Overview

Management's discussion and analysis of its financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to customer programs and incentives, bad debts, inventories, income and sales taxes, warranty obligations, financing operations, leases, restructuring, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We develop, distribute, market and sell advanced teeth whitening technology, products, systems and services and provide certain cosmetic dental procedures such as veneers and the Invisalign products (a series of clear, removable, plastic aligners that are custom-made for a patient's teeth). Unless specified to the contrary herein, references to the Company or to BSML refer to us and our subsidiaries on a consolidated basis. Our operations include the development of technologically advanced teeth whitening processes and cosmetic dental procedures that are provided and distributed in professional salon settings known as BriteSmile Professional Teeth Whitening Centers ("Centers"). Prior to the sale of the business in March 2006 (as described below), the Company previously also offered its products and systems through existing independent dental offices, known as BriteSmile Professional Teeth Whitening Associated Centers ("Associated Centers").

The Company's Associated Centers business was sold in March 2006. The financial data of the Associated Centers has been prepared in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), issued by the Financial Accounting Standards Board ("FASB"). Accordingly, the results of operations for the Associated Centers for all years presented have been reflected as discontinued operations. There were no assets or liabilities of the Associated Centers business as of December 27, 2008, or December 29, 2007.

Our products and services are ultimately directed to domestic consumers in the marketplace for aesthetic enhancement. As such, general economic factors that affect consumer confidence and spending also affect the Company. Our primary source of revenue is from consumers who are seeking to whiten their teeth using the most advanced technology available. This technology is offered through our Centers, via the internet and through various shopping programs on QVC. Currently, there are sixteen BriteSmile Centers in eleven metropolitan areas of the United States. We promote demand for our products and services by advertising directly to the consumer, while also offering a range of whitening and post-whitening maintenance retail products that generate additional revenue.

We focus on optimizing the productivity of the existing base of Light Assisted Teeth Whitening ("LATW") systems in our Centers, both in terms of the number of procedures performed per system and retail product revenue per procedure or venue.

In addition, we seek to leverage a cost base that includes, among other items, the cost of materials for the procedures and retail products, property and equipment lease expenses, employee salaries and marketing expenses.

We initially focused on building the footprint of our Center network and building brand awareness. We believe that future growth in revenue and earnings will primarily stem from higher productivity of our Centers, expansion of our Center network into existing or new markets, including additional cosmetic dental services, the introduction of new products and procedures into our Centers, and the expansion of our retail offerings.

From time to time the Company is the subject of legal actions in the ordinary course of business, including claims of alleged personal injury, infringement of trademarks and other intellectual property rights. However, the Company believes any such claims that have been presented to the Company as of the date of this report are without merit and the Company will vigorously defend against any such claims.

Critical Accounting Policies And Estimates

The consolidated financial statements are prepared in accordance with GAAP, which require the Company to make estimates and assumptions. The Company believes that the following critical accounting policies require significant management judgments, estimates and assumptions in the preparation of the consolidated financial statements.

Revenue Recognition

The Company recognizes revenue related to retail products at the time such products are shipped to customers and procedure revenues at the time the procedure is performed. Revenue is reported net of Sales Tax discounts and allowances. Under the SmileForever program, Center customers may, for an additional fee, receive a limited number of touch-up procedures over a specified term, typically one to two-years. The revenue associated with this program is deferred and recognized over the contractual term. Additionally, in cases where SmileForever revenue is bundled with procedure revenue and / or revenue from retail product sales, revenue is allocated to SmileForever using the fair values of the components of the bundle according to the requirements of EITF 00-21, and any revenue so allocated is then deferred and recognized over the contractual term. At December 27, 2008, and December 29, 2007, the deferred revenue balances associated with the SmileForever program were $1.1 million and $3.3 million, respectively.

Prior to the sale of the Associated Centers business in March 2006, the Company's operations in that business involved the shipment of key cards and activation codes to Associated Center, thereby permitting them to perform procedures. As regards domestic Associated Centers, the Company deferred the revenue generated on the sale of key cards and activation codes and recognized the revenue over the estimated performance period. As regards its customers outside of the United States, primarily distributors who sold to dentists, the Company deferred the revenue generated on the sale of key cards and activation codes and recognized related income over the estimated sell-through period for the distributor. Additionally, revenue from procedure sales was deferred if any of the components necessary to perform the procedure had not been sent to the dentist or distributor. The Company's policy was to refuse the return of key cards or access codes during the course of the agreement with an Associated Center or a distributor.

Inventories

Inventories are stated at the lower of average cost or market. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions, as well as for damaged goods. If market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Property, Equipment and Improvements

The Company evaluates its property, equipment and improvements for impairment whenever indicators of impairment exist. In 2008, a loss on disposal of property and equipment was recognized in the approximate amount of $438,000. In 2007, a loss on disposal of property and equipment for $1,000 was recognized.

Center Closures

The Company has recorded accruals in connection with Center closures. These accruals, which are periodically adjusted, include estimates pertaining to employee separation costs and the settlements of contractual obligations, primarily property leases. Although the Company does not anticipate significant changes, the actual costs related to closures may differ from these estimates. In total, the Center closure reserve decreased by approximately $331,000 to approximately $25,000 as of December 27, 2008.

Sales Tax Liability

Through the date of this Report, certain states have issued initial assessments against the Company claiming insufficient remittance of sales taxes on revenues from past procedure sales to Associated Centers, which the Company is disputing. Based upon the circumstances and the advice of its independent counsel and advisors, management has estimated and accrued approximately $1,115,000 through December 27, 2008, for potential additional sales tax liability related to these assessments and related state sales tax matters.

The Company may further increase its accrual in 2009 in response to tax assessments received through the date of this Report. The Company intends to vigorously challenge the imposition of these tax assessments, and believes it has substantial grounds for its position. Nonetheless, the Company may attempt to negotiate a resolution of such assessments and may also initiate discussions with some other states that have not asserted additional assessments against the Company. An unfavorable outcome with respect to some or all of these tax assessments discussions could have a material adverse affect on the Company's consolidated financial position and results of operations, and no assurance can be given that these tax matters will be resolved in the Company's favor in view of the inherent uncertainties involved in tax proceedings. The Company believes that it has provided adequate accruals for additional taxes and related interest expense and penalties that may ultimately result from the assessments, and will re-evaluate the adequacy of its accruals as new information or circumstances warrant.

Results of Operations

The following are explanations of significant changes for 2008 compared to 2007:

Revenue decreased from $25.0 million in 2007 to $18.1 million 27% in 2008. Economic conditions adversely affected operations.

For the year ended December 27, 2008, no one customer accounted for 10% or more of revenue.

Operating and occupancy costs decreased by two percent from $14.1 million in 2007 to $13.8 million in 2007. Reflecting a smaller more efficient operation.

Selling, general and administrative expenses decreased by 68%, totaling $5.2million in 2008 compared to $14.8 million in 2007 due principally to a decrease in professional fees and advertising expenses.

Depreciation and amortization expense decreased 43% to $.8 million in 2008 from $1.4 million in 2007 primarily as a result of certain assets reaching the end of their depreciable lives.

Interest expense decreased to $0 in 2008 from $ 8,000 in 2007 as a result of less debt outstanding, on average, due to our payment of debt instruments following the sale of the Associated Centers business in March 2006.

Interest income decreased to $0.03 million in 2008 from $0.4 million in 2007 as a result of the pay out of previously restricted cash balances following the sale of the Associated Centers business.

Income tax provision (credit) 2008 is $0, 2007 predominately relates to refunds received from prior income taxes of $178,000 (Federal of $126,000 and state of $52,000).

Discontinued operations No loss was recorded for 2008, in 2007 resulted in a loss of $0.8 million The 2007 loss is principally the result of the settlement of litigation with Longlife Health Ltd.
Related Party Transactions

For fiscal 2008, the Company paid $1.0 million for merchandise and other charges from Oracuetical, LLC, a related party. In addition, the Company paid rental costs of approximately $.06 million to another related party for a sublease in New York City.

For fiscal 2007, the Company paid $1.5 million for merchandise and other charges from Oracuetical, LLC ("Oraceutical"), a related party. In addition, the Company paid rental costs of approximately $.5 million to another related party for a sublease in New York City.

Liquidity and Capital Resources

General

At December 27, 2008 the Company had $187,000 in unrestricted cash. The Company expects that its principal uses of cash will be to provide working capital to meet corporate expenses and satisfy outstanding liabilities. The financial statements reflect a going concern basis of accounting. While the Company was able to pay its debts as of the date of this report, and had a plan to generate positive cash flow from its Centers business operations, the Company has yet to achieve profitability on an annual basis from operations and may require additional funds to continue to operate. The Company's ongoing operations may be negatively impacted if it is unable to either generate internally or obtain such funds through new debt or equity issuance. There can be no assurance that such funds will be available and if so, at an acceptable cost.

The Company had the following contractual obligations as of December 27, 2008:

                                            Payments Due By Period (in thousands)

                                                   Less Than    1-3    4-5  After 5
Contractual Obligations                    Total     1 Year    Years  Years  Years

Operating leases                          $3,304   $2,245     $  481  $120  $456
Consulting and office equipment service
contracts                                      33        28        5      0      0

Total contractual cash obligations        $3,337   $2,273     $ 486   $120  $ 456

Sources and Uses of Cash

In 2008, the Company used $5.4 million in cash from operating activities. The Company's net loss for 2008 was $2.1 million. Non-cash charges aggregated $3.7 million. Reduction of accrued liabilities of $1.9 million and reduction in deferred revenue was $2.2 million.

In 2007, the Company used $4.8 million in cash in operating activities. The Company's net loss for 2007 was $5.1 million, of which $0.8 million, net of tax, was related to the settlement of a claim. The Company had a net loss from continuing operations of $4.4 million. Non-cash charges aggregated $3.0 million, including depreciation of $1.4 million and loss on disposal of $.001 million, and resulted in an increase in the cash flow from operating activities. For fiscal 2007, changes in working capital accounts and in other operating assets and liabilities used $4.8 million in cash.

In 2008,the Company had capital expenditures of $0.2million. In 2007, the Company's investing activities were related to the release of previously restricted cash balances of $3.8 million, net of capital expenditures of $0.2 million.

.