ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed 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 this basis, the Company evaluates its estimates, including those related to customer programs and incentives, bad debts, inventories, income taxes, warranty obligations, financing operations, 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.

BSML, Inc., and its affiliates market and sell aesthetic services and advanced teeth whitening products and services. Unless specified to the contrary herein, references to BSML or to the Company refer to the Company and its subsidiaries on a consolidated basis. The Company's operations include the development of technologically advanced teeth whitening processes along with other aesthetic services in our med spa operations, which are distributed in professional salon settings known as BriteSmile Professional Teeth Whitening Centers ("Centers").

The Company's products and services are ultimately directed to consumers in the global marketplace for aesthetic enhancement. As such, general economic factors that affect consumer confidence and spending also affect the Company. The primary source of revenue for the Company is from consumers who are seeking to whiten their teeth using the most advanced technology available. This technology is offered through the Company's 23 Centers in the U.S. The Company promotes demand for its 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. The Company's addition of seven med spas expand in our presence in the aesthetic enhancement market.

Management of the Company focuses on optimizing the productivity of the existing Center locations and adding med spa procedures to expand our total overall product line and market presence, both in terms of the number of procedures performed per system and retail product revenue per procedure or venue. The marketing initiatives of the Company are usually constructed and monitored in such a way that management can determine their impact on revenue generation.

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

Critical Accounting Policies And Estimates

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, 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 condensed 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 discounts and allowances. In the third quarter of 2004, the Company introduced its SmileForever program. Under this 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 per the requirements of EITF 00-21 and any revenue allocated is then deferred and recognized over the contractual term. At March 28, 2009, and December 27, 2008, the deferred revenue balances associated with the SmileForever program were $1,827,000 and $1,127,000, respectively. Revenue for the seven acquired spas included revenue at the cost to perform the services for all prepaid sales from the prior to the acquisition date.

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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.

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 at 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 $1.1 million through March 28, 2009, for potential additional sales tax liability related to these assessments and related state sales tax matters.

The Company may further increase its tax reserve in 2009 in response to tax assessments received to date. 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 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 that may ultimately result from the assessments, and will re-evaluate the adequacy of its reserves as new information or circumstances warrant.

Forward Looking Statements

The statements contained in this report that are not purely historical are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. These statements relate to the Company's expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of words or phrases such as "believes," "expects," "anticipates," "should," "plans," "estimates," and "potential," among others. Forward-looking statements include, but are not limited to, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding the Company's financial performance, revenue and expense levels in the future and the sufficiency of its existing assets to fund future operations and capital spending needs. Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The Company believes that many of the risks set forth here and in the Company's filings with the SEC, is part of doing business in the industry in which the Company operates and competes and will likely be present in all periods reported. The forward-looking statements contained in this report are made as of the date of this Report and the Company disclaims any intention or obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect the business, financial condition, performance, development, and results of operations of the Company include those risks set forth under "Item 1A. Risk Factors."

Results of Operations

The following are explanations of significant changes for the 13-week period ended March 28, 2009 compared to the 13-week period ended March 29, 2008:

Total Revenues, Net declined 22%, to $4.2 million in our first quarter of 2009 compared to $5.4 million in the first quarter of 2008. Whitening revenues declined to $2.5 million in the first quarter of 2009 compared to $3.0 million in the first quarter of 2008. The addition of seven retail locations contributed $0.9 million to the 2009 first quarter revenue. Overall economic conditions affecting consumer spending also adversely impacted revenues.
Operating and occupancy costs decreased 15%, to $3.5 million in the first quarter of 2009 compared to $4.0 million in the first quarter of 2008, reflecting decrease in cost of goods sold relating to cost cutting measures .

Selling, General and Administrative expenses decreased to $0.8 million in the first quarter of 2009 from $1.8 million in the first quarter of 2008. This decrease was primarily due to our continued downsizing activities as well as a decrease in advertising and professional fees.

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Depreciation and Amortization expense decreased slightly to $252,000 in the first quarter of 2009 compared to $344,000 in the first quarter of 2008.

Other Income and expense, net. For the thirteen week periods ended March 28, 2009 and March 29, 2008, other income(expense), net was $(1,000) and $126,000, respectively, reflecting the decrease in interest earned as a result of the company's utilization of its cash.

Liquidity and Capital Resources

General

To date, the Company has yet to achieve profitability. The Company had an accumulated deficit of $178,901,000 and working capital deficiency of $6,749,000 as of March 28, 2009. The Company's net loss and net cash generated by operating activities were $(598,000) and $1,049,000, respectively, for the thirteen weeks ended March 28, 2009. At March 28, 2009, the Company had $25,000 in unrestricted cash and cash equivalents. The Company's principal sources of liquidity historically have been proceeds from issuance of common stock and debt and related financial instruments, and more recently, from the sale of its Associated Centers business. The Company is not certain if its cash will be sufficient to maintain operations of the continuing company at least through the next year due to the uncertainty of the Company's ability to generate positive cash flow from the Centers business operations. Additional financing of $2,500,000 to expand the Company's core operations has been arranged, and additional spa operations should help the Company to build a positive cash flow.

The financial statements reflect a going concern basis of accounting. The Company cannot currently provide assurance that it can become profitable. If it cannot become profitable, and without additional financing, which may be impossible to secure, the Company may not have sufficient liquidity to support its operating requirements through 2009. Accordingly, BSML management believes that these factors raise substantial doubt as to whether the going concern basis of accounting reflected in these financial statements continues to be appropriate. Our liquidity projections may improve or deteriorate depending on these changing conditions. The accompanying financial statements do not include any adjustments that may be necessary if the Company unable to continue as a going concern.

On January 27, 2009, the Company acquired the assets of seven med spas owned by John Street Holding under the Pure Med Spa name. The purchase price was $500,000 and the assumption of some of the spa liabilities. The property leases were being negotiated and were on a month to month basis. The fair value of the assets acquired is an average of approximately $80,000 per spa as of the date of this report. The company intends to have an asset valuation done to determine to fair value for the assets acquired.

On March 27, 2009, the Company entered into a Credit Agreement (the "Credit Agreement") between the Company, in its capacity as Borrower and a third-party lender (the "Lender"). The Credit Agreement provides for a four-year asset-based revolving credit facility under which up to two million five hundred thousand dollars ($2,500,000) will be available. Pursuant to the Credit Agreement, the Lender made initial term loans (the "Loans") to the Company, to be advanced to the Company in four installments The Loans mature on March 27, 2013, and bear interest at a rate of ten percent (10%) per annum, compounded monthly and payable quarterly beginning on August 1, 2009. The proceeds of the Loans will be used for working capital and other general corporate purposes. The first advance against this Agreement was on March 30, 2009.

On February 10, 2009, the Company, and its wholly owned subsidiary, Pure Acquisition Co., Inc., a Delaware corporation ("Pure Acquisition"), entered into an agreement (the "APA") to purchase certain assets of Pure Laser Hair Removal & Treatment Clinics, Inc., a Delaware corporation ("Pure"), John Street Holdings, LLC, a Delaware limited liability company ("JSH"), and certain subsidiaries of Pure and JSH (collectively, the "Subsidiaries," and together with Pure and JSH, the "Sellers").

Pursuant to the terms and subject to the conditions set forth in the APA, Pure Acquisition agreed to purchase substantially all of the assets of the Sellers (the "Purchased Assets") for a purchase price of: (i) two hundred thousand dollars ($200,000) (the "Cash Payment"); (ii) an unsecured promissory note in favor of Investment Partnership 2006 L.P. ("IP 2006") in the aggregate principal amount of five hundred thousand dollars $500,000 (the "Note"); (iii) the Company's agreement for the twelve month period immediately following the closing of the purchase of the Purchased Assets, that IP 2006 can acquire the same type of equity securities offered by the Company in one or more offerings for a price per share equal to the price paid by third party investors up to a maximum of $2,500,000 (the "Investment Participation Agreement"); (iv) a twelve month warrant in favor of IP 2006 with the rights to purchase up to $2,500,000 (or such lesser amount as is available after IP 2006's exercise of rights under the Investment Participation Agreement) of common stock of the Company (the "Warrant"); and (v) assumption of certain liabilities (the "Assumed Liabilities") of the Sellers.

Further, on March 24, 2009, BDC agreed to accept five hundred seventeen thousand dollars $517,000 in full satisfaction of the obligations of Pure Acquisition under the BDC Loan. On April 2, 2009, as a condition precedent to the Credit Agreement, as described in the Current Report on Form 8-K filed with the SEC on April 2, 2009, Pure Acquisition paid the BDC loan in full and BDC released all of the collateral secured by the BDC Loan. Accordingly, neither Pure Acquisition nor the Company has any further obligation in favor of BDC.

The final closing conditions of the APA have been met, and the APA and related transactions closed as of April 1, 2009.