UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-K







(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the fiscal year ended December 27, 2008




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from 
to




Commission
file number: 1-11064







BSML,
INC.


(Exact
name of registrant as specified in its charter)







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




7777
Glades Road, Suite 100, Boca Raton, Fl 33434


(Address
of principal executive offices, Zip Code)




(561)
988-4098


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:


None




Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, Par Value $0.001 Per Share







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.     ̈  Yes    x  No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.     ̈  Yes    x  No




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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
accelerated 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
            1Item 1A.
            Risk
      Factors
            3Item 2.
            Properties
            8Item 3.
            Legal
      Proceedings
            8Item 4.
            Submission
      of Matters to a Vote of Security Holders
            10PART II.Item 5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            11Item 6.
            Selected
      Financial Data
            12Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            13Item 7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            17Item 8.
            Financial
      Statements and Supplementary Data
            17Item 9A.
            Controls
      and Procedures
            18PART III.Item 10.
            Directors
      and Executive Officers, and Corporate Governance
            19Item 11.
            Executive
      Compensation
            19Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            19Item 13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            19Item 14.
            Principal
      Accountant Fees and Services
            19PART IV.Item 15.
            Exhibits,
      Financial Statement Schedules
            20Signatures
            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 WhiteStripsTM, 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,
17thJudicial 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 wasreduced 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
            LowQuarters
      Ended:December 27,
      2008
            $0.09
            $0.06September 28,
      2008
            $0.20
            $0.20June 28,
      2008
            $0.40
            $0.40March 29,
      2008
            $0.30
            $0.30Quarters
      Ended:December 29,
      2007
            $0.60
            $0.21September 30,
      2007
            $0.65
            $0.36June 30,
      2007
            $1.49
            $0.40March 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
              
              
              $
              18,880Total
      assets
              
              $
              5,014
              
              
              $
              11,408
              
              
              
              18,065
              
              
              
              27,842
              
              
              
              45,075Long-term
      obligations, less current maturities
              
              
              
              
              
              
              
              
              
              
              —
              
              
              
              —
              
              
              
              15,650Shareholders’
      equity (deficit)
              
              $
              (2,643
              )
              
              $
              (1,132
              )
              
              
              2,482
              
              
              
              2,451
              
              
              
              12,582
  Fiscal Year
      Ended2008
                
                
                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
                
                
                $
                21,857Operating
      and occupancy costs
                
                
                13,836
                
                
                
                14,097
                
                
                
                14,203
                
                
                
                13,774
                
                
                
                11,335Selling,
      general and administrative expenses
                
                
                5,156
                
                
                
                14,775
                
                
                
                20,910
                
                
                
                21,516
                
                
                
                17,280Depreciation
      and amortization
                
                
                830
                
                
                
                1,427
                
                
                
                1,618
                
                
                
                1,897
                
                
                
                3,362Restructuring
      expense
                
                
                
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                142Loss
      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
                
                
                
                1,060Loss
      on early extinguishment of debt
                
                
                
                
                
                
                
                
                
                
                (5,039
                )
                
                
                —
                
                
                
                —Loss
      on Impairment
                
                
                (438
                )
                
                
                (386
                )Other
      Income
                
                
                422
                
                
                
                (8
                )Interest
      Income
                
                
                29
                
                
                
                368Loss
      from continuing operations
                
                
                (1,681
                )
                
                
                (4,365
                )
                
                
                (14,939
                )
                
                
                (15,765
                )
                
                
                (10,181
                )Income
      (loss) from discontinued operations (1)
                
                
                
                
                
                
                (798
                )
                
                
                19,308
                
                
                
                (2,007
                )
                
                
                2,361Net
      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
                )
                
                $
                0.23Net
      income (loss) per common share from discontinued operations,
      diluted
                
                $
                (.0
                )
                
                $
                (.07
                )
                
                $
                1.83
                
                
                $
                (0.19
                )
                
                $
                0.21Net
      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
                
                
                
                10,291,714Weighted
      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:




Revenuedecreased 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 expensesdecreased 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
operationsNo 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
              YearsOperating
      leases
            $3,304
            $2,245
            $   481
            $120
            $456Consulting
      and office equipment service contracts
            33
            28
            5
            0
            0Total
      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




The
information for this Item is incorporated by reference to the definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.




ITEM 11.
            EXECUTIVE
      COMPENSATION




The
information for this Item is incorporated by reference to the definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.




ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




The
information for this Item is incorporated by reference to the definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.




ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED
TRANSACTIONS




The
information for this Item is incorporated by reference to the definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.




ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




The
information for this Item is incorporated by reference to the definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended.













PART
IV.




ITEM 15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES




The
following documents are filed as a part of this Report:




Financial
Statements




Report
      of Independent Registered Public Accounting Firm—Stonefield Josephson,
      Inc.
            F-2Consolidated
      Balance Sheets
            F-3Consolidated
      Statements of Operations
            F-4Consolidated
      Statements of Cash Flows
            F-5Consolidated
      Statements of Shareholders’ Equity (Deficit)
            F-6Notes
      to Consolidated Financial Statements
            F-7Item 15,
      Schedule II: Valuation and Qualifying Accounts
            F-24













Exhibits3.01
            Articles
      of Restatement of the Articles of Incorporation of the Company as filed
      with the Utah Division of Corporations and Commercial Code on January 17,
      2003 (incorporated by reference to the Company’s Annual Report on Form
      10-K for the fiscal year ended December 28, 2002).3.02
            Articles
      of Amendment to the Articles of Incorporation of the Company as filed with
      the Utah Division of Corporations and Commercial Code effective January
      30, 2004 (incorporated by reference to the Company’s Annual Report on Form
      10-K for the fiscal year ended December 27, 2003).3.03
            Bylaws
      adopted May 2, 1996, (incorporated by reference to the Company’s Annual
      Report on Form 10-K for the fiscal year ended March 31,
    1996).3.04
            Amendment
      to Bylaws adopted July 23, 1999 (incorporated by reference to the
      Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30,
      1999).10.01
            Registration
      Rights Agreement dated April 1, 1996 between the Company, LCO Investments
      Limited, Richard S. Braddock, and Pinnacle Fund, L.P. (incorporated by
      reference to the Current Report on Form 8-K of the Company dated April 1,
      1996).10.02
            Registration
      Rights Agreement dated May 8, 1997 among the Company, LCO Investments
      Limited, and Richard S. Braddock (incorporated by reference to the
      Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31,
      1997).10.03
            Registration
      Rights Agreement dated as of May 4, 1998 between the Company and LCO
      Investments Limited (incorporated by reference to the Company’s Annual
      Report on Form 10-KSB for the fiscal year ended March 31,
      1998).10.04*
            Revised
      1997 Stock Option and Incentive Plan of the Company, as amended through
      June 20, 2001 (incorporated by reference to the Company’s Annual Report on
      Form 10-K for the 52 weeks ended December 29, 2001).10.05*
            Form
      of Option Agreement between the Company and certain directors of the
      Company (incorporated by reference to the Company’s Annual Report on Form
      10-K for the 52 weeks ended December 29, 2001).10.06*
            Form
      of Option Agreement between the Company and certain employees of the
      Company (incorporated by reference to the Company’s Annual Report on Form
      10-K for the 52 weeks ended December 29, 2001).10.07
            Registration
      Rights Agreement dated as of June 3, 1999 between the Company and the
      non-management purchasers (incorporated by reference to the Company’s
      Current Report on Form 8-K as filed June 21, 1999).10.08
            Amended
      and Restated Registration Rights Agreement dated as of June 3, 1999
      between the Company and the management purchasers (incorporated by
      reference to the Company’s Current Report on Form 8-K as filed June 21,
      1999).10.09
            Registration
      Rights Agreement dated as of June 3, 1999 between the Company and certain
      non-management purchasers in the June 1999 Private Placement (incorporated
      by reference to the Company’s Current Report on Form 8-K dated June 4,
      1999).10.10
            Amended
      and Restated Registration Rights Agreement dated as of June 3, 1999
      between the Company and certain management purchasers (incorporated by
      reference to the Company’s Current Report on Form 8-K as filed June 4,
      1999).10.11
            Registration
      Rights Agreement dated as of January 18, 2000 between the Company and the
      Pequot Funds (incorporated by reference to the Company’s Current Report on
      Form 8-K dated January 18, 2000).10.12
            Agreement
      of Sublease dated December 1999 between the Company and LCO Properties,
      Inc. (incorporated by reference to the Company’s Annual Report on Form
      10-KSB for the fiscal year ended April 1, 2000).10.13
            Form
      of Warrants granted to note purchasers pursuant to the Securities Purchase
      Agreement dated as of June 27, 2000 (incorporated by reference to the
      Company’s Transition Report on Form 10-K for the Nine-month Transition
      Period ended December 30, 2000).10.14
            Form
      of Registration Rights Agreement between the Company of the purchasers of
      Notes pursuant to the Securities Purchase Agreement dated as of June 27,
      2000 (incorporated by reference to the Company’s Transition Report on Form
      10-K for the Nine-month Transition Period ended December 30,
      2000).10.15
            Convertible
      Promissory Note dated December 5, 2000 in the principal amount of
      $5,000,000 (incorporated by reference to the Company’s Current Report on
      Form 8-K dated December 5, 2000).10.16
            Warrant
      to Purchase 250,000 Shares of common stock of the Company dated December
      5, 2000 (incorporated by reference to the Company’s Current Report on Form
      8-K dated December 5, 2000).





10.17
            Amended
      and Restated Agreement between Excimer Vision Leasing L.P. and the Company
      dated February 2001 (incorporated by reference to the Company’s Transition
      Report on Form 10-K for the Nine-month Transition Period ended December
      30, 2000).10.18
            Amendment
      dated September 18, 2002 to Amended and Restated Agreement between Excimer
      Vision Leasing L.P. and the Company dated February 2001 (incorporated by
      reference to the Company’s Annual Report on Form 10-K for the 52 weeks
      ended December 28, 2002).10.19
            Amendment
      dated January 1, 2003 to Amended and Restated Agreement between Excimer
      Vision Leasing L.P. and the Company dated February 2001 (incorporated by
      reference to the Company’s Annual Report on Form 10-K for the 52 weeks
      ended December 28, 2002).10.20
            Loan
      Agreement between Excimer Vision Leasing L.P. and the Company dated as of
      March 1, 2001 (incorporated by reference to the Company’s Transition
      Report on Form 10-K for the Nine-month Transition Period ended December
      30, 2000).10.21
            Unsecured
      Credit Agreement between BSML International and CAP Advisers Limited dated
      March 2002 (incorporated by reference to the Company’s Annual Report on
      Form 10-K for the 52 weeks ended December 29, 2001).10.22
            Credit
      and Security Agreement dated December 13, 2001 between BSML International
      and CAP Advisers Limited (incorporated by reference to the Company’s
      Annual Report on Form 10-K for the 52 weeks ended December 29,
      2001).10.23
            Supplemental
      Agreement dated March 2002 to Credit and Security Agreement dated December
      13, 2001 between BSML International and CAP Advisers Limited (incorporated
      by reference to the Company’s Annual Report on Form 10-K for the 52 weeks
      ended December 29, 2001).10.24
            Supplemental
      Agreement dated July 19, 2002 to Credit and Security Agreement dated
      December 13, 2001, as amended, and to Unsecured Credit Agreement dated
      March 8, 2002 (incorporated by reference to the Quarterly Report on Form
      10-Q of the Company for the 13 weeks ended June 29,
  2002).10.25
            Supplemental
      Agreement dated January 9, 2003 to Credit and Security Agreement dated
      March 2002 (incorporated by reference to the Company’s Annual Report on
      Form 10-K for the 52 weeks ended December 28, 2002).10.26
            Amendment
      to Lease Agreement between Excimer Vision Leasing L.P. and the Company
      dated March 8, 2002 (incorporated by reference to the Company’s Annual
      Report on Form 10-K for the 52 weeks ended December 29,
    2001).10.27
            Form
      of Guaranty of Fiscal 2002 Shortfall Summary of Terms dated March 2002 in
      connection with commitments from certain shareholders and/or directors of
      the Company to secure up to $4 million of additional working capital
      (incorporated by reference to the Company’s Annual Report on Form 10-K for
      the 52 weeks ended December 29, 2001).10.28
            Form
      of Convertible Promissory Note issued in connection with November 20,
      2002 convertible note offering (incorporated by reference to the Current
      Report on Form 8-K of the Company filed on November 25,
      2002).10.29
            CAP
      Line Conversion Agreement dated as of November 20, 2003 between the
      Company and LCO Investments Limited (incorporated by reference to the
      Current Report on Form 8-K of the Company filed on November 28,
      2003).10.30
            Demand
      Promissory Note dated November 20, 2003 payable by the Company to LCO
      Investments Limited in the principal amount of $2,000,000 (incorporated by
      reference to the Current Report on Form 8-K of the Company filed on
      November 28, 2003).10.31
            Amendment
      to Lease Agreement between Excimer Vision Leasing L.P. and the Company
      dated December 12, 2003 (incorporated by reference to the Company’s Annual
      Report on Form 10-K for the fiscal year ended December 27,
      2003).10.32
            Receivable
      Conversion Agreement dated November 20, 2003 between the Company and
      Excimer Vision Leasing L.P. (incorporated by reference to the Company’s
      Annual Report on Form 10-K for the fiscal year ended December 27,
      2003).10.33
            Amended
      and Restated Consulting Agreement dated December 27, 2003 between the
      company and John Warner (incorporated by reference to the Company’s Annual
      Report on Form 10-K for the fiscal year ended December 27,
      2003).10.34*
            Employment
      Agreement, Confidentiality and Rights Ownership Agreement, Common Stock
      Purchase Option and Restricted Stock Grant Agreement each dated January 9,
      2005 between the Company and Gregg A. Coccari (incorporated by reference
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 25, 2004).














10.35
            Form
      of Securities Purchase Agreement dated as of December 16, 2004, between
      the Company and the Investors, together with exhibits including form of
      Senior Convertible Note dated December 16, 2004, due December 16, 2009;
      form of Warrant to Purchase Common Stock of the Company dated December 16,
      2004; and form of Additional Investment Right between the Company and the
      Investors (incorporated by reference to the Current Report on Form 8-K of
      the Company filed on December 21, 2004).10.36
            July
      2003 Asset Purchase Agreement between BDI and R. Eric Montgomery
      (incorporated by reference to the Quarterly Report on Form 10-Q of the
      Company filed on August 12, 2003).10.37
            Consulting
      Agreement between BDI and Oraceutical Innovative Properties (incorporated
      by reference to the Quarterly Report on Form 10-Q of the Company filed on
      August 12, 2003).10.38
            $2
      million promissory note issued by BDI to LCO Investments Limited
      (incorporated by reference to the Quarterly Report on Form 10-Q of the
      Company filed on August 12, 2003).10.39
            Supply
      Agreement dated December 21, 2004 between the Company and Oraceutical, LLC
      (incorporated by reference to the Company’s Annual Report on Form 10-K for
      the fiscal year ended December 25, 2004).10.40
            $2.5
      million loan agreement between BSML and CAP America Trust: See Agreement
      dated May 7, 2003 between the Company and CAP America Trust (incorporated
      by reference to the Company’s Annual Report on Form 10-K for the fiscal
      year ended December 25, 2004).10.41
            Amendment
      to Lease Agreement between Excimer Vision Leasing L.P. and the Company
      dated July 12, 2005 (incorporated by reference to the Company’s Quarterly
      Report on Form 10-Q filed on November 8, 2005).10.42*
            Letter
      Agreement between BSML and Nhat Ngo dated October 13, 2005. (Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 2005).10.43*
            Letter
      Agreement between BSML and Robert Sieban, Jr. dated October 13, 2005.
      (Incorporated by reference to the Company’s Annual Report on Form 10-K for
      the fiscal year ended December 31, 2005).10.44*
            Letter
      Agreement between BSML and Ken Czaja dated November 18, 2005.
      (Incorporated by reference to the Company’s Annual Report on Form 10-K for
      the fiscal year ended December 31, 2005).10.45*
            Letter
      Agreement between BSML and Julian Feneley dated November 21, 2005.
      (Incorporated by reference to the Company’s Annual Report on Form 10-K for
      the fiscal year ended December 31, 2005).10.46*
            Letter
      Agreement between BSML and Christopher Edwards dated January 19, 2006.
      (Incorporated by reference to the Company’s Annual Report on Form 10-K for
      the fiscal year ended December 31, 2005).10.47
            Asset
      Purchase Agreement among BSML, BSML International Limited, BSML
      Development, Inc. and Discus Dental, Inc. dated December 30, 2005
      (incorporated by reference to the Current Report on Form 8-K of the
      Company filed on January 4, 2006).10.48
            Limited
      Liability Company Membership Interest Purchase Agreement between BSML and
      Dental Spas, LLC dated January 13, 2006 (incorporated by reference to the
      Current Report on Form 8-K of the Company filed on January 19,
      2006).10.49
            Contribution
      Agreement between BSML and BSML Spas, LLC dated January 13, 2006.
      (incorporated by reference to the Current Report on Form 8-K of the
      Company filed on January 19, 2006).10.50*
            Letter
      Agreement between BSML and Ken Czaja dated May 4, 2006 (Incorporated by
      reference to the Company’s current report on Form 10-Q filed on August 21,
      2006).10.51*
            Employment
      agreement, dated December 6, 2006, between Dr. Julian Feneley and the
      Company (previously filed as an exhibit to the Company’s Current Report on
      Form 8-K, filed with the Commission on December 12, 2006, and
      incorporated herein by reference.)10.52*
            Employment
      agreement, dated December 29, 2006, between Richard De Young and the
      Company (previously filed as an exhibit to the Company’s Annual Report on
      Form 10-K, filed with the Commission on April 9, 2007, and
      incorporated herein by reference).10.53
            Agreement
      by and between 18 West 57th Street, LLC, and LCO Properties, Inc., dated
      as of August 14, 2007 (previously filed as an exhibit to the Company’s
      Current Report on Form 8-K, filed with the Commission on August 17,
      2007, and incorporated herein by
reference).





10.54
            Employment
      Agreement between the Company and Andrew Rudnick dated as of
      December 6, 2007 (previously filed as an exhibit to the Company’s
      Current Report on Form 8-K, filed with the Commission on December 11,
      2007, and incorporated herein by reference).10.55
            Support
      Services Agreement between the Company and Sleek, Inc., dated as of
      December 6, 2007 (previously filed as an exhibit to the Company’s
      Current Report on Form 8-K, filed with the Commission on December 11,
      2007, and incorporated herein by reference).14
            Code
      of Ethics (incorporated by reference to the Company’s Annual Report on
      Form 10-K for the fiscal year ended December 27, 2003).21.1
            Subsidiaries
      of the Company. (Incorporated by reference to the Company’s Annual Report
      on Form 10-K for the fiscal year ended December 31,
  2005).23
            Consent
      of Stonefield Josephson Inc. (filed herewith)31.1
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (filed herewith).31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).32.1
            Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (filed herewith).32.2
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).





*
            Denotes management contract or
      compensatory plan or
arrangement.













SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.




BSML,
      INC.By:
            /s/
      Jeffery NourseJeffery
      NourseChief
      Executive Officer(Principal
      Executive Officer)By:
            /s/
      James P. CullinJames
      P. CullinVice
      President of Finance(Principal
      Financial and Accounting Officer)Date:
            April
      13, 2009




Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Signature
            Title
            Date/s/ Jeffery
      Nourse
            Chairman
      of the Board of Directors
            April
      13, 2009Jeff
      Nourse/s/ Louise
      Talbot
            Director
            April
      13, 2009Louise
      Talbot/s/
            Director
            April
      13, 2009



















INDEX
TO FINANCIAL STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm—Stonefield Josephson,
      Inc.
            F-2Consolidated
      Balance Sheets
            F-3Consolidated
      Statements of Operations
            F-4Consolidated
      Statements of Cash Flows
            F-5Consolidated
      Statements of Shareholders’ Equity (Deficit)
            F-6Notes
      to Consolidated Financial Statements
            F-7Item
      15, Schedule II: Valuation and Qualifying Accounts
            F-24







































REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM









To
the Board of Directors and Stockholders of BSML, Inc.


Boca
Raton, FL





We
have audited the accompanying consolidated balance sheets of BSML, Inc. as of
December 27, 2008 and December 29, 2007, and the related consolidated statements
of operations, stockholders’ deficit and cash flows for each of the two years in
the period ended December 27, 2008 and December 29, 2007.   These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not
engaged to perform an audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BSML, Inc. as of
December 27, 2008, and December 29, 2007, and the results of its operations and
its cash flows for each of the two years in the period ended December 27, 2008
and December 29, 2007 in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has yet to achieve
profitability and had an accumulated deficit of $178,204,000 and a working
capital deficiency of $5,104,000 as of December 27, 2008 and incurred a net loss
from continuing operations and net cash used by operating activities of
$1,681,000 and $5,422,000, respectively, for the fiscal year ended December
27,2008. The foregoing matters raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.











Stonefield
Josephson, Inc.




Los
Angeles, California


April
13, 2009



















BSML,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)




December 27,
                2008
              
              
              December 29,
                2007ASSETS:Current
      Assets;Cash
      and cash equivalents
              
              $
              187
              
              
              $
              3,512Trade
      accounts receivable
              
              
              573
              
              
              
              241Inventories
              
              
              863
              
              
              
              753Investments,
      restricted as to use
              
              
              108
              
              
              
              2,288Prepaid
      expenses and other current assets
              
              
              365
              
              
              
              370Total
      current assets
              
              
              2,096
              
              
              
              7,164Property
      and equipment, net
              
              
              2,142
              
              
              
              3,036Investments,
      restricted as to use
              
              
              
              
              
              
              290Deposits
              
              
              755
              
              
              
              899Other
              
              
              21
              
              
              
              19Total
      assets
              
              $
              5,014
              
              
              $
              11,408LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)Current
      liabilities;Accounts
      payable
              
              $
              3,175
              
              
              $
              1,555Accrued
      liabilities
              
              
              2,621
              
              
              
              4,970Accrual
      for Center closures
              
              
              25
              
              
              
              129Prepaid
      and Gift certificate liability
              
              
              456
              
              
              
              1,721Deferred
      revenue
              
              
              922
              
              
              
              2,746Total
      current liabilities
              
              
              7,199
              
              
              
              11,121Long-term
      liabilitiesAccrual
      for Center closures
              
              
              
              
              
              
              202Deferred
      revenue
              
              
              205
              
              
              
              585Accrued
      rental costs
              
              
              253
              
              
              
              632Total
      long-term liabilities
              
              
              458
              
              
              
              1,419Total
      liabilities
              
              
              7,657
              
              
              
              12,540Commitments
      and ContingenciesShareholders’
      equity (deficit):Common
      stock, $.001 par value, 50 million shares authorized and 12,332,544
      and 12,443,713 shares issued and outstanding, respectively
              
              
              40
              
              
              
              39Preferred
      stock, 5 million shares authorized, none outstanding at either
      dateAdditional
      paid-in capital
              
              
              175,621
              
              
              
              175,452Accumulated
      deficit
              
              
              (178,204
              )
              
              
              (176,623
              )Total
      Shareholders’ equity (deficit)
              
              
              (2,643
              )
              
              
              (1,132
              )Total
      liabilities and shareholders’ equity (deficit)
              
              $
              5,014
              
              
              $
              11,408




See
accompanying notes to consolidated financial statement.













BSML,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except data share)




For fiscal year ended:December 27,
                2008
              
              
              December 29,
                2007Revenues
              
              $
              18,128
              
              
              $
              25,038Operating
      costs and expensesOperating
      and occupancy costs
              
              
              13,836
              
              
              
              14,097Selling,
      general and administrative expenses
              
              
              5,156
              
              
              
              14,775Depreciation
      and amortization
              
              
              830
              
              
              
              1,427Total
      operating costs and expenses
              
              
              19,822
              
              
              
              30,299Loss
      from operations
              
              
              (1,694
              )
              
              
              (5,261
              )Interest
      income
              
              
              29
              
              
              
              368Loss
      on Impairment
              
              
              (438
              )Interest
      expense
              
              
              
              
              
              
              (8
              )Other
      income (expense)
              
              
              422
              
              
              
              386Loss
      from continuing operations before income tax provision
              
              
              (1,681
              )
              
              
              (4,515
              )Income
      tax provision (credit)
              
              
              
              
              
              
              (150
              )Net
      loss from continuing operations
              
              
              (1,681
              )
              
              
              (4,365
              )Discontinued
      operations:Income
      (loss) from discontinued operations, net of tax (fiscal year ended
      December 29, 2007 includes loss on settlement of claim, net of tax of
      $798 thousand;
              
              
              
              
              
              
              (798
              )Net
      income (loss) attributable to common shareholders
              
              $
              (1,681
              )
              
              $
              (5,163
              )Amounts
      per common share:Basic
      and diluted net loss from continuing operations
              
              $
              (0.13
              )
              
              $
              (0.40
              )Basic
      net income (loss) from discontinued operations
              
              $
              (0.00
              )
              
              $
              (0.07
              )Basic
      net income (loss)
              
              $
              (0.13
              )
              
              $
              (0.47
              )Diluted
      net income (loss)
              
              $
              (0.13
              )
              
              $
              (0.47
              )Shares
      used in computing above amounts:Basic
      and diluted net loss from continuing operations
              
              
              12,387,823
              
              
              
              10,902,223Basic
      net and diluted lossfrom discontinued operations
              
              
              12,387,823
              
              
              
              10,902,223




See
accompanying notes to consolidated financial statements.













BSML,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)




The fiscal year ended:December 27,
                2008
              
              
              December 29,
                2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
              
              $
              (1,681
              )
              
              $
              (5,163
              )Adjustments
      to reconcile to net cash (used in) operations:Depreciation
      and amortization
              
              
              830
              
              
              
              1,427Loss
      on disposal of property and equipment (gain)
              
              
              1
              
              
              
              1Impairment
      charges
              
              
              438
              
              
              
              —Loss
      on legal settlements from discontinued operations
              
              
              —
              
              
              
              798Stock
      compensation expense
              
              
              169
              
              
              
              1,408Settlement
      of litigation (issuance of common stock)
              
              
              
              
              
              
              141Changes
      in assets and liabilities:Trade
      accounts receivable
              
              
              (332
              )
              
              
              (28
              )Inventories
              
              
              (110
              )
              
              
              520Prepaid
      expenses and other current assets
              
              
              5
              
              
              
              (127
              )Other
      assets
              
              
              142
              
              
              
              40Accounts
      payable
              
              
              1,620
              
              
              
              (215
              )Accrued
      liabilities
              
              
              (1,513
              )
              
              
              (1,749
              )Accrual
      for Center closures
              
              
              (104
              )
              
              
              (97
              )Prepaid
      and Gift certificate liability
              
              
              (1,265
              )
              
              
              (54
              )Deferred
      revenue
              
              
              (2,204
              )
              
              
              (611
              )Other
      long-term liabilities
              
              
              (379
              )
              
              
              (260
              )Net
      cash provided by (used by) operating activities-discontinued
      operations
              
              
              
              
              
              
              (857
              )Net
      cash (used in) operating activities
              
              
              (5,422
              )
              
              
              (4,826
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment-continuing operations
              
              
              (373
              )
              
              
              (239
              )Proceeds
      from assets held for sale continuing operations
              
              
              
              
              
              
              35Investments,
      restricted as to use
              
              
              2,470
              
              
              
              3,808Proceeds
      from sale of investment
              
              
              —
              
              
              
              —Net
      cash provided by (used in) investing activities
              
              
              2,097
              
              
              
              3,604NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (3,225
              )
              
              
              (1,222
              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD
              
              
              3,512
              
              
              
              4,734CASH
      AND CASH EQUIVALENTS AT END OF THE PERIOD
              
              $
              187
              
              
              $
              3,512SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest
              
              $
              
              
              
              $
              8Cash(
      received) paid for income taxes
              
              
              
              
              
              
              (158
              )SUMMARY
      OF NON-CASH INVESTING AND FINANCING ACTIVITIESCommon
      stock issued for services
              
              $
              169
              
              
              $
              1,408Common
      stock issued for settlement of litigation
              
              
              ---
              
              
              $
              141




See
accompanying notes to consolidated financial statements.















































BSML,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)


(In
thousands)




Common
                    Shares
                  
                  
                  Common
                    Stock
      at
                    Par
                  
                  
                  Additional
                    Paid-In
                    Capital
                  
                  
                  Accumulated
                    Deficit
                  
                  
                  TotalBalance
      at December 25, 2005
                  
                  
                  10,549
                  
                  
                  
                  38
                  
                  
                  
                  173,340
                  
                  
                  
                  (175,829
                  )
                  
                  
                  (2,451
                  )Stock
      option compensation expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  281
                  
                  
                  
                  
                  
                  
                  
                  281Expenses
      paid by related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  20
                  
                  
                  
                  
                  
                  
                  
                  20Non-cash
      compensation-stock grant
                  
                  
                  115
                  
                  
                  
                  1
                  
                  
                  
                  262
                  
                  
                  
                  
                  
                  
                  
                  263Net
      income and comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,369
                  
                  
                  
                  4,369Balance
      at December 30, 2006
                  
                  
                  10,664
                  
                  
                  
                  39
                  
                  
                  
                  173,903
                  
                  
                  
                  (171,460
                  )
                  
                  
                  2,482Stock
      option compensation expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  81
                  
                  
                  
                  
                  
                  
                  
                  81Non-cash
      compensation-stock grant
                  
                  
                  1,699
                  
                  
                  
                  
                  
                  
                  
                  1,327
                  
                  
                  
                  
                  
                  
                  
                  1,327Settlement
      of litigation
                  
                  
                  80
                  
                  
                  
                  
                  
                  
                  
                  141
                  
                  
                  
                  
                  
                  
                  
                  141Net
      (loss) and comprehensive (loss)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5,163
                  )
                  
                  
                  (5,163
                  )Balance
      at December 29, 2007
                  
                  
                  12,443
                  
                  
                  $
                  39
                  
                  
                  $
                  175,452
                  
                  
                  $
                  (176,623
                  )
                  
                  $
                  (1,132
                  )Non-cash
      compensation-stock grant
                  
                  
                  1,129
                  
                  
                  
                  1
                  
                  
                  
                  169
                  
                  
                  
                  
                  
                  
                  
                  169Cancellation
      of prior restricted stock
                  
                  
                  (1,240
                  )Net
      (loss) and comprehensive (loss)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,681
                  )
                  
                  
                  (1.681
                  )Balance
      at December 27, 2008
                  
                  
                  12,332
                  
                  
                  $
                  40
                  
                  
                  $
                  175,621
                  
                  
                  $
                  (178,722
                  )
                  
                  $
                  (2.643
                  )




See
accompanying notes to consolidated financial statements.













BSML,
INC. AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




1.
Description of Business and Basis of Presentation




BSML,
Inc. is a Utah corporation (“BSML” or the “Company”) formerly known as
BriteSmile, Inc. The Company and its affiliates 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) in various locations throughout the United States. The
Company’s operations include the development of technologically advanced
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 March 2006, the Company also
offered its products and technologies through arrangements with 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; see Note 3. The Company’s business is focused
on one industry segment: products and procedures to whiten teeth.




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 30, 2006.




Going
concern




As
of the date of this Report, the Company had yet to achieve profitability. The
Company had an accumulated deficit of $178,204,000 and working capital
deficiency of $5,104,000 as of December 27, 2008, and net loss from
continuing operations and net cash used by operating activities of $1,681,000
and $5,422,000, respectively, for the fiscal year ended December 27, 2008.
The Company’s principal sources of liquidity historically have been proceeds
from issuance of common stock and debt and related financial instruments, and in
the prior fiscal year, from the sale of its Associated Centers business. The
Company’s long-term debt was fully paid in March 2006 from the sale proceeds as
required by the debt holders. The Company is not certain if its cash will be
sufficient to maintain operations of the company at least through the next year
due to the uncertainty of the Company’s ability to generate positive cash
flow.




Except
for items resulting from discontinued operations which has been accounted for in
accordance with SFAS No. 144, the consolidated financial statements
otherwise 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 consolidated
financial statements continues to be appropriate. The Company’s liquidity
position may improve or deteriorate depending on these changing conditions. The
accompanying consolidated financial statements do not include any adjustments
that may be necessary if the Company is unable to continue as a going
concern.




2.
Summary of Significant Accounting Policies




Year-End




The
Company’s year-end is the last Saturday in December of each year. The Company’s
fiscal 2008 included 52 weeks and its fiscal years 2007 and 2006 included 52 and
52 weeks, respectively.




Consolidation




The
accompanying consolidated financial statements include the accounts of the
Company, its subsidiaries, and entities (“Centers”) in which the Company has a
controlling interest. The Company consolidates the Centers for financial
reporting purposes because the Company has a controlling financial interest in
the Centers.  All inter-company balances and transactions have been
eliminated upon consolidation.




Reclassifications




Certain
amounts for the prior year have been reclassified to conform to the current year
presentation.




Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates.




Cash
and Cash Equivalents




The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are recorded at cost which approximates fair value.




Cash
and Short-Term Investments, Restricted as to Use




At
December 27, 2008, and December 29, 2007, the Company had restricted
cash balances of $108,000 and $2,578,000, respectively, relating to remaining
funds to be received in connection with sale of the Associated Center business
in 2006, collateralized letters of credit and merchant banking reserve
requirements. As further described in Notes 10, in February 2008, restricted
cash of approximately $1.5 million was released to pay obligations; the balance
of approximately $1.1 million that was released to the Company has been reported
as unrestricted at December 29, 2007.




Concentrations
of Credit Risk




Credit
Risk




Financial
instruments that potentially subject the Company to a significant concentration
of credit risk consist principally of cash and cash equivalents.




The
Company maintains cash and cash equivalents with various financial institutions.
These financial institutions are located throughout the United States of
America. The Company’s policy is designed to limit exposure to any one
institution. The Company has not experienced any significant losses on its cash
and cash equivalents. The Company performs periodic evaluations of the relative
credit standing of those financial institutions that are considered in the
Company’s investment strategy. The Company does not require collateral on these
financial instruments. The Company maintains cash balances that sometimes exceed
the Federal Deposit Insurance Corporation (“FDIC”) insured level of $250,000 per
account; as of December 27, 2008, the Company had no bank cash balances
that exceeded the FDIC insured limit per account.




Concentration
of credit risk with respect to trade accounts receivable is limited due to the
large number of entities comprising the Company’s customer base. No one customer
accounted for 10% or more of revenue during any of the years covered in this
Report.




Supply
Risk




The
Company believes it has access to sufficient quantities of goods and materials
at competitive prices to enable it to operate effectively. However, the Company
currently has only one contracted supplier for its whitening gel and BTG
products. See Note 11.




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. In
the third quarter of 2004, the Company introduced its SmileForever program.
Under this program, Center customers could, 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 Emerging Issues Task Force Issue No. 00-21,
“Revenue Arrangements with
Multiple Deliverables,” (“EITF 00-21”), and the 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
this program were approximately $1.1 million and $3.3 million,
respectively.




Prior
to the sale of the Associated Centers business, the Company’s operations
involved the shipment of key cards and activation codes to Associated Centers,
thereby permitting them to perform procedures. For 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. For 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.




Comprehensive
Income




The
Company has no comprehensive income other than as presented on its consolidated
statements of operations.




Allowance
for Doubtful Accounts: Trade




The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the potential inability of its customers to make required
payments. As of December 27, 2008 and December 29, 2007, the Company’s
trade accounts receivable were essentially all related to one customer that the
Company deemed credit worthy; therefore, no allowance for doubtful accounts has
been established. If the financial condition of this customer deteriorates, or
if the Company establishes trade credit relationships with other customers,
allowances may be required.




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. Inventories
consist primarily of teeth whitening products and components, marketing
materials and displays, and replacement component parts for the teeth whitening
systems.




Property
and Equipment




Property
and equipment is stated at cost. Expenditures for maintenance and repairs are
charged to expense as incurred, and expenditures for additions and betterments
are capitalized. Furniture, fixtures and equipment are depreciated over their
estimated useful lives, ranging from three to seven years, using the
straight-line method. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the asset
or the remaining term of the lease (useful life of five to ten years). Property
and equipment consists of the following at year end 2008 and 2007 (in
thousands):




2008
            2007Furniture,
      fixtures and equipment
            $6,684
            $6,654Leasehold
      improvements
            10,863
            11,62617,547
            18,280Less
      accumulated depreciation and amortization
            (15,405)
            (15,244)Net
      property and equipment
            $2,142
            $3,036













The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income
Taxes,on January 1, 2007. Management’s review of its inventory of
tax positions indicated that there are two positions that are judged not to meet
the standard of “more likely than not” to be upheld upon audit. Specifically,
prior to 2006 the Company recorded gift card revenue as earned when utilized as
opposed to when the cash was received. In addition the Company recorded revenue
from its Smile Forever Program over an estimated two year period as opposed to a
one year period of deferral as permitted under the tax code. The Company no
longer is offering the Smile Forever program These positions would create a
timing differences as to when revenue is recognized on the Company’s financial
statements as compared to its tax return. However any tax, if due, would be
offset by the substantial net operating loss deductions the company has.
Accordingly, in accordance with FIN48 the Company has not recorded a liability
for uncertain tax positions nor did we record any unrecognized tax benefits and
no adjustments were recorded to the beginning balance of retained earnings on
the balance sheet.


Advertising




Costs
of advertising are expensed as incurred. Advertising costs related to continuing
operations were $1.1 million, and $4.4 million for 2008, and 2007, respectively.
Advertising costs related to discontinued operations, included in “Income (loss)
from discontinued operations, net of tax” in the accompanying consolidated
statements of operations, were $0.5 million for 2006 respectively.













Stock-Based
Compensation




Effective
January 1, 2006, the Company adopted SFAS No. 123(R), the restatement
of SFAS No. 123, “Accounting for Stock-Based
Compensation” This standard requires that compensation cost relating to
share-based payment transactions with employees be recognized in its financial
statements. Prior to January 1, 2006, the Company accounted for share-based
compensation to employees in accordance with Accounting Principles Board Opinion
( APB ) No. 25, “Accounting for Stock Issued to
Employees” and related interpretations. The pro forma disclosures
previously permitted under SFAS No. 123 are no longer an alternative to
financial statement recognition. The Company has adopted SFAS No. 123(R) on
a modified prospective basis, which requires that compensation cost relating to
all new awards and to awards modified, repurchased, or cancelled be recognized
in financial statements beginning January 1, 2006. Additionally,
SFAS No. 123(R) requires that compensation cost for the portion of awards
that were outstanding as of January 1, 2006, and for which the requisite
vesting period was not completed as of January 1, 2006, to be recognized as
the requisite vesting is rendered on or after January 1, 2006. Such
compensation expense is based on the value of the portion of the share-based
award that is ultimately expected to vest during the period. SFAS
No. 123(R) further requires that the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for related options be
classified as financing cash flows rather than operating cash flows as required
prior to the adoption of SFAS No. 123(R). No options were exercised during
fiscal 2007 or 2006, and the Company therefore had no such tax benefits relating
to option exercises.




In
accordance with the modified prospective transition method, the Company’s
consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS No. 123(R).




Option
valuation models were developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected life of the option. Because the Company’s
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.




Product
Development Cost




Costs
associated with the development of new products or services are charged to
operations as incurred. The Company incurred no such development costs in 2008
or 2007.




Income
Taxes




The
Company uses the liability method of accounting for income taxes pursuant to
SFAS No. 109, “Accounting
for Income Taxes.”Under the liability method, deferred tax assets and
liabilities are provided on differences between the financial reporting and
taxable loss, using the enacted tax rates.




The
Company has elected to record interest and penalties recognized in accordance
with FIN No. 48 in the consolidated financial statements as a component of
income tax expense. Any subsequent change in classification of interest and
penalties will be treated as a change in accounting principles subject to the
requirements of SFAS No. 154, “Accounting Changes and Error
Corrections.”




Impairment
of Long-Lived Assets




The
Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company does not generally perform a periodic assessment of
assets for impairment in the absence of such information or indicators.
Conditions that would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant change in the
extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company measures
fair value based on quoted market prices or based on discounted estimates of
future cash flows. Long-lived assets to be disposed are carried at fair value
less costs to sell.




Fair
Value of Financial Instruments




The
following methods and assumptions were used by the Company in establishing its
fair value disclosures for financial instruments:




Cash and cash
equivalents: The carrying amount reported in the consolidated balance
sheet for cash and cash equivalents approximates its fair value.




Accounts
receivable, accounts payable, and accrued liabilities: The carrying
amount reported in the consolidated balance sheet for accounts receivable,
accounts payable, accrued liabilities and other current liabilities approximates
its fair value.




Debt: As
of December 27, 2008 and December 29, 2007, the Company had no
debt.




Loss Per Common
ShareBasic net loss per common share is calculated as net loss divided
by the weighted-average number of common shares outstanding. Diluted net loss
per common share is calculated as net loss divided by the weighted-average
number of common shares including equivalent shares from stock options and
warrants, using the treasury stock method, and convertible notes
payable,  provided that the result is not anti-dilutive. The following
numbers of shares represented by options, warrants (prior to application of the
treasury stock method) and convertible debt were excluded from the determination
of diluted per share earnings because the result was anti-dilutive:0.3,
0.4 million  in 2008, 2007  respectively.




Recent
Accounting Pronouncements


In
May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 162, “The Hierarchy of Generally Accepted Accounting Principals” (“SFAS
162”).SFAS
162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
SFAS 162 will become effective following approval by the Securities and Exchange
Commission. Company
does not believe SFAS 162 will have an impact on our consolidated financial
statements.




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”)  No. 160,
“Noncontrolling Interests in
Consolidated Financial Statements- an Amendment of ARB No. 51s,”which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The provisions of SFAS No. 160 are effective for fiscal years
beginning on or after December 15, 2008. The Company has evaluated SFAS
No. 160 and does not believe its adoption will have a significant impact on
its consolidated results of operations or financial condition.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities,”which provides that companies may
elect to measure specified financial instruments and warranty and insurance
contracts at fair value on a contract-by-contract basis, with changes in fair
value recognized in earnings each reporting period. The election, called the
“fair value option,” will enable some companies to reduce the variability in
reported earnings caused by measuring related assets and liabilities
differently. Companies may elect fair-value measurement when an eligible asset
or liability is initially recognized or when an event, such as a business
combination, triggers a new basis of accounting for that asset or liability. The
election is irrevocable for every contract chosen to be measured at fair value
and must be applied to an entire contract, not to only specified risks, specific
cash flows,or portions of that contract. SFAS No. 159 is effective as of
the beginning of a company’s first fiscal year that begins after
November 15, 2007. Retrospective application is not allowed. Companies may
adopt SFAS No. 159 as of the beginning of a fiscal year that begins on or
before November 15, if the choice to adopt early is made after
SFAS No. 159 has been issued and within 120 days of the beginning of
the fiscal year of adoption and the entity has not issued any financial
statements in accordance with GAAP for any interim period of the fiscal year
that includes the early adoption date. Companies are permitted to elect
fair-value measurement for any eligible item within the scope of SFAS No.
159 at the date they initially adopt SFAS No. 159. The adjustment to
reflect the difference between the fair value and the current carrying amount of
the assets and liabilities for which a company elects fair-value measurement is
reported as a cumulative-effect adjustment to the opening balance of retained
earnings upon adoption. Companies that adopt SFAS No. 159 early must also
adopt all requirements of SFAS No. 157 at the early adoption date.
Management is assessing the impact of adopting SFAS No. 159 and currently
does not believe the adoption will have a material impact on its consolidated
results of operations or financial condition.




.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,”which establishes new principles and requirements for business
combinations as to how the acquirer recognizes and measures the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree. The statement also addresses other business combination issues:
goodwill acquired, gain from a bargain purchase and various disclosure
requirements.




From
time to time, new accounting pronouncements are issued by the FASB and other
standard-setting bodies that are adopted by the Company as of the specified
effective date. Unless otherwise discussed, the Company believes that the impact
of recently issued standards, which are not yet effective, will not have a
material impact on the Company’s consolidated financial statements upon
adoption.




3.
Discontinued Operations




Sale
of Business




On
March 13, 2006, the Company and its wholly owned subsidiaries, BriteSmile
International Limited, an Ireland corporation, and BriteSmile Development, Inc.
(“BDI”), a Delaware corporation (collectively, the “Sellers”) completed an asset
sale with Discus Dental, Inc., a California corporation (“Discus”), where Discus
acquired the assets and the operations of the Associated Centers for
approximately $26.8 million plus the assumption of certain operating
liabilities. Simultaneously, the parties entered into a global settlement of the
litigation proceedings between the parties. Discus and the Company agreed that
$8.7 million of the purchase price of $35.5 million, prior to consideration of
related deal costs, legal expenses and income taxes, for the Associated Centers
business and the Company’s intellectual property should be in settlement of all
litigation between the Company and Discus. All litigation between the Company
and Discus has now been dismissed; see Note 10.




The
assets sold to Discus included certain tangible assets and proprietary rights
related to the Associated Centers business, including the BriteSmile name and
trademark, and substantially all intellectual property rights. Discus acquired
the intellectual property subject to certain existing technology and trademark
licenses in favor of Sellers that permit the operation of the Centers business
of the Sellers and sales of certain retail products under the BriteSmile
trademark. Discus also acquired all rights and claims against third parties
relating to the intellectual property, except for the Company’s claims against
third parties who may have infringed certain patents in the whitening strips
field. The Company retained these claims under a license from
Discus.




Based
on the purchase prices described above for the sale of the Associated Centers
business, the proceeds were greater than the carrying values of the assets and
liabilities sold and thus there is no impairment of the related recorded
values.


.




4.
Accrual for Store Closures




The
following table sets forth the activity related to store closures during the
fiscal years ended December 27, 2008 and December 29, 2007, respectively
(in thousands):




Accrual for Store
                Closures
      at
                Beginning of Year
              
              
              Restructuring
                Expense
              
              
              Cash Paid
              
              
              Accrual for Store
                Closures
      at
                End of
      Year2008
      lease liability
              
              $
              331
              
              
              $
              
              
              
              $
              (206
              )
              
              $
              252007
      lease liability
              
              $
              428
              
              
              $
              45
              
              
              $
              (142
              )
              
              $
              331




5.
Accrued Liabilities




Accrued
liabilities consist of the following (in thousands):




December 27,
                2008
              
              
              December 29,
                2007Salaries
      and benefits
              
              $
              659
              
              
              $
              321Professional
      services/settlement of litigation
              
              
              355
              
              
              
              2,084Property
      taxes
              
              
              109
              
              
              
              508Sales
      taxes
              
              
              1,115
              
              
              
              1,223Advertising
              
              
              -
              
              
              
              293Other
      accrued expenses
              
              
              383
              
              
              
              541Total
              
              $
              2,730
              
              
              $
              4,970




6.
Leases




The
Company is party to leases for its Centers throughout the United States. These
leases expire at various dates ranging from 2008 through 2015. Certain of the
leases also provide for renewal options; there are no purchase options. Future
minimum payments under with initial terms of one year or more consisted of the
following at December 27, 2008 (in thousands):




2009
              
              $
              2,4872010
              
              
              8152011
              
              
              5262012
              
              
              5302013
              
              
              367Thereafter
              
              
              223Total
      minimum lease payments
              
              $
              4,949




Rent
expense attributable to continuing operations was $3.1 million,
and  $4.1 million, , for 2008,and 2007 respectively.




As
of December 30, 2006, the Company is no longer party to capital leases, all
such leases being fully paid and or cancelled subsequent to the sale of the
Associated Centers business.




7.
Income Taxes




Income
tax expense consists of (in thousands):




2008
              
              
              2007Current:Federal
      (see below)
              
              $
              (
      0
              )
              
              $
              (126
              )State
      (see below)
              
              
              (0
              )
              
              
              (52
              )Total
              
              $
              (0
              )
              
              $
              (178
              )




The
2007 provision includes refunds of the prior year federal and state income
taxes. Federal income taxes in 2006 result from application of Alternative
Minimum Tax requirements. Of the $178,000 credit for income taxes in fiscal
2007, $28,000 relates to discontinued operations and $150,000 relates to
continuing operations




Deferred
income taxes reflect the net tax effects of net operating loss and tax credit
carryovers and temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company’s deferred tax assets are as
follows (in thousands):




2008
              
              
              2007Deferred
      tax assets:Current:Reserves
      and accruals
              
              $
              910
              
              
              $
              1,407Other,
      net
              
              
              7
              
              
              
              7Current
      deferred tax asset
              
              
              917
              
              
              
              1,414Long-term:Net
      operating loss carryforwards
              
              
              53,413
              
              
              
              51,978Depreciation
      and amortization
              
              
              3,146
              
              
              
              3,283Stock
      based compensation
              
              
              595
              
              
              
              595Other
              
              
              409
              
              
              
              —Long-term
      deferred income tax assets
              
              
              57,563
              
              
              
              55,856Total
      deferred tax assets
              
              
              58,480
              
              
              
              57,270Valuation
      allowance
              
              
              ( 58,480
              )
              
              
              (57,270
              )Net
      deferred tax assets
              
              $
              —
              
              
              $
              —




A
reconciliation of the Federal statutory tax rate to the Company’s effective tax
rate is as follows:




2008
              
              
              2007Provision
      at statutory tax rate
              
              
              (34.0
              )%
              
              
              (34.0
              )%State
      income tax, net of Federal benefit
              
              
              -
              
              
              
              .6
              %Permanent
      difference
              
              
              (7.3
              )%
              
              
              (19.3
              )%Valuation
      allowance
              
              
              41.3
              %
              
              
              49.2
              %Total
              
              
              0
              
              
              
              (3.5
              )%




Realization
of deferred tax assets is dependent upon future earnings, if any, the timing and
amount of which are uncertain. Accordingly, the net deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance incecreased
by $1.2 million during 2008 and decreased by $4.4 million during 2007
..




As
of December 27,  2008, the Company had net operating loss carry
forwards for Federal income tax purposes of approximately $136 million, which
expire in the years 2009 through 2027, Federal research and development tax
credits of approximately $362,000, which expire in the years 2008 through 2019,
and alternative minimum tax credit carryovers of approximately $47,000. As of
December 27, 2008, the Company had net operating loss carryforwards for
state income tax purposes of approximately $117 million, which expire in the
years 2008 through 2017.




.




A
portion of the Federal and state losses is attributable to the professional
corporations formed to comply with the corporate practice of medicine statutes
in the jurisdictions where the company has operations. These professional
corporations are not consolidated for income tax purposes. Utilization of the
Company’s net operating loss and credit carryforwards may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss and credits
before utilization.




The
Company files income tax returns in the U.S. federal and in the state of
California. Our centers, which operate as professional corporations, also file
federal income tax returns and state income tax returns in their respective
states. The Company is currently not under any examination by nor has it
received notices of examination from tax authorities.






9.
Shareholders’ Equity




The
Company’s shareholders authorized the creation of 5,000,000 shares of “blank
check” preferred stock at the shareholders’ meeting held on September 30,
2005. No shares had been issued as of December 29, 2007.




Valuation
and Expense Information under SFAS No. 123(R)




SFAS
No. 123(R) requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The Company
uses the Black-Scholes option-pricing model, which requires assumptions
regarding future price volatility, expected life prior to exercise and expected
future dividends. The Black-Scholes model also requires input of the risk-free
Treasury rate that corresponds to the pricing term of the grant effective as of
the date of the grant. In the fiscal 2008 and 2007 calculation, the Company
assumed the following regarding stock-based awards:




Year
      Ended
              December 29,
              2007Risk-free
      interest rate
            
            4.61%Expected
      life of options (years)
            
            2.66Expected
      volatility
            
            121%Expected
      dividends
            
            NoneForfeiture
      rate
            
            10%




The
assumptions above are based on multiple factors, including historical exercise
patterns of employees. The Company uses historical data to estimate the options’
expected term, which represents the period of time that options granted are
expected to be outstanding. Volatility is also based on historical run-rate.
Because, BSML has never paid and does not expect to pay dividends, it uses an
expected dividend yield of zero when calculating the fair value of stock
options. The risk-free interest rate for periods within the contractual life of
the option is based on the U.S. Treasury yield curve. The Company revised its
expected forfeiture rate to 10%, effective July 2, 2006, to reflect the
completion of restructuring efforts associated with the sale of the Associated
Centers business in March 2006 (see Note 3). The Company generally uses this
forfeiture rate except in specific cases where termination is known or likely,
in which case the forfeiture rate to be applied is adjusted
accordingly.




For
the fiscal years 2008 and 2007, the Company recognized stock compensation
expense related to stock options of approximately $169,000 and $81,000,
respectively, as a result of the adoption of SFAS No. 123R.







In
accordance with an employment agreement with the current CEO, Jeffery Nourse.
the Company recognized stock compensation expense of $169,000 related to a grant
of 1,128,000 restricted common shares. In 2007  The per share fair
value on the date of the grant was $0.15. As of December 30, 2006, all
shares of common stock related to this grant vested




All
of the Company’s stock compensation expense has been included as a component of
selling, general and administrative expense.





Stock
Option Plans




In
January 1997, the Company adopted the 1997 Stock Option and Incentive Plan
(“1997 Plan”). Under the terms of the 1997 Plan, as amended to date, and as
approved by the Company’s shareholders, 1,900,000 shares are available for
issuance. Options may be granted at exercise prices of no less than the fair
market value on the date of the grant, as determined by the Board of Directors
and quoted market prices. Prior to 2006, options granted were generally
scheduled to vest over a two to five-year period. Option grants made in 2006
vested over six months, and were entirely vested at December 30, 2006. The
Company’s option grants have a maximum term of ten years. No further options can
be issued as the 1997 Plan expired in January 2007.




A
summary of the Company’s stock option activity and weighted-average exercise
price per share for the periods ended December 27, 2008 and
December 29, 2007 is as follows:




Options
              
              
              Per shareOptions
      outstanding at December 30, 2006
              
              
              487,490
              
              
              $
              13.88Granted
              
              
              40,000
              
              
              $
              1.77Forfeited
      or cancelled
              
              
              (425,740
              )
              
              $
              15.55Options
      outstanding and exercisable at December 29, 2007
              
              
              101,750
              
              
              $
              2.15Granted
              
              
              261,000Forfeited
      or cancelled
              
              
              (
      287,750
              )Options
      outstanding and exercisable at December 27, 2008
              
              
              75,000
              
              
              $
              .40




With
respect to the options outstanding and exercisable at December 27, 2008,
the weighted-average remaining contractual term and the aggregate intrinsic
value amounts are 8.51 years and $21,070, respectively. The weighted average
fair value of options granted during 2008, and 2007, using the Black-Scholes
option pricing valuation model, was $.40 and $1.48, respectively.




A
summary of the status of options outstanding and exercisable at
December 27, 2008 is as follows:




Outstanding
      and Exercisable OptionsRange
      of Exercise
              Price
      per Share
            Number
              Outstanding
            Weighted
              Average
              Remaining
              Contractual
              Life
              (in
      Years)
            Weighted
              Average
              Exercise
              Price
              per Share$ 0.40 — $ 1.77
            75,000
            8.51
            $0.40






Warrants




As
of December 29, 2008, the Company had 0  warrants for common
stock outstanding. The exercise price of the warrants is $6.00 per share. The
warrants expired April 2008. During 2007, no warrants were exercised and 34,555
warrants were cancelled. As of December 30, 2006, the Company had 367,888
warrants for common stock outstanding with exercise prices ranging from $6 to
$30 per share.




Shares
Reserved for Future Issuance




In
summary, the Company has reserved shares of common stock for future issuance as
follows as of December 27, 2008:




Employee
      stock options outstanding
            75,000Non-employee
      stock options outstanding
            0Warrants
      outstanding
            0




Notwithstanding
the availability of stock options for grant under the 1997 Plan, the Company’s
Board of Directors has determined that no future stock option grants will be
made.




10.
Litigation




From
time to time the Company is the subject of legal actions. 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 subject to legal proceedings and claims in the ordinary course of
business, including claims of alleged personal injury, employee disputes,
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.









Andrew Rudnick &
Sleek, Inc., v. BSML, Inc.,
Circuit Court, 17thJudicial 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. As of the date of this Report, the Company had not filed
its answer. 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
following claims have been settled or dismissed:







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 sought 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 amount of the settlement was fully
accrued by the Company












Claims of Longlife Health
Ltd




Discus
Dental Inc. (“Discus”), the purchaser of the Company’s Associated Center
business and other assets in March 2006 (see Note 3), 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 the receivables due to Discus. A portion of the
receivable 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; .




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




In
April 2007, Oracautical 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 defendents 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 again the Company, BDI and Discuss.




Oraceutical’s
claims were based on an Asset Purchase Agreement, as subsequently amended (the
“APA”), and entered into between Oraceutical, the Company and BDI in July 2003.
Pursuant to the APA, BDI acquired intellectual property consisting primarily of
certain United Stated 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-part
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
million, of which $8.7 million was allocated to settlement of patent
infringement litigation against Discuss. In connection with this transaction,
the Company and Discus deposited $3.5 million in escrow (as discussed above with
reference to the Lonlife claim). In its complaint, Oraceutical claimed that the
value 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. 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 of the Company acquired the intellectual property which, in part, was
the subject of litigation, together with claims for breach of the
APA.




Effective
January 2, 2008, Oraceutical, the Company and 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: $1,366,155 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 $1,130,923 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 had 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. The Company has accrued this lawsuit settlement in prior year and
accordingly no additional accrual is necessary for the fiscal year ended
December 29, 2007.




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”). As described
in more detail in Note 3, 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. As described in more detail in Note 3,
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. As
described in more detail in Note 3, this case was dismissed in March 2006 in
connection with the dismissal of the Discus patent litigation.




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. As of December 30, 2006, the Company had
accrued the full cost of this settlement.




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.




11.
Related Party Transactions




LCO
Properties Sublease




On
December 1, 1999 the Company, as sublessee, entered into an Agreement of
Sublease with LCO Properties, Inc., a Delaware corporation, as sublessor. LCO
Properties, Inc. is affiliated with the Company’s principal shareholder, LCO
Investments, Limited (“LCO”). The sublease covers approximately 4,821 square
feet of space located in New York City for a Center. The sublease term is for
ten years and called for initial lease payments of $402,000 per year, subject to
increase in the event of increases in the rent payable under the primary lease
for the property between LCO Properties, Inc., and its lessor. Rent expense for
2007 was approximately $462,000; the lease was terminated during the third
quarter of the 2007.




LCO,
a wholly owned subsidiary of ERSE Trust, is the Company’s principal shareholder;
CAP Advisers is a co-trustee of the ERSE Trust. Mr. Pilaro, the Company’s
former chairman, is also Chairman of CAP Advisers.




Consulting
Agreement with Oraceutical, LLC (“Oraceutical”)




In
November 2000, the Company entered into a Consulting Agreement with Oraceutical.
Montgomery, a former director of the Company, is the founding manager and
president of Oraceutical. Effective July 2003, the Consulting Agreement was
terminated and replaced by a new Consulting Agreement (the “BDI Consulting
Agreement”) between BDI and Oraceutical Innovative Properties (“OIP”), an
affiliate of Oraceutical.




The
BDI Consulting Agreement provided for a five-year term at a rate of $180,000 per
year. As part of the settlement of the litigation with Oraceutical and its
affiliate (as discussed in more detail in Note 10), this agreement was amended,
effective January 2, 2008, to extend the term to December 31, 2012. In
addition, the fixed-fee arrangement was eliminated; future compensation will be
based upon a per diem rate of $3,200 plus expenses for any requested consulting
services.




Fulfillment
Services Agreement with Oraceutical




In
2004, BSML entered into an agreement with Oraceutical, LLC to outsource the
Company’s whitening component and product fulfillment services beginning in
2005. Montgomery, the Chairman & CEO of Oraceutical, LLC, is a former
member of BSML’s Board of Directors. During 2007, and
2006,  $1,019,000,  $1,516,000, and
$2,254,000  respectively, were paid to Oraceutical under this
agreement.




Related
Party Payment




The
following table summarizes the amounts paid to related parties
in  2008 and 2007 (in thousands):




Related
      Party
            Goods
      / Services Provided
            2008
            2007Oraceutical
            Merchandise/pack
      out charges and order fulfillment services
            $1,019
            $1,516Oraceutical
            Consulting
            
            180LCO
      Properties, Inc.
            Monthly
      rent for New York Center
            60
            462LCO
      (and affiliates)
            Interest
      and pay off of debt and pay out for preferred stock
            —
            —CAP
      America Trust
            Interest
      and pay off of debt
            —
            —EVL
            Variable
      fees, fixed fees and pay off of deferred lease balance
            —
            —Total
            
            $1,079
            $2,158




Nature of relationships in the above
table: With respect to Oraceutical, LLC, a former BSML board member is a
co-founder and managing director of Oraceutical. With respect to the other
entities, they are deemed affiliates to the Company’s former board
chairman.







Support
Services Agreement




Effective
December 10, 2007, the Company executed a Support Services Agreement with
Sleek, Inc. (“Sleek”). Sleek is a Massachusetts corporation which is controlled
by Mr. Rudnick. Pursuant to the three-year agreement, Sleek has agreed to
provide marketing, consulting, cash management, personnel management and other
services to BSML. The Company has agreed to pay an administrative fee to Sleek
equal to the aggregate of Sleek’s actual costs, fees and expenses incurred in
providing the services. As of December 29, 2007, the Company accrued
approximately $31,000 for the services provided for the month. As part of the
execution of this contract and as an inducement to Sleek to provide these
services at cost, the Company issued Sleek 1.24 million shares with a
market value of thirty cents per share on date of issuance; as of
December 29, 2007, the Company recorded $372,000 of share-based payments as
expense with an offsetting entry to additional paid-in capital. In addition, the
agreement provides for additional equity compensation of 1.24 million
shares for each $1 million of EBITDA (determined on a cumulative, rather than
annual, basis); no additional amounts were accrued for the year ended
December 29, 2007.




12.
Benefit Plans




In
March 2000, the Company adopted a 401(k) defined contribution plan covering
substantially all employees. Employees become eligible to participate in the
plan beginning the first month following their hire date. The plan contains
provisions for an employer contribution at the discretion of management. To
date, the Company has made no contributions to the plan. The Company pays the
administrative fees of the plan. The administrative fees are not material to the
Company’s operations.




13.
Subsequent Events


On
February 10, 2009, BSML, Inc. (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.





On
March 27, 2009, BSML, Inc. (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.







On
December 28, 2008, 1,504,347 shares of common stock were issued to Jeffery
Nourse in lieu of salary. This transaction was fully accrued as of December 27,
2008









.




.




14.
Product Line Revenue:




The
Company operates in one business segment, products and procedures to whiten
teeth. Components of the Company’s revenue for the years ended December 27, 2008
December 29, 2007,and  December 30, 2006, respectively, are as
follows (in thousands):




2008
            2007
            2006Center
      whitening fees, net
            $14,916
            $18,937
            $19,125Product
      and other revenue
            3,211
            6,101
            7,089Total
            $18,127
            $25,038
            $26,214































Exhibit
Index




Exhibit Number
            Description23
            Consent
      of Stonefield Josephson Inc.31.1
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.













Exhibit
23




CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




We
consent to the incorporation by reference in Registration Statement Nos:
333-61054, 333-43790, 333-112361, and 333-12179 each on From S-3, and
Registration Statement Nos. 333-82283 and 333-16935 each on Form S-8, of our
report dated April 14, 2008 relating to the consolidated financial
statements of BSML Inc. (formerly Britesmile, Inc.) and Subsidiaries as of
December 29, 2007 and for fiscal year then ended appearing in this Annual
report on Form 10-K of BSML Inc. and Subsidiaries for fiscal year ended
December 27, 2008.




/s/
Stonefield Josephson Inc.


CERTIFIED
PUBLIC ACCOUNTANTS




Los
Angeles , California


April 13,
2009











EXHIBIT 31.1




CERTIFICATION
OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002




I,
Jeffery Nourse, certify that:




1.
I have reviewed this amended annual report on Form 10-K of BSML,
Inc.;




2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;




3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;




4.
The registrant s other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined by Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:




(a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;




(b)
designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;




(c)
evaluated the effectiveness of the registrant s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and




(d)
disclosed in this report any change in the registrant s internal control over
financial reporting that occurred during the registrant s most recent fiscal
quarter (the registrant s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant s internal control over financial reporting; and




5.
The registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant s auditors and the Audit Committee of the registrant s Board of
Directors (or persons performing the equivalent functions):




(a)
all significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant s ability to record, process, summarize and
report financial information; and




(b)
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant s internal control over financial
reporting.




Date:
April 13, 2009




By:
            /s/
      Jeffery NourseJeffery  Nourse
              Chief
      Executive Officer and Director
              (Principal
      Executive Officer)











EXHIBIT
31.2




CERTIFICATION
OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002




I,
James P. Cullin, certify that:




1.
I have reviewed this amended annual report on Form 10-K of BSML,
Inc.;




2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;




3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;




4.
The registrant’s other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:




(a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;




(b)
designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;




(c)
evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and




(d)
disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and




5.
The registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the Audit Committee of the registrant’s Board of
Directors (or persons performing the equivalent functions):




(a)
all significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and




(b)
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal control over financial
reporting.




Date:
April 13, 2009




By:
            /s/
      James P. CullinJames
      P. Cullin
              VP
      of Finance
              (Principal
      Accounting and Financial Officer)











EXHIBIT
32.1




CERTIFICATION
OF CHIEF EXECUTIVE OFFICER


PURSUANT
TO


AS
ADOPTED PURSUANT TO


SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002




I,
Jeffery Nourse, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of BSML, Inc. on Form 10-K for the fiscal year ended December 29,
2007 fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934 and that information contained
in such Annual Report on Form 10-K fairly presents in all material respects the
financial condition and results of operations of BSML, Inc.




Date:
April 13, 2009




By:
            /s/
      Jeffery NourseJeffery
      Nourse
              Chief
      Executive Officer and Director
              (Principal
      Executive Officer)













EXHIBIT
32.2




CERTIFICATION
OF CHIEF FINANCIAL OFFICER


PURSUANT
TO


AS
ADOPTED PURSUANT TO


SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002




I,
James P. Cullin, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of BSML Inc. on Form 10-K for the fiscal year ended December 29,
2007 fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934 and that information contained
in such Annual Report on Form 10-K fairly presents in all material respects the
financial condition and results of operations of BSML, Inc.




Date:
April 13, 2009




By:
            /s/
      James P. CullinJames
      P. Cullin
              VP
      of Finance
              (Principal
      Accounting and Financial Officer)