price for
      our Common Stock was $0.28. After the stores /salons sale and recent
      financing which included warrants to purchase 38.5 billion shares of Common
      Stock, issued along with the debt, the stock is no longer traded on a regular
      basis and the trading price does not appear indicative of its fair value.
      We have used an analytical approach to estimate the fair value of the shares.We
      used the projected next twelve months revenue of the Company to estimate
      its market cap. The estimated market cap was then divided by the number
      of common shares calculated on a diluted basis. Utilizing this calculation,
      the calculated fair value of the shares at September 29, 2007 was $0.00044
      per share. Changes in the price paid for a share of our Common Stock can
      have a significant impact on the amount recorded for the convertible securities.
      For example, the movement up or down in the

24

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price of our Common Stock by $0.10
    will cause the balance of convertible securities to fluctuate by approximately $4.7
    billion. This fluctuation would result in an impact to our net loss. Convertible
    securities will convert back to equity when there are a sufficient number
    of shares of Common Stock authorized.

New Accounting Pronouncements

In June
    2006, FASB issued FIN 48, Accounting for Uncertainty in Income Taxes an
    interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting
    for uncertainty in income taxes recognized in an enterprises financial
    statements in accordance with FASB Statement No. 109,Accounting
    for Income Taxes.This Interpretation
    prescribes a recognition threshold and measurement attribute for the financial
    statement recognition and measurement of a tax position taken or expected
    to be taken in a tax return. This Interpretation also provides guidance on
    derecognition, classification, interest and penalties, accounting in interim
    periods, disclosure, and transition. This guidance is effective for fiscal
    years beginning after December 15, 2006. We have evaluated the impact of
    the adoption of FIN 48, and determined there is no impact on the Companys
    consolidated financial statements.

In September
    2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS
    157 defines fair value, establishes a framework for measuring fair value
    in generally accepted accounting principles (GAAP), and expands disclosures
    about fair value measurements. This guidance originally became effective
    for the first reporting period beginning after November 15, 2007.Subsequently
    the FASB partially deferred the effective date for this pronouncement for
    one year for nonfinancial assets and nonfinancial liabilities that are recognized
    or disclosed at fair value in the financial statements on a nonrecurring
    basis. We are assessing the impact of the adoption of SFAS 157 on the Companys
    consolidated financial statements.

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

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

Results of Operations

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

Three Months Ended September
        29, 2007 and September 30, 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 September 29, 2007
    and September 30, 2006:

25

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|                |                        |       |                   |     |            |  |          |     |  |     |   |  |   |       |  |     |  
|--------------- | ---------------------- | ----- | ----------------- | --- | ---------- |  | -------- | --- |  | --- | - |  | - | ----- |  | --- | -
|In thousands    | Three
    Months Ended |       |                   |     |            |  |         
|                |                        |       |                   |     |            |  | Restated |     |  |     |   |  |  
|                | September
    29,      |       | September
    30, |     | Increase / |  | Percent 
|                | 2007                   |       | 2006              |     | (Decrease) |  | Change  
|Revenue         | $                      | 2,035 |                   | 100 | %          |  | $        | 904 |  | 100 | % |  | $ | 1,131 |  | 125 | %
|Cost of Revenue |                        | 718   |                   | 35  | %          |  |          | 353 |  | 39  | % |  |   | 365   |  | 103 | %
|Gross Margin    | $                      | 1,317 |                   | 65  | %          |  | $        | 551 |  | 61  | % |  | $ | 766   |  | 139 | %

Revenue
    for the three months ended September 29, 2007 was $2.0 million compared
    to $0.9 million for the three months ended September 30, 2006, an increase
    of $1.1 million. All revenues during the two quarters were derived from
    the U.S. The increase in revenue was primarily due to sales to HSN, which
    was added as a customer with the signing of a marketing agreement on April
    2, 2007.

As part
    of our agreement with Sephora, any charge backs from them due to damages,
    testers, obsolete product, and advertising are deducted against open Cosmedicine
    invoices.

Cost of Revenue

Cost
    of revenue increased to $0.7 million for the three months ended September
    29, 2007 from $0.4 million for the three months ended September 30, 2006,
    an increase of $0.3 million. This increase was primarily due to the increase
    in revenue and partially offset by cost efficiencies during the three months
    ended September 29, 2007. Cost of revenue represented 35% and 39% of operating
    revenues for the three months ended September 29, 2007 and September 30,
    2006, respectively. The decrease as a percentage was primarily due to focused
    cost efficiencies obtained through the reduction of transportations costs
    of incoming inventory through better planning during the three months ended
    September 29, 2007.

Gross Margin

Gross
    margin was 65% and 61% for the three months ended September 29, 2007 and
    September 30, 2006, respectively. The increase in gross margin percentage
    was primarily due to the cost efficiencies discussed above.

Operating Expenses

The following table compares our operating
    expenses for the three months ended September 29, 2007 and September 30,
    2006:

|In thousands                             |   | Three Months
          Ended |  |   |               |  |   |            |  
|---------------------------------------- | - | ---------------------------- |  | - | ------------- |  | - | ---------- | -
|                                         |   |                              |  |   |               |  |   |            |  
|                                         |   |                              |  |   | Restated      |  |   |            |  
|                                         |   | September 29,                |  |   | September 30, |  |   | Increase / |  
|                                         |   | 2007                         |  |   | 2006          |  |   | (Decrease) |  
|Operating Expenses                       |   |                              |  |   |               |  |   |            |  
|Share based compensation
        expense | $ | -                            |  | $ | 2,138         |  | $ | (2,138     | )
|Payroll                                  |   | 1,131                        |  |   | 1,388         |  |   | (257       | )
|Depreciation and amortization            |   | 27                           |  |   | 91            |  |   | (64        | )
|Loss on disposal of fixed
        assets |   | -                            |  |   | 82            |  |   | (82        | )
|Occupancy                                |   | 53                           |  |   | 195           |  |   | (142       | )
|Insurance                                |   | 149                          |  |   | 159           |  |   | (10        | )
|Travel and entertainment                 |   | 152                          |  |   | 440           |  |   | (288       | )
|Professional fees                        |   | 395                          |  |   | 1,595         |  |   | (1,200     | )
|Office Expenses                          |   | 24                           |  |   | 126           |  |   | (102       | )
|Advertising and marketing                |   | 595                          |  |   | 536           |  |   | 59         |  
|Lab testing                              |   | 76                           |  |   | 12            |  |   | 64         |  
|Postage and delivery                     |   | 42                           |  |   | 97            |  |   | (55        | )
|Telephone and data                       |   | 57                           |  |   | 34            |  |   | 23         |  
|Other                                    |   | 81                           |  |   | 96            |  |   | (15        | )
|                                         |   |                              |  |   |               |  |   |            |  
|Total Operating Expenses                 | $ | 2,782                        |  | $ | 6,989         |  | $ | (4,207     | )

26

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Operating
    expenses were $2.8 million for the three months ended September 29, 2007
    compared to $7.0 million for the three months ended September 30, 2006,
    a decrease of $4.2 million. The decrease of 60.0% was primarily due to $2.1
    million decrease in stock option expense under SFAS No. 123R related mainly
    to the change in the fair value remeasurement at September 29, 2007 compared
    to September 30, 2006, a reduction in professional fees of $1.2 million
    due to focused cost reductions and reductions in other operating costs due
    to the reduction of non-essential spending.

Non-operating Expenses

The following table compares our non-operating
    expenses for the three months ended September 29, 2007 and September 30,
    2006:

|In thousands                                             |   | Three Months
          Ended |  |   |               |   |   |            |  
|-------------------------------------------------------- | - | ---------------------------- |  | - | ------------- | - | - | ---------- | -
|                                                         |   |                              |  |   | Restated      |   |   |            |  
|                                                         |   | September 29,                |  |   | September 30, |   |   | Increase / |  
|                                                         |   | 2007                         |  |   | 2006          |   |   | (Decrease) |  
|Non-operating (Income)
          Expenses                |   |                              |  |   |               |   |   |            |  
|Interest expense, net                                    | $ | 1,942                        |  | $ | 2,674         |   | $ | (732       | )
|Unrealized (gain) loss on
        convertible securities |   | 472                          |  |   | (40,536       | ) |   | 41,008     |  
|Registration rights penalties                            |   | -                            |  |   | 1,162         |   |   | (1,162     | )
|                                                         |   |                              |  |   |               |   |   |            |  
|                                                         |   |                              |  |   |               |   |   |            |  
|Total Non-operating (Income)
        Expense             | $ | 2,414                        |  | $ | (36,700       | ) | $ | 39,114     |  
|                                                         |   |                              |  |   |               |   |   |            |  

Interest Expense, net

Interest
    expense was $1.9 million for the three months ended September 29, 2007
    compared to $2.7 million for the three months ended September 30, 2006.
    The decrease of $0.8 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 in the three months ended September 30, 2006. No similar
    write-offs occurred in the three months ended September 29, 2007. This decrease
    was partially offset by interest incurred due to the increase in debt levels
    in the three months ended September 29, 2007 versus September 30, 2006, due
    to the new financing.

Unrealized (Gain) Loss on Convertible
      Securities

On December
    20, 2005, as a result of the Share Exchange Agreement, the Company recorded
    the convertible securities at $65 million, which represented the carrying
    amount of the convertible securities issued under the arrangement. Since
    the securities issued are convertible into common shares and the 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
    determines the fair value of the convertible securities based on the

27

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number of shares common stock into
    which they are convertible and the current fair value of the common stock
    on the remeasurement date. Previous to the May 7, 2007 financing and sale
    of the stores / salons, the fair value of the Common Stock was based on the
    price paid for a share of the stock closest to the measurement date. The
    fair value of the Common Stock as of September 30, 2006 was $0.28. The
    number of common shares into which the convertible securities were convertible
    was 621,068,151 as of September 30, 2006. As of September 30, 2006, the Company
    remeasured the convertible securities based on an estimated fair value of
    approximately $173.9 million and recorded an unrealized gain of approximately $40.5
    million for the three months ended September 30, 2006. After the stores /salons
    sale and recent financing which included warrants to purchase 38.5 billion
    shares of common stock, issued along with the debt, the stock is no longer
    traded on a regular basis and the trading price does not appear indicative
    of its fair value. We have used an analytical approach to approximate the
    fair value of the shares. The calculated fair value of the shares at September
    29, 2007 was
  $0.00044. The number of common shares into which the convertible securities
  were convertible was 47,303,027,452 as of September 29, 2007. As of September
  29, 2007, the Company remeasured the convertible securities based on an estimated
  fair value of approximately $20.8 million and recorded an unrealized loss
  of approximately $0.5 million for the three months ended September 29,
  2007. Convertible securities will convert back to equity when there are a sufficient
  number of shares of Common Stock authorized.

Registration Rights Penalties

Registration
    rights penalties were zero for the three months ended September 29, 2007
    compared to $1.2 million for the three months ended September 30, 2006.
    The penalties are due to failure to meet conditions included in registration
    rights agreements with various stockholders. On March 12, 2007, holders of
    the registration rights described above, agreed to waive any additional registration
    rights penalties incurred by the Company after December 30, 2006 concurrent
    with the May 7, 2007 financing.

Dividends Accrued on Preferred
      Stock

Dividends
    accrued on preferred stock were zero and $0.4 million for the three months
    ended September 29, 2007 and September 30, 2006, respectively. Concurrent
    with the May 7, 2007 financing, preferred shareholders exchanged their Series
    C and Series D Preferred for the new Series E Preferred. This exchange eliminated
    the cumulative accrual for dividends in the three months ended September
    29, 2007 as this feature was not included in the Series E Preferred.

Financial Condition, Liquidity
      and Capital Resources

Net
    cash used in operating activities was $3.7 million and $15.3 million
    for the three months ended September 29, 2007 and September 30, 2006, respectively.
    This improvement in cash flows resulted primarily from an operating loss
    of $1.5 million for the three months ended September 29, 2007 versus
    an operating loss of $6.4 million for the three months ended September
    30, 2006 and the existence of a $6.6 million loss from discontinued operations
    in the three months ended September 30, 2006.

Net
    cash provided by investing activities was $2.9 million and used
    by investing activities was $0.8 million for the three months ended September
    29, 2007 and September 30, 2006, respectively. The increase is due to a release
    of $2.9
    million from the restricted cash account and a $0.8 million reduction
    in capital expenditures in the three months ended September 29, 2007 versus
    the three months ended September 30, 2006.

Cash
    flows provided by financing activities were $19.3 million for the three
    months ended September 30, 2006. The cash flows from financing activities
    were primarily the result of the
  $20.2 million net proceeds from debt refinancing offset by $0.9 million
  of loan fees. There were no cash flows used in or provided by financing activities
  for the three months ended September 29, 2007.



28

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Since
    its inception, the Company has experienced operating losses and negative
    cash flow from operations. As of September 29, 2007, we had a cumulative
    deficit of $95.7 million and a working capital deficiency of $5.3
    million. These factors raise substantial doubt about our ability to continue
    as a going concern. Also, as a result of our losses, among other factors,
    the opinion of our Independent Registered Public Accountants on our audited
    financial statements for fiscal year 2007 has included an explanatory paragraph
    relating to going concern. A going concern explanatory paragraph
    indicates that our auditors have substantial doubt about our ability to continue
    as a going concern for at least a reasonable period of time. Our ability
    to continue as a going concern is ultimately dependent on our ability to
    increase sales and reduce expenses to a level that will allow us to operate
    profitably and sustain positive operating cash flows and raise additional
    capital. The financial statements do not include any adjustments to reflect
    the outcome of this uncertainty. We have had several recent financings as
    described in this Report, with the most recent completed on May 7, 2007.
    As a result of this latest financing, approximately 93% of our gross debt
    is held by Laurus as of September 29, 2007. In addition, these financings
    may not be sufficient and there can be no assurance we will be able to obtain
    sufficient capital to enable us to achieve our operational objectives.

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

Financings Subsequent to End of
      Fiscal Quarter

None

Contractual Obligations

As of
    September 29, 2007, our contractual obligations were as follows:

|In
        thousands                    |  |   |        |  | Payments
          Due by Period
|--------------------------------------- |  | - | ------ |  | --------------------------------
|                                        |  |   |        |  |                                 
|Contractual
          Obligations       |  |   | Total  |  | Less
          than 1 Year      
|                                        |  |   |        |  |                                 
|Operating
        leases                |  | $ | 1,406  |  | $                               
|Operating
        leases guaranteed (1) |  |   | 2,654  |  |                                 
|Long-term
        debt                  |  |   | 58,650 |  |                                 
|Consulting
        obligation (2)       |  |   | 819    |  |                                 
|Totals                                  |  | $ | 63,529 |  | $                               

|(1) | The Company had previously
          guaranteed six leases of its previously operated stores / salons. Due
          to the fact that the Purchaser of these stores / salons has filed for
          relief under Chapter 11 of the U.S. bankruptcy laws on July 25, 2007,
          the Company has recorded a charge and related liability of $2.4
          million to recognize the present value of this potential lease guarantee
          liability which is included in Liabilities related to discontinued
          operations in the September 29, 2007 and June 30, 2007 Consolidated
          Balance Sheets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Includes contracted services
          with our Formulator for Cosmedicine, consulting agreements with external
          accounting company and Company Chairman.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   

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

29

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consolidated financial position, results
    of operations or cash flows for the three months ended September 29, 2007.

Convertible
      Securities:We remeasured our convertible
      securities in compliance with EITF 00-19, based on the fair value of our
      Common Stock into which they are convertible, since there are currently
      insufficient shares authorized to allow conversion. Previous to the May
      7, 2007 financing and sale of the stores / salons the fair value of the
      Common Stock was based on the price paid for a share of the stock closest
      to the measurement date. As of September 28, 2006 the closing price for
      our Common Stock was $0.28. After the stores / salons sale and recent
      financing which included warrants to purchase 38.5 shares of Common Stock,
      issued along with the debt, the stock has no longer traded on a regular
      basis and its trading price does not appear indicative of its fair value.
      We have used an analytical approach to approximate the fair value of the
      shares. The calculated fair value of the shares at September 29, 2007 was $0.00044.
      Changes in the price paid for a share of our Common Stock can have a significant
      impact on the amount recorded for the convertible securities. For example,
      the movement up or down in the price of our Common Stock by $0.10 will
      cause the balance of convertible securities to fluctuate by approximately $4.7
      billion. This fluctuation would result in an impact to our net loss. Convertible
      securities will convert back to equity when there are a sufficient number
      of shares of Common Stock authorized.

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 November
    16, 2007, our independent registered public accounting firm, Amper, Politziner,
    and Mattia, P.C. (Amper) noted in a letter to management, a copy
    of which was presented to our Board, certain matters involving internal controls
    that they consider to be material weaknesses and significant deficiencies.
    However, Amper was not engaged to perform an audit of our internal controls
    over financial reporting. Accordingly, Amper has not expressed an opinion
    on the effectiveness of our internal controls over financial reporting.

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

Remediation of Material Weaknesses

We have
    addressed some of the issues raised by Amper. For the three months ended
    September 29, 2007, we have placed a strong emphasis on improving controls,
    reconciliations, cash management, communication, inventory management, monitoring
    of financial results, and application of accounting

30

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principles. Due to limited capital,
    accounting resources continued to be an issue. As a result of the sale of
    the stores / salons, many of the areas of concern no longer exist in the
    remaining operations.

Except
    as described above, there have not been any changes in our internal control
    over financial reporting (as such term is defined in Rules 13a-15(f) and
    15d-15(f) under the Exchange Act) since the fiscal year ended June 30, 2007
    that have materially affected, or are reasonable likely to materially affect,
    our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

UBS Lawsuit

UBS
    Securities, LLC commenced a lawsuit against KAAI in the Supreme Court of
    the State of New York, County of New York on September 18, 2006. The complaint
    alleged that UBS was engaged to provide investment banking services to KAAI
    and that UBS is owed a fee of $1,750,000 with respect to a private placement
    that was consummated in June, 2006. On August 17, 2007 a settlement was reached
    with UBS under which the Company was required to pay $1.0 million in
    full settlement of the claim, no later than August 22, 2007. The Company
    made the required payment within the period specified by the agreement. The
    Company had a payable balance of $1.0 million as of June 30, 2007, with $0.5
    million included in Accounts payable and $0.5 million included in Accrued
    expenses and other current liabilities in the Consolidated Balance sheet.
    No liability remained as of September 29, 2007.

Employee Lawsuits

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

Other Contingencies

GK Acquisition

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

General

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

31

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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).

32

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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: January
        16, 2008 | By: | /s/ Matthew Burris                                         
|                               |     |                                                            
|                               |     | Matthew Burris                                             
|                               |     | Chief Operating Officer and
        Chief Financial Officer

33

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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.            

---