*Table
        of Contents*







**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 June 30, 2008**





**OR**





o
            **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
                incorporation or organization)
            
            (I.R.S.
                Employer
              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
o





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




Large
      accelerated filer o Accelerated
      filer o





Non-accelerated
      filer o Smaller
      reporting company x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act.)


Yes
o No
x





The
      number of shares outstanding of the issuer's Common Stock as of August 8, 2008
      was 63,032,207 shares.












*Table
        of Contents*




PHOTOMEDEX,
      INC.





INDEX
      TO FORM 10-Q




Part
                  I.  Financial Information:
              
              PAGEITEM
                  1.  Financial Statements:a.
                  Consolidated Balance Sheets, June 30, 2008 (unaudited) and
                  December 31, 2007
              
              3b.
                  Consolidated Statements of Operations for the three months
                  ended June 30, 2008 and 2007 (unaudited)
              
              4c.
                  Consolidated Statements of Operations for the six months
                  ended June 30, 2008 and 2007 (unaudited)
              
              5d.
                  Consolidated Statement of Stockholders’ Equity for the six
                  months ended June 30, 2008 (unaudited)
              
              6e.
                  Consolidated Statements of Cash Flows for the six months
                  ended June 30, 2008 and 2007 (unaudited)
              
              7f.
                  Notes to Consolidated Financial Statements
                  (unaudited)
              
              8ITEM
                  2.  Management’s Discussion and Analysis of Financial
                  Conditionand
                  Results of Operations
              
              23ITEM
                  3.  Quantitative and Qualitative Disclosure about
                  Market Risk
              
              38ITEM
                  4.  Controls and Procedures
              
              38Part
                  II.  Other Information:ITEM
                  1.  Legal Proceedings
              
              39ITEM
                  1A.  Risk Factors
              
              39ITEM
                  6.  Exhibits
              
              40Signatures
              
              40Certifications
              
              41





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**PART
      I - Financial Information**




**ITEM
      1. Financial Statements**




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS




June
                30, 2008
            
            December
                31, 2007(Unaudited)
            
            ***ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            7,292,028
            
            $
            9,837,303Restricted
                cash
            
            
            117,000
            
            
            117,000Accounts
                receivable, net of allowance for doubtful accounts of $517,000 and
                $521,000, respectively
            
            
            5,352,450
            
            
            5,797,620Inventories
            
            
            6,574,366
            
            
            6,980,180Prepaid
                expenses and other current assets
            
            
            807,829
            
            
            508,384Current
                assets held for sale
            
            
            1,585,650
            
            
            1,910,802Total
                current assets
            
            
            21,729,323
            
            
            25,151,289Property
                and equipment, net
            
            
            9,251,052
            
            
            8,091,862Patents
                and licensed technologies, net
            
            
            1,334,333
            
            
            1,408,248Goodwill,
                net
            
            
            16,917,808
            
            
            16,917,808Other
                intangible assets, net
            
            
            2,142,625
            
            
            2,607,625Other
                assets
            
            
            970,341
            
            
            448,071Assets
                held for sale
            
            
            1,655,211
            
            
            2,061,800Total
                assets
            
            $
            54,000,693
            
            $
            56,686,703**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Current
                portion of notes payable
            
            $
            489,290
            
            $
            129,305Current
                portion of long-term debt
            
            
            4,790,939
            
            
            4,757,133Accounts
                payable
            
            
            5,113,428
            
            
            3,634,519Accrued
                compensation and related expenses
            
            
            1,119,030
            
            
            1,581,042Other
                accrued liabilities
            
            
            816,868
            
            
            674,374Deferred
                revenues
            
            
            772,569
            
            
            668,032Total
                current liabilities
            
            
            13,102,124
            
            
            11,444,405Long-term
                liabilities:Notes
                payable
            
            
            91,944
            
            
            106,215Long-term
                debt
            
            
            4,716,888
            
            
            5,602,653Total
                liabilities
            
            
            17,910,956
            
            
            17,153,273Commitments
                and ContingenciesStockholders’
                equity:Common
                stock, $.01 par value, 100,000,000 shares authorized; 63,032,207
                shares
                issued and outstanding
            
            
            630,322
            
            
            630,322Additional
                paid-in capital
            
            
            133,637,828
            
            
            132,932,357Accumulated
                deficit
            
            
            (98,178,413
            )
            
            (94,029,249
            )Total
                stockholders’ equity
            
            
            36,089,737
            
            
            39,533,430Total
                liabilities and stockholders’ equity
            
            $
            54,000,693
            
            $
            56,686,703





*
            The
                December 31, 2007 balance sheet was derived from the Company’s audited
                financial statements.




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


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PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(Unaudited)




For
                the Three Months Ended June 30,2008
            
            2007Revenues:Product
                sales
            
            $
            7,028,605
            
            $
            5,675,852Services
            
            
            2,361,174
            
            
            1,634,7449,389,779
            
            
            7,310,596Cost
                of revenues:Product
                cost of revenues
            
            
            2,989,481
            
            
            2,326,656Services
                cost of revenues
            
            
            1,045,623
            
            
            976,5474,035,104
            
            
            3,303,203Gross
                profit
            
            
            5,354,675
            
            
            4,007,393Operating
                expenses:Selling
                and marketing
            
            
            3,755,834
            
            
            3,056,846General
                and administrative
            
            
            2,237,259
            
            
            2,565,952Engineering
                and product development
            
            
            218,344
            
            
            185,5056,211,437
            
            
            5,808,303Loss
                from continuing operations before interest expense, net
            
            
            (856,762
            )
            
            (1,800,910
            )Interest
                expense, net
            
            
            (281,765
            )
            
            (161,967
            )Loss
                from continuing operations
            
            
            (1,138,527
            )
            
            (1,962,877
            )Discontinued
                operations:Income
                from discontinued operations
            
            
            77,069
            
            
            126,919Estimated
                loss on sale of discontinued operations
            
            
            (545,844
            )
            
            —Net
                loss
            
            
            ($
                1,607,302
            )
            
            ($
                1,835,958
            )Basic
                and diluted net loss per share:Continuing
                operations
            
            
            ($0.02
            )
            
            ($0.03
            )Discontinued
                operations
            
            
            ($0.01
            )
            
            —Basic
                and diluted net loss per share
            
            
            ($0.03
            )
            
            ($0.03
            )Shares
                used in computing basic and diluted net loss per share
            
            
            63,032,207
            
            
            62,709,147


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




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PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(Unaudited)




For
                the Six Months Ended June 30,2008
            
            2007Revenues:Product
                sales
            
            $
            13,763,772
            
            $
            11,272,410Services
            
            
            3,956,841
            
            
            3,246,55017,720,613
            
            
            14,518,960Cost
                of revenues:Product
                cost of revenues
            
            
            5,853,932
            
            
            4,548,684Services
                cost of revenues
            
            
            2,299,202
            
            
            1,996,7508,153,134
            
            
            6,545,434Gross
                profit
            
            
            9,567,479
            
            
            7,973,526Operating
                expenses:Selling
                and marketing
            
            
            7,868,799
            
            
            6,100,795General
                and administrative
            
            
            4,381,701
            
            
            5,045,343Engineering
                and product development
            
            
            657,032
            
            
            401,47312,907,532
            
            
            11,547,611Loss
                from continuing operations before interest expense, net
            
            
            (3,340,053
            )
            
            (3,574,085
            )Interest
                expense, net
            
            
            (509,137
            )
            
            (238,386
            )Loss
                from continuing operations
            
            
            (3,849,190
            )
            
            (3,812,471
            )Discontinued
                operations:Income
                from discontinued operations
            
            
            245,870
            
            
            93,031Estimated
                loss on sale of discontinued operations
            
            
            (545,844
            )
            
            —Net
                loss
            
            
            ($
                4,149,164
            )
            
            ($
                3,719,440
            )Basic
                and diluted net loss per share:Continuing
                operations
            
            
            ($0.06
            )
            
            ($0.06
            )Discontinued
                operations
            
            
            ($0.01
            )
            
            —Basic
                and diluted net loss per share
            
            
            ($0.07
            )
            
            ($0.06
            )Shares
                used in computing basic and diluted net loss per share
            
            
            63,032,207
            
            
            62,623,079


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


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PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
      THE
      SIX MONTHS ENDED JUNE 30, 2008


(Unaudited)




AdditionalCommon
                Stock
            
            Paid-In
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            Deficit
            
            TotalBALANCE,
                DECEMBER 31, 2007
            
            
            63,032,207
            
            $
            630,322
            
            $
            132,932,357
            
            
            ($94,029,249
            )
            $
            39,533,430Stock
                options issued to consultants for services
            
            
            —
            
            
            —
            
            
            62,380
            
            
            —
            
            
            62,380Stock-based
                compensation expense
              related
                to employee options
            
            
            —
            
            
            —
            
            
            435,846
            
            
            —
            
            
            435,846Issuance
                of restricted stock and amortization of expense for restricted
                stock
            
            
            —
            
            
            —
            
            
            207,245
            
            
            —
            
            
            207,245Net
                loss for the six months ended June 31, 2008
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,149,164
            )
            
            (4,149,164
            )BALANCE,
                JUNE 30, 2008
            
            
            63,032,207
            
            $
            630,322
            
            $
            133,637,828
            
            
            ($98,178,413
            )
            $
            36,089,737


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




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            of Contents*




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)




For
                  the Six Months Ended
                June
                  30,2008
              
              2007**Cash
                  Flows From Operating Activities - continuing
                  operations**:Net
                  loss from continuing operations
              
              
              ($
                  3,849,190
              )
              
              ($
                  3,812,471
              )Adjustments
                  to reconcile net loss to net cash and cash equivalents provided
                  by (used
                  in) operating activities:Depreciation
                  and amortization
              
              
              2,039,800
              
              
              1,849,832Stock
                  options issued to consultants for services
              
              
              62,380
              
              
              77,751Stock-based
                  compensation expense related to employee options and restricted
                  stock
              
              
              643,091
              
              
              724,340Provision
                  for bad debts
              
              
              43,034
              
              
              82,423Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              402,086
              
              
              (628,088
              )Inventories
              
              
              401,545
              
              
              (338,787
              )Prepaid
                  expenses and other assets
              
              
              (137,727
              )
              
              101,317Accounts
                  payable
              
              
              1,253,909
              
              
              357,602Accrued
                  compensation and related expenses
              
              
              (462,012
              )
              
              (349,033
              )Other
                  accrued liabilities
              
              
              142,493
              
              
              365,753Deferred
                  revenues
              
              
              104,537
              
              
              409,532Other
                  liabilities
              
              
              -
              
              
              (11,623
              )Net
                  cash and cash equivalents provided by (used in) operating activities
                  -
                  continuing operations
              
              
              643,996
              
              
              (1,171,452
              )**Cash
                  Flows From Investing Activities - continuing
                  operations:**Purchases
                  of property and equipment
              
              
              (144,692
              )
              
              (30,294
              )Lasers
                  placed into service
              
              
              (2,697,734
              )
              
              (1,838,294
              )Net
                  cash and cash equivalents used in investing activities - continuing
                  operations
              
              
              (2,842,426
              )
              
              (1,868,588
              )**Cash
                  Flows From Financing Activities - continuing
                  operations:**Proceeds
                  from issuance of restricted common stock
              
              
              -
              
              
              2,625Proceeds
                  from exercise of options
              
              
              -
              
              
              85,954Payments
                  on long-term debt
              
              
              (41,709
              )
              
              (39,885
              )Payments
                  on notes payable
              
              
              (301,543
              )
              
              (297,849
              )Net
                  advancements on lease lines of credit
              
              
              (879,001
              )
              
              1,137,714Decrease
                  in restricted cash and cash equivalents
              
              
              -
              
              
              39,000Net
                  cash and cash equivalents (used in) provided by financing activities
                  -
                  continuing operations
              
              
              (1,222,253
              )
              
              927,559Net
                  decrease in cash and cash equivalents - continuing
                  operations
              
              
              (3,420,683
              )
              
              (2,112,481
              )**Cash
                  Flows from Discontinued Operations**:Net
                  cash used in operating activities
              
              
              939,501
              
              
              202,339Net
                  cash used in investing activities
              
              
              (64,093
              )
              
              (256,993
              )Net
                  cash used in financing activities
              
              
              -
              
              
              -Net
                  cash from discontinued operations
              
              
              875,408
              
              
              (54,654
              )Cash
                  and cash equivalents, beginning of period
              
              
              9,837,303
              
              
              12,729,742Cash
                  and cash equivalents, end of period
              
              $
              7,292,028
              
              $
              10,562,607
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.


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PHOTOMEDEX,
      INC. AND SUBSIDIARIES


NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




*Note
      1*




**Basis
      of Presentation:**




**The
      Company:**




***Background***


PhotoMedex,
      Inc. (and its subsidiaries) (the “Company”) is a medical device and specialty
      pharmaceutical company focused on facilitating the cost-effective use of
      technologies for doctors, hospitals and surgery centers to enable their patients
      to achieve a higher quality of life. The Company currently operates in four
      distinct business units, or segments (as described in Note 10): three in
      Dermatology, - Domestic XTRAC®, International Dermatology Equipment, and Skin
      Care (ProCyte®); and one in Surgical, - Surgical Products (SLT®). The segments
      are distinguished by our management structure, products and services offered,
      markets served or types of customers. The Surgical Services segment is reported
      as a discontinued operation, and its related assets as held for sale, in these
      financial statements.




Surgical
      Services is a fee-based procedures business using mobile surgical laser
      equipment operated by Company technicians at hospitals and surgery centers
      in
      the United States. The Company decided to sell this division primarily because
      the growth rates and operating margins of the division have decreased as the
      business had changed to rely more heavily upon procedures performed using
      equipment from third-party suppliers, thereby limiting the profit potential
      of
      these services. After preliminary investigations and discussions, the Board
      of
      Directors of the Company decided on June 13, 2008 to enter into, with the aid
      of
      its investment banker, substantive, confidential discussions with potential
      third-party buyers and began to develop plans for implementing a disposal of
      the
      assets and operations of the business. The Company accordingly classified this
      former segment as held for sale in accordance with SFAS No. 144. On August
      1,
      2008, the Company entered into a definitive agreement to sell specific assets
      of
      the business including accounts receivable, inventory and equipment, for
      $3,500,000, subject to certain closing adjustments. Such closing adjustments
      are
      currently estimated to result in net proceeds to the Company of $3,240,861.
      See
      Note 2, ***Discontinued
      Operations*** .




The
      Surgical Products segment generates revenues by selling laser products and
      disposables to hospitals and surgery centers both domestically and
      internationally. The Surgical Products segment also sells other non-laser
      products (e.g., the ClearESS® II suction-irrigation system).




The
      Domestic XTRAC segment generally derives revenues from procedures performed
      by
      dermatologists in the United States. Under these circumstances, the Company’s
      XTRAC laser system is placed in a dermatologist’s office without any initial
      capital cost to the dermatologist, and the Company charges a fee-per-use to
      treat skin disease. At times, however, the Company sells XTRAC lasers to
      customers, due generally to customer circumstances and preferences. In
      comparison to the Domestic XTRAC segment, the International Dermatology
      Equipment segment generates revenues from the sale of equipment to
      dermatologists outside the United States through a network of distributors.
      The
      Skin Care segment generates revenues by selling physician-dispensed skincare
      products worldwide and, now to a markedly lesser degree, by earning royalties
      on
      licenses for our patented copper peptide compound.




The
      Company designed and manufactured the XTRAC laser system to treat psoriasis,
      vitiligo, atopic dermatitis and leukoderma phototherapeutically. The Company
      has
      received clearances from the U.S. Food and Drug Administration (“FDA”) to market
      the XTRAC laser system for each of these indications. The XTRAC is approved
      by
      Underwriters’ Laboratories; it is also CE-marked, and accordingly a third party
      regularly audits the Company’s quality system and manufacturing facility. The
      manufacturing facility for the XTRAC is located in Carlsbad,
      California.




For
      the
      last several years the Company has sought to obtain health insurance coverage
      for its XTRAC laser therapy to treat inflammatory skin disease, particularly
      psoriasis. With the addition of new positive payment policies from Blue Cross
      Blue Shield plans from certain states during the first half of 2008, the Company
      now benefits from the fact that more than 90% of the insured United States
      population has policies that provide nearly full reimbursement for the treatment
      of psoriasis by means of an excimer laser. The Company is now focusing its
      efforts on accelerating


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the
      adoption of the XTRAC laser therapy for psoriasis and vitiligo by doctors and
      patients. Consequently, the Company has increased the size of its sales force
      and clinical technician personnel together with increasing expenditures for
      marketing and advertising.




***Liquidity
      and Going Concern***


As
      of
      June 30, 2008, the Company had an accumulated deficit of $98,178,413. Cash
      and
      cash equivalents, including restricted cash of $117,000, was $7,409,028. The
      Company has historically financed its operations with cash provided by equity
      financing and from lines of credit and, more recently but not yet consistently,
      from positive cash flow generated from operations. Management believes that
      the
      existing cash balance together with its other existing financial resources
      and
      any revenues from sales, distribution, licensing and manufacturing
      relationships, will be sufficient to meet the Company’s operating and capital
      requirements beyond the end of the third quarter of 2009. The 2008 operating
      plan reflects anticipated growth from an increase in per-treatment fee revenues
      for use of the XTRAC laser system based on increased utilization and wider
      insurance coverage in the United States and anticipated growth in sales revenues
      of the Company’s skincare products.




**Summary
      of Significant Accounting Policies:**




***Quarterly
      Financial Information and Results of Operations***


The
      financial statements as of June 30, 2008 and for the three and six months ended
      June 30, 2008 and 2007, 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 June 30, 2008, and the results
      of
      operations and cash flows for the three and six months ended June 30, 2008
      and
      2007. The results for the three and six months ended June 30, 2008 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 year ended
      December 31, 2007. The surgical services business segment is presented as
      discontinued operations for all periods presented.




***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. Future
      events and their effects cannot be predicted with certainty; estimating,
      therefore, requires the exercise of judgment. Thus, accounting estimates change
      as new events occur, as more experience is acquired, or as additional
      information is obtained.




See
      “Summary of Significant Accounting Policies” in the Company’s 2007 Annual Report
      on Form 10-K for a discussion of the estimates and judgments necessary in the
      Company’s accounting for cash and cash equivalents, accounts receivable,
      inventories, property, equipment and depreciation, product development costs
      and
      fair value of financial instruments.




***Revenue
      Recognition***


The
      Company has two distribution channels for its phototherapy treatment equipment.
      The Company either (i) sells the laser through a distributor or directly to
      a
      physician or (ii) places the laser in a physician’s office (at no charge to the
      physician) and charges the physician a fee for an agreed upon number of
      treatments. When the Company sells an XTRAC laser to a distributor or directly
      to a foreign or domestic physician, revenue is recognized when the following
      four criteria under Staff Accounting Bulletin No. 104 have been met: (i) the
      product has been shipped and the Company has no significant remaining
      obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price
      to the buyer is fixed or determinable; and (iv) collection is probable (the
“SAB
      104 Criteria”). At times, units are shipped, but revenue is not recognized until
      all of the SAB 104 criteria have been met, and until that time, the unit is
      carried on the books of the Company as inventory.




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The
      Company ships most of its products FOB shipping point, although from time to
      time certain customers, for example governmental customers, will insist upon
      FOB
      destination. Among the factors the Company takes into account in determining
      the
      proper time at which to recognize revenue are when title to the goods transfers
      and when the risk of loss transfers. Shipments to distributors or physicians
      that do not fully satisfy the collection criterion are recognized when invoiced
      amounts are fully paid or fully assured.




Under
      the
      terms of the Company’s distributor agreements, distributors do not have a
      unilateral right to return any unit that they have purchased. However, the
      Company does allow products to be returned by its distributors for product
      defects or other claims.




When
      the
      Company places a laser in a physician’s office, it recognizes service revenue
      based on the number of patient treatments performed by the physician. Treatments
      in the form of random laser-access codes that are sold to a physician, but
      not
      yet used, are deferred and recognized as a liability until the physician
      performs the treatment. Unused treatments remain an obligation of the Company
      because the treatments can only be performed on Company-owned equipment. Once
      the treatments are delivered to a patient, this obligation has been satisfied.




The
      Company excludes all sales of treatment codes made within the last two weeks
      of
      the period in determining the amount of procedures performed by its
      physician-customers. Management believes this approach closely approximates
      the
      actual amount of unused treatments that existed at the end of a period. For
      the
      three and six months ended June 30, 2008 and 2007, the Company deferred $671,014
      and $827,182, respectively, under this approach.




The
      Company generates revenues from its Skin Care business primarily through two
      channels. The first is through product sales for skin health, hair care and
      wound care and the second is through sales in bulk of the copper peptide
      compound, primarily to Neutrogena Corporation, a Johnson & Johnson company.
      The Company recognizes revenues on the products and copper peptide compound
      when
      they are shipped, net of returns and allowances. The Company ships the products
      FOB shipping point. Royalty revenues are based upon sales generated by its
      licensees. The Company recognizes royalty revenue at the applicable royalty
      rate
      applied to shipments reported by its licensee.




The
      Company generates revenues from its Surgical Products business primarily from
      product sales of laser systems, related maintenance service agreements,
      recurring laser delivery systems and laser accessories. Domestic sales are
      generally to the end-user, though the Company has a few domestic distributors
      too; foreign sales are to distributors. The Company recognizes revenues from
      surgical laser and other product sales, including sales to distributors and
      other customers, when the SAB 104 Criteria have been 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.




***Impairment
      of Long-Lived Assets and Intangibles***


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 in the amount by which the carrying amount
      of
      the asset exceeds the fair value of the asset. Assets to be disposed of are
      separately presented in the balance sheet and reported at the lower of the
      carrying amount or the fair value less costs to sell, and would no longer be
      depreciated. The assets and liabilities of a disposed group are classified
      as
      held for sale and are presented separately in the appropriate asset and
      liability sections of the balance sheet. With respect to the long-lived assets
      and intangibles held for sale as of June 30, 2008, an impairment was identified
      where the aggregate fair value was $320,844 less than the carrying value. As
      of
      June 30, 2008 and December 31, 2007, no such impairment existed related to
      continuing operations.





***Patent
      Costs and Licensed Technologies***


Costs
      incurred to obtain or defend patents and licensed technologies are capitalized
      and amortized over the shorter of the remaining estimated useful lives or 8
      to
      12 years. Developed technology was recorded in connection with
      the


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acquisition
      of the skincare business (ProCyte) in March 2005 and is being amortized on
      a
      straight-line basis over seven years.




Management
      evaluates the recoverability 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 fair value. As June 30,
      2008, no such write-down was required. (See ***Impairment
      of Long-Lived Assets and Intangibles*** ).




***Other
      Intangible Assets***


Other
      intangible assets were recorded in connection with the acquisition of ProCyte
      in
      March 2005. The assets are being amortized on a straight-line basis over 5
      to 10
      years.




Management
      evaluates the recoverability of such other 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 fair value. As of
      June
      30, 2008 no such write-down was required.




***Goodwill***


Goodwill
      was recorded in connection with the acquisition of ProCyte in March 2005 and
      the
      acquisition of Acculase in August 2000.




Management
      evaluates the recoverability of such goodwill 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 fair value. As of June 30, 2008 no
      such
      write-down was required.




***Accrued
      Warranty Costs***


The
      Company offers a warranty on product sales generally for a one to two-year
      period. In the case of domestic sales of XTRAC lasers, however, the Company
      offers longer periods in order to meet competition or meet customer demands.
      The
      Company provides for the estimated future warranty claims on the date the
      product is sold. The activity in the warranty accrual during the six months
      ended June 30, 2008 is summarized as follows:




June
                30, 2008Accrual
                at beginning of period
            
            $
            218,587Additions
                charged to warranty expense
            
            
            168,600Expiring
                warranties
            
            
            (6,941
            )Claims
                satisfied
            
            
            (41,233
            )Accrual
                at end of period
            
            $
            339,013


***Income
      Taxes***


The
      Company accounts for income taxes in accordance with 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.




The
      Company’s deferred tax asset has been fully reserved under a valuation
      allowance, reflecting the uncertainties as to realization evidenced by the
      Company’s historical results and restrictions on the usage of the net operating
      loss carryforwards. Consistent with the rules of purchase accounting, the
      historical deferred tax asset of ProCyte was written off when the Company
      acquired ProCyte. If and when components of that asset are realized in the
      future, the acquired goodwill of ProCyte will be reduced.




Utilization
      of the Company’s net operating loss carryforwards is subject to various
      limitations of the Internal Revenue Code, principally Section 382. Utilization
      of loss carryforwards from previous acquisitions (e.g. Acculase, SLT, ProCyte)
      have already been limited by this provision by the acquisition itself and by
      any
      later changes of




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ownership
      in the parent company. If the Company should undergo a further change of
      ownership under Section 382, the utilization of the Company’s loss carryforwards
      may be materially limited.




***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 of common shares outstanding for the period. Diluted net loss per share
      reflects the potential dilution from the conversion or exercise into common
      stock of securities such as stock options and warrants.




In
      these
      consolidated financial statements, diluted net loss per share from continuing
      operations is the same as basic net loss per share. Thus, no additional shares
      for the potential dilution from the conversion or exercise of securities into
      common stock are included in the denominator of this calculation, since the
      result would be anti-dilutive. Common stock options and warrants of 9,793,941
      and 11,120,797 as of June 30, 2008 and 2007, respectively, were excluded from
      the calculation of fully diluted earnings per share from continuing operations
      since their inclusion would have been anti-dilutive. The same considerations
      apply to net loss per share from discontinued operations for the three and
      six
      months ended June 30, 2008. For the three and six months ended June 30, 2007,
      however, there was income from discontinued operations, but basic net income
      per
      share and diluted net income per share from discontinued operations for these
      periods were both immaterial.




***Share-Based
      Compensation***


The
      Company measures and recognizes compensation expense at fair value for all
      stock-based payments to employees and directors as required by SFAS No. 123R
      applied on the modified prospective basis.




Under
      the
      modified prospective approach, SFAS No. 123R applies to new grants of options
      and awards of stock as well as to grants of options that were outstanding on
      January 1, 2006, the date of adoption, and that may subsequently be repurchased,
      cancelled or materially modified. Under the modified prospective approach,
      compensation cost recognized for the three and six months ended June 30, 2008
      and 2007 includes compensation cost for all share-based payments granted prior
      to, but not yet vested on, January 1, 2006, based on fair value as of the prior
      grant-date and estimated in accordance with the provisions of SFAS No. 123R.




The
      Company uses the Black-Scholes option-pricing model to estimate fair value
      of
      grants of stock options with the following weighted average
      assumptions:




Assumptions
              for Option Grants
            
            Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Risk-free
                interest rate
            
            
            3.71
            %
            
            4.75
            %
            
            3.72
            %
            
            4.78
            %Volatility
            
            
            83.56
            %
            
            85.89
            %
            
            84.16
            %
            
            86.03
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %Expected
                life
            
            
            8.1
                years
            
            
            8.1
                years
            
            
            8.1
                years
            
            
            8.1
                yearsEstimated
                forfeiture rate
            
            
            12
            %
            
            12
            %
            
            12
            %
            
            12
            %




The
      Company calculates expected volatility for a share-based grant based on historic
      daily stock price observations of its common stock during the period immediately
      preceding the grant that is equal in length to the expected term of the grant.
      For estimating the expected term of share-based grants made in the three and
      six
      months ended June 30, 2008 and 2007, the Company has adopted the simplified
      method authorized in Staff Accounting Bulletin No. 107. SFAS No. 123R also
      requires that estimated forfeitures be included as a part of the estimate of
      expense as of the grant date. The Company has used historical data to estimate
      expected employee behaviors related to option exercises and forfeitures.




With
      respect to both grants of options and awards of restricted stock, the risk-free
      rate of interest is based on the U.S. Treasury rates appropriate for the
      expected term of the grant or award.




With
      respect to awards of restricted stock, the Company uses the Monte-Carlo pricing
      model to estimate fair value of restricted stock awards. There were no
      restricted stock awards for the three and six months ended June 30,
      2008.


-
          12
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The
      awards made in the first and second quarters 2007 were estimated with the
      following weighted average assumptions:





Assumptions
                for Stock Awards
            
            Three
                and SixMonths
                Ended June 30, 2007Risk-free
                interest rate
            
            
            4.52
            %Volatility
            
            
            74.64
            %Expected
                dividend yield
            
            
            0
            %Expected
                Life
            
            
            5.07
                years




The
      Company calculated expected volatility for restricted stock based on a mirror
      approach, where the daily stock price of our common stock during the seven-year
      period immediately after the grant would be the mirror of the historic daily
      stock price of our common stock during the seven-year period immediately
      preceding the grant.




Compensation
      expense for the three months ended June 30, 2008 included $159,839 from stock
      options grants and $103,623 from restricted stock awards. Compensation expense
      for the three months ended June 30, 2007 included $266,045 from stock options
      grants and $94,218 from restricted stock awards.




Compensation
      expense for the six months ended June 30, 2008 included $435,846 from stock
      options grants and $207,245 from restricted stock awards. Compensation expense
      for the three months ended June 30, 2007 included $648,034 from stock options
      grants and $157,088 from restricted stock awards.




Compensation
      expense is presented as part of the operating results in selling, general and
      administrative expenses. For stock options granted to consultants, an additional
      selling, general, and administrative expense in the amount of $15,466 and
      $62,380 was recognized during the three and six months ended June 30, 2008.
      For
      stock options granted to consultants an additional selling, general, and
      administrative expense in the amount of $15,508 and $77,751 was recognized
      during the three months ended June 30, 2008.





***Supplemental
      Cash Flow Information***


During
      the six months ended June 30, 2008, the Company financed certain insurance
      policies through notes payable for $635,243.




During
      the six months ended June 30, 2007, the Company financed certain credit facility
      costs for $36,840, financed insurance policies through notes payable for
      $606,180 and issued warrants to a leasing credit facility which are valued
      at
      $28,011, and which offset the carrying value of debt. In addition, the Company
      financed vehicle purchases of $71,941 under capital leases.




For
      the
      six months ended June 30, 2008 and 2007, the Company paid interest of $616,343
      and $463,655, respectively. Income taxes paid in the six months ended June
      30,
      2008 and 2007 were immaterial.




***Recent
      Accounting Pronouncements***




Effective
      January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements".
      In
      February 2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective
      Date of FASB Statement No. 157", which provides a one year deferral of the
      effective date of SFAS 157 for non-financial assets and non-financial
      liabilities, except those that are recognized or disclosed in the financial
      statements at fair value at least annually. Therefore, the Company has adopted
      the provisions of SFAS 157 with respect to its financial assets and liabilities
      only. SFAS 157 defines fair value, establishes a framework for measuring fair
      value under generally accepted accounting principles and enhances disclosures
      about fair value measurements. Fair value is defined under SFAS 157 as the
      exchange price that would be received for an asset or paid to transfer a
      liability (an exit price) in the principal or most advantageous market for
      the
      asset or liability in an orderly transaction between market participants on
      the
      measurement date. Valuation techniques used to measure fair value under SFAS
      157
      must maximize the use of observable inputs and minimize the use of unobservable
      inputs. The standard describes a fair value hierarchy based on three levels
      of
      inputs, of which the first two are considered observable and the last
      unobservable, that may be used to measure fair value which are the following:




-
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Level
      1 —
Quoted prices in active markets for identical assets or
      liabilities.




Level
      2 —
Inputs other than Level 1 that are observable, either directly or indirectly,
      such as quoted prices for similar assets or liabilities; quoted prices in
      markets that are not active; or other inputs that are observable or can be
      corroborated by observable market data for substantially the full term of the
      assets or liabilities.




Level
      3 —
Unobservable inputs that are supported by little or no market activity and
      that
      are significant to the fair value of the assets or liabilities.




The
      adoption of this Statement did not have a material impact on the Company's
      consolidated results of operations and financial condition.




In
      December 2007, the Financial
      Accounting Standards Board (“FASB”) issued
      SFAS No. 141 (revised 2007), “Business Combinations”, or SFAS No. 141R. SFAS No.
      141R replaces SFAS No. 141. This Statement establishes principles and
      requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, any
      non-controlling interest in the acquiree and the goodwill acquired. This
      statement also establishes disclosure requirements which will enable users
      to
      evaluate the nature and financial effects of the business combination. This
      Statement is effective for business combinations for which the acquisition
      date
      is on or after the beginning of the first annual reporting period beginning
      on
      or after December 15, 2008This Statement will have an impact on future
      acquisitions.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements—an Amendment of Accounting Research Bulletin
      No. 51.” SFAS No. 160 establishes accounting and reporting standards for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest, changes in a parent’s ownership interest and the
      valuation of retained noncontrolling equity investments when a subsidiary is
      deconsolidated. This Statement also establishes reporting requirements that
      provide sufficient disclosures that clearly identify and distinguish between
      the
      interests of the parent and the interests of the noncontrolling owners. This
      Statement is effective for fiscal years, and interim periods within those fiscal
      years, beginning on or after December 15, 2008. The Company does not expect
      the
      adoption of this Statement to have a material impact, if any, on the Company's
      consolidated financial statements.




*Note
      2*


**Discontinued
      Operations:**




Surgical
      Services is a fee-based procedures business using mobile surgical laser
      equipment operated by Company technicians at hospitals and surgery centers
      in
      the United States. The Company decided to sell this division primarily because
      the growth rates and operating margins of the division have decreased as the
      business had changed to rely more heavily upon procedures performed using
      equipment from third-party suppliers, thereby limiting the profit potential
      of
      these services. After preliminary investigations and discussions, the Board
      of
      Directors of the Company decided on June 13, 2008 to enter into, with the aid
      of
      its investment banker, substantive, confidential discussions with potential
      third-party buyers and began to develop plans for implementing a disposal of
      the
      assets and operations of the business. The Company accordingly classified this
      former segment as held for sale in accordance with SFAS No. 144. On August
      1, 2008, the Company entered into a definitive agreement to sell specific assets
      of the business including accounts receivable, inventory and equipment, for
      $3,500,000, subject to certain closing adjustments. Such closing adjustments
      are
      currently estimated to result in net proceeds to the Company of $3,240,861.
      The
      transaction is expected to close on or about August 8, 2008.




The
      accompanying consolidated financial statements reflect the operating results
      and
      balance sheet items of the discontinued operations separately from continuing
      operations. Prior year financial statements for 2007 have been restated in
      conformity with generally accepted accounting principles to present the
      operations of Surgical Services as a discontinued operation. The Company
      recognized a loss of $545,844 on the expected sale of the discontinued
      operations in the quarter ended June 30, 2008, representing the difference
      between the estimated adjusted net purchase price and the carrying value of
      the
      assets being sold.




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Revenues
      from discontinued operations for the three months ended June 30, 2008 and 2007
      were $1,762,010 and $2,008,123, respectively. Income from discontinued
      operations for the three months ended June 30, 2008 and 2007 were $77,069 and
      $126,919, respectively.




Revenues
      from discontinued operations for the six months ended June 30, 2008 and 2007
      were $3,661,749 and $3,828,328, respectively. Income from discontinued
      operations for the six months ended June 30, 2008 and 2007 were $245,870 and
      $93,031, respectively.




The
      net
      assets of Surgical Services are classified as assets held for sale. The net
      assets, after recognition of the write-down to estimated recoverable value,
      were
      comprised of the following:




June
                30, 2008
            
            December
                31, 2007Current
                assets held for sale:Accounts
                receivable
            
            $
            788,611
            
            $
            961,440Inventories
            
            
            797,039
            
            
            949,362Total
                current assets held for sale
            
            
            1,585,650
            
            
            1,910,802Long
                term assets held for sale:Property,
                plant and equipment, net
            
            
            1,646,970
            
            
            2,051,946Deposits
            
            
            8,241
            
            
            9,854Total
                long term assets held for sale
            
            
            1,655,211
            
            
            2,061,800Total
                net assets held for sale
            
            $
            3,240,861
            
            $
            3,972,602




*Note
      3*


**Inventories:**




Set
      forth
      below is a detailed listing of inventories:




June
                30, 2008
            
            December
                31, 2007Raw
                materials and work in progress
            
            $
            4,764,837
            
            $
            4,527,708Finished
                goods
            
            
            1,809,529
            
            
            2,452,472Total
                inventories
            
            $
            6,574,366
            
            $
            6,980,180




Work-in-process
      is immaterial, given the Company’s typically short manufacturing cycle, and
      therefore is disclosed in conjunction with raw materials. As of June 30, 2008
      and December 31, 2007, the Company carried specific reserves for excess and
      obsolete stocks against its inventories of $1,212,025 and $1,124,345,
      respectively.




*Note
      4*


**Property
      and Equipment:**




Set
      forth
      below is a detailed listing of property and equipment:




June
                30, 2008
            
            December
                31, 2007Lasers
                in service
            
            $
            17,365,458
            
            $
            15,117,055Computer
                hardware and software
            
            
            341,407
            
            
            341,407Furniture
                and fixtures
            
            
            526,511
            
            
            361,174Machinery
                and equipment
            
            
            732,786
            
            
            870,986Leasehold
                improvements
            
            
            247,368
            
            
            247,36819,213,530
            
            
            16,937,990Accumulated
                depreciation and amortization
            
            
            (9,962,478
            )
            
            (8,846,128
            )Property
                and equipment, net
            
            $
            9,251,052
            
            
            8,091,862




Depreciation
      and related amortization expense was $1,838,527 and $1,697,199 for the six
      months ended June 30, 2008 and 2007, respectively.


-
          15
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*Note
      5*


**Patents
      and Licensed Technologies:**




Set
      forth
      below is a detailed listing of patents and licensed technologies:




June
                30, 2008
            
            December
                31, 2007Patents,
                owned and licensed, at gross costs of $535,095 and $510,942, net
                of
                accumulated amortization of $287,009 and $268,540,
                respectively.
            
            $
            248,086
            
            $
            242,402Other
                licensed or developed technologies, at gross costs of $2,440,124
                and
                $2,432,258, net of accumulated amortization of $1,353,877 and $1,266,412,
                respectively.
            
            
            1,086,247
            
            
            1,165,846$
            1,334,333
            
            $
            1,408,248




Related
      amortization expense was $105,934 and $169,716 for the six months ended June
      30,
      2008 and 2007, respectively. Included in other licensed and developed
      technologies is $200,000 in developed technologies acquired from ProCyte,
      $114,982 for the license with AzurTec and $85,742 for the license from the
      Mount
      Sinai School of Medicine of New York University. The Company is also obligated
      to pay Mount Sinai a royalty on a combined base of domestic sales of XTRAC
      treatment codes used for psoriasis as well as for vitiligo. In the first four
      years of the license, however, Mount Sinai may elect to be paid royalties on
      an
      alternate base, comprised simply of treatments for vitiligo, but at a higher
      royalty rate than the rate applicable to the combined base. This technology
      is
      for the laser treatment of vitiligo and is included in other licensed or
      developed technologies.




*Note
      6*


**Other
      Intangible Assets:**




Set
      forth
      below is a detailed listing of other intangible assets, all of which were
      acquired from ProCyte and which recorded at their appraised fair market values
      at the date of the acquisition:




June
                30, 2008
            
            December
                31, 2007Neutrogena
                Agreement, at gross cost of $2,400,000 net of accumulated amortization
                of
                $1,578,000 and 1,338,000, respectively.
            
            $
            822,000
            
            $
            1,062,000Customer
                Relationships, at gross cost of $1,700,000 net of accumulated amortization
                of $1,117,737 and $947,739, respectively.
            
            
            582,263
            
            
            752,261Tradename,
                at gross cost of $1,100,000 net of accumulated amortization of $361,638
                and $306,636, respectively.
            
            
            738,362
            
            
            793,364$
            2,142,625
            
            $
            2,607,625




Related
      amortization expense was $465,000 for the six months ended June 30, 2008 and
      2007, respectively. Under the Neutrogena Agreement, the Company licenses to
      Neutrogena rights to its copper peptide technology for which the Company
      receives royalties. Customer Relationships embody the value to the Company
      of
      relationships that ProCyte had formed with its customers. Tradename includes
      the
      name of “ProCyte” and various other trademarks associated with ProCyte’s
      products.




*Note
      7*


**Other
      Accrued Liabilities:**




Set
      forth
      below is a detailed listing of other accrued liabilities:




June
                30, 2008
            
            December
                31, 2007Accrued
                warranty
            
            $
            339,013
            
            $
            218,587Accrued
                professional and consulting fees
            
            
            259,600
            
            
            225,820Accrued
                sales taxes and other accrued liabilities
            
            
            218,255
            
            
            229,967Total
                other accrued liabilities
            
            $
            816,868
            
            $
            674,374





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          16
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*Note
      8*


**Notes
      Payable:**




Set
      forth
      below is a detailed listing of notes payable. The stated interest rate
      approximates the effective cost of funds from the notes:




June
                30, 2008
            
            December
                31, 2007Note
                Payable - secured creditor, interest at 6%, payable in monthly principal
                and interest installments of $2,880 through June 2012
            
            $
            120,065
            
            $
            133,507Note
                Payable - unsecured creditor, interest at 5.44%, payable in monthly
                principal and interest installments of $51,354 through February
                2008
            
            
            —
            
            
            102,013Note
                Payable - unsecured creditor, interest at 4.8%, payable in monthly
                principal and interest installments of $65,736 through December
                2008
            
            
            388,969
            
            
            —Note
                Payable - unsecured creditor, interest at 4.8%, payable in monthly
                principal and interest installments of $12,202 through December
                2008
            
            
            72,200
            
            
            —581,234
            
            
            235,520Less:
                current maturities
            
            
            (489,290
            )
            
            (129,305
            )Notes
                payable, net of current maturities
            
            $
            91,944
            
            $
            106,215




*Note
      9*


**Long-term
      Debt:**




In
      the
      following table is a summary of the Company’s long-term debt.




June
                30, 2008
            
            December
                31, 2007Total
                borrowings on credit facilities
            
            $
            9,307,372
            
            $
            10,105,608Capital
                lease obligations
            
            
            200,455
            
            
            254,178Less:
                current portion
            
            
            (4,790,939
            )
            
            (4,757,133
            )Total
                long-term debt
            
            $
            4,716,888
            
            $
            5,602,653




*Leasing
      Credit Facility, Term Note Facility*


The
      Company entered into a leasing credit facility with GE Capital Corporation
      (“GE”) on June 25, 2004. Eleven draws were made against the facility, the last
      of which was in March 2007. In June 2007, the Company entered a term-note
      facility with Leaf Financial Corporation (“Leaf”) and made its single draw
      against that facility. In December 2007, the Company extinguished its
      outstanding indebtedness under the GE and Leaf facilities, recognizing as costs
      (including termination costs and acceleration of the amortization of debt
      issuance costs and the debt discount) of such extinguishment as a refinancing
      charge under APB No. 26 of $441,956, including $178,699 related to the premium
      paid for the buyback of its warrants issued to GE. The GE warrants were redeemed
      and reflected as part of the refinancing charge.




In
      connection with the pay-off of the GE and Leaf facilities, on December 31,
      2007,
      the Company entered a term-note facility with CIT Healthcare LLC and Life
      Sciences Capital LLC, as equal participants (collectively, “CIT”), for which CIT
      Healthcare acts as the agent. The facility is for $12 million. The Company
      may
      draw against it for one year; the Company is presently in discussions with
      CIT
      Healthcare about amplifying the resources available to the Company under the
      facility. The stated interest rate for any draw is set at 675 basis points
      above
      the three-year Treasury rate. Each draw is secured by XTRAC laser systems
      consigned under usage agreements with physician-customers and the stream of
      payments generated from such lasers. Each draw has a repayment period of three
      years.




The
      first
      draw had three discrete components: carryover debt attributable to the former
      GE
      borrowings, as increased by extinguishment costs (including redemption of the
      GE
      warrants) which CIT financed; carryover debt attributable




-
          17
          -
 *Table
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to
      Leaf,
      as increased by extinguishment costs which CIT financed; and debt newly incurred
      to CIT on XTRAC units not pledged to GE or Leaf. The carryover components
      maintained the monthly debt service payments from GE and Leaf with increases
      to
      principal and changes in the stated interest rates causing minor changes in
      the
      number of months set to pay off the discrete draws. The third component will
      be
      self-amortized over three years.




The
      beginning principal of each component was $4,724,699, $1,612,626, and
      $3,990,000, respectively. The effective interest rate for the first draw was
      12.50%. The pay-off of each component is 27, 30, and 36 months, respectively.
      On
      March 31, 2008, the Company made a draw under the credit facility for $840,000.
      This draw is amortized over 36 months at an effective interest rate of 8.55%.
      On
      June 30, 2008, the Company made a draw under the credit facility for $832,675
      based on the limitations on gross borrowings under the facility. This draw
      is
      amortized over 36 months at an effective interest rate of 9.86%. The Company
      has
      used its entire availability under the CIT credit facility and is considering
      multiple written proposals for additional debt financing.




In
      connection with the CIT facility, the Company issued 235,525 warrants to each
      of
      CIT Healthcare and Life Sciences Capital. The warrants are treated as a discount
      to the debt and are amortized under the effective interest method over the
      repayment term of 36 months. The Company has accounted for these warrants as
      equity instruments in accordance with EITF 00-19, "Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
      Stock" since there is no option for cash or net-cash settlement when the
      warrants are exercised. The Company computed the value of the warrants using
      the
      Black-Scholes method.




The
      following table summarizes the future minimum payments that the Company expects
      to make for the draws made under the credit facility:




Six
                Months Ending
            
            Year
                Ending December 31,12/31/08
            
            2009
            
            2010
            
            2011Future
                minimum payments
            
            $
            2,965,071
            
            $
            4,615,492
            
            $
            2,684,487
            
            $
            240,837





*Capital
      Leases*


The
      obligations under capital leases are at fixed interest rates and are
      collateralized by the related property and equipment. The Company has agreed
      to
      pay off the capital leases on equipment that the Company is selling in
      connection with its discontinued operations.




*Note
      10*


**Employee
      Stock Benefit Plans**




The
      Company has three active, stock-based compensation plans available to grant,
      among other things, incentive and non-incentive stock options to employees,
      directors and third-party service-providers as well as restricted stock to
      key
      employees. As of September 26, 2007, the stockholders approved an increase
      in
      the number of shares reserved for the 2005 Equity Compensation Plan and for
      the
      Outside Director Plan. Under the 2005 Equity Compensation Plan, a maximum of
      6,160,000 shares of the Company’s common stock have been reserved for issuance.
      At June 30, 2008, 2,069,550 shares were available for future grants under this
      plan. Under the Outside Director Plan and under the 2005 Investment Plan,
      695,000 shares and 388,000 shares, respectively, were available for issuance
      as
      of June 30, 2008. The other stock options plans are frozen and no further grants
      will be made from them.




-
          18
          -
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          of Contents*


Stock
      option activity under all of the Company’s share-based compensation plans for
      the six months ended June 30, 2008 was as follows:




Number
                of
              Options
            
            Weighted
                Average Exercise PriceOutstanding,
                January 1, 2008
            
            
            6,129,671
            
            $
            2.00Granted
            
            
            1,145,200
            
            
            0.91Cancelled
            
            
            (635,980
            )
            
            1.69Outstanding,
                June 30, 2008
            
            
            6,638,891
            
            $
            1.84Options
                excercisable at June 30, 2008
            
            
            4,221,301
            
            $
            2.07




At
      June
      30, 2008, there was $3,553,351 of total unrecognized compensation cost related
      to non-vested option grants and stock awards that is expected to be recognized
      over a weighted-average period of 2.58 years. The intrinsic value of options
      outstanding and exercisable at June 30, 2008 was not significant.




*Note
      11*


**Business
      Segment and Geographic Data:**




Segments
      are distinguished by the Company’s management structure, products and services
      offered, markets served and types of customers. The Domestic XTRAC business
      derives its primary revenues from procedures performed by dermatologists in
      the
      United States. The International Dermatology Equipment segment, in comparison,
      generates revenues from the sale of equipment to dermatologists outside the
      United States through a network of distributors. The Skin Care (ProCyte) segment
      generates revenues by selling skincare products and by earning royalties on
      licenses for the Company’s patented copper peptide compound. The Surgical
      Products segment generates revenues by selling laser products and disposables
      to
      hospitals and surgery centers on both a domestic and international basis. For
      the three and six months ended June 30, 2008 and 2007, the Company did not
      have material revenues from any individual customer.




Unallocated
      operating expenses include costs that are not specific to a particular segment
      but are general to the group; included are expenses incurred for administrative
      and accounting staff, general liability and other insurance, professional fees
      and other similar corporate expenses. Unallocated assets include cash, prepaid
      expenses and deposits. Goodwill from the buy-out of Acculase that was carried
      at
      $2,944,423 at June 30, 2008 and December 31, 2007 has been allocated to the
      domestic and international XTRAC segments based upon its fair value as of the
      date of the buy-out in the amounts of $2,061,096 and $883,327, respectively.
      Goodwill of $13,973,385 at June 30, 2008 from the ProCyte acquisition has been
      entirely allocated to the Skin Care segment.




-
          19
          -
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          of Contents*




The
      following tables reflect results of operations from our business segments for
      the periods indicated below:




Three
                Months Ended June 30, 2008DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            3,433,998
            
            $
            697,973
            
            $
            3,424,557
            
            $
            1,833,251
            
            $
            9,389,779Costs
                of revenues
            
            
            1,483,806
            
            
            336,039
            
            
            1,180,012
            
            
            1,035,247
            
            
            4,035,104Gross
                profit
            
            
            1,950,192
            
            
            361,934
            
            
            2,244,545
            
            
            798,004
            
            
            5,354,675*Gross
                profit %*
            
            
            *56.8*
            *%*
            
            *51.9*
            *%*
            
            *65.5*
            *%*
            
            *43.5*
            *%*
            
            *57.03*
            *%*Allocated
                operating expenses:Selling,
                general and administrative
            
            
            2,064,442
            
            
            64,393
            
            
            1,480,392
            
            
            165,607
            
            
            3,774,834Engineering
                and product development
            
            
            —
            
            
            —
            
            
            106,446
            
            
            111,898
            
            
            218,344Unallocated
                operating expenses
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,218,2592,064,442
            
            
            64,393
            
            
            1,586,838
            
            
            277,505
            
            
            6,211,437Income
                (loss) from operations
            
            
            (114,250
            )
            
            297,541
            
            
            657,707
            
            
            520,499
            
            
            (856,762
            )Interest
                expense, net
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (281,765
            )(Loss)
                income from continuing operations
            
            
            (114,250
            )
            
            297,541
            
            
            657,707
            
            
            520,499
            
            
            (1,138,527
            )Discontinued
                operations:Income
                from discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            77,069Loss
                on sale of discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (545,844
            )Net
                (loss) income
            
            
            ($114,250
            )
            $
            297,541
            
            $
            657,707
            
            $
            520,499
            
            
            ($1,607,302
            )




Three
                Months Ended June 30, 2007DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            2,215,926
            
            $
            618,953
            
            $
            3,094,697
            
            $
            1,381,020
            
            $
            7,310,596Costs
                of revenues
            
            
            1,190,669
            
            
            230,204
            
            
            1,001,517
            
            
            880,813
            
            
            3,303,203Gross
                profit
            
            
            1,025,257
            
            
            388,749
            
            
            2,093,180
            
            
            500,207
            
            
            4,007,393*Gross
                profit %*
            
            
            *46.3*
            *%*
            
            *62.8*
            *%*
            
            *67.6*
            *%*
            
            *36.2*
            *%*
            
            *54.8*
            *%*Allocated
                operating expenses:Selling,
                general and administrative
            
            
            1,448,670
            
            
            44,479
            
            
            1,420,406
            
            
            160,793
            
            
            3,074,348Engineering
                and product development
            
            
            —
            
            
            —
            
            
            99,599
            
            
            85,906
            
            
            185,505Unallocated
                operating expenses
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,548,4501,448,670
            
            
            44,479
            
            
            1,520,005
            
            
            246,699
            
            
            5,808,303Income
                (loss) from operations
            
            
            (423,413
            )
            
            344,270
            
            
            573,175
            
            
            253,508
            
            
            (1,800,910
            )Interest
                expense, net
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (161,967
            )(Loss)
                income from continuing operations
            
            
            (423,413
            )
            
            344,270
            
            
            573,175
            
            
            253,508
            
            
            (1,962,877
            )Discontinued
                operations:Income
                from discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            126,919Loss
                on sale of discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —Net
                (loss) income
            
            
            ($423,413
            )
            $
            344,270
            
            $
            573,175
            
            $
            253,508
            
            
            ($1,835,958
            )





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          20
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          of Contents*





Six
                Months Ended June 30, 2008DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            5,544,705
            
            $
            1,866,178
            
            $
            6,699,249
            
            $
            3,610,481
            
            $
            17,720,613Costs
                of revenues
            
            
            2,914,584
            
            
            906,688
            
            
            2,140,464
            
            
            2,191,398
            
            
            8,153,134Gross
                profit
            
            
            2,630,121
            
            
            959,490
            
            
            4,558,785
            
            
            1,419,083
            
            
            9,567,479*Gross
                profit %*
            
            
            *47.4*
            *%*
            
            *51.4*
            *%*
            
            *68.0*
            *%*
            
            *39.3*
            *%*
            
            *54.0*
            *%*Allocated
                operating expenses:Selling,
                general and administrative
            
            
            4,055,941
            
            
            137,881
            
            
            3,405,099
            
            
            307,878
            
            
            7,906,799Engineering
                and product development
            
            
            168,214
            
            
            20,790
            
            
            247,634
            
            
            220,394
            
            
            657,032Unallocated
                operating expenses
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4,343,7014,224,155
            
            
            158,671
            
            
            3,652,733
            
            
            528,272
            
            
            12,907,532Income
                (loss) from operations
            
            
            (1,594,034
            )
            
            800,819
            
            
            906,052
            
            
            890,811
            
            
            (3,340,053
            )Interest
                expense, net
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (509,137
            )(Loss)
                income from continuing operations
            
            
            (1,594,034
            )
            
            800,819
            
            
            906,052
            
            
            890,808
            
            
            (3,849,190
            )Discontinued
                operations:Income
                from discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            245,870Loss
                on sale of discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (545,844
            )Net
                (loss) income
            
            
            ($1,594,034
            )
            $
            800,819
            
            $
            906,052
            
            $
            890,808
            
            
            ($4,149,164
            )




Six
                Months Ended June 30, 2007DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            4,022,852
            
            $
            1,297,771
            
            $
            6,580,407
            
            $
            2,617,930
            
            $
            14,518,960Costs
                of revenues
            
            
            2,293,047
            
            
            595,704
            
            
            2,027,731
            
            
            1,628,952
            
            
            6,545,434Gross
                profit
            
            
            1,729,805
            
            
            702,067
            
            
            4,552,676
            
            
            988,978
            
            
            7,973,526*Gross
                profit %*
            
            
            *43.0*
            *%*
            
            *54.1*
            *%*
            
            *69.2*
            *%*
            
            *37.8*
            *%*
            
            *54.9*
            *%*Allocated
                operating expenses:Selling,
                general and administrative
            
            
            2,992,743
            
            
            69,399
            
            
            2,767,119
            
            
            306,537
            
            
            6,135,798Engineering
                and product development
            
            
            —
            
            
            —
            
            
            191,091
            
            
            210,382
            
            
            401,473Unallocated
                operating expenses
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            5,010,3402,992,743
            
            
            69,399
            
            
            2,958,210
            
            
            516,919
            
            
            11,547,611Income
                (loss) from operations
            
            
            (1,262,938
            )
            
            632,668
            
            
            1,594,466
            
            
            472,059
            
            
            (3,574,085
            )Interest
                expense, net
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (238,386
            )(Loss)
                income from continuing operations
            
            
            (1,262,938
            )
            
            632,668
            
            
            1,594,466
            
            
            472,059
            
            
            (3,812,471
            )Discontinued
                operations:Income
                from discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            93,031Loss
                on sale of discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —Net
                (loss) income
            
            
            ($1,262,938
            )
            $
            632,668
            
            $
            1,594,466
            
            $
            472,059
            
            
            ($3,719,440
            )




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            21
            -
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            of Contents*


June
                30, 2008
            
            December
                31, 2007Assets:Total
                assets for reportable segments
            
            $
            42,576,389
            
            $
            42,239,374Assets
                held for sale
            
            
            3,240,861
            
            
            3,972,602Other
                unallocated assets
            
            
            8,183,443
            
            
            10,474,727Consolidated
                total
            
            $
            54,000,693
            
            $
            56,686,703




For
      the
      three and six months ended June 30, 2008 and 2007 there were no material net
      revenues attributed to any individual foreign country. Net revenues by
      geographic area were, as follows:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Domestic
            
            $
            7,843,450
            
            
            5,820,215
            
            $
            14,114,257
            
            $
            11,588,251Foreign
            
            
            1,546,329
            
            
            1,490,381
            
            
            3,606,356
            
            
            2,930,709$
            9,389,779
            
            $
            7,310,596
            
            $
            17,720,613
            
            $
            14,518,960




The
      Company discusses segmental details in its Management Discussion & Analysis
      found elsewhere in its Form 10-Q for the period ending June 30,
      2008.




*Note
      12*


**Significant
      Alliances/Agreements:**




The
      Company continues in alliance with GlobalMed (Asia) Technologies Co., Inc.
      as
      well as with the Mount Sinai School of Medicine and with AzurTec, Inc.




With
      respect to the Clinical Trial Agreement protocol with the University of
      California at San Francisco, Dr. Koo presented the favorable findings of the
      study at the Hawaii Dermatology Seminar in March 2008. Dr. Koo concluded that the
      XTRAC
      Excimer Laser may be appropriate for the majority of moderate to severe
      psoriasis sufferers. It also allows dermatologists to treat those patients
      with
      a high level of safety, as opposed to the use of many systemic products. Other
      phototherapy treatments such as broadband or narrow band UVB can also be used;
      however, undesirable aspects of these treatments include exposure of healthy
      skin to UVB light, and the inconvenience of extended treatment periods, which
      are often necessary for moderate to severe patients .
      We
      expensed $189,000 in the six months ended June 30, 2008 in payment for this
      study.




*Note
      13*


**Subsequent
      Event:**




On
      August
      4, 2008, the Company entered into a Purchase Agreement with Photo Therapeutics
      Group, Limited (“Photo
      Therapeutics”) and
      a
      Securities Purchase Agreement with Perseus, L.L.C. (“Perseus”). Under
      the
      Purchase Agreement with Photo Therapeutics, the Company will acquire from Photo
      Therapeutics the common stock of its subsidiaries (Photo Therapeutics Limited
      in
      the United Kingdom and Photo Therapeutics, Inc. in California) for $13 million
      in cash at closing, and up to an additional $7 million in cash if certain gross
      profit milestones are met by the Photo Therapeutics subsidiaries between July
      1,
      2008 and June 30, 2009, subject to customary adjustments. Under the Securities
      Purchase Agreement with Perseus, an investment fund managed by Perseus will
      fund
      the acquisition of the Photo Therapeutics subsidiaries through a convertible
      debt investment of up to $25 million (with associated warrants), to be made
      in
      two tranches as described below.




Photo
      Therapeutics had unaudited revenues of
      approximately $6.3 million for the year ended December 31, 2007 and
      approximately $4.0 million for the six months ended June 30, 2008.




The
      proposed acquisition and investment are subject to customary closing conditions,
      including approval by the shareholders of Photo Therapeutics of the proposed
      acquisition and approval by the Company’s stockholders of the proposed
      investment by Perseus and of a reverse split of the outstanding shares of the
      Company’s common stock at a ratio as may be agreed between the Company and
      Perseus. Certain shareholders of Photo Therapeutics




-
          22
          -
 *Table
          of Contents*


who
      collectively own approximately 51.5% of Photo Therapeutics’ outstanding shares
      have agreed to vote all of their shares in favor of the proposed acquisition.
      Approval by the holders of 75% of the shares of Photo Therapeutics entitled
      to
      vote and present in person or by proxy at its shareholders meeting will be
      required to approve the proposed acquisition. The proposed acquisition and
      the
      first tranche of the proposed investment by Perseus are expected to close
      concurrently in the fourth quarter of 2008.




The
      convertible debt investment by Perseus will be made in two tranches. The first
      tranche of $18 million will fund the initial payment to Photo Therapeutics
      and
      also provide the Company with an additional $5 million for working capital
      and
      other general corporate purposes. The second tranche will be up to $7 million
      as
      a standby commitment to fund any gross profit milestone earnout payments to
      Photo Therapeutics, if required. Perseus will have the right to nominate one
      replacement director to the Company’s Board of Directors upon closing of the
      first tranche, and an additional director if any second tranche notes are
      issued.




**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 that are discussed under the section entitled
“Risk
      Factors,” in our Annual Report on Form 10-K for the year ended December 31,
      2007.*




*The
      following discussion and analysis should be read in conjunction with the
      consolidated financial statements and related notes included elsewhere in this
      Report.*




**Introduction,
      Outlook and Overview of Business Operations**




We
      view
      our current business as comprised of the following four business segments:




·
            Domestic
                XTRAC,




·
            International
                Dermatology Equipment,




·
            Skin
                Care (ProCyte), and




·
            Surgical
                Products.




**Domestic
      XTRAC**




Our
      Domestic XTRAC segment is a U.S. business with revenues primarily derived from
      procedures performed by dermatologists. We are engaged in the development,
      manufacturing and marketing of our proprietary XTRAC® excimer laser and delivery
      systems and techniques used in the treatment of inflammatory skin
      disorders, **** including
      psoriasis, vitiligo, atopic dermatitis and leukoderma.




As
      part
      of our commercialization strategy in the United States, we offer the XTRAC
      laser
      system to targeted dermatologists at no initial capital cost. Under this
      contractual arrangement, we maintain ownership of the laser and earn revenue
      each time a physician treats a patient with the equipment, and we believe this
      arrangement




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will
      increase market penetration. At times, however, we sell the laser directly
      to
      the customer for certain reasons, including the costs of logistical support
      and
      customer preference. We are finding that through sales of lasers we are able
      to
      reach, at reasonable margins, a sector of the market that is better suited
      to a
      sale model than a per-procedure model.




For
      the
      last several years we have sought to obtain health insurance coverage for its
      XTRAC laser therapy to treat inflammatory skin disease, particularly psoriasis.
      With the addition of new positive payment policies from Blue Cross Blue Shield
      plans from certain states in 2008, the Company now benefits from the fact that
      more than 90% of the insured United States population has policies that provide
      nearly full reimbursement for the treatment of psoriasis by means of an excimer
      laser. We are now focusing our efforts on accelerating the adoption of the
      XTRAC
      laser therapy for psoriasis and vitiligo by doctors and patients. Consequently,
      we have has increased the size of our sales force and clinical technician
      personnel together with increasing expenditures for marketing and
      advertising.




Our
      32-person XTRAC sales organization includes 19 sales representatives, 10
      clinical specialists and 3 marketing support personnel. Our 27-person skin
      care
      sales organization includes 19 sales representatives, 6 customer service
      representatives and 2 marketing support personnel. The sales representatives
      in
      each segment provide follow-up sales support and share sales leads to enhance
      opportunities for cross-selling. Our marketing department has been instrumental
      in expanding the advertising campaign for the XTRAC laser system.




While
      our
      sales and marketing expenses have grown at nearly the same rate as the revenues
      on which the expenses are targeted to have positive impact, we expect to
      increase our overall revenue and productivity as a result of these expenditures
      in the long term. For example, we have tried various direct-to-consumer
      marketing programs that have positively influenced utilization, but the increase
      in utilization is expected to be attained in periods subsequent to the period
      in
      which we incurred the expense. We have also increased the number of sales
      representatives and established a group of clinical support specialists to
      optimize utilization levels and better secure the willingness and interest
      of
      patients to seek follow-up courses of treatment after the effect of the first
      battery of treatment sessions starts to wear off. We continue to implement
      innovations in this marketing effort.




**International
      Dermatology Equipment**




In
      the
      international market, we derive revenues by selling our dermatology laser
      systems and replacement parts to distributors and directly to physicians. In
      this market, we have benefited from both our clinical studies and from the
      improved reliability and functionality of the XTRAC laser system.  Compared
      to the domestic segment, the sales of laser systems in the international segment
      are influenced to a greater degree by competition from similar laser
      technologies as well as non-laser lamp alternatives. Over time, this competition
      has reduced the prices we are able to charge to international distributors
      for
      our XTRAC products. To compete with other non-laser UVB products, we offer
      a
      lower-priced, lamp-based system called the VTRAC. We expanded the international
      marketing of the VTRAC since its introduction in 2006. The VTRAC is used to
      treat psoriasis and vitiligo.




**Skin
      Care (ProCyte)**




Skin
      Care
      generates revenues from the sale of skin health, hair care and wound care
      products; the sale of copper peptide compound in bulk; and royalties on licenses
      for the patented copper peptide compound.




ProCyte’s
      focus has been to provide unique products, primarily based upon patented
      technologies for selected applications in the dermatology, plastic and cosmetic
      surgery and spa markets. ProCyte has also expanded the use of its novel copper
      peptide technologies into the mass retail market for skin and hair care through
      targeted technology licensing and supply agreements.




ProCyte’s
      products are aimed at the growing demand for skin health and hair care products,
      including products to enhance appearance and address the effects of aging on
      skin and hair. ProCyte’s products are formulated, branded and targeted at
      specific markets. ProCyte’s initial products addressed the dermatology, plastic
      and cosmetic surgery markets for use after various procedures. Anti-aging skin
      care products were added to offer a comprehensive approach for a patient’s skin
      care regimen.




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          24
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Our
      customers have displayed strong interest in MD Lash FactorTM eyelash conditioner.
      It is significant to them that this product contains no bimatoprost, the active
      ingredient found in Allergan’s product Lumigan®, which if used improperly can,
      i n
      the
      judgment of the FDA, lead to severe visual difficulties. The growth in revenues
      from this product, however, have been offset, in part, by legal costs we
      incurred in the suit brought by Allergan against us and other companies
      marketing eyelash conditioners. Our customers also show growing interest in
      our
      skin brightening cream, which uses manganese peptide as an efficacious
      substitute for hydroquinone. Universal Business Solutions, our exclusive
      distributor for spa products, continues to show progress in continuing the
      spa
      business, which it took over at the end of 2007.




**Surgical
      Products**




The
      Surgical Products segment generates revenues by selling laser products and
      disposables to hospitals and surgery centers both inside and outside of the
      United States. Also included are various non-laser surgical products (e.g.
      the
      ClearEss® II suction-irrigation system). Surgical product revenues decreased,
      reflecting we believe that sales of surgical laser systems and the related
      disposable base have eroded as hospitals continue to seek outsourcing solutions
      instead of purchasing lasers and related disposables for their operating rooms.
      We are working to offset this erosion by increasing sales from the Diode
      surgical laser introduced in 2004, including OEM arrangements.




In
      September 2007, we entered into a three-year OEM agreement with AngioDynamics
      under which we manufacture for AngioDynamics, on a non-exclusive basis, a
      private-label, 980-nanometer diode laser system. The OEM agreement provides
      that
      we shall supply this laser on an exclusive basis to AngioDynamics, should
      AngioDynamics meet certain purchase requirements. Through June 30, 2008
      shipments to AngioDynamics exceeded the minimum purchase requirement for
      delivery of lasers over the first contract year and therefore triggering
      exclusivity for worldwide sale in the peripheral vascular treatment field.
      Recently, however, AngioDynamics purchased the assets of a competitive diode
      laser company, and if it elects to source its diodes through the assets so
      purchased, our future sales of diode lasers to AngioDynamics under this
      exclusive arrangement may be severely limited.




**Sale
      of Surgical Services Business**




Surgical
      Services is a fee-based procedures business using mobile surgical laser
      equipment operated by our technicians at hospitals and surgery centers in the
      United States. We decided to sell this division primarily because the growth
      rates and operating margins of the division have decreased as the business
      had
      changed to rely more heavily upon procedures performed using equipment from
      third-party suppliers, thereby limiting the profit potential of these services.
      After preliminary investigations and discussions, our Board of Directors decided
      on June 13, 2008 to enter into, with the aid of its investment banker,
      substantive, confidential discussions with potential third-party buyers and
      began to develop plans for implementing a disposal of the assets and operations
      of the business. On August 1, 2008, we entered into a definitive agreement
      to
      sell specific assets of the business including accounts receivable, inventory
      and equipment, for $3,500,000, subject to certain closing adjustments. Such
      closing adjustments are currently estimated to result in net proceeds to us
      of
      $3,240,861.




-
          25
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**Proposed
      Acquisition of the Subsidiaries of Photo Therapeutics Group, Limited and
      Proposed Investment by Perseus, L.L.C.**




On
      August
      4, 2008, we entered into a Purchase Agreement with Photo Therapeutics Group,
      Limited (“Photo
      Therapeutics”) and
      a
      Securities Purchase Agreement with Perseus, L.L.C. (“Perseus”). Under
      the
      Purchase Agreement with Photo Therapeutics, we will acquire from Photo
      Therapeutics the common stock of its subsidiaries (Photo Therapeutics Limited
      in
      the United Kingdom and Photo Therapeutics, Inc. in California) for $13 million
      in cash at closing, and up to an additional $7 million in cash if certain gross
      profit milestones are met by the Photo Therapeutics subsidiaries between July
      1,
      2008 and June 30, 2009, subject to customary adjustments. Under the Securities
      Purchase Agreement with Perseus, an investment fund managed by Perseus will
      fund
      the acquisition of the Photo Therapeutics subsidiaries through convertible
      debt
      investment of up to $25 million (with associated warrants), to be made in two
      tranches as described below.




The
      proposed acquisition and investment are subject to customary closing conditions,
      including approval by the shareholders of Photo Therapeutics of the proposed
      acquisition and approval by our stockholders of the proposed investment by
      Perseus and of a reverse split of the outstanding shares of our common stock
      at
      a ratio as may be agreed between us and Perseus. Certain shareholders of Photo
      Therapeutics who collectively own approximately 51.5% of Photo Therapeutics’
outstanding shares have agreed to vote all of their shares in favor of the
      proposed acquisition. Approval by the holders of 75% of the shares of Photo
      Therapeutics entitled to vote and present in person or by proxy at its
      shareholders meeting will be required to approve the proposed acquisition.
      The
      proposed acquisition and the first tranche of the proposed investment by Perseus
      are expected to close concurrently in the fourth quarter of 2008.




The
      convertible debt investment by Perseus will be made in two tranches. The first
      tranche of $18 million will fund the initial payment to Photo Therapeutics
      and
      also provide us with an additional $5 million for working capital and other
      general corporate purposes. The second tranche will be up to $7 million as
      a
      standby commitment to fund any gross profit milestone earnout payments to Photo
      Therapeutics, if required. Perseus will have the right to nominate one director
      to our Board of Directors upon closing of the first tranche, and an additional
      director if any second tranche notes are issued.




Further
      information on the acquisition and
      investment can be obtained from our Current Report filed on Form 8-K
      on August 4, 2008.




**Critical
      Accounting Policies**




There
      have been no changes to our critical accounting policies in the three and six
      months ended June 30, 2008. Critical accounting policies and the significant
      estimates made in accordance with them are regularly discussed with our Audit
      Committee. Those policies are discussed under “Critical Accounting Policies” in
      our “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” included in Item 7 of our Annual Report on Form 10-K for the year
      ended December 31, 2007.




**Results
      of Operations**




***Revenues***




The
      following table presents revenues from our four business segments for the
      periods indicated below:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007XTRAC
                Domestic Services
            
            $
            3,433,998
            
            $
            2,215,926
            
            $
            5,544,705
            
            $
            4,022,852International
                Dermatology Equipment Products
            
            
            697,973
            
            
            618,953
            
            
            1,866,178
            
            
            1,297,771Skin
                Care (ProCyte) Products
            
            
            3,424,557
            
            
            3,094,697
            
            
            6,699,249
            
            
            6,580,407Total
                Dermatology Revenues
            
            
            7,556,528
            
            
            5,929,576
            
            
            14,110,132
            
            
            11,901,030Surgical
                Products
            
            
            1,833,251
            
            
            1,381,020
            
            
            3,610,481
            
            
            2,617,930Total
                Surgical Revenues
            
            
            1,833,251
            
            
            1,381,020
            
            
            3,610,481
            
            
            2,617,930Total
                Revenues
            
            $
            9,389,779
            
            $
            7,310,596
            
            $
            17,720,613
            
            $
            14,518,960









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Domestic
      XTRAC Segment




Recognized
      treatment revenue for the three months ended June 30, 2008 and 2007 for domestic
      XTRAC procedures was $2,337,148 and $1,532,306, respectively, reflecting billed
      procedures of 33,476 and 27,777, respectively. In addition, 1,130 and 1,187
      procedures were performed in the three months ended June 30, 2008 and 2007,
      respectively, without billing from us, in connection with clinical research
      and
      customer evaluations of the XTRAC laser. Recognized treatment revenue for the
      six months ended June 30, 2008 and 2007 for domestic XTRAC procedures was
      $3,903,055 and $2,994,692, respectively, reflecting billed procedures of 62,295
      and 52,793, respectively. In addition, 2,649 and 2,448 procedures were performed
      in the six months ended June 30, 2008 and 2007, respectively, without billing
      from us, in connection with clinical research and customer evaluations of the
      XTRAC laser. The increase in procedures in the periods ended June 30, 2008
      compared to the comparable periods in 2007 was largely related to our continuing
      progress in securing favorable reimbursement policies from private insurance
      plans and to our increased marketing programs. Increases in procedures are
      dependent upon building market acceptance through marketing programs with our
      physician partners and their patients that the XTRAC procedures will be of
      clinical benefit and be generally reimbursed.




We
      have a
      program to support certain physicians who may be denied reimbursement by private
      insurance carriers for XTRAC treatments. In accordance with the requirements
      of
      Staff Accounting Bulletin No. 104, we recognize service revenue during this
      program from the sale of XTRAC procedures or equivalent treatments to physicians
      participating in this program only to the extent the physician has been
      reimbursed for the treatments. For the three months ended June 30, 2008, we
      deferred net revenues of $58,120 (891 procedures) under this program compared
      to
      $87,925 (147 procedures) for the three months ended June 30, 2007. For the
      six
      months ended June 30, 2008, we deferred net revenues of $58,847 (901 procedures)
      under this program compared to $153,875 (2,342 procedures) for the six months
      ended June 30, 2007. The change in deferred revenue under this program is
      presented in the table below.




For
      the
      three and six months ended June 30, 2008, domestic XTRAC laser sales were
      $1,096,850 and $1,641,650, respectively. There were 21 and 31 lasers sold,
      respectively. For the three and six months ended June 30, 2007 domestic XTRAC
      laser sales were $683,620 and $1,028,160, respectively. There were 15 and 23
      lasers sold, respectively. Overall, laser sales have been made for various
      reasons, including costs of logistical support and customer preferences. We
      are
      finding that through sales of lasers we are able to reach, at reasonable
      margins, a sector of the market that is better suited to a sale model than
      a
      per-procedure model.




The
      following table sets forth the above analysis for the Domestic XTRAC segment
      for
      the periods reflected below:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Total
                revenue
            
            $
            3,433,998
            
            $
            2,215,926
            
            $
            5,544,705
            
            $
            4,022,852Less:
                laser sales revenue
            
            
            (1,096,850
            )
            
            (683,620
            )
            
            (1,641,650
            )
            
            (1,028,160
            )Recognized
                treatment revenue
            
            
            2,337,148
            
            
            1,532,306
            
            
            3,903,055
            
            
            2,994,692Change
                in deferred programRevenue
            
            
            58,120
            
            
            87,925
            
            
            58,847
            
            
            153,875Change
                in deferred unusedTreatments
            
            
            (212,519
            )
            
            192,569
            
            
            107,678
            
            
            320,742Net
                billed revenue
            
            $
            2,182,749
            
            $
            1,812,800
            
            $
            4,069,580
            
            $
            3,469,309Procedure
                volume total
            
            
            34,606
            
            
            28,964
            
            
            64,944
            
            
            55,241Less:
                Non-billed procedures
            
            
            1,130
            
            
            1,187
            
            
            2,649
            
            
            2,448Net
                billed procedures
            
            
            33,476
            
            
            27,777
            
            
            62,295
            
            
            52,793Avg.
                price of treatments billed
            
            $
            65.20
            
            $
            65.26
            
            $
            65.33
            
            $
            65.72Change
                in procedures with deferred program revenue, net
            
            
            891
            
            
            1,347
            
            
            901
            
            
            2,342Change
                in procedures with deferred unused treatments, net
            
            
            (3,259
            )
            
            2,951
            
            
            1,648
            
            
            4,881






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The
      average price for a treatment may be reduced in some instances based on the
      volume of treatments performed. The average price for a treatment also varies
      based upon the mix of mild and moderate psoriasis patients treated by our
      physician partners. We charge a higher price per treatment for moderate
      psoriasis patients due to the increased body surface area required to be
      treated, although there are fewer patients with moderate psoriasis than there
      are with mild psoriasis.




International
      Dermatology Equipment Segment




International
      sales of our XTRAC and VTRAC systems and related parts were $697,973 for the
      three months ended June 30, 2008 compared to $618,953 for the three months
      ended
      June 30, 2007. We sold 14 systems in each of the three month periods ended
      June
      30, 2008 and 2007. International sales of our XTRAC and VTRAC systems were
      $1,866,178 for the six months ended June 30, 2008 compared to $1,297,771 for
      the
      six months ended June 30, 2007. We sold 38 and 25 systems in the six months
      ended June 30, 2008 and 2007, respectively. The average price of dermatology
      equipment sold internationally varies due to the quantities of refurbished
      domestic XTRAC systems and VTRACs sold. Both of these products have lower
      average selling prices than new XTRAC laser systems. However, by adding these
      to
      our product offerings along with expanding into new geographic territories
      where
      the products are sold, we have been able to increase overall international
      dermatology equipment revenues.




·
            We
                sell refurbished domestic XTRAC laser systems into the international
                market. The selling price for used equipment is substantially less
                than
                new equipment, some of which may be substantially depreciated in
                connection with its use in the domestic market. We sold two and four
                such
                used lasers in the three and six months ended June 30, 2008, respectively,
                at an average price of $25,000 and $31,250, respectively. We sold
                two and
                three such lasers in the three and six months ended June 30, 2007,
                respectively, at an average price of $30,225 and $30,190, respectively;
                and




·
            In
                addition to the XTRAC laser system (both new and used) we sell the
                VTRAC,
                a lamp-based, alternative UVB light source that has a wholesale sales
                price that is below our competitors’ international dermatology equipment
                and below our XTRAC laser. In the three and six months ended June
                30,
                2008, we sold three and ten VTRAC systems respectively. In the three
                and
                six months ended June 30, 2007, we sold six and nine VTRAC systems,
                respectively.




The
      following table illustrates the key changes in the International Dermatology
      Equipment segment for the periods reflected below:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Revenues
            
            $
            697,973
            
            $
            618,953
            
            $
            1,866,178
            
            $
            1,297,771Less:
                part sales
            
            
            (161,973
            )
            
            (117,153
            )
            
            (391,178
            )
            
            (269,071
            )Laser
                revenues
            
            
            536,000
            
            
            501,800
            
            
            1,475,000
            
            
            1,028,700Laser
                systems sold
            
            
            14
            
            
            14
            
            
            38
            
            
            25Average
                revenue per laser
            
            $
            38,286
            
            $
            35,843
            
            $
            38,816
            
            $
            41,148




Skin
      Care (ProCyte) Segment




For
      the
      three months ended June 30, 2008, ProCyte revenues were $3,424,557 compared
      to
      $3,094,697 in the three months ended June 30, 2007. For the six months ended
      June 30, 2008, ProCyte revenues were $6,699,249




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compared
      to $6,580,407 in the six months ended June 30, 2007. ProCyte revenues are
      generated from the sale of various skin, hair care and wound products, from
      the
      sale of copper peptide compound and from royalties on licenses, mainly from
      Neutrogena.




Bulk
      compound sales decreased by $80,000 for the six months ended June 30, 2008
      compared to the six months ended June 30, 2007. Minimum contractual royalties
      from Neutrogena expired in November 2007 and as such the royalties decreased
      $71,800 and 146,800 for the three and six months ended June 30, 2008,
      respectively, compared to the same periods in the prior year.




·
            Included
                in Product sales for the three ended June 30, 2008 were $656,257
                of
                revenues from MD Lash Factor, an eyelash conditioning product, as
                part of
                an exclusive license to distribute in the United States and certain
                countries outside the United States. The Company is currently working
                through a delay in the supply chain for this product, and if the
                delay is
                not timely rectified, our future sales of this product may be adversely
                impacted. For the six months ended June 30, 2008, there were $1,107,834
                revenues from MD Lash Factor. In the comparable periods in 2007 there
                were
                no revenues as the product was launched in August
                2007.




The
      following table illustrates the key changes in the Skin Care (ProCyte) segment
      for the periods reflected below:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Product
                sales
            
            $
            3,293,370
            
            $
            2,859,697
            
            $
            6,536,062
            
            $
            6,190,407Bulk
                compound sales
            
            
            128,000
            
            
            160,000
            
            
            160,000
            
            
            240,000Royalties
            
            
            3,187
            
            
            75,000
            
            
            3,187
            
            
            150,000Total
                ProCyte revenues
            
            $
            3,424,557
            
            $
            3,094,697
            
            $
            6,699,249
            
            $
            6,580,407




Surgical
      Products Segment




Surgical
      Products revenues include revenues derived from the sale of surgical laser
      systems together with sales of related laser fibers and laser disposables.
      Laser
      fibers and laser disposables are more profitable than laser systems, but the
      sales of laser systems create the recurring revenue stream from fibers and
      disposables.




For
      the
      three months ended June 30, 2008, surgical products revenues were $1,833,251
      compared to $1,381,021 in the three months ended June 30, 2007. For the six
      months ended June 30, 2008, surgical products revenues were $3,610,481 compared
      to $2,617,930 in the six months ended June 30, 2007. These increases are mainly
      due to our OEM contract with AngioDynamics, which had initial shipments in
      December 2007. Recently, however, AngioDynamics purchased the assets of a
      competitive diode laser, and if it elects to source its diodes through the
      assets which it has purchased, our future sales of diode lasers to AngioDynamics
      may be severely limited. Sales to AngioDynamics were
      $700,000 and $1.4 million for the three and six months ended June 30, 2008,
      respectively. There were no comparable sales in the prior year
      periods.




The
      decrease in average price per laser between the periods, as set forth in the
      table below, was largely due to the mix of lasers sold and partly due to the
      trade level at which the lasers were sold (i.e. wholesale versus retail). Our
      diode laser has replaced our Nd:YAG laser, which had a higher sales price.
      Included in laser sales during the three months ended June 30, 2008 and 2007
      were sales of 61 and 22 diode lasers, respectively. Included in laser sales
      during the six months ended June 30, 2008 and 2007 were sales of 123 and 28
      diode lasers, respectively. The diode lasers have lower sales prices than our
      other types of lasers, and thus the increase in the number of diodes sold
      reduced the average price per laser. We expect that we will continue to sell
      more diode lasers than our other types of lasers into the near
      future.




Fiber
      and
      other disposables sales decreased 5% between the comparable six-month periods
      ended June 30, 2008 and 2007. We expect that our disposables base may erode
      over
      time as hospitals continue to seek outsourcing solutions instead of purchasing
      lasers and related disposables for their operating rooms.




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          29
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          of Contents*


The
      following table illustrates the key changes in the Surgical Products segment
      for
      the periods reflected below:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Revenues
            
            $
            1,833,251
            
            $
            1,381,021
            
            $
            3,610,481
            
            $
            2,617,930Laser
                systems sold
            
            
            62
            
            
            25
            
            
            126
            
            
            36Laser
                system revenues
            
            $
            935,995
            
            $
            513,540
            
            $
            1,908,740
            
            $
            834,040Average
                revenue per laser
            
            $
            15,097
            
            $
            20,542
            
            $
            15,149
            
            $
            23,168




***Cost
      of Revenues***




Our
      costs
      of revenues are comprised of product cost of revenues and service cost of
      revenues. Within product cost of revenues are the costs of products sold in
      the
      International Dermatology Equipment segment, the Skin Care segment (with
      royalties included in the services side of the segment), and the Surgical
      Products segment (with laser maintenance fees included in the services side
      of
      this segment). Product costs also include XTRAC domestic laser sales. Within
      services cost of revenues are the costs associated with the Domestic XTRAC
      segment, excluding the laser sales, as well as costs associated with royalties
      and maintenance.




Product
      cost of revenues for the three months ended June 30, 2008 was $2,989,481,
      compared to $2,326,656 in the comparable period in 2007. The $662,825 increase
      is due to the increases in product cost of sales for domestic XTRAC laser sales
      in the amount of $227,774, international dermatology equipment sales in the
      amount of $105,835 and surgical products of $150,721, all due to increased
      number of laser sales. In addition, there was an increase in product costs
      in
      skincare products of $178,495 due to increased product sales.




Product
      cost of revenues for the six months ended June 30, 2008 was $5,853,932 compared
      to $4,548,684 for the six months ended June 30, 2007. The increase of $1,305,248
      is proportionate to the increase in product cost of sales for domestic XTRAC
      laser sales in the amount of $318,994, international dermatology equipment
      sales
      in the amount of $310,984 and surgical products of $562,537, all due to
      increased number of laser sales. In addition, there was an increase in product
      costs in skincare products of $112,733 due to increased product
      sales.




Services
      cost of revenues was $1,045,623 in the three months ended June 30, 2008 compared
      to $976,547 in the comparable period in 2007 representing an increase of
      $69,076. The increase is directly related to the increase in Domestic XTRAC
      segment costs of $65,363.




Services
      cost of revenues was $2,299,202 in the six months ended June 30, 2008 compared
      to $1,996,750 in the comparable period in 2007 representing an increase of
      $302,452. The increase is directly related to the increase in Domestic XTRAC
      segment costs of $302,543.




Certain
      allocable XTRAC manufacturing overhead costs are charged against the XTRAC
      service revenues. The manufacturing facility in Carlsbad, California is used
      exclusively for the production of the XTRAC lasers. The unabsorbed costs are
      allocated to the domestic XTRAC and the international dermatology equipment
      segments based on actual production of lasers for each segment. Included in
      these allocated manufacturing costs are unabsorbed labor and direct plant
      costs.




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          30
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          of Contents*


The
      following table illustrates the key changes in cost of revenues for the periods
      reflected below:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Product:XTRAC
                Domestic
            
            $
            467,790
            
            $
            240,016
            
            $
            669,683
            
            $
            350,689International
                DermatologyEquipment
            
            
            336,039
            
            
            230,204
            
            
            906,688
            
            
            595,704Skin
                Care
            
            
            1,180,012
            
            
            1,001,517
            
            
            2,140,464
            
            
            2,027,731Surgical
                products
            
            
            1,005,640
            
            
            854,919
            
            
            2,137,097
            
            
            1,574,560Total
                Product costs
            
            $
            2,989,481
            
            $
            2,326,656
            
            $
            5,853,932
            
            
            4,548,684Services:XTRAC
                Domestic
            
            $
            1,016,016
            
            $
            950,653
            
            $
            2,244,901
            
            $
            1,942,358Surgical
                products
            
            
            29,607
            
            
            25,894
            
            
            54,301
            
            
            54,392Total
                Services costs
            
            $
            1,045,623
            
            $
            976,547
            
            $
            2,299,202
            
            $
            1,996,750Total
                Costs of Revenues
            
            $
            4,035,104
            
            $
            3,303,203
            
            $
            8,153,134
            
            $
            6,545,434




***Gross
      Profit Analysis***




Gross
      profit increased to $5,354,675 during the three months ended June 30, 2008
      from
      $4,007,393 during the same period in 2007. As a percent of revenues, gross
      margin increased to 57.0% for the three months ended June 30, 2008 from 54.8%
      for the same period in 2007.




Gross
      profit increased to $9,567,479 during the six months ended June 30, 2008 from
      $7,973,526 during the same period in 2007. As a percent of revenues, gross
      margin decreased to 54.0% for the six months ended June 30, 2008 from 54.9%
      for
      the same period in 2007.




The
      following table analyzes changes in our gross profit for the periods reflected
      below:




**Company
                Profit Analysis**
            
            Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Revenues
            
            $
            9,389,779
            
            $
            7,310,596
            
            $
            17,720,613
            
            $
            14,518,960Percent
                increase
            
            
            28.4
            %
            
            
            
            
            22.1
            %Cost
                of revenues
            
            
            4,035,104
            
            
            3,303,203
            
            
            8,153,134
            
            
            6,545,434Percent
                increase
            
            
            22.2
            %
            
            
            
            
            24.6
            %Gross
                profit
            
            $
            5,354,675
            
            $
            4,007,393
            
            $
            9,567,479
            
            $
            7,973,526Gross
                margin percentage
            
            
            57.0
            %
            
            54.8
            %
            
            54.0
            %
            
            54.9
            %




The
      primary reasons for the changes in gross profit and the gross margin percentage
      for the three months ended June 30, 2008, compared to the same period in 2007
      were as follows




·
            XTRAC
                Domestic deferred revenues decreased $434,893 between the periods
                without
                any offset in the cost of revenues which is consistent with a
                procedures-based model.




·
            We
                sold approximately $413,000 worth of additional domestic XTRAC lasers
                in
                the three months ended June 30, 2008 at lower margins compared to
                the same
                period in 2007. Certain of these lasers were previously being depreciated,
                since they were placements. The margin on these capital equipment
                sales
                was 57% in 2008 compared to 65% in
                2007.




·
            We
                sold a greater number of XTRAC treatment procedures in 2008 than
                in 2007.
                Each incremental treatment procedure carries negligible variable
                cost. The
                increase in procedure volume was a direct result of improving insurance
                reimbursement and increased marketing efforts.




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          of Contents*


The
      primary reasons for the changes in gross profit and the gross margin percentage
      for the six months ended June 30, 2008, compared to the same period in 2007
      were
      as follows:




·
            An
                increase in depreciation of $306,900 included in the XTRAC Domestic
                cost
                of sales as a result of increasing the overall placements.




·
            XTRAC
                Domestic deferred revenues decreased $307,612 between the periods
                without
                any offset in the cost of revenues which is consistent with a
                procedures-based model.




·
            We
                sold approximately $613,000 worth of additional domestic XTRAC lasers
                in
                the six months ended June 30, 2008 at lower margins compared to the
                same
                period in 2007. Certain of these lasers were previously being depreciated,
                since they were placements. The margin on these capital equipment
                sales
                was 59% in 2008 compared to 66% in
                2007.




·
            We
                sold a greater number of XTRAC treatment procedures in 2008 than
                in 2007.
                Each incremental treatment procedure carries negligible variable
                cost. The
                increase in procedure volume was a direct result of improving insurance
                reimbursement and increased marketing efforts.




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          of Contents*




The
      following table analyzes the gross profit for our Domestic XTRAC segment for
      the
      periods presented below:




**XTRAC
                Domestic Segment**
            
            Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Revenues
            
            $
            3,433,998
            
            $
            2,215,926
            
            $
            5,544,705
            
            $
            4,022,852Percent
                increase
            
            
            55.0
            %
            
            
            
            
            37.8
            %Cost
                of revenues
            
            
            1,483,806
            
            
            1,190,669
            
            
            2,914,584
            
            
            2,293,047Percent
                increase
            
            
            24.6
            %
            
            
            
            
            27.1
            %Gross
                profit
            
            $
            1,950,192
            
            $
            1,025,257
            
            $
            2,630,121
            
            $
            1,729,805Gross
                margin percentage
            
            
            56.8
            %
            
            46.3
            %
            
            47.4
            %
            
            43.0
            %




Gross
      profit increased for this segment for the three and six months ended June 30,
      2008 from the comparable periods in 2007 by $924,935 and $900,316. The key
      factors for the increases were as follows:




·
            XTRAC
                Domestic deferred revenues decreased $434,893 between the three-month
                periods without any offset in the cost of revenues which is consistent
                with a procedures-based model. XTRAC Domestic deferred revenues decreased
                $307,612 between the six-month periods without any offsetting reduction
                in
                the cost of revenues which is consistent with a procedures-based
                model.




·
            We
                sold approximately $413,000 worth of additional domestic XTRAC lasers
                in
                the three months ended June 30, 2008 at lower margins compared to
                the same
                period in 2007. Certain of these lasers were previously being depreciated,
                since they were placements. The margin on these capital equipment
                sales
                was 57% in the three months ended June 30, 2008 compared to 65% in
                the
                comparable three- month period in 2007. We sold approximately $613,000
                worth of additional domestic XTRAC lasers in the six months ended
                June 30,
                2008 at lower margins compared to the same period in 2007. Certain
                of
                these lasers were previously being depreciated, since they were
                placements. The margin on these capital equipment sales was 59% in
                the six
                months ended June 30, 2008 compared to 66% in the comparable six-month
                period in 2007.




·
            The
                cost of revenues increased by $293,137 for the three months ended
                June 30,
                2008. This increase is due to an increase in depreciation on the
                lasers-in-service of $158,300 and an increase in cost of revenues
                related
                to the laser sales of $227,800 over the comparable prior three-month
                period. These increases were offset, in part, by a decrease in certain
                allocable XTRAC manufacturing overhead costs that are charged against
                the
                XTRAC service revenues. The depreciation costs will continue to increase
                in subsequent periods as the business
                grows.




·
            The
                cost of revenues increased by $621,537 for the six months ended June
                30,
                2008. This increase is due to an increase in depreciation on the
                lasers-in-service of $306,900 and an increase in cost of revenues
                related
                to the laser sales of $319,000 over the comparable prior six-month
                period.
                The depreciation costs will continue to increase in subsequent periods
                as
                the business grows.




·
            Key
                drivers in increasing the fee-per-procedure revenue from in this
                segment
                are insurance reimbursement and increased direct-to-consumer advertising
                in targeted territories. Improved insurance reimbursement, together
                with
                greater consumer awareness of the XTRAC therapy, increase treatment
                revenue accordingly. Our clinical support specialists focus their
                efforts
                on increasing physicians’ utilization of the XTRAC laser system.
                Consequently procedure volume increased 21% from 27,777 to 33,476
                billed
                procedures in the three months ended June 30, 2008 compared to the
                same
                period in 2007. Procedure volume increased 18% from 52,793 to 62,295
                billed procedures in the six months ended June 30, 2008 compared
                to the
                same period in 2007. Price per procedure did not change significantly
                between the periods. Each incremental treatment procedure carries
                negligible variable cost.




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          of Contents*






The
      following table analyzes the gross profit for our International Dermatology
      Equipment segment for the periods presented below:




**International
                Dermatology****Equipment
                Segment**
            
            Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Revenues
            
            $
            697,973
            
            $
            618,953
            
            $
            1,866,178
            
            $
            1,297,771Percent
                increase
            
            
            12.8
            %
            
            
            
            
            43.8
            %Cost
                of revenues
            
            
            336,039
            
            
            230,204
            
            
            906,688
            
            
            595,704Percent
                increase
            
            
            31.5
            %
            
            
            
            
            52.2
            %Gross
                profit
            
            $
            361,934
            
            $
            388,749
            
            $
            959,490
            
            $
            702,067Gross
                margin percentage
            
            
            51.9
            %
            
            62.8
            %
            
            51.4
            %
            
            54.1
            %




Gross
      profit for the three months ended June 30, 2008 decreased by $26,815 from the
      comparable period in 2007. The key factors for the decrease were as
      follows:




·
            Overall
                margin for this segment varies based upon product mix. We sold 11
                XTRAC
                laser systems and 3 VTRAC lamp-based excimer systems during the three
                months ended June 30, 2008 and 6 XTRAC laser systems and 8 VTRAC
                systems
                in the comparable period in 2007. The gross margin percentage for
                the
                VTRAC is higher than the XTRAC.




Gross
      profit for the six months ended June 30, 2008 increased by $257,423 from the
      comparable periods in 2007. The key factors for the increase were as
      follows:




·
            We
                sold 28 XTRAC laser systems and 8 VTRAC lamp-based excimer systems
                during
                the six months ended June 30, 2008 and 16 XTRAC laser systems and
                9 VTRAC
                systems in the comparable period in 2007. Consequently, gross profit
                increased as a result of an increase in the volume of units sold.
                The
                gross margin percentage for the VTRAC is higher than the
                XTRAC.




·
            International
                part sales, which have a higher margin percent than system sales,
                increased for the six months ended June 30, 2008 by approximately
                $122,000
                compared to the same period in
                2007.




The
      following table analyzes the gross profit for our SkinCare (ProCyte) segment
      for
      the periods presented below:




**Skin
                Care (ProCyte) Segment**
            
            Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Product
                revenues
            
            $
            3,293,370
            
            $
            2,859,697
            
            $
            6,536,062
            
            $
            6,190,407Bulk
                compound revenues
            
            
            128,000
            
            
            160,000
            
            
            160,000
            
            
            240,000Royalties
            
            
            3,187
            
            
            75,000
            
            
            3,187
            
            
            150,000Total
                revenues
            
            
            3,424,557
            
            
            3,094,697
            
            
            6,699,249
            
            
            6,580,407Product
                cost of revenues
            
            
            1,088,876
            
            
            887,597
            
            
            2,026,544
            
            
            1,864,161Bulk
                compound cost of revenues
            
            
            91,136
            
            
            113,920
            
            
            113,920
            
            
            163,570Total
                cost of revenues
            
            
            1,180,012
            
            
            1,001,517
            
            
            2,140,464
            
            
            2,027,731Gross
                profit
            
            $
            2,244,545
            
            $
            2,093,180
            
            $
            4,558,785
            
            $
            4,552,676Gross
                margin percentage
            
            
            65.5
            %
            
            67.6
            %
            
            68.0
            %
            
            69.2
            %






-
          34
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 *Table
          of Contents*






Gross
      profit increased for the three and six months ended June 30, 2008 from the
      comparable periods by $151,365 and 6,109. The key factors for the increases
      were
      as follows:




·
            The
                increase in total cost of revenues of $178,495 in the three months
                ended
                June 30, 2008 from the 2007 comparable period is directly related
                to the
                increase in revenues between the periods. The decrease in gross margin
                percentage is related to the product mix of revenues. For the three
                months
                ended June 30, 2008 product revenues include $656,257 under a licensing
                agreement which are manufactured by a third-party supplier. The margin
                of
                these licensed products has a slightly lower margin than other brands
                which we distribute.




·
            The
                increase in total cost of revenues of $112,733 in the six months
                ended
                June 30, 2008 from the 2007 comparable period is directly related
                to the
                increase in revenues between the
                periods.




·
            Copper
                peptide bulk compound is sold at a substantially lower gross margin
                than
                skincare products, while revenues generated from licensees have no
                significant costs associated with this revenue
                stream.




The
      following table analyzes the gross profit for our Surgical Products segment
      for
      the periods presented below:




**Surgical
                Products Segment**
            
            Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Revenues
            
            $
            1,833,251
            
            $
            1,381,020
            
            $
            3,610,481
            
            $
            2,617,930Percent
                increase
            
            
            32.7
            %
            
            
            
            
            37.9
            %Cost
                of revenues
            
            
            1,035,247
            
            
            880,813
            
            
            2,191,398
            
            
            1,628,952Percent
                increase
            
            
            17.5
            %
            
            
            
            
            34.5
            %Gross
                profit
            
            $
            798,004
            
            $
            500,207
            
            $
            1,419,083
            
            $
            988,978Gross
                margin percentage
            
            
            43.5
            %
            
            36.2
            %
            
            39.3
            %
            
            37.8
            %




Gross
      profit for the Surgical Products segment in the three and six months ended
      June
      30, 2008 compared to the same periods in 2007 increased by $297,797 and
      $430,105. The key factors impacting gross profit were as
      follows:




·
            This
                segment includes product sales of surgical laser systems and laser
                disposables. Disposables are more profitable than laser systems,
                but the
                sale of laser systems generates the subsequent recurring sale of
                laser
                disposables.




·
            Revenues
                for the three months ended June 30, 2008 increased by $452,232 from
                the
                three months ended June 30, 2007 while cost of revenues increased
                by
                $154,432 between the same periods. There were 37 more laser systems
                sold
                in the three months ended June 30, 2008 than in the comparable period
                of
                2007. However, the lasers sold in the 2007 period were at higher
                prices
                than those sold in the comparable period in 2008. The decrease in
                average
                price per laser was largely due to the mix of lasers sold and volume
                discounts. Included in the laser sales for the three months ended
                June 30,
                2008 and 2007 were sales of $871,000, representing 61 systems, and
                $322,000, representing 22 systems, of diode lasers, respectively,
                which
                have substantially lower list sales prices than the other types of
                surgical lasers. The sales of diode systems included 50 sales due
                to our
                OEM arrangement. Despite the lower average sales price of the laser
                systems sold compared to the prior year, the higher manufacturing
                levels
                in 2008 caused better absorption of fixed overheads, thereby lowering
                average unit costs and resulting in a higher gross margin in 2008
                compared
                to 2007.




·
            Revenues
                for the six months ended June 30, 2008 increased by $992,550 from
                the six
                months ended June 30, 2007 while cost of revenues increased by $562,448
                between the same periods. There were 90 more laser systems sold in
                the six
                months ended June 30, 2008 than in the comparable period of 2007.
                However,
                the lasers sold in the 2007 period were at higher prices than those
                sold
                in the comparable




-
          35
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 *Table
          of Contents*


period
      in
      2008. The decrease in average price per laser was largely due to the mix of
      lasers sold and volume discounts. Included in the laser sales for the six months
      ended June 30, 2008 and 2007 were sales of $1,759,000, representing 123 systems,
      and $400,000, representing 28 systems, of diode lasers, respectively, which
      have
      substantially lower list sales prices than the other types of surgical lasers.
      The sales of diode systems included 100 sales due to our OEM arrangement.
      Despite the lower average sales price of the laser systems sold compared to
      the
      prior year, the higher manufacturing levels in 2008 caused better absorption
      of
      fixed overheads thereby lowering average unit costs resulting in a higher gross
      margin in 2008 compared to 2007.




·
            Additionally
                there was a decrease in sales of disposables between the periods.
                Disposables, which have a higher gross margin as a percent of revenues
                than lasers. Fiber and other disposables sales decreased 4% and 5%
                between
                the comparable three-month and six-month periods ended June 30, 2008
                and
                2007.




**Selling,
      General and Administrative Expenses**




For
      the
      three months ended June 30, 2008, selling, general and administrative expenses
      increased to $5,993,093 from $5,622,798 for the three months ended June 30,
      2007
      for the following reasons:




·
            The
                majority of the increase related to a $496,000 increase in salaries,
                benefits and travel expenses associated with an increase in the sales
                force and increased revenues, particularly in the Domestic XTRAC
                segment;




·
            An
                increase of $58,000 in marketing and advertising;




·
            An
                increase of $70,000 in royalties;




·
            An
                increase in legal expenses of $113,000;
                and




·
            These
                increases were offset, in part, by decreases in bad debt expense
                of
                $63,000, option expense of $97,000 and bonus expense of
                $175,000.




For
      the
      six months ended June 30, 2008, selling, general and administrative expenses
      increased to $12,250,500 from $11,146,138 for the six months ended June 30,
      2007
      for the following reasons:




·
            The
                majority of the increase related to a $1,004,000 increase in salaries,
                benefits and travel expenses associated with an increase in the sales
                force and increased revenues, particularly in the Domestic XTRAC
                segment;




·
            An
                increase of $405,000 in marketing and advertising;




·
            An
                increase of $76,000 in additional warranty expense due to the increase
                in
                lasers sold; and




·
            These
                increases were offset, in part, by a lawsuit settlement for reimbursement
                of legal costs of $345,000.




***Engineering
      and Product Development***




Engineering
      and product development expenses for the three months ended June 30, 2008
      increased to $218,344 from $185,505 for the three months ended June 30, 2007.
      Engineering and product development expenses for the six months ended June
      30,
      2008 increased to $657,032 from $401,473 for the six months ended June 30,
      2007.
      The increase for the six months was due to meeting our financial sponsorship
      obligations in March 2008 for the severe psoriasis study by Dr. Koo, MD, of
      the
      University of California at San Francisco, of $189,000. During the 2008 and
      2007
      periods, the engineers at the Carlsbad plant were primarily focused on
      manufacturing efforts, and therefore, their costs have been reflected in cost
      of
      goods sold.




***Interest
      Expense, Net***




Net
      interest expense for the three months ended June 30, 2008 increased to $281,765,
      as compared to $161,967 for the three months ended June 30, 2007. Net interest
      expense for the six months ended June 30, 2008




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increased
      to $509,137, as compared to $238,386 for the six months ended June 30, 2007.
      The
      change in net interest expense was the result of the interest earned on cash
      reserves in the three and six months ended June 30, 2007 due to the equity
      financing in November 2006, which offset interest expense in those periods
      due
      to draws on the lease line of credit during the fourth quarter of 2007 and
      the
      first and second quarters of 2008.




***Net
      Loss***




The
      aforementioned factors resulted in a net loss of $1,607,302 during the three
      months ended June 30, 2008, as compared to a net loss of $1,835,958 during
      the
      three months ended June 30, 2007, a decrease of 12.5%. The aforementioned
      factors resulted in a net loss of $4,149,164 during the six months ended June
      30, 2008, as compared to a net loss of $3,719,440 during the six months ended
      June 30, 2007, an increase of 11.6%. The three and six months ended June 30,
      2008 included a loss on sale of discontinued operations of
      $545,844.




The
      following table illustrates the impact of major expenses, namely depreciation,
      amortization and stock option expense between the periods:




For
                the three months ended June 30,2008
            
            2007
            
            ChangeNet
                loss from continuing operations
            
            $
            1,138,527
            
            $
            1,962,877
            
            
            ($824,350
            )Major
                expenses included in net loss:Depreciation
                and amortization
            
            
            1,194,851
            
            
            1,182,715
            
            
            12,136Stock-based
                compensation
            
            
            278,928
            
            
            375,772
            
            
            (96,844
            )Total
                major expenses
            
            $
            1,473,779
            
            $
            1,558,487
            
            
            ($84,708
            )




For
                the six months ended June 30,2008
            
            2007
            
            ChangeNet
                loss from continuing operations
            
            $
            3,849,190
            
            $
            3,812,471
            
            $
            36,719Major
                expenses included in net loss:Depreciation
                and amortization
            
            
            2,409,463
            
            
            2,331,915
            
            
            77,548Stock-based
                compensation
            
            
            705,471
            
            
            802,091
            
            
            (96,620
            )Total
                major expenses
            
            $
            3,114,934
            
            $
            3,134,006
            
            
            ($19,072
            )




***Liquidity
      and Capital Resources***




We
      have
      historically financed our operations with cash provided by equity financing
      and
      from lines of credit and, more recently, occasionally from positive cash flows
      from operations.




At
      June
      30, 2008, our current ratio was 1.66 compared to 2.20 at December 31, 2007.
      As
      of June 30, 2008, we had $8,627,199 of working capital compared to $13,705,775
      as of December 31, 2007. Cash and cash equivalents were $7,409,028 as of June
      30, 2008, as compared to $9,954,303 as of December 31, 2007. We had $117,000
      of
      cash that was classified as restricted as of June 30, 2008 and December 31,
      2007. ****




We
      believe that our existing cash balance together with our other existing
      financial resources and revenues from sales and distribution, will be sufficient
      to meet our operating and capital requirements beyond the third quarter of
      2009.
      The 2008 operating plan reflects increases in per-treatment fee revenues for
      use
      of the XTRAC system




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based
      on
      increased utilization of the XTRAC by physicians and on wider insurance coverage
      in the United States. In addition, the 2008 operating plan calls for increased
      revenues and profits from our Skin Care business.




On
      December 31, 2007, we entered into a term-note credit facility from CIT
      Healthcare and Life Sciences Capital (collectively “CIT”). The credit facility
      has a commitment term of one year, expiring on December 31, 2008. We account
      for
      each draw as funded indebtedness, with ownership in the lasers remaining with
      us. CIT holds a security interest in the lasers and in their revenue streams.
      Each draw against the credit facility has a repayment period of three years.
      The
      Company has used its entire availability under the CIT credit facility and
      is
      considering multiple written proposals for additional debt financing. A summary
      of the terms and activity under the CIT credit facility is presented in Note
      9,
“ *Long-term
      Debt* ”,
      of the
      Financial Statements included in this Report.




Net
      cash
      and cash equivalents provided by operating activities - continuing operations
      was $643,996 for the six months ended June 30, 2008 compared to cash used of
      $1,171,452 for the six months ended June 30, 2007. The increase was mostly
      due
      to the decreases in accounts receivable and inventory and increases in accounts
      payable and other accrued liabilities.




Net
      cash
      and cash equivalents used in investing activities - continuing
      operations was $3,842,426 for the six months ended June 30, 2008 compared
      to $1,868,588 for the six months ended June 30, 2007. This was primarily
      for the placement of lasers into service.




When
      we
      retire a laser from service, we transfer the laser into inventory and then
      write
      off the net book value of the laser, which is typically negligible. Over the
      last few years, the retirements of lasers from service have been minor or
      immaterial and, therefore, they are reported with placements on a net
      basis.




Net
      cash
      and cash equivalents used in financing activities - continuing operations was
      $1,222,253 for the six months ended June 30, 2008 compared to net cash provided
      by financing activities of $927,559 for the six months ended June 30, 2007.
      In
      the six months ended June 30, 2008 we repaid $343,252 on the lease and term-note
      lines of credit, net of advances, $879,001 for the payment of certain notes
      payable and capital lease obligations.




***Commitments
      and Contingencies***




Except
      for items discussed in ***Legal
      Proceedings*** below,
      during the three and six months ended June 30, 2008, there were no other items
      that significantly impacted our commitments and contingencies as discussed
      in
      the notes to our 2007 annual financial statements included in our Annual Report
      on Form 10-K. In addition, we have no significant off-balance sheet
      arrangements.




***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.




**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**




***Evaluation
      of Disclosure Controls and Procedures***





Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of our disclosure controls and
      procedures as of the end of the period covered by this Report. Based on that
      evaluation, the Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures as of the end of the period covered
      by this Report are effective such that information required to be disclosed
      by
      us in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
      processed, summarized and reported within the time periods specified in the
      Securities and Exchange Commission’s rules and forms and (ii) accumulated and
      communicated to our management, including the Chief Executive Officer and
      Chief
      Financial Officer, as appropriate to allow timely decisions regarding
      disclosure.


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***Change
      in Internal Control Over Financial Reporting***





No
      change
      in our internal control over financial reporting occurred during the three
      and
      six months ended June 30, 2008 that has materially affected, or is reasonably
      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, 2007 for descriptions
      of our legal proceedings.




In
      the
      matter brought by the Company in January 2004 against Ra Medical Systems, Inc.
      and Dean Irwin in the United States District Court for the Southern District
      of
      California, the Company appealed from the new judge’s grant of summary judgment
      to the defendants. All parties have filed their briefs with the Ninth
      Circuit of Appeals and we are awaiting a date for oral argument.




I n
      the
      matter which RA Medical brought against the Company in June 2006 for unfair
      competition and which the Company removed to the United States District Court
      for the Southern District of California, the Company filed an appeal to the
      Ninth Circuit from the new judge's dismissal, among other things, of the
      Company's counterclaims of misappropriation, and a motion with the District
      Court for certification of such issues for an interlocutory appeal with respect
      thereto. The Ninth Circuit dismissed the appeal without prejudice to the Company
      filing a new notice of appeal in the event the District Court grants the motion
      for certification. The District Court has granted that motion. The Company
      plans
      to file a new notice of appeal. RA Medical filed a motion for summary
      adjudication in the District Court on its sole claim that the Company violated
      provisions of the California Health & Safety Code and thus violated Section
      17200 of the California Business & Professions Code. The District Court has
      partially granted that motion, finding as a matter of fact which requires no
      further proof that the Company operated its business for a period of time
      without the required licensing under California law. However, the Court did
      not
      make any finding as to the Company's liability under Section
      17200 .




In
      the
      patent infringement suit brought in November 2007, Allergan, Inc. brought an
      infringement suit under the Johnstone ‘105 patent against PhotoMedex, Inc., as
      well as against a number of other co-defendants, in the United States District
      Court for the Central District of California. Allergan has recently filed its
      Third Amended Complaint, alleging that PhotoMedex and others have also infringed
      its US Patent No. 7,351,404, the so-called Woodward ‘404 patent and that ProCyte
      Corporation infringes both the ‘105 and ‘404 patents. Discovery has begun in the
      case. PhotoMedex and ProCyte are aggressively defending these allegations.




In
      the
      patent infringement action brought in February 2008 by Cardiofocus, Inc. against
      PhotoMedex, Inc., as well as against a number of other co-defendants, the
      Company has settled the matter with Cardiofocus on July 16, 2008, on terms
      fair
      and favorable to the Company.




In
      the
      patent infringement action brought by Bella Bella, Inc. against a number of
      companies, including PhotoMedex, Inc. and ProCyte Corporation, in the United
      States District Court for the Central District of California, plaintiff’s
      attorneys have allowed the case to be dismissed without prejudice on July 11,
      2008.




The
      Company is involved in certain other legal actions and claims arising in the
      ordinary course of business. The Company believes, based on discussions with
      legal counsel, the above litigation and claims will likely be resolved without
      a
      material effect on our consolidated financial position, results of operations
      or
      liquidity.




**ITEM
      1A. Risk Factors**




There
      have been no material changes in our risk factors from those disclosed in our
      Annual Report on Form 10-K for the year ended December 31, 2007.




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**ITEM
      6. Exhibits**




10.1
            
            Multi-Tenant
                Industrial Net Lease, dated by reference to May 3, 2007, executed
                as of
                December 14, 2007, by and between PhotoMedex, Inc. and CALWEST Industrial
                Properties, LLC31.1
            
            Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer31.2
            
            Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
            
            Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 200232.2
            
            Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002
















**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:
      August 8, 2008




By: 
      /s/ Jeffrey F. O’Donnell


Jeffrey
      F. O’Donnell


President
      and Chief Executive Officer




Date:
      August 8, 2008


By: 
      /s/ Dennis M. McGrath


Dennis
      M.
      McGrath


Chief
      Financial Officer






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