UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, ~~D.C.~~ DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 30, 2006

For the quarterly period ended April 1, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____

~~For~~TrueYou.Com ~~the~~Inc.(Exact ~~transition~~name ~~period~~of ~~from~~registrant ~~______________ to~~as ~~______________~~specified in its charter)

Commission file number 000-51158


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)

~~TRUEYOU.COM INC.~~ (~~Exact name~~203)295-2121(Registrant’s oftelephone ~~registrant~~number, including asarea ~~specified in its charter~~code)

Delaware		13-4024017
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)
Building No. 501, Fifth Floor, 7 Corporate Park, Norwalk, CT 06851
(Address of principal executive offices with zip code)

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

~~Registrant’s~~Indicate ~~Telephone~~by ~~Number~~check ~~Including~~mark whether ~~Area~~the registrant (1) has filed all reports required to be filed by ~~Code:~~Section 13 or 15(~~203~~d) ~~295-2121~~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

~~501~~Indicate ~~Madison~~by ~~Avenue,~~check ~~Suite~~mark whether ~~407~~the registrant is a large accelerated filer, ~~New~~an ~~York~~accelerated filer, ~~New~~or ~~York~~a non-accelerated ~~10022~~filer. ~~Former~~See ~~Name,~~definition ~~Former~~of ~~Address~~“accelerated filer and ~~Former~~large accelerated ~~Fiscal~~filer” ~~Year,~~in ifRule ~~Changed~~12b-2 ~~Since~~of ~~Last~~the ~~Report~~Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the ~~Registrant~~registrant ~~(1)~~is ~~has~~a ~~filed~~shell ~~all~~company ~~reports required to be filed by Section 13 or 15~~(d)as ofdefined ~~the~~in ~~Securities~~Rule ~~Exchange~~12b-2 ~~Act~~ of ~~1934 during~~ the ~~preceding~~Exchange ~~12 months (or for such shorter period that the Registrant was required to file such reports~~Act)~~, and (2) has been subject to such filing requirements for the past 90 days~~. ~~Yes~~ ~~x No~~ Yes o No x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No 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 ~~July~~ 12June 15, ~~2006~~2007 was 14 16,~~995~~756,~~513~~438.

~~TRUEYOU.COM INC.~~TABLE OF CONTENTS

Table of Contents


		Page

PART I	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of December 30, 2006 (unaudited) and July 1, 2006	1

	Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended December 30, 2006 and December 31, 2005	3

	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended December 30, 2006 and December 31, 2005	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	45


PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 6.	Exhibits	46

SIGNATURES		47

EXHIBIT INDEX

PART I.		FINANCIAL INFORMATION	1
	Item 1.	Financial Statements.	1
		Condensed Consolidated Balance Sheets as of April 1, 2006 (unaudited) and June 30, 2005 (As Restated)	1
		Condensed Consolidated Statements of Operations (unaudited) for the three months and nine months ended April 1, 2006 and March 31, 2005	3
		Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended April 1, 2006 and March 31, 2005	4
		Notes to Condensed Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk.	39
	Item 4.	Controls and Procedures.	39
PART II.		OTHER INFORMATION	41
	Item 4	Submission of matters to vote of Securityholders.
	Item 5	Other Information.	41
	Item 6.	Exhibits.	41
SIGNATURES			43
EXHIBIT INDEX			44

PART I. FINANCIAL INFORMATION

~~-i-~~Item 1. Financial Statements

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements.

TrueYou.Com Inc.
Condensed Consolidated Balance Sheets

	As of
	April 1,			June 30,
	December 30,			July 1,
	2006			2005
In thousands, except share and per share amounts	2006			2006
In thousands, except share and per share amounts	(Unaudited)			(As Restated)
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	32,~~494~~814		$	~~173~~189
Restricted cash, current portion		1,~~212~~616			1,~~228~~602
Accounts receivable, net		~~966~~413			~~244~~137
Inventories		2,361			1,977
Inventories, net		2,207			2,214
Other current assets		938			501
Prepaid Interest		1,226			—
Total current assets		8,971			4,123
Other current assets		1,485			1,009
Property and equipment, net		9,112			6,561
Total current assets		9,761			5,151
Other assets		526			392
Property and equipment, net		12,748			12,981
Deferred financing costs, net		264			330
Other assets		899			855
Restricted cash, non-current portion		1,479			369
Deferred financing costs, net		1,108			242
Restricted cash, non-current portion		786			845
Goodwill		18,072			18,072
Other intangibles, net		54,~~490~~137			75,~~116~~025
Total assets	$	4347,~~914~~511		$	3643,~~963~~171
Liabilities and Shareholders’ deficit:
Liabilities:
Current liabilities:
Cash overdraft	$	—		$	163
Accounts payable	$	7,225		$	7,984
Accounts payable		3,989			3,641
Accrued expenses and other current liabilities		19,928			16,449
Accrued expenses and other current liabilities		10,830			9,915
Deferred revenue		9,418			8,273
Deferred revenue		8,673			8,882
Current portion of long term debt (net of debt discount of $18.0 million and $0 as of December 30, 2006, and July 1, 2006 respectively)		22,066			5,839
Current portion of long term debt		—			744
Senior Debt Current (net of debt discount of $0.9 million as of July 1, 2006)		—			9,146
Senior Debt Current (net of debt discount of $0.931 million as of April 1, 2006)		9,069			—
Total current liabilities		58,637			47,691
Total current liabilities		32,561			23,345
Convertible securities		122,826			197,565
Senior debt (net of debt discount of $1.164 million as of June 30, 2005)		—			8,836
Other long term liabilities		9,439			7,829
Senior subordinated debt (net of debt discount $1.234 million as of June 30, 2005)		—			12,066
Total liabilities		190,902			253,085
Other long term debt (net of current portion)		1,000			7,061
Commitments and contingencies
Convertible securities		349,631			11,684
Other long term liabilities		7,645			9,780
Total liabilities		390,837			72,772
Minority Interest in KAAI		135			135
Shareholders’ deficit:
Common stock, par value $0.001, authorized 20,000,000; issued and outstanding 14,995,513 as of April 1, 2006 and June 30, 2005, respectively		15			15
Common stock, par value $0.001, authorized 20,000,000; issued and outstanding 14,995,513		15			15
Additional paid-in capital		32,~~755~~446			34,~~782~~347
Accumulated deficit		(145,852	)		(214,276	)

	As of
	April 1,			June 30,
	December 30,			July 1,
	2006			2005
In thousands, except share and per share amounts	2006			2006
In thousands, except share and per share amounts	(Unaudited)			(As Restated)
Total shareholders’ deficit		(143,391	)		(209,914	)
Accumulated deficit		(350,828	)		(39,741	)
Total liabilities and shareholders’ deficit	$	47,511		$	43,171
Total shareholders’ deficit		(346,923	)		(35,809	)
Total liabilities and shareholders’ deficit	$	43,914		$	36,963

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

-2-

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

	Nine Months Ended						Three Months Ended
	Three Months Ended						Six Months Ended
	April 1,			March 31,			April 1,			March 31,
In thousands, except share and per share amounts	December 30, 2006			December 31, 2005			December 30, 2006			December 31, 2005
In thousands, except share and per share amounts	2006			2005			2006			2005
Revenues:
Service	$	185,~~446~~176		$	196,~~198~~091		$	69,~~492~~824		$	711,~~008~~954
Retail		7,355			5,641			3,991			1,794
Retail and wholesale products		2,001			1,462			4,615			3,364
Total Revenue		257,~~801~~177			247,~~839~~553			1014,~~483~~439			815,~~802~~318
Cost of Revenue:
Service		103,~~805~~638			103,~~312~~472			36,~~945~~557			36,~~422~~860
Retail		2,593			2,236			1,233			761
Retail and wholesale products		679			572			1,743			1,360
Total Cost of Revenue		134,~~398~~317			124,~~548~~044			58,~~178~~300			48,~~183~~220
Gross margin		122,~~403~~860			123,~~291~~509			56,~~305~~139			47,~~619~~098
Selling, general and administrative expenses		29,468			21,055			10,985			6,800
Stock based compensation (income) expense		(3,169	)		150			1,012			150
Depreciation and amortization		3,141			2,771			873			953
Selling, general and administrative expenses		10,733			10,333			21,700			18,305
Total operating expenses		32,609			23,826			11,858			7,753
Depreciation and amortization		1,135			1,160			2,301			2,269
Operating loss		(20,206	)		(11,535	)		(6,553	)		(3,134	)
Total operating expenses		8,699			11,643			25,013			20,724
Interest expense, net		3,391			2,974			348			1,064
Operating loss		(5,839	)		(8,134	)		(18,874	)		(13,626	)
Unrealized loss on convertible securities		284,749			—			147,000			—
Interest expense, net		1,706			1,969			4,384			3,070
Loss before income tax provision		(308,346	)		(14,509	)		(153,901	)		(4,198	)
Registration rights penalties		1,162			—			2,324			—
Income tax provision (benefit)		—			—			—			—
Unrealized (gain) loss on convertible securities		(53,470	)		137,749			(94,006	)		137,749
Net loss		(308,346	)		(14,509	)		(153,901	)		(4,198	)
Income (loss) before income tax provision		44,763			(147,852	)		68,424			(154,445	)
Dividends on preferred stock		769			1,023			407			376
Income tax provision		—			—			—			—
Net loss applicable to common shareholders	$	(309,115	)	$	(15,532	)	$	(154,308	)	$	(4,574	)
Net income (loss)		44,763			(147,852	)		68,424			(154,445	)
Basic and diluted loss per common share:	$	(20.61	)	$	(1.04	)	$	(10.29	)	$	(0.31	)
Accrual / (forfeitures) of dividends on preferred stock		383			(102	)		765			362
Net income (loss) applicable to common shareholders	$	44,380		$	(147,750	)	$	67,659		$	(154,807	)
Basic and diluted income (loss) per common share:	$	2.96		$	(9.85	)	$	4.51		$	(10.32	)
Weighted average common shares outstanding, basic and diluted		14,995,513			14,995,513			14,995,513			14,995,513

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

-3-

TrueYou.Com Inc. ~~Condensed~~ Consolidated Statements of Cash Flows(Unaudited)

(unaudited)


	Six Months Ended

*In thousands*	December 30, 2006			December 31, 2005

Cash flows from operating activities:
Net income (loss)	$	68,424		$	(154,445	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		2,300			2,268
Loss on disposals		171			35
Amortization of deferred financing costs		153			44
Amortization of debt discount		1,294			—
Stock based compensation (income) expense		(1,012	)		150
Non-cash interest expense		1,753			1,389
Unrealized (gain) loss on convertible securities		(94,006	)		137,749
Changes in operating assets and liabilities:
Inventories		7			(555	)
Accounts receivable		(276	)		44
Other current assets		(1,983	)		(335	)
Other assets		(44	)		(33	)
Accounts payable		(759	)		282
Accrued expenses and other current liabilities		2,057			935
Deferred revenue		1,145			330
Other long term liabilities		1,486			(348	)

Net cash used in operating activities		(19,290	)		(12,490	)
Cash flows from investing activities:
Capital expenditures		(1,350	)		(2,015	)
Purchase of intangible asset		—			(113	)

Net cash used in investing activities		(1,350	)		(2,128	)
Cash flows provided by financing activities:
Cash overdraft		—			(163	)
Restricted cash		45			(673	)
Proceeds of issuance of debt		32,450			—
Repayment of long term debt		(8,250	)		(900	)
Loan fees		(980	)		—
Proceeds of issuance of TrueYou Series D Preferred stock		—			14,942
Proceeds of issuance of KAAI Series G Preferred stock		—			10,058
Proceeds of issuance of KAAI Series F Preferred stock		—			4,754

Net cash provided by financing activities		23,265			28,018

Net increase in cash and cash equivalents		2,625			13,400
Cash and cash equivalents - beginning of period		189			173

Cash and cash equivalents - end of period	$	2,814		$	13,573

Supplemental cash flow information
Non-cash financing activities:
Preferred stock dividends, net of preferred stock forfeitures	$	765		$	362
Reclassification of preferred stock into convertible securities		—			28,166
Beneficial conversion feature on preferred stock		—			2,830
Exchange of KAAI accrued dividends for TrueYou Series B Preferred Stock		—			464
Exchange of KAAI long term debt for TrueYou Series B Preferred Stock		—			19,205
Exchange of KAAI accrued interest for TrueYou Series B Preferred Stock		—			1,598
Classification of KAAI warrants issued with KAAI Preferred stock as liabilities		—			935
Exchange of senior debt for subordinated debt		1,750			—
Warrants issued with debt		19,267			—

	Nine Months Ended
	April 1,			March 31,
In thousands	2006			2005
Cash flows from operating activities:
Net loss	$	(308,346	)	$	(14,509	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,141			2,771
Amortization of deferred financing costs		66			—
Stock based compensation expense		146			131
Non-cash interest expense		1,478			9
Unrealized Loss on Convertible Securities		284,749			—
Changes in operating assets and liabilities:
Inventories		(384	)		(1,095	)
Accounts receivable		(722	)		—
Other current assets		(437	)		(1,432	)
Other assets		(134	)		(637	)
Accounts payable		337			1,434
Accrued expenses and other current liabilities		719			5,861
Deferred revenue		(209	)		(361	)
Net cash used in operating activities		(19,596	)		(7,828	)
Cash flows from investing activities:
Capital expenditures		(3,983	)		(1,751	)
Purchase of intangible asset		(84	)		(977	)
Net cash used in investing activities		(4,067	)		(2,728	)
Cash flows provided by financing activities:
Cash overdraft		(163	)		(1	)
Restricted cash		(1,094	)		1,204
Proceeds of Issuance of long term debt net of deferred financing costs		—			(22	)
Other long-term liabilities		(635	)		4,979
Proceeds of issuance of TrueYou Series D Preferred Stock		14,964			—
Proceeds of issuance of KAAI Series G preferred stock		10,058			—
Repayment of Sellers’ Note		(900	)		—
Proceeds of issuance of KAAI Series F preferred stock		4,754			—
Net cash provided by financing activities		26,984			6,160
Net increase (decrease) in cash and cash equivalents		3,321			(4,396	)
Cash and cash equivalents - beginning of period		173			6,689
Cash and cash equivalents - end of period	$	3,494		$	2,293
Supplemental cash flow information
Non-cash financing activities:
Preferred stock dividends, net of preferred stock forfeitures	$	769		$	1,023
Reclassification of preferred stock into convertible securities	$	11,726		$	11,591
Beneficial conversion feature on preferred stock	$	11,435		$	—
Exchange of KAAI Common Stock for TrueYou Series B Preferred Stock	$	—		$	93
Exchange of KAAI accrued dividends for TrueYou Series B Preferred Stock	$	464		$	—
Exchange of KAAI long term debt for TrueYou Series B Preferred Stock	$	19,205		$	—
Exchange of KAAI accrued interest for TrueYou Series B Preferred Stock	$	1,598		$	—
Classification of KAAI warrants issued with KAAI preferred stock as liabilities	$	3,765		$	—
Deferred licensing fees and related liability in connection with licensing agreements with John Hopkins	$	—		$	3,805

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

-4-

~~TRUEYOU.COM INC.~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~NOTES~~ Unless TOotherwise ~~THE~~indicated: ~~CONDENSED~~references ~~CONSOLIDATED~~in ~~FINANCIAL~~these ~~STATEMENTS~~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 December 30, 2006.

~~Unless otherwise indicated: references to “TrueYou” refer to TrueYou~~1.~~Com~~ ~~Inc.; references~~Basis toof ~~“KAAI”~~Presentation 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 April 1, 2006.

1. On May ~~BUSINESS~~7, ~~AND~~2007, ~~BASIS~~the OFCompany entered into a Purchase and Sale Agreement pursuant to ~~PRESENTATION~~ which it sold all of its spa/salons to GK Acquisition LLC, an unaffiliated third party (see Subsequent Events Note 10).

The Company ~~offers~~adopted ~~both~~a ~~cosmetic~~plan ~~services and medical procedures~~ to ~~customers~~sell ~~under one~~the ~~delivery~~spa/salons ~~system~~in ~~and~~May ~~brings~~2007 ~~cosmetic surgery~~and, ~~cosmetic~~accordingly ~~dentistry and~~the ~~dermatology,~~Company ~~and~~will ~~salon~~present ~~and~~the ~~spa~~operations ~~services~~of ~~together~~the ~~under~~stores aas ~~single~~discontinued ~~brand, giving~~operations ~~clients~~beginning ~~access to top service providers, unique treatments and predictable results~~ in ~~a state of~~ the ~~art~~fourth ~~environment.~~quarter ~~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~~current ~~own~~fiscal ~~facilities~~year. The ~~Company is the~~consolidated ~~owner~~financial ofstatements ~~the~~presented ~~Cosmedicine~~herein ~~trademark.~~include ~~The Company co-brands its trade name with~~ the ~~trade~~results ~~names~~ of ~~the~~operations ~~salons~~for ~~and spas that it has acquired. The Company’s~~the spas/salons ~~and~~in ~~spas~~continuing ~~share~~operations ~~certain~~for ~~corporate resources such as senior management and administrative services. As of April 1, 2006,~~ the ~~Company~~periods ~~had 527 employees~~presented.

The ~~consolidated~~Company ~~financial~~offers ~~statements~~both ~~presented~~cosmetic ~~herein~~services ~~pertain~~and medical procedures to customers under one delivery system and combines them with salon and spa services together under a single brand, giving clients access to top service providers, unique treatments and predictable results in a state of the art environment. The Company has developed a skin care line of products (Cosmedicine TM or Cosmedicine) which is being distributed through Sephora USA, Inc. stores and the Company’s own facilities. The Company is the owner of the Cosmedicine trademark. The Company co-brands its ~~subsidiaries~~trade ~~(including~~name ~~KAAI)~~with onthe atrade ~~consolidated~~names ~~basis~~of the salons and spas that it has acquired. ~~All~~The ~~significant~~Company’s salons and spas share ~~intercompany~~certain ~~accounts~~corporate resources such as senior management and ~~transactions~~administrative services. ~~have~~As ~~been~~of ~~eliminated~~May in31, ~~consolidation~~2007, and as a result of the sale of the spa/salons described above, the Company had 29 employees. As of December 30, 2006 the Company had 542 employees.

The ~~accompanying condensed~~ consolidated financial statements ~~included~~presented herein ~~have been~~pertain ~~prepared~~to by the Company ~~pursuant to the rules~~ and ~~regulations of the~~ ~~Securities~~its ~~and~~subsidiaries ~~Exchange~~on ~~Commission~~a ~~for~~consolidated ~~interim financial information~~basis. ~~Accordingly,~~ ~~they~~All dosignificant ~~not~~intercompany ~~include all of the information~~ accounts and ~~footnotes~~transactions ~~required by~~have ~~accounting~~been ~~principles~~eliminated ~~generally accepted~~ in ~~the~~consolidation.The ~~United~~Company ~~States~~considers ofthat ~~America~~it ~~for complete~~operates ~~financial statement presentation and should be read~~ in ~~conjunction~~one ~~with~~segment ~~KAAI’s~~for ~~audited~~spa ~~consolidated financial statements~~ and ~~related~~salon ~~footnotes thereto~~domestic ~~for the fiscal year ended June 30, 2005 included in the Company’s Current Report on Form 8-K/A filed with the Commission on February 27, 2006~~operations.

The accompanying condensed consolidated ~~balance~~financial ~~sheet~~statements ofincluded herein have been prepared by the Company aspursuant ofto ~~June~~the ~~30,~~rules ~~2005~~and ~~was~~regulations of the ~~derived~~Securities ~~from~~and ~~audited~~Exchange ~~consolidated~~Commission ~~financial~~for ~~statements,~~interim asfinancial ~~adjusted~~information. ~~for~~In the ~~capital~~opinion ~~transaction~~of ~~with TrueYou.Com~~management, asall ~~described~~adjustments ~~below~~(consisting ~~under~~of ~~Share~~normal ~~Exchange~~recurring ~~Agreement.~~accruals) ~~The~~considered ~~consolidated~~necessary ~~financial~~for ~~statements~~a ~~presented~~fair inpresentation ~~this~~have ~~quarterly~~been included. ~~report~~Accordingly, ~~are~~they ~~unaudited~~do ~~but~~not include all ~~adjustments that are~~ of athe ~~normal~~information and ~~recurring~~ ~~nature~~footnotes ~~that~~required by ~~management~~accounting ~~considers~~principles ~~necessary~~generally ~~for~~accepted in the ~~fair~~United ~~statement~~States of ~~the~~ ~~results~~America for complete ~~the~~financial ~~interim~~statement ~~periods.~~presentation ~~The~~and should be read in conjunction with the Company’s ~~results~~audited ofconsolidated ~~operations~~financial ~~for~~statements and related ~~the~~footnotes ~~three~~thereto ~~and~~for ~~nine~~the ~~month~~fiscal ~~periods~~year ended ~~April~~July 1, 2006 ~~are~~included ~~not~~in ~~necessarily~~the ~~indicative~~Company’s ofAnnual ~~the~~Report ~~results~~on toForm be10-K ~~expected~~filed ~~for~~with the ~~year~~Commission ~~ended~~on ~~June~~February 306, ~~2006 or~~ ~~future periods~~2007.

~~Restatement~~ The Company’s quarterly results have included the operating results of ~~Interim~~the ~~Condensed~~spa/salons and ~~Consolidated~~the ~~Financial~~operating ~~Statements~~results for any quarter are therefore not necessarily indicative of results that may be otherwise expected for the entire year.

~~During~~Beginning ~~the~~in ~~quarter~~fiscal ~~ended~~year ~~April 1,~~ 2006, the Company ~~became~~began ~~aware~~following ~~of certain transactions that should have been recorded in earlier quarters during~~ the ~~current~~ standard fiscal year. ~~After review~~ of the ~~transactions~~retail industry, ~~management~~which ~~has~~is ~~decided to~~a ~~make~~52 ~~adjustments~~or to53 ~~record~~week ~~these transactions in the proper~~ period., ~~The following~~with ~~table shows~~ the ~~effects~~end of ~~these~~a ~~transactions~~period being ~~had~~the ~~they~~closest ~~been~~Saturday ~~recorded in~~to the ~~proper~~end ~~periods~~of a month.

~~Consolidated~~ Going Concern ~~Balance~~Disclosure: ~~Sheet~~The accompanying financial statements have been prepared on the going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has experienced operating losses and negative cash flows from operations. As of December 30, 2006, the Company had an accumulated deficit of $145.9 million and a working capital deficiency of $48.9 million. Included in the Company’s net deficit at December 30, 2006 is the remeasurement of convertible securities. Cumulative charges recorded through the remeasurement of this obligation amounted to $38.7 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is ultimately dependent on its ability to increase sales and reduce expenses to a level that will allow it to operate profitably and sustain positive operating cash flows and raise additional capital. There have been no adjustments to the financial statements to reflect the outcome of this ~~October~~uncertainty. 1The Company has had several recent financings, ~~2005:~~with the most recent being completed on May 7, 2007 (see Subsequent Events Note 10). There is no assurance that the recent financings will be sufficient to fund operations until sales and profitability improves such that the Company is able to operate from internally generated cash flows.

In thousands, except share and per share amounts	As Reported			Adjustment			As Restated
Assets:
Property and equipment, net	$	7,048		$	(406	)1	$	6,642
Other Assets		447			(80	)2		367
Total Assets:		45,924			(486	)		45,438
Liabilities and shareholders’ deficit:
Accounts Payable		5,335			448	3		5,783
Accrued expenses and other current
liabilities		9,669			(16	)4		9,653
Deferred Revenue		8,919			(57	)5		8,862
Total Liabilities		61,465			375	6		61,840
Shareholders deficit:
Accumulated deficit		(47,009	)		(861	)7		(47,870	)
Total shareholders’ deficit		(15,540	)		(861	)		(16,401	)
Total liabilities and shareholders’ deficit	$	45,924		$	(486	)8	$	45,438

2. Summary of Significant Accounting Policies

1Use Earlier in the year, the cost associated with developing the Company’s Advanced Practice Delivery System (APDS) was capitalized incorrectly. Since such costs may not be capitalized until technological feasibility has been reached, and technological feasibility has not been reached, the Company has made an adjustment to record the development costs as operating expense. The Company also evaluated previously capitalized consultant costs associated with the development and enhancement of internally used software in the quarter and decided that some of the cost had been improperly capitalized as they were operating expenses. The total of these adjustments was $409, which was offset by $3 interest expense capitalized under SFAS 34.Estimates

2 In preparing ~~The~~the consolidated financial statements, management is required to make ~~Company~~estimates ~~identified~~and assumptions that aaffect ~~payment~~the ~~for~~reported aamounts ~~security~~in ~~deposit~~the ~~was~~consolidated financial ~~duplicated~~statements and accompanying notes. The more significant management ~~carried~~estimates asare anthe ~~asset~~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. ~~The~~Actual ~~Company~~results ~~recorded~~could ~~this~~differ ~~entry~~from tothose estimates. ~~write~~Changes ~~off~~in facts and circumstances may result in revised estimates, which are recorded in the ~~asset.~~period in which they become known.

~~3 The~~Revenue ~~Company~~Recognition ~~identified unreconciled differences to its accounts payable balances as of the quarter end October 1, 2005 and has expensed all unreconciled items identified.~~

4 The Company evaluated its accrual balances and identified several over accruals in the amount $131 and an under accrual of interest expense related to the TICC debt in the amount $100. In addition, the Company analyzed deferred rent obligations and determined that an additional expense in the amount $15 related to two of its operating facilities needed to be recognized for the period October 1, 2005.


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

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

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

5 The Company has begun reconciling our gift card liability on a monthly basis during our current period. As a result of the latest reconciliation, the Company realized that our first quarter should have had recognized additional gift card income. 6

6Cash ~~The Company’s net effect of total liabilities increased $375 due to the increase in the restated accounts payable in the amount $448, a decrease in the restated accrued expenses~~ and ~~other current liabilities in the amount of $16 and the~~Cash ~~decrease~~Equivalents ~~in the restated deferred revenue in the amount $57.~~

~~7 The~~ Cash ~~Company’s~~and ~~accumulated~~cash ~~deficit~~equivalents ~~increased~~consist ~~$861 due to its increase in restated SG&A expenses~~ of ~~$764~~cash and ~~the~~investments ~~increase~~with inmaturities ~~restated interest expense~~ of ~~$97.~~ninety ~~See~~days ~~footnotes~~or ~~to the restatement table on page 7 (Consolidated Statement of Operations for the three months ended October 1, 2005)~~ less.

~~8 Total~~Restricted ~~liabilities~~Cash ~~and shareholders’ deficit decreased $486 based on the Company’s restated assets, liabilities and accumulated deficit.~~

~~-6-~~ 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.

~~Consolidated Statement of Operations for the three months ended October 1, 2005:~~ Inventories

In thousands, except share and per share amounts	As Reported			Adjustment			As Restated
Selling, general and administrative expenses	$	7,208		$	764	9	$	7,972
Total operating expenses		8,317			764			9,081
Operating loss		(4,728	)		(764	)		(5,492	)
Interest expense, net		1,004			97	10		1,101
Loss before income tax provision		(5,732	)		(861	)		(6,593	)
Net loss		(5,732	)		(861	)		(6,593	)
Net loss applicable to common shareholders	$	(6,195	)	$	(861	)11	$	(7,056	)
Basic and diluted loss per common share:	$	(0.41	)				$	(0.47	)
Weighted average common shares outstanding, basic and diluted		14,995,513			—			14,995,513

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.

9Provisions for ~~The~~Inventory Company’s SG&A expenses and operating expenses increased $764 due to the write-off of incorrectly capitalized development costs of $409 (see note 1), the write-off of the duplicate recording of a security deposit of $80, the additional rent expense of $15 and the write-off of the unreconciled accounts payable differences of $448. These are offset by the write-off of the over accruals of $131 and the increase in other income related to the gift card retirements of $57. See footnotes to the restatement table on page 6 (Consolidated Balance Sheet as of October 1, 2005).Obsolescence

~~10 In~~ The ~~compliance~~Company ~~with~~records ~~SFAS~~provisions ~~34,~~for ~~the~~estimated ~~Company~~obsolescence ~~determined that $3~~ of ~~interest~~inventory. ~~expense~~The ~~should~~Company’s beestimates ~~capitalized~~consider asthe ~~part~~cost of inventory, forecasted demand, the shelf ~~cost~~life of ~~construction.~~the ~~This~~inventory isand ~~offset~~our ~~by the~~historical ~~reclassification~~experience. ofIf ~~$100~~there ofare ~~interest~~changes to ~~expense~~these ~~incorrectly~~estimates, ~~recorded~~additional ~~to SG&A~~provisions ~~expenses~~for ~~(see~~inventory ~~note~~obsolescence ~~4).~~may be necessary.

~~11 The~~Property ~~Company’s net loss applicable to common shareholders increased $861 due to its increase in restated SG&A expenses of $764~~ and ~~the net increase in~~ ~~restated~~Equipment ~~interest expense of $97.~~

-7-

Consolidated Balance Sheet as of December 31, 2005:

In thousands, except share and per share amounts	As Reported			Adjustment (A) 10/1/2005			Adjustment 12/31/2005			As Restated
Assets:
Accounts Receivable, net	$	1,387		$	—		$	(351	)12	$	1,036
Property and equipment, net		8,385			(406	)		(416	)13		7,563
Other assets		505			(80	)		—			425
Total assets		52,950			(486	)		(767	)		51,697
Liabilities and shareholders’ deficit:
Accounts payable		3,475			448			—			3,923
Accrued expenses and other current liabilities		9,120			(16	)		16	14		9,120
Deferred Revenue		9,336			(57	)		(67	)15		9,212
Convertible Securities		64,882			—			137,749	16		202,631
Total liabilities		106,188			375			137,698			244,261
Shareholders’ deficit:
Accumulated deficit		(57,541	)		(861	)		(138,465	)		(196,867	)
Total shareholders’ deficit		(53,238	)		(861	)		(138,465	)		(192,564	)
Total liabilities and shareholders’ deficit	$	52,950		$	(486	)	$	(767	)	$	51,697

(A) Details to the adjustments contained in this column can be found in the footnotes to the Restated Consolidated Balance Sheet as of October 1, 2005 appearing earlier in the document.

12 The Company received payments for credit card receivable balances during the three months ended December 31, 2005 and recorded them as income instead of as a reduction of accounts receivable. As a result, the Company recorded an entry to write off the accounts receivable balance.

13 Earlier in the year, the cost associated with developing the Company’s Advanced Practice Delivery System (APDS) was capitalized incorrectly. Since such costs may not be capitalized until technological feasibility has been reached, and technological feasibility has not been reached, the Company has made an adjustment to record the development costs as operating expense. The Company also evaluated previously capitalized consultant costs associated with the development and enhancement of internally used software in the quarter and decided that some of the cost had been improperly capitalized as they were operating expenses. Legal expenses associated with patents the Company intended to file were capitalized in prior periods. While a significant portion of those expenses were properly capitalized, some of the expense was associated with review of suppliers’ patents and, accordingly, are reclassified as an operating expense. The aggregate of these adjustments was $441 which was offset by $25 of interest expense capitalized under SFAS 34.

14 The Company analyzed deferred rent obligations and determined that an additional expense in the amount $16 related to two of its operating facilities needed to be recognized for period ending December 31, 2005.

15 The Company has begun reconciling gift card liability monthly during the current period. As a result of the latest reconciliation, the Company realized that the second quarter should have had recognized additional gift card income.

16 The Company originally valued the convertible securities at $65 million as of December 20, 2005, the date of the Share Exchange Agreement, based on the transaction value of the Share Exchange Agreement. The Company has subsequently determined that a better measure of fair value is based on the share trading value of the publicly traded securities of Trueyou.com Inc. (TUYU.PK) and as a result, the Company has remeasured its convertible securities as of December 31, 2005. The number of common shares into which the convertible securities are convertible was 506,576,690 as of December 31, 2005 and the per share trading value as of December 31, 2005 was in the amount $0.40, which has resulted in an estimated fair value of the convertible securities to be approximately $203 million. The Company recorded an unrealized loss of approximately $138 million for the three months ended December 31, 2005

-8-

Consolidated Statement of Operations for the three months ended December 31, 2005:

In thousands, except share and per share amounts	As Reported			Adjustment			As Restated
Selling, general and administrative expenses	$	9,693		$	741	17	$	10,434
Total operating expenses		10,852			741			11,593
Operating loss		(7,343	)		(741	)		(8,084	)
Interest expense, net		1,995			(25	)18		1,970
Unrealized loss on measurement of convertible securities		—			(137,749	)19		(137,749	)
Loss before income tax provision		(9,338	)		(138,465	)		(147,803	)
Net loss		(9,338	)		(138,465	)		(147,803	)
Net loss applicable to common shareholders	$	(9,237	)	$	(138,465	)20	$	(147,702	)
Basic and diluted loss per common share:	$	(0.62	)				$	(9.85	)
Weighted average common shares outstanding, basic and diluted		14,995,513			—			14,995,513

17 The Company’s SG&A expenses and operating loss increased $741 due to the write-off of $351 of credit card receivables, the write-off of incorrectly capitalized development costs of $441 (see note 13), the additional rent expense of $16 netted against the increase in other income related to the gift card retirements of $67.

18 In compliance with SFAS 34, the Company determined that $25 of interest expense should be capitalized as part of the cost of construction.

19 The Company originally valued the convertible securities at $65 million as of December 20, 2005, the date of the Share Exchange Agreement, based on the transaction value of the Share Exchange Agreement. The Company has subsequently determined that a better measure of fair value is based on the share trading value of the publicly traded securities of Trueyou.com Inc. (TUYU.PK) and as a result, the Company has remeasured its convertible securities as of December 31, 2005. The number of common shares into which the convertible securities are convertible was 506,576,690 as of December 31, 2005 and the per share trading value as of December 31, 2005 was in the amount $0.40, which has resulted in an estimated fair value of the convertible securities to be approximately $203 million. The Company recorded an unrealized loss of approximately $138 million for the three months ended December 31, 2005

20 The Company’s net loss applicable to common shareholders increase $139.3 million due to our increase in restated SG&A expenses of $741, the decrease in restated interest expense of $25 and the $137.7 million in additional liability for the remeasurement of convertible securities.

-9-

Consolidated Statement of Operations for the six months ended December 31, 2005:

In thousands, except share and per share amounts	As Reported			Adjustment			As Restated
Selling, general and administrative expenses	$	16,798		$	1,505	21	$	18,303
Total operating expenses		19,066			1,505			20,571
Operating loss		(11,968	)		(1,505	)		(13,473	)
Interest expense, net		2,999			72	22		3,071
Unrealized loss on measurement of convertible securities		—			(137,749	) 23		(137,749	)
Loss before income tax provision		(14,967	)		(139,326	)		(154,293	)
Net loss		(14,967	)		(139,326	)		(154,293	)
Net loss applicable to common shareholders	$	(15,329	)	$	(139,326	) 24	$	(154,655	)
Basic and diluted loss per common share:	$	(1.02	)	$			$	(10.31	)
Weighted average common shares outstanding, basic and diluted		14,995,513			—			14,995,513

21 The Company’s six month SG&A expenses and operating loss increased $1,505 due to the total SG&A restatement in the amount of $764 for the period ending October 1, 2005 and the total SG&A restatement in the amount $741 for period ending December 31, 2005.

22 In compliance with SFAS 34, the Company determined that $3 and $25 of interest expense for the periods October 1, 2005 and December 31, 2005, respectively, should be capitalized as part of the cost of construction. This was offset by the reclassification of $100 of interest expense incorrectly recorded to SG&A expenses during the three months ended October 1, 2005 (see note 4).

23 The Company originally reclassified $65 million to convertible securities ending December 20, 2005, the date of the Share Exchange Agreement, based on the transaction value of the Share Exchange Agreement. The Company has subsequently determined a better measure of fair value based on the share trading value of the securities and as a result, the Company has remeasured its convertible securities as of its quarter ended December 31, 2005 in the amount $.40 per share trading value which has resulted in an unrealized loss on measurement of convertible securities in the amount $137.7 million.

24 The Company’s net loss applicable to common shareholders increased $139.3 million due to our increase in restated SG&A expenses of $1,505, increase in restated interest expense of $72 and the $137.7 million in additional liability for the remeasurement of convertible securities.

-10-

The aggregate amount of these adjustments is $.09 million and $138 million for the quarter ended October 1, 2005 and December 31, 2005, respectively.

Share Exchange Agreement:

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

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

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

Accordingly, the outstanding shares of KAAI have been restated in the balance sheet and the statement of stockholders’ deficit to give effect to the Share Exchange Agreement. The restated shares have been used in the computation for loss per share. The historical balance sheet as of June 30, 2005 is that of KAAI.

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

Revenue Recognition:

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104 (“Revenue Recognition”), at the time the customer either receives services or takes possession of merchandise and pays for such service or merchandise with cash, check, gift card or a credit card.

When the Company receives payment from customers before the services have been performed or the customer has taken possession of the merchandise, which principally relates to the sale of gift cards, the amount received is recorded as deferred revenue in the Company’s consolidated balance sheet. The liability remains on the balance sheet until the earlier of redemption, escheatment or 36 months. It is the Company’s and its predecessors’ historical experience that the likelihood of redemption after 36 months is remote. After 36 months, 80% of the remaining liability is relieved and recorded as other income. After 48 months, any remaining 10% of the liability is relieved and recorded as other income. After 60 months, the last 10% of the remaining liability is relieved and recorded as other income.

Cost of Revenue:

Cost of sales for services include salaries associated with employees that are directly related to providing various services to clients. These services include hair cuts, hair coloring, facials, medical procedures, waxing, massages, pedicures and manicures. In addition, the cost of products utilized as part of the service is also included in cost of revenues. Product costs are determined by utilizing the cost that the product was acquired for from various vendors and manufacturers on a first-in first-out (FIFO) basis.

-11-

Significant changes in product costs, product pricing, revenue mix, shrinkage and vendor allowances and rebates could have a material impact on our gross margin.

Cosmedicine:

The Company developed an over-the-counter medical grade skin care line of products called Cosmedicine, for which Johns Hopkins Medicine, acting through The Johns Hopkins Health System Corporation and The Johns Hopkins University (“Johns Hopkins”) consulted on the design and information analysis of independent tests performed on the products. In return for its consulting services, Johns Hopkins Medicine receives fees from KAAI. The Company launched the products in February 2006 for exclusive retail distribution at Sephora stores, KAAI locations and on our respective websites. For the nine months ended April 1, 2006, the Company had $2.4 million in Cosmedicine sales, which accounts for approximately 9% of total revenue and $0.7 million in accounts receivable for the sale of Cosmedicine products, which accounts for approximately 72% of its accounts receivable balance. There were no Cosmedicine sales for the comparable 2005 period.

Accounts Receivable:

The Company’s accounts receivables includes in-transit credit card payments made by its customers, and Cosmedicine products purchased by Sephora that are being sold in their stores.

Allowances for Doubtful Accounts Receivable:

The Company maintains allowances for doubtful accounts to cover uncollectible accounts receivable, and evaluates its accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including an analysis of receivables aging and a customer-by-customer review for large accounts. If, for example, the financial condition of the Company’s customers deteriorates resulting in an impairment of their ability to pay, additional allowances may be required. As of April 1, 2006, the Company has approximately $35,000 in allowance for doubtful accounts.

Provisions for Inventory Obsolescence:

The Company records provisions for estimated obsolescence and shrinkage of inventory. The Company’s estimates consider the cost of inventory, forecasted demand, the estimated market value, 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 & 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.

~~John Hopkins:~~ 7

~~-12-~~Goodwill

InGoodwill ~~December~~is ~~2004~~tested ~~KAAI~~for ~~entered~~impairment ~~into~~annually aor ~~Services~~more ~~and~~frequently ~~Licensing~~in ~~Agreement~~accordance with ~~Johns~~the ~~Hopkins~~provisions ~~Medicine~~of ~~(“Johns~~Statement ~~Hopkins”),~~of ~~acting~~Financial ~~through~~Accounting ~~Johns~~Standards ~~Hopkins Health System Corporation~~No. 142, “Goodwill and ~~the~~Other ~~Johns~~Intangible ~~Hopkins University (the “John Hopkins Agreement”)~~Assets. ~~Under~~” ~~the~~Fair ~~Agreement,~~values ~~Johns Hopkins~~are ~~agreed~~estimated tobased ~~provide~~on the ~~following services to us: (i) investigate current~~ ~~methods~~Company’s ~~for~~best ~~skin~~estimate ~~care~~of ~~parameter~~the ~~testing~~expected atpresent ~~the~~value ~~point~~ of ~~sale;~~future ~~(ii)~~cash ~~where existing~~flows ~~protocols~~ and ~~equipment for skin care parameter testing do not exist~~ orcompared ~~are~~with ~~not acceptable to Johns Hopkins, develop acceptable methods to measure~~ the ~~condition~~corresponding ofcarrying ~~clients’~~value ~~skin; (iii) create a new testing methodology to validate skin care product efficacy; (iv) oversee the ongoing testing~~ of ~~skin care products using~~ the ~~Johns~~reporting ~~Hopkins~~unit, ~~testing standards; and (v) oversee the~~including ~~testing of 15 of our skin care products using the agreed upon testing standards~~goodwill. ~~This~~ ~~agreement~~The ~~was~~Company ~~subject to~~considers ~~the~~its ~~satisfaction~~consolidated ofoperations ~~certain conditions, which we had~~ to ~~satisfy~~be bya ~~October~~single ~~31,~~reporting ~~2005. The~~unit ~~conditions~~when ~~include:~~it ~~(i) written~~tests ~~agreement by Johns Hopkins and KAAI on: (A) the parameters~~ for ~~research and~~goodwill ~~academic~~impairment ~~freedom~~due ~~as opposed~~ to ~~work for hire as noted in~~ the ~~agreement; (B)~~similar ~~the~~customer ~~amount~~base ~~of royalty fees, guaranteed annual fees~~ and ~~equity~~use asof ~~noted~~ the ~~agreement;~~ ~~(C)~~Klinger ~~the~~name ~~buyout~~for orits ~~additional~~products ~~stock~~and toservices, ~~be provided Johns Hopkins at~~and the ~~end~~way ofin ~~the~~which ~~term~~management ofreviews the ~~agreement;~~operations and ~~(D)~~allocates anits ~~appropriate scope of coverage~~resources. ~~for~~The ~~product~~Company ~~and/or~~tested ~~contractual liability insurance to be maintained by KAAI; (ii) final approval by internal Johns Hopkins committees~~ for ~~the~~ ~~Permitted~~goodwill ~~Statement~~at ~~(as~~July ~~defined~~1, in2006 ~~the agreement);~~ and ~~(iii) documentation~~determined ofthat the ~~matters described in~~ ~~the~~estimated ~~(i)~~fair ~~and~~value ~~(ii)~~of ~~by an amendment to~~ the ~~agreement. Our~~reporting ~~conditions~~unit ~~have~~exceeded ~~been~~its ~~extended~~carrying ~~due~~amount, indicating tono ~~negotiations~~impairment ~~on use~~ of ~~the~~ ~~John Hopkins name~~goodwill. On ~~November~~Subsequent ~~10, 2005,~~to the ~~period~~end byof ~~which we are required to satisfy~~ the ~~conditions was~~quarter ~~extended~~ended to December 3130, ~~2005. On January 3~~2006, ~~2006~~however, the ~~parties~~Company ~~extended~~believes ~~such~~that ~~period~~events ~~until~~have occurred ~~March~~that ~~31,~~have ~~2006. In~~fully ~~March~~impaired ~~2006,~~its ~~the~~goodwill ~~parties~~(see ~~extended~~Subsequent ~~such period~~Events toNote ~~June 30, 2006~~10). On As ~~June~~a 21result, ~~2006,~~ the ~~period~~Company byanticipates ~~which~~a wecharge ~~are~~of ~~required~~$18.1 tomillion ~~satisfy~~in ~~the~~its ~~conditions was extended~~fiscal toquarter ~~September~~ended 30March 31, ~~2006. The~~2007 ~~term~~to ofwrite-off ~~the agreement~~all ~~is 5 years after the satisfaction~~ of ~~the~~its ~~conditions~~goodwill.

WeThe ~~have~~Company’s aimpairment ~~multi-pronged~~review ~~alliance~~process ~~with~~is ~~John~~based ~~Hopkins,~~on ~~widely~~a ~~acknowledged~~discounted tofuture becash flow ~~among~~approach ~~the~~that ~~most~~uses ~~respected~~estimates ~~medical~~of ~~institutions~~revenues, indriven ~~the~~by ~~US. John~~assumed ~~Hopkins~~growth ~~has agreed to review and assess~~rates, ~~our~~estimated ~~process~~future ~~for~~gross ~~verifying~~margin ~~the safety~~ and ~~clinical~~expense ~~quality of our practitioners~~rates, ~~protocols~~ ~~and~~as ~~facilities;~~well itas ~~also provides oversight of our Medical Advisory~~acquisition ~~Board~~integration and ~~provides~~maturation, ~~oversight~~and ofappropriate ~~the~~discount ~~scientific testing of our Cosmedicine product line~~rates. ~~John~~ ~~Hopkins~~These ~~approved~~estimates ~~the~~are ~~use~~consistent ofwith the ~~John~~plans ~~Hopkins Medicine name as part of the marketing of our facilities, intellectual property, collateral materials~~ and ~~Cosmedicine products~~estimates ~~and~~that we are inused ~~the process of finalizing a formal agreement with respect~~ to manage the ~~forgoing~~underlying business.

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

~~Johns~~Certain ~~Hopkins~~intangible ~~has~~asset ~~approved~~amounts ~~the~~are ~~use~~based ~~of the Johns Hopkins Medicine name~~ on ~~the Company’s~~purchase ~~Cosmedicine~~price ~~packaging. The specific~~allocations ~~approved language on the packaging is: Johns Hopkins Medicine~~associated ~~consulted~~with onacquisitions ~~the design~~ and ~~information~~are ~~analysis~~based ofupon ~~tests~~valuations ~~performed~~conducted ~~on Cosmedicine~~by ~~products. In return for its~~independent ~~consulting services, Johns Hopkins Medicine receives fees from KAAI~~appraisers.

~~The~~All ~~Company~~intangible ~~has recorded~~assets, ~~pursuant~~other tothan ~~its agreement with John Hopkins for review and assessment services~~goodwill, ~~amortization~~have ofbeen ~~$241,000~~assigned ~~and~~an ~~$72,000~~estimated ~~for the three~~finite ~~months~~useful ~~ended April 1~~life, ~~2006~~ and ~~March~~are ~~31,~~amortized 2005, respectively and $722,000 and $216,000 for the nine months ending April 1, 2006 and March 31, 2005, respectively. The Company also recorded non-cash interest expense of $63,000 and $15,011 for the three months ended April 1, 2006 and March 31, 2005, respectively and $197,000 and $48,000 for the nine months ending April 1, 2006 and March 31, 2005, respectively. The Johns Hopkins Agreement is carried on ~~the~~a ~~balance~~straight ~~sheet~~line atbasis ~~the present value of all future payments to Johns Hopkins and amortized~~ over the ~~term~~number of ~~the~~ ~~agreement. The~~years ~~carrying~~that ~~value~~approximate oftheir ~~this asset~~respective ~~was~~useful ~~$4.0~~lives ~~million~~(ranging asfrom oftwo ~~April~~to ~~1, 2006.~~six ~~The amount is reported as a component of Intangible Assets~~years).

Measurement of Impairment of Long-~~13-~~Lived Assets and Intangible Assets Subject to Amortization

AsWhen ofevents April 1, 2006, John Hopkins held a minority interest in KAAI constituting shares of Series E Preferred Stock. The Series E Preferred Stock represented John Hopkin’s equity interest in KAAI. On May 4, 2006, Johns Hopkins voluntarily forfeited all of its equity interest in KAAI shares of Series E Preferred Stock. The forfeited shares constituted all issued and ~~outstanding~~circumstances ~~shares~~indicate ofthat ~~Series~~assets Emight ~~Preferred~~be ~~Stock~~impaired and the asundiscounted acash ~~result,~~flows asestimated ofto ~~May~~be 4,generated ~~2006,~~by nothose ~~shares~~assets ofare ~~Series~~less ~~E Preferred Stock of KAAI~~than ~~are~~the ~~issued~~carrying ~~and~~amount ~~outstanding. As a result~~ of ~~the~~those ~~forfeited shares~~assets, the Company ~~plans~~ onrecords ~~canceling~~impairment ~~these~~losses ~~shares~~with respect atto ~~the~~those ~~end if its fiscal year, ending June 30, 2006~~assets.

~~Goodwill:~~ 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.

~~Goodwill is~~Debt ~~tested~~Issue ~~for~~Costs 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 facilities to be reporting units when it tests for goodwill impairment because that is where the Company believes goodwill resides. The Company tested for goodwill at June 30, 2005 and determined that the estimated fair value of the reporting units exceeded their carrying amounts, 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~~Debt ~~impairment~~costs ~~review~~and ~~process~~transaction isfees, ~~based~~which ~~on a discounted future cash flow~~are ~~approach~~directly ~~that~~associated ~~uses~~with ~~estimates of revenues for~~ the ~~reporting~~issuance ~~units,~~of ~~driven~~senior ~~by assumed growth rates~~notes, ~~estimated~~are ~~future~~recorded ~~gross~~on ~~margin~~the balance ~~and~~sheet ~~expense rates,~~ as ~~well as~~deferred ~~acquisition~~financing ~~integration~~costs and ~~maturation,~~amortized ~~and~~(charged ~~appropriate~~to ~~discount rates.~~interest ~~These~~expense) ~~estimates~~using ~~are consistent with~~ the ~~plans~~straight ~~and~~line ~~estimates~~method ~~that~~over ~~are~~the ~~used~~term ~~to manage~~of the ~~underlying~~related ~~businesses~~notes. ~~Charges for impairment of goodwill for a reporting~~If ~~unit~~the ~~may~~senior benotes ~~incurred~~are inredeemed, the ~~future~~unamortized ifdebt ~~the~~issuance ~~reporting~~costs ~~unit~~and transaction ~~fails~~fees related to ~~achieve~~the ~~its assumed~~senior ~~revenue~~notes ~~growth~~being ~~rates~~redeemed orwill ~~assumed~~be ~~gross~~charged ~~margin,~~to expense orin ifthat ~~interest rates increase significantly~~period.

~~Loss Per Share:~~ 8

~~Basic loss~~Income ~~per~~Taxes share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing net loss by the weighted average number of shares of common stock outstanding for the period, adjusted to reflect the dilutive impact of potential shares of common stock outstanding during the period.

~~Each~~The ~~security~~Company isprovides ~~evaluated~~for tofederal ~~determine~~and ifstate ~~the~~income ~~security~~taxes orcurrently ~~note~~payable, isas ~~dilutive or~~well ~~anti-dilutive. If~~as ~~the~~for ~~security~~those isdeferred due to ~~be deemed~~temporary ~~anti-dilutive,~~differences itbetween isreporting ~~excluded~~income ~~from~~and expenses ~~the~~for ~~computation~~financial ~~for~~statement ~~diluted~~purposes ~~loss~~versus ~~per common~~tax ~~share~~purposes. A ~~total~~Deferred oftax assets ~~25,404,083~~ and ~~2,671,135~~ ~~equivalent~~liabilities ~~shares~~are ~~related~~recognized tofor ~~convertible~~the ~~securities~~future ~~were~~tax ~~considered~~consequences attributable ~~anti-dilutive,~~to ~~due~~differences tobetween the ~~Company~~carrying ~~having~~amount aof ~~net~~assets ~~loss~~and ~~applicable~~liabilities ~~to common~~for ~~shareholders~~financial ~~for~~reporting purposes and the ~~nine~~amounts ~~months~~used ~~ended~~for ~~April~~income 1,tax ~~2006~~purposes. Deferred tax assets and ~~March~~liabilities ~~31,~~are ~~2005,~~measured using the enacted tax rates ~~respectively~~expected ~~and~~to ~~were~~apply ~~therefore~~to ~~excluded~~taxable ~~from~~income in the ~~loss~~years ~~per~~in ~~common~~which ~~share~~those temporary ~~calculation~~differences are expected to be recoverable or settled. ~~Stock~~ ~~options~~Realization ~~and~~of ~~warrants~~deferred ~~with~~tax ~~exercise~~assets ~~prices~~is ~~greater~~ultimately ~~than~~dependent ~~the~~upon ~~average~~future ~~market~~taxable ~~value~~income. ofThe ~~the~~effect ~~Company’s~~of a ~~Common~~change ~~Stock~~in ~~are~~tax ~~also~~rates ~~excluded~~is ~~from~~recognized ~~the~~as ~~computation~~income ofor ~~dilutive~~expense ~~loss~~in ~~per~~the ~~common~~period of the ~~share~~change.

~~2. STOCK~~Stock-Based Compensation ~~BASED COMPENSATION PLAN~~

In ~~December~~ December 2004, the FASB issued SFAS No. 123(R), Share Based Payment. This ~~statement~~ statement establishes standards for the accounting for transactions in which an ~~entity~~ entity exchanges its equity instruments for goods and services. It focuses ~~primarily~~ 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.

~~-14-~~Income (Loss) Per Share

~~the~~ Basic ~~measurement~~income of(loss) per share represents the ~~cost~~net ofincome ~~employee~~(loss) ~~services~~applicable ~~received~~to inCommon Shareholders ~~exchange~~divided ~~for~~by anthe ~~award~~ weighted average number of ~~equity~~common ~~instruments~~shares outstanding ~~(such~~during asthe ~~employee~~measurement ~~stock~~period. ~~options~~Diluted income (loss) atper ~~fair~~share represents ~~value~~the onnet loss applicable to Common Shareholders divided by the ~~grant~~weighted ~~date.~~average ~~That~~number ~~cost~~of ~~will~~common beshares ~~recognized~~outstanding ~~over~~during the measurement period ~~during~~while ~~which~~also angiving effect to all potentially dilutive securities that ~~employee~~were isoutstanding ~~required~~during tothe ~~provide~~period. ~~services~~Potential indilutive ~~exchange~~common stock equivalents for the ~~award~~three ~~(the~~months ended December 30, 2006 consist of those related to: ~~requisite~~convertible ~~service~~preferred ~~period)~~stock of 448. ~~The~~2 ~~Company~~million, warrants 164.5 million, stock ~~adopted~~options ~~FAS~~38.0 ~~123R~~million, ~~“Share-Based~~and ~~payment”~~registration rights 11.4 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 December 31, ~~applying~~2005, the ~~modified~~impact ~~retrospective~~of any convertible securities would be anti-dilutive due ~~method.~~to either losses incurred during the period or out-of-the-money options and are not included in the diluted loss per share calculation.

~~All existing~~Software ~~stock~~Development ~~options~~Costs have been issued under the subsidiary (KAAI) 2003 stock option plan. Management is currently drafting a new stock option plan for the Company that will be presented to the board of directors of the Company and shareholders for approval in the first quarter of fiscal year 2007. Once the new stock option plan is approved, the Company will start the process of exchanging KAAI options for options of the Company under the new stock incentive plan.

The Company ~~recognized~~incurs ~~approximately~~costs ~~$37,000~~for ~~and~~the ~~$52,000~~development ~~for~~of ~~the~~its ~~three~~Klinger ~~months~~360° ~~ended~~Best ~~April~~Practices 1,Aesthetics ~~2006~~System ~~and~~™ (the “K360”), ~~March~~which ~~31,~~is ~~2005,~~a ~~respectively~~comprehensive software and ~~approximately~~hardware ~~$146,000~~practice ~~and~~management ~~$131,000~~system ~~for~~that facilitates the ~~nine~~delivery ~~months~~of ~~ended~~evidenced ~~April~~based 1,“best ~~2006~~practices” aesthetic ~~and~~services ~~March~~that 31is to be sold, ~~2005~~leased, ~~respectively,~~ ~~for~~or ~~stock~~licensed ~~options~~to ~~granted. In~~third ~~addition,~~parties asin the offuture. ~~April~~All 1,software ~~2006,~~development ~~there~~costs ~~was~~have ~~approximately~~been ~~$516,000~~appropriately inaccounted ~~unrecognized~~for ~~stock~~in ~~based~~accordance ~~compensation~~with ~~expense~~SFAS ~~related~~86 toAccounting ~~non-vested~~for ~~stock options~~the ~~which~~Costs isof ~~expected~~Computer Software to be ~~recorded~~Sold, inLeased ~~future~~or ~~periods~~Otherwise Marketed. All costs are expensed as incurred as technological feasibility has not yet been established.

~~A summary~~Disclosures ofabout ~~the~~Fair ~~KAAI’s~~Value ~~share~~of ~~option activity and related information during the~~Financial ~~period ended April 1, 2006 is as follows.~~Instruments

			Weighted Average
Options outstanding	Shares		Exercise Price
Outstanding, June 30, 2005	3,354,150			$	4.00
Granted	—				—
Cancelled	(1,215,150	)			4.00
Exercised	—				—
Outstanding, April 01, 2006	2,139,000			$	4.00

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:

	Options outstanding						Options exercisable
Range of exercise prices	Number of options outstanding as of 4/1/06		Weighted average remaining contractual life (in years)		Weighted average exercise price		Number exercisable as of 4/01/06		Weighted average price
Stock options issued @ $4.00		2,139,000		8.25	$	4.00		953,875	$	4.00

~~3. ACCRUED~~Cash ~~EXPENSES~~and short-term ~~AND~~investmentsFor those ~~OTHER~~short-term ~~CURRENT~~instruments, the carrying amount is a reasonable estimate of ~~LIABILITIES~~fair value.

~~The~~Convertible SecuritiesThe ~~table~~Company remeasures its ~~below~~convertible ~~consists~~securities ofin ~~the~~compliance ~~Company’s~~with ~~accrued~~EITF ~~expenses~~00-19, ~~and~~based ~~other~~on ~~current~~the ~~liabilities as~~fair value of ~~April,~~its 1Common ~~2006~~Stock ~~and~~into ~~June~~which 30they are convertible, ~~2005~~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

~~-15-~~Recently Issued Accounting Standards

(Amounts in thousands)	April 1, 2006		June 30, 2005
Accrued Interest	$	2,614	$	3,654
Accrued Dividends		2,118		1,853
Accrued Management Fees		1,714		1,305
Due to John Hopkins – License fees		1,500		—
Payroll, Benefits and Other		2,884		3,103
Total Accrued Expenses and Other Current Liabilities	$	10,830	$	9,915

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.

4 In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. ~~LONG~~ ~~TERM~~SFAS 157 ~~DEBT~~defines ~~AND~~fair ~~LIABILITIES:~~value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This guidance becomes effective for the first reporting period beginning after November 15, 2007. The Company is assessing the impact of the adoption of SFAS 157 on its consolidated financial statements.

~~The~~In ~~table~~September ~~below~~2006, ~~consists~~the ofFASB ~~the~~issued ~~Company~~SFAS 158, “Employers’s ~~long~~Accounting ~~term~~for ~~debt~~Defined Benefit Pension and ~~liabilities~~Other asPostretirement Plans—an amendment of FASB Statements ~~April~~No. 187, ~~2006~~88, 106, and ~~June~~132(R). 30SFAS 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, ~~2005~~2006. We believe the impact of the adoption of SFAS 158 will not be significant to the Company’s consolidated financial statements.

(Amounts in thousands)	Maturity Dates	Interest Rate %	April 1, 2006		June 30, 2005
Senior debt	3/31/2009	12%	$	—	$	8,836
Senior subordinated debt, net of debt discount	11/4/2010	10%		—		12,066
Other long term debt
Seller notes payable	Varies	5%-15%		1,000		7,061
Other long term liabilities
Long term licensing obligation	12/1/2008	6%		2,515		4,555
Capital lease obligations	Varies	6%		130		225
Deferred liability
Sephora	12/31/2010	N/A		5,000		5,000
Convertible Securities	N/A	N/A		349,631		11,684
Long term debt			$	358,276	$	49,427

3. Property and Equipment, net

~~The~~Following ~~Company’s~~are ~~Senior~~the ~~Debt,~~components ~~represents~~of ~~our~~property ~~commitment~~and toequipment ~~Technology~~included ~~Investment Capital Corporation (TICC),~~ in the ~~amount~~Consolidated Balance $9Sheets ~~million and $8.8 million~~ as of ~~April~~ 1,December ~~2006 and June~~ 30, ~~2005, respectively. On June 30,~~ 2006, ~~the Company obtained a covenant compliance waiver~~ and ~~amendment~~ ~~under~~July ~~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 31st~~1, ~~2007. In~~ ~~addition, the Company obtained amended covenants for the Unit EBITDAR, Unit Fixed Coverage Ratio and minimum cash required covenant tests.~~ 2006:

As such, management believes that the new waiver and amendments will allow the company to remain in compliance with all covenant tests under the senior debt agreement for the next four quarters from April 1, 2006. This assessment is based upon a review of management’s financial projections as compared to each covenant test.


(Dollars in thousands)	December 30, 2006			July 1, 2006


Furniture and fixtures	$	2,914		$	2,337
Machinery and equipment		3,331			3,078
Leasehold improvements		11,610			11,261
Capital lease assets		439			439


Total property and equipment		18,294			17,115

Accumulated depreciation and amortization		(5,546	)		(4,134	)


Total property and equipment, net	$	12,748		$	12,981

The Company intends to repay the senior subordinated debt with proceeds from a financing it expects to complete in the near term. As a result, the senior subordinated debt was reclassed to current liabilities as of April 1, 2006. 10

5 Depreciation expense for the three months ended December 30, 2006 and December 31, 2005 was $0.7 ~~SHARE~~and $0.5 million, respectively, and for the six ~~EXCHANGE~~months ~~AGREEMENT:~~ended December 30, 2006 and December 31, 2005 was $1.4 and $1.0 million, respectively.

~~On December~~4. ~~20,~~Accrued ~~2005,~~Expenses ~~the Company entered into the Share Exchange Agreement (the “Share Exchange Agreement”) with KAAI~~ and ~~KAAI securityholders, pursuant to~~Other ~~which~~Current ~~KAAI~~Liabilities ~~Securityholders received newly issued preferred securities of the Company in exchange for their securities of KAAI.~~

~~-16-~~ The table below sets forth the Company’s accrued expenses and other current liabilities as of December 30, 2006 and July 1, 2006.


*(Amounts in thousands)*	December 31, 2006		July1, 2006


Accrued interest	$	3,393	$	2,735
Accrued dividends		3,239		2,474
Accrued management Fees		1,714		1,714
Due to Johns Hopkins – consulting fees		1,528		1,300

Accrued registration penalties (a)		3,871		1,547

Payroll, benefits and other		6,183		6,679

Total Accrued Expenses and Other Current Liabilities	$	19,928	$	16,449

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

~~The~~On ~~following~~September ~~table~~1, ~~shows~~2005, KAAI entered into an agreement with various stockholders regarding the ~~effect~~registration of ~~reclassifying~~the shares of common stock underlying the securities ~~Common~~they ~~Stock~~had ~~and~~purchased. The agreement, which was assumed by the Company ~~Preferred~~in ~~Stock~~connection aswith ifthe 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 ~~took~~(the ~~place~~“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, ~~2005:~~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.

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

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

A note payable of $5,905 (long term portion $5,161, short term $744), classified under seller notes payable, along with accrued interest thereon of $1,598, was converted into KAAI’s common stock, which was subsequently exchanged for Series B Preferred Stock of the Company. In addition, the senior subordinated note payable for $12,066 along with accrued debt discount thereon of $1,234, was converted into KAAI’s common stock and subsequently exchanged for Series B Preferred Stock, par value 0.001 per share of the Company (the “Series B Preferred Stock”). 11

~~As of~~such ~~December~~stockholders. ~~20,~~Due ~~2005,~~to the ~~under~~fact that the ~~terms~~Company ofdid ~~the~~not ~~Share~~meet ~~Exchange~~this ~~Agreement~~requirement, ~~shares~~it is subject to a one-time penalty of ~~Series~~3% Aof ~~Preferred~~the ~~Stock,~~aggregate ~~Series~~purchase Bprice ~~Preferred~~paid ~~Stock,~~by ~~Series~~such stockholders. CIn ~~Preferred~~addition, ~~Stock and~~the ~~Series~~agreement Drequired ~~Preferred~~the ~~Stock~~Company ofto ~~KAAI,~~put into effect the ~~outstanding~~planned ~~senior~~authorized ~~subordinated~~share ~~debt~~increase, which would increase the number ~~other~~of ~~long~~authorized ~~term~~shares ~~debt,~~of ~~accrued~~Common ~~interest~~Stock onthat the ~~other~~Company ~~long~~is ~~term~~authorized ~~debt~~to ~~and certain~~issue ~~accrued~~from ~~dividends~~20,000,000 to 60,000,000 (“Authorized Share Increase) by May 1, 2006 which was ~~immediately~~130 ~~prior~~days toafter the ~~consummation~~closing date of the ~~Share~~sale of securities to such ~~Exchange~~stockholders. ~~Agreement~~Due ~~were~~to ~~converted~~the ~~into~~fact ~~KAAI’s~~that ~~Common~~the ~~Stock,~~Company ~~were~~did ~~exchanged~~not ~~for~~meet this requirement it ~~Series~~may Bbe ~~Preferred~~subject ~~Stock~~to a one time penalty of 3% of the ~~Company.~~aggregate purchase price paid ~~The~~by ~~outstanding~~such ~~shares~~stockholders ofand ~~Series~~ongoing Gmonthly ~~Preferred~~charges ~~Stock~~of ~~and~~1.5% ~~Series~~of Hthe aggregate ~~Preferred~~purchase ~~Stock~~price ofpaid ~~KAAI~~by ~~were~~such ~~exchanged~~stockholders for ~~Series~~each C30-day ~~Preferred~~period ~~Stock,~~or ~~par~~pro ~~value~~rata $0portion.~~001~~ ~~per~~Failure ~~share~~under either of the ~~Company~~obligations ~~(the~~requires ~~“Series~~a Ccash ~~Preferred Stock”)~~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-~~17-~~operating charge has been recorded for the combined estimated penalties of $1.2 million and $2.3 during the three months and six months ended December 30, 2006. This includes 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 $3.9 million represents the aggregate registration penalties payable through December 30, 2006 and is included in Accrued expenses and other current liabilities on the Consolidated Balance Sheet.

~~The~~Concurrent ~~following~~with ~~table reflects~~ the ~~amounts~~May of7, ~~KAAI~~2007 ~~securities~~financing ~~that~~(see ~~were~~Subsequent ~~converted into~~Events ~~common~~Note ~~stock~~10), holders of ~~KAAI~~the registration ~~and~~rights ~~subsequently~~described ~~exchanged~~above, ~~for~~agreed ~~securities~~to ofwaive ~~the~~any additional ~~Company~~registration ~~under~~rights penalties incurred by the ~~Share~~Company ~~Exchange~~after ~~Agreement:~~December 30, 2006.

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

5. Long-Term Debt and Other Long Term Liabilities

OnThe ~~December~~Company’s ~~22,~~long-term ~~2005,~~debt ~~affiliates of North Sound Capital, LLC~~ and ~~Velesco~~other ~~Capital Management,~~long-term LPliabilities ~~invested~~as ~~$15.3 million in exchange for 1,530 newly issued shares~~ of ~~our~~December ~~Series D Convertible Preferred Stock~~30, ~~par value $0.001 per share (the~~ ~~“Series~~2006 ~~D Preferred Stock”~~ and ~~together~~July ~~with the Series B Preferred Stock and the Series C Preferred Stock~~1, ~~the~~2006 ~~“Preferred~~consist ~~Stock”). Issuance costs associated with the round~~ of ~~financing amounted to approximately $0.4 million. The Company also issued warrants to purchase 2,395 shares of Series B Preferred Stock with~~ the ~~Series D Preferred stock, which were valued using the Black-Scholes option pricing model using the~~ following ~~assumptions~~: risk-free rate of return – 4.36%; term – 5 years; volatility – 30%; dividend yield – 0.0%. The value ascribed to the warrant was $5.4 million. As a result of the value being allocated to the warrants, a beneficial conversion feature resulted on the Series D Preferred Stock. The total beneficial conversion feature was approximately $30 million but was recorded only to the extent of the carrying value of the Preferred Stock, in the amount $9.9 million. The value ascribed to the warrant in the amount $5.4 million was accreted as a dividend and recorded immediately as an increase in additional paid in capital and an increase in accumulated deficit.

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


					Amounts Outstanding

*(Dollars in thousands)*	Maturity Dates		Interest Rate %		December 30, 2006		July 1, 2006


Senior debt (a)		3/31/2009		12%	$	—	$	9,146

Senior debt (b)		6/30/2010		Prime + 2%		15,860		—

Subordinated debt (c)		7/1/2010		12%		5,206		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%		3,618		3,818
Deferred construction allowance						120		130
Capital lease obligations		Varies		6%		298		393

Deferred Liability - Sephora						5,000		5,000

Stock based awards						2,147		—

Convertible securities						122,826		197,565


Total						156,075		221,891

Less current portion and amount included in other current liabilities*						23,810		16,497


Long-term portion					$	132,265	$	205,394

~~Since~~* ~~the~~Portion ~~Company~~included ~~does~~in ~~not~~other ~~have~~current ~~sufficient~~liabilities ~~number~~amounted ~~of authorized shares of Common Stock~~ to ~~allow for the conversion of the Preferred Stock into Common Stock or the exercise of warrants for Series B Preferred Stock that may ultimately be converted into Common Stock~~$1,744 inand ~~accordance with EITF 00-19~~$1,512 ~~“Accounting for~~at ~~Derivative~~December ~~Financial Instruments Indexed to~~30, 2006 and ~~Potentially~~July ~~Settled in~~1, ~~a Company’s Own Stock”~~2006, ~~the Company has reclassified these instruments to liabilities~~respectively.

~~-18-~~12

~~The following~~(a) ~~table~~- ~~shows~~Senior ~~the~~Debt ~~effect~~- ofTICC ~~reclassifying the Preferred Stock and warrants:~~

(Amounts in thousands)
Series B Preferred Stock of the Company	$	32,951
Series C Preferred Stock of the Company		14,240
Series D Preferred Stock of the Company (as restated)		9,939
Warrants to purchase Series B Preferred Stock issued to the holders of Series B Preferred Stock		935
Warrants to purchase Series B Preferred Stock issued to the holders of Series C Preferred Stock		1,535
Warrants to purchase Series B Preferred Stock issued to the holders of Series D Preferred Stock (as restated)		5,361
Amount reclassified to convertible securities in the liabilities section of the balance sheet	$	64,961

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

6.(b) ~~CONVERTIBLE SECURITIES~~- Senior Debt - Laurus

~~Under~~On ~~EITF~~July ~~00-19~~6, 2006, the Company isclosed ~~required to remeasure the convertible securities at each reporting period end based~~ on ~~fair~~a ~~value. The~~financing ~~Company~~and ~~determines~~issued ~~the~~to ~~fair~~Laurus ~~value~~a ~~of the convertible~~Secured ~~securities~~Term ~~based~~Note onin the ~~number~~aggregate ofprincipal ~~shares~~amount ~~common stock into which they are convertible and the current fair value~~ of ~~the common stock on the remeasurement date~~$25. ~~Fair~~0 ~~value~~million of (the ~~common stock~~“Laurus isNote”) ~~determined~~and ~~based~~issued ~~on actual amounts paid for a share of common stock in a transaction closest~~ to ~~the~~Laurus ~~remeasurement~~series ~~date. The~~A ~~fair values of the common stock as of December 31~~warrants, ~~2005~~series ~~and~~B ~~April~~warrants ~~1, 2006 were $0.40~~ and ~~$0.69,~~series ~~respectively.~~C ~~The~~warrants ~~number~~to ofpurchase ~~common~~up ~~shares~~to ~~into which the convertible securities are convertible was 506~~37,~~576~~351,~~690~~824 ~~as of December 31~~shares, ~~2005 and April 1~~6, ~~2006. As of December 31~~839,394 ~~2005,~~shares ~~the Company calculated the fair value of the convertible securities to be approximately $203 million~~ and ~~has recorded $138 million as an unrealized loss for the three and six month periods ended December 31~~6, ~~2005 (see note on Restatement of Interim Condensed Consolidated Financial~~693,875 ~~Statements). As of April 1~~shares, ~~2006~~respectively, ~~the Company remeasured the convertible securities based on an estimated fair value~~ of ~~approximately~~its ~~$350~~common ~~million and recorded an unrealized loss of approximately $147 million and $285 million for the three months and nine months ended April 1, 2006, respectively~~stock.

The Company placed $2.5 million (the “Interest Amount”) of the proceeds in a restricted account to be utilized to pre-19fund interest for the first year of the Laurus Note. Closing costs of $0.9 million were incurred by the Company relating to this debt. These costs were recorded as deferred financing costs and will be amortized to interest expense over the term of the note using straight-line amortization. The balance of $21.6 was placed into a restricted cash account which was released on July 11, 2006 when the Company satisfied the conditions associated with the Laurus Note. The Company used $8.3 million to pay off the existing senior debt held by TICC and an additional $0.1 million representing unpaid interest and other costs owed to TICC. Also in conjunction with the payoff of the senior debt and all related interest and fees was the release of $1.6 million of restricted cash previously held for interest payments. The restriction on the funds was removed in January 2007.

7 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. ~~CONTRACTUAL~~These payments are approximately $0.2 ~~OBLIGATIONS~~million ~~AND~~per ~~COMMITMENTS~~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 ~~leases~~calculated ~~facilities~~a ~~under~~debt ~~non-cancelable~~discount ~~operating~~attributable ~~leases. Future~~to ~~minimum~~the ~~lease~~value ~~payments~~of ~~under~~these ~~existing~~warrants ~~operating~~to ~~leases~~be ~~are~~$10.3 asmillion, ~~follows~~which will be amortized over the term of the Note using the effective interest method (insee ~~thousands~~Note 8 for a discussion of assumptions used to value the warrants):. As of December 30, 2006, this Note carried a debt discount of $9.1 million. For the three and six months ended December 30, 2006, the Company recorded interest expense of $0.6 million and $1.2 million respectively, related to the amortization of the debt

Year Ending June 30,
2006 (Balance of year)	$	945
2007		3,989
2008		3,852
2009		3,229
2010		3,259
2011 and thereafter		14,642
	$	29,916

discount. The ~~Company~~ iswarrants ~~obligated~~have ~~under~~a ~~various~~10-year ~~investor~~term ~~agreements~~and ~~for~~an exercise ~~registration~~price ~~right penalties~~equal ~~associated~~to ~~with~~$0.01 ~~the~~per ~~timely~~share, ~~filing~~or ofin ~~our~~certain ~~Form~~circumstances, ~~S-1~~may ~~registration~~be ~~statement. The~~exercised ~~Company~~on isa ~~subject~~cashless tobasis. If, ~~registration~~prior ~~right~~to ~~penalties~~the ~~with~~fourteenth ~~all~~month ~~holders~~anniversary of ~~Series~~June C30, ~~Preferred~~2006, ~~Stock~~(i) ~~and~~the Company’s ~~Series~~obligations Dunder ~~Preferred Stock. For~~ the ~~Series~~ CNote ~~Preferred~~have ~~Stock~~been ~~holders,~~reduced ~~the~~to ~~penalty~~$12.5 ismillion 1%or ~~per~~less, ~~month~~then of the ~~principal~~ ~~investment~~series ~~amount~~B ~~after~~warrants ~~May~~will ~~9th,~~automatically ~~2006. For~~be ~~the~~cancelled ~~Series~~and Dterminated; ~~Preferred~~and ~~Stock~~(ii) ~~holders,~~ the Company’s isobligations ~~obligated~~ under ~~two~~ ~~different~~the ~~registration~~Note ~~right~~have ~~penalties. The~~been ~~first~~reduced ~~penalty~~to ~~states~~zero, ~~that~~then if the series ~~Company~~C ~~fails~~warrants towill ~~increase~~automatically ~~the number~~be ofcancelled ~~authorized~~and ~~shares~~terminated. byThe ~~May~~Company is 1,obligated ~~2006,~~to ~~the~~file ~~Company~~a ~~will~~registration ~~incur~~statement awith ~~one~~the ~~time penalty~~Securities ofand 3%Exchange Commission ofcovering the ~~principal~~resale ~~investment~~of ~~amount~~the ~~and~~shares ~~1.5%~~underlying ~~per~~the ~~month thereafter~~warrants. ~~The~~ ~~second~~As ~~penalty~~a ~~states~~result ~~that~~of if the ~~Company~~May ~~fails~~7, to2007 ~~have~~refinancing ~~the~~discussed ~~registration statement declared effective by June 6~~below, ~~2006,~~ the Company will ~~incur~~cancel athe ~~one~~combined 13,533,269 ~~time~~warrants 3%held ~~penalty~~by ofLaurus, ~~the~~due ~~principal investment~~to ~~amount~~the ~~and 1~~prepayment.5% ~~per month thereafter.~~

The Company ishas ~~currently~~also ~~re-negotiating~~agreed ~~these~~to ~~registration~~use ~~right~~its ~~penalties~~best ~~with each~~efforts ~~investor~~to amend its certificate of incorporation to ~~have~~increase ~~these~~the ~~penalties~~number ~~either~~of ~~waived~~authorized orshares ~~converted~~of its Common Stock to such number as shall be sufficient to permit the exercise in full of the ~~equity~~warrants. InIf Laurus notifies the ~~event~~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 ~~fails~~issue, in exchange for the warrants, substitute warrants exercisable to purchase ~~successfully~~that ~~renegotiate~~number ~~these~~of ~~registration~~shares ~~right~~of ~~penalties~~its series B convertible preferred stock that are, upon effecting the Authorized Share Increase immediately convertible into ~~penalty~~the ~~payments~~number ~~may~~of shares of our Common Stock that would then have abeen ~~significant~~issuable upon ~~adverse~~exercise ~~impact~~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 ~~cash~~same ~~flow~~terms and ~~liquidity~~ ofprovisions as the ~~Company~~warrants.

On March 8, 2007, Laurus sent the Company a notice of default relating to the $25.0 ~~SUBSEQUENT~~million Note and also the $1.0 million bridge loan obtained on December ~~EVENTS~~ 22, 2006 (see Subsequent Events Note 10). As a result of this default, the Company has classified all its remaining debt as current as of December 30, 2006, in its Consolidated Balance Sheet.

~~Consulting~~ On May 7, 2007 the Company entered into an Amended and Restated Securities Purchase Agreement: with Laurus pursuant to which the Company sold to Laurus a Secured Term Note in the aggregate principal amount of $54,650,000. On the Closing Date, the 25.0 million obligation of the Company to Laurus under the June 30, 2006 note and an additional $3.8 million default penalty incurred in the fiscal quarter ended March 31, 2007 was repaid (see Subsequent Events Note 10).

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

~~The Consulting~~$4.8 ~~Agreement~~Million ~~also~~Subordinated contains a non-competition clause that provides, among other things, that (i) the formulas developed by the Formulators for KAAI are proprietary and may not be used by the Formulators for any purpose other than on behalf of KAAI and may not be utilized in products sold to anyone other than KAAI and (ii) except for limited exceptions, the Formulators will not directly or Loan

~~-20-~~ On July 11, 2006, the Company entered into an amended and restated loan agreement (the “Amended Subordinated Loan Agreement”) in order to amend and restate the provisions of its $4.8 million loan (the “Amended Subordinated Loan”) that the Company received from the Amended Subordinated Lenders on May 9, 2006 in order to conform its terms to the terms of the $5.2 million Subordinated Loan Agreement discussed below. Pursuant to a subordination agreement dated July 11, 2006, the Amended Subordinated Loan is subordinated to the Company’s existing senior indebtedness to Laurus under the Securities Purchase Agreement and the Related Agreements

~~indirectly~~ The ~~acquire~~Amended orSubordinated ~~own~~Loan ~~any~~is ~~interest~~evidenced ~~in any entity engaged in the business conducted~~ by ~~KAAI.~~ Inan ~~addition,~~amended ~~Mr.~~and ~~Potter~~restated ~~agreed to spend a majority of his formulation time~~subordinated onpromissory ~~behalf~~note ofdated ~~KAAI~~July ~~for~~11, ~~the~~2006 ~~first 12 months of~~ (the ~~Consulting~~“Amended ~~Agreement.~~Subordinated ~~After~~Promissory ~~KAAI~~Note”). ~~begins~~The ~~purchasing~~terms ~~in excess~~ of ~~$5,000,000~~the ~~annually~~Amended inSubordinated ~~products,~~Promissory ~~Mr.~~Note ~~Potter is~~are ~~required~~identical to ~~devote at least 90% of his formulation time to KAAI product~~ ~~development~~the ~~requirements.~~terms ~~Mr. Potter is to be paid an annual consulting fee~~ of ~~$207,000~~ inthe ~~equal~~Subordinated ~~monthly~~Promissory ~~installments~~Note ofexcept ~~$17,250.~~that Ininterest ~~addition,~~on ~~KAAI~~the ~~will grant~~Amended ~~Mr.~~Subordinated ~~Potter~~Promissory anNote ~~option~~accrues tofrom ~~purchase~~May ~~150~~9,~~000~~ ~~shares of common stock of KAAI at an exercise price of $2~~2006.50 ~~per share, vesting over a period of four years.~~

The ~~initial~~Amended ~~term~~Subordinated ofPromissory ~~the~~Note ~~Consulting~~ranks ~~Agreement is five years and automatically~~pari ~~renewed~~passu ~~for~~with ~~an additional five years at~~ the ~~end~~Subordinated ofPromissory ~~each five year term, unless earlier terminated as provided in the agreement filed as an exhibit in the Company’s Form 8-K dated April 21, 2006~~Note.

~~Formula~~ 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

In connection with the Consulting Agreement, on April 12, 2006, KAAI entered into a Formula Agreement (the “Formula Agreement”) with the Formulators and JPMorgan Chase Bank, N.A., as Escrow Agent (the “Escrow Agent”). Pursuant to the Formula Agreement, the Formulators agreed that all existing and future formula, manufacturing procedures and specifications, along with specific details of all raw material suppliers and specifications for the raw materials relating to the products to be purchased by KAAI from the Formulators are to be deposited with the Escrow Agent. In the event of certain specified events and/or contingencies, the Escrow Agent is required to deliver such formulas, manufacturing procedures and specifications to KAAI. 14

~~Construction~~warrants have the same terms and rights, including piggyback registration rights, as the warrants that were issued pursuant to the Subordinated Loan Agreement: described below. The Company calculated a debt discount attributable to the value of these warrants of $3.2 million, which will be amortized over the term of the note using the effective interest method (see Note 8 for a discussion of assumptions used to value the warrants). As of December 30, 2006, this note carried a debt discount of $3.1 million. For the three and six months ended December 30, 2006, the Company recorded interest expense of $0.03 million and $0.06 million respectively, related to the amortization of the debt discount.

~~Pursuant~~On toMay ~~the~~7, ~~Consulting Agreement~~2007, ~~KAAI~~each ~~agreed to loan up to a total~~ of ~~$1,100,000 to Mr. Mark Potter for~~ the ~~purchase~~holders of ~~land in Conroe, Texas (“Property”) and construction of a laboratory and manufacturing facility to manufacture and supply~~ the ~~Cosmedicine line of products~~$4.8 Onmillion ~~April~~Subordinated ~~17, 2006, KAAI made a loan of~~Loan ~~$392,200~~converted totheir ~~the~~indebtedness ~~Formulators~~into ~~for~~shares ~~the purchase~~ of ~~the Property evidenced by~~ a ~~Promissory~~ ~~Note~~newly ~~(the~~created ~~“Promissory~~Series ~~Note”). Under the Promissory Note, the~~E ~~principal~~Convertible ~~sum~~Preferred ofStock ~~$392,200 with interest at the rate~~ of ~~6-1/2% per annum is payable in 120 monthly installments of principal and interest in~~ the ~~amount~~Company ~~of $4,453~~(see ~~each~~Subsequent ~~with~~Events ~~the first installment due on May 1, 2006. The Formulators’ obligations under the Promissory~~ Note ~~are secured by a Deed of Trust, and~~ ~~Assignment of Rents and Security Agreement, dated April 4, 2006~~10).

In connection with the foregoing, KAAI also entered into a Construction Loan Agreement dated April 4, 2006 with the Formulators (the “Construction Loan Agreement”) pursuant to which the Formulators executed a $~~650,000 Construction Loan Promissory Note (“Construction Loan Promissory Note”) to KAAI for the development of a laboratory and manufacturing facility to be operated by Atlantis Laboratories, Inc~~5.2 onMillion ~~the~~Subordinated ~~Property. Under the terms of the Construction~~ Loan: Agreement, KAAI is to make advances to the Formulators under the Construction Loan Promissory Note from time to time in connection with the construction on the Property. The amount of each advance will be determined by KAAI. The unpaid principal balance on the Construction Loan Promissory Note bears interest at a rate of 6-1/2% per annum. Monthly installments of interest only on the outstanding principal balance will be due commencing on the first day of the month following the initial advance and continuing on the first day of each subsequent month up to and including April 1, 2007. Commencing May 1, 2007, and continuing through April 1, 2016, installment payments of principal and interest will be due in such amount as will be sufficient to pay in 108 equal payments all principal and accrued interest.

~~The~~On ~~Formulators’~~July ~~obligations~~11, ~~under~~2006, the ~~Construction~~Company entered into a loan agreement (the “Subordinated Loan ~~Promissory~~Agreement”) ~~Note~~with ~~are~~subordinated lenders for $5.2 million (the “Subordinated ~~secured~~Loan”) byto abe ~~Construction~~used ~~Deed~~by ofthe ~~Trust,~~Company ~~Security~~for ~~Agreement~~capital expenditures, ~~Assignment~~general ofworking ~~Leases~~capital and ~~Rents,~~to pay all costs and ~~Fixture~~expenses ~~Filing~~in connection with the Subordinated Loan. Pursuant to a subordination agreement dated ~~April~~July 411, 2006, between ~~Mr.~~the Subordinated ~~Potter~~Lenders and ~~the~~ ~~Trustee~~Laurus, ~~for~~ the ~~benefit~~Subordinated ofLoan ~~KAAI~~is ~~covering~~subordinated to the Company’s ~~Property~~existing senior indebtedness to Laurus.

~~-21-~~ 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”).

~~We have agreed~~ Subject to ~~assign~~prior ~~the~~payment ~~Construction~~in ~~Loan~~full ~~Agreement,~~of ~~Promissory~~all ~~Note,~~senior ~~Construction Loan Promissory Note~~indebtedness, ~~Deed~~the ofSubordinated ~~Trust~~Loan ~~and~~is subject ~~Construction Deed of Trust~~ to ~~Technology Investment~~voluntary ~~Capital~~prepayment ~~Corp.~~at ~~(“TICC”)~~any astime ~~additional~~and ~~collateral~~mandatory toprepayment ~~secure~~upon ~~KAAI’s~~the ~~obligations~~occurrence ~~under~~of ~~the~~a ~~Note~~change ~~and~~in ~~Warrant~~control ~~Purchase~~of ~~Agreement~~the ~~with TICC dated March 31, 2004, as amended~~Company.

~~Bridge~~ In the ~~Financing:~~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.

~~On May 9~~Additionally, ~~2006, we entered into a Loan Agreement with some of our existing~~ ~~shareholders, pursuant to which~~ the ~~Lenders loaned the~~ Company ~~$4,838,710~~agreed tothat ~~be used~~if byit ~~the~~consummated ~~Company~~one ~~for~~or ~~capital~~more ~~expenditures~~equity ~~and~~financings ~~general working capital.~~or ~~Pursuant~~indebtedness tojunior ~~a Subordination Agreement dated May 9, 2006 with the Lenders and TICC, the Loan is subordinated~~ to the Company’s ~~existing~~ senior indebtedness ~~to TICC~~after ~~under~~ the ~~Note~~date ~~and~~of ~~Warrant~~such financing ~~Purchase~~with ~~Agreement,~~proceeds ~~dated March 31, 2004, as amended.~~ in

~~Laurus Financing:~~ 15

~~On June~~excess 30of $10.0 million in the aggregate, ~~2006~~then two-thirds weof ~~sold~~all proceeds in excess of $10.0 shall be proportionately applied to ~~Laurus~~prepay ~~Master~~pari ~~Fund~~passu, ~~Ltd.~~the ~~(“Laurus”)~~Subordinated aLoan ~~Secured~~and ~~Term~~the obligations of ~~Note~~the inCompany under the ~~aggregate~~Amended ~~principal~~Subordinated ~~amount~~Loan. This provision ofhas ~~$25,000,000~~been ~~(the~~amended ~~“Note”)~~so ~~and~~that ~~issued~~no such prepayment can be made until the Senior Debt issued to Laurus ~~series~~on AJuly ~~warrants~~11, ~~series~~2006 Bas ~~warrants~~well ~~and~~as ~~series~~the C$4 ~~warrants~~million toof ~~purchase~~Senior upSubordinated toDebt ~~37,351,824~~issued ~~shares,~~on 6December 22,~~839,394~~ ~~shares~~2006 ~~and~~(including ~~6,693,875~~interest ~~shares,~~and ~~respectively,~~all ofother ~~our~~obligations ~~common~~due) ~~stock~~have been paid.

WeThe ~~placed~~obligations ~~$21,556,000~~of (the ~~“Funding~~Company ~~Amount”)~~under ~~into~~the aSubordinated ~~restricted~~Loan ~~account~~Agreement ~~that will~~and ~~only~~Subordinated bePromissory ~~release~~Note toare usguaranteed ifby ~~the~~each ~~following~~of ~~conditions (~~the ~~“Funding Amount~~Company’s ~~Conditions”)~~subsidiaries. ~~are satisfied by July 11, 2006:~~

• The Subordinated WePromissory ~~and~~Note ~~our~~ranks ~~subsidiaries~~pari passu ~~deliver~~with tothe ~~Laurus~~Amended ~~evidence~~Subordinated ~~that~~Promissory ~~$5,200,000 in additional junior capital has been raised~~Note. • We and our subsidiaries deliver (or cause to be delivered) a subordination agreement(s) executed by each of us and any of our lenders reasonably acceptable to Laurus. • Laurus receives an executed payoff letter from Technology Investments Capital Corporation, our existing senior lender, in form and substance satisfactory to Laurus in its sole discretion.

WePursuant ~~also~~to ~~placed~~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 $20.001 per share,~~500~~ subject to certain adjustments set forth therein. The warrants expire on June 30,~~000~~ (2013. The Subordinated Lenders are not entitled to receive shares of Common Stock upon exercise of the warrants ~~“Interest~~if ~~Amount”)~~such inreceipt awould ~~restricted~~cause ~~account~~such Subordinated Lender to be ~~utilized~~ deemed to beneficially ~~prefund~~own ~~interest~~in ~~for~~excess of 4.99% of the ~~first~~outstanding ~~year~~shares of Common Stock on the ~~Note~~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 ~~balance~~Company ofrecorded a debt discount in the amount of $~~25,000,000~~3.4 million which is attributable to bethe ~~used~~value of the warrants ~~for~~issued. The ~~Laurus’s~~debt ~~closing~~discount ~~payment~~will be amortized over the term of ~~$900,000,~~the ~~Laurus’s~~loan ~~due~~using ~~diligence~~the ~~and structuring~~effective ~~expenses~~interest method. As of ~~$40~~December 30,~~000~~ ~~and~~2006, ~~escrow~~this ~~agent~~note ~~fees~~carried a debt discount of $~~4,000~~3.3 million. IfFor the three ~~Funding~~and ~~Amount~~six ~~Conditions~~months ~~are~~ended ~~not~~December ~~met by July 11~~30, 2006, the ~~Funding~~Company ~~Amount~~recorded ~~and~~interest expense ~~the~~of ~~Interest~~$0.04 ~~Amount~~million ~~will~~and ~~revert~~$0.07 million respectively, related to the ~~Laurus~~amortization of the debt discount.

~~-22-~~ 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.

~~The~~On ~~Note~~May ~~matures~~7, ~~on June 30~~2007, ~~2010~~each ~~and~~of ~~interest~~the ~~accrues~~holders atof ~~a rate per annum equal to~~ the ~~“prime rate,” plus two percent (~~$5.2%) ~~per~~million ~~annum,~~Subordinated ~~payable monthly, in arrears,~~Loan ~~commencing~~converted ontheir ~~August~~indebtedness 1,into ~~2006. Commencing~~shares onof ~~August~~a 1,newly ~~2007,~~created weSeries ~~will make monthly payments to Laurus in~~E anConvertible ~~amount~~Preferred ~~equal~~Stock ~~to $416,666.67 together with any accrued and unpaid interest on such portion~~ of the ~~outstanding~~Company ~~principal~~(see ~~amount~~Subsequent ~~plus~~Events ~~any and all other unpaid amounts which are then owing under the~~ Note. ~~Our payment obligations are guaranteed by certain of our subsidiaries and are secured by all of our and such subsidiaries’ assets~~10).

~~The warrants have a 10-year term and an exercise price equal to~~ $04.010 ~~per~~Million ~~share,~~Senior ~~or in~~Subordinated certain circumstances, may be exercised on a cashless basis. If, prior to the fourteenth month anniversary of June 30, 2006, (i) our obligations under the Note have been reduced to $12,500,000 or less, then the series B warrants will automatically be cancelled and terminated; and (ii) our obligations under the Note have been reduced to zero, then the series C warrants will automatically be cancelled and terminated. We are obligated to file a registration statement with the Securities and Exchange Commission covering the resale of the shares underlying the warrants. Loans:

We have also agreed to use our best efforts amend our certificate of incorporation to increase the number of authorized shares of our common stock to such number as shall be sufficient to permit the exercise in full of the warrants (~~the “Share Amount”~~i) $1. If0 ~~Laurus~~Million ~~notifies~~Senior usSubordinated atSecured any time prior to the effective date of such amendment that it desires to exercise the warrants prior to such effective date, we will promptly issue, in exchange for the warrants, substitute warrants exercisable to purchase that number of shares of our series B convertible preferred stock that are, upon authorization of the Share Amount, immediately convertible into the number of shares of our common stock that would then have been issuable upon exercise of the warrants in full if our certificate of incorporation had then provided for sufficient authorized shares of our common stock to satisfy such exercise, and otherwise containing substantially the same terms and provisions as the warrants. Loan

~~On July~~The ~~3, 2006, we borrowed $1,000,000 from William J. Kidd, a shareholder of the~~ Company, entered ~~through~~into ~~an affiliated company, and $150,000 from Andrew D. Lipman,~~ a ~~shareholder,~~ ~~Director~~Subordinated ~~and~~Securities ~~Officer~~Purchase ofAgreement (the ~~Company. These~~“Laurus ~~amounts~~Purchase Agreement”) ~~were~~with ~~borrowed~~Laurus indated ~~anticipation~~as of ~~and~~December ~~are~~22, ~~intended to be part of the $5~~2006,~~200,000~~ ofpursuant ~~junior~~to ~~capital~~ which ~~is currently being raised by~~ the Company ~~with~~issued ~~Subordinated~~to ~~Lenders in connection with the~~ Laurus ~~transaction~~ ~~described~~(i) ~~above. The foregoing~~a ~~loans~~Subordinated ~~will~~Secured beTerm ~~payable~~Note ~~and~~in ~~will otherwise be on~~ the ~~terms and~~principal ~~conditions~~amount of ~~the~~ $~~5,200,000~~1.0 ~~junior~~million ~~capital financing to be executed in connection with~~ (the ~~release~~“Subordinated ofSecured ~~funds under the Laurus agreement described above.~~

~~Liquidity:~~ 16

~~The~~Note”); ~~accompanying financial statements have been~~and ~~prepared~~(ii) onwarrants (the ~~going~~“Laurus ~~concern~~Warrants”) ~~basis~~to ~~which~~purchase ~~contemplates~~up ~~the~~to ~~realization of~~10,000,000 ~~assets~~shares ~~and~~ (the “Warrant ~~satisfaction~~Shares”), of ~~liabilities in~~ the ~~normal~~Company’ ~~course~~Common ~~of business~~Stock. ~~Since~~ ~~its~~In ~~inception,~~ the event ~~Company~~the ~~has~~Subordinated ~~experienced~~Secured ~~operating~~Note ~~losses~~is ~~and~~not ~~negative~~repaid ~~cash~~by ~~flow from operations. As of~~ April 130, ~~2006~~2007, the Company has agreed ato ~~cumulative~~issue ~~deficit~~Laurus ofwarrants ~~$350.8~~with ~~million~~like ~~and~~terms ato ~~working~~purchase ~~capital deficiency~~an ofadditional ~~$23.6 million~~8, ~~as compared to June 30~~750, ~~2005, the Company had a~~000 ~~cumulative~~shares ~~deficit~~ of ~~$39.7~~Common ~~million and a working capital deficiency of $20~~Stock.~~3 million. These~~ ~~factors~~Due ~~raise substantial~~to ~~doubt about~~ the ~~Company’s~~fact ~~ability~~that tothis ~~continue~~debt aswas anot ~~going~~repaid ~~concern. The~~by ~~Company’s ability to continue as a going concern is ultimately dependent on~~April ~~its~~30, ~~ability~~2007, tothe ~~increase~~Company ~~sales and reduce expenses to a level that~~ will ~~allow~~issue ~~it to~~the ~~operate~~additional ~~profitably and sustain positive operating cash flows~~8,750,000 ~~and~~warrants ~~the Company’s ability~~ to ~~successfully raise additional capital~~Laurus.

~~There~~The isSenior noSubordinated ~~assurance~~Secured ~~that~~Note ~~the~~matures ~~recent~~on ~~bridge~~December ~~financing~~22, 2009 or earlier upon a change of control or other specified events. Interest will beaccrue ~~sufficient~~on the unpaid principal amount of the Note at a rate per annum equal to ~~fund~~twelve percent (12%) ~~operations~~per ~~until~~annum. ~~sales~~Interest ~~and~~in ~~profitability~~the ~~improves~~amount of six percent (6 %) per annum shall accrue, and subject to the ~~point~~provisions ~~that~~of the Subordination Agreement among the Company, isLaurus ~~able~~and Subordinated Lenders to ~~operate~~the ~~from~~Company ~~internally~~dated ~~generated~~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-~~23-~~year term and an exercise price equal to $0.001 per share. The Laurus Warrants also provide that if the fair market value of one share of Common Stock is greater than the exercise price Laurus may choose to exercise the warrant on a cashless exercise basis resulting in an issuance of net shares with no cash payment. The Company recorded a debt discount in the amount of $0.7 million which is attributable to the value of the warrants issued. The debt discount will be amortized over the term of the loan using the effective interest method. As of December 30, 2006, this note carried a debt discount of $0.7 million.

~~cash flows.~~ On ~~The~~May ~~financial~~7, ~~statements~~2007, doLaurus ~~not~~converted ~~include any adjustments to reflect~~ the ~~possible future~~$1.0 ~~effects~~million onloan ~~the~~into ~~recoverability~~shares ~~and classification~~ of ~~assets~~a ~~or the~~newly ~~amounts~~created ~~and~~Series ~~classification~~E ofConvertible ~~liabilities~~Preferred ~~that~~Stock ~~may result from the possible inability~~ of the Company to(see ~~continue as a going concern. Management plans include raising additional~~Subsequent ~~capital,~~Events ~~and~~Note ~~executing the expansion plans per the business plan~~10). ~~However, there can be no assurance that these sources will provide sufficient cash inflows to enable the Company to achieve its operational objectives.~~

~~-24-~~(ii) $3.0 Million Senior Subordinated Loan

~~Item~~ The Company 2entered 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 ~~Management~~(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 ~~Discussion~~indebtedness to Laurus under the Securities Purchase Agreement dated June 30, 2006 (the “Securities Purchase Agreement”), and ~~Analysis~~the ofRelated ~~Financial~~Agreements ~~Condition~~referred to in the Securities Purchase Agreement and ~~Results~~ranks senior to the Company’s $10.0 million of ~~Operations~~existing subordinated indebtedness.

~~You~~The ~~should~~Senior ~~read~~Subordinated ~~the~~Loan ~~following~~is ~~discussion~~evidenced inby ~~conjunction~~a ~~with~~senior ~~the~~subordinated ~~attached~~promissory ~~unaudited~~note ~~condensed~~dated ~~consolidated~~December ~~financial~~22, ~~statements~~2006 ~~and~~(the ~~notes~~“Senior ~~thereto~~Subordinated Note”) and ~~with~~bears ~~the~~interest at ~~Klinger~~annual ~~Advanced~~rate ~~Aesthetics,~~equal ~~Inc.~~to twelve percent (~~“KAAI”~~12%) ~~audited~~per ~~financial~~annum ~~statements~~of ~~and notes~~which ~~thereto~~6% ~~for~~shall ~~the~~be ~~fiscal~~paid in ~~year~~cash ~~ended~~monthly, ~~June~~commencing 30, ~~2005~~days from the closing (assubject ~~restated~~to the provisions of the Subordination Agreement) ~~included~~and the balance of 6% paid in ~~our~~ ~~Current~~kind ~~Report~~and paid on the ~~Form~~maturity ~~8-K/A~~date. The ~~filed~~principal balance ~~with~~and remaining accrued interest on the ~~Securities~~Senior ~~and~~Subordinated ~~Exchange Commission~~Note is due on ~~February~~December 2131, ~~2006~~2009.

~~Unless~~In ~~otherwise~~the ~~indicated:~~event ~~references~~that tothe ~~“TrueYou”~~Company ~~refer~~consummates toan ~~Trueyou.com~~equity ~~Inc.; references~~financing toat ~~“KAAI”~~any ~~refer~~time prior to the ~~Klinger~~maturity ~~Advanced~~date ~~Aesthetics,~~of ~~Inc.~~the ~~and~~Senior ~~its consolidated~~Subordinated ~~subsidiaries;~~Note, ~~references~~each toSenior ~~the~~Subordinated ~~“we,”~~Lender ~~“our,”~~may ~~and~~elect ~~“us”~~to ~~refer~~convert tothe ~~TrueYou.Com~~entire ~~Inc.~~principal amount and ~~its~~accrued ~~consolidated~~interest ~~subsidiaries~~due ~~(including~~to ~~KAAI);~~such ~~and~~Senior ~~the~~Subordinated ~~terms~~Lender ~~“fiscal~~under ~~quarter”~~the ~~and~~Senior ~~“three months”~~Subordinated inNote ~~this~~into equity ~~Quarterly Report~~ on the ~~Form~~same ~~10-Q~~basis ~~refer~~as toin the ~~quarter~~equity ~~ended April 1, 2006~~offering.

Pursuant to the Senior Subordinated Loan Agreement, the Company issued to the Senior Subordinated Lenders warrants to purchase an aggregate of 15,384,615 shares of Common Stock at an exercise price of $0.001 per share. The warrants expire on December 31, 2013. In the event the Laurus Note is not paid by April 30, 2007, certain holders of such Warrants have agreed to contribute 8,750,000 Warrants back to the Company and the Company has agreed to issue an additional 8,750,000 Warrants to Laurus. As the debt was not repaid by April 30, 2007, certain holders will return 8,750,000 warrants to the Company which will then be issued to Laurus per the agreement. The Company recorded a debt discount in the amount of $1.7 million which is attributable to the value of the warrants issued. The debt discount will be amortized over the term of the loan using the effective interest method. As of December 30, 2006, this note carried a debt discount of $1.7 million.

On May 7, 2007, each of the holders of the $3.0 million Senior Subordinated Loan converted their indebtedness into shares of a newly created Series E Convertible Preferred Stock of the Company (see Subsequent Events Note 10).

Accrued Interest and Maturities of Other Long Term Debt

Accrued interest of $3.4 million and $2.7 million is included in accrued expenses as of December 30, 2006 and July 1, 2006, respectively.

Concurrent with the May 7, 2007 financing, various debt holders agreed to waive $0.8 million in accrued interest that is included in the December 30, 2006 Condensed Consolidated Balance Sheet.

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 to a private placement that was consummated in June, 2006, and funded in July 2006. By order entered on May 25, 2007, the court granted UBS’s motion for summary judgment. On June 5, 2007 the court entered judgment against the Company in the sum of $1,962,139.25, inclusive of interest and costs. A hearing on UBS’s request for attorney’s fees will be held on July 10, 2007. In the event the Company is required to pay this judgment, it would materially and adversely affect 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 six months ended December 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 was to be structured as an acquisition of all of the capital stock of Nouvisage in exchange for newly issued shares of Series B Preferred Stock of the Company, par value $0.001 per share (the “Shares”), each of which would be convertible into 10,000 shares of Common Stock of the Company, par value $0.001 per share The acquisition was intended to qualify as a tax-free exchange under the Internal Revenue Code of 1986.

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

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

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

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

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 December 30, 2006 and July 1, 2006, there were accrued and unpaid consulting fees to L Capital of approximately $876,841.

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

Concurrent with the May 7, 2007 financing, L Capital waived the $876,841 in accrued management fees included in the December 30, 2006 Condensed Consolidated Balance Sheet.

KCO Advisory Services Agreement

On November 25, 2003 KAAI entered into an Advisory Services Agreement with KCO pursuant to which KCO performed advisory services for the Company. Under the Agreement KAAI was required to pay KCO an annual advisory fee, payable in quarterly installments in arrears, equal to the higher of (a) $425,000 and (b) 1% of our gross revenues for such year. As of December 30, 2006 and July 1, 2006, there were accrued and unpaid consulting fees to KCO of approximately $837,433.

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

Concurrent with the May 7, 2007 financing, KCO waived the $837,433 in accrued management fees included in the December 30, 2006 Condensed Consolidated Balance Sheet.

Loans by Affiliates of Pequot

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

On May 7, 2007, affiliates of Pequot converted their indebtedness into shares of a newly created Series E Convertible Preferred Stock of the Company (see Subsequent Events Note 10).

Loans by Klinger Investments

Klinger Investments, LLC, an entity owned by William J. Kidd, the spouse of Carla G. Kidd, the sole Manager of Seapine Investments, LLC, a holder of more than 5% of the Common Stock of the Company and a 50% owner of Kidd & Company, LLC, loaned the Company $2,275,269 as part of the July 11, 2006 $5.2 million Subordinated Debt financing and May 9, 2006 $4.8 million Subordinated Debt financing and $650,000 in the $4 million December 22, 2006 Senior Subordinated financing and received 7 year warrants with an exercise price of $.001 per share to purchase an aggregate of 14,416,354 shares of Common Stock and 7 year warrants to purchase an aggregate of 2,904,762 shares of Common Stock. In the event the Laurus $1 million Senior Subordinated Loan is not repaid by April 30, 2007, warrants to purchase 2,708,374 shares will be returned by Klinger Investments to the Company for cancellation. Due to the fact that this debt was not repaid by April 30, 2007, the Company will cancel the 2,708,374 warrants held by Klinger Investments.

On May 7, 2007, Klinger Investments, LLC converted its indebtedness into shares of a newly created Series E Convertible Preferred Stock of the Company (see Subsequent Events Note 10).

Loans by Laurus Master Fund Ltd.

Laurus has loaned the Company $25,000,000 as Senior Secured Debt and $1 million as Senior Subordinated Secured Debt as described in this Report and received 10 year warrants with an exercise price of $.01 per share to purchase a total of 50,885,093 shares of Common Stock and 7 year warrants with an exercise price of $.001 per share to purchase a total of 10,000,000 shares of Common Stock. In addition Laurus is entitled to receive warrants to purchase an additional 8,750,000 shares of Common Stock if the $1,000,000 Senior Subordinated Secured Debt is not repaid by April 30, 2007. Due to the fact that this debt was not repaid by April 30, 2007, the Company will issue the additional 8,750,000 warrants to Laurus. If prior to the 14^th 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. As a result of the May 7, 2007 refinancing discussed below, the Company will cancel the combined 13,533,269 warrants held by Laurus, due to the prepayment.

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

Loan by Richard Rakowski

Richard Rakowski, the Chairman and former Chief Executive Officer of the Company, loaned the Company $850,000 as part of the Senior Subordinated Debt financing on December 22, 2006 and received 7 year warrants with an exercise price of $.001 per share to purchase 3,798,534 shares of Common Stock. In the event the Laurus $1 million Senior Subordinated Secured Loan is not repaid by April 30, 2007, warrants to purchase 3,541,666 shares of Common Stock will be returned to the Company for cancellation by Mr. Rakowski. Due to the fact that this debt was not repaid by April 30, 2007, the Company will cancel the 3,541,666 warrants held by Mr. Rakowski. Mr. Rakowski has also personally guaranteed certain obligations of the Company.

On May 7, 2007, Mr. Rakowski converted his indebtedness into shares of a newly created Series E Convertible Preferred Stock of the Company (see Subsequent Events Note 10).

Loans by Andrew Lipman

Andrew D. Lipman, a former Director, loaned the Company $150,000 in the July 11, 2006 $5.2 million Subordinated Debt Financing and received 7 year warrants with an exercise price of $.001 per share to purchase 950,416 shares of Common Stock and loaned the Company $200,000 in the December 22, 2006 Senior Subordinated financing and received 7 year warrants with an exercise price of $.001 per share to purchase 893,773 shares of Common Stock. In the event the Laurus $1 million Senior Subordinated Secured Loan is not repaid by April 30, 2007, warrants to purchase 833,334 shares of Common Stock will be returned to the Company for cancellation by Mr. Lipman. Due to the fact that this debt was not repaid by April 30, 2007, the Company will cancel the 833,334 warrants held by Mr. Lipman. Mr. Lipman loaned the Company a combined $250,000 in the combined $4.0 million Secured Demand Note financings completed on March 16, 2007 and March 27, 2007.

On May 7, 2007, Mr. Lipman converted his indebtedness from the July 11, 2006 and December 22, 2006 financings into shares of a newly created Series E Convertible Preferred Stock of the Company (see Subsequent Events Note 10).

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 $4.1 million in net revenues on a cumulative basis as of December 30, 2006. The Company recorded revenues of $0.5 million and $1.4 million for the three and six months ended December 30, 2006. At December 30, 2006, the Company had a $0.2 million payable balance to 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. No options were granted in the three months ended December 30, 2006.

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 December 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 income of approximately $3.2 million and compensation expense of $0.2 million for the three months ended December 30, 2006 and December 31, 2005, respectively for stock options granted and the subsequent remeasurement. The Company recognized compensation expense of approximately $1.0 and $0.2 million for the six months ended December 30, 2006 and December 31, 2005, respectively for stock options granted and the subsequent remeasurement. In addition, as of December 30, 2006, there was approximately $1.4 million in unrecognized stock based compensation expense related to non-vested stock options which is expected to be recorded in future periods over a weighted average period of 1.9 years.

There were new TrueYou options for the purchase of $55.1 million shares of Common Stock granted during the six months ended December 30, 2006. There were additional TrueYou options to purchase $22.2 million shares of Common Stock issued as an exchange for Advanced Aesthetics, Inc. options. There were no options granted during the six months ended December 31, 2005.

The weighted average fair value of the new employee options granted during the six months ended December 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 six months ended December 30, 2006 and December 31, 2005:


	Six Months Ended

Assumptions	December 30, 2006		December 31, 2005


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

The Company also provides stock options to some of its outside contractors. These options are subject to the provisions of EITF 96-8, which requires remeasurement of the awards until performance is complete. As a result, these awards were also revalued as of December 30, 2006. As of December 30, 2006 the weighted average fair value was $0.06, the weighted average interest rate was 4.8%, the forfeiture rate was 2.5%, and weighted average expected life was 3.1 years for these stock options.

A summary of the Company’s stock option activity during the six 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, December 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 December 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 12/30/06

Weighted average
remaining
contractual life (in
years)

Weighted
average
exercise price

Number
exercisable as
of 12/30/06

Weighted
average price

Stock options issued @$0.19 to $0.34

77,301,262

9.3

$0.28

53,873,479

$0.28

Warrants

The Company issued 139,876,075, warrants during the six months ended December 30, 2006 which were valued using the Black-Scholes option pricing model using the following weighted average assumptions: risk-free rate of return – 5.08%; term – 8.1 years; volatility – 50%; dividend yield – 0.0%. The warrants were recorded as a discount to debt.

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


	Warrants Outstanding

	Shares		Weighted Average Exercise Price


Outstanding, July 1, 2006		63,638,769	$	0.166

Granted		139,876,075		0.004
Cancelled		—		—
Exercised		—		—


Outstanding, December 30, 2006		203,514,844	$	0.055

At December 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 12/30/06

Weighted
average
remaining
contractual life
(in years)

Weighted
average
exercise
price

Number
exercisable
as of 12/30/06

Weighted
average
price

Warrants issued @ $.001 to $.230

203,514,844

6.8

varies

203,514,844

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 December 30, 2006 and July 1, 2006 were $0.19 and $0.39, respectively. The number of common shares into which the convertible securities are convertible was 646,452,766 and 506,576,690 as of December 30, 2006 and July 1, 2006, respectively. As of December 30, 2006, the Company remeasured the convertible securities based on an estimated fair value of approximately $122.8 million and recorded an unrealized gain of approximately $53.5 and $94.0 million for the three and six months ended December 30, 2006. As of December 31, 2005, the Company remeasured the convertible securities based on an estimated fair value of approximately $197.6 million and recorded an unrealized loss of approximately $137.7 for the three and six months ended December 31, 2005.

10. Subsequent Events

Bridge financings

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

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

The Company, Laurus, and bridge lenders are negotiating to implement the integration of these loans into an agreement consistent with that of the May 2007 loan document discussed below.

(b) $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.

The Company, Laurus, and bridge lenders are negotiating to implement the integration of these loans into an agreement consistent with that of the May 2007 loan document discussed below.

Default on Senior Secured Debt

On March 8, 2007, Laurus, the holder of the Company’s $25.0 million in principal amount of Senior Secured Debt and also the holder of $1.0 million in principal amount of Senior Subordinated Secured Debt, sent the Company a Notice of Default and Acceleration accelerating the obligations due to Laurus under the Secured Term Note issued as of June 30, 2006 and the Senior Subordinated Secured Term Note issued as of December 22, 2006. As a result of this default, the Company has classified all the debt discussed above as current as of December 30, 2006, in its Consolidated Balance Sheet. The Company incurred a $3.8 million penalty in May 2007 as a result of this default.

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 May 30, 2007, the closing price of its Common Stock was $0.04. The default and the limited capital options determined after the event left the Company with no capacity to invest to maintain any remaining goodwill. Planned spending was curtailed relating to any non-essential activities or operations. This reduction in planned spending significantly reduced the projected cash flows of the stores/salons and the Company overall. As a result, the Company anticipates a charge of $18.1 million in its fiscal quarter ended March 31, 2007 to write-off all of its goodwill.

Closing of Beverly Hills

On February 8, 2007, 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.

Refinancing – Senior Debt

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

On the Closing Date, the obligations of the Company to Laurus under the June 30, 2006 note were repaid and the Company received $25,900,000 in new cash proceeds from the Note and placed $8,069,243 in a restricted account to be utilized to prefund interest of the Note. Other disbursements include a closing payment of $906,500 to Laurus Capital Management, LLC, an affiliate of Laurus, Laurus’ due diligence and structuring expenses of $10,000 and escrow agent fees of $2,000. The sum of $4,000,000 was wired to a Company account and an additional $12,912,256 was deposited to a restricted account to be disbursed to the Company in accordance with the Restricted Account Letter Agreement dated May 4, 2007, which provides that the Company must meet certain financial conditions including reaching settlements with creditors before further money is released.

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

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

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

The Warrants issued to the Purchaser have a 10-year term and an exercise price equal to $.001 per share. The Company will calculate a debt discount attributable to the value of these warrants which will be amortized over the term of the Note using the effective interest method. As the determination of the fair value of the warrants is finalized by the Company, an expense and corresponding liability will be recorded, as required by EITF 00-19 due to the insufficient number of shares authorized. The liability to be recorded for the securities will be adjusted to fair value at each reporting period until the number of authorized shares is increased to permit the exercise of these securities. Under the Purchase Agreement, if the conditions set forth in the Purchase Agreement are met within three years, then the Series E Warrant will be returned to the Company. The Company has agreed to issue a like warrant to Richard Rakowski, Chairman of the Company if the Series E warrants are returned to the Company. The conditions include that all of the Company’s obligations to Purchaser have been repaid and that the Company’s Total Debt (as defined) divided by the aggregate amount of EBITDA (as defined) for a 12 month period has not exceeded 4.0 for four consecutive months.

If exercised in full, the Warrants issued to Laurus would constitute approximately 75% of the issued and outstanding Common Stock of the Company on a fully diluted basis provided however that such Warrants contain a “blocker” provision pursuant to which Laurus cannot exercise such Warrants to acquire more than 9.99% of the then outstanding shares of Common Stock of the Company provided further that such limitation may be waived by the Holder on not less than 61 days prior notice to the Company. The Warrants further provide that such limitation is automatically null and void following notice to the Company upon the occurrence and during the continuance of an Event of Default (as defined in the Purchase Agreement).

The Company has agreed to use its best efforts to cause its certificate of incorporation to be amended to increase the number of authorized shares of Common Stock to such number as shall be sufficient to permit the exercise in full of the Warrants (such amount, the “Share Amount”). If the Purchaser notifies the Company at any time prior to the effective date of such amendment that it desires to exercise the Warrants prior to such effective date, the Company will promptly issue to the Purchaser, in exchange for the Warrants, substitute warrants exercisable to purchase that number of shares of its Series B Convertible Preferred Stock that are, upon authorization of the Share Amount, immediately convertible into the number of shares of Common Stock that would then have been issuable upon exercise of the Warrants in full if the certificate of incorporation of the Company had then provided for sufficient authorized shares of Common Stock to satisfy such exercise, and otherwise containing substantially the same terms and provisions as the Warrants. In the event that effective date of the amendment authorizing the Share Amount does not occur by December 31,

2007 as described in the Purchase Agreement, the Contract Rate of the Note may be increased by 2% per annum and shall remain at such higher rate until such time as the Share Amount is authorized.

Sale of Company Stores/salons

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

In consideration for the sale, the Purchaser assumed $1,450,000 of accounts payable relating to the business as well as all outstanding gift card liability of the spa/salons. In addition the Purchaser issued a note to the Company in the amount of $150,000 due in 60 days.

The parties also entered into various agreements in connection with the sale including a transition services agreement pursuant to which the Company will provide transitional services to the Purchaser as well as a Cosmedicine supply agreement pursuant to which the Company will supply the Purchaser with Cosmedicine products. Pursuant to the transaction, the Company agreed not to compete with the business sold for a period of three years.

In connection with the sale, on May 7, 2007 the Company and Laurus entered into a Waiver and Consent Agreement whereby Laurus released its security interest in the assets sold in connection with the Purchase and Sale Agreement. As the Company could not sell the stores without approval from Laurus, the Company will record discontinued operations in the fourth quarter. The Company was not committed to a plan to sell the stores until the forth quarter as the required approval from Laurus occurred at that time. As a result of this sale, the Company anticipates a loss on sale of $2.5 million in the fourth quarter.

Conversion of Debt and Equity

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

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

Consulting Agreement – Richard Rakowski

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

Termination of Agreements – Johns Hopkins

On May 7, 2007, the Company entered into an agreement with Johns Hopkins Medicine, Johns Hopkins University and Johns Hopkins Health Systems Corporation, pursuant to which the Consulting and Services Agreement between Advanced Aesthetics, Inc. and Johns Hopkins Medicine dated November 23, 2003, as amended was terminated effective April 13, 2007. Under the Agreement, KAA is required to pay Johns Hopkins $369,565 by July 31, 2007, and as of the effective date, Johns Hopkins will no longer provide services to the Company. As a result of this agreement, the Company will record a derecognition of the intangible asset of approximately $3.7 million and liability of approximately $3.3 million in the fourth quarter.

The May 7, 2007 agreement also provides that the License and Management Agreement between Johns Hopkins University and the Company relating to the Company’s Chevy Chase, Maryland facility is terminated effective May 13, 2007, and that the Company shall pay Johns Hopkins all amounts due under that agreement by May 21, 2007. The Company paid $0.2 million as part of this agreement.

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 December 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.

~~Overview~~Business Overview

WeOn ~~offer~~May ~~both medical and non-medical KAAI Signature Services and products to customers under one delivery system and we are bringing cosmetic surgery~~7, ~~cosmetic~~ ~~dentistry and dermatology~~2007, ~~and~~the ~~salon~~Company ~~and~~entered ~~spa~~into ~~services together under~~ a ~~single~~ ~~brand,~~Purchase ~~giving~~and ~~clients~~Sale ~~access~~Agreement topursuant ~~top service providers, unique treatments~~to ~~and~~which ~~predictable~~it ~~results~~sold inall ~~a state~~ of ~~the~~its ~~art environment. We co-brand our trade name with the trade names of the~~ spa/salons ~~and~~to ~~spas~~GK ~~that~~Acquisition weLLC, ~~acquired. Our~~an ~~salons and spas share certain corporate resources such as senior~~unaffiliated ~~management~~third ~~and~~party ~~administrative~~(see ~~services. We~~Subsequent ~~had~~Events ~~527~~Note ~~employees on April 1, 2006~~10).

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

We offer both medical and non-medical services and products to customers. We co-brand our trade name with the trade names of the salons and spas that we acquired. We offer our Cosmedicine skin care products at retail through our own location and at wholesale through Sephora stores and the internet. We are developing and testing the Klinger 360° Best Practices Aesthetics System ™ (the “K360”), which to our knowledge is the first comprehensive software and hardware practice management system that facilitates the delivery of evidenced based “best practices” aesthetic services. Our salons and spas share certain corporate resources such as senior management and administrative services. As of May 31, 2007, and as a result of the sale of the spa/salons described above, we had 29 employees. As of December 30, 2006 we had 542 employees.

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.

~~Our~~In ~~locations~~2006, ~~include~~we opened our two ~~fully~~new ~~integrated~~flagship ~~properties~~locations, ~~located~~the inNorthPark ~~West~~flagship ~~Palm~~in Dallas ~~Beach~~Texas, ~~Florida~~ and ~~Palm~~the ~~Beach~~Chevy ~~Gardens,~~Chase ~~Florida.~~flagship Ofin ~~our~~Chevy ~~twelve locations~~Chase, ~~two~~Maryland. These locations are ~~fully integrated~~the ~~properties,~~models ~~eight~~that ~~are~~showcase inour ~~the~~business ~~planning~~strategy ~~stages~~and ~~for~~are ~~conversion~~used ~~into~~to ~~fully~~advertise ~~integrated~~all ~~properties,~~our orproducts ~~what~~and weservices. ~~call~~They ~~the~~have ~~“KAAI~~been ~~Model,”~~developed ~~and~~as ~~two are~~fully ~~being~~integrated ~~converted~~properties, toin a new format which ~~will~~offers ~~offer~~ cosmetic dermatology, spa ~~and~~ and salon services, ~~and~~ retail products, and the K360 system in a luxurious upscale setting (the “KAAI Model”). These ~~two~~locations ~~facilities~~are ~~will~~located ~~occupy~~in akey ~~smaller~~markets. The ~~square~~complete ~~footage~~listing of our store locations is as follows:

~~-25-~~• 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

~~than~~ (A) ~~many of~~– ~~our~~There ~~other~~are ~~facilities. These~~currently ~~locations are~~three ~~located~~stores in ~~key~~Palm ~~markets with a national operating presence. Our additional locations are:~~ Beach

• These fully-integrated ~~Manhattan,~~facilities ~~New~~feature ~~York~~cosmetic dermatology, •skin ~~Manhasset~~care, ~~Long~~cosmetic medical ~~Island~~consultations, ~~New~~hair ~~York~~care, •spa ~~Beverly~~and ~~Hills~~salon services, ~~California~~and •retail ~~Costa~~products on ~~Mesa~~site, ~~California~~and •cosmetic ~~Boca~~medical ~~Raton,~~services ~~Florida~~provided •by ~~Palm~~medical ~~Beach,~~offices ~~Florida~~operated •by Johns ~~Washington,~~Hopkins DCand •UT ~~Dallas,~~Southwestern. ~~Texas~~We •also ~~Chicago,~~participate ~~Illinois~~in the Johns Hopkins Cosmetic Safety Program in locations where they have visited the site and confirmed •that ~~Short~~we ~~Hills,~~are ~~New~~in ~~Jersey~~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 ~~consider~~have ~~West~~developed ~~Palm~~an ~~Beach and Palm Beach Gardens, Florida locations to be our flagship facilities. These fully~~over-~~integrated~~the-counter ~~facilities feature cosmetic dermatology,~~ skin care, ~~cosmetic surgery~~line ~~consultations,~~of ~~hair~~products ~~care,~~called Cosmedicine. ~~spa~~Johns ~~and~~Hopkins ~~salon~~consulted ~~services, and retail products~~ on ~~site,~~the ~~and~~design ~~cosmetic surgery~~ and ~~dentistry~~information ~~via~~analysis ~~off-site affiliated providers. All~~ of ~~our medical~~ ~~treatments~~tests ~~and~~performed ~~providers (both~~ on ~~and~~Cosmedicine ~~off-site) are reviewed and approved by our Medical Advisory Board~~products. ~~Our~~ ~~Medical Advisory~~In ~~Board~~return isfor ~~advised~~its byconsulting ~~Johns Hopkins Medicine (“John Hopkins”)~~services, ~~acting~~ ~~through~~Johns ~~The John~~ Hopkins ~~Health~~receives ~~System~~fees ~~Corporation~~from ~~and The Johns Hopkins University~~KAAI. ~~Johns~~ ~~Hopkins~~We ~~Medicine provides~~launched ~~clinical~~the ~~and~~products ~~safety~~in ~~oversight~~February 2006 for ~~our~~exclusive ~~medical~~retail ~~services.~~distribution Weat ~~have~~Sephora ~~rights to~~stores, ~~use~~KAAI ~~the~~locations ~~Johns~~and ~~Hopkins~~on our ~~Medicine~~respective ~~name~~websites. inAll ~~this~~Cosmedicine ~~regard~~products ~~and~~are ~~approved~~being ~~language~~developed isand ~~used~~formulated infor ~~our~~us ~~facilities~~by ~~and~~Atlantis ~~diagnostic software~~Laboratories. We ~~believe~~Atlantis ~~that~~Laboratories ~~our~~is ~~clients are able~~an toindependent ~~better~~developer ~~understand their aesthetic service~~ and ~~product~~manufacturer ~~needs via the use~~ of ~~our~~ ~~SkinState~~bulk ~~diagnostic~~skin ~~tools~~care ~~which~~products. ~~objectively~~We ~~record~~believe that ~~facial~~going ~~aesthetic metrics~~forward, ~~such~~revenues asgenerated ~~hydration~~from ~~(moisture)~~sales ~~level,~~of ~~sebum~~our ~~(oil)~~Cosmedicine ~~level,~~products will ~~pore~~be ~~size,~~a ~~UV damage,~~significant ~~and~~percentage ~~other~~of ~~facial~~our ~~aesthetic~~aggregate ~~metrics~~revenues.

In addition, we ~~help~~have ~~clients~~developed ~~navigate~~a ~~through~~beta anversion ~~array~~ of ~~beauty~~the ~~enhancement options~~K360 ~~through~~system, ~~our~~a ~~Aesthetics~~practice management ~~Concierge~~system ~~program~~for ~~which~~medical isoffices ~~currently~~that ~~available in~~perform ~~our~~aesthetic ~~flagship locations~~procedures. The ~~Aesthetics~~K360 ~~Concierge~~system ~~guides~~has ~~interested~~been ~~clients~~designed ~~through~~to provide a ~~comprehensive~~series ~~analysis~~ of unique tools that we believe will improve the ~~client’s~~quality, ~~current~~safety and predictability of aesthetic services ~~characteristics~~performed ~~and~~in ~~goals~~a medical setting. The ~~Aesthetics~~K360 ~~Concierge~~system ~~also~~has ~~provides~~a series of ~~information~~functions, ~~and~~each ~~decision~~of ~~support~~which onis ~~all~~guided ofby ~~our~~standardized ~~treatments,~~protocols ~~services~~to ~~and~~optimize ~~products~~standardization. We ~~believe~~Beginning ~~the~~in ~~Aesthetics Concierge~~July ~~function~~2006, towe bebegan anlicensing ~~integral~~the ~~component~~software ofto ~~consumer~~a small ~~education~~number ~~about aesthetic~~of ~~services~~clients. ~~and~~Our ~~products~~goal ~~and~~is ~~that~~to itbegin ~~translates~~generating ~~into~~a ~~client~~small ~~interest~~amount inof ~~additional~~revenue ~~products~~on ~~and~~this ~~services~~software ~~that~~in ~~we offer~~2007.

We have developed an over-the-counter medical grade skin care line of products called Cosmedicine, for which clinical testing, design and data analysis were overseen by Johns Hopkins. 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. 31

InOur ~~addition,~~financial westatements ~~are~~have ~~developing~~been anprepared ~~Advanced~~on ~~Practice~~the ~~Delivery~~going ~~System~~concern ~~(“APDS”)~~basis, awhich ~~practice~~contemplates ~~management~~the ~~system~~realization ~~for~~of ~~medical~~assets ~~offices~~and ~~that~~the ~~perform~~satisfaction ~~aesthetic~~of liabilities in ~~procedures~~the normal course of business. ~~APDS~~ isSince ~~being~~our ~~designed~~inception, towe have experienced ~~provide~~substantial operating losses and negative cash flow from operations. As of December 30, 2006, we have an accumulated deficit of $145.9 million and a working ~~series~~capital deficit of ~~unique~~$48.9 ~~tools~~million. ~~that~~Included wein ~~believe~~our ~~will~~net ~~improve~~deficit ~~the~~at ~~quality~~December 30, 2006 is the remeasurement of convertible securities. Cumulative charges ~~safety~~recorded ~~and~~through ~~predictability~~the remeasurement of ~~aesthetic~~this ~~services~~obligation ~~performed~~amounted into a$38.7 million. ~~medical~~These factors raise substantial doubt about our ability to continue as ~~setting~~a going concern. ~~APDS~~ ~~will~~Also, ~~have~~as a ~~series~~result of ~~functions~~ our losses, ~~each~~the opinion of ~~which~~our Independent ~~will~~Registered bePublic ~~guided~~Accountants byon ~~standardized~~our ~~protocols~~audited financial statements for fiscal year 2006 included an explanatory paragraph relating to ~~optimize~~“going ~~standardization~~concern. We” ~~expect~~A going concern explanatory paragraph indicates that our auditors believe there is substantial doubt about our ability to ~~license~~continue as a going ~~APDS~~concern for at least a reasonable period of time. Our ability to ~~cosmetic~~continue ~~medical~~as ~~practitioners~~a going inconcern ~~the~~ultimately ~~United~~depends ~~States~~on our ability to increase sales and ~~abroad~~reduce expenses to a level that will allow us to operate profitably and sustain positive operating cash flows.

~~-26-~~ On May 7, 2007 we entered into an Amended and Restated Securities Purchase Agreement with Laurus pursuant to which we sold to Laurus a Secured Term Note in the aggregate principal amount of $54,650,000. On the Closing Date, our 25.0 million obligation to Laurus under the June 30, 2006 note was repaid.

~~Our~~There 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 KAAI’s inception, it has experienced large operating losses and negative cash flow from operations. As of June 30, 2005, we had an accumulated net deficit of $39.7 million and a working capital deficit of $20.3 million. For the nine months ended April 1, 2006, we had an accumulated net deficit of $351 million and a working capital deficit $24.7 million. Included in our net deficit is ~~the~~no ~~remeasurement~~assurance of convertible securities which resulted in an additional liability in the amount $285 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 years 2005, 2004 and 2003 has included an explanatory paragraph relating to “going concern.” A going concern explanatory paragraph indicates that ~~our~~this ~~auditors~~recently ~~have substantial~~completed ~~doubt~~financing ~~about~~will ~~our~~be ~~ability~~sufficient to ~~continue as a going concern for at least~~fund aoperations ~~reasonable~~until ~~period of time. Our ability to continue as a going concern ultimately depends on our ability to increase~~ sales and ~~reduce~~profitability ~~expenses~~improve to athe ~~level~~point that ~~will~~KAAI ~~allow~~is us able to operate ~~profitably~~ ~~and~~from ~~sustain~~internally ~~positive~~generated ~~operating~~ cash flows.

Current Trends and Outlook

~~With~~We ~~our~~have ~~launch~~recently ofcompleted ~~Cosmedicine~~some atkey ~~exclusive~~initiatives ~~retail~~that ~~distribution~~we atbelieve ~~Sephora~~will ~~stores,~~result in ~~KAAI~~improved ~~locations~~operating performance and onprofitability. ~~our~~On ~~respective~~May ~~websites~~7, 2007, we ~~believe~~sold ~~that revenues~~all ~~generated~~our ~~from~~stores/salons ~~sales~~in ofan ~~our~~effort ~~Cosmedicine~~to ~~products~~improve ~~will~~profitability beand acash ~~significant~~flow. This ~~percentage~~will ofalso allow management to focus on our ~~aggregate~~Cosmedicine ~~revenues~~skin ~~going~~care ~~forward~~line. WeIn ~~have~~April 2007, ~~had~~we ~~slower~~entered ~~growth due~~into toa ~~some~~marketing ~~facilities~~agreement ~~experiencing~~with ~~losses. We~~Home ~~believe~~Shopping ~~the~~Network ~~reasons~~(“HSN”) to ~~behind~~promote ~~this~~and ~~trend~~sell ~~include~~Cosmedicine ~~our~~products. ~~facility~~Commencing in ~~Boca Raton~~August ~~that~~of ~~has~~2007, ~~not~~the Company, ~~fully~~expects ~~recovered~~to ~~from~~sell ~~hurricane~~selected ~~damage~~products ~~that~~of ~~was~~its ~~sustained~~Cosmedicine ~~in October,~~skin ~~2005.~~care ~~This~~line through ~~includes~~direct ~~significant~~to ~~employee~~consumer ~~turnover~~television atprogramming ~~this~~on ~~facility~~HSN. asCosmedicine is acurrently ~~result~~available ofin the ~~damage~~United ~~sustained.~~States ~~The~~at ~~Company~~Sephora ~~believes~~stores, ~~that~~Sephora’s ~~the~~website, Cosmedicine.com ~~facility~~and ~~will recover~~spa ~~early~~locations informerly operated by the ~~summer~~Company ofand ~~2006. In~~which ~~addition,~~have webeen ~~have~~sold ~~also~~to ~~closed~~GK ~~our~~Acquisitions ~~Beverly~~LLC. ~~Hills~~We ~~facility~~believe ~~for~~that ~~renovations~~these ~~and expect~~markets towill ~~reopen~~provide excellent itgrowth inopportunities ~~July~~for ~~2006~~our products.

As discussed above, concurrent with the stores sale on May 7^th, we completed a refinancing with Laurus. This capital was critical to the operations and will be a key to growing the Cosmedicine business.

Earlier in the year, we had experienced significant challenges to raise sufficient capital to service our ongoing debt obligations and continue our operations as 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. This default was one of the factors that ultimately led to the selling of the stores. As a result of the this notice of default on the Senior Secured Debt and the drop in the Company traded share price, we believe that there has been an impairment to goodwill in our fiscal quarter ended March 31, 2007. As of May 30, 2007, the closing price of the Company’s Common Stock was $0.04. The default and the limited capital options determined after the event left the Company with no capacity to invest to maintain any remaining goodwill. Planned spending was curtailed relating to any non-essential activities or operations. This reduction in planned spending significantly reduced the projected cash flows of the stores/salons and the Company overall. As a result, we intend to record an $18.1 million expense in our fiscal quarter ended March 31, 2007 to write-off all of our goodwill.

On February 8, 2007, we reached an agreement with the landlord at our Beverly Hills store to surrender the leased property. Due to our limited capital and revised business plan, we 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 and six months ended December 30, 2006 versus the three and six months ended December 31, 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. We 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 experienced declining revenues in some of our legacy stores, due to limited capital. These losses were partially offset in the quarter and six months ended December 30, 2006 with the continued success of our Cosmedicine products. 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~~derived revenue from the following sources during the periods: Spa and Salon Services – Our salon offerings include services such as hair styling, coloring, texturizing, treatments, extensions, make-up artistry and manicure/pedicures. Our spa services include treatments such as facials, body treatments (exfoliation, wraps, cellulite treatments), waxing and massage therapy. Spa and salon service revenue represented 66% and 71% of our total operating revenues for the three months ended December 30, 2006 and December 31, 2005, respectively and 62% and 69% of our total operating revenues for the six months ended December 30, 2006 and December 31, 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 laser hair removal. Medical service revenue represented 6% and 9% of our total operating revenues for the three months ended December 30, 2006 and December 31, 2005, respectively and 6% and 9% of our total operating revenues for the six months ended December 30, 2006 and December 31, 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.

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. 33

~~Medical Services~~In all cases, physicians are contracted as consultants and not as employees. ~~Our~~ In most cases, the nurse practitioners are hired as employees. We do not generate any revenues from referring individuals to medical ~~services~~providers. Retail Product Sales – Include sales of third party products and our Cosmedicine products through our own locations. Retail product sales revenue represented 21% and 19% of our total operating revenues for the three months ended December 30, 2006 and December 31, 2005, respectively and 22% of our total operating revenues for the six months ended December 30, 2006 and December 31, 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 ~~grouped~~offered ~~into~~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 ~~following~~internet. ~~categories:~~These products were launched in fiscal 2006 and represented 7% and 10% of our total operating revenues for the three and six months ended December 30, 2006, respectively. 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 $0.5 million and $1.4 million for the three and six months ended December 30, 2006. Our decision to enter into a strategic alliance with Sephora was made independent of our relationship with L Capital.

~~Dermatology~~ We manage ~~Services~~our –business ~~Our~~by ~~dermatology~~evaluating ~~offerings~~net ~~include~~revenue, ~~injection~~gross ~~services~~margin, ~~(Botox~~ and ~~Restylane),~~liquidity. There ~~facials,~~is ~~sclerotherapy~~a ~~(vein~~close ~~treatments),~~review ~~peels,~~of ~~microdermabrasion,~~performance ~~permanent~~by ~~make-up,~~location ~~laser~~in ~~resurfacing~~these ~~and~~key ~~laser~~areas ~~hair~~to determine ~~removal.~~if ~~Cosmetic~~resources ~~Dentistry~~need ~~Services~~to –be ~~Our~~added ~~two~~or ~~integrated~~shifted ~~flagship~~to ~~locations~~improve ~~offer~~performance. ~~consumers~~We benchmark ~~access~~the tofacilities ~~cosmetic~~against ~~dentistry~~each ~~services,~~other ~~including~~to ~~tooth~~utilize ~~whitening~~data ~~and~~from ~~veneers.~~high performing ~~Cosmetic~~locations ~~Surgery~~to ~~Services~~assist –those ~~Our~~that ~~integrated~~are ~~flagship~~under ~~locations~~performing. ~~offer~~Key ~~consumers~~personnel are ~~access~~often deployed to ~~cosmetic~~the ~~surgery~~locations ~~services,~~that ~~including~~show ~~liposuction,~~negative ~~breast~~trends ~~enhancement,~~in ~~breast~~these statistics. ~~reduction,~~A ~~eye,~~close ~~brow,~~review ~~breast,~~of ~~body~~the ~~and~~operations ~~face~~is ~~lifts,~~also ~~nose~~performed ~~contouring,~~to ~~tummy~~determine current ~~tucks~~cash position and ~~cheek/chin~~future ~~implants~~capital needs. InCapital ~~addition,~~is ~~the~~tightly ~~Company~~managed ~~also~~and utilized ~~performs~~in ~~such~~those ~~services~~operations inthat anwill ~~off-site~~provide ~~medical~~the ~~facility~~greatest return.

ToWe ~~generate~~encounter ~~our~~a ~~revenues~~variety ~~for~~of ~~our~~challenges ~~medical~~that ~~segment,~~may weaffect ~~enter~~our ~~into~~business. ~~medical~~These factors ~~practitioner~~include ~~fee~~weather, ~~contracts~~including ~~with~~hurricanes ~~our~~which ~~medical~~have ~~practitioners~~adversely ~~where~~impacted ~~they~~our facilities ~~receive~~in ~~a percentage~~Florida, ofand ~~the~~our ~~revenue~~dependence ~~generated~~on ~~from~~individuals ~~the~~to ~~performance~~provide ofservices ~~their~~to ~~services. Depending~~our ~~upon~~clients ~~the~~who ~~medical provider~~leave ~~and~~ the ~~type~~Company ofand ~~service~~take ~~that~~clients iswith them.

~~-27-~~ 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.

delivered, the percentage varies from 30-70% for dermatology revenues and from 50-70%for cosmetic surgery revenues. We also contract with Ambulatory Service Centers to provide the facility and supporting staff that our Cosmetic Surgeons utilize to perform their services. Typically, these arrangements are based upon a per hour charge for the uses of the facility. 34

In all cases, our medical practitioners are contracted as consultants and not as employees. In addition, we do not generate any revenues from referring individuals to medical providers.

A majority of our medical revenue is derived from our Florida facilities. As such, we have spent considerable legal and consulting costs to ensure that we comply with all state and federal regulations with which we must comply, especially as it relates to Florida’s state regulations.

Retail Products. 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 Goldwell, Wella, Primary Scent, Kerastase, and Bumble & Bumble. Skin care product offerings include such brands as DDF, Obagi, IS Clinical, Neova, MD Skincare, Skinceuticals, and Strivectin. Make-up product offerings include such brands as Pauls Dorf, Glominerals, Vincent Longo, and Darphin. Additionally many of our locations offer private label skin care brands, Georgette Klinger and Anushka. We have developed an over-the-counter medical grade skin care line of products called Cosmedicine, for which John Hopkins Medicine consulted on the design and information analysis of tests performed on Cosmedicine products.

Other. We derive e-commerce revenue primarily through the sale of private label skin care products via the internet. For the nine months ended April 1, 2006 and March 31, 2005, e-commerce revenue was approximately $0.4 million, respectively.

We manage our business by evaluating net revenue, gross margin, and liquidity. 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. Further, we are dependent on a third party, Atlantis Laboratories, for the development and supply of bulk product for our Cosmedicine product line which we launched in February 2006.

We utilize several financial and operational metrics to evaluate the health and strength of our business. We utilize metrics such as revenue growth, gross margin percentage, payroll efficiency percentage, EBIDTA and free cash flow to assess the general health of our operations, including segmenting these metrics by facility and by business segment. In addition, we utilize specific performance metrics by business segment to assess performance by business segment. For example within our retail business segment, we track retail revenue as a percentage of our service revenue by facility to assess the performance of our retail segment. We benchmark each facility against all facilities to determine opportunities for improvement and develop action plans relative to the performance of these metrics. In addition we utilize working capital and liquidity ratios to assess our future cash needs and current cash position.

Beginning in fiscal year 2006 (which started on July 1, 2005), we are following the standard fiscal year of the retail industry, which is a 52 or 53 week period ending on the Saturday closest to June 30 of the following year.

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.

~~-28-~~ Revenue Recognition: We record revenue based on the following types of product and service offerings:

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.


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

	•	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.

~~Revenue~~Impairment ~~Recognition~~of Goodwill: ~~Revenue~~ isWe ~~recognized~~review ~~for~~long-lived ~~services~~assets ~~rendered~~to be held and used whenever events or ~~product~~changes ~~sold~~in atcircumstances indicate that the ~~time~~carrying ~~when~~amount ~~the~~of ~~service~~such isassets ~~performed~~may ornot ~~the~~be ~~item~~fully ~~sold~~recoverable. ~~When~~ aIn ~~gift~~addition, ~~card~~we isreview goodwill ~~purchased~~ for aimpairment ~~future~~at ~~service~~least oron ~~product,~~an annual basis. Measurement of an impairment loss is based on the fair value of the ~~card~~asset iscompared ~~recorded~~to asits carrying ~~a liability~~value. ~~The~~ ~~liability~~As ~~remains~~discussed onabove, ~~the~~as ~~balance~~a ~~sheet~~result ~~until~~of the ~~earlier~~this notice of default ~~redemption,~~on ~~escheatment~~the orSenior 36Secured ~~months. It~~Debt isand ~~our’s~~the ~~and~~drop ~~our~~in ~~predecessors’~~the ~~historical~~Company ~~experience~~traded ~~that~~share ~~the~~price, we ~~likelihood~~believe ofthat ~~redemption~~there ~~after~~has 36been ~~months~~an isimpairment ~~remote. After~~to 36goodwill ~~months,~~in ~~80%~~our offiscal ~~the~~quarter ~~remaining~~ended March ~~liability~~31, is2007. ~~relieved~~As ~~and recorded~~of asMay ~~other~~30, ~~income. After 48 months~~2007, ~~any~~the ~~remaining~~closing ~~10%~~price of the ~~liability~~Company’s isCommon Stock ~~relieved~~was ~~and~~$0.04. ~~recorded~~As asa ~~other income. After~~result, 60we ~~months,~~intend ~~the~~to ~~last~~record ~~10%~~an $18.1 million expense in ofour ~~the~~fiscal ~~remaining~~quarter ~~liability~~ended isMarch ~~relieved~~31, ~~and~~2006 ~~recorded~~to aswrite-off ~~other~~all ~~income~~of our goodwill.

Accounting for Acquisitions and Intangible Assets: We have accounted for our acquisitions under the purchase method of accounting for business combinations. Under the purchase method of accounting, the cost, including transaction costs, are allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired, including allocated intangible assets, is recorded as goodwill.

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. To the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset; net income in a given period may be higher.

Impairment of Long-Lived Assets: 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 ~~and shrinkage~~ of inventory. ~~Our~~ Our estimates consider the cost of inventory, forecasted demand, the ~~estimated market value, 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.

~~Gift~~Stock ~~Cards~~Based Compensation: We ~~review~~ estimate the ~~aging~~cost of ~~our~~stock based ~~gift~~compensation ~~card~~using ~~liability~~the ~~quarterly~~Black-Scholes inOption ~~relation~~Pricing toModel. ~~our historical~~Inherent ~~redemption rates. We~~in ~~recognize~~that ~~revenue~~model ~~for~~are ~~those~~assumptions ~~cards~~including wethe ~~determine~~volatility ~~will~~of ~~not~~our beCommon ~~redeemed~~Stock, forfeiture torate, and the ~~extent~~ ~~that~~length ~~they~~of ~~are~~time ~~not~~which ~~subject~~we toexpect ~~escheatment~~an ~~laws.~~option to remain outstanding.

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 and the length of time which we expect an option to remain outstanding. 35

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 December 30, 2006 the closing price for our Common Stock was $0.19. Changes in the price paid for a share of our Common Stock can have a significant impact on the amount recorded for the convertible securities. For example, the movement up or down in the price of our Common Stock by $0.10 will cause the balance of convertible securities to fluctuate by approximately $65 million. This fluctuation would result in an impact to our net loss. As of May 30, 2007, the closing price of our Common Stock was $0.04. Convertible securities will convert back to equity when there are a sufficient number of shares of Common Stock authorized.

~~-29-~~New Accounting Pronouncements

~~Common Stock~~ In isJune ~~based~~2006, inFASB ~~the~~issued ~~price~~FIN ~~paid~~48, “Accounting for aUncertainty ~~share~~in ofIncome ~~the~~Taxes” ~~stock~~—an interpretation ~~closest~~of toFASB ~~the~~Statement ~~measurement date~~No. As109. ofFIN ~~April~~48 1,clarifies ~~2006~~ the ~~price~~accounting ~~paid~~ for uncertainty ~~our~~in ~~Common~~income ~~Stock~~taxes recognized in ~~the~~an ~~most recent~~enterprise’s ~~transaction~~financial ~~was~~statements in ~~$0.69.~~accordance ~~Changes~~with inFASB ~~the~~Statement ~~price~~No. ~~paid~~109, Accounting for aIncome ~~share~~Taxes. ofThis ~~our Common~~Interpretation ~~Stock~~prescribes ~~can~~a ~~have~~recognition threshold aand ~~significant~~measurement ~~impact~~attribute onfor the ~~amount~~financial ~~recorded~~statement ~~for~~recognition ~~the~~and ~~convertible~~measurement ~~securities.~~of ~~For~~a ~~example,~~tax ~~the~~position ~~movement~~taken up or ~~down~~expected to be taken in ~~the~~a ~~price~~tax ofreturn. ~~our~~This ~~Common~~Interpretation ~~Stock~~also byprovides ~~$0.10~~guidance ~~will~~on ~~cause~~derecognition, ~~the~~classification, interest ~~balance~~and ofpenalties, ~~convertible~~accounting ~~securities~~in tointerim periods, disclosure, and ~~fluctuate~~transition. byThis ~~approximately~~guidance $5is ~~million.~~effective Asfor offiscal ~~June~~years 30beginning after December 15, 2006,. ~~the~~We ~~current~~believe ~~traded value~~the impact of ~~our~~the ~~share~~adoption of ~~Common~~FIN ~~Stock~~48 iswill ~~$0.39.~~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 ~~table~~discussion ~~sets~~should ~~forth~~be ~~our~~read ~~income~~in ~~statement~~conjunction ~~data~~with asour ~~a percentage of net~~Financial ~~sales~~Statements ~~for~~and the ~~periods~~Notes ~~indicated~~thereto. ~~below:~~

	Nine months ended										Quarter ended
In thousands, except share and per share amounts	April 1, 2006					March 31, 2005					April 1, 2006					March 31, 2005
Revenues
Service	$	18,446		71	%	$	19,198		77	%	$	6,492		62	%	$	7,008		80	%
Retail		7,355		29	%		5,641		23	%		3,991		38	%		1,794		20	%
Total Revenue		25,801		100	%		24,839		100	%		10,483		100	%		8,802		100	%
Cost of Revenue
Service	$	10,805		42	%	$	10,312		42	%	$	3,945		38	%	$	3,422		39	%
Retail		2,593		10	%		2,236		9	%		1,233		11	%		761		9	%
Total Cost of Revenue:		13,398		52	%		12,548		51	%		5,178		49	%		4,183		48	%
Gross Margin
Service	$	7,641		30	%	$	8,886		36	%	$	2,547		24	%	$	3,586		41	%
Retail		4,762		18	%		3,405		13	%		2,758		27	%		1,033		11	%
Total Gross Margin		12,403		48	%		12,291		49	%		5,305		51	%		4,619		52	%
Selling, general and administrative expenses		29,468		114	%		21,055		85	%		10,985		105	%		6,800		77	%
Depreciation and amortization		3,141		12	%		2,771		11	%		873		8	%		953		11	%
Total operating Expenses		32,609		126	%		23,826		96	%		11,858		113	%		7,753		88	%
Operating loss		(20,206	)	(78	)%		(11,535	)	(46	)%		(6,553	)	(63	)%		(3,134	)	(36	)%
Interest expense, net		3,391		13	%		2,974		12	%		348		3	%		1,064		12	%
Unrealized loss on convertible securities		284,749		2,125	%		—					147,000		2,839	%		—
Net loss		(308,346	)	1,195	%		(14,509	)	(58	)%		(153,901	)	1,468	%		(4,198	)	(48	)%
Dividends on preferred stock		769		(3	)%		1,023		4	%		407		(4	)%		376		4	%
Net loss applicable to common shareholders	$	(309,115	)	(1,198	)%	$	(15,532	)	(63	)%	$	(154,308	)	(1,472	)%	$	(4,574	)	(52	)%

Three Months Ended December 30, 2006 and December 31, 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 December 30-, 2006 and December 31, 2005:

~~Three months ended April 1, 2006 compared to three months ended March 31, 2005~~36


	Three Months Ended

*In thousands*	December 30, 2006				December 31, 2005				Increase / (Decrease)			Percent Change

Operating Revenues
Services	$	5,176	72	%	$	6,091	81	%	$	(915	)		(15	%)
Retail and wholesale		2,001	28	%		1,462	19	%		539			37	%


Total Operating Revenue	$	7,177	100	%	$	7,553	100	%	$	(376	)		(5	%)



Cost of Revenue
Services	$	3,638	51	%	$	3,472	46	%	$	166			5	%
Retail and wholesale		679	9	%		572	8	%		107			19	%


Total Cost of Revenue	$	4,317	60	%	$	4,044	54	%	$	273			7	%



Gross Margin
Services	$	1,538	21	%	$	2,619	35	%	$	(1,081	)		(41	%)
Retail and wholesale		1,322	18	%		890	12	%		432			49	%


Total Gross Margin	$	2,860	40	%	$	3,509	46	%	$	(649	)		(18	%)

Revenue

Total revenue for the quarter ended April 1, 2006 was $10.5 million compared to $8.8 million for the quarter ended March 31, 2005. Retail revenue, comprised of the sale of retail products and wholesale products totaling $4.0 million increased significantly in the quarter compared to last year due to the launch of our Cosmedicine product line in both the Sephora locations nationwide as well as our facilities. Service revenue comprised of our Spa and Salon services and medical services totaling $6.5 million for quarter ended April 1, 2006, decreased in the quarter compared to last year due to remodeling activities in some of the facilities. Our sources of revenue include spa and salon services, retail products sold in our facilities, wholesale products, including our branded product Cosmedicine sold to Sephora locations, and medical services such as dermatology, dentistry and cosmetic surgery. The results of such sources for the three months ended ~~April~~December 130, 2006 and ~~March~~ December 31, 2005 are as follows:

	Three Months Ended
In thousands	Three Months Ended
In thousands	April 1, 2006				March 31, 2005
	December 30, 2006				December 31, 2005					Increase / (Decrease)			Percent Change
Revenues
Operating Revenues
Spa and Salon Services	$	5,910	56	%		$	6,203			70	%
Spa and salon services	$	4,711	66	%	$	5,394		71	%	$	(683	)		(13	%)
Retail Products		1,610	15	%			1,794			20	%
Retail products		1,481	21	%		1,462		19	%		19			1	%
Wholesale Products		2,381	23	%			—			—
Wholesale products		520	7	%		0		—			520			—
Medical Services		582	6	%			805			10	%
Medical services		465	6	%		697		9	%		(232	)		(33	%)
Total Revenue	$	10,483	100	%		$	8,802			100	%
Total Operating Revenue	$	7,177	100	%	$	7,553		100	%	$	(376	)		(5	%)

Revenue for the three months ended December 30, 2006 was $7.2 million compared to $7.6 million for the three months ended December 31, 2005, a decrease of $0.4 million. All revenues during the two quarters were derived from the U.S. The slight decrease in revenue was primarily due to a $0.7 million decrease in service revenue, comprised of spa and salon services, and the decrease of medical services of $0.2 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. Employees initially stayed with the Company as they anticipated capital spending to restore the spa to pre-hurricane conditions. But due to limited capital, we were not able to make the required repairs. While some of the damages were ultimately recovered from insurance, the proceeds were needed for operations and could not be used for capital improvements. The

combination of damages and employee turnover led to a significant loss of the pre-existing customer base. Customers often follow long-term service providers to their new location. The decrease in spa and service revenue was $0.8 million for this location versus the three months ended December 31, 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 December 30, 2006 versus $0.1 million for the three months ended December 31, 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 $0.5 million for the three months ended December 30, 2006, from the Cosmedicine products sold to Sephora.

Cost of Revenue

Cost of revenue increased to $4.3 million for the ~~quarter~~three months ended ~~April~~December 130, 2006 ~~was~~from $54.20 million ~~compared~~for tothe three months ended December 31, 2005, an increase of $40.23 million. Cost of revenue represented 60% and 54% of operating revenues for the ~~quarter~~three months ended ~~March~~December 3130, ~~2005.~~2006 ~~The~~and ~~majority~~December of31, ~~the~~2005, ~~increase~~respectively. The increase was primarily due to the ~~direct~~higher ~~costs~~cost of ~~our~~backbar ~~Cosmedicine~~usage ~~product~~in ~~sold~~the salons tofor ~~Sephora~~the quarter ended December 30, 2006. These are products used only ~~Additionally,~~for weservices ~~have~~provided ~~incurred~~at anthe ~~increased~~salons ~~commission~~and ~~expense~~not sold at retail. ~~The~~In ~~commission~~an effort to ~~compensation~~expand ~~plans~~our ~~currently~~Cosmedicine ~~structured~~line, we began increasing the use of these products for backbar usage in our ~~nine~~salons ~~original~~and reducing the usage of the Georgette Klinger ~~facilities~~backbar ~~were~~products ~~increased~~and tothose ~~levels~~of ~~similar~~third ~~with~~party ~~our~~vendors. ~~other~~While ~~facilities~~we atbelieve the ~~end~~Cosmedicine products provide additional benefits to customers, the cost of the Cosmedicine ~~last~~backbar ~~year’s~~products ~~quarter~~is ~~ended~~higher ~~March~~than ~~31,~~Georgette ~~2005~~Klinger or those purchased from third party vendors.

Gross ~~margin~~ was 51% for the quarter ended April 1, 2006 compared to 52% for the quarter ended March 31, 2005. We experienced higher margins on our retail sales based on the sales of Cosmedicine and a decrease in service gross margin caused by higher commission structures. Margin

~~Selling~~ Gross margin was 40% and 46% for the three months ended December 30, ~~General~~2006 and December ~~Administrative~~31, ~~Expenses~~2005, respectively. The decline in gross margin was primarily due to the higher cost of backbar usage discussed above and higher payroll and commission structures which were partially offset by the launch of our Cosmedicine product line.

~~For the~~Operating ~~quarter~~Expenses ended April 1, 2006, selling, general and administrative expenses (“SG&A”) increased to $11.0 million from $6.8million for the quarter ended March 31, 2005. This increase is primarily due to significantly higher professional expenses, including employing an outsourced accounting services firm. In addition, our legal, information technology, and inventory management services expenses also increased. Moreover, the increase is due to fees incurred in public relations and market awareness with the launch of and expenses that were incurred in connection with the development of our Cosmedicine product line. This increase is also attributed to the addition of several senior management level officers.

~~Included~~The infollowing ~~SG&A~~table ~~expenses~~compares ~~for~~our ~~the~~operating ~~quarter~~expenses ~~ended~~for ~~April 1, 2006 are professional fees in~~ the ~~amount~~three ~~$3.0~~months ~~million, which consist of $1.0 million in accounting fees,~~ended ~~including~~December ~~outsourced accounting services~~30, ~~$1.1~~2006 ~~million in consulting fees, including financial, operational~~ and ~~product~~December ~~consulting~~31, ~~$0.8 million in legal fees and $0.1 million in other fees.~~ 2005:

-31-


	Three Months Ended

*In thousands*	December 30, 2006			December 31, 2005		Increase / (Decrease)			Percent Change

Operating Expenses
Share based compensation expense	$	(3,169	)	$	150	$	(3,319	)		(2213	%)
Payroll		3,118			3,535		(417	)		(12	%)
Depreciation and amortization		1,134			1,159		(25	)		(2	%)

Loss on disposal of fixed assets		—			35		(35	)		—
Occupancy		1,691			1,288		403			31	%
Insurance		1,114			588		526			89	%
Equipment leasing		57			49		8			16	%
Travel and entertainment		557			395		162			41	%
Professional fees		2,834			2,445		389			16	%
Office Expenses		272			144		128			89	%
Advertising and marketing		292			656		(364	)		(55	%)
Credit card fees		198			83		115			139	%
Postage and delivery		170			118		52			44	%
Telephone		169			109		60			55	%
Training and education		46			101		(55	)		(54	%)
Management fees		—			190		(190	)		(100	%)
Other		216			598		(382	)		(64	%)


Total Operating Expenses	$	8,699		$	11,643	$	(2,944	)		(25	%)

Additional SG&A expenses for the quarter ended April 1, 2006 were $8.0 million. Below is a table representing our SG&A expenses in detail as represented in the condensed consolidated statement of operations. SG&A expenses represented 105% of total revenue for the quarter ended April 1, 2006 compared to 77% for the quarter ended March 31, 2005. While this expense is very high as a percentage of sales, we believe this level of spending is necessary to develop and implement our business plan. 38

~~For~~Operating expenses were $8.7 million for the ~~quarters~~three months ended ~~April~~December 130, 2006 compared ~~and~~to ~~March~~$11.6 million for the three months ended December 31, 2005 ~~respectively~~, ~~SG&A~~a ~~expenses~~decrease ~~were~~of ~~comprised~~$2.9 million. The decrease of 25.0% was primarily due to due to a $3.3 million decrease in stock option expense under SFAS No. 123R related primarily to the ~~following:~~remeasurement at December 30, 2006.

(Amounts in millions)	2006		2005
Payroll	$	3.4	$	2.5
Occupancy		1.5		1.3
Insurance		0.8		0.7
Equipment Leasing		0.1		0.1
Travel and Entertainment		0.5		0.3
Professional Fees		3.0		0.7
Office Expenses		0.1		0.1
Advertising and Marketing		0.4		0.2
Severance		0.4		—
Credit Cards Fees		0.1		0.2
Taxes & Licenses		0.1		—
Telephone		0.1		0.1
Training and Education		0.3		—
Management Fees		—		0.5
Other		0.2		0.1
Total	$	11.0	$	6.8

Non-operating Expenses

~~Depreciation~~The following table compares our non-operating expenses for the three months ended December 30, 2006 and ~~amortization~~December ~~expense~~31, 2005:

For the quarter ended April 1, 2006 and March 31, 2005 depreciation and amortization expense was $0.9 million and $1.0 million, respectively.


	Three Months Ended
*In thousands*	December 30, 2006			December 31, 2005		Increase / (Decrease)			Percent Change

Non-operating (Income) Expenses
Interest expense, net	$	1,706		$	1,969	$	(263	)		(13	%)
Unrealized (gain) on convertible securities		(53,470	)		137,749		(191,219	)		(139	%)
Registration rights penalties		1,162			—		1,162			—

Total Non-operating (Income) Expense	$	(50,602	)	$	139,718	$	(190,320	)		(136	%)

~~Operating~~Interest ~~Loss~~Expense, net

~~Our~~Interest ~~operating~~expense ~~loss~~ was $61.67 million ~~and $3.1 million~~ for the ~~quarters~~three months ended ~~April 1~~December 30, 2006 ~~and~~compared to ~~March~~$2.0 ~~31,~~million ~~2005,~~for ~~respectively.~~the Asthree ~~stated~~months ~~above~~ended ~~under~~December ~~Selling~~31, ~~General~~ ~~and Administrative Expenses~~2005, ~~the~~a ~~operating~~decrease ~~loss increased~~of ~~primarily~~$0.3 ~~due to significantly higher SG&A expenses~~million.

~~Interest~~Unrealized ~~expense,~~Loss ~~net~~on Convertible Securities

~~Interest~~On ~~expense~~December 20, ~~net~~2005, ~~was~~as a result of the Share Exchange Agreement, the Company recorded the convertible securities at $~~0.3~~65 million, which represented the carrying amount of the convertible securities issued under the arrangement. Since the securities issued are convertible into common shares and $the Company did not have sufficient authorized shares to allow for that conversion, under EITF 00-19 the Company was required to reclassify these amounts as liabilities and remeasure them to fair value at each reporting period end. The Company remeasures the convertible securities at the end of each reporting period based on the share price of the True You Common Stock closest to the period end. At July 1, 2006 the share price was multiplied by the number of common shares into which the convertible securities were convertible, which was 506,576,690 as of that date. The per share trading value as of July 1, 2006 was $0.39, which resulted in an estimated fair value of the convertible securities of $197.6 million. ~~for~~During the ~~quarters~~three months ended ~~April~~December 130, 2006, ~~and~~the ~~March~~Company 31added 25,384,615 ~~2005~~warrants issued with debt. As of December 30, ~~respectively~~2006, athe ~~decrease~~number of common shares into which the convertible securities were convertible was 646,452,766 as of that date. The per share trading value as of December 30, 2006 was $0.19, that resulted in an estimated fair value of the convertible securities of $122.8 million. The ~~decrease~~ isCompany ~~primarily~~recorded ~~attributed~~an tounrealized ~~the~~gain ~~reduction~~ of approximately ~~debt~~$53.5 ~~that~~million ~~was~~for ~~converted~~the ~~to convertible~~three ~~securities~~months inended December ~~2005~~30, 2006.

~~-32-~~39

Registration Rights Penalties

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

Concurrent with the May 7, 2007 financing, holders of the registration rights waived any additional registration rights penalties incurred by the Company after December 30, 2006.

Dividends Accrued on Preferred Stock

Dividends accrued on ~~Preferred~~preferred ~~Stock~~stock were $0.4 million for the ~~quarter~~three months ended December ~~April 1~~30, 2006 as compared to net forfeitures of dividends of $0.41 million for the three months ended December 31, 2005. The increase 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 in the quarter ended ~~March~~December 31, 2005.

~~Unrealized~~ Concurrent with ~~loss~~the onMay ~~Convertible~~7, ~~Securities~~2007 financing, preferred shareholders waived $3.2 million in accrued dividends fees included in the December 30, 2006 Condensed Consolidated Balance Sheet.

~~Under~~Six ~~EITF 00-19,~~Months ~~we are required to remeasure the convertible securities at each~~Ended ~~reporting period end based on fair value. The Company originally reclassified $65 million to convertible securities as of~~ December 2030, 2005, the date of the Share Exchange Agreement, based on the transaction value of the Share Exchange Agreement. The Company has subsequently determined that a better measure of fair value is based on the share trading value of the publicly traded securities of Trueyou.com Inc. (TUYU.PK) and as a result, the Company has remeasured its convertible securities as of December 31, 2005 and April 1, 2006. ~~The number of common shares into which the convertible securities are convertible was 506,576,690 as of December 31, 2005~~ and ~~April 1, 2006. The per share trading value as of~~ December 31, 2005 was in the amount $0.40, which has resulted in an estimated fair value of the convertible securities to be approximately $203 million. The per share trading value as of April 1, 2006 was in the amount $0.69, which has resulted in an estimated fair value of the convertible securities to be approximately $350 million. The Company recorded an unrealized loss of approximately $147 million for the three months ended April 1, 2006.

~~Net~~ The following ~~Loss~~table ~~Applicable~~sets toforth ~~Common~~our ~~Stockholders~~operating revenues and cost of revenue data as a percentage of net sales for the six months ended December 30, 2006 and December 1, 2005:

Our net loss applicable to common stockholders for the quarter ended April 1, 2006 was $154.3 million compared to $4.6 million for the quarter ended March 31, 2005. Included is $6.5 million operating loss, and $147 million unrealized loss on convertible securities.


	Six Months Ended

*In thousands*	December 30, 2006				December 31, 2005				Increase / (Decrease)			Percent Change

Operating Revenues
Services	$	9,824	68	%	$	11,954	78	%	$	(2,130	)		(18	%)
Retail and wholesale		4,615	32	%		3,364	22	%		1,251			37	%

Total Operating Revenue	$	14,439	100	%	$	15,318	100	%	$	(879	)		(6	%)


Cost of Revenue
Services	$	6,557	45	%	$	6,860	45	%	$	(303	)		(4	%)
Retail and wholesale		1,743	12	%		1,360	9	%		383			28	%

Total Cost of Revenue	$	8,300	57	%	$	8,220	54	%	$	80			1	%


Gross Margin
Services	$	3,267	23	%	$	5,094	33	%	$	(1,827	)		(36	%)
Retail and wholesale		2,872	20	%		2,004	13	%		868			43	%

Total Gross Margin	$	6,139	43	%	$	7,098	46	%	$	(959	)		(14	%)

~~In addition, our increase in net loss applicable to common stockholders was due to our SG&A expenses increasing 62% for quarter ended April 1, 2006 compared to March 31, 2005.~~ 40

~~Nine~~ The ~~months~~results ~~ended~~of ~~April~~such 1,sources ~~2006~~for ~~compared~~the tosix ~~nine~~ months ended ~~March~~December 30, 2006 and December 31, 2005 are as follows:

Revenue


	Six Months Ended

*In thousands*	December 30, 2006				December 31, 2005				Increase / (Decrease)			Percent Change

Operating Revenues
Spa and salon services	$	9,007	62	%	$	10,603	69	%	$	(1,596	)	(15	%)
Retail products		3,191	22	%		3,364	22	%		(173	)	(5	%)
Wholesale products		1,424	10	%		—	—			1,424		—
Medical services		817	6	%		1,351	9	%		(534	)	(40	%)


Total Operating Revenue	$	14,439	100	%	$	15,318	100	%	$	(879	)	(6	%)

Revenue for the ~~nine~~six months ended ~~April~~December 130, 2006 was $2514.84 million compared to $2415.83 million for the ~~nine~~six months ended ~~March~~December 31, 2005, a decrease of $0.9 million. All revenues during the periods were derived from the U.S. The ~~increase~~decrease in revenue was primarily due to ana ~~increase~~$1.6 million decrease in ~~retail~~service ~~sales~~revenue, comprised ~~comprising~~ of ~~the~~spa ~~sale~~and ofsalon ~~our~~services, ~~retail products~~ and ~~wholesale~~the ~~products,~~decrease ~~totaling~~of medical services of $70.45 million. ~~for~~The decrease was primarily due to the ~~nine~~Boca ~~months~~Raton location which ~~ended~~has ~~April~~not 1,fully ~~2006,~~recovered from the ~~launch~~major ofhurricane ~~our~~which ~~Cosmedicine~~hit ~~product~~in ~~line~~October in2005. ~~salons~~The ~~and~~combination ~~facilities~~of damages and ~~Sephora~~employee ~~Stores.~~turnover ~~Service~~led ~~revenue,~~to ~~comprised~~a ofsignificant ~~spa~~loss ~~and~~of ~~salon~~the ~~services~~pre-existing customer base. The decrease in spa and ~~medical~~service ~~services~~revenue ~~totaling~~was $181.4 million for this location versus the ~~nine~~six months ~~ending April~~ended 1December 31, 2005. In addition, ~~decreased~~we ~~due~~have decided to ~~the~~permanently ~~remodeling~~close ~~and~~the ~~damages~~Beverly ~~sustained~~Hills inlocation ~~the~~that ~~Florida~~had ~~locations~~been ~~from~~temporarily ~~the~~closed ~~major~~for ~~hurricane~~remodeling. ~~which~~There ~~hit~~were inno ~~October~~revenues ~~2005.~~from ~~We have~~this ~~also~~location ~~experienced~~in ~~significant~~the ~~employee~~six ~~turnover~~months inended ~~the~~December ~~Boca Raton~~30, FL2006 ~~facility due~~versus to$0.3 ~~damage~~million ~~sustained~~for by the six ~~hurricane~~months atended ~~this~~December ~~facility~~31, 2005. ~~Our~~We ~~sources~~have ~~of revenue~~also ~~include~~experienced ~~spa~~a ~~and~~slight ~~salon~~decline in ~~services,~~several ~~retail~~of ~~products sold in~~ our ~~facilities, wholesale~~other ~~products,~~legacy ~~including~~stores ~~our~~due ~~branded~~to ~~product~~the ~~Cosmedicine~~limited ~~sold~~capital toavailable ~~Sephora~~to ~~locations,~~maintain ~~and~~or ~~medical~~increase ~~services~~the ~~such~~revenue asbase. ~~dermatology,~~These ~~dentistry~~decreases ~~and~~were ~~cosmetic~~partially offset by ~~surgery.~~wholesale ~~The~~product ~~results~~sales of ~~such~~$1.4 ~~sources~~million for the ~~nine~~six months ended ~~April~~December 130, 2006, ~~and~~from ~~March~~the ~~31,~~Cosmedicine ~~2005~~products ~~are~~sold asto ~~follows:~~Sephora.

-33-

	Nine Months Ended
In thousands	April 1, 2006				March 31, 2005
Revenues
Spa and Salon Services	$	16,514	64	%	$	17,246	69	%
Retail Products		4,974	20	%		5,641	23	%
Wholesale Products		2,381	9	%		—	—
Medical Services		1,932	7	%		1,952	8	%
Total Revenue	$	25,801	100	%	$	24,839	100	%

Cost of Revenue

Cost of revenue increased to $138.43 million for the ~~nine~~six months ended ~~April~~December 130, 2006 from $128.52 million for the ~~nine~~six months ended ~~March~~December 31, 2005., ~~The~~an ~~largest portion~~increase of $0.1 ~~the~~million. ~~increase~~Cost ~~was~~of ~~the~~revenue ~~direct~~increased ~~costs~~from ofperiod ~~Cosmedicine~~to ~~product~~period ~~sold~~as toit represented ~~Sephora.~~57% ~~The~~and ~~balance~~54% ~~was~~of ~~due~~operating torevenues ~~increase~~for ~~commission~~the ~~expense.~~six ~~The~~months ~~commission compensation~~ended ~~plans~~December in30, ~~place~~2006 and inDecember ~~the~~31, 92005, ~~original~~respectively. ~~Georgette~~The ~~Klinger~~primary ~~facilities~~cause ~~were raised~~of tothe ~~levels~~increase ~~similar~~was ~~with~~an increase in the ~~balance~~cost of ~~our~~backbar ~~facilities~~usage atin the ~~end~~salons offor the ~~last~~ ~~year’s~~six ~~3rd~~months ~~quarter~~ended December 30, 2006.

Gross Margin

Gross margin was 4843% and 46% for the ~~nine~~six months ended ~~April~~December 130, 2006 ~~compared~~and ~~to 49% for the~~December ~~nine months ended March~~ 31, 2005, respectively. The decline in gross ~~margins~~margin was due primarily to the higher cost of backbar usage and higher payroll and commission structures which were partially offset by the launch of our Cosmedicine product line.

~~Selling~~Operating ~~General and Administrative~~ Expenses

~~Selling, general~~The ~~and~~following ~~administrative~~table ~~expenses~~compares ~~(“SG&A”)~~our ~~was~~operating ~~$29.5~~expenses ~~million~~ for the ~~nine months~~six months ended ~~April~~December 130, 2006 ~~compared~~and toDecember ~~$21.1 million for the nine months ended March~~ 31, 2005. The increase was primarily due to the addition of several senior management level officers and expenses that were incurred in connection with the development of a new product line called Cosmedicine which was launched in February 2006. Further, we incurred higher professional expenses for accounting, legal, information technology inventory management services and public relations activities.:

Included in SG&A expenses for the nine months ended April 1, 2006 are professional fees in the amount $7.0 million, which consist of approximately $2.3 million in accounting fees, including outsourced accounting services, $3.0 million in consulting fees, including financial, operational and product consulting, and $1.7 million in legal fees. 41

Additional SG&A expenses for the nine months ended April 1, 2006 were $22.5 million. Below is a table representing our SG&A expenses in detail represented in the condensed consolidated statement of operations. SG&A expenses represented 114% of total revenue for the nine months ended April 1, 2006 compared to 85% for the nine months ended March 31, 2005. While this expense is very high as a percentage of sales, we believe this level of spending is necessary to develop and implement our business plan.


	Six Months Ended

*In thousands*	December 30, 2006		December 31, 2005		Increase / (Decrease)			Percent Change

Operating Expenses
Share based compensation expense	$	1,012	$	150	$	862			575	%
Payroll		6,512		5,667		845			15	%
Depreciation and amortization		2,300		2,268		32			1	%
Loss on disposal of fixed assets		171		35		136			389	%
Occupancy		3,326		2,572		754			29	%
Insurance		2,006		1,147		859			75	%
Equipment leasing		166		100		66			66	%
Travel and entertainment		1,041		711		330			46	%
Professional fees		5,274		4,170		1,104			26	%
Office Expenses		575		293		282			96	%
Advertising and marketing		1,075		1,123		(48	)		(4	%)
Credit card fees		358		286		72			25	%
Postage and delivery		309		185		124			67	%
Telephone		275		202		73			36	%
Training and education		190		176		14			8	%
Management fees		—		420		(420	)		(100	%)
Other		423		1,219		(796	)		(65	%)


Total Operating Expenses	$	25,013	$	20,724	$	4,289			21	%

~~For~~Operating expenses were $25.0 million for the ~~nine~~six months ended ~~April~~December 130, 2006 ~~and~~compared to ~~March~~$20.7 million for the six months ended December 31, 2005, ~~respectively~~an increase of $4.3 million. The increase of 21.0% was primarily due to due to a $0.9 million increase in stock option expense under SFAS No. 123R related primarily to new options granted during the six months ended December 30, ~~SG&A~~2006 and the remeasurement at December 30, 2006, an increase of $1.1 million in professional fees for accounting, legal, information technology, inventory management services, software development, and public relations; a $.9 million increase in payroll due to a $0.5 increase in severance expense, and the addition of several senior management level officers; a $0.8 million increase in occupancy expenses ~~were~~due ~~comprised~~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 ~~following:~~quarter to provide 1,760,925 shares of Common stock to a vendor in settlement of a prior unfulfilled contract.

Non-~~34-~~operating Expenses

(Amounts in millions)	2006		2005
Payroll	$	9.2	$	7.6
Occupancy		4.1		3.9
Insurance		1.9		2.4
Equipment Leasing		0.2		0.3
Travel and Entertainment		1.2		0.6
Professional Fees		7.0		2.0
Office Expenses		0.4		0.5
Advertising and Marketing		1.5		1.1
Severance		0.4		—
Cleaning Expenses		0.2		0.2
Credit Cards Fees		0.4		0.5
Taxes & Licenses		0.2		—
Telephone		0.3		0.3
Training and Education		0.5		—
Management Fees		0.4		1.6
Other		1.6		—
Total	$	29.5	$	21.0

The following table compares our non-operating expenses for the six months ended December 30, 2006 and December 31, 2005:

Depreciation and Amortization


	Six Months Ended

*In thousands*	December 30, 2006			December 31, 2005		Increase / (Decrease)			Percent Change


Non-operating (Income) Expenses
Interest expense, net	$	4,384		$	3,070	$	1,314			43	%
Unrealized gain on convertible securities		(94,006	)		137,749		(231,755	)		(168	%)
Registration rights penalties		2,324			—		2,324			—


Total Non-operating (Income) Expense	$	(87,298	)	$	140,819	$	(228,117	)		(162	%)

Depreciation and amortization was $3.1 million for the nine months ended April 1, 2006 compared to $2.8 million for the nine months ended March 31, 2005. This increase is due primarily to increased amortization expense in fiscal 2005 associated with the Johns Hopkins trademark agreement.42

~~Operating~~Interest ~~Loss~~Expense, net

~~Our~~Interest ~~operating~~expense ~~loss~~ was $204.24 million for the ~~nine~~six months ended ~~April~~December 130, 2006 compared to $113.51 million for the ~~nine~~six months ended ~~March~~December 31, 2005. The increase inof ~~the~~$1.3 million ~~operating~~was ~~loss~~caused is primarily ~~due~~by to the ~~increase~~write-off inthe ~~SG&A~~unamortized ~~expense~~discount and ~~for~~financing costs on the ~~nine~~loan ~~months~~with ~~ended~~Technology ~~April~~Investment 1Capital Corp of $0.9 million and $0.2 million, respectively, ~~2006~~upon ~~compared~~the early repayment. Interest expense also increased due to the ~~nine~~increase in debt levels in the six months ended ~~March~~December 30, 2006 versus December 31, 2005., due to the new financing.

~~Interest~~Unrealized ~~Expense~~Loss on Convertible Securities

~~Interest~~During ~~expense was $3.3 million for~~ the ~~nine~~six months ended ~~April~~December 130, 2006, ~~compared~~the toCompany added 139,876,075 warrants $3issued with debt.0 ~~million~~As ~~for~~of December 30, 2006, the ~~nine~~number ~~months~~of ~~ended~~common ~~March~~shares ~~31,~~into which ~~2005.~~the ~~The~~convertible ~~increase~~securities were convertible was ~~primarily~~ ~~due~~646,452,766 toas ~~the~~of ~~accelerated~~that date. ~~amortization~~The ofper ~~the~~share ~~debt~~trading ~~discount~~value onas ~~senior subordinated~~of ~~debt~~December 30, ~~which~~2006 was ~~converted~~$0.19, ~~into~~which resulted ~~KAAI’s~~in ~~common~~an ~~stock~~estimated ~~and subsequently~~fair ~~exchanged~~value ~~for~~of ~~Series~~the Bconvertible ~~Preferred~~securities ~~Stock,~~ of $1122.08 million ~~coupled~~. ~~with~~The ~~imputed~~Company ~~interest~~recorded ~~expense~~an onunrealized gain of approximately $94.0 million for the six ~~Johns~~months ~~Hopkins~~ended ~~agreement~~December 30, 2006.

~~Net~~Registration ~~Loss~~Rights Penalties

~~Our~~The ~~net~~Company ~~loss~~incurred ~~increased~~penalties toof $~~308~~2.3 million ~~from $14.5 million~~ for the ~~nine~~six ~~month periods~~months ended ~~April 1~~December 30, 2006 ~~and March 31, 2005, respectively~~. ~~This increase~~The inpenalties ~~our~~are ~~net~~due ~~loss~~to ~~resulted~~failure ~~from~~to ~~revaluing~~meet ~~our~~conditions ~~convertible~~included ~~securities~~in ~~which~~registration ~~resulted~~rights inagreements anwith ~~unrealized~~various ~~loss of approximately $285 million for nine months~~stockholders.

-35-

ended April 1, 2006. Also included is the increase of $20.0 million in operating loss and the increase of 40% for SG&A expenses.

Dividends Accrued on Preferred Stock

Dividends accrued on preferred stock were $0.8 million for the ~~nine~~six months ended ~~April 1,~~December 30, 2006 as compared to $10.4 million for the ~~nine~~six months ended ~~March~~December 31, 2005. The ~~decrease~~ increase was due to the forfeiture of dividends accrued on preferred ~~stock~~ stock which ~~was~~were converted into KAAI’s common stock and subsequently exchanged for ~~our~~ TrueYou Series B Preferred Stock in the quarter ended December 31, 2005.

Unrealized loss on convertible securities

The Company originally valued the convertible securities at $65 million as of December 20, 2005, the date of the Share Exchange Agreement, based on the transaction value of the Share Exchange Agreement. The Company has subsequently determined that a better measure of fair value is based on the share trading value of the publicly traded securities of Trueyou.com Inc. (TUYU.PK) and as a result, the Company has remeasured its convertible securities as of December 31, 2005 and April 1, 2006. The number of common shares into which the convertible securities are convertible was 506,576,690 as of December 31, 2005 and April 1, 2006. The per share trading value as of December 31, 2005 was in the amount $0.40, which has resulted in an estimated fair value of the convertible securities to be approximately $203 million. The per share trading value as of April 1, 2006 was in the amount $0.69, which has resulted in an estimated fair value of the convertible securities to be approximately $350 million. The Company recorded an unrealized loss of approximately $147 million for the three months ended April 1, 2006. For the nine months ended April 1, 2006, we added our December unrealized loss of $138 million to our additional liability in the amount $147 million to record an unrealized loss of approximately $285 million.

Net Loss Applicable to Common Stockholders

Our net loss applicable to common stockholders for the nine months ended April 1, 2006 was $309 million compared to $15.5 million for the nine months ended March 31, 2005. Included is $20 million operating loss, $3 million interest expense and $285 million unrealized loss on convertible securities.

In addition, SG&A expenses increased 40% for nine months ended April 1, 2006 compared to March 31, 2005.

Seasonality

Our operations have historically been seasonal, with higher revenues generally generated in the first half of our fiscal year (July through December) as a result of increased demand for our services and products during the holiday season from the end of November through the end of December. Furthermore, we have historically discounted our products during the month of August, which has further skewed revenues into the first half of the fiscal year.

Financial Condition, Liquidity and Capital Resources

Net cash used in operating activities was $19.63 million and $712.85 million for the ~~nine~~six ~~month~~months ~~periods~~ ended ~~April~~December 130, 2006 and ~~March~~December 31, 2005, respectively. This deterioration of cash flows resulted primarily from an ~~increase~~operating ~~in our net~~ loss of $~~308~~ 18.9 million for the ~~nine~~six months ended ~~April~~December 130, 2006. ~~Included~~versus isan ~~$20 million~~ operating loss, ~~$3 million interest expense and $285 million unrealized loss on our remeasurement~~ of ~~convertible securities. We were able to partially~~ ~~mitigate the cash used in operating activities by paying vendors on longer terms~~$13.6 ~~Vendors~~million ~~are~~for ~~now~~six onmonths ~~terms~~ended ~~that~~December ~~cannot~~31, ~~be further extended~~2005.

~~-36-~~ Net cash used in investing activities was $1.4 million and $2.1 million for the six months ended December 30, 2006 and December 31, 2005, respectively. The decrease is primarily due to capital expenditures.

~~Net~~Cash ~~cash~~flows ~~used~~provided inby ~~investing~~financing activities ~~was~~were $423.13 million and $228.70 million for ~~the~~ ~~nine~~the ~~month~~six ~~periods~~months ended ~~April~~December 130, 2006 and ~~March~~December 31, 2005, respectively. ~~The~~For ~~increase~~the issix months ended December 30, 2006, financing activities were primarily the $24.2 net increase in debt due to ~~facility~~the ~~renovations~~new financing, ~~information~~offset ~~technology~~by the $0.9 million debt closing costs. For the six months ended December 31, 2005, cash flows from financing activities were primarily the result of the $14.9 million gross issuance of TrueYou Series D Preferred Stock, $10.1 million gross issuance of KAAI Series G Preferred Stock and $4.8 million gross from issuance of KAAI ~~accounting~~Series ~~systems~~F Preferred Stock, which was subsequently exchanged for ~~our~~Series ~~facilities~~H Preferred Stock.

Cash flows provided by financing activities were $27.0 million and $6.2 million for the nine month periods ended April 1, 2006 and March 31, 2005, respectively. For the nine months ended April 1, 2006, cash flows from financing activities were primarily the result of the issuance of our Series D Preferred Stock in the amount of $15.0 million gross, $10.1 million gross from the issuance of KAAI Series G Preferred Stock and $4.8 million gross from issuance of KAAI Series F Preferred Stock. 43

On February 21, 2006, we entered into an Amendment and Consent (the “Amendment and Consent”) with Technology Investment Capital Corp. (“TICC”), which provided for amendments to the following financial covenants to which we are subject through the end of fiscal year 2007, pursuant to the Note and Warrant Purchase Agreement dated March 31, 2004, as amended (the “Purchase Agreement”): Minimum Consolidated EBITDA, Consolidated Total Debt to Consolidated EBITDA, Consolidated Senior Debt Ratio, Minimum Unit EBITDAR, Minimum Unit Fixed Charge Ratio, and Minimum Unrestricted Cash Balance. The new covenants are substantially lower than the covenants set forth in our prior agreement with TICC and as such we believe they are achievable. Accordingly, on February 21, 2006 we agreed with TICC to new covenants which management has reviewed and believe to be achievable. In consideration for the new covenants, we increased our escrow account for TICC interest payments by $1.0 million to cover interest through the end of fiscal year 2007. As of April 1, 2006 approximately $1.9 million has been deposited in the TICC escrow account.

In addition, on June 30, 2006, the Company obtained a covenant compliance waiver and amendment under the senior debt agreement with TICC. The Company obtained a waiver for the Consolidated Senior Debt to Consolidated EBITDA ratio covenant test for all periods April 1, 2006 through March 31st, 2007. In addition, the Company obtained amended covenants for the Unit EBITDAR, Unit Fixed Coverage Ratio and minimum cash required covenant tests.

Future Liquidity and Capital Needs

OnSince ~~May~~its 9inception, the Company has experienced operating losses and negative cash flow from operations. As of December 30, 2006, we ~~entered~~had ~~into~~ a ~~Loan~~cumulative ~~Agreement~~deficit ~~with~~of $145.9 ~~some~~million and a working capital deficiency of ~~our~~$48.9 ~~existing~~million. Included in ~~shareholders,~~our ~~(“Lenders”),~~net ~~pursuant~~deficit toat ~~which~~December 30, 2006 is the ~~Lenders~~remeasurement ~~loaned~~of convertible securities. Cumulative charges recorded through the ~~Company~~remeasurement of this obligation amounted to $~~4,838,710~~38.7 million. These factors raise substantial doubt about our ability to becontinue ~~used~~as bya usgoing ~~for~~concern. ~~capital~~Our ~~expenditures~~ability to continue as a going concern is ultimately dependent on our ability to increase sales and reduce ~~general~~expenses ~~working~~to a level that will allow us to operate profitably and sustain positive operating cash flows and raise additional capital. ~~Pursuant~~The financial statements do not include any adjustments to areflect ~~Subordination~~the ~~Agreement~~outcome ~~dated~~of this ~~May~~uncertainty. 9,We ~~2006~~have had several recent financings as described in this Report, with the ~~Lenders~~ ~~and~~most ~~TICC~~recent completed on May 7, 2007. There is no assurance that the ~~Loan~~recent isrefinancing ~~subordinated~~will be sufficient to fund ~~our~~operations ~~existing~~until ~~senior~~sales ~~indebtedness~~ and profitability improve to ~~TICC~~the ~~under~~point that the Company ~~Purchase~~is ~~Agreement~~able to operate from internally generated cash flows.

~~Our~~On ~~principal~~March ~~future uses of funds are for debt service~~8, ~~working capital requirements~~2007, ~~and~~Laurus ~~capital~~sent ~~spending~~the toCompany ~~execute~~a ~~our~~Notice ~~strategy.~~of ItDefault isand ~~expected that~~Acceleration ~~our~~accelerating ~~net~~the ~~losses~~obligations ~~will~~due ~~continue~~to atLaurus ~~least~~under ~~through~~ the ~~end~~$25.0 ofmillion ~~fiscal~~Secured ~~year 2007. In~~Term ~~addition,~~Note ~~subject~~issued toas ~~our~~of ~~ability~~June ~~to raise additional capital~~30, we2006 ~~expect~~and ~~to spend~~the ~~approximately~~ $61.0 million ~~during~~Senior ~~the~~Subordinated Secured ~~period~~Term ~~commencing~~Note ~~with~~issued ~~the~~as ~~last quarter~~ of ~~fiscal~~December ~~year~~22, 2006. ~~through~~The ~~the~~Company ~~end~~incurred ofa ~~fiscal year 2007 to refurbish~~$3.8 ~~our~~penalty ~~facilities,~~in ~~develop~~May an2007 ~~information~~as ~~technology~~a ~~infrastructure,~~result ~~and~~of ~~develop our~~this ~~proprietary diagnostics products~~default.

AtOur ~~the~~principal ~~current~~future ~~level~~uses of ~~operations, we expected that we would need to raise additional~~ funds byare ~~the~~for ~~end~~debt ofservice, ~~fiscal~~working ~~year 2006. On June 30~~capital requirements, ~~2006~~and wecapital ~~sold~~spending to ~~Laurus~~ ~~Master~~execute ~~Fund,~~our ~~Ltd~~strategy. aIt ~~Secured~~is ~~Term~~expected ~~Note in the aggregate principal amount~~that ofour ~~$25,000,000. We~~net ~~placed $21,556,000~~losses ~~into a restricted account that~~ will ~~only~~continue beat ~~release~~least tothrough ~~us if~~ the ~~following~~ ~~conditions~~end ~~are~~of ~~satisfied~~fiscal byyear ~~July~~2008. ~~11, 2006:~~

~~• We and~~Financings ~~our~~Subsequent ~~subsidiaries deliver~~ to ~~Laurus~~End ~~evidence~~of ~~that $5,200,000 in additional~~Fiscal ~~junior capital has been raised.~~Quarter

~~-37-~~ 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.

~~• We~~On May 7, 2007 the Company entered into an Amended and ~~our~~Restated ~~subsidiaries~~Securities Purchase ~~deliver~~Agreement ~~(or~~with ~~cause~~Laurus pursuant to bewhich ~~delivered)~~the aCompany ~~subordination~~sold to Laurus a ~~agreement(s)~~Secured ~~executed~~Term byNote ~~each~~in ofthe usaggregate ~~and~~principal ~~any~~amount of ~~our~~$54,650,000. ~~lenders~~On ~~reasonably~~the Closing ~~acceptable~~Date, the 25.0 million obligation of the Company to Laurus under the June 30, 2006 note and an additional $3.8 million default penalty incurred in the fiscal quarter ended March 31, 2007 was repaid

~~• Laurus receives~~Contractual anObligations ~~executed payoff letter from Technology Investments Capital Corporation, our existing senior lender, in form and substance satisfactory to Laurus in its sole discretion.~~

WeAs ~~also placed $2,500,000 in a restricted account to be utilized to prefund interest for the first year~~ of ~~the~~December ~~Note. The balance of the $25~~30,~~000,000~~ is to be used for Laurus’s closing payment of $900,000, Laurus’s due diligence and structuring expenses of $40,000 and escrow agent fees of $4,000. If the Funding Amount Conditions are not met by July 11, 2006, ~~the Funding Amount and the Interest Amount will revert to Laurus. In addition, this capital will be utilized for the purposes: (i) to fund~~ our ~~operating~~contractual ~~losses~~obligations ~~until~~were ~~the~~as end of fiscal year 2007; (ii) for the abovementioned capital spending purposes; and (iii) the repayment of our TICC debt. Our failure to meet the conditions of the note would adversely affect our prospects, business, operating results and financial condition. In such case, we would be forced to reduce our expenses and our planned expansion and we would be required to substantially curtail our operations. We would also not be in a position to pursue opportunities which present themselves and would seek additional funding from our existing shareholders.follows:

Our Senior Debt, represents our TICC commitment in the amount $9 million as of April 1, 2006. We expect to repay this debt with additional financing expected by July 2006. Therefore, we have reclassified this debt from a long-term liability to a short-term liability on its Condensed Consolidated Balance Sheet.


					Payments Due by Period

Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years


Operating leases		23,581		3,801		8,908		6,572		4,300
Capitalized leases		311		207		104		—		—
Long-term debt (1)		40,039		40,039		—		—		—
Consulting obligation (2)		1,052		379		621		52		—

Totals		64,983		44,426		9,633		6,624		4,300

There is no assurance that the recent financing will be sufficient to fund operations until sales and profitability improve to the point that we are to operate from internally generated cash flows. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our possible inability to continue as a going concern.


	(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.

~~-38-~~44

Item 3.	Quantitative and Qualitative Disclosure About Market Risk.
None.
Item 4.	Controls and Procedures.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows. We are exposed to market risk associated with changes in interest rates. Our cash resources earned interest at variable rates and, therefore, our return on these funds is affected by fluctuations in interest rates. There have been no changes in interest rates that would have a material impact on our consolidated financial position, results of operations or cash flows for the three and six months ended December 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 December 30, 2006 the closing price for our Common Stock was $0.19. Changes in the price paid for a share of our Common Stock can have a significant impact on the amount recorded for the convertible securities. For example, the movement up or down in the price of our Common Stock by $0.10 will cause the balance of convertible securities to fluctuate by approximately $65 million. This fluctuation would result in an impact to our net loss. As of May 30, 2007, the closing price of our Common Stock was $0.04. 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.

~~Restatement~~Material ~~of Financial Statements:~~Weaknesses

~~During~~On ~~the~~January ~~quarter ended April 1~~25, ~~2006~~2007, weour ~~became~~independent ~~aware~~registered ofpublic ~~certain~~accounting ~~transactions~~firm, ~~that~~Amper, ~~should~~Politziner, ~~have~~and ~~been~~Mattia, ~~recorded~~P.C. in(“Amper”) ~~earlier~~noted ~~quarters~~in ~~during~~a ~~the~~letter ~~current~~to ~~fiscal~~management, ~~year.~~a copy ~~After~~of ~~review~~which ofwas ~~the~~presented ~~transactions~~to our Board, ~~management~~certain ~~has~~matters ~~decided~~involving tointernal controls ~~make~~that ~~adjustments~~they consider to be material weaknesses and significant ~~record~~deficiencies. ~~these~~However, ~~transactions~~Amper inwas ~~the~~not ~~proper~~engaged ~~period.~~to ~~[see~~perform ~~“Restatement~~an audit of ~~Interim~~our ~~Condensed~~internal ~~Consolidated~~controls ~~Financial~~over ~~Statement”~~financial ~~contained~~reporting. ~~within~~Accordingly, ~~Note~~Amper 1has tonot expressed an opinion on the ~~Condensed~~ ~~Consolidated~~effectiveness ~~Financial~~of ~~Statements]~~our internal controls over financial reporting.

OnThe ~~February~~material ~~13,~~weaknesses ~~2006,~~identified ~~our~~by ~~Board~~Amper ofwere ~~Directors,~~(A) ~~upon~~inadequate resources in the accounting ~~recommendation~~functions; of(B) ~~our management,~~inadequate ~~concluded~~controls ~~that~~over ~~the~~cash ~~financial~~management; ~~statements~~(C) inadequate ofcontrols ~~KAAI~~over ~~for~~computer ~~the~~information; ~~fiscal~~and ~~year~~(D) inadequate anti-fraud ~~ended~~program. ~~June~~More 30specifically, ~~2005~~Amper ~~(the~~identified ~~“2005~~among ~~Audited~~other ~~Financial~~things, ~~Statements”)~~material weaknesses ~~should~~in nothe ~~longer be~~processes ~~relied~~and ~~upon~~procedures associated with our preparation and ~~should~~review beof ~~restated.~~account reconciliations, ~~Our~~monitoring ~~Board’s~~of ~~conclusion~~financial ~~was~~results, ~~based~~application onof aaccounting ~~finding~~principles, bycontrol ~~our~~over cash management, ofcommunication anbetween ~~error~~departments, ininventory ~~accounting~~management ~~causing~~and anvaluation, ~~under~~vendor management ~~accrual~~and segregation of ~~accrued~~ ~~expenses~~duties, ~~relating~~and toanti-fraud ~~management~~program. ~~fees~~Examples of ~~and~~the toissues ~~accrued~~identified ~~bonuses~~include, ~~payable.~~

In addition, as a result of the errors that led to the conclusion that our 2005 Audited Financial Statements cannot be relied upon, our management concluded that our unaudited financial statements for the quarter ended October 1, 2005 (the “Subsequent Quarter Financial Statements” and together with the 2005 Audited Financial Statements, the “Financial Statements”) should no longer be relied upon and should be restated. On February 20, 2006, our Board of Directors met and discussed the foregoing with management and our independent registered public accounting firm, Amper, Politziner & Mattia, P.C. Our Board of Directors concurred with the recommendation of management. 45

Asamong many others, ainadequate ~~result~~segregation of ~~the above~~duties, insufficient staffing in the ~~consolidated~~accounting department, ~~balance~~failure ~~sheets~~to asreconcile ofor ~~June~~analyze 30accounts, ~~2005~~lack ~~and~~of effective review ~~October~~of 1,the ~~2005~~reconciliations and ~~the~~analysis ~~related~~that ~~consolidated~~are ~~statements~~prepared ~~of operations~~and, ~~cash~~in some instances, ~~flows~~poor design of controls and ~~stockholders’~~poor ~~equity~~compliance ~~have~~with ~~been~~existing ~~restated~~policies toand procedures, ~~correct~~and ~~these~~no ~~changes~~whistle blower hotline.

~~Management~~Remediation ~~Letter~~of ~~from~~Material ~~our Independent Registered Public Accountants:~~Weaknesses

~~Independently,~~In onorder ~~January~~to ~~12,~~remediate ~~2006~~these weaknesses, we ~~received~~have aretained ~~letter~~another ~~from~~accounting ~~our~~firm in ~~independent~~which ~~registered public~~members ~~accountants,~~of ~~Amper,~~that ~~Politziner,~~firm’s ~~and~~accounting ~~Mattia,~~staff ~~P.C.,~~have ~~indicating~~worked ~~that~~under ~~KAAI~~the ~~had~~supervision ~~material~~of ~~weaknesses~~our inChief ~~the~~Financial ~~design~~Officer. ~~and~~The ~~operation~~Company ofhas ~~its~~also ~~internal~~retained ~~control~~an ~~over~~information technology firm to upgrade operating, financial ~~reporting~~and ~~with~~accounting systems ~~respect~~which is expected to ~~the~~further ~~process~~improve ofthe ~~preparing~~control ~~and~~environment. ~~reviewing~~In ~~annual~~addition, ~~and~~On ~~interim~~May ~~financial~~1, ~~statements~~2006, we appointed a new Chief Financial Officer and ~~related~~in August ~~timely~~2006 ~~account~~we ~~analysis~~hired a Controller. We are also working to integrate our inventory system to improve our controls over inventory and ~~reconciliations~~related areas. ~~Weaknesses~~We have made progress to remediate identified ~~resulted~~internal ~~from~~control ~~inadequate~~deficiencies ~~resources~~and to inestablish ~~the~~adequate internal controls over financial reporting ~~area~~during ~~and~~the ~~lack~~six months ofended ~~appropriate~~December ~~technical~~30, ~~training~~2006. ~~of such~~The ~~resources~~above ~~relating~~remedial toactions ~~the~~have ~~preparation~~not ofbeen ~~financial~~in ~~statements and~~place ~~disclosures~~long enough to have been tested and ~~the~~will ~~accounting~~be assessed for ~~significant~~their ~~transactions~~adequacy on a continuous basis.

InExcept ~~order~~as todescribed ~~remediate these weaknesses~~above, wethere have ~~retained~~not ~~another~~been ~~accounting~~any ~~firm~~ changes in ~~which~~our ~~members~~internal ofcontrol over ~~that~~financial ~~firm’s~~reporting ~~accounting~~(as ~~staff~~such ~~will~~term ~~work~~is defined in Rules 13a-15(f) and 15d-15(f) under the ~~supervision~~ ofExchange ~~our~~Act) ~~Chief~~since ~~Financial~~the ~~Officer.~~fiscal ~~Additional~~year ~~resources~~ended ~~from~~July ~~the accounting~~1, ~~firm~~2006 ~~may~~that have bematerially ~~retained~~affected, onor anare asreasonable ~~needed~~likely ~~basis.~~to ~~Also~~materially affect, ~~the~~our internal ~~Company~~control over financial reporting.

~~-39-~~PART II. OTHER INFORMATION

~~has~~Item ~~retained an information technology firm to upgrade operating, financial and accounting systems which is expected to further improve the control environment~~1. ~~In addition,~~Legal On April 26, 2006, we appointed a new Chief Financial officer. 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. Proceedings

~~Except as~~UBS described above, there have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) since the beginning of the quarter ended December 31, 2005 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.Lawsuit

~~-40-~~ UBS Securities, LLC commenced a lawsuit against the Company in the Supreme Court of the State of New York, County of New York on September 18, 2006. The complaint alleges that UBS was engaged to provide investment banking services to the Company and that UBS is owed a fee of $1,750,000 with respect to a private placement that was consummated in June, 2006 and funded in July 2006. By order entered on May 25, 2007, the court granted UBS’s motion for summary judgment. On June 5, 2007 the court entered judgment against the Company in the sum of $1,962,139.25, inclusive of interest and costs. A hearing on UBS’s request for attorney’s fees will be held on July 10, 2007. In the event the Company is required to pay this judgment, it would materially and adversely affect the Company. The Company does not believe a loss from an unfavorable outcome will exceed the amount accrued.

PART II.	OTHER INFORMATION
Item 4.	Submission of Matters to a vote of Securityholders.

Item 6. Exhibits

~~On March~~1. ~~22,~~Exhibits: ~~2006, the Company’s Board of Directors approved and recommended that the stockholders of the Company approve an amendment to our Certificate of Incorporation~~ (~~the~~see ~~“Certificate~~accompanying ofExhibit ~~Amendment”)~~Index toincluded ~~(i)~~after ~~change~~ the ~~Company’s~~signature ~~name from~~page ~~TrueYou.Com Inc. to Klinger Advanced Aesthetics, Inc., (ii) increase the number~~ of ~~authorized~~this ~~shares~~Report offor ~~Common Stock that we are authorized to issue from 20,000,000 to 60,000,000, and (iii) implement~~ a ~~reverse~~list ~~stock split whereby each twenty-five (25) shares~~ of ~~our~~exhibits ~~issued~~filed ~~and~~in ~~outstanding~~this ~~Common Stock will be combined into one (1~~Report) ~~share of Common Stock~~.

On March 23, 2006 the Certificate of Amendment was approved by: (A) the holders of a majority of the Company’s outstanding stock entitled to vote with respect to an amendment of the Company’s certificate of incorporation, (B) the holders of more than 50% of the outstanding shares of Series C Preferred Stock, in accordance with the Certificate of Designation of the Series C Preferred Stock; and (C) the holders of more than 75% of the outstanding shares of Series D Preferred Stock, in accordance with the Certificate of Designation of the Series D Preferred Stock. On March 23, 2006 we filed with the Commission a preliminary Information Statement on Schedule 14C (the “Information Statement”) in connection with the proposed Amendment. On May 2, 2006, we received comments from the Commission with respect to the Information Statement. We are currently reviewing the Commission’s comments and will revise the Information Statement in response to such comments. Upon completion of the Commission’s review, we will file a definitive Information Statement and mail it to our shareholders in accordance with the Exchange Act. The Certificate of Amendment may not be filed until at least 20 calendar days after the definitive Information Statement is mailed to the stockholders of the Company. Following the expiration of such 20-day period, the Company will file the Certificate of Amendment with the Delaware Secretary of State, which will become effective on the date of such filing.46

Item 5.	Other Information
	On June 21, 2006, the Company entered into an Extension Letter with The John Hopkins System Corporation and The John Hopkins University, pursuant to which the period by which the Company is required to satisfy certain conditions under the John Hopkins Agreement was extended to September 20, 2006.
Item 6.	Exhibits
(a)	The following exhibits are filed herewith:

-41-

Exhibit Number			Description
10.1			Extension Letter dated June 21, 2006 regarding Services and Licensing Agreement from the Company to the Johns Hopkins Health System Corporation and the Johns Hopkins University.
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.
32.2			Section 1350 Certification of Principal Financial Officer.

-42-

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.	~~TRUEYOU.COM INC.~~
Date: July 12, 2006		By:	/s/ Matthew Burris
Date: July 3, 2007	By:	/s/ Matthew Burris
			Matthew Burris Chief Financial Officer/Chief Operating Officer
		Matthew Burris
		Chief Operating Officer and Chief Financial Officer

~~-43-~~47

EXHIBIT INDEX

Exhibit Number		Description
10.1		Extension Letter dated June 21, 2006 regarding Services and Licensing Agreement from the Company to the Johns Hopkins Health System Corporation and the Johns Hopkins University.
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.
32.2		Section 1350 Certification of Principal Financial Officer.

Description

-44-


10.1	James O'Crowley separation agreement.

31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

32.1	Section 1350 Certification of Principal Financial Officer.

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