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 MARCH 31, 2004

                                       OR

          [ ] 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 0-11365
                                                -------

                                PHOTOMEDEX, INC.
                                ----------------
             (Exact name of registrant as specified in its charter)

             DELAWARE                                      59-2058100
             --------                                      ----------
   (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                       Identification No.)

             147 KEYSTONE DRIVE, MONTGOMERYVILLE, PENNSYLVANIA 18936
             -------------------------------------------------------
          (Address of principal executive offices, including zip code)

                                 (215) 619-3600
                                 --------------
              (Registrant's telephone number, including area code)




Indicate  by check  mark  whether  the  registrant:  (i) 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 (ii) has been subject to such
filing requirements for the past 90 days.
                                  Yes X  No
                                     ---   ---
Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act.)
                                  Yes X  No
                                     ---   ---

The number of shares outstanding of the issuer's Common Stock as of May 7, 2004,
was 38,542,245 shares.


<PAGE>





                        PHOTOMEDEX, INC. AND SUBSIDIARIES

                                      INDEX

Part I. Financial Information:                                              PAGE
------------------------------                                              ----

     ITEM 1.  Financial Statements:

     a.  Consolidated Balance Sheets, March 31, 2004 (unaudited) and
         December 31, 2003 (audited)                                          3

     b.  Consolidated Statements of Operations for the three months
         ended March 31, 2004 and 2003 (unaudited)                            4

     c.  Consolidated Statements of Cash Flows for the three months
         ended March 31, 2004 and 2003 (unaudited)                            5

     d.  Notes to Consolidated Financial Statements (unaudited)               6

     ITEM 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                       16

     ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk       24

     ITEM 4.  Controls and Procedures                                         24

Part II. Other Information:

     ITEM 1.  Legal Proceedings                                               24
     ITEM 2.  Changes in Securities and Use of Proceeds                       25
     ITEM 3.  Defaults Upon Senior Securities                                 25
     ITEM 4.  Submission of Matters to a Vote of Security Holders             25
     ITEM 5.  Other Information                                               25
     ITEM 6.  Exhibits and Reports on Form 8-K                                25

     Signatures                                                               26
     Certifications                                                           27

                                        2
<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



                        PHOTOMEDEX, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
    <S>                                                                          <C>                 <C>


                                                                                    March 31,         December 31,
                                                                                     2004                2003
                                                                                  ------------        ------------

                                      ASSETS                                        (Unaudited)       (Audited)
     Current assets:

           Cash and cash equivalents .............................................$  5,825,956        $  6,633,468
           Accounts  receivable,  net of  allowance  for  doubtful  accounts of
           $670,122 and $698,044, respectively ...................................   3,756,100           3,483,030
           Inventories ...........................................................   4,387,541           4,522,462
           Prepaid expenses and other current assets .............................     398,319             334,002
                                                                                  ------------        ------------
              Total current assets ...............................................  14,367,916          14,972,962

     Property and equipment, net .................................................   4,163,898           4,005,205

     Goodwill, net of accumulated amortization of $452,992 .......................   2,944,423
                                                                                                         2,944,423

     Patents and licensed technologies, net ......................................     714,647             758,655

     Other assets ................................................................      68,186              71,486
                                                                                  ------------        ------------
           Total assets ..........................................................$ 22,259,070        $ 22,752,731
                                                                                  ============        ============

                       LIABILITIES AND STOCKHOLDERS' EQUITY

     Current liabilities:
           Current portion of notes payable ......................................$    151,385        $    101,066
           Current portion of long-term debt .....................................   1,258,945           1,269,759
           Accounts payable ......................................................   2,338,436           2,218,993
           Accrued compensation and related expenses .............................     805,584             940,352
           Other accrued liabilities .............................................     864,775             975,536
           Deferred revenues .....................................................     956,469             811,712
                                                                                  ------------        ------------
              Total current liabilities ..........................................   6,375,594           6,317,418

     Notes payable ...............................................................      45,675              51,489
     Long-term debt ..............................................................     347,566             405,749
                                                                                  ------------        ------------
             Total liabilities ...................................................   6,768,835           6,774,656
                                                                                  ------------        ------------

     Stockholders' equity:
           Common Stock, $.01 par value, 75,000,000 shares authorized;
            38,196,321and 37,736,139 shares issued and outstanding ...............     381,963             377,361
           Additional paid-in capital ............................................  87,740,435          86,871,415
           Accumulated deficit ................................................... (72,625,448)        (71,262,366)
           Deferred compensation .................................................      (6,715)             (8,335)
                                                                                  ------------        ------------
              Total stockholders' equity .........................................  15,490,235          15,978,075
                                                                                  ------------        ------------
              Total liabilities and stockholders' equity .........................$ 22,259,070        $ 22,752,731
                                                                                  ============        ============
</TABLE>



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

                                        3
<PAGE>

                        PHOTOMEDEX, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)
<TABLE>
<CAPTION>
<S>                                                                             <C>                 <C>

                                                                                    For the Three Months Ended
                                                                                             March 31,
                                                                                      2004               2003
                                                                                  ------------       ------------
Revenues:
     Product sales ...............................................................$  1,792,400       $  1,869,292
     Services ....................................................................   2,232,830          1,604,185
                                                                                  ------------       ------------
                                                                                     4,025,230          3,473,477

Cost of revenues:
     Product cost of revenues ....................................................     832,483            944,882
     Services cost of revenues ...................................................   1,661,583          1,465,376
                                                                                  ------------       ------------
                                                                                     2,494,066          2,410,258
                                                                                  ------------       ------------

Gross profit .....................................................................   1,531,164          1,063,219
                                                                                  ------------       ------------

Operating expenses:
      Selling, general and administrative ........................................   2,470,424          2,294,592
      Engineering and product development ........................................     415,950            411,932
                                                                                  ------------       ------------
                                                                                     2,886,374          2,706,524
                                                                                  ------------       ------------

Loss from operations before interest expense, net ................................  (1,355,210)        (1,643,305)

Interest expense, net ............................................................       7,872             31,023
                                                                                  ------------       ------------

Net loss .........................................................................$ (1,363,082)      $ (1,674,328)
                                                                                  ============       ============


Basic and diluted net loss per share .............................................$      (0.04)      $      (0.05)
                                                                                  ============       ============

Shares used in computing basic and diluted net loss per share ....................  37,773,301         31,439,058
                                                                                  ============       ============
</TABLE>










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

                                        4
<PAGE>

                        PHOTOMEDEX, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Unaudited)
<TABLE>
<CAPTION>
     <S>                                                                        <C>                 <C>
                                                                                  For the Three Months Ended
                                                                                           March 31,
                                                                                     2004               2003
                                                                                  -----------       -----------
     Operating activities:

           Net loss ..............................................................$(1,363,082)       $(1,674,328)
           Adjustments to reconcile net loss to net cash used
              in operating activities:
                   Depreciation and amortization .................................    493,745            479,334
                   Stock options and warrants issued to consultants for services       48,192               --
                   Amortization of deferred compensation .........................      1,620              1,602
                   Provision for bad debt ........................................       --               84,000
           Changes in operating assets and liabilities:
              Accounts receivable ................................................   (273,070)           289,535
              Inventories ........................................................     19,025           (216,462)
              Prepaid expenses and other assets ..................................     65,865             (6,819)
              Accounts payable ...................................................    119,443             27,522
              Accrued compensation and related expenses ..........................   (134,768)            96,831
              Other accrued liabilities ..........................................   (110,761)          (400,849)
              Deferred revenues ..................................................    144,757            101,129
                                                                                  -----------        -----------

                       Net cash used in operating activities .....................   (989,034)        (1,218,505)
                                                                                  -----------        -----------

     Investing activities:
           Purchases of property and equipment, net ..............................    (11,137)           (21,136)
           Lasers placed into service ............................................   (481,398)          (293,401)
                                                                                  -----------        -----------

                       Net cash used in investing activities .....................   (492,535)          (314,537)
                                                                                  -----------        -----------

     Financing activities:
           Proceeds from issuance of common stock, net ...........................     11,199               --
           Proceeds from exercise of warrants ....................................    814,231               --
           Payments on long-term debt ............................................    (68,997)           (44,426)
           Payments on notes payable .............................................    (82,376)          (109,812)
           Net repayments on line of credit ......................................       --           (1,407,451)
           Decrease  in  restricted  cash,  cash  equivalents  and  short-term
           investments ...........................................................       --            1,637,183
                                                                                  -----------        -----------

                       Net cash provided by financing activities .................    674,057             75,494
                                                                                  -----------        -----------

     Net decrease  in cash and cash equivalents ..................................   (807,512)        (1,457,548)

     Cash and cash equivalents, beginning of period ..............................  6,633,468          4,008,051
                                                                                  -----------        -----------

     Cash and cash equivalents, end of period ....................................$ 5,825,956        $ 2,550,503
                                                                                  ===========        ===========

</TABLE>




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

                                        5
<PAGE>

                        PHOTOMEDEX, INC. AND SUBSIDIARIES

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY:

BACKGROUND
PhotoMedex,  Inc. and  subsidiaries  (the "Company") is a medical device company
focused on facilitating  the  cost-effective  use of  technologies  for doctors,
hospitals and surgery centers.  The Company  develops,  manufactures and markets
excimer-laser-based   instrumentation  designed  to  phototherapeutically  treat
psoriasis,  vitiligo,  atopic  dermatitis and  leukoderma.  In January 2000, the
Company  received the first Food and Drug  Administration  ("FDA")  clearance to
market an excimer  laser  system,  the  XTRAC(R)  system,  for the  treatment of
psoriasis.  In March 2001, the Company received FDA clearance to treat vitiligo;
in August 2001, the Company  received FDA clearance to treat atopic  dermatitis;
and in May 2002, the FDA granted 510(k) clearance to market the XTRAC system for
the  treatment  of  leukoderma.  The  Company  launched  the XTRAC  phototherapy
treatment system commercially in the United States in August 2000.

Through the acquisition of Surgical Laser Technologies, Inc. ("SLT") on December
27, 2002, the Company also develops, manufactures and markets proprietary lasers
and  delivery  systems for both  contact and  non-contact  surgery and  provides
surgical services utilizing these and other manufacturers' products.

LIQUIDITY AND GOING CONCERN
The Company has incurred significant losses and has had negative cash flows from
operations since emerging from bankruptcy in May 1995. As of March 31, 2004, the
Company had an accumulated deficit of $72,625,448.  The Company has historically
financed its  activities  from the private  placement of equity  securities.  To
date, the Company has dedicated most of its financial  resources to research and
development and general and administrative expenses. During the first quarter of
2003,  the Company  re-launched  the marketing of its XTRAC system in the United
States following the issuance of current  procedural  terminology  ("CPT") codes
and  associated  reimbursement  rates by the  Center of  Medicare  and  Medicaid
Services ("CMS").  The Company has focused the re-launch on securing approval by
various  private health plans to reimburse for treatments of psoriasis using the
XTRAC.

The Company expects to incur  operating  losses for 2004 as it plans to continue
to focus on securing  reimbursement  from more  private  insurers  and to devote
sales and  marketing  efforts in the areas where such  reimbursement  has become
available.  Once favorable momentum has been achieved,  the Company contemplates
spending substantial amounts on the marketing of its psoriasis, vitiligo, atopic
dermatitis and leukoderma  treatment products and expansion of its manufacturing
operations.  Notwithstanding  the  approval  by CMS for  Medicare  and  Medicaid
reimbursement and recent approvals by certain private insurers,  the Company may
continue  to face  resistance  from  private  healthcare  insurers  to adopt the
excimer-laser-based therapy as an approved procedure.  Management cannot provide
assurance  that the  Company  will  market  the  product  successfully,  operate
profitably  in the future,  or that it will not require  significant  additional
financing in order to accomplish its business plan.

The Company's  future  revenues and success depend upon its  excimer-laser-based
systems  for the  treatment  of a  variety  of  skin  disorders.  The  Company's
excimer-laser-based  system for the  treatment of  psoriasis,  vitiligo,  atopic
dermatitis  and leukoderma is currently  generating  revenues in both the United
States and abroad.  The Company's  ability to introduce  successful new products
based on its business focus and the expected  benefits to be obtained from these
products may be adversely  affected by a number of factors,  such as  unforeseen
costs  and  expenses,  technological  change,  economic  downturns,  competitive
factors  or  other  events  beyond  the  Company's  control.  Consequently,  the
Company's  historical  operating  results cannot be relied upon as indicators of
future  performance,  and  management  cannot  predict  whether the Company will
obtain or sustain  positive  operating  cash flow or generate  net income in the
future.
                                        6
<PAGE>
Cash and cash  equivalents  were  $5,825,956  as of March 31,  2004.  Management
believes  that the existing cash balance  together  with its existing  financial
resources, including access to lease financing for capital expenditures, and any
revenues from sales,  distribution,  licensing and manufacturing  relationships,
will be  sufficient to meet the  Company's  operating  and capital  requirements
through the first quarter of 2005. The 2004 operating plan reflects  anticipated
revenue growth from an increase in  per-treatment  fees for the use of the XTRAC
system  based on growing  private  insurance  coverage in the United  States and
continuing cost savings from the integration of the combined companies. However,
depending upon the Company's  rate of growth and other  operating  factors,  the
Company  may require  additional  equity or debt  financing  to meet its working
capital  requirements or capital  expenditure  needs.  There can be no assurance
that  additional  financing,  if needed,  will be available when required or, if
available, could be obtained on terms satisfactory to the Company.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

QUARTERLY FINANCIAL INFORMATION AND RESULTS OF OPERATIONS
The  financial  statements  as of March 31, 2004 and for the three  months ended
March 31,  2004 and 2003,  are  unaudited  and,  in the  opinion of  management,
include  all  adjustments  (consisting  only of  normal  recurring  adjustments)
necessary to present fairly the financial position as of March 31, 2004, and the
results of  operations  and cash flows for the three months ended March 31, 2004
and  2003.  The  results  for the three  months  ended  March  31,  2004 are not
necessarily  indicative of the results to be expected for the entire year. While
management of the Company  believes that the disclosures  presented are adequate
to make the information not misleading,  these consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes  included in the Company's  Annual Report on Form 10-K for the fiscal year
ended December 31, 2003.

PRINCIPLES OF CONSOLIDATION
The consolidated  financial  statements  include the accounts of the Company and
its  wholly-owned  subsidiaries.   All  significant  intercompany  balances  and
transactions have been eliminated.

USE OF ESTIMATES
The  preparation of the  consolidated  financial  statements in conformity  with
accounting   principles   generally  accepted  in  the  United  States  requires
management to make estimates and assumptions that affect amounts reported in the
financial  statements and accompanying  notes.  Actual results could differ from
those estimates and be based on events different from those assumptions.

CASH AND CASH EQUIVALENTS
The Company  invests its excess cash in highly liquid,  short-term  investments.
The Company considers short-term investments that are purchased with an original
maturity  of  three  months  or less  to be  cash  equivalents.  Cash  and  cash
equivalents  consisted of cash and money  market  accounts at March 31, 2004 and
December 31, 2003.

INVENTORIES
Inventories  are  stated at the  lower of cost  (first-in,  first-out  basis) or
market.  Cost  is  determined  at the  latest  cost  for  raw  materials  and at
production  cost  (materials,   labor  and  indirect   manufacturing  cost)  for
work-in-process and finished goods.  Throughout the laser manufacturing process,
the related production costs are recorded within inventory.

The  Company's  skin  disorder  treatment  equipment  will either (i) be sold to
distributors  or physicians  directly or (ii) be placed in a physician's  office
and  remain  the  property  of the  Company.  For  lasers  that are  placed in a
physician's  office,  the cost is  transferred  from  inventory  to  "lasers  in
service" within property and equipment.  The Company earns revenue each time the
laser  is  used  for a  patient  treatment.  Lasers  that  are not  placed  in a
physician's office are maintained in inventory until the unit is sold.

PROPERTY, EQUIPMENT AND DEPRECIATION
Property and  equipment  are recorded at cost.  Depreciation  is calculated on a
straight-line  basis over the  estimated  useful lives of the assets,  primarily
three to seven  years for lasers in service,  computer  hardware  and  software,
furniture and fixtures,  automobiles,  and  machinery and  equipment.  Leasehold
improvements  are amortized  over the lesser of the useful lives or lease terms.
Expenditures  for major  renewals and  betterments to property and equipment are
capitalized,  while  expenditures  for  maintenance  and  repairs are charged to
operations as incurred. Upon retirement or disposition,  the applicable property

                                        7
<PAGE>
amounts are  relieved  from the accounts and any gain or loss is recorded in the
consolidated statements of operations.

Laser  units and laser  accessories  located  at  medical  facilities  for sales
evaluation  and  demonstration  purposes  or  those  units/accessories  used for
development  and medical  training are included in property and equipment  under
the caption  "machinery and  equipment".  These units and  accessories are being
depreciated  over a period of up to five  years.  Laser  units  utilized  in the
provision of surgical  services are included in property and equipment under the
caption "lasers in service."

Management  evaluates  the  realizability  of property  and  equipment  based on
estimates of  undiscounted  future cash flows over the remaining  useful life of
the asset.  If the amount of such  estimated  undiscounted  future cash flows is
less than the net book value of the asset,  the asset is written down to the net
realizable  value.  As of March 31, 2004, no such  write-down  was required (see
Impairment of Long-Lived Assets below).

PATENT COST AND LICENSED TECHNOLOGIES
Costs  incurred to obtain or defend patents are  capitalized  and amortized over
the  shorter  of the  estimated  useful  lives or eight to 12  years.  Developed
technology  relates to the  purchase of the  minority  interest of  Acculase,  a
former  subsidiary  of the Company,  and is being  amortized on a  straight-line
basis over seven years.

Management  evaluates the  realizability of intangible assets based on estimates
of undiscounted  future cash flows over the remaining  useful life of the asset.
If the amount of such estimated  undiscounted future cash flows is less than the
net book value of the asset,  the asset is  written  down to the net  realizable
value.  As of March 31, 2004, no such write-down was required (see Impairment of
Long-Lived Assets below).

ACCRUED WARRANTY COSTS
The Company  offers a warranty on product sales  generally for a one to two-year
period.  The Company  provides for the estimated  future  warranty claims on the
date the  product is sold.  The  activity  in the  warranty  accrual  during the
quarter  ended March 31, 2004 is summarized as
follows:


                                                  March 31, 2004
                                                ------------------
   Accrual at beginning of period                       $316,714
   Additions charged to warranty expense                 117,546
   Claims paid and charged against the accrual          (98,983)
                                                ------------------
   Accrual at end of period                             $335,277
                                                ==================

REVENUE RECOGNITION
The  Company  has  two  distribution  channels  for its  phototherapy  treatment
equipment.  The Company will either (i) sell the laser through a distributor  or
directly to a physician or (ii) place the laser in a  physician's  office (at no
charge to the  physician)  and charge  the  physician  a fee for an agreed  upon
number  of  treatments.  When  the  Company  sells a laser to a  distributor  or
directly to a physician,  revenue is recognized  when the product is shipped and
the Company has no significant remaining obligations,  persuasive evidence of an
arrangement  exists,  the  price to the  buyer is  fixed  or  determinable,  and
collection  is  probable.  At  times,  units  are  shipped  but  revenue  is not
recognized until all of the criteria are met.

Under the terms of the distributor agreements,  the distributors do not have the
right to return any unit, which they have purchased.  However,  the Company does
allow products to be returned by its  distributors in redress of product defects
or other claims.

When the Company places a laser in a physician's  office, it recognizes  service
revenue based on an estimate of patient treatments. Treatment codes or treatment
cards sold to  physicians  but not yet used are  deferred  and  recognized  as a
liability until the treatment occurs.

In the first  quarter of 2003,  the  Company  implemented  a limited  program to
support certain  physicians in addressing  treatments with the XTRAC system that
may  be  denied  reimbursement  by  private  insurance  carriers.   The  Company
recognizes  service  revenue during the program from the sale of treatment codes
to  physicians  participating  in this  program  only if and to the  extent  the
physician has been reimbursed for the treatments.  In the first quarter of 2004,

                                        8
<PAGE>

the Company  deferred  revenues of $143,271  under this program and at March 31,
2004 had total deferred revenues of $817,218 under the program.

Through the surgical  businesses,  the Company generates revenues primarily from
three channels.  The first is through sales of recurring laser delivery  systems
and accessories;  the second is through the per-procedure surgical services; and
the third is through the sale of laser systems and related  maintenance  service
agreements.  The Company recognizes revenues from product sales, including sales
to  distributors,  when products are shipped and the Company has no  significant
remaining  obligations,  persuasive evidence of an arrangement exists, the price
to the buyer is fixed or  determinable,  and  collection is probable.  At times,
units are shipped but revenue is not  recognized  until all of the  criteria are
met.

For per-procedure  surgical  services,  the Company  recognizes revenue upon the
completion of the  procedure.  Revenue from  maintenance  service  agreements is
deferred  and  recognized  on  a  straight-line  basis  over  the  term  of  the
agreements.  Revenue from  billable  services,  including  repair  activity,  is
recognized when the service is provided.

PRODUCT DEVELOPMENT COSTS
Costs of research,  new product  development and product redesign are charged to
expense as incurred.

INCOME TAXES
The Company  accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS
No. 109,  the  liability  method is used for income  taxes.  Under this  method,
deferred tax assets and liabilities are determined based on differences  between
the financial reporting and tax basis of assets and liabilities and are measured
using  enacted  tax rates and laws that are  expected  to be in effect  when the
differences reverse.

NET LOSS PER SHARE
The  Company  computes  net loss per  share in  accordance  with  SFAS No.  128,
"Earnings per Share." In accordance  with SFAS No. 128, basic net loss per share
is  calculated  by dividing  net loss  available to common  stockholders  by the
weighted average number of common shares outstanding for the period. Diluted net
loss per share  reflects the potential  dilution from the conversion or exercise
of securities into common stock, such as stock options and warrants.

In these consolidated  financial  statements,  diluted net loss per share is the
same as  basic  net loss per  share.  No  additional  shares  for the  potential
dilution from the  conversion  or exercise of  securities  into common stock are
included in the denominator, since the result would be anti-dilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The  estimated  fair  values  for  financial  instruments  under  SFAS No.  107,
"Disclosures  about Fair Value of  Financial  Instruments,"  are  determined  at
discrete  points in time based on relevant market  information.  These estimates
involve uncertainties and cannot be determined with precision. The fair value of
cash is based on its demand  value,  which is equal to its carrying  value.  The
fair values of notes payable are based on borrowing  rates that are available to
the Company for loans with similar terms, collateral and maturity. The estimated
fair values of notes payable approximate the carrying values. Additionally,  the
carrying value of all other monetary assets and liabilities is equal to its fair
value due to the short-term nature of these instruments.

IMPAIRMENT OF LONG-LIVED ASSETS
In accordance  with SFAS No. 144,  "Accounting for the Impairment or Disposal of
Long-Lived  Assets,"  long-lived  assets,  such as property and  equipment,  and
purchased  intangibles  subject to  amortization,  are reviewed  for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured  by a  comparison  of the  carrying  amount  of an asset  to  estimated
undiscounted  future cash flows  expected to be generated  by the asset.  If the
carrying  amount  of an asset  exceeds  its  estimated  future  cash  flows,  an
impairment  charge is recognized  by the amount by which the carrying  amount of
the asset exceeds the fair value of the asset. Assets to be disposed of would be
separately  presented  in the  balance  sheet and  reported  at the lower of the
carrying  amount  or fair  value  less  costs to sell,  and  would no  longer be
depreciated.  The assets and liabilities of a disposed group  classified as held
for sale would be presented  separately in the  appropriate  asset and liability
sections of the balance sheet.

                                        9
<PAGE>

STOCK OPTIONS
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting  Principles Board (APB) Opinion No. 25,  "Accounting for Stock Issued
to Employees," and related interpretations,  to account for its fixed-plan stock
options.  Under this  method,  compensation  expense is  recorded on the date of
grant only if the current  market  price of the  underlying  stock  exceeded the
exercise  price.  SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation,"
established  accounting and  disclosure  requirements  using a  fair-value-based
method of accounting for stock-based employee  compensation plans. As allowed by
SFAS  No.  123,  as  amended  in  SFAS  No.  148,  "Accounting  for  Stock-Based
Compensation,"   the   Company   has   elected   to   continue   to  apply   the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123 and SFAS No. 148.

Had  stock  compensation  cost  for the  Company's  common  stock  options  been
determined  based  upon the fair value of the  options at the date of grant,  as
prescribed  under SFAS No. 123, as amended by SFAS No. 148,  the  Company's  net
loss and net loss per share would have been increased to the following pro-forma
amounts:
<TABLE>
<CAPTION>
  <S>                                                   <C>                 <C>

                                                               Three Months Ended March 31,
                                                         -----------------------------------------
                                                               2004                  2003
                                                         -----------------    --------------------
  Net loss:
    As reported                                              ($1,363,082)            ($1,674,238)
    Less: stock-based employee compensation expense
      included in reported net loss                                 1,620                   1,602
    Impact of total  stock-based  compensation  expense
      determined  under fair value based method for all
      grants and awards                                         (444,720)               (512,313)
                                                         -----------------    --------------------
    Pro-forma                                                ($1,806,182)            ($2,184,949)
                                                         =================    ====================
  Net loss per share:
    As reported                                                   ($0.04)                 ($0.05)
                                                         =================    ====================
    Pro-forma                                                     ($0.05)                 ($0.07)
                                                         =================    ====================
</TABLE>

The above pro-forma  amounts may not be indicative of future  pro-forma  amounts
because future options are expected to be granted.

The fair value of the  options  granted  is  estimated  using the  Black-Scholes
option-pricing model with the following weighted average assumptions  applicable
to options granted in the following three-month periods:
<TABLE>
<CAPTION>
  <S>                                                   <C>                  <C>

                                                             Three Months Ended March 31,
                                                         --------------------------------------
                                                               2004                 2003
                                                         -----------------    -----------------
  Risk-free interest rate                                          3.07%                3.05%
  Volatility                                                       99.9%                 100%
  Expected dividend yield                                             0%                   0%
  Expected option life                                           5 years              5 years
</TABLE>

SUPPLEMENTAL CASH FLOW INFORMATION

During the three months ended March 31, 2004, the Company  financed an insurance
policy through a note payable for $126,881.

During the three months ended March 31, 2003, the Company  financed  vehicle and
equipment  purchases  of $94,501  under  capital  leases,  financed an insurance
policy  through a note payable for $138,000  and  financed  certain  acquisition
costs,  which were included in accounts payable at December 31, 2002,  through a
note payable for $171,000.

                                        10
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial  Accounting Standards Board ("FASB") issued FASB
Interpretation  No. 46  (revised  December  2003),  "Consolidation  of  Variable
Interest  Entities,"  ("VIEs") which addresses how a business  enterprise should
evaluate  whether it has a controlling  financial  interest in an entity through
means other than voting rights and  accordingly  should  consolidate the entity.
FIN 46R replaces FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities,"  which was issued in January  2003.  The Company  will be required to
apply FIN 46R to variable interests in VIEs created after December 31, 2003. For
variable  interests in VIEs created before  January 1, 2004, the  Interpretation
will be  applied  beginning  on  January  1,  2005.  For any VIEs  that  must be
consolidated under FIN 46R that were created before January 1, 2004, the assets,
liabilities and noncontrolling  interests of the VIE initially would be measured
at their carrying  amounts with any  difference  between the net amount added to
the balance sheet and any previously recognized interest being recognized as the
cumulative  effect of an accounting  change. If determining the carrying amounts
is not practicable,  fair value at the date FIN 46R first applies may be used to
measure the assets,  liabilities and noncontrolling interest of the VIE. At this
time,  the  adoption  of FIN  46R is not  expected  to  have  an  effect  on the
consolidated financial statements.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial  instruments  entered into or modified  after
May 31, 2003,  and otherwise is effective July 1, 2003. The adoption of SFAS No.
150 did not have a  material  impact  on the  Company's  consolidated  financial
statements,  as the  Company  does not have the types of  financial  instruments
which would require consideration under this Statement.

Note 2
INVENTORIES:

Set forth below is a detailed listing of inventories.
<TABLE>
<CAPTION>
     <S>                                         <C>                      <C>

                                                     March 31, 2004           December 31, 2003
                                                  ----------------------    ----------------------
      Raw materials                                        $2,826,940                $2,506,827
      Work-in-process                                          84,680                    79,520
      Finished goods                                        1,475,921                 1,936,115
                                                  ----------------------    ----------------------
      Total inventories                                    $4,387,541                $4,522,462
                                                  ======================    ======================

</TABLE>


                                        11
<PAGE>

Note 3
PROPERTY AND EQUIPMENT:

Set forth below is a detailed listing of property and equipment.
<TABLE>
<CAPTION>
<S>                                                                <C>                        <C>

                                                                       March 31, 2004           December 31, 2003
                                                                   -----------------------     ---------------------
Lasers in service                                                          $  7,765,629             $  7,254,340
Computer hardware and software                                                  256,340                  256,340
Furniture and fixtures                                                          202,748                  200,247
Machinery and equipment                                                         167,479                   72,841
Autos and trucks                                                                189,820                  196,870
Leasehold improvements                                                          109,652                  109,652
                                                                   -----------------------     ---------------------
                                                                              8,691,668                8,090,290
Accumulated depreciation and amortization
                                                                            (4,527,770)              (4,085,085)
                                                                   -----------------------     ---------------------
Property and equipment, net                                                $  4,163,898             $  4,005,205
                                                                   =======================     =====================
</TABLE>


Depreciation  expense was $449,737 and $435,324 for the three months ended March
31, 2004 and 2003,  respectively.  At March 31, 2004 and December 31, 2003,  net
property and equipment included $714,613 and $763,429,  respectively,  of assets
recorded under  capitalized lease  arrangements,  of which $606,511 and $675,508
was  included  in  long-term  debt at March  31,  2004 and  December  31,  2003,
respectively (see Note 7).

Note 4
PATENTS AND LICENSED TECHNOLOGIES:

Set forth below is a detailed listing of patents and licensed technology.
<TABLE>
<CAPTION>
<S>                                                               <C>                        <C>

                                                                       March 31, 2004           December 31, 2003
                                                                   -----------------------     ---------------------
Patents,   net  of  accumulated   amortization  of  $124,870  and
  $112,865                                                                     $277,274                    $289,279
Licensed  technologies,   net  of  accumulated   amortization  of
  $399,627 and $367,624                                                         437,373                     469,376
                                                                   -----------------------     ---------------------
Total patents and licensed technologies, net                                   $714,647                    $758,655
                                                                   =======================     =====================
</TABLE>

Amortization  expense was $44,008 and $44,010 for the three  months  ended March
31, 2004 and 2003, respectively.

Note 5
OTHER ACCRUED LIABILITIES:

Set forth below is a detailed listing of other accrued liabilities.
<TABLE>
<CAPTION>
<S>                                                               <C>                        <C>

                                                                       March 31, 2004           December 31, 2003
                                                                   -----------------------    ---------------------
Accrued professional and consulting fees                                       $178,699                $203,699
Accrued warranty                                                                335,277                 316,714
Accrued liability from matured notes                                            246,720                 247,108
Cash deposit on sales                                                            12,000                 125,500
Other accrued expenses                                                           92,079                  82,515
                                                                   -----------------------    ---------------------
Total other accrued liabilities                                                $864,775                $975,536
                                                                   =======================    =====================
</TABLE>

During 2002,  SLT resumed  direct  control of $223,000 of funds  previously  set
aside for the payment of SLT's  subordinated  notes, which matured and ceased to
bear  interest on July 30,  1999,  and $31,000 of funds set aside to pay related
accrued  interest.  As of March 31,  2004 and  December  31,  2003,  the matured
principal and related interest was $246,720 and $247,108, respectively.

                                        12
<PAGE>

Note 6
NOTES PAYABLE:

Set forth below is a detailed listing of notes payable.
<TABLE>
<CAPTION>
  <S>                                                               <C>                      <C>
                                                                       March 31, 2004           December 31, 2003
                                                                    ---------------------     ----------------------
  Note  payable - secured  creditor,  interest  at  16.47%,  payable
  in monthly principal and interest installments of $2,618 through
  December 2006.                                                             $ 67,570                   $ 72,382

  Note  payable - unsecured creditor, interest at 7.47%, payable in
  monthly principal and interest installments of $7,827 through
  June 2004.                                                                   20,453                     40,907

  Note payable - unsecured creditor, repaid in January 2004.                        -                     37,409

  Note payable - unsecured creditor, repaid in January 2004.                        -                      1,857

  Note  payable - unsecured creditor, interest at 6.25%, payable in
  monthly principal and interest installments of $18,505 through
  September 2004.                                                             109,037                          -
                                                                    ----------------------     ----------------------
                                                                              197,060                    152,555
  Less: current maturities                                                   (151,385)                  (101,066)
                                                                    ----------------------     ----------------------
  Notes payable, net of current maturities                                   $ 45,675                   $ 51,489
                                                                    ======================     ======================
</TABLE>

Note 7
LONG-TERM DEBT:

Set forth below is a detailed listing of the Company's long-term debt.
<TABLE>
<CAPTION>
<S>                                                                 <C>                        <C>

                                                                       March 31, 2004            December 31, 2003
                                                                    ---------------------      ---------------------
Borrowings on credit facility                                                $1,000,000               $1,000,000
Capital lease obligations (see Note 3)                                          606,511                  675,508
Less: current portion                                                        (1,258,945)              (1,269,759)
                                                                    ---------------------      ---------------------
Total long-term debt                                                          $ 347,566                $ 405,749
                                                                    =====================      =====================
</TABLE>

Concurrent with the SLT  acquisition,  the Company  assumed a $3,000,000  credit
facility  from a bank,  subsequently  amended on February 27, 2003 and March 26,
2003 to $1,400,000 and on May 13, 2003 to $1,000,000.  The credit facility had a
commitment term expiring May 31, 2004, permitted deferment of principal payments
until the end of the commitment  term, and was secured by SLT's business assets,
including collateralization (until May 13, 2003) of $2,000,000 of SLT's cash and
cash  equivalents  and short-term  investments.  The bank allowed the Company to
apply the cash  collateral  to a paydown  of the  facility  in 2003.  The credit
facility has an interest rate equal to the 30 day LIBOR plus 2.25%.  The rate at
March 31, 2004 was 3.34%.

The credit  facility  was subject to certain  restrictive  covenants  at the SLT
level and at the group level and  borrowing  base  limitations.  At December 31,
2003,  the group did not meet the  covenants set by the bank. On March 10, 2004,
the bank waived the  non-compliance  with the  covenants as of December 31, 2003
and will allow the line to continue until it expires on May 31, 2004.

The assets of SLT,  including the subsidiaries of SLT, may not be transferred to
PhotoMedex  without  observance  of certain  restrictions  imposed on SLT by the
terms of the credit  facility with its bank.  Under a restriction  on dividends,
the assets of SLT may not be dividended, distributed or otherwise transferred by
way of purchase,  redemption  or  retirement  of SLT's  capital  stock if such a
dividend,  distribution  or  transfer  would  cause SLT to be in  default of the
financial  covenants  it has  made  to the  bank.  Given  this  restriction,  no
dividend, distribution or other transfer was made in the year ended December 31,
2003 nor in the  quarter  ended  March  31,  2004.  On the other  hand,  under a

                                        13
<PAGE>

restriction under the credit facility on other,  non-dividend transfers,  SLT is
permitted to engage in other  transactions with affiliated  entities,  including
PhotoMedex,  provided  such  transactions  are in the  ordinary  course  of, and
pursuant to the  reasonable  requirements  of, SLT's business and are based upon
fair  and  reasonable  terms  no less  favorable  to SLT than  would  obtain  in
comparable  arm's length  transactions  with  non-affiliated  entities.  The net
assets  of SLT  subject  to the  restriction  on  dividends  and  other  similar
transfers amounted to approximately  $5,149,000 and $4,412,000 at March 31, 2004
and December 31, 2003, respectively.

The  obligations  under  capital  leases  are at fixed  interest  rates  and are
collateralized by the related property and equipment (see Note 3).

Note 8
WARRANT EXERCISES

In the three months ended March 31, 2004,  460,182  warrants on the common stock
of the Company were exercised,  resulting in an increase to the Company's shares
outstanding  as of the end of the  period  by the  same  amount.  Most of  these
warrants were exercisable at $1.77 per share and were set to expire on March 31,
2004.  The Company  received  $746,735 in cash  proceeds  from the exercises and
$67,496 in subscriptions receivable that were paid promptly after the end of the
period.

Note 9
BUSINESS SEGMENT AND GEOGRAPHIC DATA:

The Company is engaged in four business segments:  Domestic XTRAC, International
XTRAC,  Surgical Services,  and Surgical Products and Other. The Company markets
its offering through traditional products sales as well as through the provision
of fee-based medical procedures services.  The Company's customers are primarily
doctors,  hospitals  and surgery  centers.  For the three months ended March 31,
2004  and  2003,  the  Company  did not  have  material  net  revenues  from any
individual customer.
<TABLE>
<CAPTION>
<S>                              <C>               <C>               <C>               <C>              <C>

                                                           Three Months Ended March 31, 2004
                                 --------------------------------------------------------------------------------------
                                                                                         SURGICAL
                                    DOMESTIC         INTERN'L          SURGICAL          PRODUCTS
                                     XTRAC             XTRAC           SERVICES          AND OTHER           TOTAL
                                 ---------------   --------------    --------------    -------------    ---------------
Revenues                              $550,601          $580,744        $1,639,604       $1,254,281         $4,025,230
Costs of revenues                      486,286           370,380         1,138,910          498,490          2,494,066
                                 ---------------   --------------    --------------    -------------    ---------------
   Gross profit                         64,315           210,364           500,694          755,791          1,531,164
                                 ---------------   --------------    --------------    -------------    ---------------

Allocated Operating expenses:
   Selling, general and
    administrative                     500,740           128,101           325,991          124,454          1,079,286
   Engineering and product
    development                        162,794           101,911                 -          151,245            415,950

Unallocated Operating
    expenses                                 -                 -                 -                -          1,391,138
                                 ---------------   --------------    --------------    -------------    ---------------
                                       663,534           230,012           325,991          275,699          2,886,374
                                 ---------------   --------------    --------------    -------------    ---------------
Income (loss) from operations        (599,219)          (19,648)           174,703          480,092        (1,355,210)

Interest expense, net                        -                 -                 -                -              7,872
                                 ---------------   --------------    --------------    -------------    ---------------

Net income (loss)                   $(599,219)         $(19,648)          $174,703         $480,092       $(1,363,082)
                                 ===============   ==============    ==============    =============    ===============

</TABLE>


                                        14
<PAGE>

<TABLE>
<CAPTION>
<S>                              <C>               <C>               <C>               <C>              <C>

                                                           Three Months Ended March 31, 2003
                                 --------------------------------------------------------------------------------------
                                                                                          SURGICAL
                                    DOMESTIC         INTERN'L          SURGICAL           PRODUCTS
                                     XTRAC             XTRAC           SERVICES           AND OTHER          TOTAL
                                 ---------------   --------------    --------------    -------------    ---------------
Revenues                              $153,164          $163,300        $1,405,801       $1,751,212         $3,473,477
Costs of revenues                      581,959           125,132           868,417          834,750          2,410,258
                                 ---------------   --------------    --------------    -------------    ---------------
   Gross profit (loss)               (428,795)            38,168           537,384          916,462          1,063,219
                                 ---------------   --------------    --------------    -------------    ---------------

Allocated Operating expenses:
   Selling, general and
    administrative                     379,088            68,586           299,167          234,012            980,853
  Engineering and product
    development                        207,860            80,835                 -          123,237            411,932

Unallocated Operating
    expenses                                 -                 -                 -                -          1,313,739
                                 ---------------   --------------    --------------    -------------    ---------------
                                       586,948           149,421           299,167          357,249          2,706,524
                                 ---------------   --------------    --------------    -------------    ---------------
Loss from operations               (1,015,743)         (111,253)           238,217          559,213        (1,643,305)

Interest expense, net                        -                 -                 -                -             31,023
Other income, net                            -                 -                 -                -                  -
                                 ---------------   --------------    --------------    -------------    ---------------

Net loss                          $(1,015,743)        $(111,253)          $238,217         $559,213       $(1,674,328)
                                 ===============   ==============    ==============    =============    ===============


                                                                   March 31, 2004         December 31, 2003
                                                                ---------------------    ---------------------
       Assets:
          Total assets for reportable segments                           $15,787,697             $15,602,758
          Other allocated assets                                           6,471,373               7,149,973
                                                                ---------------------    ---------------------
             Consolidated total                                          $22,259,070             $22,752,731
                                                                =====================    =====================
</TABLE>

For the three months  ended March 31, 2004 and 2003,  there were no material net
revenues attributed to an individual foreign country. Net revenues by geographic
area were as follows:

<TABLE>
<CAPTION>

       <S>                                                      <C>                      <C>

                                                                    For the Three Months Ended March 31,
                                                                        2004                    2003
                                                                ---------------------    --------------------
       Domestic                                                      $ 3,269,746               $ 2,935,080
       Foreign                                                           755,484                   538,397
                                                                ---------------------    --------------------
                                                                     $ 4,025,230               $ 3,473,477
                                                                =====================    ====================

</TABLE>

Note 10
SIGNIFICANT ALLIANCES/AGREEMENTS:

TNC AGREEMENT
The Company has entered into an agreement with True North Capital Ltd. (the "TNC
Agreement"),  dated as of October 28, 2003, pursuant to which True North Capital
has  agreed to  assist  the  Company  in  identifying  and  evaluating  proposed
strategic growth transactions  relating to the healthcare  industry.  True North
Capital is a fund management  group,  which provides  management and acquisition
advisory  services  with a  specialty  in the  healthcare  industry.  One of the
Company's directors is a senior member of the executive management staff of True
North  Capital and holds  approximately  20.3%  equity  interests  in True North
Capital and its affiliate, True North Partners, LLC.

                                        15
<PAGE>

In the event of the  completion of an acquisition  or merger  transaction,  the
Company  has  agreed to pay True  North  Capital a  "success  fee"  equal to the
greater of: (i) $250,000,  or (ii) the sum of (a) 5% of the aggregate  purchase,
if the aggregate  consideration  is equal to or greater than $5,000,000 and less
than $10,000,000;  plus, (b) 3% of the aggregate  consideration from $10,000,000
to $50,000,000;  plus, (c) 2.5% of the aggregate  consideration from $50,000,000
to $100,000,000;  plus, (d) 2% of the aggregate  consideration from $100,000,000
to  $150,000,000;  plus,  (e) 1.5% of the aggregate  consideration  in excess of
$150,000,000. The Company has paid True North Capital a one-time $20,000 expense
reimbursement  for  the  deployment  of  its  personnel  and  resources  in  the
fulfillment  of the goals set forth in the TNC  Agreement.  The Company has also
agreed to reimburse True North Capital the cost of out-of-pocket  expenses which
it incurs in  performance  of the  agreement  and which the Company has approved
beforehand.  The TNC  Agreement may be canceled upon 30 days' notice from either
party.


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

         Certain  statements  in this  Quarterly  Report  on Form  10-Q,  or the
Report,  are  "forward-looking  statements."  These  forward-looking  statements
include,  but are not  limited  to,  statements  about  the  plans,  objectives,
expectations  and  intentions  of  PhotoMedex,   Inc.,  a  Delaware  corporation
(referred  to in this  Report as "we," "us,"  "our" or  "registrant")  and other
statements   contained   in  this   Report  that  are  not   historical   facts.
Forward-looking  statements  in this  Report  or  hereafter  included  in  other
publicly available documents filed with the Securities and Exchange  Commission,
or the  Commission,  reports to our  stockholders  and other publicly  available
statements   issued  or  released  by  us  involve  known  and  unknown   risks,
uncertainties   and  other  factors  which  could  cause  our  actual   results,
performance  (financial or operating) or  achievements to differ from the future
results,  performance  (financial  or operating)  or  achievements  expressed or
implied by such forward-looking  statements.  Such future results are based upon
management's  best estimates  based upon current  conditions and the most recent
results  of  operations.   When  used  in  this  Report,   the  words  "expect,"
"anticipate,"  "intend,"  "plan,"  "believe,"  "seek,"  "estimate"  and  similar
expressions  are  generally  intended  to identify  forward-looking  statements,
because these forward-looking statements involve risks and uncertainties.  There
are important  factors that could cause actual results to differ materially from
those expressed or implied by these  forward-looking  statements,  including our
plans, objectives, expectations and intentions and other factors discussed under
the section  entitled "Risk  Factors," in our Annual Report on Form 10-K for the
year ended December 31, 2003.

         The following  discussion  and analysis  should be read in  conjunction
with the Consolidated  Financial Statements and related notes included elsewhere
in this Report.

INTRODUCTION
         Our  primary  focus in 2003 was to secure  from  private  health  plans
favorable  reimbursement  policies for treatment of psoriasis using the XTRAC(R)
excimer laser. In March 2003, we had  re-introduced  the XTRAC and, based on the
establishment of CPT codes by the AMA and  reimbursement  rates from the Centers
for Medicare and Medicaid  Services,  we began efforts to secure such  favorable
policies.   To  persuade  such  plans  to  adopt  favorable  policies,  we  also
commissioned  a  clinical  economic  study  of the use of the  XTRAC  laser as a
second-step  therapy  for  psoriasis.  This study was  sufficiently  complete in
December  2003 that we were able to deploy it through a Data  Compendium  in our
ongoing efforts to secure favorable reimbursement policies.

         Moving into 2004,  we have  expanded our  deployment  of the study and,
from feedback we have received from the medical  insurers to the Data Compendium
that we mailed in December 2003, we anticipate that the study,  coupled with our
other efforts, will succeed in gaining a place on the agenda of private plans as
they consider their coverage and reimbursement policies. We have already secured
such approval in 2004 from two significant plans and are under  consideration by
other  plans.  We cannot at this time assure you that other plans will adopt the
favorable policies that we desire, and if they do not, what further requirements
may be asked of us. In addition to  reimbursement,  our focus in 2004 will be to
continue to improve care for those  suffering  from  psoriasis,  and to obtain a
larger body of satisfied  practitioners using the XTRAC and to increase domestic
XTRAC revenues for the Company.

         We  integrated  the  business of SLT in 2003.  We acquired  two revenue
streams from SLT: one from surgical services,  the other from surgical products;
these  supplemented  our own discrete  product  lines,  XTRAC Domestic and XTRAC

                                        16
<PAGE>
International.  We view our  business as comprised  of four  business  segments:
Domestic XTRAC, International XTRAC, Surgical Services and Surgical Products.

         We experienced  revenue  growth in Surgical  Services in 2003 from 2002
and expect growth in 2004. Our plan in 2003 was to grow in a controlled  fashion
such that capital  expenditures  necessary for that growth would come from these
operations.  We anticipate  that this will continue in 2004. In this manner,  we
intend to conserve our cash resources for the Domestic XTRAC business segment.

         In 2003,  our  revenues  from  Surgical  Products  remained  stable and
contributed  to  maintaining  our  staying  power  in our  two  growth  business
segments.  Our surgical products enjoy a reputation for qualityand  believe that
this  reputation for quality will continue to generate  revenues for us in 2004.
While  surgical  product  revenues  decreased in the first  quarter of 2004 when
compared to 2003,  we expect those  revenues  may grow as we  introduce  two new
surgical lasers in 2004.

         Finally,  our revenues from  International  XTRAC sales provided needed
working capital in 2003. We have enjoyed some distinction in the market from our
clinical studies and the physician researchers involved in such studies; we also
benefited in 2003 from the improved  reliability and functionality of the XTRAC.
Despite  intensifying price competition in 2003 and into 2004, we saw an overall
improvement in the gross profit  percentage to 36%, due largely to  efficiencies
and product  cost  reductions  realized  through  our  operations  in  Carlsbad,
California.

OVERVIEW OF BUSINESS OPERATIONS
         We are engaged in the development,  manufacturing  and marketing of our
proprietary   XTRAC(R),  or  XTRAC,  excimer  laser  and  delivery  systems  and
techniques  directed  toward the treatment of inflammatory  skin  disorders.  In
addition, through the acquisition of SLT on December 27, 2002, we also engage in
the development,  manufacture and sale of surgical products, including free-beam
laser  systems  for  surgery  and in the  provision  of  surgical  services on a
turn-key procedural basis.

         In  connection  with our current  business  plan,  the initial  medical
applications  for our excimer laser technology are intended for the treatment of
psoriasis,  vitiligo,  atopic  dermatitis  and  leukoderma.  In January 2000, we
received   approval   of  our   510(k)   submission   from  the  Food  and  Drug
Administration,  or  FDA,  relating  to the  use of our  XTRAC  system  for  the
treatment of psoriasis.  The 510(k)  establishes  that our XTRAC system has been
determined  to be  substantially  equivalent to currently  marketed  devices for
purposes of treating psoriasis.

         In February 2002, the Current Procedural Terminology Editorial Board of
the AMA  approved the request by the American  Academy of  Dermatology  to issue
reimbursement  codes for the laser  therapies in the  treatment of psoriasis and
other inflammatory  diseases,  which would include laser therapy using the XTRAC
system to treat  such  conditions.  The AMA  published  three  CPT code  numbers
covering the  treatment of psoriasis and other  inflammatory  skin diseases with
the XTRAC system.  These new codes were  effective in the first quarter of 2003.
We believe that the  publication of these codes,  together with a compilation of
clinical and economic  studies (Data  Compendium)  recently mailed to almost all
private  healthcare  insurers  throughout the United States will  facilitate our
ability to obtain broader approvals for reimbursement for treatment of psoriasis
and other  inflammatory  skin diseases  using the XTRAC system.  We have already
secured in 2004  approval from two  significant  insurance  groups,  Regence and
Wellpoint,  and are under consideration by other groups and plans. We anticipate
that the  approvals by Regence and Wellpoint  will  positively  influence  other
private plans to adopt  favorable  reimbursement  policies.  Such  influence and
possible  momentum from it can help in 2004 to overcome  resistance  and inertia
that we  encountered  in 2003.  However,  there can be no  assurance  that these
effects will transpire.

         As part of our commercialization  strategy in the United States, we are
providing the XTRAC system to targeted dermatologists at no initial capital cost
to them.  We  believe  that  this  strategy  will  create  incentives  for these
dermatologists  to adopt the XTRAC system and will increase market  penetration.
This strategy will require us to identify and target appropriate  dermatologists
and to balance the  planned  roll-out of our XTRAC  lasers  during 2004  against
uncertainties  in  acceptance  by  physicians,  patients  and  health  plans and
constraints on the number of XTRAC systems we are able to provide. Our marketing
force has limited  experience  in dealing with such  challenges.  Outside of the
United  States,   our  strategy  includes  selling  XTRAC  systems  directly  to
dermatologists through distributors and, potentially, placing XTRAC systems with
dermatologists  to provide us with a  usage-based  revenue  stream.  To date, no
units have been  placed in  international  markets  that  provide a  usage-based
revenue stream.

                                        17
<PAGE>
         In  similar  fashion,  we have  growing,  but still  limited  marketing
experience in expanding our surgical  services  business.  The  preponderance of
this business is in the southeastern  part of the United States.  New procedures
and new geographies,  customers and different  business habits and networks will
likely pose different  challenges than the ones we have encountered in the past.
There can be no assurance  that our  experience  will be  sufficient to overcome
such challenges.

RESULTS OF OPERATIONS

REVENUES
         We generated revenues of $4,025,230 during the three months ended March
31, 2004, of which $2,893,885 were from the products and services  operations of
SLT.  The balance of revenues  were from  phototherapy  products  and  services,
including $580,744 from XTRAC  international  sales of excimer systems and parts
and $550,601 from domestic XTRAC procedures. We generated revenues of $3,473,477
during the three months ended March 31, 2003, of which  $3,157,013 were from the
products  and  services  operations  of SLT.  The balance of  revenues  was from
phototherapy products and services,  including $163,300 from XTRAC international
sales of excimer systems and parts and $153,164 from domestic XTRAC procedures.

         In the first  quarter  of 2003,  we  implemented  a limited  program to
support certain  physicians in addressing  treatments with the XTRAC system that
may be  denied  reimbursement  by  private  insurance  carriers.  Following  the
requirements of Staff Accounting  Bulletin No. 104, we recognize service revenue
during the program from the sale of XTRAC  procedures,  or equivalent  treatment
codes, to physicians participating in this program only if and to the extent the
physician has been reimbursed for the treatments. In the quarter ended March 31,
2004 and 2003, the Company deferred revenues of $143,271 and $122,756 under this
program.

         Recognized  revenue for the three  months ended March 31, 2004 and 2003
for domestic  XTRAC  procedures was $550,601 and $153,164,  respectively.  Total
XTRAC  procedures  for the same  periods  were  approximately  10,700 and 4,000,
respectively,  including  1,090  and 85  procedures,  respectively,  which  were
performed by customers  without billing from us as the procedures were performed
in  connection  with  customer  evaluations  of the  XTRAC  laser as well as for
clinical  research.  The ramp in  procedures in the three months ended March 31,
2004 was related to the first quarter 2003 effective date of reimbursement rates
and CPT codes for Medicare and Medicaid. Increases in these levels are dependent
upon more widespread adoption of these CPT codes and comparable rates by private
healthcare insurers.

         International XTRAC sales of our excimer laser system and related parts
were $580,744 for the three months ended March 31, 2004 compared to $163,300 for
the three  months ended March 31,  2003.  We sold 10 laser  systems in the three
months  ended March 31, 2004  compared to two laser  systems in the three months
ended March 31, 2003. We sell the excimer laser overseas which is different from
the domestic revenue model. Consequently, the international XTRAC operations are
more widely  influenced by competition  from similar laser technology from other
manufactures  and non-laser lamp  alternatives  for treating  inflammatory  skin
disorders.  Over time, competition has served to reduce the international prices
we charge  distributors for our excimer  products..  While the average price per
laser was less in the first  quarter of 2004 than in the first  quarter of 2003,
the number of lasers sold was greater,  due to a variety of factors.  Conditions
in the Middle East were more settled in the first quarter of 2004, and the XTRAC
laser had been upgraded and made more reliable.  In addition,  four lasers which
had been shipped  before the first  quarter of 2004 but not  recognized as sales
due to the application of the recognition  criteria of Staff Accounting Bulletin
No. 104 were recognized in the first quarter of 2004.

         In the three  months  ended March 31, 2004 and 2003,  surgical  service
revenues were  $1,639,604  and  $1,405,801,  respectively.  Revenues in surgical
services  grew,  but in a  restrained  fashion in that we  limited  the funds we
expended  for capital  equipment.  In the three  months ended March 31, 2004 and
2003,  surgical product  revenues were $1,254,281 and $1,751,212,  respectively.
Revenues from surgical products were reasonably stable in disposables,  although
there was a decline in surgical laser sales which vary from quarter to quarter.

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<PAGE>
COST OF REVENUES

         Product cost of revenues for the three months ended March 31, 2004 were
$832,483,  compared  to $944,882  for the three  months  ended  March 31,  2003.
Included in these costs were $462,103 and $819,750, respectively, related to SLT
product  revenues,  for the three  months  ended  March 31,  2004 and 2003.  The
remaining  product  cost of  revenues  during  these  periods  of  $370,380  and
$125,132,  respectively,  related primarily to the production costs of the XTRAC
laser equipment sold outside of the United States.

         Services cost of revenues was  $1,661,583  and  $1,465,376 in the three
months ended March 31, 2004 and 2003, respectively. Included in these costs were
$1,175,297 and $883,417, respectively,  related to SLT service revenues, for the
three  months  ended March 31, 2004 and 2003.  The  remaining  services  cost of
revenues of $486,286  and $581,959  during the periods  ended March 31, 2004 and
2003, respectively, represented manufacturing, depreciation and field service on
the lasers in service.

         The  increase  in the  services  cost of sales  for SLT  service  costs
relates to an increase in  technician  costs of $92,000,  depreciation  costs of
$42,000 and  operating  costs of $37,000,  which are all due to the increases in
service  revenue.  There  was also a  change  in the mix of  services  provided,
increasing the product costs by $95,000.

GROSS MARGIN ANALYSIS

         Overall,  revenues increased by $550,000 with the cost to produce those
revenues only  increasing  by $85,000.  The largest  contributing  factor to the
increased  gross  margin  was an  increase  in the  XTRAC  revenues  as  well as
manufacturing  efficiencies and cost reductions at the California facility.  The
domestic  XTRAC gross margin  improved  from the first quarter 2003 to the first
quarter  2004 by  approximately  $500,000.  This was  accomplished  by  revenues
increasing  by $400,000  while the cost of revenues  decreased  by $95,000.  The
international  XTRAC gross margin  improved  from the first  quarter 2003 to the
first  quarter 2004 by $170,000  driven mostly by an increase in revenue of over
$400,000.  These  margin  improvements  were  offset  by a margin  reduction  of
$160,000 in the  surgical  products  segment  even though this  segment's  gross
profit  percentage  increased by 8%. This segment includes surgical laser system
sales and  surgical  disposables.  This margin  reduction  was driven by a sales
reduction of approximately  $500,000 mostly in the less profitable laser systems
rather than the more  profitable  disposables.  In the first  quarter 2004 there
were three  surgical  laser systems sold compared to thirteen in the same period
of 2003.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses for the three months ended
March 31, 2004 were  $2,470,424,  compared to  $2,294,592  for the three  months
ended March 31,  2003,  an increase of 8%. This  increase was due to the fees of
$263,600  related to the lawsuits in the first  quarter  2004, as compared to no
such expenses in the first quarter of 2003. Selling,  general and administrative
expenses,  excluding lawsuit-related expenses,  decreased by $87,768 between the
first quarter of 2004 and 2003.

         Regarding  specifically  allocated selling,  general and administrative
expenses by business segment, the domestic XTRAC segment, in first quarter 2004,
included higher commission expense on increased  revenues,  one additional sales
person, and increased marketing expenses to advance our insurance  reimbursement
initiatives,  as  compared  to the same  period in 2003.  Selling,  general  and
administrative  expenses allocated to the international  XTRAC segment increased
in the first  quarter  2004  compared to the first  quarter  2003 due to accrued
warranty expenses which were driven by the increase in revenues in that segment.
In the  surgical  products  segment  the  reduction  in  specifically  allocated
selling, general and administrative expenses from the first quarter 2003 to 2004
is largely  related to a decrease in distributor  commissions due to the reduced
laser system sales between the periods.

ENGINEERING AND PRODUCT DEVELOPMENT

         Engineering and product development expenses for the three months ended
March 31, 2004  increased to $415,950  from  $411,932 for the three months ended
March 31, 2003. The expenses remained consistent from period to period.

         Allocations  of  the  California   facility   engineering  and  product

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<PAGE>
development expenses between domestic and international XTRAC are based upon the
planned manufactured output of XTRAC laser for the year.

INTEREST EXPENSE, NET

         Net interest  expense  during for the three months ended March 31, 2004
decreased to $7,872, as compared to $31,023 for the three months ended March 31,
2003. The decrease in net interest expense in the comparable  periods relates to
two factors;  one factor is that the line of credit balance decreased due to the
amendments  reducing  the total line from $3 million to $1  million.  The second
factor is due to our larger average balance of cash and cash  equivalents in the
current period compared to the corresponding period in the prior year.

NET LOSS

         The aforementioned  factors resulted in a net loss of $1,363,082 during
the three months ended March 31, 2004,  as compared to a net loss of  $1,674,328
during the three months ended March 31, 2003, a decrease of 19%.  This  decrease
was primarily the result of the increase in revenues and resulting gross margin.

LIQUIDITY AND CAPITAL RESOURCES

We have historically  financed our operations through the use of working capital
provided from equity financing.  From September 1997 through May 2003, we issued
certain  securities,  including  shares of our common stock and other securities
convertible or exercisable  into shares of common stock, in order to finance our
business operations.

         On May 28, 2003, we closed on a private  placement for 5,982,352 shares
of common stock at $1.70 per share  resulting in gross proceeds of  $10,170,000.
The closing  price of our common  stock on May 28, 2003 was $2.07 per share.  In
connection with this private  placement,  we paid commissions and other expenses
of $692,454, resulting in net proceeds of $9,477,546. In addition, the investors
received  warrants to purchase  1,495,588  shares of common stock at an exercise
price  of $2.00  per  share.  The  warrants  have a  five-year  term and  became
exercisable  on November 29, 2003.  We have used,  and will continue to use, the
proceeds  of this  financing  to pay  for  working  capital  and  other  general
corporate purposes.

         On December  27,  2002,  we acquired  SLT.  The  surgical  products and
services  provided by SLT  increased  revenues  for 2003 and into 2004.  We also
saved  costs  from  the  consolidation  of  the   administrative  and  marketing
infrastructure  of the combined  company.  Additionally,  with the  consolidated
infrastructure  in  place,  our  revenues,  both in  phototherapy  and  surgical
products and services, grew, without commensurate growth in our fixed costs. The
established  revenues from surgical  products and services  helped to absorb the
costs of the infrastructure of the combined company.

         At March 31, 2004, the ratio of current  assets to current  liabilities
was 2.25 to 1.00  compared to 2.37 to 1.00 at December 31, 2003. As of March 31,
2004,  we had  $7,992,322 of working  capital.  Cash and cash  equivalents  were
$5,825,956  as of March 31, 2004,  as compared to  $6,633,468 as of December 31,
2003.

         We believe  that our  existing  cash  balance  together  with our other
existing  financial  resources,  including access to lease financing for capital
expenditures,   and  any  revenues  from  sales,  distribution,   licensing  and
manufacturing  relationships,  will be  sufficient  to meet  our  operating  and
capital  requirements through the first quarter of 2005. The 2004 operating plan
reflects  anticipated  revenue growth from an increase in per-treatment fees for
use of the XTRAC system based on the recent approval of applicable reimbursement
codes and wider  insurance  coverage in the United States and  continuing  costs
savings from the integration of the combined companies.  However,  the projected
cost of our  business  plan may require us to obtain  additional  equity or debt
financing to meet our working capital requirements or capital expenditure needs.
Similarly,  if our growth outstrips the business plan, we may require additional
equity or debt financing.  There can be no assurance that additional  financing,
if needed,  will be available  when required or, if available,  will be on terms
satisfactory to us. In such an event, we would further rationalize our plans and
operations to seek to balance cash inflows and outflows.

         As discussed in Note 7 to the financial statements, concurrent with the
SLT  acquisition,   we  assumed  a  $3,000,000  credit  facility  from  a  bank,
subsequently  amended on February 27, 2003 and March 26, 2003 to $1,400,000  and
on May 13,  2003 to  $1,000,000.  The  credit  facility  had a  commitment  term
expiring May 31, 2004,  permitted  deferment of principal payments until the end

                                        20
<PAGE>
of the  commitment  term, and was secured by SLT's  business  assets,  including
collateralization  (until  May 13,  2003) of  $2,000,000  of SLT's cash and cash
equivalents  and short-term  investments.  The bank allowed us to apply the cash
collateral  to paydown of the  facility  in 2003.  The  credit  facility  has an
interest  rate equal to the 30-day LIBOR plus 2.25%.  The rate at March 31, 2004
was 3.34%.

         The credit facility was subject to certain restrictive covenants at the
SLT level and at the group level and borrowing base limitations. At December 31,
2003,  the group did not meet the  covenants set by the bank. On March 10, 2004,
the bank  waived the  non-compliance  with the  covenants  at that date and will
allow the line to continue until it expires on May 31, 2004.

         We intend to replace the  $1,000,000  line of credit with a  $2,500,000
lease line of credit for which we have  obtained a letter of intent.  If
we take on this lease  line of credit,  we should be able to finance in part our
placements  of XTRAC  lasers in the United  States and also to fund more  easily
such  capital  expenditures  as we deem  appropriate  in our  surgical  services
business segment.

         Operating  cash flow for the three months ended March 31, 2004 compared
to the three  months  ended  March 31,  2003  improved  mostly due to a $550,000
increase in revenues  with only a $85,000  increase in costs of producing  those
revenues.  This  resulted in net cash used in operating  activities of $989,034,
for the three months ended March 31, 2004,  compared to $1,218,505  for the same
period in 2003.  In the three months ended March 31, 2004,  changes in operating
assets and  liabilities  used $169,000 of cash compared to the $109,000 usage of
cash for the same period in 2003.

         Net cash used in investing activities was $492,535 and $314,537 for the
three  months  ended  March 31,  2004 and 2003,  respectively.  During the three
months  ended  March 31,  2004 and 2003,  we  utilized  $481,398  and  $293,401,
respectively, for production of our lasers in service.

         Net cash provided by financing  activities was $674,057 and $75,494 for
the three  months  ended  March 31,  2004 and 2003,  respectively.  In the three
months ended March 31, 2004 we received  $814,231  from the exercise of warrants
which  were set to expire  on March 31,  2004,  which  was  partially  offset by
$151,373 for the payment of certain  debts.  In the three months ended March 31,
2003,  we  received  $1,637,183  from  the  release  of  restricted  cash,  cash
equivalents  and  short-term  investments,  which was offset by a net payment of
$1,407,451 on the line of credit, and $154,238 for the payment of certain debts.

         Our ability to expand our business operations is currently dependent in
significant part on financing from external  sources.  There can be no assurance
that  changes  in our  manufacturing  and  marketing,  engineering  and  product
development plans or other changes affecting our operating expenses and business
strategy will not require financing from external sources before we will be able
to develop  profitable  operations.  There can be no assurance  that  additional
capital  will be  available  on terms  favorable to us, if at all. To the extent
that  additional  capital is raised  through  the sale of  additional  equity or
convertible  debt  securities,  the issuance of such securities  could result in
additional  dilution to our  stockholders.  Moreover,  our cash requirements may
vary materially from those now planned because of results of marketing,  product
testing,  changes  in  the  focus  and  direction  of  our  marketing  programs,
competitive and technological advances, the level of working capital required to
sustain our planned growth, litigation,  operating results, including the extent
and  duration  of  operating  losses,  and other  factors.  In the event that we
experience the need for additional capital, and are not able to generate capital
from financing sources or from future operations,  management may be required to
modify, suspend or discontinue our business plan.

         We expect to incur  operating  losses in fiscal 2004 because we plan to
spend  substantial  amounts on securing broader  reimbursement  for psoriasis by
private  healthcare  plans  and  in  expanding,   in  controlled  fashion,   our
operations,  both in phototherapy and in surgical services.  We expect, based on
our  current  business  plan,  and our  present  outlook,  that we will have the
resources to market our current  products and services through the first quarter
of 2005.  Nevertheless,  we cannot  assure you that we will market any  products
successfully,  operate  profitably  in the  future,  or that we may not  require
significant additional financing in order to accomplish our business plan.

         During the three months ended March 31, 2004,  there have been no items
that significantly  impact our commitments and contingencies as discussed in the
notes  to the 2003  annual  financial  statements  as  filed  on Form  10-K.  In
addition, we have no significant off-balance sheet arrangements.

                                        21
<PAGE>
IMPACT OF INFLATION

         We have not  operated in a highly  inflationary  period,  and we do not
believe that inflation has had a material effect on sales or expenses.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In December 2003,  the Financial  Accounting  Standards  Board ("FASB")
issued FASB  Interpretation  No. 46 (revised  December 2003),  "Consolidation of
Variable Interest  Entities," ("VIEs") which addresses how a business enterprise
should  evaluate  whether it has a controlling  financial  interest in an entity
through means other than voting rights and  accordingly  should  consolidate the
entity. FIN 46R replaces FASB Interpretation No. 46,  "Consolidation of Variable
Interest  Entities,"  which was issued in January  2003.  We will be required to
apply FIN 46R to variable interests in VIEs created after December 31, 2003. For
variable  interests in VIEs created before  January 1, 2004, the  Interpretation
will be  applied  beginning  on  January  1,  2005.  For any VIEs  that  must be
consolidated under FIN 46R that were created before January 1, 2004, the assets,
liabilities and noncontrolling  interests of the VIE initially would be measured
at their carrying  amounts with any  difference  between the net amount added to
the balance sheet and any previously recognized interest being recognized as the
cumulative  effect of an accounting  change. If determining the carrying amounts
is not practicable,  fair value at the date FIN 46R first applies may be used to
measure the assets,  liabilities and noncontrolling interest of the VIE. At this
time,  the  adoption  of FIN  46R is not  expected  to  have  an  effect  on the
consolidated financial statements.

         In May 2003,  the FASB  issued SFAS No.  150,  "Accounting  for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement  establishes  standards  for how an  issuer  classifies  and  measures
certain  financial  instruments  with  characteristics  of both  liabilities and
equity.  SFAS No. 150 is effective  for  financial  instruments  entered into or
modified  after May 31,  2003,  and  otherwise is  effective  July 1, 2003.  The
adoption  of SFAS No.  150 did not have a  material  impact on our  consolidated
financial statements, as we do not have the types of financial instruments which
would require consideration under this Statement.

CRITICAL ACCOUNTING POLICIES

         The discussion  and analysis of our financial  condition and results of
operations in this Report are based upon our consolidated  financial statements,
which have been  prepared in accordance  with  accounting  principles  generally
accepted in the United States. The preparation of financial  statements requires
management to make estimates and judgments  that affect the reported  amounts of
assets and liabilities,  revenues and expense and disclosures at the date of the
financial  statements.   On  an  on-going  basis,  we  evaluate  our  estimates,
including,  but not limited to, those related to revenue  recognition,  accounts
receivables,   inventories,   impairment   of  property  and  equipment  and  of
intangibles   and   accruals   for  warranty   claims.   We  use   authoritative
pronouncements,  historical  experience  and other  assumptions as the basis for
making estimates.  Actual results could differ from those estimates.  Management
believes  that  the  following  critical  accounting  policies  affect  our more
significant  judgments  and  estimates  in  the  preparation  of  the  Company's
consolidated  financial  statements.  These critical accounting policies and the
significant  estimates made in accordance with them have been discussed with our
Audit Committee.

REVENUE RECOGNITION.

         We  have  two  distribution  channels  for our  phototherapy  treatment
equipment.  We will either (i) sell the laser through a distributor  or directly
to a physician or (ii) place the laser in a physician's  office (at no charge to
the  physician)  and charge the  physician  a fee for an agreed  upon  number of
treatment  cards  or  equivalent  access  codes.  When  we  sell  a  laser  to a
distributor or directly to a physician,  revenue is recognized  when the product
is shipped and the Company has no significant remaining obligations,  persuasive
evidence  of an  arrangement  exists,  the  price  to  the  buyer  is  fixed  or
determinable,  and  collection  is  probable.  At times,  units are  shipped but
revenue is not recognized  until all of the criteria are met. Under the terms of
the distributor agreements, the distributors do not have the right to return any
unit.  However,  we do allow  products  to be returned  by our  distributors  in
redress  of  product  defects  or  other  claims.  When we  place  a laser  in a
physician's  office,  service  revenues are  recognized  based on an estimate of
patient  treatments.  To use the laser, the physician purchases a treatment card
or an access code that allows  performance of a specified  number of treatments.

                                        22
<PAGE>
This amount is included in deferred  revenues on the  accompanying  consolidated
balance sheets until the treatment occurs or is estimated to have occurred.

         In the first  quarter  of 2003,  we  implemented  a limited  program to
support certain  physicians in addressing  treatments with the XTRAC system that
may be denied reimbursement by private insurance carriers.  We recognize service
revenue  during the  program  for the sale of  treatment  codes,  or  equivalent
treatment cards, to physicians  participating in this program only if and to the
extent the  physician has been  reimbursed  for the  treatments.  In the quarter
ended March 31, 2004, we deferred revenues of $143,271 under this program.

                  Through  our  surgical   businesses,   we  generate   revenues
primarily  from three  channels.  The first is through sales of recurring  laser
delivery  systems  and  accessories;  the  second is through  the  per-procedure
surgical  services;  and the  third is  through  the sale of laser  systems  and
related  maintenance  service  agreements.  We recognize  revenues  from product
sales, including sales to distributors, when products are shipped and we have no
significant remaining obligations, persuasive evidence of an arrangement exists,
the price to the buyer is fixed or determinable,  and collection is probable. At
times, units are shipped but revenue is not recognized until all of the criteria
are met.

         For  per-procedure  surgical  services,  we recognize  revenue upon the
completion of the  procedure.  Revenue from  maintenance  service  agreements is
deferred  and  recognized  on  a  straight-line  basis  over  the  term  of  the
agreements.  Revenue from  billable  services,  including  repair  activity,  is
recognized when the service is provided.

         Our independent auditors issued a material weakness in internal control
letter as a result of the 2003 audit.  That material  weakness  arises under the
revenue recognition  criteria of Staff Accounting Bulletin No. 104 as it relates
to  collectibility  analysis of laser  shipments.  While we believe that we have
adequate  policies  for  proper  recognition  of  revenue,  we  agree  with  our
independent  auditors that our  implementation of those policies,  especially in
evaluating the  collectibility  of discrete  sales of laser units,  needed to be
improved.  We have re-evaluated the various factors, and the relative weights we
ascribe  to  the   factors,   which  we  take  into   account   in   determining
collectibility.  We have  implemented  in the first  quarter  of 2004  these and
additional  procedures to evaluate not only new distributors and customers,  but
past customers as well.

         INVENTORY.  We account for  inventory  at the lower of cost  (first-in,
first-out) or market. Cost is determined at latest cost for raw materials and at
production  cost  (materials,   labor  and  indirect   manufacturing  cost)  for
work-in-process  and finished goods. We perform full physical  inventory  counts
for XTRAC and cycle counts on all the other  inventory to maintain  controls and
to have accurate  data.  Reserves for slow moving and obsolete  inventories  are
provided based on historical experience and product demand. Management evaluates
the adequacy of these reserves periodically based on forecasted sales and market
trend.

         ALLOWANCE FOR DOUBTFUL ACCOUNTS.  Accounts receivable are reduced by an
allowance for amounts that may become  uncollectible in the future. The majority
of receivables, related to phototherapy sales, are due from various distributors
located outside of the United States.  The majority of  receivables,  related to
surgical product sales, are due from various customers and distributors  located
inside the United States. From time to time, our clients dispute the amounts due
to us, and, in other cases, our clients  experience  financial  difficulties and
cannot pay on a timely basis.  In certain  instances,  these factors  ultimately
result in uncollectible  accounts.  The determination of the appropriate reserve
needed for uncollectible accounts involves significant judgment. A change in the
factors used to evaluate  collectibility could result in a significant change in
the reserve needed.  Such factors include changes in the financial  condition of
our customers as a result of industry, economic or customer specific factors.

         PROPERTY AND EQUIPMENT.  As of March 31, 2004 and December 31, 2003, we
had net property and equipment of $4,163,898 and $4,005,205,  respectively.  The
most  significant  component of these amounts relates to the lasers placed by us
in  physicians'  offices.  We own the  equipment  and charge the  physician on a
per-treatment  basis  for use of the  equipment.  The  realizability  of the net
carrying  value of the lasers is  predicated  on  increasing  revenues  from the
physicians'  use of the lasers.  We believe that such usage will increase in the
future  based on the  recently  approved  CPT codes and  expected  increases  in
insurance reimbursement.

         INTANGIBLES.  Our balance sheet includes  goodwill and other intangible
assets  which  affect  the  amount of future  period  amortization  expense  and
possible impairment expense that we will incur. Management's judgments regarding

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<PAGE>

the existence of impairment  indicators are based on various factors,  including
market conditions and operational  performance of its business.  As of March 31,
2004 and December 31, 2003, we had $3,659,070 and $3,703,078,  respectively,  of
goodwill and other  intangibles,  accounting  for 16% of our total assets at the
respective  dates.  The  determination  of the value of such  intangible  assets
requires   management  to  make  estimates  and  assumptions   that  affect  our
consolidated financial statements.

         WARRANTY ACCRUALS.  We establish a liability for warranty repairs based
on estimated future claims for XTRAC systems and based on historical analysis of
the cost of the repairs for surgical laser systems.  However,  future returns on
defective   laser   systems  and  related   warranty   liability   could  differ
significantly  from estimates and  historical  patterns,  which would  adversely
affect our operating results.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         We are not currently exposed to market risks due to changes in interest
rates  and  foreign  currency  rates  and  therefore,  we do not use  derivative
financial  instruments to address treasury risk management  issues in connection
with changes in interest rates and foreign currency rates.

ITEM 4.  CONTROLS AND PROCEDURES

         Our management,  with the  participation of our Chief Executive Officer
and Chief Financial  Officer,  has evaluated the effectiveness of our disclosure
controls and  procedures as of March 31, 2004. To remedy a material  weakness in
our internal  controls dealing with proper  recognition of revenue from the sale
of  laser  units,  we  have  implemented  in the  first  quarter  2004  modified
procedures for evaluating the recognizability of revenue from such sales, and in
particular  in  evaluating  the  collectibility  of such  sales.  We  have  also
implemented  additional procedures to evaluate new distributors and customers as
well as past customers.  Based on this evaluation of our controls and procedures
as improved and  implemented,  our Chief  Executive  Officer and Chief Financial
Officer concluded that our disclosure  controls and procedures are effective for
gathering,  analyzing and disclosing the information we are required to disclose
in the reports we file under the  Securities  Exchange  Act of 1934,  within the
time periods  specified in the SEC's rules and forms.  Such  evaluation  did not
identify  any  unaddressed  change in the quarter  ended March  31,2004 that has
materially affected,  or is reasonable likely to materially affect, our internal
control over financial reporting.
..

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         Reference is made to Item 3, Legal Proceedings, in our Annual Report on
Form 10-K for the year ended  December  31, 2003 for  descriptions  of our legal
proceedings.

         In March  2004,  the  Company  entered a  settlement  agreement  in the
employment-related action brought by Barbara Tandon in the Court of Common Pleas
for the Ninth  Judicial  Circuit in the State of South  Carolina.  The Court has
dismissed the action. The Company's insurance carrier supported the terms of the
settlement, which management viewed as reasonable.

         In the action brought by the Company against RA Medical  Systems,  Inc.
and Dean Stewart Irwin in the Superior  Court for San Diego County,  California,
the Court  awarded,  in  addition  to  statutory  costs of  $9,976,  Defendants'
attorney's  fees and costs in the amount of  $83,129,  although  Defendants  had
requested  an award of $213,124.  This award was based on a  California  statute
providing for  reciprocity  where one party  alleges a  contractual  right to an
award of attorney's  fees.  The Company  intends to appeal the award.  The Court
also denied Defendants' request based on a California statute for claims made in
bad faith of trade secret misappropriation.

         In the  action  brought by the  Company  against  Edwards  Lifesciences
Corporation and Baxter  Healthcare  Corporation in the Superior Court for Orange
County, California, the Defendants demurred to the Company's complaint,  seeking
dismissal  on several  grounds.  The  Company  has filed its  opposition  to the
demurrer with the Court. The Court has not yet ruled on the demurrer.

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<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Recent Issuances of Unregistered Securities

         During the three  months ended March 31,  2004,  we granted  options to
purchase up to an aggregate of 801,000  shares of common stock to various of our
directors and employees as follows: (i) options to purchase up to 561,000 shares
of common stock under our 2000 Stock Option Plan at a weighted  average exercise
price of $2.14 per share;  (ii)  options  to  purchase  up to 210,000  shares of
common  stock under our  Non-Employee  Director  Stock Option Plan at a weighted
average  exercise  price of $2.44 per share and (iii)  options to purchase up to
30,000 shares of common stock to members of our  Scientific  Advisory  Board and
similar  consultants.  Those grants were at an exercise price of $2.14, and were
made under the 2000 Stock Option Plan.

         On April 2, 2004, we filed a Form S-8 with the SEC, thereby registering
virtually  all shares of common stock which  underlie  stock  options  issued or
issuable  under our two active option  plans,  namely the 2000 Stock Option Plan
and the 2000 Non-Employee  Director Stock Option Plan. Also registered under the
Form S-8 were 272,000 shares  underlying  certain options which had been granted
outside of our two active option plans.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable.

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

         None.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

          A.      Reports on Form 8-K

         On February 27, 2004, we filed a Report on Form 8-K with respect to our
press release, dated February 24, 2004, with respect to our 2003 earnings.

         On April 15,  2004,  we filed a Report on Form 8-K with  respect to our
press  release,  dated April 12, 2004,  with respect to Regence Group, a private
health  plan,  which  had  approved  for  reimbursement   procedures  using  the
XTRAC(R)excimer laser to treat psoriasis.

         On April 21,  2004,  we filed a Report on Form 8-K with  respect to our
press  release,  dated  April 20,  2004,  with  respect  to  WellPoint,  a group
comprised in part of private health plans,  which had approved for reimbursement
procedures using the XTRAC(R) excimer laser to treat psoriasis.

         On May 4, 2004, we filed a Report on Form 8-K with respect to our press
release, dated April 29, 2004, with respect to our first quarter 2004 earnings.

         B.       Other Exhibits

       31.1  Rule 13a-14(a) Certificate of Chief Executive Officer
       31.2  Rule 13a-14(a) Certification of Chief Financial Officer
       32.1  Certificate of Chief Executive Officer pursuant to 18 U.S.C.Section
             1350, as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002
       32.2  Certificate of Chief Financial Officer pursuant to 18 U.S.C.Section
             1350, as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002


                                          25
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

         We  are  currently  subject  to  the  reporting   requirements  of  the
Securities  Exchange  Act of  1934,  as  amended  (the  "Exchange  Act")  and in
accordance  therewith file reports,  proxy statements and other information with
the  Commission.  Such reports,  proxy  statements and other  information may be
inspected and copied at the public  reference  facilities  of the  Commission at
Judiciary Plaza, 450 Fifth Street, N.W.,  Washington D.C. 20549; at its New York
Regional  Office,  233  Broadway,  New York,  New York  10297;  and its  Chicago
Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604,
and copies of such materials can be obtained from the Public  Reference  Section
of the  Commission at its principal  office in  Washington,  D.C., at prescribed
rates.  In  addition,  such  materials  may be  accessed  electronically  at the
Commission's  site on the World  Wide Web,  located  at  http://www.sec.gov.  We
intend to furnish  our  stockholders  with  annual  reports  containing  audited
financial  statements  and such other  periodic  reports as we  determine  to be
appropriate or as may be required by law.



                                   SIGNATURES

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



                                   PHOTOMEDEX, INC.



Date:  May 10, 2004                By: /s/ Jeffrey F. O'Donnell
                                           --------------------------------
                                           Jeffrey F. O'Donnell
                                           President and Chief Executive Officer


Date:  May 10, 2004                By:/s/  Dennis M. McGrath
                                           --------------------------------
                                           Dennis M. McGrath
                                           Chief Financial Officer


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