Edgar Filing: BRITESMILE INC

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 27, 2003

[ ] 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

BRITESMILE, INC.
(Exact name of business issuer as specified in its charter)

UTAH 87-0410364
--------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation (IRS employer identification no.)
or organization)

490 North Wiget Lane
Walnut Creek, California 94598
--------------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)

(925) 941-6260
(Issuer's telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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.

X Yes No

Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2)

Yes __ No X

The Company had 2,752,513 shares of common stock outstanding at November 11,
2003.

BRITESMILE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of September 27, 2003 and December 28, 2002.............3

Condensed Consolidated Statements of Operations for the 13 and 39 weeks ended
September 27, 2003 and September 28, 2002........................................................5

Condensed Consolidated Statements of Cash Flows for the 39 weeks ended
September 27, 2003 and September 28, 2002, respectively..........................................6

Notes to Condensed Consolidated Financial Statements.............................................7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........13

Item 3. Qualitative and Quantitative disclosure about Market Risk.......................................20

Item 4. Controls and Procedures.........................................................................20

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................................................21

Item 2. Changes in Securities............................................................................23

Item 3. Default Upon Senior Securities...................................................................24

Item 4. Submission of Matters to a Vote of Security Holders..............................................24

Item 5. Other Information................................................................................25

Item 6. Exhibits and Reports on Form 8-K.................................................................25

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
($ in thousands, except share data)
(Unaudited)

September 27, December
2003 28,
2002
--------------- ------------------
CURRENT ASSETS:

Cash and cash equivalents $ 1,982 $ 3,527
Trade accounts receivable, net of allowance
for doubtful accounts of $556 and $506,
respectively 2,134 2,364

Inventories 1,736 2,502

Prepaid expenses and other 977 189
--------------- ------------------

Total current assets 6,829 8,582
--------------- ------------------

PROPERTY AND EQUIPMENT, net 17,157 20,289
INTANGIBLES 5,268 -
OTHER ASSETS 3,290 2,228
--------------- ------------------

TOTAL ASSETS $ 32,544 $ 31,099
=============== ==================

continued

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

BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

LIABILITIES AND SHAREHOLDERS' EQUITY
($ in thousands, except share data)
(Unaudited)

September 27, December 28,
2003 2002
------------------ -----------------
CURRENT LIABILITIES:

Accounts payable $ 4,531 $ 4,793
Accrued expenses 5,437 4,604
Deferred revenue 665 819
Note payable to related party 500 500
Subordinated convertible debenture, net of discount - 749
Accrued variable rent payable to EVL 3,870 -
Capital lease obligation with related party. 701 701
------------------ -----------------

Total current liabilities 15,704 12,166
------------------ -----------------

Notes payable to related party, net 2,419 1,083
Line of credit borrowings 6,940 4,714
Capital lease obligations with related party, less current portion 1,370 1,885
Accrued variable rent payable to EVL - 2,150
Convertible 2% debenture 3,500 3,500
Other long-term liabilities 1,773 1,802
Preferred Stock of Subsidiary 1,000 -
------------------ -----------------

Total long-term liabilities 17,002 15,134
------------------ -----------------

Total liabilities 32,706 27,300
------------------ -----------------

SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value; 50,000,000 shares authorized;
2,749,153 and 2,428,464 shares issued and outstanding,
respectively
37 36
Additional paid-in capital 145,203 139,418
Accumulated deficit (145,402) (135,655)
------------------ -----------------

Total shareholders' equity (deficit) (162) 3,799
------------------ -----------------

Total liabilities and shareholders' equity (deficit) $ 32,544 $ 31,099
================== =================

concluded

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

BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands except share data)
Unaudited

13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
REVENUES:

Center whitening fees, net $ 4,616 $ 3,209 $ 11,985 $ 9,827
Associated Center whitening fees, net 5,387 5,818 15,937 17,283
Product sales 1,434 919 3,470 3,182
---------------- ---------------- ---------------- ----------------

Total revenues, net 11,437 9,946 31,392 30,292
---------------- ---------------- ---------------- ----------------

OPERATING COSTS AND EXPENSES:
Operating and occupancy costs 5,013 3,675 12,849 11,217
Selling, general and administrative
expenses 8,779 8,703 21,961 24,837
Research and development expenses 403 425 772 717
Depreciation and amortization 1,688 1,580 4,883 4,571
---------------- ---------------- ---------------- ----------------

Total operating costs and expenses 15,883 14,383 40,465 41,342
---------------- ---------------- ---------------- ----------------

Loss from operations (4,446) (4,437) (9,073) (11,050)
---------------- ---------------- ---------------- ----------------

Total interest expense, net (331) (148) (670) (618)
---------------- ---------------- ---------------- ----------------

Loss before income tax provision (4,777) (4,585) (9,743) (11,668)

INCOME TAX PROVISION - 18 4 54
---------------- ---------------- ---------------- ----------------

Net loss $ (4,777) $ (4,603) $ (9,747) $ (11,722)
================ ================ ================ ================

BASIC AND DILUTED NET LOSS PER SHARE
(1.76) $ (1.90) $ (3.84) $ (4.83)
================ ================ ================ ================

WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 2,718,547 2,428,464 2,536,953 2,427,061
================ ================ ================ ================

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

BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
($ in thousands, except share data)

39 Weeks Ended 39 Weeks Ended
September 27, 2003 September 28, 2002
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss $ (9,747) $ (11,722)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,883 4,571
Increase in variable EVL deferred payments 1,721 -
Changes in assets and liabilities and other 85 705
------------------- --------------------

Net cash used in operating activities (3,058) (6,446)
------------------- --------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,949) (2,809)
Purchase of intangibles (1,750) (675)
------------------- --------------------
Net cash used in investing activities (3,699) (3,484)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds on line of credit 2,226 3,218
Proceeds from debt financing 2,500 -
Principal payments on long-term debt (543) (431)
Payments on capital lease obligations (516) (420)
Proceeds from issuance of preferred stock by subsidiary 1,000 -
Proceeds from exercise of stock options 545 504
------------------- --------------------

Net cash provided by financing activities 5,212 2,871
------------------- --------------------

NET DECREASE IN CASH AND CASH EQUIVALENTS (1,545) (7,059)

CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 3,527 7,162
------------------- --------------------

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,982 $ 103
=================== ====================

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

BRITESMILE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 27, 2003

1. Description of Business and Nature of Operations

BriteSmile, Inc., a Utah corporation ("BriteSmile" or the "Company"), and its
affiliates develop and sell advanced teeth whitening products, services and
technology. Unless specified to the contrary herein, references to BriteSmile or
to the Company refer to the Company and its subsidiaries on a consolidated
basis. The Company's operations include the development of technologically
advanced teeth whitening processes that are distributed in professional salon
settings known as BriteSmile Professional Teeth Whitening Centers ("Centers").
The Company also offers its products and technologies through arrangements with
existing independent dental offices known as BriteSmile Professional Teeth
Whitening Associated Centers ("Associated Centers"). As of September 27, 2003,
the Company had 14 Centers and there were 4,943 Associated Centers in operation.
Commencing September 25, 2003, the Company began offering some of its products
to dentists who are not Associated Centers through a major dental products
distribution company.

2. Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions in Form 10-Q and Article 10 of Regulations S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the 13 weeks and 39 weeks ended September 27,
2003 are not necessarily indicative of the results that may be expected for the
remainder of the fiscal year.

The accompanying condensed consolidated financial statements include the
accounts of the Company, its subsidiaries, and entities (specifically including
the Centers) in which the Company has a controlling interest. The Company
consolidates the operating results of the Centers as the Company has a
controlling financial interest in the Centers in accordance with the criteria of
EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion #16 to
Physician Practice Management Entities ("PPM") and Certain Other Entities with
Contractual Management Arrangements." The agreements with the Centers are 30
year, non-terminable agreements that provide the Company a financial interest in
the PPM and exclusive authority over all decision making other than the
dispensing of dental services.

Comprehensive Loss approximates net loss for all periods presented.

3. Stock Based Compensation

The Company uses the intrinsic value method to account for its stock based
compensation plans. Had compensation cost for the Company's stock-based
compensation plans been determined using fair value at the grant award dates
using the Black-Scholes option pricing valuation model, the Company's reported
net loss applicable to common shareholders and basic and diluted net loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):

13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended
September 27, 2003 September 28, 2002 September 27, 2003 September 28, 2002
------------------------- ------------------------ ----------------------- ----------------------- -----------------------

Net Loss as reported $ 4,777 $ 4,603 $ 9,747 $ 11,722
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Add: Compensation
expense reported under
APB25 $ 0 $ 0 $ 0 $ 0
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Deduct: Compensation
expense computed using
fair value method $ 755 $ 793 $ 2,381 $ 2,347
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Pro forma net loss $ 5,532 $ 5,396 $ 12,128 $ 14,069
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Pro forma basic and
diluted net loss per share
$ (2.03) $ (2.22) $ (4.78) $ (5.80)
------------------------- ------------------------ ----------------------- ----------------------- -----------------------

For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
52 weeks ended December 28, 2002.

4. Loss Per Common Share

Basic net loss per share is calculated as net loss divided by the
weighted-average number of common shares outstanding, less shares subject to
repurchase. Diluted net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding and dilutive common stock
equivalents outstanding during the period. Common equivalent shares from stock
options and warrants and convertible notes payable have been excluded from the
calculation of net loss per share, as their effect is anti-dilutive.

5. Debt

Excimer Vision Leasing

During 2000 and 2001 the Company entered into an Agreement with Excimer Vision
Leasing L.P. ("EVL"), a related party, to lease whitening devices for a period
of 5 years. The lease was accounted for as a capital lease. The Company will pay
EVL a monthly rental for each device consisting of a fixed amount (ranging from
twenty dollars to thirty dollars) plus one hundred twenty-five dollars for each
key card sold by the Company for that device. During 2002 and 2003, the Company
and EVL amended their lease agreement to provide that the variable rent portion
of the monthly rental payments due during 2002 and 2003, in the amount of
twenty-five dollars for each BriteSmile procedure, will be deferred and paid to
EVL on January 1, 2004, with interest payable on the deferred amount ($3.9
million at September 27, 2003) at a rate equal to LIBOR as quoted by The Bank of
Nova Scotia for the applicable adjustment dates for deposits in U.S. Dollars for
one month maturities, plus 200 basis points.

CAP America Trust Center Loan

On May 7, 2003, the Company and CAP America Trust entered into a Loan Agreement
for $2.5 million to be used for capital expenditures and other specific revenue
generating initiatives to be agreed and defined by BriteSmile and CAP America
Trust. The Company began drawing on the line May 7, 2003 and may do so until May
10, 2006. Up to $1,700,000 of loan proceeds may be used for the specific revenue
generating initiatives, and up to $800,000 for general working capital. Interest
is fixed at 6%, payable monthly, with CAP America Trust having the right to
reset the interest rate to 200bps over 1 year London Interbank Offered Rate
("LIBOR") after giving the Company 30 days notice. A variable fee payment based
on the number of teeth whitening procedure performed at the Centers will
commence on May 11, 2006, and continue until May 10, 2011. Variable fees will be
payable 40 days after the end of the month in which the procedures are
performed, except for fees due for April/May 2011, which will become payable on
the maturity date. The Company drew down $1.6 million under this loan as of
September 27, 2003.

LCO Investments Limited ("LCO") is the Company's major shareholder. LCO is a
wholly owned subsidiary of the ERSE Trust. CAP Advisers Limited is a co-trustee
of the ERSE Trust. Mr. Anthony Pilaro, a director and Chairman of the Company,

is also Chairman of CAP Advisers Limited. CAP America Limited is a co-trustee of
CAP America Trust, the lender under the Center Loan described above. CAP America
Limited is owned and controlled by LCO.

In August 2003, a subsidiary of the Company issued $1.0 million of preferred
stock. Interest is computed at the 1 year LIBOR rate plus 2% and adjusts
annually on the anniversary date. Interest is payable annually. The preferred
stock is not convertible and is redeemable in the event of certain
circumstances. The Company has recorded this preferred stock as a liability.

During 2003, certain convertible debt holders converted $1.3 million of debt and
accumulated interest into 218,293 shares of common stock.

6. Acquisition of Certain Human Oral Care Intellectual Property

Effective July 1, 2003, the Company and its wholly owned subsidiary, BriteSmile
Development, Inc. ("BDI"), entered into an Asset Purchase Agreement (the "APA")
with R. Eric Montgomery ("Montgomery") and certain entities owned and controlled
by him (collectively, the "REM Group"). Montgomery is a member of the board of
directors of the Company.

Pursuant to the APA, on July 23, 2003 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 ("HOC") for a
purchase price of $5.4 million ($6.4 million under certain conditions), plus a
50% participation interest in third party royalties and infringement recoveries
relating to the HOC intellectual property acquired from the REM Group. In
addition, the REM Group conveyed certain other HOC intellectual property, which
is implicated by certain agreements between the Company, the REM Group and a
third party to a new entity, Oraceutical Acquisition LLC ("OAC"), an entity
owned and controlled by REM.

The purchase price consists of the following:

(i) $750,000 paid on May 9, 2003.

(ii) $1,000,000 paid on July 23, 2003, in connection with the closing of
the APA;

(iii)66,667 shares of Common Stock of the Company (the "Payment Shares")
issued to Montgomery on July 25, 2003; and valued at $2,267,000 and

(iv) $1,352,000 payable to Oraceutical Innovative Properties ("OIP"), a REM
Group member. For a period of up to 5 years, BDI will pay 5% of
worldwide net revenues of the Company for a whitening crayon or pen
product currently referred to as "BriteSmile to Go," and 1% of
worldwide net revenues of the Company or its affiliates for light
activated teeth whitening or other in-office or chair side whitening
procedures, until the aggregate of such payments equals $1,352,000 At
the end of the five year period any remaining amounts will be payable.
The foregoing net revenue payments will be paid in cash, or at the
option of BDI, up to 50% of any payment amount may be made in the form
of Common Stock of the Company (the "Net Revenue Payment Shares"). All
Net Revenue Payment Shares, if and when issued by the Company, will be
issued at the then current market price as quoted on NASDAQ, and the
balance in cash. The payments are due on a quarterly basis, 15 days
after the close of the Company's applicable fiscal quarter.

BDI may be required to pay OIP an additional $1 million pursuant to the
foregoing formula if REM Group fulfills certain contingencies, in which
case the total purchase price to the REM Group will be $6 million.

Effective October 30, 2003, OAC entered into an agreement with a third
party (the "OAC Licensee") which satisfied the conditions required to
increase the purchase price due the REM Group under the APA by $1 million.

With respect to third party infringement and/or licensing activities, BDI will
pay the REM Group 50% of such recoveries after payment of legal fees incurred in
prosecution of third party claims, all patent prosecution and maintenance costs,
and certain other amounts.

In connection with the APA, the Company recorded an intangible asset (primarily
patents) of $5.4 million, which will be amortized on the straight-line method
over 10 years. Amortization expense will be approximately $540,000 per year.

Financing Arrangements for the APA

Pursuant to a commitment agreement dated April 29, 2003, LCO loaned $1,000,000
to BDI on May 9, 2003 under the terms of a promissory note with interest and
principal due on May 9, 2008. Interest accrues at 200 basis points above the
1-year LIBOR as quoted by the Bank of Nova Scotia (1.3075% at September 26,
2003). The interest rate on the note is reset every thirty days.

LCO loaned BDI an additional $1,000,000 on similar terms on July 23, 2003, the
closing date of the APA.

The promissory notes issued to LCO by BDI were guaranteed by the Company.

In connection with the granting of the loans to BDI, LCO received warrants to
purchase 133,333 shares of Common Stock of the Company. The warrants are
exercisable at $15.00 per share and have a five year life. The shares of Common
Stock underlying the warrants granted to LCO are subject to certain limited
"piggyback" registration rights in the event of future registered public
offerings of Common Stock sold by the Company. The fair value of the warrants
issued of $1,704,378 was recorded as a discount of the notes, and is being
amortized under the equity method over the life of the note, 5 years, to
interest expense.

7. Legal Matters

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"). The Company filed an initial complaint against Discus
Dental, Inc. ("Discus"), Culver City, California, on July 8, 2002, asserting
claims of infringement of the Company's U.S. Patents No. 6,343,933 and U.S.
Patent No. 6,361,320. On February 28, 2003, the Company amended the Discus
Patent Litigation by adding Salim Nathoo ("Nathoo") as a defendant. The
complaint, as amended, further alleges misappropriation of the Company's trade
secrets, civil conspiracy, and unfair competition and business practices by
Discus and Nathoo; breach of contract and breach of fiduciary duty by Mr.
Nathoo, and tortious interference with contract by Discus. The complaint alleges
that Nathoo and Discus conspired to misappropriate BriteSmile's trade secrets in
violation of Nathoo's contractual obligations to the Company. The amended
lawsuit alleges that, as BriteSmile's Medical Director, Nathoo had and continues
to have, an obligation to keep BriteSmile's trade secrets confidential.
Beginning in 2001, Discus Dental and Nathoo entered into an agreement whereby
Discus Dental paid Nathoo at least $2.5 million over a less than two year period
for Nathoo's "consulting" services, which included paying Nathoo to share with
Discus certain of the Company's trade secrets. The lawsuit alleges further that
in December 2002, a third party informed BriteSmile of Nathoo's activities, and
that when confronted by BriteSmile, Nathoo admitted to receiving $2.5 million
from Discus. The Company seeks a permanent injunction against both Discus and
Nathoo to prevent further infringement of its patents and improper disclosure of
the Company's trade secrets, lost profits, treble damages and attorneys fees for
willful patent infringement, punitive damages, and other relief.

On March 25, 2003, Discus filed its Answer to the Amended Complaint and
Counterclaims. In its Answer, Discus denies any liability for BriteSmile's
claims. Discus also raises affirmative defenses, including claims that its
products and processes do not infringe BriteSmile's patents, and that
BriteSmile's patents are invalid and unenforceable. Discus asserts counterclaims
against BriteSmile, seeking (i) judicial declarations that BriteSmile's patents
are invalid, unenforceable, and have not been infringed, (ii) tortious
interference with prospective economic advantage and economic business
relations, and (iii) unfair competition. Discus also asks for declarations that
its products and processes do not violate BriteSmile's patents, that
BriteSmile's patents are unenforceable, that BriteSmile has no protectable trade
secrets, that BriteSmile's contracts with dentists which contain contractual

restrictions on the purchase and use of competitive systems are unenforceable
and should be enjoined, lost profits, treble damages and attorneys fees.

In July 2003, the case of Salim Nathoo v. BriteSmile Leasing (discussed below)
was consolidated with the Discus Patent Litigation. All parties have produced
documents and written discovery responses in support of their claims and
defenses. Discovery is proceeding. The depositions of several key witnesses were
taken from August through October 2003.

Salim Nathoo v. BriteSmile Leasing. On March 6, 2003, Nathoo filed a lawsuit
against BriteSmile Leasing, a subsidiary of the Company in the New Jersey state
court. In this action, Nathoo alleges that the Company breached its agreement to
pay Nathoo money, and that such failure should result in the reversion of
certain patent rights, which were previously assigned by Nathoo to the Company,
back to Nathoo. Nathoo also seeks the payment of profits derived from the patent
rights. The Company has filed an answer to the complaint, together with
counterclaims alleging the same causes of action as in the Company's California
litigation against Nathoo.

In May 2003, the court ordered that the case be transferred to California. In
July 2003, the case was consolidated with the Discus Patent Litigation in
California.

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, in the Third Judicial District Court in Salt Lake
City, Utah. The Complaint alleges that BriteSmile Management breached its 1998
distributor agreement with Smile (exclusive as to Singapore and other
surrounding countries) by failing to fill orders placed and to perform other
obligations under the agreement. The Complaint also alleges that BriteSmile
Management and the Company fraudulently induced Smile to enter into the
distributor agreement, and includes claims for damages based on alleged unjust
enrichment, civil conspiracy, breach of the duty of good faith and fair dealing,
interference with contractual and economic relations, and fraudulent transfer.

In May 2002, the Company and BriteSmile Management filed their answer and
counterclaim. The counterclaim alleges that Smile breached the distributor
agreement by, among other things, failing to operate using a licensed dentist in
good standing (the license of the principal of Smile, Dr. Tan, was revoked
during 1999) and using BriteSmile's names and marks in a fashion not permitted
by the distributor agreement.

The primary defense to Smile's claims is that the distributor agreement
expressly excludes "non-laser-aided teeth whitening products and processes" sold
by the Company. Accordingly, Smile has no rights to market and sell the
Company's current light activated in-office whitening products and cannot claim
damages for BriteSmile's marketing of its light activated system in the
exclusive territory described in the distributor agreement.

Discovery is proceeding; both parties have produced documents and written
responses in support of their claims and defenses.

BriteSmile v. Discus Dental, filed in Contra Costa County Superior Court,
California. On May 31, 2002, the Company filed a complaint against Discus
Dental, Inc. in Contra Costa County Superior Court, California, alleging causes
of action for intentional interference with contractual relationship, negligent
interference with contractual relationship, violation of Unfair Business
Practice Act - Loss Leader, violation of Unfair Business Practice Act, trade
libel and injunctive relief. The complaint alleges that Discus Dental and other
defendants yet to be identified wrongfully interfered with the Company's
contractual relationships with its Associated Center dentists, in part by
writing letters with the purpose of inducing certain of the Company's Associated
Dentists to terminate their contracts with the Company and switch to Discus'
Zoom! system, and by making false and disparaging statements concerning the
Company's teeth whitening system. The Complaint seeks damages for loss of
business, punitive damages, injunctive relief, and costs of suit. This case was
stayed in March 2003 and will remain stayed until January 2004.

Kalow & Springut v. BriteSmile et. al., filed in Supreme Court of the State of
New York, County of New York. In April 2003, the law firm of Kalow & Springut
("KS") filed a complaint against the Company, BriteSmile International, a
subsidiary of the Company, and A.M. Pilaro, the Company's Chairman. KS seeks to
recover alleged unpaid legal fees and expenses in the amount of $767,818.18.
Plaintiff also alleges that it was fraudulently induced to incur the legal fees
and expenses, and seeks to recover punitive damages of at least $5 million.

On June 13, 2003, BriteSmile answered the Complaint and asserted counterclaims
against KS for negligence, malpractice and breach of contract, including failure
to return Company files, and failure to inform the Company that Dr. Salim Nathoo
had been working for Discus Dental in violation of Nathoo's agreement with the
Company.

Discovery proceedings have commenced. Motions have been filed to dismiss all
claims alleged against Mr. Pilaro and all claims alleged against the Company,
except for one breach of contract claim. The Company has also applied to the
court to compel KS to produce documents and to turn over certain Company files

PracticeMasters, Inc. v. BriteSmile, Inc., filed in Superior Court in San Diego,
California. On May 21, 2003, PracticeMasters, Inc. ("PMI") filed a complaint
against the Company. PMI seeks compensatory damages in an unspecified amount for
BriteSmile's alleged breach of a Marketing Associate Agreement with PMI. PMI
alleges that BriteSmile failed to pay fees owed to PracticeMasters under the
agreement and that it failed to provide proper notice of termination of the
agreement. BriteSmile filed a demurrer and motion to strike on July 15, 2003. By
the demurrer, BriteSmile seeks dismissal of PMI' causes of action for breach of
fiduciary duty and constructive trust, which are the basis for its claim for
punitive damages. By the motion to strike, BriteSmile seeks to strike PMI's
claim for punitive damages. BriteSmile plans to file a cross-complaint against
PMI for breach of the Marketing Associate Agreement and fraudulent
misrepresentations and to seek compensatory damages arising from PracticeMasters
failure to set up viable accounts and from resulting damage to BriteSmile's
reputation.

No discovery has been taken.

The Proctor & Gamble Company vs. Orcaceutical 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, The Proctor & Gamble Company ("P&G") filed a complaint against the
defendants listed above alleging that Oraceutical LLC, IDEX Dental Sciences,
Inc. and Robert 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 (the "MOU") with BriteSmile, Inc. and
BriteSmile Development, Inc. (collectively, the "Company") on May 9, 2003. R.
Eric Montgomery ("Montgomery") is a director of the Company. Oraceutical LLC,
which is owned by Montgomery, is a consultant to the Company. The complaint also
seeks a declaratory judgment that US Patent Nos. 5,922,307, 6,331,292 and
6,488,914 (owned by the REM Group at the time the complaint was filed)(the
"Patents") are invalid and unenforceable and that P&G's Whitestrips product does
not infringe the Patents. In its complaint P&G asserts that the REM Group was
obligated under the Standstill Agreement not to take any action which would
prevent it from granting rights to P&G under the Patents sufficient at least for
P&G's current Whitestrips products. P&G further alleges that the REM Group
breached that obligation by entering into the MOU and, accordingly, P&G
terminated the Standstill Agreement. P&G does not seek monetary damages from the
Company under the claims set forth in its complaint.

In Management's opinion, based upon advice of counsel, the litigation matters
listed above in the aggregate will not have a material adverse effect on the
Company.

8. Subsequent Events

Recent Note Conversions

On November 10, 2003, LCO Investments Limited exercised its right to convert a
Promissory Note dated November 20, 2002 payable by the Company to LCO in the
original principal amount of $2,500,000 (the "LCO Note") plus accrued interest,
into shares of common stock of the Company. The conversion price of the LCO Note
was $6.00 per share, equal to the fair market value of the common stock of the
Company on the date the LCO Note was issued. Upon conversion of the LCO Note,
the Company issued to LCO 424,907 shares of common stock of the Company. LCO is
the Company's major shareholder and is identified under Note 5, "CAP America
Trust Center Loan," above.

On November 12, 2003, Brad Peters exercised his right to convert a Promissory
Note dated November 20, 2002 payable by the Company to Mr. Peters in the
original principal amount of $1,000,000 (the "Peters Note") plus accrued
interest, into shares of common stock of the Company. The conversion price of
the Peters Note was $6.00 per share, equal to the fair market value of the
common stock of the Company on the date the Peters Note was issued. Upon
conversion of the Peters Note, the Company issued to Mr. Peters 169,991 shares
of common stock of the Company. Mr. Peters is a member of the Board of Directors
of the Company.

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

Forward-looking Statements and Risk Factors

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements may be deemed to include
information that is not historical. The statements contained in this Report that
are not purely historical are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act. These statements relate to the Company's expectations,
hopes, beliefs, anticipations, commitments, intentions and strategies regarding
the future. They may be identified by the use of words or phrases such as
"believes," "expects," "anticipates," "should," "plans," "estimates," and

"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations regarding the Company's financial
performance, revenue and expense levels in the future, and the sufficiency of
its existing assets to fund future operations and capital spending needs. Actual
results could differ materially from the anticipated results or other
expectations expressed in such forward-looking statements. The Company believes
that many of the risks set forth here and in the Company's 10-K Annual Reports
filed with the SEC are inherent to doing business in the industry in which the
Company operates, and will likely be present in all periods reported. The
forward-looking statements contained in this Report are made as of the date of
this Report and the Company assumes no obligation to update them or to update
the reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations of the Company include:

o Government regulation of the Company's products and teeth whitening
procedures, including: (i) current restrictions or controls on the
practice of dentistry by general business corporations, and (ii)
future, unknown enactments or interpretations of current regulations
which could, in the future, affect the Company's operational structure
and relationships with licensed dentists;

o Failure of the Company to generate, sustain or manage growth,
including failure to develop new products and expand Center and
Associated Center locations and revenues;

o The loss of product market share to competitors and/or development of
new or superior technologies by competitors;

o Ongoing operating losses associated with the development, marketing
and implementation of new, light-activated teeth whitening
technologies and other teeth whitening products;

o Failure of the Company to secure additional financing to complete its
plan for the rollout of a broad base of Associated Centers and for the
introduction of additional retail whitening products;

o Unproven market for the Company's new whitening products, including
"BriteSmile To Go", whitening process, and "Whitening Center" and
"Associated Center" concepts, in light of competition from traditional
take-home whitening products and bleaching tray methods and newly
introduced in-office bleaching methods;

o Failure to develop marketing strategies and delivery methods to
penetrate non-U.S. markets; and

o Lack of product diversity.

Critical Accounting Policies and Estimates

General

The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these 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, taxes, warranty obligations, financing
operations, restructuring, and 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.

The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its condensed
consolidated financial statements.

Revenue Recognition

BriteSmile recognizes revenue related to retail products at the time such
products are shipped to customers.

BriteSmile recognizes revenue at Centers at the time a whitening procedure is
performed.

BriteSmile records deferred revenue at the time of sale of key cards and access
codes to Associated Centers. Revenue is subsequently recognized over the period
that the whitening procedures (which can be performed utilizing the key cards
and access codes) are performed, currently estimated at 19 days from the date of
shipment for Domestic Associated Centers and 13 days for International
Associated Centers. A material change to the estimated time period over which
the key cards and access codes are used could have a significant impact on
BriteSmile's revenue in the period of change as well as future periods.

BriteSmile's policy is not to accept any return of key cards or access codes
during the course of the agreement with an Associated Center.

Bad Debts

BriteSmile maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of accounts receivable including the current credit-worthiness of
each customer. If the financial condition of BriteSmile's customers (dentists
who operate Associated Centers) were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.

Inventory

Inventories are stated at the lower of cost or market. BriteSmile 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 actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.

Property and Equipment

BriteSmile evaluates its property, equipment and improvements for impairment
whenever indicators of impairment exist. An impairment charge of $293,000 was
recorded during the 39 weeks ended September 27, 2003 related to the relocation
of the Company's Houston Center to a new strategic location.

Store Closures

BriteSmile recorded significant reserves in connection with store closures made
in prior years. These reserves include estimates pertaining to employee
separation costs and the settlements of contractual obligations, primarily
property leases. The remaining liability relates only to lease obligations.
Although the Company does not anticipate significant changes, the actual costs
related to the closures may differ from these estimates. During the thirty-nine
weeks ended September 27, 2003, the Company paid $176,000 related to these
leases. Additionally, during the thirty-nine weeks ended September 27, 2003, the
Company revised its estimated liability by $140,000 related to two leases as the
sub-lessees stopped making payments.

Legal Contingencies

BriteSmile is currently a party to certain legal actions. Management does not
believe that current pending litigation will have a material adverse effect on
BriteSmile's condensed consolidated financial statement position taken as a
whole. This conclusion has been developed in consultation with outside counsel
handling BriteSmile's defenses in the matters. It is possible, however, that
future results of operations for any particular quarterly or annual period could
be materially affected by changes in management's assumptions and the
effectiveness of BriteSmile's strategies related to these legal actions.

BriteSmile recognizes the costs of legal services in the periods incurred.

Overview

Operating and occupancy costs are composed primarily of three main groups: 1)
the cost of goods for both the Center and Associated Center whitening procedure
kits and retail products; 2) the financing costs for the devices in the
Associated Centers; and 3) the operating and occupancy costs for the Centers.

Selling, general and administrative expenses are composed of expenses associated
with all corporate and administrative functions that support existing operations
and provide an infrastructure to support future growth, including management and
staff salaries, employee benefits, travel, information systems, operating costs
of the Call Center, training, field support, and marketing and advertising.

The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q and in the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 2002.

The following table sets forth unaudited operating results for the thirteen week
periods and 39 week periods ended September 27, 2003 and September 28, 2002, as
a percentage of sales in each of these periods. This data has been derived from
the unaudited financial statements.

13 Weeks ended 13 Weeks ended 39 Weeks ended 39 Weeks ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
-------------- -------------- --------------- ---------------
Income Statement Data:

Revenues:
Center whitening fees, net 40.4% 32.3% 38.2% 32.4%
Associated Center whitening fees,
net 47.1% 58.5% 50.8% 57.1%
Product sales 12.5% 9.2% 11.0% 10.5%
Total revenues, net 100.0% 100.0% 100.0% 100.0%

Operating Costs and Expenses:
Operating and occupancy costs 43.8% 36.9% 40.9% 37.0%
Selling, general and administrative
expenses 76.8% 87.5% 70.0% 82.0%
Research and development expenses 3.5% 4.3% 2.5% 2.4%
Depreciation and amortization 14.8% 15.9% 15.5% 15.1%
Total operating costs and expenses 138.9% 144.6% 128.9% 136.5%

Loss from operations (38.9)% (44.6)% (28.9)% (36.5)%

Interest expense, net (2.9)% (1.5)% (2.1)% (2.0)%

Loss before income tax provision (41.8)% (46.1)% (31.0)% (38.5)%
Provision for income taxes 0.0% 0.2% 0.0% 0.2%
Net Loss (41.8)% (46.3)% (31.0)% (38.7)%
============== ============== =============== ===============

The following are explanations of significant period-to-period changes for the
13 weeks ended September 27, 2003 compared to September 28, 2002:

Revenues

Total Revenues, net. Total revenues increased by $1.5 million, or 15.0% to $11.4
million for the 13 weeks ended September 27, 2003 compared to $9.9 million for
the 13 weeks ended September 28, 2002.

Center Whitening Fees, net. Center whitening fees increased by $1.4 million, or
43.9%, to $4.6 million for the 13 weeks ended September 27, 2003, from $3.2
million for the 13 weeks ended September 28, 2002. The number of procedures
performed in the Centers increased by 45.2% to 10,361 in the third quarter of
2003, compared to 7,136 in the same quarter of 2002.

Associated Center Whitening Fees. Associated Center whitening fees decreased by
$431,000, or 7.4%, to $5.4 million for the 13 weeks ended September 27, 2003,
from $5.8 million for the 13 weeks ended September 28, 2002. This decrease was
due to increased discounting of procedures in the 13 weeks ended September 27,
2003 compared to the 13 weeks ended September 28, 2002. The number of procedures
sold in the Associated Centers increased 11.1% to 33,270 procedures in the third
quarter of 2003 compared to 29,940 procedures in the same quarter of 2002.
Domestic Associated Center whitening procedures were 23,165 in the 13 weeks
ended September 27, 2003 compared to 23,345 in the same quarter of 2002.
International Associated Center whitening procedures were 10,105 in the 13 weeks
ended September 27, 2003 compared to 6,595 in the same quarter of 2002. While
the Company continues to execute its strategy of expanding distribution both
domestically and internationally through the dental practice channel (Associated
Centers), the Company has taken efforts domestically to terminate and replace
dental practices that are not assisting the Company in achieving its plans. As a
result, the number of domestic Associated Centers has decreased from 3,362 at
September 28, 2002 to 3,192 at September 27, 2003.

Product Sales. Product sales increased by $515,000 or 56.0% to $1.4 million for
the 13 weeks ended September 27, 2003, from $919,000 for the 13 weeks ended
September 28, 2002. Product sales represent the Company's traditional retail
products (toothpaste, mouthwash, whitening gum, and the Sonicare toothbrush
products sold at Centers and Associated Centers), and the Company's two new
product offerings (Magic Mirror and BriteSmile To Go), which were launched in
September 2003. These new offerings accounted for $324,000 or 22.6% of total
product sales for the 13 weeks ended September 27, 2003.

Operating Costs and Expenses

Operating and Occupancy Costs. Operating costs includes costs of goods sold,
lease financing costs for the Associated Centers, and the operating and
occupancy costs for the Centers. Operating and occupancy costs were $5.0 million
or 43.8% as a percentage of revenues for the 13 weeks ended September 27, 2003,
compared to $3.7 million or 36.9% as a percentage of revenues in the 13 weeks
ended September 28, 2002. This increase was higher due to increased revenues and
the costs associated with the new Magic Mirror and BriteSmile To Go products.
Operating expenses for the 13 weeks ended also included an inventory adjustment
of $343,000 that relates to periods prior to 2003. Management does not believe
this adjustment has a material effect on any period.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained relatively flat at $8.8 million or 76.8% as a
percentage of revenue for the third quarter of 2003, compared to $8.7 million or
87.5% in the corresponding period in 2002.

Research and Development Expenses. Research and development expenses decreased
to $403,000 or 3.5% as a percentage of revenue for the thirteen weeks ended
September 27, 2003 compared to $425,000 or 4.3% as a percentage of revenue in
the corresponding period in 2002. The expenses incurred in 2003 related
primarily to product development, whereas the expenses in 2002 were a mixture of
product development and product efficacy studies.

Depreciation and Amortization. Depreciation and amortization was $1.7 million or
14.8% as a percentage of revenue for the third quarter of 2003 compared to $1.6
million or 15.9% as a percentage of revenue in the corresponding period in 2002.
The increase is due to $101,000 in amortization expense in connection with the
intellectual property acquired in July 2003.

Interest Expense, net. Interest expense, net increased to $331,000 or 2.9% as a
percentage of revenue for the third quarter of 2003 compared to interest
expense, net of $148,000 or 1.5% as a percentage of revenue in the corresponding
quarter of 2002. The increase is due to increased levels of borrowing in
connection with new business initiatives.

The following are explanations of significant period-to-period changes for the
39 weeks ended September 27, 2003 and September 28, 2002:

Revenues

Total Revenues. Total revenues increased by $1.1 million, or 3.6%, to $31.4
million for the 39 weeks ended September 27, 2003, from $30.3 million for the 39
weeks ended September 28, 2002.

Center Whitening Fees. Center whitening fees increased by $2.2 million, or
22.0%, to $12.0 million for the 39 weeks ended September 27, 2003, from $9.8
million for the 39 weeks ended September 28, 2002. The number of procedures
performed in the Centers increased by 18.5% to 25,947 for the 39 weeks ended
September 27, 2003, compared to 21,905 for the same period of 2002.

Associated Center Whitening Fees. Associated Center whitening fees decreased by
$1.3 million, or 7.8%, to $15.9 million for the 39 weeks ended September 27,
2003, from $17.3 million for the 39 weeks ended September 28, 2002. The
primarily reason for this decline was an increase in discounting year-over-year.
There were 4,943 Associated Centers at the end of the 39 weeks ended September
27, 2003 compared to 4,568 Associated Centers at the end of the 39 weeks ended
September 28, 2002. The number of procedures sold in the Associated Centers
decreased slightly (0.95%) to 96,075 procedures in the 39 weeks ended September
27, 2003 compared to 97,000 procedures in the same period of 2002. Domestic
Associated Center whitening procedures totaled 70,585 in the 39 weeks ended
September 27, 2003 compared to 78,010 in the same period of 2002. International
Associated Center whitening procedures were 25,490 in the 39 weeks ended
September 27, 2003 compared to 18,990 in the same period of 2002. While the
Company continues to execute its strategy of expanding distribution both
domestically and internationally through the dental practice channel (Associated
Centers), the Company has taken efforts domestically to terminate and replace
dental practices that are not assisting the Company in achieving its plans. As a
result, the number of domestic Associated Centers has decreased from 3,362 at
September 28, 2002 to 3,192 at September 27, 2003.

Product Sales. Product sales increased by $288,000 to $3.5 million for the 39
weeks ended September 27, 2003, from $3.2 million for the 39 weeks ended
September 28, 2002. Product sales represent the Company's toothpaste, mouthwash,
whitening gum, and the Sonicare toothbrush products sold at Centers and
Associated Centers, as well as the Company's new products - Magic Mirror and
BriteSmile To Go. This increase in product sales is attributable primarily to
the launch of the Company's two new products in September 2003.

Operating Costs and Expenses

Operating and Occupancy Costs. Operating costs includes costs of goods sold,
lease financing costs for the Associated Centers, and the operating and
occupancy costs for the Centers. Operating and occupancy costs were $12.8
million or 40.9% as a percentage of revenues for the 39 weeks ended September
27, 2003, compared to $11.2 million or 37.0% as a percentage of revenue in the
39 weeks ended September 28, 2002. This increase was primarily due to increased
revenues and the launch of two new products - Magic Mirror and BriteSmile To Go.
Operating expenses for the 39 weeks ended September 27, 2003 also includes an
adjustment to cost of goods sold of $343,000 that relates to periods prior to
2003. Management does not believe this adjustment has a material effect on any
period.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $22.0 million or 70.0% as a percentage of
revenue for the 39 weeks ended September 27, 2003 compared to $24.8 million or
82.0% as a percentage of revenue in the corresponding period in 2002. The $2.9
million decrease is due to lower advertising costs, reflecting the Company's
continued commitment to improve its marketing efficiency.

Research and Development Expenses. Research and development expenses of $772,000
were 2.5% as a percentage of revenue for the 39 weeks ended September 27, 2003
compared to $717,000 or 2.4% as a percentage of revenue in the corresponding
period in 2002. This expense is primarily related to development of new products
to expand our leadership position in the teeth-whitening industry.

Depreciation and Amortization. Depreciation and amortization increased to $4.9
million or 15.6% as a percentage of revenue for the 39 weeks ended September 27,
2003 compared to $4.6 million or 15.1% as a percentage of revenue in the
corresponding period in 2002. This increase, for 39 weeks ended September 27,
2003, is the result of a greater number of light activated whitening devices in
operation internationally and $101,000 in amortization expense in connection
with the intellectual property acquired on July 23, 2003.

Interest Expense, net. Interest expense, net increased to $670,000 or 2.1% as a
percentage of revenue for the 39 weeks ended September 27, 2003 compared to
interest expense, net of $618,000 or 2.0% as a percentage of revenue in the
corresponding period of 2002.

Liquidity and Capital Resources

To date, the Company has yet to achieve profitability. The Company does not
expect to be profitable in 2003. The Company has implemented initiatives to
increase sales and decrease expenses to assure its viability for the next 12
months. The Company's principal sources of liquidity have been proceeds from
issuance of common stock and debt. At September 27, 2003, the Company had $2.0
million in cash and borrowing capacity under lines of credit totaling $1.7
million.

The Company obtained the following additional borrowing availability during
2003:

o $1.5 million increase, effective January 2003, in the Credit
Agreements with CAP Advisers. The increase is specifically for
international capital expenditures.

o The Company has drawn $0.9 million under this credit facility,
leaving $0.6 million currently available.

o $2.5 million Center Loan with CAP America Trust. This credit facility
is for general working capital needs ($800,000) and capital
expenditures and specific revenue generating initiatives ($1.7
million).

o The Company has drawn $1.3 million under the Center Loan.

o On October 2, 2003, the Company drew down an additional $0.3
million, leaving $0.9 million currently available under this
line.

The Company believes that cash on hand along with available borrowing capacity
discussed above will be sufficient to sustain operations for the next twelve
months.

In addition to the line of credit facilities, the Company entered into a
financing agreement with LCO Investment Limited, as follows:

Pursuant to a commitment agreement dated April 29, 2003, LCO loaned $1,000,000
to BDI on May 9, 2003 under the terms of a promissory note, with interest and
principal due on May 9, 2008. Interest accrues at 200 basis points above the 1
year LIBOR as quoted by the Bank of Nova Scotia. The interest rate on the note
is reset every thirty days.

LCO loaned BDI an additional $1,000,000 on similar terms on July 23, 2003, the
closing date of the APA.

The promissory notes issued to LCO by BDI were guaranteed by the Company.

In connection with the granting of the loans to BDI, LCO received warrants to
purchase 133,333 shares of Common Stock of the Company. The warrants are
exercisable at $15.00 per share and have a five year life. The shares of Common
Stock underlying the warrants granted to LCO are subject to certain limited
"piggyback" registration rights in the event of future registered public
offerings of Common Stock sold by the Company. The fair value of the warrants
issued of $1,704,378 was recorded as a discount of the note, and is being
amortized over the life of the note, 5 years, to interest expense.

Cash flows used in operations decreased by $3.4 million to ($3.1 million) for
the 39 weeks ended September 27, 2003 from ($6.5 million) during the third
quarter of 2002, primarily due to the decrease in the net loss.

Cash provided by financing activities was $5.2 million for the 39 weeks ended
September 27, 2003, compared to $ 2.9 million for the same period in 2002.
During the second and third quarters of 2003, the Company received $2 million

financing from LCO for BDI in connection with its acquisition of human oral care
intellectual property.

Capital expenditures were $1.9 million for the 39 weeks ended September 27,
2003, compared to $2.8 million for the same period in 2002. In 2002, capital
expenditures related primarily to the purchase of light activated whitening
devices. For the 39 weeks ended September 27, 2003, capital expenditures
represented either the purchase of new light activated devices or the conversion
of old devices for use in the Company's international markets, and the launch of
new Company initiatives. In July 2003, the Company acquired intellectual
property of $5.4 million and paid cash of $1,750,000.

Inflation

In general, the Company does not believe that inflation has had a material
effect on its results of operations in recent years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.

Seasonality

Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Centers
(both domestic and international) shut down for vacation. As a result, the
frequency of key card purchases by Associated Centers during these months
declines as well. Additionally, the Company's Centers have recognized some
seasonality during the same months because of customer vacations.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

We believe there has been no material change in our exposure to Market Risk from
that discussed in our 2002 Annual Report on Form 10-K

ITEM 4. CONTROLS AND PROCEDURES

During the 13 week period ended September 27, 2003, the Company identified an
error in the recording of cost of sales. This error resulted in the Company
restating their financial statements for the 13 week period ended June 28, 2003.
The errors were the result of weaknesses in the Company's internal control
structure. Deloitte & Touche LLP has communicated to management and the Audit
Committee that these weaknesses are considered material weaknesses. Management
and the Audit Committee have identified certain changes that they feel are
necessary to strengthen the Company's accounting and reporting function,
including capabilities of its accounting personnel and adoption of more frequent
reviews and reconciliations of financial information.

Within 90 days prior to the date of this report, the Company's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the
Company's disclosure controls and procedures. Based on upon their evaluation and
as a result, in part, of the matters noted in the preceding paragraph, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended),
are effective, with the following qualifications:

1. The error discussed above was just recently identified and corrected
and management has not had sufficient time to (i) fully assess their
remediation plan and (ii) to fully implement appropriate changes.

2. The inventory accounting systems require additional review and
enhancement to ensure that inventory costing is reasonable and
accurate, and applies costing principles that are consistent with U.S.
GAAP on a recurring basis.

3. Accounting policies and procedures must be formally documented.

4. Unusual and complex transactions require the involvement of accounting
personnel on a timely basis.

Since the date of their evaluation, there have been no significant changes to
the Company's internal controls or other factors that could significantly affect
these controls.

Management has directed that the foregoing corrective procedures and accounting
system enhancements be designed and fully implemented.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In May 2003, the court ordered that the case be transferred to California. In
July 2003, the case was consolidated with the Discus Patent Litigation in
California.

enrichment, civil conspiracy, breach of the duty of good faith and fair dealing,
interference with contractual and economic relations, and fraudulent transfer.

Discovery is proceeding; both parties have produced documents and written
responses in support of their claims and defenses.

PracticeMasters, Inc. v. BriteSmile, Inc., filed in Superior Court in San Diego,
California. On May 21, 2003, PracticeMasters, Inc. ("PMI") filed a complaint
against the Company. PMI seeks compensatory damages in an unspecified amount for
BriteSmile's alleged breach of a Marketing Associate Agreement with PMI. PMI
alleges that BriteSmile failed to pay fees owed to PracticeMasters under the
agreement and that it failed to provide proper notice of termination of the
agreement. After BriteSmile filed a demurrer and motion to strike on July 15,
2003, PMI subsequently amended its complaint to dismiss its causes of action for
breach of fiduciary duty and constructive trust, which are the basis for
punitive damages. On October 17, 2003, BriteSmile filed a cross-complaint
against PMI for breach of the Marketing Associate Agreement and fraudulent
misrepresentations and to seek compensatory damages arising from PracticeMasters
failure to set up viable accounts and from resulting damage to BriteSmile's
reputation. A trial date has been set for April 30th, 2004.

No discovery has been taken.

In Management's opinion, based upon advice of counsel, the litigation matters
listed above in the aggregate will not have a material adverse effect on the
Company.

ITEM 2. CHANGES IN SECURITIES

During the period June 28, 2003 to September 27, 2003, the Company granted to
key employees under its 1997 Plan non-qualified options to purchase an aggregate
of 82,167 shares of the Company's common stock, at exercise prices ranging from
$27.46 to $27.85 per share. The options vest over a period of time following
their respective dates of grant.

Pursuant to the APA, BDI acquired 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
("HOC") for a purchase price of $5.4 million ($6.4 million under certain
contingencies), plus a 50% participation interest in third party royalties and
infringement recoveries relating to the HOC intellectual property acquired from
the REM Group. A portion of the purchase price was paid in the form of 66,667
shares of Common Stock of the Company issued to Montgomery on July 25, 2003.

In connection with the granting of loans by LCO to BDI to finance a portion of
the payments required under the APA, LCO received warrants to purchase 133,333
shares of Common Stock of the Company. All warrants granted to LCO are
exercisable at $15.00 per share and have a five-year life. Warrants to purchase
66,666 shares of the 133,333 total were issued on May 9, 2003. The remaining
66,667 warrants were granted to LCO on July 23, 2003 in connection with the
closing of the APA transaction.

The shares of Common Stock underlying the warrants granted to LCO, and the
shares of Common Stock issued to Montgomery on July 25, 2003 in connection with
closing of the APA, are subject to certain limited "piggyback" registration
rights in the event of future registered public offerings of Common Stock sold
by the Company.

All issuances and sales of the Company's Common Stock in connection with the
closing of the APA, and the grant of warrants to LCO as described above, were
made in private transactions, exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) of the Act and Rule 506
promulgated by the Securities and Exchange Commission there under. Each person
acquired the shares for investment purposes only, with no present intent to
distribute the securities. The certificates representing the shares issued were
subject to standard restrictive legends with respect to transfer or resale. All
recipients received or had meaningful access to all Company reports filed with
the Commission pursuant to the Securities Exchange Act of 1934.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company's Annual Meeting of Shareholders held on September 5, 2003, the
shareholders of the Company voted on the following three proposals:

Proposal 1 - To elect ten directors, each to serve until the next annual meeting
of shareholders and until his successor is elected and shall have qualified; and

Proposal 2 - To approve the Board of Directors' selection of Deloitte and Touche
LLP as the Company's independent auditors for the fiscal year ending December
27, 2003.

Voting results were as follows:

Proposal 1: For Withheld
------------------------- ------------------ ----------------

Mr. Pilaro 2,393,710 767
Mr. Reed 2,375,872 18,605
Mr. Poch 2,394,063 414
Mr. Lazzara, Jr. 2,392,443 2,034
Mr. Peters 2,392,545 1,932
Mr. Thompson 2,394,064 413
Mr. Schechter 2,377,832 16,645
Mr. Fleming 2,390,036 441
Mr. Pierce 2,394,078 399
Mr. Montgomery 2,377,841 16,636

For Against Abstain
--------------- ---------------- ----------------

Proposal 2: 2,394,145 88 244

ITEM 5. OTHER INFORMATION.

Gasper Lazzara resigned from the Company's board of directors on September 8,
2003.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

31 Certifications of John L. Reed, CEO and John C. Dong, CFO (filed herewith).

32 Certifications of John L. Reed, CEO, and John C. Dong, CFO, pursuant to
Section 906 of the SarbanesOxley Act Of 2002 (filed herewith).

99.1 Earnings Release of BriteSmile, Inc. dated November 11, 2003 for the 26
week period ended September 28, 2003 (filed herewith).

99.2 Transcript of Earnings Conference Call of the Company held on November 13,
2003 (herewith).

(B) REPORTS ON FORM 8-K

On August 12, 2003, the Company filed a Current Report on Form 8-K for the
purpose of reporting the status of The Proctor & Gamble Company vs. Orcaceutical
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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

BRITESMILE, INC.

/s/ John L. Reed November 17, 2003
John L. Reed Date
Chief Executive Officer

/s/ John C. Dong November 17, 2003
John C. Dong Date
Chief Financial Officer