Dec 28, Dec 29, Dec 30, April 1, March 31, 2002 2001 2000 2000 1999 ---- ---- ---- ---- ---- (in thousands, except per share data) Consolidated Balance Sheet Data: Cash and cash equivalents $ 3,527 $ 7,162 $ 5,701 $10,969 $ 6,200 Working capital/(deficit) (3,584) 1,357 (4,808) 10,869 3,498 Current assets 8,582 14,771 13,257 15,018 7,780 Total assets 31,099 39,847 30,131 32,390 10,432 Long-term obligations, less current maturities 13,332 4,120 1,727 122 - Shareholders' equity 3,799 20,556 9,519 28,119 6,060UNITED STATES

~~9-month~~SECURITIES AND ~~Transition~~EXCHANGE Period Ended Year Ended Year Ended Year Ended Year Ended Year Ended Dec.28, Dec.29, Dec. 30, Dec 30, April 1, March 31 2002 2001 2000 2000 2000 1999 ---- ---- ---- ---- ---- ---- Consolidated Statement of Operations data: (in thousands, except per share data) Center whitening fees, net $ 12,738 $ 14,333 $ 9,315 $ 11,295 $ 5,838 $ 46 Associated center whitening fees, net 22,460 24,048 5,766 6,994 1,970 - Product sales 4,125 4,849 1,223 1,362 236 501 ------------------------------------------------------------------------------------ Net Sales 39,323 43,230 16,304 19,651 8,044 547 Operating and occupancy costs 14,671 16,744 9,462 16,580 13,849 946 Selling, general and administrative 34,480 43,492 30,556 32,753 14,498 4,627 Research and development 923 1,849 1,811 2,280 1,748 3,201 Depreciation and amortization 6,099 4,715 3,830 4,513 1,457 123 Restructuring expense 304 879 778 950 472 1,030 Impairment charges - 1,217 1,254 1,254 - 2,525 Loss on sale/leaseback - - 7,138 7,138 - - ------------------------------------------------------------------------------------ Total operating expenses 56,477 68,896 54,829 65,468 32,024 12,452 ------------------------------------------------------------------------------------ Loss from operations (17,154) (25,666) (38,525) (45,817) (23,980) (11,905) Other income (expense), net (1,537) (776) (5,961) (5,766) 475 138 ------------------------------------------------------------------------------------ Loss before income tax provision (18,691) (26,442) (44,486) (51,583) (23,505) (11,767) Provision for income taxes 80 57 26 37 11 - ------------------------------------------------------------------------------------ Net Loss, before cumulative effect of change in accounting principle $ (18,771) $ (26,499) $ (44,512) $ (51,620) $ (23,516) $(11,767) Cumulative effect of change in accounting principle - - (272) (272) - - ------------------------------------------------------------------------------------COMMISSION

~~Net Loss $ (18~~Washington,771) $ (26,499) $ (44,784) $ (51,892) $ (23,516) $(11,767) ==================================================================================== INCREASED VALUE OF WARRANTS 307 - - - ==================================================================================== NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (19,078) $ (26,499) $ (44,784) $ (51,892) $ (23,516) $(11,767) ==================================================================================== Basic and Diluted Net Loss per Share: Before cumulative effect of change in $ (7 D.~~86) $ (11~~C.~~85)~~ $ (27.26) $ (31.89) $ (17.64) $ (16.96) accounting principle ==================================================================================== Cumulative effect of change in accounting - - $ (0.17) $ (0.17) - - principle ==================================================================================== Basic and diluted net loss per share $ (7.86) $ (11.85) $ (27.43) $ (32.06) $ (17.64) $ (16.96) ==================================================================================== Weighted average shares outstanding-diluted 2,427,412 2,236,688 1,632,912 1,618,791 1,333,053 693,948 ====================================================================================20549

~~Payments Due By Period Contractual Obligations Total Less Than 1 Year 1~~FORM 10-3 Years 4-5 Years After 5 Years Long-Term Debt 12,696 500 7,450 4,746 - Capital Lease Obligations 2,986 956 1,800 230 - Operating Leases 12,921 2,921 4,497 3,242 2,261 Lease Obligation for Closed Centers 1,236 197 410 349 280 ----- --- --- --- --- Total Contractual Cash Obligations 29,839 4,574 14,157 8,567 2,541K

Summary Compensation Table Long Term Compensation ------------------------ Annual Compensation Awards ------------------- ------------------------ Securities Underlying Name and Options/ Principal Position Period Salary ($Mark One) SARs (#) ----------------------- ----------------------- ------------------ ------------------------ John Reed, CEO Fiscal 2002 $ 225,000 0 Fiscal 2001 252,600 0 Transition Period 125,000 0 Paul Dawson Fiscal 2002 $ 191,667 0 CEO, BriteSmile Fiscal 2001 $ 210,000 0 International, Ltd. Transition Period 133,333 0 Bruce Fleming Fiscal 2002 $ 175,000 0 President Officer Derek Correia Fiscal 2002 $ 400,079 0 ExecutiveVP, Marketing Fiscal 2001 96,726 0 Stephen Miller Fiscal 2002 $ 150,000 0 Executive VP, Fiscal 2001 231,789 0 Manufacturing and Transition Period 143,750 0 Distribution

~~OPTION/SAR~~x ~~GRANTS~~ANNUAL INREPORT ~~FISCAL~~PURSUANT ~~YEAR~~TO ~~2002~~SECTION ~~Potential~~13 ~~Realizable~~OR Value at Assumed Annual Rates of Stock Price Appreciation for Option Term Individual Grants -------------------------------------------------------------- ---------------------------------------- Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Options/SARs Employees in Base Price Expiration Name Granted 15(#d) FYOF ~~2002~~THE ~~($/Share)~~SECURITIES ~~Date~~EXCHANGE 5%ACT ~~10%~~OF --------------------- ---------------------------------------------------------------------------------------------------- John L. Reed 0 0 N/A N/A N/A N/A Paul Dawson 0 0 N/A N/A N/A N/A Bruce Fleming 66,667 53 58.50 05/31/12 0 0 Steve Miller 0 0 N/A N/A N/A N/A Derek Correria 3,333 3 70.50 03/01/12 0 01934

~~AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND DECEMBER 28, 2002 OPTION VALUES Number of Securities Underlying Unexercised Value of Unexercised Shares Options at In~~ For the ~~Money~~fiscal ~~Options~~year atended ~~Acquired on Value~~ December 28 27, 2002 (1) December 28, 2002 (1) Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable ---- ------------ ------------ ------------------------- ------------------------- John L. Reed (2) 0 0 36,667 /13,333 $0/$0 Paul Dawson (2) 0 0 0/0 $0/$0 $0/$0 Bruce Fleming 0 0 13,333/53,334 $0/$0 Steve Miller (2) 0 0 8,667/4,666 $0/$0 Derek Correria (2) 0 0 0/0 $0/$02008

~~(a)~~¨ ~~The~~TRANSITION ~~following~~REPORT ~~documents~~PURSUANT ~~are~~TO ~~filed~~SECTION as13 aOR ~~part~~15(d) ofOF ~~this~~THE ~~Report:~~SECURITIES 1.EXCHANGE ~~Financial~~ACT ~~Statements~~OF Report of Independent Auditors F-2 Report of Independent Auditors F-3 Consolidated Balance Sheets for the 52-week periods ended December 28, 2002 and December 29, 2001. F-4 Consolidated Statements of Operations for the 52-week periods ended December 28, 2002 and December 29, 2001 and the 39-week period ended December 30, 2000. F-6 Consolidated Statements of Cashflows for the 52-week periods ended December 28, 2002 and December 29, 2001 and the 39-week period ended December 30, 2000. F-8 Consolidated Statements of Shareholders' Equity for the 52-week periods ended December 28, 2002 and December 29, 2001 and the 39-week period ended December 30, 2000. F-9 Notes to Consolidated Financial Statements. F-10 2. Financial Statement Schedules F-33 Schedule of Valuation and Qualifying Accounts for the 52-week periods ended December 28, 2002 and December 29, 2001 and the 39-week period ended December 30, 2000. 3. Exhibits1934

~~Signature Title Date /s/ A.M. Pilaro Chairman of~~ For the ~~Board~~transition ofperiod Directors April 9, 2003 ---------------------------- Anthony M. Pilaro /s/ John L. Reed Chief Executive Officer April 9, 2003 ---------------------------- and Director (Principal Executive Officer) John L. Reed /s/Bruce Fleming Director April 9, 2003 ---------------------------- Bruce Fleming /s/ R. Eric Montgomery Director April 9, 2003 ---------------------------- R. Eric Montgomery /s/ Gerald Poch Director April 9, 2003 ---------------------------- Gerald Poch /s/ Dr. Gasper Lazzara, Jr. Director April 10, 2003 ---------------------------- Dr. Gasper Lazzara, Jr. /s/ Brad Peters Director April 10, 2003 ---------------------------- Brad Peters /s/ Harry Thompson Director April 10, 2003 ---------------------------- Harry Thompson /s/ Peter Schechter Director April 10, 2003 ---------------------------- Peter Schechter /s/ Tim Pierce Director April 10, 2003 ---------------------------- Tim Piercefrom to

~~December~~Commission file ~~28, December 29, 2002 2001 -------------- ---------------- CURRENT ASSETS~~number: Cash and cash equivalents $ 3,527 $ 7,162 Trade accounts receivable, net of allowances of $506 and $615, respectively 2,364 4,311 Inventories 2,502 2,540 Prepaid expenses and other 189 423 Notes receivable-current portion - 335 -------------- ---------------- Total current assets 8,582 14,771 PROPERTY, EQUIPMENT AND IMPROVEMENTS: Furniture, fixtures and equipment 7,600 7,690 Teeth whitening equipment 16,682 13,160 Leasehold improvements 10,171 10,491 -------------- ---------------- 34,453 31,341 Less accumulated depreciation and amortization (14,164) (8,827) -------------- ---------------- Net property, equipment and improvements 20,289 22,514 INVESTMENTS, RESTRICTED AS TO USE 843 843 OTHER ASSETS 1~~,385 1,719~~ -~~------------- ---------------- TOTAL ASSETS $ 31,099 $ 39,847 ============== ================ Continued~~11064

~~December 28~~BSML, December 29, 2002 2001 --------------------- -------------------- CURRENT LIABILITIES: Accounts payable $ 4,793 $ 5,512 Accrued liabilities 4,403 4,959 Deferred revenue 819 763 Accrual for store closures 201 310 Note payable to related party 500 500 Subordinated convertible debenture, net of discount 749 729 Capital lease obligation with related party- current portion 701 641 ------------- ------------- Total current liabilities 12,166 13,414 ------------- ------------- LONG TERM LIABILITIES Capital lease obligations with related party - less current portion 1,885 2,537 Accrual for store closure 1,035 900 Note payable to related party, less current portion 1,083 1,583 Line of credit borrowings 4,714 - Accrued variable rent payable to EVL 2,150 - Convertible debenture 2% 3,500 - Other long term liabilities 767 857 ------------- ------------- Total long term liabilities 15,134 5,877 ------------- ------------- Total liabilities 27,300 19,291 ------------- ------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $ INC.001 par value; 50,000,000 shares authorized; 2,428,464 and 2,415,131 shares issued and outstanding as of December 28, 2002 and December 29, 2001, respectively 36 36 Additional paid-in capital 139,418 137,097 Accumulated deficit (135,655) (116,577) ------------- ------------- Total shareholders' equity 3,799 20,556 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,099 $ 39,847 ============= =============

52 Weeks Ended 52 Weeks Ended 39 Weeks Ended December 28, December 29, December 30, 2002 2001 2000 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ REVENUES: Center whitening fees, net $ 12,738 $ 14,333 $ 9,315 Associated center whitening fees, net 22,460 24,048 5,766 Product sales 4,125 4,849 1,223 ----------- ----------- ------------ Total revenues, net 39,323 43,230 16,304 OPERATING COSTS AND EXPENSES: Operating and occupancy costs 14,671 16,744 9,462 Selling, general and administrative expenses 34,480 43,492 30,556 Research and development expenses 923 1,849 1,811 Depreciation and amortization 6,099 4,715 3,830 Restructuring expense 304 879 778 Impairment charges on leasehold improvements - 1,217 1,254 Loss on sale/leaseback transaction - - 7,138 ----------- ----------- ------------ Total operating costs and expenses 56,477 68,896 54,829 ----------- ----------- ------------ Loss from operations (~~17,154)~~Exact name (25,666) (38,525) ----------- ----------- ------------ Interest expense (1,603) (1,083) (6,153) Interest income 66 307 192 ----------- ----------- ------------ Loss before income tax provision and cumulative effect of ~~change~~registrant inas ~~accounting~~specified ~~principle (18,691) (26,442) (44,486) Income tax provision 80 57 26 ----------- ----------- ------------ Net loss before cumulative effect of change~~ in ~~accounting~~its ~~principle (18,771~~charter) (26,499) (44,512) Cumulative effect of change in accounting principle (Note 3) - - (272) ----------- ----------- ------------ Net loss $ (18,771) $ (26,499) $ (44,784) DEEMED DIVIDEND RELATED TO WARRANTS 307 - - ----------- ----------- ------------ NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (19,078) $ (26,499) $ (44,784) =========== =========== ============ Basic and diluted net loss per share before cumulative effect of change in accounting principle $ (7.86) $ (11.85) (27.26) =========== =========== ============ Cumulative effect of change in accounting principle - - $ (0.17) =========== =========== ============ Basic and diluted net loss per share $ (7.86) $ (11.85) $ (27.43) =========== =========== =========== Weighted average shares - basic and diluted 2,427,412 2,236,688 1,632,912 =========== =========== ============

52 Weeks 52 Weeks 39 Weeks Ended Ended Ended December 28, December 29, December 30, 2002 2001 2000 ----------------- ------------------ ------------------ CASH FLOWS USED IN OPERATING ACTIVITIES: Net loss $ (18,771) $ (26,499) $ (44,784) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 6,099 4,715 3,830 Write off of property and equipment 76 Amortization of discount on debt 20 20 198 Loss on sale/leaseback transaction - - 7,138 Impairment charges on leasehold improvements - 1,217 1,254 Debt conversion expense, including accrued interest converted to equity 724 385 5,736 Costs recognized for issuance of stock and stock options 1,013 1,554 313 Changes in assets and liabilities: Trade accounts receivable 1,947 (1,516) (2,061) Inventories 38 (175) (1,174) Prepaid expenses and other 234 460 (49) Other assets 113 (150) (726) Accounts payable (719) (2,917) 6,565 Accrued liabilities 1,594 1,853 2,031 Deferred revenue 56 (13) 776 Other long-term liabilities (64) 421 314 ------------ ------------ ------------ Net cash used in operating activities (7,640) (20,645) (20,639) ------------ ------------ ------------ CASH FLOWS USED IN INVESTING ACTIVITIES: Proceeds from sales of assets - - 5,000 Repayment of notes receivable 391 335 112 Purchase of property and equipment (3,948) (11,225) (14,968) ------------ ------------ ------------ Net cash used in investing activities (3,557) (10,890) (9,856) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments of capital lease obligation (592) (394) - Principal payments on long-term debt (500) (417) - Proceeds from issuance of debt 3,500 2,500 25,000 Borrowings from line of credit 4,714 - - Proceeds from common stock offerings - 26,623 - Proceeds from exercise of stock options and warrants 440 4,684 227 ------------ ------------ ------------ Net cash provided by financing activities 7,562 32,996 25,227 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,635) 1,461 (5,268) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 7,162 5,701 10,969 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 3,527 $ 7,162 $ 5,701 ============ ============ ============

Utah	87-0410364
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

527777 Glades ~~Weeks 52 Weeks 39 Weeks Ended Ended Ended December 28~~Road, ~~December~~Suite 29100, ~~December~~Boca 30Raton, ~~2002~~Fl 2001 2000 ---- ---- ---- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 617 $ 291 $ 232 ============= ============= ============= Cash paid for income taxes $ 80 $ 57 $ 26 ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF NON CASH ITEMS: Conversion of debt, including accrued interest of $132 equity $ - $ 5,132 $ 19,395 ============= ============= ============= Fair value of stock options and warrants issued to consultants $ - $ - $ 352 Fair value of warrants issued in debt financing arrangements $ 158 $ - $ 2,787 ============= ============= ============= Equipment acquired under capital lease obligations $ - $ 2,373 $ 1,199 ============= ============= =============33434

Additional Total Common Shares Paid-In Accumulated Shareholder's Shares Amount Capital Deficit Equity ------------- ------------------------------ ------------------ -------------------- Balance at April 1, 2000 1,591 $ 24 $ 73,389 $ (~~45,294) $ 28,119 Exercise~~ Address of ~~stock~~principal ~~options~~executive ~~10 - 227 - 227 Beneficial conversion related to debt financing - - 3~~offices,~~378~~ -Zip ~~3,378 Income tax benefit on exercise of stock options - - 3,253 - 3,253 Valuation allowance for income tax benefit on exercise of stock options - - (3,253~~Code) - (3,253) Stock option compensation cost - - 479 - 479 Conversion of long-term debt to common stock 316 5 19,390 - 19,395 Issuance of warrants in connection with financing agreement - - 2,705 - 2,705 Net loss and comprehensive loss - - - (44,784) (44,784) ---------- ------- --------- ---------- ----------- Balance at December 30, 2000 1,917 29 99,568 (90,078) 9,519 Exercise of stock options 65 1 4,124 - 4,125 Stock option compensation cost - - 1,097 - 1,097 Conversion of long-term debt to common stock 68 1 5,131 - 5,132 Exercise of warrants 7 - 559 - 559 Private placement of common stock, net of placement fees of $1,400 and fair value of warrants issued to placement agent 358 5 26,618 - 26,623 Net loss and comprehensive loss - - - (26,499) (26,499) ---------- ------- --------- ---------- ----------- Balance at December 29, 2001 2,415 36 137,097 (116,577) 20,556 Deemed dividend related to warrants - - 307 (307) - Exercise of stock options 13 - 440 - 440 Stock option compensation and warrant cost - - 1,574 - 1,574 Net loss and comprehensive loss - - - (18,771) (18,771) ---------- ------- --------- ---------- ----------- Balance at December 28, 2002 2,428 $ 36 $139,418 $(135,655) $ 3,799 ========== ======= ========= ========== ===========

52 Weeks Ended 52 Weeks Ended December 39 Weeks Ended December 28, 29, December 30, 2002 2001 2000 -------------------- ----------------------- -------------------- Loss as reported $ 19,078 $ 26,499 $ 44,784 Compensation expense reported under APB25 $ (~~265~~561) $ 988- $ - Compensation expense computed using fair value method $ 3,562 $ 2,595 $ 1,449 -------------------- ----------------------- -------------------- Pro forma loss $ 22,375 $ 29,094 $ 46,233 ==================== ======================= ==================== Pro forma basic and diluted loss per share $ 9.22 $ 13.01 $ 28.31 ==================== ======================= ====================4098

Accrual for Accrual for Store Closures Store Closures at December 29, Restructuring at December 28, 2001 Charges Cash Paid 2002 ------------------- ---------------- -------------- ------------------- Restructuring expense $ 1,210 $ - $ (~~278)~~Registrant’s telephone ~~$ 932 Revision of December 29~~number, ~~2001~~including ~~estimate~~area ~~- 304 - 304 ------------------- ---------------- -------------- ------------------- Total $ 1,210 $ 304 $ (278~~code) ~~$ 1,236 =================== ================ ============== ===================~~

~~Accrual~~Securities registered ~~for~~pursuant ~~Store~~to Accrual for Store Closures at Restructuring Closures at December 30, 2000 Charges Cash Paid December 29, 2001 Asset Write-Offs ------------------- ---------------- -------------- ------------------- --------------------- Restructuring expense $ 617 $ 934 $ Section 12(~~286~~b) ~~$ 1,318 Severance 161 - (161) - Revision~~ of ~~December~~the 30, 2000 estimate - (55) - (108) ------------------- ---------------- -------------- ------------------- Total $ 778 $ 879 $ (447) $ 1,210 =================== ================ ============== =================== Impairment charges $ 1,217 =====================Act:

52 weeks 52 weeks 39 weeks ended ended ended December 28, December 29, December 30, 2002 2001 2000 ---- ---- ---- Current: Federal $ - $ - $ - State 80 57 26 ---------- ------------- ----------- Total current 80 57 26 ----------- ------------- ----------- Deferred: Federal $ - $ - $ - State - - - ----------- ------------- ----------- Total deferred - - - ----------- ------------- ----------- Total current and deferred $ 80 $ 57 $ 26 =========== ============= ===========None

~~December~~Securities registered ~~28,~~pursuant ~~December~~to 29, Current deferred tax assets: 2002 2001 ---- ---- Reserves and accruals $ 1,432 $ 433 Other, net 916 605 --------------------- ---------------------- Current deferred tax asset 2,348 1,038 --------------------- ---------------------- Long-term deferred tax asset Net operating loss carryforwards 45,632 38,542 Property and equipment 1,343 2,687 Tax credit carryforwards . 441 378 --------------------- ---------------------- Long-term deferred income tax assets 47,416 41,607 --------------------- ---------------------- Total deferred income tax asset 49,764 42,645 --------------------- ---------------------- Valuation allowance Section 12(~~49,764~~g) ~~(42,645)~~of ~~---------------------~~the ~~---------------------- Net deferred tax assets $ - $ - ===================== ======================~~Act:

~~52 Weeks 52 Weeks 39 Weeks ended ended ended December 28~~Common Stock, ~~December~~Par ~~29,~~Value ~~December 30, 2002 2001 2000 ---- ---- ---- Provision at statutory tax rate -34.00% -34.00% -34.00% State income tax benefits, net of Federal benefit -3.90% -6.00% -5.90% Non-deductible items~~ $0.~~17%~~001 ~~-7.04%~~Per ~~5.31% Tax on foreign earnings at less than U.S. Rates -2.21% - - Valuation allowance 40.11% 47.26% 34.60% ------ ------ ------ Total 0.17% 0.22% 0.01% ======== ======== =======~~Share

~~December~~Indicate by ~~28,~~check ~~December~~mark ~~29,~~if ~~2002~~the ~~2001~~registrant ~~----~~is ~~---- Note Payable to EVL,~~ a ~~related party, due May 10, 2006 $ 1,583 $ 2,083 Line of credit 4,714~~ well-known 2%seasoned ~~Convertible Promissory Note 3~~issuer,~~500~~ -as ~~EVL~~defined ~~variable~~in Rule ~~rent~~405 ~~2,150 - 5% Subordinated Convertible Notes (net~~ of ~~discount~~the ofSecurities ~~$51 and $71) 749 729 ------------------ ---------------------- $ 12,696 $ 2,812 ================== ======================~~Act. ¨ Yes x No

52Indicate by ~~weeks~~check ~~ended~~mark 52if ~~weeks~~the ~~ended~~registrant 39is ~~weeks~~not ~~ended~~required ~~December~~to ~~28,~~file ~~2002~~reports ~~December~~pursuant 29, 2001 December 30, 2000 ------------------ ------------------- ------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Price Price Price Options Per Share Options Per Share Options Per Share --------- ------------ ---------- ------------ ---------- ------------- Outstanding at beginning Of year 405,768 $78.30 424,728 $82.50 409,512 $71.70 Granted 125,712 62.88 90,183 79.01 77,200 88.95 Exercised (to Section 13~~,333)~~ ~~29.49~~or Section 15(~~30,736~~d) ~~43.06 (10,917) 22.65 Forfeited/expired (200,478) 96.04 (78,407) 93.13 (51,067) 99.60 --------- -------- -------- Outstanding at end~~ of ~~year~~the ~~317,669 75~~Exchange Act.~~90 405,768 78.30 424,728 82.50 ========= ======== ========~~ ¨ Yes x No

~~Outstanding~~Indicate by ~~Options~~check ~~Exercisable~~mark ~~Options~~whether ~~Weighted~~the ~~Average~~registrant ~~Weighted~~(1) has ~~Range~~filed ofall ~~Exercise~~reports ~~Remaining~~required ~~Average~~to be ~~Weighted~~filed ~~Price~~by ~~Per~~Section 13 ~~Number~~or ~~Contractual Exercise Price Per Number Average Exercise Share Outstanding Life~~ 15(~~in Years~~d) ~~Share~~of ~~Exercisable~~the ~~Price~~Securities ~~Per~~Exchange ~~Share~~Act ~~-------------------~~of ~~---------------~~1934 during ~~-------------------~~the ~~--------------------~~preceding ~~--------------- -------------------- $4.95 -~~ 12~~.75~~ ~~14,800~~months ~~10.00~~(or ~~5.76~~for ~~6,667~~such ~~5.61~~shorter ~~15.00~~period -that ~~28.80~~the ~~54,400~~registrant was ~~8.10~~required ~~22.06~~to ~~51,133~~file ~~22.89~~such ~~31.20 - 44.10 78~~reports),~~356~~ ~~8.87~~and ~~38.21~~(2) has ~~58,556~~been ~~37.85~~subject ~~45.00~~to -such ~~58.50~~filing requirements ~~75,822~~for ~~9.19~~the ~~57.55~~past ~~20,922~~90 56days.~~40 61.95 - 74.10 27,757 8.26 68.10 17,702 68.18 75.00 - 106.95 27,312 8.58 84.56 23,546 83.88 120.00-206.25 39,222 8.37 152.16 36,689 145.35 -------- -------- Total 317,669 215,215 ======== ========~~ Yes x No ¨

52Indicate by ~~Weeks~~check ~~Ended~~mark 52if ~~Weeks~~disclosure ~~Ended 39 Weeks Ended December 28, December 29, December 30, 2002 2001 2000 ----- ----- ----- Net loss before cumulative effect~~ of ~~change~~delinquent infilers ~~accounting~~pursuant ~~principle~~to $Item 405 ~~(18,771) $ (26,499) $ (44,512) Cumulative effect~~ of Regulation ~~change in accounting principle~~ S-K -is ~~(272)~~not ~~Deemed~~contained ~~dividend~~herein, ~~related~~and towill ~~warrants~~not ~~307~~be -contained, ~~- -------------- ---------------- ---------------- Net loss attributable~~ to ~~common~~the ~~shareholders~~best of $the ~~(19,078)~~registrant’s ~~$ (26~~knowledge,~~499)~~ ~~$ (44,784) =========== =========== =========== Weighted-average shares of common stock outstanding used~~ in ~~computing~~definitive ~~basic~~proxy ~~and~~or ~~diluted~~information ~~net~~statements incorporated ~~loss~~by ~~per~~reference ~~share 2,427,412 2,236,688 1,632,912 Basic and diluted net loss per common share before cumulative effect of change~~ in ~~accounting~~Part ~~principle~~III ~~$ (7.86) $ (11.85) $ (27.26) =========== ============ ============ Cumulative effect~~ of ~~change~~this inForm ~~accounting principle $~~ 10-K $or -any $amendment ~~(0.17)~~to ~~===========~~this Form ~~============ ============ Basic and diluted net loss per common share $ (7~~10-K.~~86) $ (11.85) $ (27.43) =========== ============ ============~~ ¨

~~March~~Indicate by ~~30,~~check ~~June~~mark ~~29,~~whether ~~September~~the ~~December~~registrant ~~2002~~is ~~2002~~a ~~28,~~large ~~2002~~accelerated 28filer, ~~2002~~an accelerated ~~---------~~filer, ~~-------~~a non-~~--------~~accelerated ~~--------- Revenue $ 9~~filer,~~333~~ $or ~~11,013~~a $smaller ~~9,946~~reporting $ 9,031 Total operating costs and expenses 13,080 13,878 14,383 15,135 Loss from operations (3,747) (2,865) (4,437) (6,104) Net loss $ (4,132) $ (2,986) $ (4,603) $ (7,050) Basic and diluted net loss per share $ (1company.~~65)~~ $See definitions ~~(1.20)~~of $“large ~~(1.95)~~accelerated ~~$ (2.90) March 31~~filer,” ~~June~~“accelerated 30filer,” ~~September December 2001 2001 29, 2001 29, 2001 --------- --------- --------- --------- Revenue $ 8,917 $ 11,570 $ 13,359 $ 9,384 Total operating costs~~ and ~~expenses~~“smaller reporting ~~14,792~~company” ~~16,724~~in ~~17,444~~Rule ~~19,936 Loss from operations (5,875) (5,154) (4,085) (10,552) Net loss $ (6,143) $ (5,473) $ (4,132) $(10,751) Basic and diluted net loss per share $ (3.15) $ (~~12b-2~~.40)~~ $of ~~(1.80)~~the $Exchange (4Act.~~50)~~

52Large accelerated Weeks Ended December 52 Weeks Ended December 39 Weeks Ended December 28, 2002 29, 2001 30, 2000 ------------------------- ------------------------- ------------------------- (in thousands) Allowance for doubtful accounts - trade accounts receivable: Balance, beginning of period $ 615 $ 163 $ 83 Additions to allowance 276 676 137 Write-offs, net of recoveries (385) (224) (57) ------------------------- ------------------------- ------------------------- Balance, end of period $ 506 $ 615 $ 163 ========================= ========================= =========================filer ¨ Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company x

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

The aggregate market value of common stock held by non-affiliates of the registrant as of June 28, 2008, was approximately $1,254,373.

The number of shares outstanding of the registrant’s common stock as of February 24, 2009 was 14,481,042.

Documents incorporated by reference. The registrant incorporates information required by Part III (Items 10, 11, 12, 13, and 14) of this report by reference to the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A for the June 2007 Annual Shareholders Meeting.

BSML, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


PART I.
Item 1.	Business	1
Item 1A.	Risk Factors	3
Item 2.	Properties	8
Item 3.	Legal Proceedings	8
Item 4.	Submission of Matters to a Vote of Security Holders	10

PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6.	Selected Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 8.	Financial Statements and Supplementary Data	17
Item 9A.	Controls and Procedures	18

PART III.
Item 10.	Directors and Executive Officers, and Corporate Governance	19
Item 11.	Executive Compensation	19
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	19
Item 13.	Certain Relationships and Related Transactions, and Director Independence	19
Item 14.	Principal Accountant Fees and Services	19

PART IV.
Item 15.	Exhibits, Financial Statement Schedules	20

Signatures		25

THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. THE COMPANY’S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED BY THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION ENTITLED “FORWARD-LOOKING STATEMENTS” AND ELSEWHERE IN THIS ANNUAL REPORT. THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS DOCUMENT.

PART I.

ITEM 1.

BUSINESS

Overview

BSML, Inc. (“BSML” or the “Company” or “we”) is a Utah corporation, formerly known as BriteSmile, Inc. We formally changed our name to BSML, Inc., in the fourth quarter of 2006. Some of discussion in this Annual Report on Form 10-K regarding operations during 2006 and prior periods may reference our prior name of BriteSmile, Inc.

The Company and its affiliates distribute, market, and sell advanced teeth whitening products and services through its 16 Centers (defined below) throughout the United States. Unless specified to the contrary herein, references to BSML or to the Company refer to us and our subsidiaries on a consolidated basis. Our operations include the sale of technologically advanced teeth whitening processes that are offered at professional salon settings known as BriteSmile Professional Teeth Whitening Centers (“Centers”). In addition, the Company sells certain of its products including its whitening pen, toothpaste and mouthwash products through the internet and third party retail channels. The Company also offers certain cosmetic dental procedures such as veneers and Invisalign products (a series of clear, removable, plastic aligners that are custom-made for a patient’s teeth) at its Centers. Prior to March 2006, the Company also offered its products and systems through independent dental offices, known as BriteSmile Professional Teeth Whitening Associated Centers (“Associated Centers”).

On March 13, 2006, the Company and its wholly owned subsidiaries, BriteSmile International Limited, an Ireland corporation, and BriteSmile Development, Inc., a Delaware corporation (collectively, the “Sellers”) completed an asset sale to Discus Dental, Inc., a California corporation (“Discus”), wherein Discus acquired the assets and the operations of our Associated Centers and substantially all of our intellectual property for approximately $26.8 million, plus the assumption of certain liabilities. Also, we settled our patent infringement litigation with Discus in exchange for a payment of $8.7 million, resulting in total consideration of approximately $35.5 million to BSML, prior to consideration of deal costs that totaled approximately $1.3 million, legal expenses and income taxes.

The assets sold to Discus included certain of our tangible assets and proprietary rights related to the Associated Centers business, including the BriteSmile name and trademark, and substantially all of the our intellectual property rights. Discus acquired our intellectual property subject to certain existing technology and trademark licenses in favor of Sellers that permit the continued operation of the Centers and sales of certain retail products under the BriteSmile trademark. Discus also acquired all of our rights and claims against third parties relating to the intellectual property, except for our claims against third parties that may have infringed certain patents in the whitening strips field, which we retained under a license from Discus. During February 2008, all litigation associated with this transaction was settled. (See “Legal Proceedings,” below.)

This Annual Report on Form 10-K presents financial information in Item 6, “Selected Financial Data,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Other Supplementary Data,” among other sections. 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.” Accordingly, the results of operations for the Associated Centers for all years presented have been reflected as discontinued operations. The continuing operations in the financial statements consist of sales, costs of sales and operating expenses of our Centers business, including our corporate expenses.

During December 2007, the Company named Andrew Rudnick Chief Executive Officer. The Company also entered into an Support Services Agreement with Sleek Inc. (“Sleek”), a company controlled by Mr. Rudnick. Pursuant to the Support Services Agreement, Sleek agreed to provide marketing, consulting, cash management, personnel management, and other services to the Company. Mr. Rudnick Services have been terminated and all agreements with sleek have been cancelled. . (See “Legal Proceedings,” below.) The Company also relocated its Corporate Offices to Boca Raton, Florida, in February 2008.

In April of 2008 Jeff Nourse was name Chief executive Officer.

The Company maintains executive offices and principal facilities at 777 Glades Road, Suite 100 Boca Raton, Fl 33434. Our telephone number is (561) 988-4098. The Company maintains a web site at www.britesmile.com. The information on our web site should not be considered part of this Report on Form 10-K.

Marketing and Distribution

Our teeth-whitening and cosmetic dental procedures and products are marketed primarily via consumer advertising. We devote significant resources to direct-to-consumer marketing through a variety of channels including radio, print, and on-line advertising. In addition, we distribute promotional certificates to consumers using e-mail and direct mailings. In the U.S., using a toll-free number, consumers can call our Call Center and speak to a trained advisor who can make an appointment at a Center for a whitening procedure.

Competition

The Company’s light-activated teeth whitening (“LATW”) procedure competes with all teeth whitening products and services. These include in-office bleaching systems, professionally administered take home bleaching systems, and over-the-counter consumer products such as pastes, gels, brush-ons and strips. Competition continues to proliferate as consumer demand for whitening increases.

Numerous manufacturers and individual brands compete in the various product arenas. Companies continue to enter the LATW arena with products of their own. Some of these companies are also in the professional teeth whitening tray business. A significant development in 2001 was the launch of Crest WhiteStrips™, a new methodology for at-home whitening. These strips are sold over-the-counter and in dental offices. Many of these competing products have a treatment time substantially longer (weeks or more) than BSML’s LATW procedure, are less efficacious, and cause greater sensitivity.

When Discus acquired our Associated Centers business, it agreed not to use the intellectual property acquired from the Company to compete in the Center channel. However, Discus owns other tooth whitening technologies that could be used to compete against us in the Center channel.

Virtually all professional whitening systems use some form of peroxide (usually a hydrogen peroxide) for in-office procedures, or, in the case of some at-home products, a milder carbamide peroxide. Our LATW system uses a 15% hydrogen peroxide solution, a relatively low percentage for an in-office procedure. As a result, our process has lower sensitivity relative to many competing systems.

Sources of Supply

Historically, we have subcontracted the manufacturing of LATW devices with a single manufacturer, Peak Industries in Longmont, Colorado. We have recently contracted for the purchase of LATW devices from Docland, Inc. of California. We believe we have and will continue to have access to sufficient quantities of goods and materials at competitive prices to enable us to operate effectively.

Fulfillment Services Agreement with Oraceutical

In 2004, we entered into an agreement with Oraceutical, LLC (“Oraceutical”) to outsource the Company’s whitening component and product fulfillment services beginning in 2005. Robert Eric Montgomery (“Montgomery”), the Chairman & CEO of Oraceutical, LLC, was a member of our Board of Directors until September 2005 and a member of BriteSmile Development Inc.’s Board of Directors until December 2005. BriteSmile Development Inc. is an affiliate of the Company.

Contractual Relationship with Centers

Prior to April 2008, a licensed dentist and a dental hygienist or licensed dental assistant administered the Company’s LATW process at BriteSmile Centers. Typically, the dentists created a professional corporation (the “PC”), which entered into various agreements with the Company. Pursuant to such agreements, the licensed dentist had exclusive authority regarding dental matters, including administration of the LATW procedure. Pursuant to a Management Agreement between us and the PC, we managed the business and marketing aspects of the Center including provision and maintenance of furnishings and equipment, advertising and office space.

In April 2008, the Company adopted a new teeth whitening protocol which allows the customer to self-administer the teeth whitening gel and activate the LATW device in a single 20-minute procedure. The procedure protocol eliminates the need for a licensed dentist and a dental hygienist or licensed dental assistant to administer LATW procedures. Accordingly, the Company intends to terminate its Management Agreements with the PCs and the licensed dentists and a dental hygienists or licensed dental assistants which they employ.

In connection with the Company’s offering of cosmetic dental procedures, the Company will contract with licensed dentists to perform those services in the dentist’s own office or will enter into new agreements with PCs owned or organized by licensed dentists to perform cosmetic dental procedures at the Company’s Centers.

Patents, Trademarks and Licenses

Since inception, the Company has filed for and received many patents related to teeth whitening compositions, methods of tooth whitening, methods of LATW, compositions for use in LATW, peroxidase-activating oral compositions, compositions for making an artificial prosthesis, an adjustable articulated positioning device, a portable, high power arc lamp system, and a design for a device that provides light to teeth for whitening procedures. Similar patent applications have issued or are pending in various countries including the European Union, Canada, Japan and Australia. These patents and patent applications, along with the underlying technology, were sold to Discus. In connection with the sale, Discus granted the Company a license to all patents and know how relating to or used in the operation of the Centers business and a trademark license to use the BriteSmile tradename and marks in the Centers business and for licensed retail products for distribution in the retail channel.

Governmental Regulations

Our business operations are subject to certain federal, state and local statutes, regulations and ordinances (collectively, “government regulations”), including those governing health and safety. The LATW system is categorized as a Class 1 Medical Device as defined by the United States Food and Drug Administration (“FDA”). In most states, our historic teeth whitening procedure is deemed to be a part of the practice of dentistry. Generally, states impose licensing and other requirements on the practice of dentistry. In addition, some states prohibit general business corporations (such as the Company) from engaging in the practice of dentistry.

To our knowledge, our new, self-administered teeth whitening procedure is not presently subject to government regulation.

We regularly monitor developments in government regulations relating to the practice of dentistry. We believe that we have, and will continue to, structure all of our agreements, operations and marketing in accordance with applicable government regulations.

Product Liability

From time to time, we may become subject to suits alleging negligence, product liability or related causes of action. Currently there are no such claims pending. The Company maintains product liability insurance coverage for its products and services with coverage limits of $5 million per occurrence and $5 million per year.

Employees

As of March 27, 2009, we had 78 full-time employees and part-time employees, including professional and administrative personnel in the Centers. None of our employees are represented by a union, and we are not aware of any efforts to unionize any employees. We believe our labor relations are satisfactory.

Financial Information about Segments and Geographic Areas

Our business is focused on one industry segment: products and procedures to whiten teeth. All of our revenues and profits are generated through the sale and service of products for this one segment. Our profit and loss and our total assets for the last three fiscal years are reported in the financial statements included in Item 8 of this report. The reported amounts are prepared in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the results of operations for the Associated Centers for all years presented have been reflected as discontinued operations. The continuing operations in the financial statements consist of revenues, costs of goods sold and Center and corporate operating expenses.

ITEM 2.

PROPERTIES

Effective February 2008, the Company moved its corporate offices to a leased facility in Boca Raton, Florida. This lease is on a month-to-month basis. Prior to this date and for the period presented in this Report on Form 10-K, the Company operated at its 14,162 square foot corporate office facility in Walnut Creek, California, on a month-to-month rental basis. This facility was used for administration and general office purposes.

Fifteen of the Centers are under operating lease agreements expiring from 2008 through July 2015. Two Centers are operating on a month-to-month rental basis. Each Center lease covers prime street-level retail spaces, with square footage ranging from 1,800 to 5,200 square feet, and feature improvements to create attractive salon settings. Equipment available at each Center includes BriteSmile LATW devices, dental chairs and dental cabinetry and equipment.

The Company amortizes leasehold improvements over the shorter of their economic lives or the lease term. Any lease that includes a rent holiday period is expensed on a straight-line basis over the lease term (including any rent holiday period). Landlord incentives or allowances under operating leases are amortized over the shorter of the economic life or the lease term.

ITEM 3.

LEGAL PROCEEDINGS

From time to time the Company is the subject of legal actions. The Company is subject to legal proceedings and claims in the ordinary course of business. There are no current pending legal actions involving the Company that are expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Company is party to certain legal proceedings and claims in the ordinary course of business. There are no current pending legal activities that are expected to have a material adverse effect on the company’s financial position or results of operations.

Andrew Rudnick & Sleek, Inc., v. BSML, Inc., Circuit Court, 17th Judicial Circuit, Broward County, Florida, Case No. 08 30137. On June 30, 2008, Andrew Rudnick, the Company’s former CEO, and Sleek, Inc. a company controlled by Rudnick (the “Rudnick Plaintiffs”) filed suit against the Company alleging breach of an Amended and Restated Support Services Agreement and breach of a Separation and Release of Claims Agreement and fraud in the inducement relating to both agreements. The Rudnick Plaintiffs subsequently amended the complaint to allege conversion and to seek specific performance and permanent injunctive relief against the Company. The Company intends to defend itself vigorously against the allegations of the amended complaint and to assert various counter claims against the Rudnick Plaintiffs. The Company recorded an expense and charge to paid in capital for the fair value of 1,240,000 shares to be issued to Sleek, Inc., an entity controlled by Mr. Rudnick, the former CEO of the Company, as of December 29, 2007, because the notification of the transfer agent to issue the shares was considered ministerial. However, due to delays, resulting from a dispute between the Company and Mr. Rudnick during the first and second quarters of 2008, the Company determined during the second quarter of 2008 that it no longer had an obligation to issue the shares. Accordingly, the number of common shares outstanding was reduced by 1,240,000 as of December 27, 2008.

2012710 Ontario Inc. Pure Laser Hair Removal & Treatment Clinic (carrying on business as Pure Med Spa, Pure Laser Hair Removal and Treatment Clinics, Inc.) and Investment Partnership (2006) LP v. BSML, Inc., and Jeff Nourse , Ontario Superior Court of Justice, Court File CV-08-00359260-0000. In July 2008, 2012710 Ontario Inc. Pure Laser Hair Removal & Treatment Clinic and Investment Partnership (2006) LP (the “Canadian Plaintiffs”) brought an action against the Company and Jeff Nourse, the Company’s current CEO, alleging, among other claims, breach of Mr. Nourse’s fiduciary duty while an officer with Pure Med Spa, breach of duties following his resignation from Pure Med Spa, breach of a non-competition agreement, interference with Pure Med Spa’s suppliers, interference with potential investors, misappropriation of Pure Med Spa’s website, and improper disclosure of Pure’s confidential information. The Canadian Plaintiffs seek compensatory damages and punitive damages. This matter was dismissed with prejudice on April 1, 2009.

Douglas Wu vs BSML, Inc. and Andrew Rudnick, Contra Costa County Superior Court, California, Case No. C08-00358. On February 21, 2008, Mr. Wu filed a complaint asserting a single cause of action alleging breach of contract for failing to pay $70,000 in severance allegedly due upon Mr. Wu’s termination of employment. The Company denies the allegations of the complaint. The claim against Mr. Rudnick was subsequently dismissed for lack of jurisdiction. On November 12, 2008, the Company and Mr. Wu reached a settlement in principal whereby the Company agreed, without admitting liability, that the Company would pay $23,333 to Mr. Wu not later than December 31, 2008. In exchange Mr. Wu agreed to execute a general release and to dismiss the lawsuit. The parties signed a written settlement agreement, and the case was dismissed with prejudice on January 21, 2009.

Green River Junction, Inc. v. BSML, Inc, United States District Court for the Eastern District of Pennsylvania, Civil Action No. 08CV2372. In May 2008, Green River Junction, Inc. (“Green River Plaintiffs”) brought action against the Company alleging, among other claims breach of contract, unjust enrichment and wrongful withholding of commissions. On September 23, 2008, the parties participated in a court-ordered settlement conference. On October 22, 2008, the Company settled the lawsuit with the Green River Plaintiffs. The settlement calls for the Company to pay as full settlement of all claims the sum of $180,000. Payments are due as follows: $30,000 immediately; $3,000 in December 2008; monthly payments of $9,000 from January through September 2009 and monthly payments of $11,000 from October 2009 through March 2010.

The following claims have been settled or dismissed prior to February 22, 2008:

Claims of Longlife Health Ltd.

Discus Dental Inc. (“Discus”), the purchaser of the Company’s Associated Center business and other assets in March 2006, notified the Company in the first quarter of 2007 of a pending dispute over collection of receivables from Longlife Health Ltd. (“Longlife”), the Company’s former distributor in the United Kingdom. Subsequent to the sale of the Associated Centers business, Discus terminated Longlife’s distribution agreement. Longlife thereafter alleged that the termination of the distribution agreement was wrongful and, in response, withheld payment of receivables due to Discus. A portion of the receivables in question was a component of the assets sold to Discus. As a result, Discus notified the Company that Longlife’s claims gave rise to a claim that the Company was in breach of certain representations made in the March 2006 Asset Purchase Agreement and exercised its rights to block disbursement to the Company of $3.5 million in funds escrowed at the time of the sale.

In October 2007, the Company reached a settlement with Longlife and Discus regarding these issues. Under the terms of the settlement, $1,005,396 was paid to Discus from the escrowed funds, with Discus remitting $581,588 of these funds to Longlife in settlement of its claim. The Company received $109,443 from the escrowed funds. The balance of the escrowed funds (plus interest) was released in the settlement of the litigation with Oraceutical LLC, as discussed below.

Claims of Oraceutical LLC, Oraceutical Innovative Properties LLC, and R. Eric Montgomery:

In April 2007, Oraceutical LLC, Oraceutical Innovative Properties LLC, and R. Eric Montgomery, a former director of the Company (collectively, “Oraceutical”) filed suit in California state court naming as defendants the Company and its subsidiary, BriteSmile Development, Inc. (“BDI”), the Company’s former Chief Executive Officer Julian C. Feneley (“Feneley”), and the Company’s former Chairman of the Board Anthony M. Pilaro (“Pilaro”). The complaint also names as defendants Discus and its subsidiary BriteSmile Professional, Inc., neither of whom is affiliated with the Company.

Oraceutical’s Amended Complaint sought to recover at least $11.3 million plus punitive and exemplary damages. The Amended Complaint asserted claims against the Company and BDI for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, violations of California law and accounting, and asserted a fraud claim against Feneley and Pilaro. The complaint also included a declaratory judgment claim against the Company, BDI and Discus.

Oraceutical’s claims were based on an Asset Purchase Agreement, as subsequently amended (the “APA”), entered into between Oraceutical, the Company and BDI in July 2003. Pursuant to the APA, BDI acquired intellectual property consisting primarily of certain United States and foreign patents, patent applications, continuations, continuations-in-part, trade secrets, technologies, know-how, trademarks and trade names relating to human oral care for a purchase price of $6.4 million, plus a participation interest, after offsets and deductions, in third-party royalties and infringement recoveries relating to the intellectual property acquired.

In March 2006, certain assets of the Company, including the intellectual property acquired from Oraceutical, were sold to Discus in a transaction valued at $35.5 million, of which $8.7 million was allocated to settlement of patent infringement litigation against Discus. In connection with this transaction, the Company and Discus deposited $3.5 million in escrow (as discussed above with reference to the Longlife claim). In its complaint, Oraceutical claimed that the value of the patent infringement settlement should be substantially more than $8.7 million. Oraceutical also asserted that the Company and Discus placed an artificially low value on the settlement of the patent infringement claims and asserted that if the claims were valued fairly, Oraceutical would have shared in a portion of the recovery under the terms of the APA. The declaratory judgment claims asserted by Oraceutical also sought a declaration that Discus was bound by the terms of the APA as the party who acquired the subject intellectual property from BDI.

In June 2007, the Company filed a counterclaim against Oraceutical alleging fraud and misrepresentation in connection with representations made to the Company at the time the Company acquired the intellectual property which, in part, was the subject of the litigation, together with claims for breach of the APA.

Effective January 2, 2008, Oraceutical, the Company, BDI, Feneley, Pilaro, and Discus entered into a global settlement of these claims and counterclaims. As consideration for the settlement, the parties agreed to disburse all remaining funds held in escrow as follows: $1,366,115 was released to Oraceutical, $73,225 was released to Discus, $95,000 was released to Pilaro, as reimbursement of legal fees and the balance of the escrowed funds of $1,137,923 was released to the Company. In addition, the parties gave mutual releases of all claims between them arising before the date of the settlement agreement, Oraceutical and the Company entered into an Amended and Restated Consulting Agreement which amends and restates in its entirety the Consulting Agreement entered into between them on July 1, 2003, and the Company delivered to Oraceutical, with Discus’s consent, an Assignment of Patent License Agreement pertaining to whitening strips. Oraceutical agreed that, other than the rights assigned pursuant to the Patent License Agreement, it has no right, title or interest in the intellectual property that was transferred by the Company to Discus, nor any rights, interests, royalties, recoveries or other proceeds thereof. All of the claims asserted in the litigation were dismissed with prejudice on February 15, 2008.

Smile Inc. Asia Pte. Ltd. v. BriteSmile. In April 2002, Smile Inc. Asia Pte. Ltd. (“Smile”) sued the Company and BriteSmile Management, Inc., a wholly-owned subsidiary of the Company (“BriteSmile Management”), in Utah state court. Among other charges, the complaint sought $10 million in damages and alleged that BriteSmile Management breached its 1998 distributor agreement for laser-aided teeth whitening devices with Smile (exclusive as to Singapore and other surrounding countries) by failing to fill orders placed and to perform other obligations under the agreement. On August 7, 2007, the Company settled this matter through payment to Smile of $1.5 million under the terms of a settlement agreement that provided for the mutual release of all claims asserted in the lawsuit.

BriteSmile, Inc. v. Discus Dental, Inc. and Salim Nathoo, filed in the United States District Court for the Northern District of California (the “Discus Patent Litigation”). This case was dismissed in March 2006 in connection with the sales transaction with Discus.

BriteSmile Development, Inc. v. Discus Dental, Inc. BSML Development, Inc., a wholly owned subsidiary of BSML, Inc. filed on October 28, 2005, a patent infringement suit against Discus in federal court in California. This case was dismissed in March 2006 in connection with the dismissal of the Discus Patent Litigation.

BriteSmile Inc. v. Discus Dental, Inc., filed in Contra Costa County Superior Court, California. This case was dismissed in March 2006 in connection with the Discus Patent Litigation.

The Procter & Gamble Company v. Oraceutical LLC, IDEX Dental Sciences, Inc., Robert Eric Montgomery, BriteSmile, Inc. and BriteSmile Development, Inc., filed in the United States District Court for the Southern District of Ohio. In June 2003, Procter & Gamble Company (“P&G”) filed a complaint against the defendants listed above alleging that Oraceutical LLC, IDEX Dental Sciences, Inc. and Eric Montgomery (collectively, the “REM Group”) had breached an agreement between the REM Group and P&G (the “Standstill Agreement”) by entering into a binding memorandum of understanding with the Company and BSML Development, Inc. on May 9, 2003.

On February 17, 2006, the parties entered into a global settlement of the litigation proceedings between the parties. As part of the settlement, the Company granted to P&G a nonexclusive license to certain patents relating to teeth whitening strips and P&G paid $4 million of which the Company received approximately $1 million, with the remainder paid to the Company’s legal counsel in the matter and to the REM Group.

Gregg A. Coccari v. BriteSmile, Inc., an arbitration proceeding with the American Arbitration Association filed on August 11, 2005. This matter was settled in February 2007. Under the terms of the settlement, Mr. Coccari, former Chief Executive Officer, received approximately $700,000 in cash payments, of which $200,000 was paid by the Company’s insurance carrier, and 80,000 shares of the Company’s common stock valued at approximately $141,000.

Mayer, Brown, Rowe & Maw LLP v. BSML, Inc. and BSML Development, Inc., filed in the California Superior Court for San Francisco County. Mayer, Brown, Rowe & Maw LLP (“MBR&M”), the Company’s former patent litigation counsel in the Discus Patent Litigation, filed a complaint alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment arising from the attorney-client relationship between MBR&M and the Company. On November 17, 2006, the Company and MBR&M agreed to a settlement under which the Company paid MBR&M a total of $5 million in full settlement of all outstanding claims. All related litigation matters were subsequently dismissed.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II.

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of the Company trades on the OTC Bulletin Board under the symbol “BSML” The following table sets forth, for each full quarterly period during 2008 and 2007, high and low closing sales price information as reported by Nasdaq, the OTC Bulletin Board, or other electronic services, as the case may be.


	High	Low
Quarters Ended:
December 27, 2008	$0.09	$0.06
September 28, 2008	$0.20	$0.20
June 28, 2008	$0.40	$0.40
March 29, 2008	$0.30	$0.30

Quarters Ended:
December 29, 2007	$0.60	$0.21
September 30, 2007	$0.65	$0.36
June 30, 2007	$1.49	$0.40
March 31, 2007	$1.91	$1.20

As of December 27, 2008, there were 263 holders of record of the Company’s common stock (counting Cede & Company as one holder of record). This number excludes any estimate by the Company of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.

Dividends

The Company has not paid any cash dividends on its common stock since its inception and currently has no plan to do so in the future.

Recent Sales of Unregistered Securities

There were no sales of securities in 2008 or 2007 There have been no repurchases of equity securities by BSML during the years ended December 27, 2008, or December 29, 2007

In 2008, the Company recognized stock-compensation costs of approximately $ 169,000. The $169,000 recognized in 2008, consisted of 1,128,831shares of restricted $0.001 par value common stock with a fair value of $0.15 per share, issued to the Company’s Chief Executive Officer who is also Chairman of the Company’s Board of Directors as a recruitment incentive. In 2007 Company recognized stock-compensation costs of approximately $326,000, approximately $140,000 had been previously accrued as an expense related to an expected legal settlement; this amount was reclassified to stock-compensation expense in the first quarter of 2007 matching the period of final settlement and issuance of shares.

Based on current assumptions, currently outstanding option grants and restricted common shares expected to vest and become unrestricted in the future, the remaining value as stock-compensation cost in the future is approximately $11,600.

Stock Options

Since March 1998, the Company has granted options to purchase shares of common stock to employees, directors, or key consultants pursuant to the Company’s 1997 Stock Option and Incentive Plan (the “1997 Plan”) as well as through separate agreements. For the period ended December 27, 2008, options for 261,000 shares of common stock were granted, none were exercised and 287,750 were forfeited. As of December 27, 2008 75,000 options for shares of common stock remain outstanding. The weighted average exercise prices of the outstanding options is $0.40 per share. Most of our options vest and become exercisable in increments over time.

In addition to stock option activities, 574,290 shares of restricted stock were granted to our then Chief Executive Officer in November 2006. Of this amount, 114,858 shares vested immediately and additional amounts of 114,858 shares vest on the next four anniversaries of the date of grant. In connection with this grant, stock compensation expense of approximately $263,000 was recognized in 2006. This individual resigned in December 2007 and he and the Company agreed that all of these shares would vest immediately upon his resignation

In 2008 the Company granted 1,128,000 shares of restricted common stock to the current CEO..

Also, 240,000 shares of restricted stock were granted to our then Chief Executive Officer in January 2005. Some 80,000 of these shares vested immediately. This individual resigned later in 2005, forfeiting the remaining 160,000 shares of the restricted stock grant. Related to settlement of legal action with this individual, an additional 80,000 shares were subsequently awarded to him.

The Company has registered with the SEC, on Form S-8, up to 1,166,668 shares of common stock subject to stock options which have been granted under the Company’s 1997 Plan, and up to 112,500 shares of common stock subject to stock options or warrants which have been granted to consultants or advisers outside the 1997 Plan. No additional shares were registered on Form S-8 during 2008.

ITEM 6.

SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to the Company’s consolidated statements of earnings and consolidated balance sheets for the periods indicated are derived from the consolidated financial statements of the Company. The Company’s year-end is the last Saturday in December. The data set forth should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited consolidated financial statements and related notes thereto.


	December 27, 2008			December 29, 2007			December 30, 2006		December 31, 2005		December 25, 2004
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	187		$	3,512		$	4,734	$	5,518	$	18,880
Total assets	$	5,014		$	11,408			18,065		27,842		45,075
Long-term obligations, less current maturities								—		—		15,650
Shareholders’ equity (deficit)	$	(2,643	)	$	(1,132	)		2,482		2,451		12,582

	Fiscal Year Ended
	2008			2007			2006			2005			2004
	(in thousands, except per share data)
Consolidated Statement of Operations data:
Total revenues, net	$	18,128		$	25,038		$	26,214		$	21,754		$	21,857
Operating and occupancy costs		13,836			14,097			14,203			13,774			11,335
Selling, general and administrative expenses		5,156			14,775			20,910			21,516			17,280
Depreciation and amortization		830			1,427			1,618			1,897			3,362
Restructuring expense								—			—			142
Loss from operations		(1,694	)		(5,261	)		(10,517	)		(15,433	)		(10,262	)
Amortization of discount on debt								(530	)		(2,606	)		—
Gain on mark-to-market of financial instruments related to convertible debt								—			3,811			1,060
Loss on early extinguishment of debt								(5,039	)		—			—
Loss on Impairment		(438	)		(386	)
Other Income		422			(8	)
Interest Income		29			368
Loss from continuing operations		(1,681	)		(4,365	)		(14,939	)		(15,765	)		(10,181	)
Income (loss) from discontinued operations (1)					(798	)		19,308			(2,007	)		2,361
Net income (loss)		(1,681	)		(5,163	)		4,369			(17,772	)		(7,820	)
Net income (loss) attributable to common shareholders		(1,681	)		(5,163	)		4,369			(17,772	)		(7,820	)
Net loss per common share from continuing operations, basic and diluted	$	(.13	)	$	(.40	)	$	(1.42	)	$	(1.50	)	$	(0.99	)
Net income (loss) per common share from discontinued operations, basic	$	(.0	)	$	(.07	)	$	1.83		$	(0.19	)	$	0.23
Net income (loss) per common share from discontinued operations, diluted	$	(.0	)	$	(.07	)	$	1.83		$	(0.19	)	$	0.21
Net income (loss) attributable to common shareholders, basic and diluted	$	(.13	)	$	(.47	)	$	0.41		$	(1.69	)	$	(0.76	)
Weighted average shares outstanding-basic		12,387,823			10,902,223			10,557,239			10,543,553			10,291,714
Weighted average shares outstanding-diluted (2)		12,387,823			10,902,223			10,574,606			10,543,553			11,073,098

(1)	Includes loss on settlement net of tax of $798 in 2007 and gain on sale of assets, net of tax, of $14.9 million and gain on settlement of litigation, net of tax, of $3.3 million and income from discontinued operations of $1.1 million in 2006.

(2)	Shares shown are used in the determination of per share income only if the result is not anti-dilutive.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not undertake any specific actions to cover our exposure to interest rate risk, and we are not party to any interest rate risk management transactions. We believe our exposure to foreign exchange rate risk is insignificant.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company’s consolidated financial statements and associated notes are set forth on pages F-1 through F-36.

ITEM 9A.

CONTROLS AND PROCEDURES

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer that: (i) pertains to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provides reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements for external reporting in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorization of the Company’s management and directors; and (iii) provides reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedure may deteriorate. As a non-accelerated filer, management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 27, 2008. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control — Integrated Framework.

As a result of this assessment, the Company’s management has determined that there is one deficiency that constitutes a material weakness in the Company’s internal control over financial reporting for the period. A material weakness in internal control over financial reporting is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5), or a combination of control deficiencies, that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. The four deficiencies that the Company’s management has determined constitutes a material weakness is discussed below.

Material Weakness No. 1 Entity Level Controls

During the Company’s assessment of the Entity Level control environment, management noted that design over the entity level controls was not sufficient to prevent a material weakness. The Company identified the following areas that were considered weaknesses at the Entity Level. The deficiencies in the design of the controls result in a reasonable possibility that a material misstatement may not be prevented or detected in the annual or interim financial statements in a timely manner.

•

Audit committee oversight of financial reporting

•

Senior management oversight of financial reporting

•

Inadequate number of technically skilled accounting personnel within the Company’s corporate accounting department with relevant financial reporting expertise to identify technical accounting issues on a timely basis

•

Ineffective process of identifying and assessing risks within the Company

Based on our evaluation under the framework in Internal Control, Integrated Framework, our management concluded that our internal control over financial reporting was not effective as of December 27, 2008.

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, has concluded that our disclosure controls and procedures were not effective based on his evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

Changes in Internal Control Over Financial Reporting. Other than as discussed above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls. A system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the system will meet its objectives. The design of a control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon assumptions about the likelihood of future events.

No Attestation Report. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.

PART III.

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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