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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 1934

For the quarterly period
ended September 30, 2006ORo 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.)

|                                                              |  |           
|------------------------------------------------------------- |  | ----------
|Building No. 501, Fifth Floor
  7 Corporate Park, Norwalk, CT |  | 06851     
|(Address of principal
  executive offices)                    |  | (Zip Code)

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

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



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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares of
common stock, par value $0.001 per share, outstanding as of April 10, 2007 was
16,756,438.

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TABLE OF CONTENTS

|              |                                                                                                                                   |  |      | 
|------------- | --------------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|              |                                                                                                                                   |  | Page
|              |                                                                                                                                   |  |      | 
|PART I        | FINANCIAL INFORMATION                                                                                                             |  |      | 
|              |                                                                                                                                   |  |      | 
|Item 1.       | Condensed Consolidated Financial Statements                                                                                       |  |      | 
|              |                                                                                                                                   |  |      | 
|              | Condensed
  Consolidated Balance Sheets as of September 30, 2006 (unaudited) and July 1,
  2006                                   |  | 1    | 
|              |                                                                                                                                   |  |      | 
|              | Condensed
  Consolidated Statements of Operations (unaudited) for the three months ended
  September 30, 2006 and October 1, 2005 |  | 2    | 
|              |                                                                                                                                   |  |      | 
|              | Condensed
  Consolidated Statements of Cash Flows (unaudited) for the three months ended
  September 30, 2006 and October 1, 2005 |  | 3    | 
|              |                                                                                                                                   |  |      | 
|              | Notes to
  Condensed Consolidated Financial Statements                                                                            |  | 4    | 
|              |                                                                                                                                   |  |      | 
|Item 2.       | Managements Discussion and Analysis of Financial
Condition and
  Results of Operation                                            |  | 25   | 
|              |                                                                                                                                   |  |      | 
|Item 3.       | Quantitative and Qualitative Disclosures about Market
Risk                                                                        |  | 36   | 
|              |                                                                                                                                   |  |      | 
|Item 4.       | Controls and Procedures                                                                                                           |  | 36   | 
|              |                                                                                                                                   |  |      | 
|PART II       | OTHER INFORMATION                                                                                                                 |  |      | 
|              |                                                                                                                                   |  |      | 
|Item 5.       | Legal Proceedings                                                                                                                 |  | 37   | 
|              |                                                                                                                                   |  |      | 
|Item 6.       | Exhibits                                                                                                                          |  | 37   | 
|              |                                                                                                                                   |  |      | 
|SIGNATURES    |                                                                                                                                   |  | 38   | 
|              |                                                                                                                                   |  |      | 
|EXHIBIT INDEX |                                                                                                                                   |  |      | 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TrueYou.Com Inc.Condensed Consolidated Balance Sheets

|                                                                                                     |  |               |          |         |   |          |  
|---------------------------------------------------------------------------------------------------- |  | ------------- | -------- | ------- | - | -------- | -
|                                                                                                     |  | As of         |         
|                                                                                                    
|                                                                                                     |  | September 30, |          | July 1, |  
|                                                                                                     |  |              
|In
  thousands, except share and per share amounts                                                   |  | 2006          |          | 2006    |  
|                                                                                                    
|                                                                                                     |  | (Unaudited)   |          |         |  
|Assets:                                                                                              |  |               |          |         |   |          |  
|Current
assets:                                                                                      |  |               |          |         |   |          |  
|Cash and cash
equivalents                                                                            |  | $             | 3,340    |         | $ | 189      |  
|Restricted cash, current
portion                                                                     |  |               | 1,609    |         |   | 1,602    |  
|Accounts receivable,
net                                                                             |  |               | 568      |         |   | 137      |  
|Inventories, net                                                                                     |  |               | 2,533    |         |   | 2,214    |  
|Other current assets                                                                                 |  |               | 2,807    |         |   | 1,009    |  
|                                                                                                     |  |               |          |         |   |          |  
|Total current
assets                                                                                 |  |               | 10,857   |         |   | 5,151    |  
|                                                                                                     |  |               |          |         |   |          |  
|Property and equipment,
net                                                                          |  |               | 12,950   |         |   | 12,981   |  
|Other assets                                                                                         |  |               | 907      |         |   | 855      |  
|Deferred financing costs,
net                                                                        |  |               | 1,150    |         |   | 242      |  
|Restricted cash, non-current
portion                                                                 |  |               | 773      |         |   | 845      |  
|Goodwill                                                                                             |  |               | 18,072   |         |   | 18,072   |  
|Other intangibles,
net                                                                               |  |               | 4,565    |         |   | 5,025    |  
|                                                                                                     |  |               |          |         |   |          |  
|Total assets                                                                                         |  | $             | 49,274   |         | $ | 43,171   |  
|                                                                                                     |  |               |          |         |   |          |  
|                                                                                                     |  |               |          |         |   |          |  
|Liabilities and Shareholders
deficit:                                                               |  |               |          |         |   |          |  
|                                                                                                     |  |               |          |         |   |          |  
|Liabilities:                                                                                         |  |               |          |         |   |          |  
|Current
liabilities:                                                                                 |  |               |          |         |   |          |  
|Accounts payable                                                                                     |  | $             | 3,096    |         | $ | 7,984    |  
|Accrued expenses and other
current liabilities                                                       |  |               | 19,052   |         |   | 16,449   |  
|Deferred revenue                                                                                     |  |               | 8,340    |         |   | 8,273    |  
|Current portion of long term
debt (net of debt discount of $16.3
  million as of September 30, 2006) |  |               | 19,778   |         |   | 5,839    |  
|Senior Debt Current (net of
debt discount of $0.9 million as of July
  1, 2006)                      |  |               |         |         |   | 9,146    |  
|                                                                                                     |  |               |          |         |   |          |  
|Total current
liabilities                                                                            |  |               | 50,266   |         |   | 47,691   |  
|Convertible
securities                                                                               |  |               | 173,899  |         |   | 197,565  |  
|Other long term
liabilities                                                                          |  |               | 12,748   |         |   | 7,829    |  
|                                                                                                    
|                                                                                                     |  |               |          |         |   |          |  
|Total
liabilities                                                                                    |  |               | 236,913  |         |   | 253,085  |  
|                                                                                                     |  |               |          |         |   |          |  
|                                                                                                     |  |               |          |         |   |          |  
|Commitments and contingencies                                                                        |  |               |          |         |   |          |  
|Shareholders deficit:                                                                               |  |               |          |         |   |          |  
|Common stock, par value $0.001,
authorized 20,000,000; issued and
  outstanding 14,995,513           |  |               | 15       |         |   | 15       |  
|                                                                                                     |  |               |          |         |   |          |  
|Additional paid-in
capital                                                                           |  |               | 2,961    |         |   | 4,347    |  
|                                                                                                     |  |               |          |         |   |          |  
|Accumulated deficit                                                                                  |  |               | (190,615 | )       |   | (214,276 | )
|                                                                                                     |  |               |          |         |   |          |  
|                                                                                                     |  |               |          |         |   |          |  
|Total shareholders
deficit                                                                          |  |               | (187,639 | )       |   | (209,914 | )
|                                                                                                     |  |               |          |         |   |          |  
|                                                                                                     |  |               |          |         |   |          |  
|Total liabilities and
shareholders deficit                                                          |  | $             | 49,274   |         | $ | 43,171   |  
|                                                                                                     |  |               |          |         |   |          |  

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

1

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

|                                                              |  |                      |            |                   |   |            |  
|------------------------------------------------------------- |  | -------------------- | ---------- | ----------------- | - | ---------- | -
|                                                              |  | Three Months Ended   |           
|In thousands, except share and per share amounts              |  | September 30,
  2006 |            | October 1,
  2005 |  
|Revenues:                                                     |  |                      |            |                   |   |            |  
|Service                                                       |  | $                    | 4,648      |                   | $ | 5,863      |  
|Retail and wholesale
products                                 |  |                      | 2,614      |                   |   | 1,902      |  
|                                                              |  |                      |            |                   |   |            |  
|Total Revenue                                                 |  |                      | 7,262      |                   |   | 7,765      |  
|                                                              |  |                      |            |                   |   |            |  
|Cost of Revenue:                                              |  |                      |            |                   |   |            |  
|Service                                                       |  |                      | 2,919      |                   |   | 3,388      |  
|Retail and wholesale
products                                 |  |                      | 1,064      |                   |   | 788        |  
|                                                              |  |                      |            |                   |   |            |  
|Total Cost of Revenue                                         |  |                      | 3,983      |                   |   | 4,176      |  
|                                                              |  |                      |            |                   |   |            |  
|Gross margin                                                  |  |                      | 3,279      |                   |   | 3,589      |  
|                                                              |  |                      |            |                   |   |            |  
|Stock based compensation expense                              |  |                      | 4,181      |                   |   |           |  
|Selling, general and administrative expenses -
other          |  |                      | 10,967     |                   |   | 7,972      |  
|Depreciation and amortization                                 |  |                      | 1,166      |                   |   | 1,109      |  
|                                                              |  |                      |            |                   |   |            |  
|Total operating expenses                                      |  |                      | 16,314     |                   |   | 9,081      |  
|                                                              |  |                      |            |                   |   |            |  
|Operating loss                                                |  |                      | (13,035    | )                 |   | (5,492     | )
|                                                              |  |                      |            |                   |   |            |  
|Other
  Expense (Income):                                     |  |                      |            |                   |   |            |  
|Interest expense, net                                         |  |                      | 2,678      |                   |   | 1,101      |  
|Registration rights penalties                                 |  |                      | 1,162      |                   |   |           |  
|Unrealized (gain) on convertible
securities                   |  |                      | (40,536    | )                 |   |           |  
|                                                              |  |                      |            |                   |   |            |  
|                                                              |  |                      |            |                   |   |            |  
|Income (loss) before income tax
provision                     |  |                      | 23,661     |                   |   | (6,593     | )
|                                                              |  |                      |            |                   |   |            |  
|Income tax provision                                          |  |                      |           |                   |   |           |  
|                                                              |  |                      |            |                   |   |            |  
|                                                              |  |                      |            |                   |   |            |  
|Net income (loss)                                             |  |                      | 23,661     |                   |   | (6,593     | )
|                                                              |  |                      |            |                   |   |            |  
|Dividends on preferred stock                                  |  |                      | 382        |                   |   | 464        |  
|                                                              |  |                      |            |                   |   |            |  
|                                                              |  |                      |            |                   |   |            |  
|Net income (loss) applicable to common
shareholders           |  | $                    | 23,279     |                   | $ | (7,057     | )
|                                                              |  |                      |            |                   |   |            |  
|                                                              |  |                      |            |                   |   |            |  
|Basic and diluted income (loss) per common share:             |  | $                    | 1.55       |                   | $ | (0.47      | )
|                                                              |  |                      |            |                   |   |            |  
|                                                              |  |                      |            |                   |   |            |  
|Weighted average common shares outstanding,
basic and diluted |  |                      | 14,995,513 |                   |   | 14,995,513 |  
|                                                              |  |                      |            |                   |   |            |  

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

2

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TrueYou.Com Inc.Consolidated Statements of Cash Flows

(Unaudited)

|                                                                                       |  |                      |         |                   |   |        |  
|-------------------------------------------------------------------------------------- |  | -------------------- | ------- | ----------------- | - | ------ | -
|                                                                                       |  | Three Months Ended   |        
|                                                                                      
|In thousands                                                                           |  | September 30,
  2006 |         | October 1,
  2005 |  
|                                                                                      
|Cash flows from operating
activities:                                                  |  |                      |         |                   |   |        |  
|Net income (loss)                                                                      |  | $                    | 23,661  |                   | $ | (6,593 | )
|Adjustments to reconcile net
income (loss) to net cash used in
  operating activities: |  |                      |         |                   |   |        |  
|Depreciation and
amortization                                                          |  |                      | 1,166   |                   |   | 1,109  |  
|Loss on disposals                                                                      |  |                      | 171     |                   |   |       |  
|Amortization of deferred
financing costs                                               |  |                      | 77      |                   |   | 22     |  
|Amortization of debt
discount                                                          |  |                      | 609     |                   |   |       |  
|Stock based compensation
expense                                                       |  |                      | 4,181   |                   |   |       |  
|Non-cash interest
expense                                                              |  |                      | 1,447   |                   |   | 135    |  
|Unrealized gain on convertible
securities                                              |  |                      | (40,536 | )                 |   |       |  
|Changes in operating assets and
liabilities:                                           |  |                      |         |                   |   |        |  
|Inventories                                                                            |  |                      | (319    | )                 |   | 103    |  
|Accounts receivable                                                                    |  |                      | (431    | )                 |   | 18     |  
|Other current assets                                                                   |  |                      | (2,081  | )                 |   | (215   | )
|Other assets                                                                           |  |                      | (52     | )                 |   | 24     |  
|Accounts payable                                                                       |  |                      | (4,888  | )                 |   | 2,151  |  
|Accrued expenses and other
current liabilities                                         |  |                      | 1,869   |                   |   | (727   | )
|Deferred revenue                                                                       |  |                      | 67      |                   |   | (20    | )
|Other long term
liabilities                                                            |  |                      | (265    | )                 |   | (180   | )
|                                                                                       |  |                      |         |                   |   |        |  
|Net cash used in operating
activities                                                  |  |                      | (15,324 | )                 |   | (4,173 | )
|Cash flows from investing
activities:                                                  |  |                      |         |                   |   |        |  
|Capital expenditures                                                                   |  |                      | (846    | )                 |   | (572   | )
|Purchase of intangible
asset                                                           |  |                      |        |                   |   | (71    | )
|                                                                                       |  |                      |         |                   |   |        |  
|Net cash used in investing
activities                                                  |  |                      | (846    | )                 |   | (643   | )
|Cash flows provided by financing
activities:                                           |  |                      |         |                   |   |        |  
|Cash overdraft                                                                         |  |                      |        |                   |   | (163   | )
|Restricted cash                                                                        |  |                      | 65      |                   |   | (114   | )
|Proceeds of issuance of
debt                                                           |  |                      | 28,450  |                   |   |       |  
|Repayment of long term
debt                                                            |  |                      | (8,250  | )                 |   | (900   | )
|Loan fees                                                                              |  |                      | (944    | )                 |   |       |  
|Proceeds of issuance of KAAI
Series G Preferred stock                                  |  |                      |        |                   |   | 10,058 |  
|Proceeds of issuance of KAAI
Series H Preferred stock                                  |  |                      |        |                   |   | 4,754  |  
|                                                                                       |  |                      |         |                   |   |        |  
|Net cash provided by
financing activities                                              |  |                      | 19,321  |                   |   | 13,635 |  
|                                                                                       |  |                      |         |                   |   |        |  
|                                                                                       |  |                      |         |                   |   |        |  
|Net increase in cash and cash
equivalents                                              |  |                      | 3,151   |                   |   | 8,819  |  
|Cash and cash equivalents - beginning of
period                                        |  |                      | 189     |                   |   | 173    |  
|                                                                                       |  |                      |         |                   |   |        |  
|Cash and cash equivalents - end of
period                                              |  | $                    | 3,340   |                   | $ | 8,992  |  
|                                                                                       |  |                      |         |                   |   |        |  
|                                                                                      
|Supplemental cash flow
information                                                     |  |                      |         |                   |   |        |  
|Non-cash financing
activities:                                                         |  |                      |         |                   |   |        |  
|Preferred stock dividends, net of preferred
stock forfeitures                          |  | $                    | 382     |                   | $ | 463    |  
|Beneficial conversion feature on preferred
stock                                       |  |                      |        |                   |   | 1,535  |  
|Converted senior debt to subordinated
debt                                             |  |                      | 1,750   |                   |   |       |  
|Warrants issued with debt                                                              |  |                      | 16,870  |                   |   |       |  

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 30, 2006.

1. Basis of Presentation

The
Company offers both cosmetic services and medical procedures to customers under
one delivery system and combines them with salon and spa services together
under a single brand, giving clients access to top service providers, unique
treatments and predictable results in a state of the art environment. The
Company has developed a skin care line of products called Cosmedicine which is
being distributed through Sephora USA, Inc. stores and the Companys own
facilities. The Company is the owner of the Cosmedicine trademark. The Company
co-brands its trade name with the trade names of the salons and spas that it
has acquired. The Companys salons and spas share certain corporate resources
such as senior management and administrative services. As of March 30, 2007,
the Company had 501 employees.

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

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

Beginning
in fiscal year 2006, the Company began following the standard fiscal year of
the retail industry, which is a 52 or 53 week period, with the end of a period
being the closest Saturday to the end of a month.

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 30, 2006, the Company had an accumulated deficit of $190.6 million
and a working capital deficiency of $39.4 million. Included in the Companys
net deficit at September 30, 2006 is the remeasurement of convertible securities
which resulted in a cumulative liability in the amount $92.1 million. These
factors raise substantial doubt about the Companys ability to continue as a
going concern. The Companys ability to continue as a going concern is
ultimately dependent on its ability to increase sales and reduce expenses to a
level that will allow it to operate profitably and sustain positive operating
cash flows and raise additional capital. There have been no adjustments to the
financial statements to reflect the outcome of this uncertainty. The Company
has had several recent financings, with the most recent being completed on
March 27, 2007. But these financings are not sufficient to sustain operations
and

4

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additional capital will be
required. Management plans include raising additional capital. However, there
can be no assurance that the Company will be able to secure sufficient cash
inflows to enable the Company to continue its operations.

2. Summary of Significant Accounting Policies

Use
of Estimates

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

Revenue
Recognition

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

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

Cash
and Cash Equivalents

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

Restricted
Cash

Restricted
cash represents an escrow account for prefunded interest on senior debt and
certificates of deposit to collateralize leases. The Company categorizes the
restricted cash as current or long term based on the date the restriction is
expected to lapse.

5

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Inventories

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

Provisions
for Inventory Obsolescence

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

Property
and Equipment

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

Goodwill

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

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

Intangible
Assets

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

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

6

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

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

The
impairment charge is determined based upon the amount by which the net book
value of the assets exceeds their estimated fair value. In determining the fair
value of the assets, the Company considers market trends, published values for
similar assets, recent transactions involving sales of similar assets or quotes
from third party appraisers. In making these determinations, the Company also
uses certain assumptions, including, but not limited to, the estimated
discounted future cash flows expected to be generated by these assets, which
are based on additional assumptions such as asset utilization, length of
service the asset will be used in the Companys operations and estimated
residual values.

Debt
Issue Costs

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

Income
Taxes

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

Stock-Based
Compensation

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

7

---



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 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. These common stock equivalents were not considered to be dilutive as there were not sufficient
authorized shares to issue common stock. For the three months ended October 1, 2005, the impact of
any convertible securities would be anti-dilutive due to either losses incurred
during the period or out-of-the-money options and are not included in the
diluted loss per share calculation.

Software
Development Costs

The
Company incurs costs for the development of its Klinger 360° Best Practices Aesthetics System 
(the
K360), which is a comprehensive software and hardware practice management
system that facilitates the delivery of evidenced based best practices
aesthetic services that is to be sold, leased, or licensed to third parties in
the future. All software development costs have been appropriately accounted
for in accordance with SFAS 86 Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed. All costs are expensed as incurred as technological feasibility has not
yet been established.

Disclosures
about Fair Value of Financial Instruments

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

Cash and short-term investments

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

Convertible
Securities

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

Recently
Issued Accounting Standards

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

In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This guidance becomes effective for the

8

---



first
reporting period beginning after November 15, 2007. The Company is assessing the impact
of the adoption of SFAS 157 on its consolidated financial statements.

In
September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB Statements No. 87,
88, 106, and 132(R). SFAS 158 requires an employer to recognize the overfunded
or underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. This guidance is effective as
of the end of the fiscal year for years ending after December 15, 2006. We
believe the impact of the adoption of SFAS 158 will not be significant to the
Companys consolidated financial statements.

3. Property and Equipment, net

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

|                                          |  |                      |        |                |   |        |  
|----------------------------------------- |  | -------------------- | ------ | -------------- | - | ------ | -
|(Dollars in thousands)                    |  | September 30,
  2006 |        | July 1,
  2006 |  
|                                          |  |                      |        |                |  
|                                         
|Furniture and fixtures                    |  | $                    | 2,883  |                | $ | 2,337  |  
|Machinery and equipment                   |  |                      | 3,324  |                |   | 3,078  |  
|Leasehold improvements                    |  |                      | 11,144 |                |   | 11,261 |  
|Capital lease assets                      |  |                      | 439    |                |   | 439    |  
|                                          |  |                      |        |                |   |        |  
|                                          |  |                      |        |                |   |        |  
|Total property and equipment              |  |                      | 17,790 |                |   | 17,115 |  
|                                          |  |                      |        |                |   |        |  
|Accumulated depreciation and amortization |  |                      | (4,840 | )              |   | (4,134 | )
|                                          |  |                      |        |                |   |        |  
|                                         
|Total property and equipment, net         |  | $                    | 12,950 |                | $ | 12,981 |  
|                                          |  |                      |        |                |   |        |  

Depreciation
expense for the three months ended September 30, 2006 and October 1, 2005 was
$0.7 and $0.5 million, respectively.

4. Accrued Expenses and Other
Current Liabilities

The
table below sets forth the Companys accrued expenses and other current
liabilities as of September 30, 2006 and October 1, 2005.

9

---



|                                                       |  |                   |        |               |   |        | 
|------------------------------------------------------ |  | ----------------- | ------ | ------------- | - | ------ | 
|(Amounts in thousands)                                 |  | September,
  2006 |        | July1,
  2006 |  
|                                                       | 
|                                                      
|Accrued
  interest                                     |  | $                 | 3,087  |               | $ | 2,735  | 
|Accrued
  dividends                                    |  |                   | 2,856  |               |   | 2,474  | 
|Accrued
  management Fees                              |  |                   | 1,714  |               |   | 1,714  | 
|Due
  to JohnsHopkins  consulting fees                |  |                   | 1,512  |               |   | 1,300  | 
|                                                      
|Accrued registration
  penalties (a)                   |  |                   | 2,709  |               |   | 1,547  | 
|                                                      
|Payroll,
  benefits and other                          |  |                   | 7,174  |               |   | 6,679  | 
|                                                       | 
|Total
  Accrued Expenses and Other Current Liabilities |  | $                 | 19,052 |               | $ | 16,449 | 
|                                                       | 

(a) 
Registration Rights Penalties

On
September 1, 2005, KAAI entered into an agreement with various stockholders
regarding the registration of the shares of common stock underlying the securities
they had acquired from KAAI. The agreement, which was assumed by the Company in
connection with the Share Exchange Agreement, included an obligation to file a
resale registration statement covering the shares by February 18, 2006, which
was 60 days after the closing date of the Share Exchange Agreement (the Filing
Date). The Company did meet this requirement as it filed a Registration
Statement on Form S-1 on January 24, 2006. In addition, the agreement required
that the registration statement be declared effective by June 3, 2006 (105 days
after the Filing Date), which the Company did not meet. Failure under either of
the obligations under the original agreement required a cash payment. On
December 20, 2006, an amendment to the agreement was signed which required the
payment of damages through the issuance of warrants to purchase shares of
Company Common Stock, at an exercise price of $0.001 per share. The number of
Common Stock warrants to be issued for each period is calculated by dividing
the liquidated damages of 1% of the aggregate purchase price paid by such
stockholder for each 30-day period or pro rata portion, to the holders, by the
higher of (A) the average closing trading price of the Common Stock during the
30-day period immediately before the last day of the relevant period and (B)
$0.211254. The shareholders may also elect to receive a portion of the damages
in cash.

On
December 22, 2005, the Company entered into an agreement with certain
stockholders regarding the registration of the shares of common stock
underlying the securities they had acquired from the Company. The agreement
included an obligation to file a resale registration statement covering the
shares by January 21, 2006 which was 30 days after the December 22, 2005 closing
date of the sale of securities to such stockholders. Due to the fact that the
Company did not meet this requirement, it is subject to a one-time penalty of
3% of the aggregate purchase price paid by such stockholders. In addition, the
agreement required the Company to put into effect the planned authorized share
increase, which would increase the number of authorized shares of Common Stock
that the Company is authorized to issue from 20,000,000 to 60,000,000
(Authorized Share Increase) by May 1, 2006 which was 130 days after the
closing date of the sale of securities to such stockholders. Due to the fact
that the Company did not meet this requirement it may be subject to a one time
penalty of 3% of the aggregate purchase price paid by such stockholders and
ongoing monthly charges of 1.5% of the aggregate purchase price paid by such
stockholders for each 30-day period or pro rata portion. Failure under either
of the obligations requires a cash payment.

Due
to the fact that the Company did not meet the effective date requirement by
June 3, 2006 or the Authorized Share Increase requirement, a non-operating
charge has been recorded for the combined estimated penalties of $1.2 million
during the three months ended September 30, 2006. This includes monthly charges
of $0.4 million per month. There is no maximum included in the agreement and
penalties will continue to accrue for each agreement until the Company is able
to achieve compliance. The cumulative obligation of $2.7 million represents the
aggregate registration penalties payable through September 30, 2006 and is
included in Accrued expenses and other current liabilities on the Consolidated
Balance Sheet.

10

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5. Long-Term Debt and Other Long Term
Liabilities

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

|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|----------------------------------------------------------------------- |  | ---------------- |  | ----------------- |  | --------------------- | ------- | ----------- | - | ------- | 
|                                                                        |  |                  |  |                   |  | Amounts
  Outstanding |        
|(Dollars in
thousands)                                                  |  | Maturity
  Dates |  | Interest Rate
  % |  | September 30,2006     |         | July 1,2006 |  
|                                                                        |  |                  |  |                   |  |                       |         |             |  
|Senior debt (a)                                                         |  | 3/31/2009        |  | 12%               |  | $                     |        |             | $ | 9,146   | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Senior debt (b)                                                         |  | 6/30/2010        |  | Prime + 2%        |  |                       | 15,249  |             |   |        | 
|Subordinated debt (c)                                                   |  | 7/1/2010         |  | 12%               |  |                       | 3,529   |             |   | 4,839   | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Other long term debt                                                    |  |                  |  |                   |  |                       |         |             |   |         | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Note
payable                                                            |  | Varies           |  | 5%                |  |                       | 1,000   |             |   | 1,000   | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Other long term liabilities                                             |  |                  |  |                   |  |                       |         |             |   |         | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Long term licensing
obligation                                          |  | 12/1/2008        |  | 6%                |  |                       | 3,818   |             |   | 3,818   | 
|Deferred
construction allowance                                         |  |                  |  |                   |  |                       | 125     |             |   | 130     | 
|Capital lease
obligations                                               |  | Varies           |  | 6%                |  |                       | 346     |             |   | 393     | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Deferred Liability -
Sephora                                            |  |                  |  |                   |  |                       | 5,000   |             |   | 5,000   | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Stock base awards                                                       |  |                  |  |                   |  |                       | 5,185   |             |   |        | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Convertible Securities                                                  |  |                  |  |                   |  |                       | 173,899 |             |   | 197,565 | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Total                                                                   |  |                  |  |                   |  |                       | 208,151 |             |   | 221,891 | 
|                                                                       
|Less current portion and amount
included in other current
  liabilities |  |                  |  |                   |  |                       | 21,504  |             |   | 16,497  | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 
|Long-term portion                                                       |  |                  |  |                   |  | $                     | 186,647 |             | $ | 205,394 | 
|                                                                        |  |                  |  |                   |  |                       |         |             |   |         | 

(a) - Senior Debt - TICC

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

The
senior note agreement contained covenants, including limitations on incurrence
of debt, granting of liens, capital expenditures, mergers and consolidations.
In addition, the Company could not exceed specified fixed charge coverage,
total debt-to-profit, senior debt-to-profit and debt-to-equity ratios. These
covenants applied in some cases to the unit level operations and in other cases
to the consolidated operations, all effective for periods subsequent to June
30, 2004. As of June 30, 2006, the Company was not in

11

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compliance with certain of these covenants.  On June 30, 2006, the Company obtained a covenant
compliance waiver and amendment under the senior debt agreement with TICC.  The Company obtained a waiver for the
Consolidated Senior Debt to Consolidated EBITDA ratio covenant test for all
periods through March 31, 2007.  In
addition, the Company obtained amended covenants for the Unit EBITDAR, Unit
Fixed Coverage Ratio and minimum cash required covenant tests.

On
July 6, 2006 the Company repaid the senior debt with proceeds from a financing
it completed with Laurus Master Fund, Ltd. (Laurus).  As a result of the early repayment of the
debt, the unamortized discount of $0.9 million and unamortized financing costs
of $0.2 million were written off and recorded as interest expense upon
repayment in the three months ended September 30, 2006.

(b) - Senior
Debt - Laurus

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

The
Company placed $2.5 million (the Interest Amount) of the proceeds in a
restricted account to be utilized to pre-fund interest for the first year of
the Laurus Note.  Closing costs of $0.9
million were incurred by the Company relating to this debt.  These costs were recorded as deferred
financing costs and will be amortized to interest expense over the term of the
note using straight-line amortization. The balance of $21.6 was placed into a
restricted cash account which was released on July 11, 2006 when the Company
satisfied the conditions associated with the Laurus Note.  The Company used $8.3 to pay off the
existing senior debt held by TICC and an additional $0.1 million representing
unpaid interest and other costs owed to TICC.
The remaining $1.7 million of principal outstanding on the senior debt
to TICC was converted as a part of the $5.2 million subordinated loan discussed
below.   Also in conjunction with the
payoff of the senior debt and all related interest and fees was the release of
$1.6 million of restricted cash previously held for interest payments.  The restriction on the funds was removed in
January 2007.

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

The
Company calculated a debt discount attributable to the value of these warrants
of $10.3 million, which will be amortized over the term of the Note using the
effective interest method (see Note 8 for a discussion of assumptions used to
value the warrants).  As of September
30, 2006, this Note carried a debt discount of $9.8 million.  For the three months ended September 30,
2006, the Company recorded interest expense of $0.6 million related to the
amortization of the debt discount.  The
warrants have a 10-year term and an exercise price equal to $0.01 per share, or
in certain circumstances, may be exercised on a cashless basis.  If, prior to the fourteenth month
anniversary of June 30, 2006, (i) the Companys obligations under the Note have
been reduced to $12.5 million or less, then the series B warrants will
automatically be cancelled and terminated; and (ii) the Companys obligations
under the Note have been reduced to zero, then the series C warrants will
automatically be cancelled and terminated.
The Company is obligated to file a registration statement with the
Securities and Exchange Commission covering the resale of the shares underlying
the warrants.

12

---



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

On
March 8, 2007, Laurus sent the Company a notice of Default relating to the
$25.0 million Note and also the $1.0 million bridge loan obtained subsequent to
quarter-end (see Subsequent Events Note 10).
As a result of this default, the Company has classified all its
remaining debt as current as of September 30, 2006, in its Consolidated Balance
Sheet.

(c) -
Subordinated Debt

$4.8 Million Subordinated Loan

On
May 9, 2006, the Company entered into a Loan Agreement with certain of its
existing shareholders, pursuant to which the Lenders loaned the Company
$4,838,710 to be used by the Company for capital expenditures and general
working capital. Unamortized closing costs relating to this loan were $0.3
million as of September 30, 2006 and July 1, 2006 and are included in Deferred
financing costs, net on the Condensed Consolidated Balance Sheet.  Pursuant to a Subordination Agreement dated
May 9, 2006 with the Lenders and TICC, the Loan was subordinated to the
Companys then existing senior indebtedness to TICC under the Note and Warrant
Purchase Agreement, dated March 31, 2004, as amended.

On
July 11, 2006, the Company entered into a amended and restated loan agreement
(the Amended Subordinated Loan Agreement) with Pequot Healthcare Fund, L.P.,
Pequot Healthcare Offshore Fund, Inc., Premium Series PCC Limited -Cell 32,
Pequot Diversified Master Fund, Ltd., Pequot Healthcare Institutional Fund,
L.P., North Sound Legacy Institutional Fund LLC, North Sound Legacy
International Ltd. and Klinger Investments LLC (collectively, the Amended
Subordinated Lenders) in order to amend and restate the provisions of the $4.8
million loan (the Amended Subordinated Loan) that the Company received from
the Amended Subordinated Lenders on May 9, 2006 in order to conform its terms
to the terms of the $5.2 million Subordinated Loan Agreement discussed below.
Pursuant to a subordination agreement dated July 11, 2006, the Amended
Subordinated Loan is subordinated to the Companys existing senior indebtedness
to Laurus under the Securities Purchase Agreement and the Related Agreements

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

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

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

13

---



issued
pursuant to the Subordinated Loan Agreement described below.  The Company calculated a debt discount
attributable to the value of these warrants of $3.2 million, which will be
amortized over the term of the note using the effective interest method (see
Note 8 for a discussion of assumptions used to value the warrants).  As of September 30, 2006, this note carried
a debt discount of $3.1 million.  For
the three months ended September 30, 2006, the Company recorded interest
expense of $0.03 million related to the amortization of the debt discount.

$5.2 Million Subordinated Loan:

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

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

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

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

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

14

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Subordinated Debt issued on December 22, 2006
(including interest and all other obligations due) have been paid.

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

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

Pursuant
to the Subordinated Loan Agreement, the Company issued to the Subordinated
Lenders warrants to purchase an aggregate of 32,947,771 shares of Common Stock
at an exercise price of $0.001 per share, subject to certain adjustments set
forth therein. The warrants expire on June 30, 2013. The Subordinated Lenders
are not entitled to receive shares of Common Stock upon exercise of the
warrants if such receipt would cause such Subordinated Lender to be deemed to
beneficially own in excess of 4.99% of the outstanding shares of Common Stock
on the date of issuance of such shares. Such provision may by waived by any Subordinated
Lender upon 61 days prior written notice to the Company.  The Company recorded a debt discount in the
amount of $3.4 million which is attributable to the value of the warrants
issued.  The debt discount will be
amortized over the term of the loan using the effective interest method.  As of September 30, 2006, this note carried
a debt discount of $3.4 million.  For
the three months ended September 30, 2006, the Company recorded interest
expense of $0.03 million related to the amortization of the debt discount.

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

Accrued Interest and Maturities of Other Long
Term Debt

Accrued
interest of $3.1 and $2.7 million is included in accrued expenses as of
September 30, 2006 and July 1, 2006, respectively.

6. Commitments and Contingencies

Litigation

UBS Lawsuit

UBS
Securities, LLC commenced a lawsuit against the Company in the Supreme Court of
the State of New York, County of New York on September 18, 2006.  The complaint alleges that UBS was engaged
to provide investment banking services to the Company and that UBS is owed a
fee of $1,750,000 with respect

15

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to a private placement that was consummated
in June, 2006, and funded in July 2006. In the event the Company is
unsuccessful in defending the lawsuit, it would have a material adverse effect
on the Company. The Company does not believe a loss from an unfavorable outcome
will exceed the amount accrued.

Other Contingencies

Mandalay
Agreement

A vendor
asserted a claim relating to an October 1, 2005 agreement that was contested by
the Company. An agreement between the parties was reached on February 1, 2007
to settle the dispute by granting the vendor 1,760,925 shares of Common Stock.
The Company has recorded a marketing charge of $0.4 million for the three
months ended September 30, 2006 for this claim and the $0.4
million is included in Accrued expenses and other current liabilities on the
Consolidated Balance Sheet.

General

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

Commitments

Acquisition of
Nouvisage Corp:

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

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

The
letter of intent was terminable by either party if the acquisition did not
close by January 10, 2007 (the Termination Date). Pursuant to the letter of
intent, the Sellers and Nouvisage had agreed not to solicit, initiate, or
encourage submission of or receive proposals or offers from another party until
the Termination Date. The board of directors of both the Company and Nouvisage
agreed to extend the Termination Date until March 1, 2007. As of March 31,
2007, the Companies have not extended the Termination date further and the
exclusive period to negotiate has ended.

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

16

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other
agreements as may be appropriate or desirable to the parties. The parties also
agreed to negotiate a Strategic Alliance Agreement.

Upon
the signing of the letter of intent, the Company agreed to advance $300,000 to
Nouvisage. In accordance with this agreement, as of March 31, 2007 the Company
has advanced $300,000 to Nouvisage. If the Company does acquire Nouvisage, this
advance will be applied to the purchase price. In addition, Nouvisage agreed to
provide security of its obligations through the issuance of promissory notes
which will allow the holder to convert such promissory notes into an aggregate
of 17% of Nouvisages common ownership if not repaid. Pursuant to the letter of
intent, if the acquisition does not close, Nouvisage has agreed to refund to
the Company all amounts paid to Nouvisage, except for documented transaction
costs of up to $75,000, in six equal monthly installments.

7. Related Party Transactions

L Capital Consulting
Services Agreement

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

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

KCO Advisory Services
Agreement

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

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

17

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Loans by Affiliates of Pequot

Affiliates
of Pequot, who collectively are holders of more than 5% of the Common Stock of
the Company, hold 7 year warrants with an exercise price of $.001 per share, to
purchase an aggregate of 14,654,807 shares of the Common Stock of the Company
which warrants were received in connection with the $5.2 million Subordinated
Debt financing on July 11, 2006 and the $4.8 Million Subordinated Debt
financing on May 9, 2006 in which such affiliates loaned the Company an
aggregate of $2,312,903.

Loans by Klinger Investments

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

Loans by Laurus Master Fund Ltd.

Laurus
has loaned the Company $25,000,000 as Senior Secured Debt and $1 Million as
Senior Subordinated Secured Debt as described in this Report and received 10
year warrants with an exercise price of $.01 per share to purchase a total of
50,885,093 shares of Common Stock and 7 year warrants with an exercise price of
$.001 per share to purchase a total of 10,000,000 shares of Common Stock. In
addition Laurus is entitled to receive warrants to purchase an additional
8,750,000 shares of Common Stock if the $1,000,000 Senior Subordinated Secured
Debt is not repaid by April 22, 2007. If prior to the 14th month
anniversary of June 30, 2006, the Companys obligations to Laurus under the
Senior Secured Debt have been reduced to $12,500,000 or less, then warrants to
purchase 6,839,394 shares of Common Stock will be automatically cancelled and
terminated and if at such time the Companys obligations have been reduced to
zero, then warrants to purchase an additional 6,693,875 shares of Common Stock
will also be cancelled.

Loan by Richard Rakowski

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

Loans by Andrew Lipman

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

18

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Sephora

Sephora,
with whom the Company has a strategic relationship, is a subsidiary of LVMH. L
Capital Management SAS, which manages and represents L Capital, is also a
subsidiary of LVMH, and as a result L Capital Management SAS and Sephora are
affiliates. The Companys decision to enter into a contract with Sephora was
made independent of its relationship with L Capital. The Company has recorded
$3.6 million in net revenues on a cumulative basis as of September 30, 2006.
The Company recorded revenues of $0.9 million for the three months ended
September 30, 2006. At September 30, 2006, the Company had a $0.3 million
receivable balance from Sephora which is included in Accounts receivable, net
in the Condensed Consolidated Balance Sheet.

8. Stock-Based Compensation Plan
and Warrants

Stock Options

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

All
existing stock options as of July 1, 2006 had been issued under the subsidiary
(KAAI) 2003 stock option plan. Management has developed a new stock option plan
(The TrueYou.Com Inc. 2006 Stock Incentive Plan or the 2006 Plan) for the
Company that was approved by the Board of Directors (Board) of the Company in
the first quarter of fiscal year 2007. At that time, the Board also approved,
subject to shareholder approval, the exchanging of KAAI options for TrueYou
options under the 2006 Plan. The 2006 Plan must be submitted to the
stockholders of the Company for their approval within twelve months. The
Company believes that the approval of the 2006 Plan by the stockholders is
perfunctory, and as such has considered all options approved by the Board as
granted. All options granted by the Board in the three months ended September
30, 2006 have been granted under the 2006 Plan.

The
2006 Plan provides for awards of up to105 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 27,698,738 shares of Common Stock
remained available for future award grants as of September 30, 2006.

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
77,301,262 shares of Common Stock 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 authorized, it is required to treat the
options 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 approximately $4.2 million and zero for the
three months ended September 30, 2006 and October 1, 2005, respectively for
stock options

19

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granted and
the subsequent remeasurement. In addition, as of September 30, 2006, there was
approximately $3.1 million in unrecognized stock based compensation expense
related to non-vested stock options which is expected to be recorded in future
periods over a weighted average period of 2.2 years.

There were
55.1 million new TrueYou options granted during the three months ended
September 30, 2006. There were an additional 22.2 million TrueYou options
issued as an exchange for Advanced Aesthetics, Inc. options. There were no
options granted during the three months ended October 1, 2005.

The
weighted average fair value of the new employee options granted during the
three months ended September 30, 2006 was $0.08. The fair value was estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions for the three months ended September 30, 2006 and October
1, 2005:

|                                 |  |      |      |      |  |     | 
|-------------------------------- |  | ---- | ---- | ---- |  | --- | 
|Assumptions                      |  | 2007 |      | 2006 | 
|                                 |  |      |      |      | 
|                                 |  |      |      |      |  |     | 
|Expected
  dividend yield        |  |      | None |      |  | N/A | 
|Risk-free
  interest rate        |  |      | 4.6  |      |  | N/A | 
|Expected
  life of option grants |  |      | 3.0  |      |  | N/A | 
|Forfeiture
  rate                |  |      | 2.5% |      |  | N/A | 
|Expected
  volatility            |  |      | 50%  |      |  | N/A | 

The
Company also provides stock options to some of its outside contractors. These
options are subject to variable accounting and were revalued as of September
30, 2006. As of September 30, 2006 the weighted average fair value was $0.10,
the weighted average interest rate was 4.7%, the forfeiture rate was 2.5%, and
weighted average expected life was 3.4 years for these stock options.

A
summary of the Companys stock option activity during the three months ended September 30, 2006 is follows:

|                                |  |                       |             |                                   |   |      | 
|------------------------------- |  | --------------------- | ----------- | --------------------------------- | - | ---- | 
|                                |  | Options
  Outstanding |            
|                                |  |                       |            
|                                |  | Shares                |             | Weighted Average
  Exercise Price |  
|                                |  |                       |             |                                   |  
|                                |  |                       |             |                                   |   |      | 
|Outstanding, July 1, 2006 (1)   |  |                       | 22,220,942  |                                   | $ | 0.34 | 
|                                |  |                       |             |                                   |   |      | 
|Granted                         |  |                       | 77,301,262  |                                   |   | 0.28 | 
|Cancelled                       |  |                       | (22,220,942 | )                                 |   | 0.34 | 
|Exercised                       |  |                       |            |                                   |   |     | 
|                                |  |                       |             |                                   |   |      | 
|                                |  |                       |             |                                   |   |      | 
|Outstanding, September 30, 2006 |  |                       | 77,301,262  |                                   | $ | 0.28 | 
|                                |  |                       |             |                                   |   |      | 

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

As
of September 30, 2006, the weighted average exercise prices and remaining
contractual lives of stock options are as follows:

|                                       |  |                                                   |            |                                                             |  |                                     |  |                                      |      |                          |  |            |  |   |      | 
|-------------------------------------- |  | ------------------------------------------------- | ---------- | ----------------------------------------------------------- |  | ----------------------------------- |  | ------------------------------------ | ---- | ------------------------ |  | ---------- |  | - | ---- | 
|                                       |  | Options outstanding                               |            | Options exercisable                                         | 
|                                       |  |                                                   |            |                                                             | 
|Range of
  exercise prices             |  | Number of
  options
  outstanding
  as of 9/30/06 |            | Weighted average
  remaining
  contractual life(in
  years) |  | Weighted
  average
  exercise price |  | Number
  exercisable as
  of 9/30/06 |      | Weighted
  average price | 
|                                       |  |                                                   |            |                                                             |  |                                     |  |                                      |      |                          | 
|Stock options issued @$0.19
  to $0.34 |  |                                                   | 77,301,262 |                                                             |  | 9.3                                 |  | $                                    | 0.28 |                          |  | 53,873,479 |  | $ | 0.28 | 

20

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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.

Warrants
outstanding as of September 30, 2006 are as follows:

|                                |  |                      |             |                                   |   |       | 
|------------------------------- |  | -------------------- | ----------- | --------------------------------- | - | ----- | 
|                                |  | Warrants Outstanding |            
|                                |  |                      |            
|                                |  | Shares               |             | Weighted Average
  Exercise Price |  
|                                |  |                      |             |                                   |  
|                                |  |                      |             |                                   |   |       | 
|Outstanding, July 1, 2006       |  |                      | 63,638,769  |                                   | $ | 0.166 | 
|                                |  |                      |             |                                   |   |       | 
|Granted                         |  |                      | 114,491,460 |                                   |   | 0.005 | 
|Cancelled                       |  |                      |            |                                   |   |      | 
|Exercised                       |  |                      |            |                                   |   |      | 
|                                |  |                      |             |                                   |   |       | 
|                                |  |                      |             |                                   |   |       | 
|Outstanding, September 30, 2006 |  |                      | 178,130,229 |                                   | $ | 0.063 | 
|                                |  |                      |             |                                   |   |       | 

At
September 30, 2006, the exercise prices and remaining contractual lives of
warrants are as follows:

|                                   |  |                                                    |             |                                                                |  |                                       |  |                                     |        |                            |  |             |  |  |        | 
|---------------------------------- |  | -------------------------------------------------- | ----------- | -------------------------------------------------------------- |  | ------------------------------------- |  | ----------------------------------- | ------ | -------------------------- |  | ----------- |  |  | ------ | 
|                                   |  | Warrants outstanding                               |             | Warrants exercisable                                           | 
|                                   |  |                                                    |             |                                                                | 
|Range of
  exercise prices         |  | Number of
  warrants
  outstanding
  as of 9/30/06 |             | Weighted
  average
  remaining
  contractual life
  (in years) |  | Weighted
  average
  exercise
  price |  | Number
  exercisable
  as of 7/1/06 |        | Weighted
  average
  price | 
|                                   |  |                                                    |             |                                                                |  |                                       |  |                                     |        |                            | 
|                                  
|Warrants issued @
  $.001 to $.230 |  |                                                    | 178,130,229 |                                                                |  | 6.8                                   |  |                                     | varies |                            |  | 178,130,229 |  |  | varies | 

9.
Convertible Securities

The
Company has insufficient shares of Common Stock authorized to allow for the
exercise of stock options or warrants, or allow the conversion of preferred
stock. As a result, under EITF 00-19, the Company is required to classify these
instruments as liabilities and remeasure the convertible securities at each
reporting period end based on fair value. The Company determines the fair value
of the convertible securities based on the number of shares common stock into
which they are convertible and the current fair value of the common stock on
the remeasurement date. Fair value of the Common Stock is determined based on actual
amounts paid for a share of Common Stock in a transaction closest to the
remeasurement date. The fair values of the Common Stock as of September 30,
2006 and July 1, 2006 were $0.28 and $0.39, respectively. The number of common
shares into which the convertible securities are convertible was 621,068,151
and 506,576,690 as of September 30, 2006 and July 1, 2006, respectively. As of
September 30, 2006, the Company remeasured the convertible securities based on
an estimated fair value of approximately

21

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$173.9 million
and recorded an unrealized gain of approximately $40.5 million for the three
months ended September 30, 2006.

10. Subsequent Events

Bridge financings

$4.0 Million Senior Subordinated Loans:

(a) $1.0
Million Senior Subordinated Secured Loan

The
Company entered into a Subordinated Securities Purchase Agreement (the Laurus
Purchase Agreement) with Laurus dated as of December 22, 2006, pursuant to
which the Company issued to Laurus (i) a Subordinated Secured Term Note in the
principal amount of $1.0 million (the Subordinated Secured Note); and (ii)
warrants (the Laurus Warrants) to purchase up to 10,000,000 shares (the
Warrant Shares), of the Company Common Stock. In the event the Subordinated
Secured Note is not repaid by April 30, 2007, the Company has agreed to issue
Laurus warrants with like terms to purchase an additional 8,750,000 shares of
Common Stock.

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

The
Laurus Warrants have a 7-year term and an exercise price equal to $0.001 per
share. The Laurus Warrants also provide that if the fair market value of one
share of Common Stock is greater than the exercise price Laurus may choose to
exercise the warrant on a cashless exercise basis resulting in an issuance of
net shares with no cash payment.

(b) $3.0
Million Senior Subordinated Loan

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

The
Senior Subordinated Loan is evidenced by a senior subordinated promissory note
dated December 22, 2006 (the Senior Subordinated Note) and bears interest at
annual rate equal to twelve

22

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percent (12%)
per annum of which 6% shall be paid in cash monthly, commencing 30 days from
the closing (subject to the provisions of the Subordination Agreement) and the
balance of 6% paid in kind and paid on the maturity date. The principal balance
and remaining accrued interest on the Senior Subordinated Note is due on
December 31, 2009

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

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

(c) $2,000,000 Senior Secured Loans

On
March 16, 2007, the Company executed four Senior Secured Notes in the aggregate
amount of $2,000,000 (North Sound Legacy International Ltd. $1,125,000, North
Sound Legacy Institutional Fund LLC $375,000, and, Seapine Investments, LLC
$375,000, each of whom is an existing stockholder of the Company, and Andrew D.
Lipman, a former director and existing stockholder $125,000). The Notes are due
on demand and bear interest at the prime rate in effect from time to time as
reported in the Wall Street Journal plus 2% and rank pari passu in payment
and security with the $25,000,000 of senior indebtedness of the Company issued
to Laurus made as of June 30, 2006.

(d) $2,000,000 Senior Secured Loans

On
March 27, 2007, the Company executed four additional Senior Secured Notes in
the aggregate amount of $2,000,000 (North Sound Legacy International Ltd.
$1,125,000, North Sound Legacy Institutional Fund LLC $375,000, and, Seapine
Investments, LLC $375,000, each of whom is an existing stockholder of the
Company, and Andrew D. Lipman, a former director and existing stockholder
$125,000). The Notes are due on demand and bear interest at the prime rate in
effect from time to time as reported in the Wall Street Journal plus 2% and
also rank pari passu in payment and security with the $25,000,000
of senior indebtedness of the Company issued to Laurus made as of June 30,
2006.

Default on Senior Secured Debt

On
March 8, 2007, Laurus, the holder of the Companys $25,000,000 in principal
amount of Senior Secured Debt and also the holder of $1,000,000 in principal
amount of Senior Subordinated Secured Debt, sent the Company a Notice of
Default and Acceleration accelerating the obligations due to Laurus under the
Secured Term Note issued as of June 30, 2006 and the Senior Subordinated Secured
Term Note issued as of December 22, 2006.

In
addition, the other $3,000,000 in principal of the Senior Subordinated Secured
Debt issued as of December 22, 2006 and $11,038,710 in principal of
Subordinated Debt of which $4,838,710 was issued as of May 9, 2006, $5,200,000
as of July 11, 2006, and $1,000,000 as of April 23, 2004, may be accelerated as
a result of the Notice of Default and Acceleration from Laurus. As a result of
this default, the Company has classified all the debt discussed above as
current as of September 30, 2006, in its Consolidated Balance Sheet.

23

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The
Company does not have sufficient funds to pay the amounts accelerated and
unless prompt arrangements can be made with Laurus or other sources of funds,
Laurus has the right to foreclose upon all of the assets of the Company. The
Company is currently in discussion with Laurus with respect to the obligations
accelerated by Laurus but no assurance can be given as to the outcome of such
discussions.

Impairment of Goodwill

As
a result of the notice of default received on the Senior Secured Debt on March
8, 2007 and the drop in the Company traded share price, the Company believes
that there has been an impairment to its goodwill. As of April 9, 2007, the
closing price of its Common Stock was $0.03. Due to its limited capital and
recent developments, the Company does not have the available funds to expend to
maintain this goodwill. As a result, the Company anticipates a charge of $18.1
million in its fiscal quarter ended December 30, 2006 to write-off all of its
goodwill.

Closing of Beverly Hills

On
February 8, 2006, the Company reached an agreement with the landlord at Beverly
Hills to surrender the leased property. Due to the limited capital and a revised
business plan, the Company is unable to complete the remodeling and re-open the
store. As a result of this agreement, the Company anticipates a charge of $0.6
million in the third quarter to write-off all of the net assets of the Beverly
Hills facility.

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

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

Unless
otherwise indicated in this Item 2, references to TrueYou refer to
TrueYou.Com Inc.; references to KAAI refer to Klinger Advanced Aesthetics,
Inc. and its consolidated subsidiaries; references to the we, our, ,
Company, and us refer to TrueYou.Com Inc. and its consolidated subsidiaries
(including KAAI), as applicable; and the terms fiscal quarter and three
months in this Quarterly Report on Form 10-Q refer to the quarter ended
September 30, 2006.

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
offer both medical and non-medical services and products to customers. We
co-brand our trade name with the trade names of the salons and spas that we
acquired. We offer our Cosmedicine skin care products at retail through our own
location and at wholesale through Sephora stores and the internet. We are
developing and testing the Klinger 360°
Best Practices Aesthetics System  (the K360), which to our knowledge is the
first comprehensive software and hardware practice management system that
facilitates the delivery of evidenced based best practices aesthetic
services. Our salons and spas share certain corporate resources such as senior
management and administrative services. We had 501 employees as of March 30,
2007 and 539 employees on September 30, 2006, respectively.

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

In
2006, we opened our two new flagship locations, the NorthPark flagship in
Dallas Texas, and the Chevy Chase flagship in Chevy Chase, Maryland. These
locations are the models that showcase our business

25

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strategy and
are used to advertise all our products and services. They have been developed
as fully integrated properties, in a new format which offers cosmetic
dermatology, spa and salon services, retail products, and the K360 system in a
luxurious upscale setting (the KAAI Model). These locations are located in
key markets. The complete listing of our store locations is as follows:

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

(A)
 There are currently three stores in Palm Beach

These
fully-integrated facilities feature cosmetic dermatology, skin care, cosmetic
medical consultations, hair care, spa and salon services, and retail products
on site, and cosmetic medical services provided by medical offices operated by
Johns Hopkins and UT Southwestern. We also participate in the Johns Hopkins
Cosmetic Safety Program in locations where they have visited the site and confirmed
that we are in compliance with their specifications. Johns Hopkins Medicine
provides clinical and safety oversight for our medical services. We have rights
to use the Johns Hopkins Medicine name in this regard and approved language is
used in our facilities and diagnostic software.

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

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

Our
financial statements have been prepared on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Since our inception, we have experienced
substantial operating losses and negative cash flow from operations. As of
September 30, 2006, we have an accumulated deficit of $190.6 million and a
working capital deficit of $39.4 million. Included in our net deficit at
September 30, 2006 is the remeasurement of convertible securities which
resulted in a cumulative liability in the amount $92.1 million. These factors
raise substantial doubt about our ability to continue as a going concern. Also,
as a result of our losses, the opinion of our Independent Registered Public
Accountants on our audited financial statements for fiscal year 2006 included
an explanatory paragraph relating to going concern. A going concern
explanatory paragraph indicates that our auditors believe there is substantial
doubt about our ability to continue as a going concern for at least a

26

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reasonable
period of time. Our ability to continue as a going concern ultimately depends
on our ability to increase sales and reduce expenses to a level that will allow
us to operate profitably and sustain positive operating cash flows and raise
additional capital.

Current Trends and
Outlook

We
have experienced significant challenges to raise sufficient capital to service
our ongoing debt obligations and continue our operations as presently
conducted. As discussed below (see Future Liquidity and Capital Needs), on
March 8, 2007 Laurus sent a notice of default relating to its $25.0 million
Secured Term Note and its $1.0 million Senior Subordinated Secured Term Note.
As a result of the this notice of default on the Senior Secured Debt and the
drop in the Company traded share price, we believe that there has been an
impairment to goodwill in our fiscal quarter ended December 30, 2006. As of
April 9, 2007, the closing price of the Companys Common Stock was $0.03. Due
to our limited capital and recent developments, the Company does not have
available funds to expend to maintain goodwill. We intend to record an $18.1
million expense in our fiscal quarter ended December 30, 2006 to write-off
all of our goodwill.

On
February 8, 2006, we reached an agreement with the landlord at our Beverly Hills
store to surrender the leased property. Due to our limited capital and revised
business plan, we are unable to complete the remodeling and re-open the store.
As a result of this agreement, we anticipate a net write-off of $0.6 million of
net assets in the third quarter.

We
have had a small net decline in revenues for the three months ended September
30, 2006 versus the three months ended October 1, 2005 due primarily to some
facilities experiencing lost revenue. We believe the reasons behind this trend
include our facility in Boca Raton that has not fully recovered from hurricane
damage that was sustained in October, 2005. This includes significant employee
turnover at this facility as a result of the damage sustained. There is no
clear indication if the facility will return to prior revenue levels without
significant resources added. We have permanently closed our Beverly Hills
location, that had been temporarily closed for renovations, due to the ongoing
rent expense and the significant capital investment it would have required to
re-open it. We are also experiencing declining revenues in some of our legacy
stores, due to limited capital. These losses were partially offset in the
quarter ended September 30, 2006 with the continued success of our Cosmedicine
products. With our sales of Cosmedicine at Sephora stores, KAAI locations and
on our respective websites, we believe that revenues generated from sales of
our Cosmedicine products will be a significant percentage of our aggregate
revenues going forward. We also plan to optimize the K360 system. The plan is
to license the software to clients for a modest fee and to have it serve as the
catalyst for the sale of our products and licensed services.

Revenue Sources

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently
  derive revenue from the following sources:                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Spa and Salon Services
   Our salon offerings include services such as hair styling, coloring,
  texturizing, treatments, extensions, make-up artistry and manicure/pedicures.
  Our spa services include treatments such as facials, body treatments
  (exfoliation, wraps, cellulite treatments), waxing and massage therapy. Spa
  and salon service revenue represented 59% and 67% of our total operating
  revenues for the three months ended September 30, 2006 and October 1, 2005,
  respectively.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Spa and
  salon services are provided at all our operating stores.                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Medical Services 
  Our medical offerings include injection services (Botox and Restylane),
  sclerotherapy (vein treatments), peels, microdermabrasion, permanent make-up,
  laser resurfacing and                                                                                                                                                                                                                                                                                                         

27

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | laser hair
  removal. Medical service revenue represented 5% and 8% of our total operating
  revenues for the three months ended September 30, 2006 and October 1, 2005,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Historically
  we have offered on-site and off-site medical services. All dermatology
  related procedures are performed on-site. For the on-site procedures, medical
  providers utilize space in our stores, having been provided a separate
  medical area with its own entrance and medical accessories. Prior to August
  2006, we also offered off-site medical services. These services consisted of
  cosmetic surgeries that were performed by the medical practitioners at a
  third party participating hospital. The on-site medical facility would
  provide the initial consultation, with the surgery performed off-site by the
  medical practitioner. We bill and collect all revenues and pay all expenses
  related to the medical services and pay the medical practitioners for their
  services. We no longer offer any off-site medical services as we have
  discontinued offering cosmetic surgeries.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | To generate
  our revenues for our medical segment, we enter into medical practitioner fee
  contracts with our medical practitioners where they receive a percentage of
  the revenue generated from the performance of their services. Depending upon
  the medical provider and the type of service that is delivered, the
  percentage varies from 30-70% for medical revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In all
  cases, physicians are contracted as consultants and not as employees. In most
  cases, the nurse practitioners are hired as employees. We do not generate any
  revenues from referring individuals to medical providers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Retail Product Sales
   Include sales of third party products and our Cosmedicine products through
  our own locations. Retail product sales revenue represented 24% of our total
  operating revenues for both the three months ended September 30, 2006 and
  October 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Our
  locations offer a variety of retail products including products for hair
  care, skin care, and make-up. Hair care product offerings include such brands
  as LOreal, Kerastase, and Bumble & Bumble. Skin care product offerings
  include such brands as DDF, Obagi, IS Clinical, MD Skincare, and La Therapie.
  Our make-up product offering consists of the brand NARS. Additionally many of
  our locations offer our private label skin care brands, Georgette Klinger and
  Cosmedicine. In general, different combinations of the products are offered
  at different locations. Our Cosmedicine products are sold at all our locations,
  however, and have become our largest retail brand, beginning in fiscal 2006.                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Wholesale
  Product Sales Include sales of our Cosmedicine products at Sephora stores and
  through the internet. These products were launched in fiscal 2006 and
  represented 12% of our total operating revenues for the three months ended
  September 30, 2006. Sephora, with whom we have a strategic relationship, is a
  subsidiary of LVMH, SA and L Capital is a private equity fund sponsored by
  LVMH, SA and, as a result, Sephora and L Capital are affiliates. Net revenue
  recognized on sales to Sephora was $0.9 million and $0 for the three months
  ended September 30, 2006 and October 1, 2005, respectively. Our decision to
  enter into a strategic alliance with Sephora was made independent of our
  relationship with L Capital.                                                                                                                                                             

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

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

Beginning
in fiscal year 2006, the Company began following the standard fiscal year of
the retail industry, which is a 52 or 53 week period, with the end of a period
being the closest Saturday to the end of a month.

Critical Accounting Estimates

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

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

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

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

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

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

29

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

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

Convertible
Securities:We remeasured our convertible securities
in compliance with EITF 00-19, based on the fair value of our Common Stock into
which they are convertible, since there are currently insufficient shares
authorized to allow conversion. The fair value of the Common Stock is based in
the price paid for a share of the stock closest to the measurement date. As of
September 30, 2006 the closing price for our Common Stock was $0.28. 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 $62 million. This fluctuation
would result in an impact to our net loss. As of April 9, 2007, the closing
price of our Common Stock was $0.03. 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 believe the impact of the adoption of FIN 48 will not be
significant to the Companys consolidated financial statements.

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

In
September 2006, the FASB issued SFAS 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment of FASB Statements
No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income. This guidance is
effective as of the end of the fiscal year for years ending after December 15,
2006. We believe the impact of the adoption of SFAS 158 will not be significant
to the Companys consolidated financial statements.

Results of Operations

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

30

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Three Months
Ended September 30, 2006 and October 1, 2005

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 30, 2006 and
October 1, 2005:

|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|----------------------- |  | -------------------- | ----- | ----------------- |  | ----------------------- | - | ---------------- | ----- |  |  | --- | - | - | ------ | - |  | --- | --
|In thousands            |  | Three Months Ended   |       |                   |  |                         |   |                  |      
|                        |  |                      |       |                   |  |                         |   |                  |      
|Unaudited               |  | September 30,
  2006 |       | October 1,
  2005 |  | Increase /
  (Decrease) |   | Percent
  Change |      
|                        |  |                      |       |                   |  |                         |   |                  |      
|Operating
  Revenues    |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|Services                |  | $                    | 4,648 |                   |  | 64                      | % | $                | 5,863 |  |  | 76  | % | $ | (1,215 | ) |  | (21 | %)
|Retail and wholesale    |  |                      | 2,614 |                   |  | 36                      | % |                  | 1,902 |  |  | 24  | % |   | 712    |   |  | 37  | % 
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|Total Operating Revenue |  | $                    | 7,262 |                   |  | 100                     | % | $                | 7,765 |  |  | 100 | % | $ | (503   | ) |  | (6  | %)
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|                       
|Cost of
  Revenue       |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|Services                |  | $                    | 2,919 |                   |  | 40                      | % | $                | 3,388 |  |  | 44  | % | $ | (469   | ) |  | (14 | %)
|Retail and wholesale    |  |                      | 1,064 |                   |  | 15                      | % |                  | 788   |  |  | 10  | % |   | 276    |   |  | 35  | % 
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|Total Cost of Revenue   |  | $                    | 3,983 |                   |  | 55                      | % | $                | 4,176 |  |  | 54  | % | $ | (193   | ) |  | (5  | %)
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|                       
|Gross
  Margin          |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|Services                |  | $                    | 1,729 |                   |  | 24                      | % | $                | 2,475 |  |  | 32  | % | $ | (746   | ) |  | (30 | %)
|Retail and wholesale    |  |                      | 1,550 |                   |  | 21                      | % |                  | 1,114 |  |  | 14  | % |   | 436    |   |  | 39  | % 
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   
|Total Gross Margin      |  | $                    | 3,279 |                   |  | 45                      | % | $                | 3,589 |  |  | 46  | % | $ | (310   | ) |  | (9  | %)
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |        |   |  |     |   

Revenue

The
results of such sources for the three months ended September 30, 2006 and
October 1, 2005 are as follows:

|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |      |   |  |     |   
|----------------------- |  | -------------------- | ----- | ----------------- |  | ----------------------- | - | ---------------- | ----- |  |  | --- | - | - | ---- | - |  | --- | --
|In thousands            |  | Three Months Ended   |       |                   |  |                         |   |                  |      
|                        |  |                      |       |                   |  |                         |   |                  |      
|                        |  | September 30,
  2006 |       | October 1,
  2005 |  | Increase /
  (Decrease) |   | Percent
  Change |      
|                        |  |                      |       |                   |  |                         |   |                  |      
|Operating
  Revenues    |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |      |   |  |     |   
|Spa and salon services  |  | $                    | 4,296 |                   |  | 59                      | % | $                | 5,209 |  |  | 67  | % | $ | (913 | ) |  | (18 | %)
|Retail products         |  |                      | 1,710 |                   |  | 24                      | % |                  | 1,902 |  |  | 25  | % |   | (192 | ) |  | (10 | %)
|Wholesale products      |  |                      | 904   |                   |  | 12                      | % |                  |      |  |  |    |   |   | 904  |   |  |    |   
|Medical services        |  |                      | 352   |                   |  | 5                       | % |                  | 654   |  |  | 8   | % |   | (302 | ) |  | (46 | %)
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |      |   |  |     |   
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |      |   |  |     |   
|Total Operating Revenue |  | $                    | 7,262 |                   |  | 100                     | % | $                | 7,765 |  |  | 100 | % | $ | (503 | ) |  | (6  | %)
|                        |  |                      |       |                   |  |                         |   |                  |       |  |  |     |   |   |      |   |  |     |   

Revenue
for the three months ended September 30, 2006 was $7.3 million compared to $7.8
million for the three months ended October 1, 2005, a decrease of $0.5 million.
All revenues during the two quarters were derived from the U.S. The slight
decrease in revenue was primarily due to a $0.9 million decrease in

31

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service
revenue, comprised of spa and salon services, and the decrease of medical
services of $0.3 million. The decrease was primarily due to the Boca Raton
location which has not fully recovered from the major hurricane which hit in
October 2005. The combination of damages and employee turnover led to a
significant loss of the pre-existing customer base. The decrease in spa and
service revenue was $0.7 million for this location versus the three months
ended October 1, 2005. In addition, we have decided to permanently close the
Beverly Hills location that had been temporarily closed for remodeling. There
were no revenues from this location in the three months ended September 30,
2006 versus $0.2 million for the three months ended October 1, 2005. We have
also experienced a slight decline in several of our other legacy stores due to
the limited capital available to maintain or increase the revenue base. These
decreases were partially offset by wholesale product sales of $0.9 million for
the three months ended September 30, 2006, from the Cosmedicine products sold
to Sephora.

Cost of Revenue

Cost
of revenue decreased to $4.0 million for the three months ended September 30,
2006 from $4.2 million for the year ended June 30, 2005, a decrease of $0.2
million. Cost of revenue was consistent from year to year as it represented 55%
and 54% of operating revenues for the three months ended September 30, 2006 and
October 1, 2005, respectively.

Gross Margin

Gross
margin was 45% for the three months ended September 30, 2006 compared to 46%
for the three months ended October 1, 2005. The slight decline in gross margins
was due to higher payroll and commission structures which were partially offset
by the launch of our Cosmedicine product line.

Operating Expenses

The
following table compares our operating expenses for the three months ended
September 30, 2006 and October 1, 2005:

|                                 |  |                      |        |                   |   |                         |  |                  |       |   |  |      |   
|-------------------------------- |  | -------------------- | ------ | ----------------- | - | ----------------------- |  | ---------------- | ----- | - |  | ---- | --
|In thousands                     |  | Three Months Ended   |        |                   |   |                         |  |                  |      
|                                 |  |                      |        |                   |   |                         |  |                  |      
|                                 |  | September 30,
  2006 |        | October 1,
  2005 |   | Increase /
  (Decrease) |  | Percent
  Change |      
|                                 |  |                      |        |                   |   |                         |  |                  |      
|Operating
  Expenses             |  |                      |        |                   |   |                         |  |                  |       |   |  |      |   
|                                
|Share based compensation expense |  | $                    | 4,181  |                   | $ |                        |  | $                | 4,181 |   |  |     |   
|Payroll                          |  |                      | 3,394  |                   |   | 2,132                   |  |                  | 1,262 |   |  | 59   | % 
|Depreciation and amortization    |  |                      | 1,166  |                   |   | 1,109                   |  |                  | 57    |   |  | 5    | % 
|                                
|Loss on disposal of fixed assets |  |                      | 171    |                   |   |                        |  |                  | 171   |   |  |     |   
|Occupancy                        |  |                      | 1,635  |                   |   | 1,284                   |  |                  | 351   |   |  | 27   | % 
|Insurance                        |  |                      | 892    |                   |   | 559                     |  |                  | 333   |   |  | 60   | % 
|Equipment leasing                |  |                      | 109    |                   |   | 51                      |  |                  | 58    |   |  | 114  | % 
|Travel and entertainment         |  |                      | 484    |                   |   | 316                     |  |                  | 168   |   |  | 53   | % 
|Professional fees                |  |                      | 2,440  |                   |   | 1,725                   |  |                  | 715   |   |  | 41   | % 
|Office Expenses                  |  |                      | 303    |                   |   | 149                     |  |                  | 154   |   |  | 103  | % 
|Advertising and marketing        |  |                      | 783    |                   |   | 467                     |  |                  | 316   |   |  | 68   | % 
|Credit card fees                 |  |                      | 160    |                   |   | 203                     |  |                  | (43   | ) |  | (21  | %)
|Postage and delivery             |  |                      | 139    |                   |   | 67                      |  |                  | 72    |   |  | 107  | % 
|Telephone                        |  |                      | 106    |                   |   | 93                      |  |                  | 13    |   |  | 14   | % 
|Training and education           |  |                      | 144    |                   |   | 75                      |  |                  | 69    |   |  | 92   | % 
|Management fees                  |  |                      |       |                   |   | 230                     |  |                  | (230  | ) |  | (100 | %)
|Other                            |  |                      | 207    |                   |   | 621                     |  |                  | (414  | ) |  | (67  | %)
|                                 |  |                      |        |                   |   |                         |  |                  |       |   |  |      |   
|                                
|Total Operating Expenses         |  | $                    | 16,314 |                   | $ | 9,081                   |  | $                | 7,233 |   |  | 80   | % 
|                                 |  |                      |        |                   |   |                         |  |                  |       |   |  |      |   

32

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Operating
expenses were $16.3 million for the three months ended September 30, 2006
compared to $9.1 million for the three months ended October 1, 2005, an
increase of $7.2 million. The increase of 80.0% was primarily due to due to a $4.2
million increase in stock option expense under SFAS No. 123R related primarily
to the September 18, 2006 option grants and remeasurement, an increase of $0.7
million in professional fees for accounting, legal, information technology,
inventory management services, software development, and public relations; a
$1.3 million increase in payroll due to a $0.4 increase in severance expense,
and the addition of several senior management level officers; a $0.4 million
increase in occupancy expenses due to the new leases on the flagship stores and
headquarters versus the prior leases on the old locations, and $0.3 million
increase in advertising and marketing due primarily to an agreement made after
the end of the quarter to provide 1,760,925 shares of Common stock to a vendor
in settlement of a prior unfulfilled contract.

Non-operating Expenses

The following table compares our non-operating expenses for the three
months ended September 30, 2006 and October 1, 2005:

|                                          |  |                      |         |                   |   |                         |  |                  |         |   |  |        |   
|----------------------------------------- |  | -------------------- | ------- | ----------------- | - | ----------------------- |  | ---------------- | ------- | - |  | ------ | --
|In thousands                              |  | Three Months Ended   |         |                   |   |                         |  |                  |        
|                                          |  |                      |         |                   |   |                         |  |                  |        
|                                          |  | September 30,
  2006 |         | October 1,
  2005 |   | Increase /
  (Decrease) |  | Percent
  Change |        
|                                          |  |                      |         |                   |   |                         |  |                  |        
|Non-operating
  (Income) Expenses         |  |                      |         |                   |   |                         |  |                  |         |   |  |        |   
|Interest expense, net                     |  | $                    | 2,678   |                   | $ | 1,101                   |  | $                | 1,577   |   |  | 143    | % 
|Unrealized gain on convertible securities |  |                      | (40,536 | )                 |   |                        |  |                  | (40,536 | ) |  |       |   
|Registration rights penalties             |  |                      | 1,162   |                   |   |                        |  |                  | 1,162   |   |  |       |   
|                                          |  |                      |         |                   |   |                         |  |                  |         |   |  |        |   
|                                         
|Total Non-operating (Income) Expense      |  | $                    | (36,696 | )                 | $ | 1,101                   |  | $                | (37,797 | ) |  | (3,433 | %)
|                                          |  |                      |         |                   |   |                         |  |                  |         |   |  |        |   

Interest
Expense, net

Interest
expense was $2.7 million for the three months ended September 30, 2006 compared
to $1.1 million for the three months ended October 1, 2005. The increase of
$1.6 million was caused primarily by the write-off the unamortized discount and
financing costs on the loan with Technology Investment Capital Corp of $0.9
million and $0.2 million, respectively, upon the early repayment. Interest
expense also increased due to the increase in debt levels in the quarter ended
September 30, 2006 versus October 1, 2005, due to the new financing.

Unrealized Loss on
Convertible Securities

On
December 20, 2005, as a result of the Share Exchange Agreement, the Company
recorded the convertible securities at $65 million, which represented the
carrying amount of the convertible securities issued under the arrangement.
Since the securities issued are convertible into common shares and the Company
did not have sufficient authorized shares to allow for that conversion, under
EITF 00-19 the Company was required to reclassify these amounts as liabilities
and remeasure them to fair value at each reporting period end. The Company
remeasures the convertible securities at the end of each reporting period based
on the share price of the Trueyou Common Stock closest to the period end. At
July 1, 2006 the share price was multiplied by the number of common shares into
which the convertible securities were convertible,

33

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which was
506,576,690 as of that date. The per share trading value as of July 1, 2006 was
$0.39, which resulted in an estimated fair value of the convertible securities
of $197.6 million. During the three months ended September 30, 2006, the
Company added 114,491,460 warrants issued with debt. As of September 30, 2006,
the number of common shares into which the convertible securities were
convertible was 621,068,151 as of that date. The per share trading value as of
September 30, 2006 was $0.28, which resulted in an estimated fair value of the
convertible securities of $173.9 million. The Company recorded an unrealized
gain of approximately $40.5 million for the three months ended September 30,
2006.

Registration Rights Penalties

The
Company incurred penalties of $1.2 million for the three month ended September
30, 2006. The penalties are due to failure to meet conditions included in
registration rights agreements with various stockholders.

Dividends Accrued on Preferred Stock

Dividends
accrued on preferred stock were $0.4 million for the three months ended
September 30, 2006 as compared to $0.5 million for the three months ended
October 1, 2005. The decrease was due to the forfeiture of dividends accrued on
preferred stock which was converted into KAAIs common stock and subsequently
exchanged for TrueYou Series B Preferred Stock.

Financial Condition, Liquidity and Capital
Resources

Net
cash used in operating activities was $15.3 million and $4.2 million for the
three months ended September 30, 2006 and October 1, 2005, respectively. This
deterioration of cash flows resulted primarily from an operating loss of $13.0
million for the three months ended September 30, 2006 versus an operating loss
of $5.5 million for three months ended October 1, 2005 and the significant
amount of trade payables that were paid after the financing was received in the
three months ended September 30, 2006.

Net
cash used in investing activities was $0.8 million and $0.6 million for the
three months ended September 30, 2006 and October 1, 2005, respectively. The
increase is primarily due to capital expenditures.

Cash
flows provided by financing activities were $19.3 million and $13.6 million for
the three months ended September 30, 2006 and October 1, 2005, respectively.
For the three months ended September 30, 2006, financing activities were
primarily the $20.2 net increase in debt due to the new financing, offset by
the $0.9 million debt closing costs. For the three months ended October 1,
2005, cash flows from financing activities were primarily the result of the
$10.1 million gross issuance of our KAAI Series G Preferred Stock and $4.8
million gross from issuance of KAAI Series F Preferred Stock, which was
subsequently exchanged for Series H Preferred Stock.

Future Liquidity and Capital Needs

Since
its inception, the Company has experienced operating losses and negative cash
flow from operations. As of September 30, 2006, we had a cumulative deficit of
$190.6 million and a working capital deficiency of $39.4 million. Included in
our net deficit at September 30, 2006 is the remeasurement of convertible
securities which resulted in a cumulative liability in the amount $92.1
million. These factors raise substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is ultimately
dependent on our ability to increase sales and reduce expenses to a level that
will allow us to operate profitably and sustain positive operating cash flows
and raise additional capital. The financial statements do not include any
adjustments to reflect the outcome of this uncertainty. We have had
several recent financings as described in this Report, with the most recent completed on March 27, 2007. These financings
are not sufficient and we are currently
seeking to raise additional
capital.

34

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On
March 8, 2007, Laurus sent the Company a Notice of Default and Acceleration
accelerating the obligations due to Laurus under the $25.0 million Secured Term
Note issued as of June 30, 2006 and the $1.0 million Senior Subordinated
Secured Term Note issued as of December 22, 2006. In addition, the other
$3,000,000 in principal of the Senior Subordinated Secured Debt issued as of
December 22, 2006 and $11,038,710 in principal of Subordinated Debt of which
$4,838,710 was issued as of May 9, 2006, $5,200,000 as of July 11, 2006, and
$1,000,000 as of April 23, 2004, may be accelerated as a result of the Notice
of Default and Acceleration from Laurus.

The
Company does not have sufficient funds to pay the amounts accelerated and
unless prompt arrangements can be made with Laurus or other sources of funds,
Laurus has the right to foreclose upon all of the assets of the Company. We are
currently in discussion with Laurus with respect to the obligations accelerated
by Laurus but no assurance can be given as to the outcome of such discussions.

There
can be no assurance we will be able to obtain sufficient capital to enable us
to achieve our operational objectives. We need to obtain capital to continue to
invest in the core growth assets. Failure to raise such capital will severely
limit our ability to grow and service our ongoing debt obligations and may result in our inability to
continue our operations as presently conducted.

Our
principal future uses of funds are for debt service, working capital
requirements, and capital spending to execute our strategy. It is expected that
our net losses will continue at least through the end of fiscal year 2008.

Financings Subsequent to End of Fiscal
Quarter

On
December 22, 2006, we entered into the Laurus Purchase Agreement with Laurus,
pursuant to which we issued to Laurus a senior subordinated secured term note
in the principal amount of $1.0 million and a Senior Subordinated Loan
Agreement with senior subordinated lenders, pursuant to which the senior
subordinated lenders loaned us $3.0 million.

On
March 16, 2007, we executed four Senior Secured Notes with existing
stockholders in the aggregate amount of $2.0 million and on March 27, 2007, we
executed four additional Senior Secured Notes with existing stockholders in the
aggregate amount of $2.0 million.

Contractual Obligations

As
of September 30, 2006, our contractual obligations were as follows:

|                          |  |        |  |                        |  |           |       |           |       |                   |       |  | 
|------------------------- |  | ------ |  | ---------------------- |  | --------- | ----- | --------- | ----- | ----------------- | ----- |  | 
|                          |  |        |  | Payments Due by Period | 
|                          |  |        | 
|Contractual
  Obligations |  | Total  |  | Less than 1 Year       |  | 1-3 Years |       | 3-5 Years |       | More than 5 Years |      
|                          |  |        |  |                        |  |           |       |           |       |                   |      
|                         
|Operating leases          |  | 24,588 |  | 3,859                  |  |           | 9,165 |           | 6,995 |                   | 4,569 |  | 
|Capitalized leases        |  | 362    |  | 207                    |  |           | 155   |           |      |                   |      |  | 
|Long-term debt (1)        |  | 36,039 |  | 36,039                 |  |           |      |           |      |                   |      |  | 
|Consulting obligation (2) |  | 1,427  |  | 702                    |  |           | 621   |           | 104   |                   |      |  | 
|                          |  |        |  |                        |  |           |       |           |       |                   |       |  | 
|Totals                    |  | 62,416 |  | 40,807                 |  |           | 9,941 |           | 7,099 |                   | 4,569 |  | 
|                          |  |        |  |                        |  |           |       |           |       |                   |       |  | 

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

35

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Off Balance Sheet
Arrangements

We
do not have any off balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

Market
risk represents the risk of loss that may impact our consolidated financial
position, results of operations or cash flows. We are exposed to market risk
associated with changes in interest rates. Our cash resources earned interest
at variable rates and, therefore, our return on these funds is affected by
fluctuations in interest rates. There have been no changes in interest rates
that would have a material impact on our consolidated financial position,
results of operations or cash flows for the three months ended
September 30, 2006.

Convertible
Securities:We remeasured our convertible securities
in compliance with EITF 00-19, based on the fair value of our Common Stock into
which they are convertible, since there are currently insufficient shares
authorized to allow conversion. The fair value of the Common Stock is based on
the 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. 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 $62 million. This
fluctuation would result in an impact to our net loss. As of April 9, 2007, the
closing price of our Common Stock was $0.03. 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 Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures are not effective for the
reasons specified below.

Material Weaknesses

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

The
material weaknesses identified by Amper were (A) inadequate resources in the
accounting functions; (B) inadequate controls over cash management; (C)
inadequate controls over computer information; and (D) inadequate anti-fraud
program. More specifically, Amper identified among other things, material
weaknesses in the processes and procedures associated with our preparation and review of account
reconciliations, monitoring of financial results, application of accounting
principles, control over cash management, communication between departments, inventory management and valuation, vendor
management and segregation of duties, and anti-fraud program. Examples
of the issues identified include,

36

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among many
others, inadequate segregation of duties, insufficient staffing in the
accounting department, failure to reconcile or analyze accounts, lack of
effective review of the reconciliations and analysis that are prepared and, in
some instances, poor design of controls and poor compliance with existing
policies and procedures, and no whistle blower hotline.

Remediation of Material Weaknesses

In
order to remediate these weaknesses, we have retained another accounting firm
in which members of that firms accounting staff have worked under the
supervision of our Chief Financial Officer. The Company has also retained an
information technology firm to upgrade operating, financial and accounting
systems which is expected to further improve the control environment. In
addition, On May 1, 2006, we appointed a new Chief Financial Officer and in
August 2006 we hired a Controller. We are also working to integrate our
inventory system to improve our controls over inventory and related areas. We
have made progress to remediate identified internal control deficiencies and to
establish adequate internal controls over financial reporting during the
quarter ended September 30, 2006. The above remedial actions have not been in
place long enough to have been tested and will be assessed for their adequacy
on a continuous basis.

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

PART II. OTHER INFORMATION

|        |                  
|------- | -----------------
|Item 5. | Legal Proceedings

UBS Lawsuit

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

|        |         
|------- | --------
|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).

37

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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: April 16, 2007 | By:              | /s/ Matthew Burris                     
|                     |                  |                                        
|                     |                  | Matthew Burris                         
|                     |                  | Chief Financial Officer                
|                     |                  |                                        
|                     | TRUEYOU.COM INC.
|                     |                  |                                        
|Date: April 16, 2007 | By:              | /s/ James OCrowley III                
|                     |                  |                                        
|                     |                  | James OCrowley III                    
|                     |                  | President and Chief Executive
  Officer

38

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EXHIBIT INDEX

Description

|              |                                                                                                                                                          
|------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  No. | Description                                                                                                                                              
|              |                                                                                                                                                          
|              |                                                                                                                                                          
|10.1          | Secured
  Demand Note issued by TrueYou.Com Inc. in the sum of $1,125,000 to North
  Sound Legacy International Ltd. dated March 16, 2007.               
|              |                                                                                                                                                          
|10.2          | Secured
  Demand Note issued by TrueYou.Com Inc. in the sum of $375,000 to North Sound
  Legacy Institutional Fund LLC dated March 16, 2007.             
|              |                                                                                                                                                          
|10.3          | Secured
  Demand Note issued by TrueYou.Com Inc. in the sum of $1,125,000 to North
  Sound Legacy International Ltd. dated March 27, 2007.               
|              |                                                                                                                                                          
|10.4          | Secured
  Demand Note issued by TrueYou.Com Inc. in the sum of $375,000 to North Sound
  Legacy Institutional Fund LLC dated March 27, 2007.             
|              |                                                                                                                                                          
|10.5          | Secured
  Demand Note issued by TrueYou.Com Inc. in the sum of $375,000 to Seapine
  Investments, LLC dated March 16, 2007.                              
|              |                                                                                                                                                          
|10.6          | Secured
  Demand Note issued by TrueYou.Com Inc. in the sum of $125,000 to Andrew D.
  Lipman dated March 16, 2007.                                      
|              |                                                                                                                                                          
|10.7          | Secured
  Demand Note issued by TrueYou.Com Inc. in the sum of $375,000 to Seapine
  Investments, LLC dated March 27, 2007.                              
|              |                                                                                                                                                          
|10.8          | Secured
  Demand Note issued by TrueYou.Com Inc. in the sum of $125,000 to Andrew D.
  Lipman dated March 27, 2007.                                      
|              |                                                                                                                                                          
|10.9          | Intercreditor
  and Collateral Agency Agreement dated March 16, 2007 among Laurus Master
  Fund, Ltd., North Sound Legacy International Ltd., North Sound

---



|      |                                                                                                                                                                                                                                                              
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | Legacy
  Institutional Fund LLC, Andrew D. Lipman and Seapine Investments LLC.                                                                                                                                                                               
|      |                                                                                                                                                                                                                                                              
|10.10 | Amended and Restated Intercreditor and Collateral Agency Agreement
  dated March 27, 2007 among Laurus Master Fund, Ltd., North
  Sound Legacy International Ltd., North Sound Legacy Institutional Fund LLC,
  Andrew D. Lipman and Seapine Investments LLC.
|      |                                                                                                                                                                                                                                                              
|10.11 | Form of
  Unconditional Guaranty and Security Agreement of TrueYou subsidiaries to
  North Sound Legacy International Ltd., North Sound Legacy Institutional Fund
  LLC, Andrew D. Lipman and Seapine Investments LLC.                                       
|      |                                                                                                                                                                                                                                                              
|31.1  | Rule
  13a-14(a)/15d-14(a) Certification of Principal Executive Officer.                                                                                                                                                                                     
|      |                                                                                                                                                                                                                                                              
|31.2  | Rule
  13a-14(a)/15d-14(a) Certification of Principal Financial Officer.                                                                                                                                                                                     
|      |                                                                                                                                                                                                                                                              
|32.1  | Section 1350
  Certification of Principal Executive Officer and Principal Financial Officer.                                                                                                                                                                 

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