**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, 2007**





**OR**





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





**For
      the transition period from _________ to ___________**





Commission
      File Number 0-11365





**PHOTOMEDEX,
      INC.**


(Exact
      name of registrant as specified in its charter)




Delaware
              (State
                or other jurisdiction
              of
                incorporation or organization)
            
            59-2058100
              (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  ̈





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




Large
      accelerated filer  ̈ Accelerated
      filer x Non-accelerated
      filer  ̈





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


Yes  ̈ No
x





The
      number of shares outstanding of the issuer's Common Stock as of August 9, 2007
      was 62,874,707 shares.





1




PHOTOMEDEX,
      INC.





INDEX
      TO
      FORM 10-Q




Part
                  I. Financial Information:
              
              PAGEITEM
                  1. Financial Statements:a.
              
              
              Consolidated
                  Balance Sheets, June 30, 2007 (unaudited) and December 31,
                  2006
              
              
              3b.
              
              
              Consolidated
                  Statements of Operations for the three months ended
                  June 30, 2007 and 2006 (unaudited)c.
              
              
              Consolidated
                  Statements of Operations for the six months ended
                  June 30, 2007 and 2006 (unaudited)c.
              
              
              Consolidated
                  Statement of Stockholders’ Equity for the six months ended
                  June 30, 2007 (unaudited)
              
              
              5d.
              
              
              Consolidated
                  Statements of Cash Flows for the six months ended June 30, 2007
                  and 2006
                  (unaudited)
              
              
              6e.
              
              
              Notes
                  to Consolidated Financial Statements (unaudited)
              
              
              7ITEM
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              
              
              21ITEM
                  3. Quantitative and Qualitative Disclosure about Market
                  Risk
              
              
              37ITEM
                  4. Controls and Procedures
              
              
              37Part
                  II. Other Information:ITEM
                  1. Legal Proceedings
              
              
              37ITEM
                  1A. Risk Factors
              
              
              38ITEM
                  4. Submission of Matters to a Vote of Security Holders
              
              
              38ITEM
                  6. Exhibits
              
              
              39Signatures
              
              
              40Certifications




2




**PART
      I - Financial Information**




**ITEM
      1. Financial Statements**




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS




June
                30, 2007
            
            December
                31, 2006(Unaudited)
            
            ***ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            10,562,607
            
            $
            12,729,742Restricted
                cash
            
            
            117,000
            
            
            156,000Accounts
                receivable, net of allowance for doubtful accounts of $588,381 and
                $508,438, respectively
            
            
            5,692,954
            
            
            4,999,224Inventories
            
            
            7,840,302
            
            
            7,301,695Prepaid
                expenses and other current assets
            
            
            1,121,146
            
            
            534,135Total
                current assets
            
            
            25,334,009
            
            
            25,720,796Property
                and equipment, net
            
            
            9,581,929
            
            
            9,054,098Goodwill,
                net
            
            
            16,917,808
            
            
            16,917,808Patents
                and licensed technologies, net
            
            
            1,529,887
            
            
            1,695,727Other
                intangible assets, net
            
            
            3,072,625
            
            
            3,537,625Other
                assets
            
            
            566,289
            
            
            555,467Total
                assets
            
            $
            57,002,547
            
            $
            57,481,521**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Current
                portion of notes payable
            
            $
            505,667
            
            $
            195,250Current
                portion of long-term debt
            
            
            3,655,286
            
            
            3,018,874Accounts
                payable
            
            
            3,975,327
            
            
            3,617,726Accrued
                compensation and related expenses
            
            
            1,180,829
            
            
            1,529,862Other
                accrued liabilities
            
            
            1,011,426
            
            
            657,293Deferred
                revenues
            
            
            1,041,707
            
            
            632,175Total
                current liabilities
            
            
            11,370,242
            
            
            9,651,180Long-term
                liabilities:Notes
                payable
            
            
            120,065
            
            
            133,507Long-term
                debt
            
            
            4,210,085
            
            
            3,593,920Total
                liabilities
            
            
            15,700,392
            
            
            13,378,607Commitments
                and ContingenciesStockholders’
                equity:Common
                stock, $.01 par value, 100,000,000 shares authorized; 62,874,707
                and
                62,536,054 shares issued and outstanding, respectively
            
            
            628,747
            
            
            625,360Additional
                paid-in capital
            
            
            132,067,851
            
            
            131,152,557Accumulated
                deficit
            
            
            (91,394,443
            )
            
            (87,675,003
            )Total
                stockholders’ equity
            
            
            41,302,155
            
            
            44,102,914Total
                liabilities and stockholders’ equity
            
            $
            57,002,547
            
            $
            57,481,521




*
      The
      December 31, 2006 balance sheet was derived from the Company’s audited financial
      statements.






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




3




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS




(Unaudited)




For
                the Three Months Ended June 30,2007
            
            2006Revenues:Product
                sales
            
            $
            5,675,853
            
            $
            5,008,914Services
            
            
            3,642,867
            
            
            3,214,8299,318,720
            
            
            8,223,743Cost
                of revenues:Product
                cost of revenues
            
            
            2,282,770
            
            
            1,955,175Services
                cost of revenues
            
            
            2,621,703
            
            
            2,269,0154,904,473
            
            
            4,224,190Gross
                profit
            
            
            4,414,247
            
            
            3,999,553Operating
                expenses:Selling
                and marketing
            
            
            3,292,426
            
            
            2,604,820General
                and administrative
            
            
            2,565,953
            
            
            2,341,638Engineering
                and product development
            
            
            229,859
            
            
            255,1796,088,238
            
            
            5,201,637Loss
                from operations
            
            
            (1,673,991
            )
            
            (1,202,084
            )Interest
                expense, net
            
            
            (161,967
            )
            
            (137,847
            )Net
                loss
            
            
            ($
                1,835,958
            )
            
            ($
                1,339,931
            )Basic
                and diluted net loss per share
            
            
            ($0.03
            )
            
            ($0.03
            )Shares
                used in computing basic and diluted net loss per share
            
            
            62,709,147
            
            
            52,622,189







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




4




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS




(Unaudited)




For
                the Six Months Ended June 30,2007
            
            2006Revenues:Product
                sales
            
            $
            11,272,410
            
            $
            10,252,826Services
            
            
            7,074,878
            
            
            6,052,07918,347,288
            
            
            16,304,905Cost
                of revenues:Product
                cost of revenues
            
            
            4,475,122
            
            
            4,276,844Services
                cost of revenues
            
            
            5,207,039
            
            
            4,655,2449,682,161
            
            
            8,932,088Gross
                profit
            
            
            8,665,127
            
            
            7,372,817Operating
                expenses:Selling
                and marketing
            
            
            6,624,829
            
            
            5,557,759General
                and administrative
            
            
            5,045,345
            
            
            4,748,877Engineering
                and product development
            
            
            476,007
            
            
            497,38312,146,181
            
            
            10,804,019Loss
                from operations
            
            
            (3,481,054
            )
            
            (3,431,202
            )Interest
                expense, net
            
            
            (238,386
            )
            
            (258,990
            )Net
                loss
            
            
            ($
                3,719,440
            )
            
            ($
                3,690,192
            )Basic
                and diluted net loss per share
            
            
            ($0.06
            )
            
            ($0.07
            )Shares
                used in computing basic and diluted net loss per share
            
            
            62,623,079
            
            
            52,399,143







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




5




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
      THE
      SIX MONTHS ENDED JUNE 30, 2007




(Unaudited)






Common
                StockShares
            
            Amount
            
            Additional
              Paid-In
              Capital
            
            Accumulated
                Deficit
            
            TotalBALANCE,
                DECEMBER 31, 2006
            
            
            62,536,054
            
            $
            625,360
            
            $
            131,152,557
            
            
            ($87,675,003
            )
            $
            44,102,914Stock
                options issued to consultants for services
            
            
            -
            
            
            -
            
            
            77,751
            
            
            -
            
            
            77,751Stock-based
                compensation expenserelated
                to employee options
            
            
            -
            
            
            -
            
            
            551,578
            
            
            -
            
            
            551,578Exercise
                of stock options
            
            
            76,153
            
            
            762
            
            
            85,192
            
            
            -
            
            
            85,954Issuance
                of restricted stock
            
            
            262,500
            
            
            2,625
            
            
            172,762
            
            
            -
            
            
            175,387Issuance
                of warrants for draws under line of credit
            
            
            -
            
            
            -
            
            
            28,011
            
            
            -
            
            
            28,011Net
                loss for the six months ended June 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,719,440
            )
            
            (3,719,440
            )BALANCE,
                JUNE 30, 2007
            
            
            62,874,707
            
            $
            628,747
            
            $
            132,067,851
            
            
            ($91,394,443
            )
            $
            41,302,155







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




6




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)




For
                the Six Months Ended
              June
                30,2007
            
            2006**Cash
                Flows From Operating Activities**:Net
                loss
            
            
            ($
                3,719,440
            )
            
            ($
                3,690,192
            )Adjustments
                to reconcile net loss to net cash provided byoperating
                activities:Depreciation
                and amortization
            
            
            2,331,915
            
            
            2,054,511Stock
                options issued to consultants for services
            
            
            77,751
            
            
            93,437Stock-based
                compensation expense related to employee options and restricted
                stock
            
            
            724,340
            
            
            805,122Amortization
                of deferred compensation
            
            
            -
            
            
            29,436Provision
                for bad debts
            
            
            83,843
            
            
            58,246Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (777,573
            )
            
            (271,585
            )Inventories
            
            
            (566,115
            )
            
            (27,785
            )Prepaid
                expenses and other assets
            
            
            103,935
            
            
            367,049Accounts
                payable
            
            
            357,602
            
            
            463,295Accrued
                compensation and related expenses
            
            
            (349,033
            )
            
            (36,033
            )Other
                accrued liabilities
            
            
            365,753
            
            
            (277,184
            )Deferred
                revenues
            
            
            409,532
            
            
            170,707Other
                liabilities
            
            
            (11,623
            )
            
            -Net
                cash used in operating activities
            
            
            (969,113
            )
            
            (260,976
            )**Cash
                Flows From Investing Activities:**Purchases
                of property and equipment
            
            
            (30,294
            )
            
            (34,830
            )Lasers
                placed into service
            
            
            (2,095,287
            )
            
            (2,097,925
            )Net
                cash used in investing activities
            
            
            (2,125,581
            )
            
            (2,132,755
            )**Cash
                Flows From Financing Activities:**Proceeds
                from issuance of restricted common stock
            
            
            2,625
            
            
            8,600Costs
                related to issuance of common stock
            
            
            -
            
            
            (7,890
            )Proceeds
                from exercise of options
            
            
            85,954
            
            
            76,180Payments
                on long-term debt
            
            
            (39,885
            )
            
            (113,509
            )Payments
                on notes payable
            
            
            (297,849
            )
            
            (396,547
            )Net
                advancements on lease lines of credit
            
            
            1,137,714
            
            
            1,517,439Decrease
                in restricted cash and cash equivalents
            
            
            39,000
            
            
            38,764Net
                cash provided by financing activities
            
            
            927,559
            
            
            1,123,037Net
                decrease in cash and cash equivalents
            
            
            (2,167,135
            )
            
            (1,270,694
            )Cash
                and cash equivalents, beginning of period
            
            
            12,729,742
            
            
            5,403,036Cash
                and cash equivalents, end of period
            
            $
            10,562,607
            
            $
            4,132,342







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




7




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 operates in five distinct
      business units, or segments (as described in Note 10): three in Dermatology,
      -
      Domestic XTRAC®, International Dermatology Equipment, and Skin Care (ProCyte®);
      and two in Surgical, - Surgical Services (SISTM) and Surgical Products (SLT®).
      The segments are distinguished by our management structure, products and
      services offered, markets served or types of customers.




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 by earning royalties on licenses for our patented copper
      peptide compound.




The
      Surgical Services segment generates revenues by providing fee-based procedures
      typically using our mobile surgical laser equipment delivered and operated
      by a
      technician at hospitals and surgery centers in the United States. 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
      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 first XTRAC
      phototherapy treatment systems were commercially distributed in the United
      States in August 2000 before any of its procedures had been approved for medical
      insurance reimbursement. In the last several years, the Company has sought
      to
      obtain reimbursement for psoriasis and other inflammatory skin disorders. As
      a
      result of initiatives undertaken by the Company and by the physician community,
      the ability for physicians to process claims efficiently and receive positive
      payment decisions for use of the XTRAC system improved significantly during
      the
      latter part of 2005 and 2006. In March 2007, the Blue Cross Blue Shield
      Association (“BCBSA”) published a National Reference Policy that now recommends
      reimbursement coverage for treatment of psoriasis by means of lasers, including
      the XTRAC, as first-step therapy for moderate to severe psoriasis comprising
      less than 20% of body surface area. The Company is now seeking adoption of
      this
      National Reference Policy by the remaining state Blue Cross- Blue Shield Health
      Insurance Plans, which currently do not have a positive payment policy for
      the
      XTRAC. 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.




***Liquidity
      and Going Concern***


As
      of
      June 30, 2007, the Company had an accumulated deficit of $91,394,443. Cash
      and
      cash equivalents, including restricted cash of $117,000, was $10,679,607. 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. The 2007 operating plan
      reflects increases in per-treatment fee revenues for use of the XTRAC system
      based on increased utilization of the XTRAC by physicians and on wider insurance
      coverage in the United States. In addition, the 2007 operating plan reflects
      increased revenues and profits from the Skin Care business. Management of the
      Company believes that the Company’s existing cash balance together with other
      existing financial resources, including access to lease financing for capital
      expenditures, and revenues from sales, distribution, licensing and manufacturing
      relationships, will be sufficient to meet the Company’s operating and capital
      requirements, at a minimum, beyond the second quarter of 2008.




8




**Summary
      of Significant Accounting Policies:**




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


The
      financial statements as of June 30, 2007 and for the three and six months ended
      June 30, 2007 and 2006, 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, 2007, and the results
      of
      operations and cash flows for the three and six months ended June 30, 2007
      and
      2006. The results for the three and six months ended June 30, 2007 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, 2006.




***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 2006 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; (iv) and 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.




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 criteria are recognized when invoiced
      amounts are fully paid.




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 months ended June 30, 2007 and 2006, the Company deferred $827,182 and
      $397,844, respectively, under this approach.




The
      Company has a program to support certain physicians in addressing treatments
      with the XTRAC laser system that may be denied reimbursement by private
      insurance carriers. The Company recognizes service revenue from the sale of
      treatment codes to physicians participating in this program only if and to
      the
      extent the physician has been reimbursed for the treatments. For the three
      months ended June 30, 2007, the Company deferred an additional $87,925, under
      this program, as all the SAB 104 Criteria for revenue recognition had not been
      met. At June 30, 2007, the Company had net deferred revenues of $188,437 under
      this program.




Under
      this program, the Company may reimburse qualifying doctors for the cost of
      the
      Company’s fee but only if they are ultimately denied reimbursement after appeal
      of their claim with the insurance company. The key components of the program
      are
      as follows:




9




·
            The
                program only covers medically necessary treatments of psoriasis as
                determined by the treating
                physician;




·
            The
                patient must have medical insurance and a claim for the treatment
                must be
                timely filed with the patient’s insurance company;




·
            Upon
                denial by the insurance company (generally within 30 days of filing
                a
                claim), a standard insurance form called an EOB (“Explanation of
                Benefits”) must be submitted to the Company’s in-house appeals group, who
                will then prosecute the appeal. The appeal process can take 6 to
                9
                months;




·
            After
                all appeals have been exhausted by the Company and the claim remains
                unpaid, the physician is entitled to receive credit for the fee for
                the
                treatment he or she purchased from the Company on behalf of the patient;
                and




·
            Physicians
                are still obligated to make timely payments for treatments purchased,
                irrespective of whether reimbursement is paid or denied. Future sales
                of
                treatments to a physician can be denied if timely payments are not
                made,
                even if a patient’s appeal is still in
                process.




The
      Company estimates a contingent liability for potential refunds under this
      program by reviewing the history of denied insurance claims and appeals
      processed. The Company estimates that approximately 4% of the revenues under
      this program for the quarters ended June 30, 2007 and 2006 are subject to being
      credited or refunded to the physician.




The
      Company generates revenues from its Skin Care business primarily through three
      channels. The first is through product sales for skin health, hair care and
      wound care; the second is through sales in bulk of the copper peptide compound,
      primarily to Neutrogena Corporation, a Johnson & Johnson company; and the
      third is through royalties generated by our licenses, principally to Neutrogena.
      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 our
      licensees. The Company recognizes royalty revenue at the applicable royalty
      rate
      applied to shipments reported by our licensee.




The
      Company generates revenues from its Surgical businesses primarily from two
      channels. The first is through product sales of laser systems, related
      maintenance service agreements, recurring laser delivery systems and laser
      accessories, and the second is through per-procedure surgical services. 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.




10




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 would
      be
      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 would be classified
      as held for sale and would be presented separately in the appropriate asset
      and
      liability sections of the balance sheet. As of June 30, 2007 and during 2006,
      no
      such impairment existed.





***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 purchase
      in
      August 2000 of the minority interest of Acculase, a former subsidiary of the
      Company, and is being amortized on a straight-line basis over seven years.
      Developed technology was also recorded in connection with the 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 of June
      30,
      2007, 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, 2007, 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, 2007 and
      during 2006, 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 some cases, however, the Company offers longer periods in order
      to
      meet competition. 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, 2007 is summarized as follows:




11




June
                30, 2007Accrual
                at beginning of period
            
            $
            123,738Additions
                charged to warranty expense
            
            
            127,500Expiring
                warranties
            
            
            (35,250
            )Claims
                satisfied
            
            
            (33,110
            )Accrual
                at end of period
            
            $
            182,878




***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, of which the principal constraint
      is
      Section 382. Loss carryforwards from previous acquisitions (e.g. SLT, ProCyte)
      have already been constrained by this provision. If the Company undergoes a
      change of ownership in the future, the utilization of the Company’s loss
      carryforwards may be further materially constrained.




Effective
      January 1, 2007, the Company adopted Financial Interpretation (“FIN”) No. 48,
      Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement
      No. 109. This financial statement prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. The interpretation
      contains a two-step approach to recognizing and measuring uncertain tax
      positions accounted for in accordance with SFAS No. 109. The first step is
      to
      evaluate the tax position for recognition by determining if the weight of
      available evidence indicates it is more likely than not that the position will
      be sustained on audit, including resolution of related appeals or litigation
      processes, if any. The second step is to measure the tax benefit as the largest
      amount which is more than fifty percent likely of being realized upon ultimate
      settlement. The interpretation also provides guidance on derecognition,
      classification, interest and penalties, and other matters. The adoption did
      not
      have an effect on the consolidated financial statements. There continues to
      be
      no liability related to unrecognized tax benefits at June 30, 2007, and no
      effect on the effective tax rate. No tax-related interest and penalties have
      been recognized in the financial statements. Virtually all tax years have net
      operating losses and therefore remain open to examination by the major taxing
      jurisdictions to which the Company is subject.




***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 is the same as
      basic net loss per share. No additional shares for the potential dilution from
      the conversion or exercise of securities into common stock are included in
      the
      denominator, since the result would be anti-dilutive. Common stock options
      and
      warrants of 11,120,797 and 8,301,392 as of June 30, 2007 and 2006, respectively,
      were excluded from the calculation of fully diluted earnings per share since
      their inclusion would have been anti-dilutive.




***Share-Based
      Compensation***


On
      January 1, 2006, The Company adopted SFAS No. 123R, “Share-Based Payment,” which
      requires all companies to measure and recognize compensation expense at fair
      value for all stock-based payments to employees and directors. SFAS No. 123R
      is
      being applied on the modified prospective basis. Prior to the adoption of SFAS
      No. 123R, the Company accounted for its stock-based compensation plans for
      employees and directors under the recognition and measurement principles of
      Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
      to Employees”, and related interpretations, and accordingly, the Company
      recognized no compensation expense related to the stock-based plans for grants
      to employees or directors. Grants to consultants under the plans were recorded
      under SFAS No. 123.




12




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 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, 2007 and 2006 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. Prior periods
      were
      not required to be restated to reflect the impact of adopting the new standard.




SFAS
      No.
      123R also requires companies to calculate an initial "pool" of excess tax
      benefits available at the adoption date to absorb any tax deficiencies that
      may
      be recognized under SFAS No. 123R. The pool includes the net excess tax benefits
      that would have been recognized if the Company had adopted SFAS No. 123 for
      recognition purposes on its effective date. The Company has elected to calculate
      the pool of excess tax benefits under the alternative transition method
      described in FASB Staff Position ("FSP") No. FAS 123(R)-3, "Transition Election
      Related to Accounting for Tax Effects of Share-Based Payment Awards," which
      also
      specifies the method to calculate excess tax benefits reported on the statement
      of cash flows. The Company is in a net operating loss position; therefore,
      no
      excess tax benefits from share-based payment arrangements have been recognized
      for the three and six months ended June 30, 2007.




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 30,2007
            
            2006
            
            2007
            
            2006Risk-free
                interest rate
            
            
            4.75
            %
            
            5.00
            %
            
            4.78
            %
            
            4.63
            %Volatility
            
            
            85.89
            %
            
            94.64
            %
            
            86.03
            %
            
            94.14
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %Expected
                life
            
            
            8.1
                years
            
            
            8.13
                years
            
            
            8.1
                years
            
            
            7.84
                yearsEstimated
                forfeiture rate
            
            
            12
            %
            
            11
            %
            
            12
            %
            
            11
            %




The
      Company calculates expected volatility for a share-based grant based on historic
      daily stock price observations of our 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, 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 made in the second quarter 2007 with the following weighted average
      assumptions:




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




13




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 will 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, 2007 included $266,045 from stock
      options grants and $94,218 from restricted stock awards. Compensation expense
      for the three months ended June 30, 2006 included $336,410 from stock options
      grants and $78,544 from restricted stock awards.




Compensation
      expense for the six months ended June 30, 2007 included $551,578 from stock
      options grants and $172,762 from restricted stock awards. Compensation expense
      for the six months ended June 30, 2006 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 $15,508 and
      $77,751 was recognized during the three and six months ended June 30, 2007,
      respectively. For stock options granted to consultants an additional selling,
      general, and administrative expense in the amount of $16,814 and $93,437 was
      recognized during the three and six months ended June 30, 2006,
      respectively.





***Supplemental
      Cash Flow Information***


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.




During
      the six months ended June 30, 2006, the Company financed insurance policies
      through notes payable for $763,982, financed certain credit facility costs
      for
      $82,043, financed a license agreement with a note payable of $77,876 and issued
      warrants to a leasing credit facility which are valued at $54,401, and which
      offset the carrying value of debt. During the six months ended June 30, 2006,
      the Company issued 101,010 shares of its restricted common stock to Stern Laser
      srl (“Stern”) due upon achievement of another milestone under the Master
      Purchase Agreement. The cost associated with this issuance is included in the
      license from Stern, which is found in patents and licensed technologies. In
      March 2006, the Company also issued 200,000 shares of its restricted common
      stock to AzurTec, Inc. (“AzurTec”) as part of an investment in the capital stock
      of AzurTec as well as for a license agreement on AzurTec technology, both
      existing and to be developed in the future.




For
      the
      six months ended June 30, 2007 and 2006, the Company paid interest of $463,655
      and $296,990, respectively. Income taxes paid in the six months ended June
      30,
      2007 and 2006 were immaterial.




***Recent
      Accounting Pronouncements***


In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      159, "The Fair Value Option for Financial Assets and Financial Liabilities."
      This Statement permits entities to choose to measure many financial instruments
      and certain other items at fair value that are not currently required to be
      measured at fair value. This Statement is effective for financial statements
      issued for fiscal years beginning after November 15, 2007 and will become
      effective for the Company beginning with the first quarter of 2008. We have
      not
      yet determined the impact of the adoption of SFAS No. 159 on our financial
      statements and footnote disclosures.




14




*Note
      2*


**Inventories:**




Set
      forth
      below is a detailed listing of inventories:




June
                30, 2007
            
            December
                31, 2006Raw
                materials and work in progress
            
            $
            4,860,061
            
            $
            4,433,917Finished
                goods
            
            
            2,980.241
            
            
            2,867,778Total
                inventories
            
            $
            7,840,302
            
            $
            7,301,695




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, 2007
      and December 31, 2006, the Company carried specific reserves for excess and
      obsolete stocks against its inventories of $1,383,744 and $1,354,444,
      respectively.




*Note
      3*


**Property
      and Equipment:**




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




June
                30, 2007
            
            December
                31, 2006Lasers
                in service
            
            $
            17,667,638
            
            $
            16,234,834Computer
                hardware and software
            
            
            341,407
            
            
            334,490Furniture
                and fixtures
            
            
            335,551
            
            
            331,379Machinery
                and equipment
            
            
            785,349
            
            
            738,636Autos
                and trucks
            
            
            454,631
            
            
            382,690Leasehold
                improvements
            
            
            247,368
            
            
            247,36819,831,944
            
            
            18,269,397Accumulated
                depreciation and amortization
            
            
            (10,250,015
            )
            
            (9,215,299
            )Property
                and equipment, net
            
            $
            9,581,929
            
            $
            9,054,098




Depreciation
      expense was $1,697,199 and $1,430,093 for the six months ended June 30, 2007
      and
      2006, respectively. At June 30, 2007 and December 31, 2006, net property and
      equipment included $325,400 and $380,875, respectively, of assets recorded
      under
      capitalized lease arrangements, of which $154,794 and $122,717 was included
      in
      long-term debt at June 30, 2007 and December 31, 2006, respectively (see Note
      8).




*Note
      4*


**Patents
      and Licensed Technologies:**




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




June
                30, 2007
            
            December
                31, 2006Patents,
                owned and licensed, at gross costs of $505,533 and $501,657, net
                of
                accumulated amortization of $250,069 and $231,599,
                respectively.
            
            $
            255,464
            
            $
            270,058Other
                licensed or developed technologies, at gross costs of $2,432,258
                and
                $2,432,258, net of accumulated amortization of $1,157,835 and $1,006,589,
                respectively.
            
            
            1,274,423
            
            
            1,425,669$
            1,529,887
            
            $
            1,695,727




Related
      amortization expense was $169,716 and $159,418 for the six months ended June
      30,
      2007 and 2006, respectively. Included in other licensed and developed
      technologies is $200,000 in developed technologies acquired from ProCyte and
      $114,982 for the license with AzurTec. On March 31, 2006, the Company closed
      the
      transaction provided for in the License Agreement with Mount Sinai School of
      Medicine of New York University (“Mount Sinai”). Pursuant to the license
      agreement, the Company must reimburse $77,876 to Mount Sinai, over the first
      18
      months of the license term and at no interest, for patent prosecution costs
      incurred. 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.




15




*Note
      5*


**Other
      Intangible Assets:**




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




June
                30, 2007
            
            December
                31, 2006Neutrogena
                Agreement, at gross cost of $2,400,000 net of accumulated amortization
                of
                $1,098,000 and $858,000, respectively.
            
            $
            1,302,000
            
            $
            1,542,000Customer
                Relationships, at gross cost of $1,700,000 net of accumulated amortization
                of $777,741 and $607,743, respectively.
            
            
            922,259
            
            
            1,092,257Tradename,
                at gross cost of $1,100,000 net of accumulated amortization of $251,634
                and $196,632, respectively.
            
            
            848,366
            
            
            903,368$
            3,072,625
            
            $
            3,537,625




Related
      amortization expense was $465,000 and $465,000 for the six months ended June
      30,
      2007 and 2006, 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
      6*


**Other
      Accrued Liabilities:**




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




June
                30, 2007
            
            December
                31, 2006Accrued
                warranty
            
            $
            182,878
            
            $
            123,738Accrued
                professional and consulting fees
            
            
            602,693
            
            
            320,331Accrued
                sales taxes and other accrued liabilities
            
            
            225,855
            
            
            213,224Total
                other accrued liabilities
            
            $
            1,011,426
            
            $
            657,293





16




*Note
      7*


**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, 2007
            
            December
                31, 2006Note
                Payable - secured creditor, interest at 6%, payable in monthly principal
                and interest installments of $2,880 through June 2012
            
            $
            146,552
            
            $
            159,213Note
                Payable - unsecured creditor, non-interest bearing, payable in 18
                equal
                monthly installments of $4,326 through October 2007
            
            
            17,306
            
            
            43,265Note
                Payable - unsecured creditor, interest at 8.72%, payable in monthly
                principal and interest installments of $12,119.61 through November
                2007
            
            
            59,299
            
            
            -Note
                Payable - unsecured creditor, interest at 5.44%, payable in monthly
                principal and interest installments of $51,353.95 through February
                2008
            
            
            402,575
            
            
            -Note
                Payable - unsecured creditor, interest at 7.42%, payable in monthly
                principal and interest installments of $61,493 through March
                2007
            
            
            -
            
            
            126,279625,732
            
            
            328,757Less:
                current maturities
            
            
            (505,667
            )
            
            (195,250
            )Notes
                payable, net of current maturities
            
            $
            120,065
            
            $
            133,507




*Note
      8*


**Long-term
      Debt:**




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


June
                30, 2007
            
            December
                31, 2006Total
                borrowings on credit facilities
            
            $
            7,710,577
            
            $
            6,490,077Capital
                lease obligations (see Note 3)
            
            
            154,794
            
            
            122,717Less:
                current portion
            
            
            (3,655,286
            )
            
            (3,018,874
            )Total
                long-term debt
            
            $
            4,210,085
            
            $
            3,593,920




*Leasing
      Credit Facility*


The
      long-term debt is comprised largely of borrowings under a leasing credit
      facility that the Company entered into with GE Capital Corporation (“GE”) on
      June 25, 2004. The credit facility has a commitment term of three years, which
      expired on June 25, 2007. The Company accounts for each draw as funded
      indebtedness taking the form of a capital lease, with equitable ownership in
      the
      lasers remaining with the Company. GE retains title as security for the
      borrowings. The Company depreciates the lasers generally over their remaining
      useful lives, as established when originally placed into service. Each draw
      against the credit facility has a self-amortizing repayment period of three
      years and is secured by specified lasers, which the Company has sold to GE
      and
      leased back for continued deployment in the field. The Company does not plan
      on
      any future draws from GE; the Company will continue to pay down the outstanding
      indebtedness to GE.




Draws
      under the credit facility were set at an interest rate, which ranged from 577
      basis points above the three-year Treasury note rate in the first year of the
      term to 400 basis points above the three-year Treasury rate in the third year
      of
      the term. Each draw in the first year of the term was discounted 7.75%; draws
      made by the second and third years were discounted 3.5%. The monthly payment
      set
      for a draw is self-amortizing.




17




The
      following table summarizes the future minimum payments that the Company expects
      to make for the 11 draws made under the credit facility:




Quarter
                Ending
            
            Year
                Ending December 31,9/30/07
            
            12/31/07
            
            2008
            
            2009
            
            2010Future
                minimum payments
            
            $
            1,078,712
            
            $
            1,048,846
            
            $
            3,842,332
            
            $
            2,297,838
            
            $
            457,080




With
      each
      draw, the Company issued warrants to purchase shares of the Company’s common
      stock which ranged from a high of 5% of the draw in the first year to 3% in
      the
      third year. The number of warrants is determined by dividing either 3% or 5%
      of
      the draw by the average closing price of the Company’s common stock for the ten
      days preceding the date of the draw. The warrants have a five-year term from
      the
      date of each issuance and bear an exercise price set at 10% over the average
      closing price of the Company’s common stock for the ten days preceding the date
      of the draw. Taking the above factors into account, each draw has an effective
      interest rate that ranges from17.79% to 12.62%.




For
      reporting purposes, the carrying value of the liability is reduced at the time
      of each draw by the value ascribed to the warrants. This reduction will be
      amortized at the effective interest rate to interest expense over the term
      of
      the draw.  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. Future exercises and forfeitures will reduce the amount of warrants
      outstanding. Exercises will increase the amount of common stock outstanding
      and
      additional paid in capital.




On
      June
      29, 2007, the Company entered into an arrangement with LEAF Financial
      Corporation (“LEAF”), whereby LEAF may make available term loans to the Company
      under a facility for $6 million that will be available through June 30, 2008.
      Under the facility, LEAF is prepared to lend $45,000 against an XTRAC laser
      system. LEAF will be granted a first-priority lien on XTRAC lasers, and their
      associated cash flows from consignment agreements, which are pledged by the
      Company and which are free of, or have been released from, security interests
      of
      GE. The Company will retain ownership of all of the lasers pledged. The term
      loans are granted with self-amortizing payment terms of 3 years. The stated
      interest rate of a draw is to be set at 616.5 basis points above the 2-year
      SWAPS rate. The funds drawn down are not subject to an up-front discount, and
      no
      warrants are issuable under the facility. In the quarter ending June 30, 2007,
      the Company entered into a term loan from LEAF in the amount of $1,755,000.
      The
      effective interest rate was 11.53%.




*Capital
      Leases*


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




*Note
      9*


**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 June 26, 2007, the stockholders approved an increase in the
      number of shares reserved to the 2005 Equity Compensation Plan and to the
      Outside Director Plan. Under the 2005 Equity Compensation Plan, a maximum of
      6,160,000 shares of the Company’s common stock were reserved for issuance. At
      June 30, 2007, 3,154,800 shares were available for future grants under this
      Plan. Under the Outside Director Plan and under the 2005 Investment Plan,
      931,250 shares and 388,000 shares, respectively, were available for issuance
      as
      of June 30, 2007. The other stock options plans are frozen and no further grants
      will be made from them.




Stock
      option activity under all of the Company’s share-based compensation plans for
      the six months ended June 30, 2007 was as follows:




18




Number
                of Options
            
            Weighted
                Average Exercise PriceOutstanding,
                January 1, 2007
            
            
            6,093,725
            
            $
            2.09Granted
            
            
            696,000
            
            
            1.13Exercised
            
            
            (76,153
            )
            
            1.13Cancelled
            
            
            (345,682
            )
            
            2.05Outstanding,
                June 30, 2007
            
            
            6,367,890
            
            $
            2.00Options
                excercisable at June 30, 2007
            
            
            4,073,019
            
            $
            2.08




At
      June
      30, 2007, there was $4,145,082 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 2.70 years. The intrinsic value of options
      outstanding and exercisable at June 30, 2007 was not significant.




*Note
      10*


**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
      Services segment generates revenues by providing fee-based procedures typically
      using the Company’s mobile surgical laser equipment delivered and operated by a
      technician at hospitals and surgery centers in the United States. 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, 2007 and 2006, 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, 2007 and December 31,
        2006
        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, 2007 from the
        ProCyte acquisition has been entirely allocated to the Skin Care segment.




19


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




Three
                Months Ended June 30, 2007DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                SERVICES
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            2,215,926
            
            $
            618,953
            
            $
            3,094,697
            
            $
            2,008,123
            
            $
            1,381,021
            
            $
            9,318,720Costs
                of revenues
            
            
            1,058,351
            
            
            383,023
            
            
            1,001,517
            
            
            1,645,625
            
            
            815,957
            
            
            4,904,473Gross
                profit
            
            
            1,157,575
            
            
            235,930
            
            
            2,093,180
            
            
            362,498
            
            
            565,064
            
            
            4,414,247*Gross
                profit %*
            
            
            *52.2*
            *%*
            
            *38.1*
            *%*
            
            *67.6*
            *%*
            
            *18.1*
            *%*
            
            *40.9*
            *%*
            
            *47.4*
            *%*Allocated
                Operating expenses:Selling,
                general and administrative
            
            
            1,448,670
            
            
            44,479
            
            
            1,424,583
            
            
            230,889
            
            
            161,305
            
            
            3,309,925Engineering
                and product development
            
            
            -
            
            
            -
            
            
            99,599
            
            
            -
            
            
            130,260
            
            
            229,859Unallocated
                Operating expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,548,4541,448,670
            
            
            44,479
            
            
            1,524,182
            
            
            230,889
            
            
            291,565
            
            
            6,088,238Income
                (loss) from operations
            
            
            (291,095
            )
            
            191,451
            
            
            568,998
            
            
            131,609
            
            
            273,499
            
            
            (1,673,991
            )Interest
                expense, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (161,967
            )Net
                income (loss)
            
            
            ($291,095
            )
            $
            191,451
            
            $
            568,998
            
            $
            131,609
            
            $
            273,499
            
            
            ($1,835,958
            )








Three
                Months Ended June 30, 2006DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                SERVICES
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            1,328,215
            
            $
            290,616
            
            $
            3,069,827
            
            $
            1,749,315
            
            $
            1,785,770
            
            $
            8,223,743Costs
                of revenues
            
            
            879,464
            
            
            122,069
            
            
            939,795
            
            
            1,363,760
            
            
            919,102
            
            
            4,224,190Gross
                profit
            
            
            448,751
            
            
            168,547
            
            
            2,130,032
            
            
            385,555
            
            
            866,668
            
            
            3,999,553*Gross
                profit %*
            
            
            *33.8*
            *%*
            
            *58.0*
            *%*
            
            *69.4*
            *%*
            
            *22.0*
            *%*
            
            *48.5*
            *%*
            
            *48.6*
            *%*Allocated
                Operating expenses:Selling,
                general and administrative
            
            
            973,050
            
            
            44,136
            
            
            1,213,772
            
            
            253,573
            
            
            137,790
            
            
            2,622,321Engineering
                and product development
            
            
            -
            
            
            -
            
            
            126,520
            
            
            -
            
            
            128,659
            
            
            255,179Unallocated
                Operating expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,324,137973,050
            
            
            44,136
            
            
            1,340,292
            
            
            253,573
            
            
            266,449
            
            
            5,201,637Income
                (loss) from operations
            
            
            (524,299
            )
            
            124,411
            
            
            789,740
            
            
            131,982
            
            
            600,219
            
            
            (1,202,084
            )Interest
                expense, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (137,847
            )Net
                income (loss)
            
            
            ($524,299
            )
            $
            124,411
            
            $
            789,740
            
            $
            131,982
            
            $
            600,219
            
            
            ($1,339,931
            )




20




Six
                Months Ended June 30, 2007DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                SERVICES
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            4,022,852
            
            $
            1,297,771
            
            $
            6,580,407
            
            $
            3,828,328
            
            $
            2,617,930
            
            $
            18,347,288Costs
                of revenues
            
            
            2,107,639
            
            
            803,187
            
            
            2,027,731
            
            
            3,211,263
            
            
            1,532,341
            
            
            9,682,161Gross
                profit
            
            
            1,915,213
            
            
            494,584
            
            
            4,552,676
            
            
            617,065
            
            
            1,085,589
            
            
            8,665,127*Gross
                profit %*
            
            
            *47.6*
            *%*
            
            *38.1*
            *%*
            
            *69.2*
            *%*
            
            *16.1*
            *%*
            
            *41.5*
            *%*
            
            *47.2*
            *%*Allocated
                Operating expenses:Selling,
                general and administrative
            
            
            2,992,743
            
            
            69,399
            
            
            2,833,592
            
            
            463,371
            
            
            300,725
            
            
            6,659,830Engineering
                and product development
            
            
            -
            
            
            -
            
            
            191,091
            
            
            -
            
            
            284,916
            
            
            476,007Unallocated
                Operating expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,010,3442,992,743
            
            
            69,399
            
            
            3,024,683
            
            
            463,371
            
            
            585,641
            
            
            12,146,181Income
                (loss) from operations
            
            
            (1,077,530
            )
            
            425,185
            
            
            1,527,993
            
            
            153,694
            
            
            499,948
            
            
            (3,481,054
            )Interest
                expense, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (238,386
            )Net
                income (loss)
            
            
            ($1,077,530
            )
            $
            425,185
            
            $
            1,527,993
            
            $
            153,694
            
            $
            499,948
            
            
            ($3,719,440
            )








Six
                Months Ended June 30, 2006DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                SERVICES
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            2,387,845
            
            $
            821,681
            
            $
            6,530,388
            
            $
            3,365,349
            
            $
            3,199,642
            
            $
            16,304,905Costs
                of revenues
            
            
            1,826,076
            
            
            452,359
            
            
            1,992,239
            
            
            2,778,338
            
            
            1,883,076
            
            
            8,932,088Gross
                profit
            
            
            561,769
            
            
            369,322
            
            
            4,538,149
            
            
            587,011
            
            
            1,316,566
            
            
            7,372,817*Gross
                profit %*
            
            
            *23.5*
            *%*
            
            *44.9*
            *%*
            
            *69.5*
            *%*
            
            *17.4*
            *%*
            
            *41.1*
            *%*
            
            *45.20*
            *%*Allocated
                Operating expenses:Selling,
                general and administrative
            
            
            2,105,001
            
            
            61,567
            
            
            2,641,946
            
            
            505,649
            
            
            278,597
            
            
            5,592,760Engineering
                and product development
            
            
            -
            
            
            -
            
            
            232,255
            
            
            -
            
            
            265,128
            
            
            497,383Unallocated
                Operating expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,713,8762,105,001
            
            
            61,567
            
            
            2,874,201
            
            
            505,649
            
            
            543,725
            
            
            10,804,019Income
                (loss) from operations
            
            
            (1,543,232
            )
            
            307,755
            
            
            1,663,948
            
            
            81,362
            
            
            772,841
            
            
            (3,431,202
            )Interest
                expense, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (258,990
            )Net
                income (loss)
            
            
            ($1,543,232
            )
            $
            307,755
            
            $
            1,663,948
            
            $
            81,362
            
            $
            772,841
            
            
            ($3,690,192
            )




21




June
                30, 2007
            
            December
                31, 2006Assets:Total
                assets for reportable segments
            
            $
            45,022,783
            
            $
            43,955,628Other
                unallocated assets
            
            
            11,979,764
            
            
            13,525,893Consolidated
                total
            
            $
            57,002,547
            
            $
            57,481,521




For
      the
      three and six months ended June 30, 2007 and 2006 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 30,2007
            
            2006
            
            2007
            
            2006Domestic
            
            $
            7,828,339
            
            $
            7,133,862
            
            $
            15,416,579
            
            $
            13,793,240Foreign
            
            
            1,490,381
            
            
            1,089,881
            
            
            2,930,709
            
            
            2,511,665$
            9,318,720
            
            $
            8,223,743
            
            $
            18,347,288
            
            $
            16,304,905




T he
        Company discusses segmental details in its Management Discussion & Analysis
        found elsewhere in its Form 10-Q for the period ending June 30, 2007.




*Note
      11*




**Significant
      Alliances/Agreements:**




On
      March
      31, 2005, the Company entered into a Sales and Marketing Agreement with
      GlobalMed (Asia) Technologies Co., Inc. (“GlobalMed”). Under this agreement,
      GlobalMed acts as master distributor in the Pacific Rim for the Company’s XTRAC
      excimer laser and for the Company’s LaserPro® diode surgical laser system. The
      Company’s diode laser will be marketed for, among other things, use in a
      gynecological procedure pioneered by David Matlock, MD. The
      Company has engaged Dr. Matlock as a consultant to explore further business
      opportunities for the Company. In connection with this engagement, Dr. Matlock
      received options to purchase up to 25,000 shares of the Company’s common stock
      at an exercise price, which was the market value of the Company’s common stock
      on the date of the grant. In July 2006, the Company broadened the territory
      covered by the Sales and Marketing Agreement to include the United States and
      added Innogyn, Inc., a related party of GlobalMed, as co-distributor under
      the
      agreement.




On
      March
      30, 2006, the Company entered a strategic relationship with AzurTec to resume
      development, and to undertake the manufacture and distribution, of AzurTec's
      MetaSpex Laboratory System, a light-based system designed to detect certain
      cancers of the skin. The Company issued 200,000 shares of its restricted common
      stock in exchange for 6,855,141 shares of AzurTec common stock and 181,512
      shares of AzurTec Class A preferred stock, which represent a 14% interest in
      AzurTec on a fully diluted basis. The Company will assist
      in
      the development of FDA-compliant prototypes for AzurTec’s product. Continuing
      development of this project requires additional investment by AzurTec, which
      AzurTec has undertaken to raise. The Company has granted AzurTec an additional
      12 months (i.e. until December 30, 2007) in which to raise the additional
      investment. The Company will resume development once the additional investment
      has been raised, and AzurTec has settled its prior indebtedness to the Company
      for development work.




On
      March
      31, 2006, the Mount Sinai School of Medicine of New York University granted
      the
      Company an exclusive license, effective April 1, 2006, to use Mount Sinai's
      patented methodology for utilization of ultraviolet laser light for the
      treatment of vitiligo. The licensed patent is US Patent No. 6,979,327, Treatment
      of Vitiligo. It was issued December 27, 2005, and the inventor is James M.
      Spencer, MD, a member of the Company’s Scientific Advisory Board.




On
        April
        14, 2006, the Company entered into a Clinical Trial Agreement protocol with
        the
        University of California at San Francisco. The protocol was originally for
        a
        phase 4, randomized, double-blinded study to evaluate the safety and efficacy
        of
        the XTRAC laser system in the treatment of moderate to severe psoriasis.
        The
        protocol has been revised to be an open-label study in order to facilitate
        greater patient recruitment into the study. John Koo, MD, a member of our
        Scientific Advisory Board, is guiding the study using our high-powered UltraTM
excimer laser.






22




**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,
      2006.*




*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 business as comprised of the following five business segments:




·
            Domestic
                XTRAC,




·
            International
                Dermatology Equipment,




·
            Skin
                Care (ProCyte),




·
            Surgical
                Services, 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 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.




For
      the
      past six years, we have sought to clear the path of obstacles and barriers
      to a
      roll-out of the XTRAC laser system in dermatology. In 2000, the laser system,
      which was originally designed for cardiology applications, was found to have
      significant therapeutic advantages for psoriasis patients who were treated
      with
      the UVB light emitted from the excimer-based laser system. For the first two
      years, we invested in establishing the clinical efficacy of the product and
      mechanical reliability of the equipment. In the last three years, we have
      pursued widespread reimbursement commencing with obtaining newly created Current
      Procedure Terminology (“CPT”) reimbursement codes that became effective in 2003.
      This was followed by a lengthy process of persuading private medical insurers
      to
      adopt a positive reimbursement policy for the procedure. As a result of
      initiatives undertaken by the Company and by the physician community, the
      ability for physicians to process claims efficiently and receive positive
      payment decisions for use of the XTRAC system improved significantly during
      the
      latter part of 2005 and 2006. In March 2007, the Blue Cross Blue Shield
      Association (BCBSA) published a National Reference Policy that now recommends
      positive reimbursement coverage for psoriasis, including the XTRAC as first
      step
      therapy for moderate to severe psoriasis comprising less than 20% body area.
      The
      Company is now seeking adoption of this National Reference Policy by the
      remaining state Blue Cross-Blue Shield Health Insurance Plans which currently
      do
      not have a positive payment policy for the XTRAC.




23




We
      increased our dermatology sales force and marketing department as part of the
      acquisition of ProCyte in March 2005. Our 22 person XTRAC sales organization
      includes 12 sales representatives, 8 clinical specialists and 2 marketing
      support personnel. Our 29-person skin care sales organization includes 20 sales
      representatives, 4 customer service representatives and 5 marketing support
      personnel. The sales representatives of 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. In November 2005, we commenced an advertising
      campaign in selected regions that have attained certain levels of reimbursement
      in order to make consumers aware of the technology and therapeutic benefits
      of
      targeted UVB laser treatment for psoriasis. We continue to analyze and adjust
      this campaign for effectiveness.




While
      our
      sales and marketing expenses have grown faster than 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 payback in utilization is expected
      to
      be attained over more periods than in just the period in which we incurred
      the
      expense. We have also increased the number of sales representatives and also
      established a cadre 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. The efforts of this cadre, if successful,
      will likely realize benefits over several fiscal quarters.




**International
      Dermatology Equipment**




In
      the
      international market, we derive revenues by selling the dermatology laser
      systems 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
      is 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. In 2005, as a result of the acquisition of worldwide rights to certain
      proprietary light-based technology from Stern, we also explored new product
      offerings in the treatment of dermatological conditions. We have expanded the
      international marketing of this product, called the VTRACTM, in 2006. The VTRAC
      is a lamp-based UVB targeted therapy, positioned at a price point lower than
      the
      XTRAC laser system so that it will effectively compete with other
      non-laser-based therapies for psoriasis and vitiligo.




Due
      to
      the significant financial investment requirements,  we
      did
      not implement an international XTRAC and/or VTRAC fee-per-use revenue model,
      similar to our domestic revenue model. However, as reimbursement in the domestic
      market has become more widespread, we have recently started to offer a version
      of this model overseas.




**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.




24




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.




**Surgical
      Services**




The
      Surgical Services segment generates revenues by providing fee-based procedures
      typically using our mobile surgical laser equipment delivered and operated
      by a
      technician at hospitals and surgery centers in the United States. Although
      we
      intend to increase our investment in this business during 2007, we will continue
      to pursue a cautious growth strategy in order to conserve our cash resources
      for
      the XTRAC business segments.




**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). We expect that sales of surgical laser
      systems and the related disposable base may begin to erode 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
      cautiously expanding our surgical services segment and by increasing sales
      from
      the diode surgical laser introduced in 2004.




**Critical
      Accounting Policies**




There
      have been no changes to our critical accounting policies in the three months
      ended June 30, 2007. 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, 2006.




**Results
      of Operations**




***Revenues***




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




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2007
            
            2006
            
            2007
            
            2006XTRAC
                Domestic Services
            
            $
            2,215,926
            
            $
            1,328,215
            
            $
            4,022,852
            
            $
            2,387,845International
                Dermatology Equipment Products
            
            
            618,953
            
            
            290,616
            
            
            1,297,771
            
            
            821,681Skin
                Care (ProCyte) Products
            
            
            3,094,697
            
            
            3,069,827
            
            
            6,580,407
            
            
            6,530,389Total
                Dermatology Revenues
            
            
            5,929,576
            
            
            4,688,658
            
            
            11,901,030
            
            
            9,739,915Surgical
                Services
            
            
            2,008,123
            
            
            1,749,315
            
            
            3,828,328
            
            
            3,365,349Surgical
                Products
            
            
            1,381,021
            
            
            1,785,770
            
            
            2,617,930
            
            
            3,199,641Total
                Surgical Revenues
            
            
            3,389,144
            
            
            3,535,085
            
            
            6,446,259
            
            
            6,564,990Total
                Revenues
            
            $
            9,318,720
            
            $
            8,223,743
            
            $
            18,347,288
            
            $
            16,304,905




Domestic
      XTRAC Segment




Recognized
      treatment revenue for the three months ended June 30, 2007 and 2006 for domestic
      XTRAC procedures was $1,532,306 and $1,328,215, respectively, reflecting billed
      procedures of 27,777 and 21,365, respectively. In addition, 1,187 and 1,479
      procedures were performed in the three months ended June 30, 2007 and 2006,
      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, 2007 and 2006 for domestic XTRAC procedures was
      $2,994,692 and $2,387,845, respectively, reflecting billed procedures of 52,793
      and 40,125, respectively. In addition, 2,448 and 2,652 procedures were performed
      in the six months ended June 30, 2007 and 2006, 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, 2007
      compared to the comparable periods in 2006 was largely related to our continuing
      progress in securing favorable reimbursement policies from private insurance
      plans. Increases in procedures are dependent upon more widespread adoption
      of
      CPT codes with comparable rates by private healthcare insurers and on 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.




25




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, 2007, we
      deferred net revenues of $87,925 under this program compared to $105,388 for
      the
      three months ended June 30, 2006. For the six months ended June 30, 2007, we
      deferred net revenues of $153,875 under this program compared to $156,468 for
      the six months ended June 30, 2006. The change in deferred revenue under this
      program is presented in the table below.




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, which were made for various reasons, including costs of logistical
      support and customer preferences. There were no domestic XTRAC laser sales
      for
      the three and six months ended June 30, 2006.




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 30,2007
            
            2006
            
            2007
            
            2006Total
                revenue
            
            $
            2,215,926
            
            $
            1,328,215
            
            $
            4,022,852
            
            $
            2,387,845Less:
                laser sales revenue
            
            
            (683,620
            )
            
            -
            
            
            (1,028,160
            )
            
            -Recognized
                treatment revenue
            
            
            1,532,306
            
            
            1,328,215
            
            
            2,994,692
            
            
            2,387,845Change
                in deferred programRevenue
            
            
            87,925
            
            
            105,388
            
            
            153,875
            
            
            156,468Change
                in deferred unusedTreatments
            
            
            192,569
            
            
            (23,781
            )
            
            320,742
            
            
            86,273Net
                billed revenue
            
            $
            1,812,800
            
            $
            1,409,822
            
            $
            3,469,309
            
            $
            2,630,586Procedure
                volume total
            
            
            28,964
            
            
            22,844
            
            
            55,241
            
            
            42,777Less:
                Non-billed procedures
            
            
            1,187
            
            
            1,479
            
            
            2,448
            
            
            2,652Net
                billed procedures
            
            
            27,777
            
            
            21,365
            
            
            52,793
            
            
            40,125Avg.
                price of treatments billed
            
            $
            65.26
            
            $
            65.99
            
            $
            65.72
            
            $
            65.53Change
                in procedures with deferred program revenue, net
            
            
            1,347
            
            
            1,597
            
            
            2,342
            
            
            2,372Change
                in procedures with deferred/(recognized) unused treatments,
                net
            
            
            2,951
            
            
            (360
            )
            
            4,881
            
            
            1,316




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. Due to the length of treatment time required, it has
      not generally been practical to use our therapy to treat severe psoriasis
      patients, but this may change as our new product, the XTRAC Ultra, has shorter
      treatment times. A study undertaken with the guidance of John Koo, MD, of the
      University of California at San Francisco, is evaluating the effectiveness
      of
      the Ultra in treating patients suffering from severe psoriasis. In March 2007,
      the Blue Cross Blue Shield Association (BCBSA) published a National Reference
      Policy that now recommends positive reimbursement coverage for treatment of
      psoriasis by laser, including the XTRAC as first step therapy for moderate
      to
      severe psoriasis comprising less than 20% body area.




26




International
      Dermatology Equipment Segment




International
      sales of our dermatology equipment and related parts were $618,953 for the
      three
      months ended June 30, 2007 compared to $290,616 for the three months ended
      June
      30, 2006. We sold 14 and 6 laser systems in the three months ended June 30,
      2007
      and 2006, respectively. International sales of our dermatology equipment and
      related parts were $1,297,771 for the six months ended June 30, 2007 compared
      to
      $821,681 for the six months ended June 30, 2006. We sold 25 and 18 laser systems
      in the six months ended June 30, 2007 and 2006, respectively. Compared to the
      domestic business, the international dermatology equipment operations are more
      influenced by competition from similar laser technology from other manufacturers
      and from non-laser lamps. Such competition has caused us to reduce the prices
      we
      charge to international distributors. Furthermore, average selling prices for
      international dermatology equipment are influenced by the following two
      factors:




·
            We
                have begun selling refurbished domestic XTRAC laser systems into
                the
                international market. The selling price for used equipment is
                substantially less than new equipment. We sold two and three such
                used
                lasers in the three and six months ended June 30, 2007, respectively,
                and
                two and five such lasers in the three and six months ended June 30,
                2006,
                respectively; and




·
            We
                have begun selling the new VTRAC, a lamp-based, alternative UVB light
                source that has a wholesale sales price that is substantially below
                our
                competitors’ international dermatology equipment. In the three and six
                months ended June 30, 2007, we sold eight and nine VTRAC systems,
                respectively. In the three and six months ended June 30, 2006, we
                sold two
                and four 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 30,2007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            618,953
            
            $
            290,616
            
            $
            1,297,771
            
            $
            821,681Laser
                systems sold
            
            
            14
            
            
            6
            
            
            25
            
            
            18Average
                revenue per laser
            
            $
            44,211
            
            $
            48,436
            
            $
            51,911
            
            $
            45,649




Skin
      Care (ProCyte) Segment




For
      the
      three months ended June 30, 2007, ProCyte revenues were $3,094,697 compared
      to
      $3,069,827 in the three months ended June 30, 2006. For the six months ended
      June 30, 2007, ProCyte revenues were $6,580,407 compared to $6,530,388 in the
      six months ended June 30, 2006. ProCyte revenues are generated from the sale
      of
      various skin and hair care products, from the sale of copper peptide compound
      and from royalties on licenses, mainly from Neutrogena.




Bulk
      compound sales decreased by $144,000 for the six months ended June 30, 2007
      compared to the six months ended June 30, 2006. These sales are mainly from
      Neutrogena and will affect future royalties earned from Neutrogena.




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




27




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2007
            
            2006
            
            2007
            
            2006Product
                sales
            
            $
            2,859,697
            
            $
            2,838,815
            
            $
            6,190,407
            
            $
            5,916,377Bulk
                compound sales
            
            
            160,000
            
            
            128,000
            
            
            240,000
            
            
            384,000Royalties
            
            
            75,000
            
            
            103,012
            
            
            150,000
            
            
            230,012Total
                ProCyte revenues
            
            $
            3,094,697
            
            $
            3,069,827
            
            $
            6,580,407
            
            $
            6,530,389




We
        engaged a new senior officer to direct the operations of the skin care segment.
        The new officer has devised plans to increase existing product sales and
        to
        introduce new products of our own (e.g. Neova® Skin Brightening Serum) and
        third-party products we have licensed (e.g. MD Lash Factor TM conditioner).




Surgical
      Services Segment




In
      the
      three months ended June 30, 2007 and 2006, surgical services revenues were
      $2,008,123 and $1,749,315, respectively. In the six months ended June 30, 2007
      and 2006, surgical services revenues were $3,828,328 and $3,365,349,
      respectively. These increases were primarily due to the fact that during the
      first quarter of 2006, we began working with a regional hospital system in
      central Florida, which has continued to show business growth.




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.
      Sales
      of laser systems create recurring sales of laser fibers and laser disposables
      that are more profitable than laser systems.




For
      the
      three months ended June 30, 2007, surgical products revenues were $1,381,021
      compared to $1,785,770 in the three months ended June 30, 2006. The decrease
      was
      partly due to $112,000 less laser system revenues, as a result of a decrease
      in
      the number of systems sold (25 vs. 27). For the six months ended June 30, 2007,
      surgical products revenues were $2,617,930 compared to $3,199,641 in the six
      months ended June 30, 2006. The decrease was partly due to $258,300 less laser
      system revenues, as a result of a decrease in the number of systems sold (36
      vs.
      45).




The
      decrease in average price per laser between the periods 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, which has a lower sales
      price than our other types of lasers, has largely replaced our Nd:YAG laser,
      which had a higher sales price. Included in laser sales during the three and
      six
      months ended June 30, 2007 were sales of 22 and 28 diode lasers. There were
      sales of 23 and 36 diode lasers, during the three and six months ended June
      30,
      2006. We expect that we will continue to sell more diode lasers than our other
      types of lasers in the near future.




Fiber
      and
      other disposables sales decreased 26% and 17% between the comparable three-month
      and six-month periods ended June 30, 2007 and 2006. This is due to the fact
      that
      in the three and six months ended June 30, 2006 we had a one-time order of
      approximately $250,000. 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. We continue to seek to offset
      this erosion through expansion of our surgical services. Similarly, we believe
      there will be continuing pressure on laser system sales as hospitals continue
      to
      outsource their laser-assisted procedures to third parties, such as our surgical
      services business. Any decline in laser and disposables revenues is partly
      offset by sales of CO2 and diode surgical lasers.




28


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 30,2006
            
            2006
            
            2006
            
            2006Revenues
            
            $
            1,381,021
            
            $
            1,785,770
            
            $
            2,617,930
            
            $
            3,199,641Laser
                systems sold
            
            
            25
            
            
            27
            
            
            36
            
            
            45Laser
                system revenues
            
            $
            513,540
            
            $
            625,590
            
            $
            834,040
            
            $
            1,092,340Average
                revenue per laser
            
            $
            20,542
            
            $
            23,170
            
            $
            23,168
            
            $
            24,274




***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, and the Surgical Services segment, as well
      as costs associated with royalties and maintenance.




Product
      cost of revenues for the three months ended June 30, 2007 was $2,282,770
      compared to $1,955,175 for the three months ended June 30, 2006. The $327,595
      increase reflected the cost of sales for the domestic XTRAC laser sales of
      $108,168, an increase of $61,721 in costs for the ProCyte business and a
      $260,954 increase in costs associated with sales of XTRAC laser equipment sold
      outside the United States. Offsetting these increases was a decrease of $103,248
      for surgical products, due to decreased laser system sales.




Product
      cost of revenues for the six months ended June 30, 2007 was $4,475,122 compared
      to $4,276,844 for the six months ended June 30, 2006. The $198,278 increase
      reflected the cost of sales for the domestic XTRAC laser sales of $166,255,
      an
      increase of $35,491 in costs for the ProCyte business and a $350,828 increase
      in
      costs associated with sales of XTRAC laser equipment sold outside the United
      States. Offsetting these increases was a decrease of $354,296 for surgical
      products, due to decreased laser system sales.




Services
      cost of revenues was $2,621,703 in the three months ended June 30, 2007 compared
      to $2,269,015 in the comparable period in 2006. Contributing to the $352,688
      increase was a $281,968 increase in the surgical services business segment
      due
      to increased revenues. Additionally, there was an increase of $70,720 in the
      cost of revenues for the domestic XTRAC services business.




Services
      cost of revenues was $5,207,039 in the six months ended June 30, 2007 compared
      to $4,655,244 in the comparable period in 2006. Contributing to the $551,795
      increase was a $436,487 increase in the surgical services business segment
      due
      to increased revenues. Additionally, there was an increase of $115,308 in the
      cost of revenues for the domestic XTRAC services business.




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.




29




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 30,2007
            
            2006
            
            2007
            
            2006Product:XTRAC
                Domestic
            
            $
            108,168
            
            $
            -
            
            $
            166,255
            
            $
            -International
                DermatologyEquipment
            
            
            383,023
            
            
            122,069
            
            
            803,187
            
            
            452,359Skin
                Care
            
            
            1,001,517
            
            
            939,796
            
            
            2,027,731
            
            
            1,992,240Surgical
                products
            
            
            790,062
            
            
            893,310
            
            
            1,477,949
            
            
            1,832,245Total
                Product costs
            
            $
            2,282,770
            
            $
            1,955,175
            
            $
            4,475,122
            
            $
            4,276,844Services:XTRAC
                Domestic
            
            $
            950,184
            
            $
            879,464
            
            $
            1,941,384
            
            $
            1,826,076Surgical
                Services
            
            
            1,671,519
            
            
            1,389,551
            
            
            3,265,655
            
            
            2,829,168Total
                Services costs
            
            $
            2,621,703
            
            $
            2,269,015
            
            $
            5,207,039
            
            $
            4,655,244Total
                Costs of Revenues
            
            $
            4,904,473
            
            $
            4,224,190
            
            $
            9,682,161
            
            $
            8,932,088




***Gross
      Profit Analysis***




Gross
      profit increased to $4,414,247 during the three months ended June 30, 2007
      from
      $3,999,553 during the same period in 2006. As a percent of revenues, gross
      margin decreased to 47.4% for the three months ended June 30, 2007 from 48.6%
      for the same period in 2006.




Gross
      profit increased to $8,665,127 during the six months ended June 30, 2007 from
      $7,372,817 during the same period in 2006. As a percent of revenues, gross
      margin increased to 47.2% for the six months ended June 30, 2007 from 45.2%
      for
      the same period in 2006.




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 30,2007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            9,318,720
            
            $
            8,223,743
            
            $
            18,347,288
            
            $
            16,304,905Percent
                increase
            
            
            13.3
            %
            
            
            
            
            12.5
            %Cost
                of revenues
            
            
            4,904,473
            
            
            4,224,190
            
            
            9,682,161
            
            
            8,932,088Percent
                increase
            
            
            16.1
            %
            
            
            
            
            8.4
            %Gross
                profit
            
            $
            4,414,247
            
            $
            3,999,553
            
            $
            8,665,127
            
            $
            7,372,817Gross
                margin percentage
            
            
            47.4
            %
            
            48.6
            %
            
            47.2
            %
            
            45.2
            %




The
      primary reasons for the increase in gross profit for the three months ended
      June
      30, 2007, compared to the same period in 2006 were as follows




·
            We
                sold a greater number of treatment procedures for the XTRAC laser
                systems
                in 2007 than in 2006. 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.




·
            We
                sold XTRAC lasers domestically during the three months ended June
                30,
                2007. The gross margin on these sales are higher, approximately 84%,
                since
                certain of the lasers were previously being
                depreciated.




·
            Partially
                offsetting the above was an increase in depreciation of $52,000 included
                in the XTRAC domestic cost of sales as a result of increasing the
                overall
                placements of new lasers since the period ended June 30,
                2006.




30




·
            The
                gross margin percentage decreased for the three months ended June
                30, 2007
                due to a change in product mix. Revenues in the three months ended
                June
                30, 2006 included a substantial one-time order of highly profitable
                surgical disposable products.




The
      primary reasons for the increase in gross profit for the six months ended June
      30, 2007, compared to the same period in 2006 were as follows




·
            We
                sold a greater number of treatment procedures for the XTRAC laser
                systems
                in 2007 than in 2006. Since each incremental treatment procedure
                carries
                negligible variable cost, this significantly enhanced profit margins.
                The
                increase in procedure volume was a direct result of improving insurance
                reimbursement and increased marketing efforts.




·
            We
                sold XTRAC lasers domestically during the three months ended June
                30,
                2007. The gross margin on these sales are higher, approximately 84%,
                since
                certain of the lasers were previously being
                depreciated.




·
            Partially
                offsetting the above was an increase in depreciation of $121,000
                included
                in the XTRAC domestic cost of sales as a result of increasing the
                overall
                placements of new lasers since the period ended June 30,
                2006.




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




**XTRAC
                Domestic Segment**
            
            Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            2,215,926
            
            $
            1,328,215
            
            $
            4,022,852
            
            $
            2,387,845Percent
                increase
            
            
            66.8
            %
            
            
            
            
            68.5
            %Cost
                of revenues
            
            
            1,058,352
            
            
            879,464
            
            
            2,107,639
            
            
            1,826,076Percent
                increase
            
            
            20.3
            %
            
            
            
            
            15.4
            %Gross
                profit
            
            $
            1,157,574
            
            $
            448,751
            
            $
            1,915,213
            
            $
            561,769Gross
                margin percentage
            
            
            52.2
            %
            
            33.8
            %
            
            47.6
            %
            
            23.5
            %




Gross
      profit increased for this segment for the three and six months ended June 30,
      2007 from the comparable periods in 2006 by $708,823 and $1,353,444. The key
      factors for the increases were as follows:




·
            Key
                drivers in increased revenue 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, increased treatment revenue accordingly. Our
                clinical support specialists have also begun to show favorable impact
                on
                increasing physicians’ utilization of the XTRAC laser
                system.




·
            Procedure
                volume increased 30% from 21,365 to 27,777 billed procedures in the
                three
                months ended June 30, 2007 compared to the same period in 2006. Price
                per
                procedure did not change significantly between the periods. Procedure
                volume increased 32% from 40,125 to 52,793 billed procedures in the
                six
                months ended June 30, 2007 compared to the same period in 2006. Price
                per
                procedure did not change significantly between the
                periods.




·
            We
                sold XTRAC lasers domestically during the three and six months ended
                June
                30, 2007. The gross margins on these sales are higher, approximately
                84%,
                which is higher than overall gross margin of 52.2% and 47.6%,
                respectively, in this segment and which is largely due to the fact
                that
                certain of the lasers were previously being
                depreciated.




·
            The
                cost of revenues increased by $178,888 for the three months ended
                June 30,
                2007. This increase is due to the cost of sales for the lasers of
                $108,168
                and to an increase in depreciation on the lasers in service of $52,000
                over the comparable prior year period. The cost of revenues increased
                by
                $281,563 for the six months ended June 30, 2007. This increase is
                due to
                the cost of sales for the lasers of $166,255 and to an increase in
                depreciation on the lasers in service of $121,000 over the comparable
                prior year period. The depreciation costs will continue to increase
                in
                subsequent periods as the business grows thereby increasing the installed
                base of lasers. In addition, there was an increase in certain allocable
                XTRAC manufacturing overhead costs that are charged against the XTRAC
                service revenues.




31




The
      following table analyzes our 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 30,2007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            618,953
            
            $
            290,616
            
            $
            1,297,771
            
            $
            821,681Percent
                increase
            
            
            113.0
            %
            
            
            
            
            57.9
            %Cost
                of revenues
            
            
            383,023
            
            
            122,069
            
            
            803,187
            
            
            452,359Percent
                increase
            
            
            213.8
            %
            
            
            
            
            77.6
            %Gross
                profit
            
            $
            235,930
            
            $
            168,547
            
            $
            494,584
            
            $
            369,322Gross
                margin percentage
            
            
            38.1
            %
            
            58.0
            %
            
            38.1
            %
            
            44.9
            %




Gross
      profit for the three and six months ended June 30, 2007 increased by $67,383
      and
      $125,262, respectively, from the comparable periods in 2006. The key factors
      for
      the increase were as follows:




·
            We
                sold six XTRAC laser systems and eight VTRAC lamp-based excimer systems
                during the three months ended June 30, 2007 and four XTRAC laser
                systems
                and two VTRAC systems in the comparable period in 2006. We sold sixteen
                XTRAC laser systems and nine VTRAC lamp-based excimer systems during
                the
                six months ended June 30, 2007 and fourteen XTRAC laser systems and
                four
                VTRAC systems in the comparable period in 2006.




·
            The
                International dermatology equipment operations are influenced by
                competition from similar laser technology from other manufacturers
                and
                from non-laser lamp alternatives for treating inflammatory skin disorders,
                which has served to reduce the prices we charge international distributors
                for our excimer products.




·
            Although
                there were more new XTRAC lasers sold in the three months ended June
                30,
                2007 compared to the three months ended June 30, 2006, the average
                selling
                price was approximately 12% lower.




32


The
      following table analyzes our 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 30,2007
            
            2006
            
            2007
            
            2006Product
                revenues
            
            $
            2,859,697
            
            $
            2,838,815
            
            $
            6,190,407
            
            $
            5,916,377Bulk
                compound revenues
            
            
            160,000
            
            
            128,000
            
            
            240,000
            
            
            384,000Royalties
            
            
            75,000
            
            
            103,012
            
            
            150,000
            
            
            230,012Total
                revenues
            
            
            3,094,697
            
            
            3,069,827
            
            
            6,580,407
            
            
            6,530,389Product
                cost of revenues
            
            
            887,597
            
            
            860,356
            
            
            1,864,161
            
            
            1,753,920Bulk
                compound cost of revenues
            
            
            113,920
            
            
            79,440
            
            
            163,570
            
            
            238,320Total
                cost of revenues
            
            
            1,001,517
            
            
            939,795
            
            
            2,027,731
            
            
            1,992,240Gross
                profit
            
            $
            2,093,180
            
            $
            2,130,032
            
            $
            4,552,676
            
            $
            4,538,149Gross
                margin percentage
            
            
            67.6
            %
            
            69.4
            %
            
            69.2
            %
            
            69.5
            %




Gross
      profit for the three months ended June 30, 2007 decreased by $36,852, from
      the
      comparable period in 2006. Gross profit for the six months ended June 30, 2007
      increased by $14,527, for the comparable period in 2006. The key factor
      impacting gross margin was that copper peptide bulk compound is sold at a
      substantially lower gross margin than skin care products, while revenues
      generated from licensees have no significant costs associated with this revenue
      stream. Product
      mix can contribute to slightly varying margins, and if a growing percentage
      of
      our product reaches the end-user customer through sales to distributors, our
      margins can also be negatively impacted.




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




**Surgical
                Services Segment**
            
            Three
                Months Ended June 30,
            
            Six
                Months EndedJune
                30,2007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            2,008,123
            
            $
            1,749,315
            
            $
            3,828,328
            
            $
            3,365,349Percent
                increase
            
            
            14.8
            %
            
            
            
            
            13.8
            %Cost
                of revenues
            
            
            1,645,625
            
            
            1,363,760
            
            
            3,211,263
            
            
            2,778,339Percent
                increase
            
            
            20.7
            %
            
            
            
            
            15.6
            %Gross
                profit
            
            $
            362,498
            
            $
            385,555
            
            $
            617,065
            
            $
            587,010Gross
                margin percentage
            
            
            18.1
            %
            
            22.0
            %
            
            16.1
            %
            
            17.4
            %




Gross
      profit in the Surgical Services segment for the three months ended June 30,
      2007
      decreased by $23,057, from the comparable periods in 2006. Gross profit in
      the
      Surgical Services segment for the three months ended June 30, 2007 increased
      by
      $30,055, from the comparable periods in 2006. The key factor impacting gross
      margin for the Surgical Services business was:




·
            For
                the three months ended June 30, 2007 compared to the three months
                ended
                June 30, 2006, the Company incurred incremental costs in repairs
                of
                $55,000, outside contractors of $40,000 and incremental depreciation
                of
                $55,000.




33


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




**Surgical
                Products Segment**
            
            Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            1,381,021
            
            $
            1,785,770
            
            $
            2,617,931
            
            $
            3,199,641Percent
                decrease
            
            
            (22.7
            %)
            
            
            
            
            (18.2
            %)Cost
                of revenues
            
            
            815,956
            
            
            919,102
            
            
            1,532,341
            
            
            1,883,074Percent
                decrease
            
            
            (11.2
            %)
            
            
            
            
            (18.6
            %)Gross
                profit
            
            $
            565,065
            
            $
            866,668
            
            $
            1,085,590
            
            $
            1,316,567Gross
                margin percentage
            
            
            40.9
            %
            
            48.5
            %
            
            41.5
            %
            
            41.1
            %




Gross
      profit for the Surgical Products segment in the three and six months ended
      June
      30, 2007 compared to the same periods in 2006 decreased by $302,603 and
      $230,977. The key factors impacting gross margin 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, 2007 decreased by $404,749 from
                the
                three months ended June 30, 2006 while cost of revenues decreased
                by
                $103,146 between the same periods. There were two less laser systems
                sold
                in the three months ended June 30, 2007 than in the comparable period
                of
                2006. Additionally, the lasers sold in the 2007 period were at lower
                prices than in the comparable period in 2006. The decrease in average
                price per laser was largely due to the mix of lasers sold. Included
                in the
                laser sales for the three months ended June 30, 2007 and 2006 were
                sales
                of $321,990 and $410,790 of diode lasers, respectively, which have
                substantially lower list sales prices than the other types of surgical
                lasers.




·
            Revenues
                for the six months ended June 30, 2007 decreased by $581,710 from
                the six
                months ended June 30, 2006 while cost of revenues decreased by $350,733
                between the same periods. There were nine less laser systems sold
                in the
                six months ended June 30, 2007 than in the comparable period of 2006.
                Additionally, the lasers sold in the 2007 period were at lower prices
                than
                in the comparable period in 2006. The decrease in average price per
                laser
                was largely due to the mix of lasers sold. Included in the laser
                sales for
                the six months ended June 30, 2007 and 2006 were sales of $400,490
                and
                $641,290 of diode lasers, respectively, which have substantially
                lower
                list sales prices than the other types of surgical
                lasers.




·
            This
                revenue increase was partly offset by 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 26% and 17% between the comparable three-month and six-month
                periods ended June 30, 2007 and 2006. This is due to in the three
                and six
                months ended June 30, 2006 we had a one-time order of approximately
                $250,000.




***Selling,
      General and Administrative Expenses***




For
      the
      three months ended June 30, 2007, selling, general and administrative expenses
      increased $911,922 to $5,858,380 from the three months ended June 30, 2006.
      The
      increase was caused by higher sales costs due to increased staffing and related
      travel of $610,000, and increases in bad debt expense of $75,000, consulting
      expense of $80,000 and legal expense of $58,000. Offsetting a portion of the
      increases for the three months ended June 30, 2007, was a decrease of $56,000
      for stock-based compensation expense.




For
      the
      six months ended June 30, 2007, selling, general and administrative expenses
      increased $1,363,538 to $11,670,174 from the six months ended June 30, 2006.
      The
      increase was caused by higher sales costs due to increased staffing and related
      travel of $1,044,000, and increases in consulting expenses of $123,000 and
      legal
      of $308,000. Offsetting a portion of the increases for the three months ended
      June 30, 2007, was a decrease of $96,000 for stock-based
      compensation.




34




***Engineering
      and Product Development***




Engineering
      and product development expenses for the three months ended June 30, 2007
      decreased to $229,859 from $255,179 for the three months ended June 30, 2006.
      Engineering and product development expenses for the six months ended June
      30,
      2007 decreased to $476,007 from $497,383 for the six months ended June 30,
      2006.
      During the 2006 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, 2007 decreased to $161,967,
      as compared to $137,847 for the three months ended June 30, 2006. Net interest
      expense for the six months ended June 30, 2007 decreased to $238,386, as
      compared to $258,990 for the six months ended June 30, 2006. The change in
      net
      interest expense was the result of the interest earned on cash reserves
      offsetting an increase in interest expense due to draws on the lease line of
      credit during the third and fourth quarters of 2006 and the first quarter of
      2007.




***Net
      Loss***




The
      aforementioned factors resulted in a net loss of $1,835,958 during the three
      months ended June 30, 2007, as compared to a net loss of $1,339,931 during
      the
      three months ended June 30, 2006, an increase of 37%. The aforementioned factors
      resulted in a net loss of $3,719,440 during the six months ended June 30, 2007,
      as compared to a net loss of $3,690,192 during the six months ended June 30,
      2006, an increase of 1%. These increases were primarily the result of increased
      sales and marketing expenses as well as an increase of $145,299 and $277,404
      of
      depreciation and amortization for the three and six month periods, respectively,
      offset partially by increased revenues along with the increase in cost of sales
      and resulting increase in gross margin.




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 30,2007
            
            2006
            
            ChangeNet
                loss
            
            $
            1,835,958
            
            $
            1,339,931
            
            $
            496,027Major
                expenses included in net loss:Depreciation
                and amortization
            
            
            1,182,715
            
            
            1,037,416
            
            
            145,299Stock-based
                compensation
            
            
            375,772
            
            
            431,769
            
            
            (55,997
            )Total
                major expenses
            
            $
            1,558,487
            
            $
            1,469,184
            
            $
            89,303





35




For
                the six months ended June 30,2007
            
            2006
            
            ChangeNet
                Loss
            
            $
            3,719,440
            
            $
            3,690,192
            
            $
            29,248Major
                Expenses:Depreciation
                and amortization
            
            
            2,331,915
            
            
            2,054,511
            
            
            277,404Stock-based
                compensation
            
            
            802,091
            
            
            898,559
            
            
            (96,468
            )$
            3,134,006
            
            $
            2,953,070
            
            $
            180,936




***Liquidity
      and Capital Resources***




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




At
      June
      30, 2007, our current ratio was 2.23 compared to 2.66 at December 31, 2006.
      As
      of June 30, 2007, we had $13,963,767 of working capital compared to $16,069,616
      as of December 31, 2006. Cash and cash equivalents were $10,679,607 as of June
      30, 2007, as compared to $12,885,742 as of December 31, 2006. We had $117,000
      of
      cash that was classified as restricted as of June 30, 2007 compared to $156,000
      as of December 31, 2006. ****




As
      of
      June 30, 2007, we had an accumulated deficit of $91,394,443, and cash and cash
      equivalents were $10,679,607, including restricted cash of $117,000, reflecting
      the private placement of our common stock in November 2006. We have historically
      financed our 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 . The
      2007
      operating plan reflects increases in per-treatment fee revenues for use of
      the
      XTRAC system based on increased utilization of the XTRAC by physicians and
      on
      wider insurance coverage in the United States. In addition, the 2007 operating
      plan calls for increased revenues and profits from the Skin Care business.
      Management of the Company believes that our existing cash balance together
      with
      other existing financial resources, including access to lease financing for
      capital expenditures, and revenues from sales, distribution, licensing and
      manufacturing relationships, will be sufficient to meet our operating and
      capital requirements, at a minimum, beyond the second quarter of 2008.




On
      June
      25, 2004, we entered into a leasing credit facility from GE Capital Corporation
      (“GE”). The credit facility has a commitment term of three years, expiring on
      June 25, 2007. We account for each draw as funded indebtedness taking the form
      of a capital lease, with equitable ownership in the lasers remaining with us.
      GE
      retains title as a form of security over the lasers. Each draw against the
      credit facility has a repayment period of three years and is secured by specific
      lasers, which we have sold to GE and leased back for deployment in the field.
      A
      summary of the activity under the GE leasing credit facility is presented in
      Note 8, “ *Long-term
      Debt* ”. We
      did
      not take a draw from GE in the second quarter of 2007 inasmuch as we secured
      from LEAF Financial Corporation (“LEAF”) a new credit facility with terms more
      favorable to us.




The
      new
      LEAF credit facility is for $6 million and is available through June 30, 2008.
      Under the facility, LEAF is prepared to lend $45,000 against an XTRAC laser
      system. LEAF will be granted a first-priority lien on XTRAC lasers, and their
      associated cash flows from consignment agreements, which are pledged by the
      Company and which are free of, or have been released from, security interests
      of
      GE. The Company will retain ownership of all of the lasers pledged. The term
      loans are granted with self-amortizing payment terms of 3 years. The stated
      interest rate of a draw is to be set at 616.5 basis points above the 2-year
      SWAPS rate. The funds drawn down are not subject to an up-front discount, and
      no
      warrants are issuable under the facility. In the quarter ending June 30, 2007,
      the Company was granted a term loan from LEAF in the amount of $1,755,000.
      The
      effective interest rate was 11.53%.




36




Net
      cash
      used by operating activities was $969,113 for six months ended June 30, 2007,
      compared to cash used of $260,976 for the same period in 2006. The change was
      primarily due to an increase in inventory, an increase in accounts receivable
      and a decrease in accrued compensation expense.




Net
      cash
      used in investing activities was $2,125,581 for the six months ended June 30,
      2007 compared to cash used of $2,132,755 for the six months ended June 30,
      2006.
      This was primarily for the placement of lasers into service.




Net
      cash
      provided by financing activities was $927,560 for the six months ended June
      30,
      2007 compared to $1,123,037 for the six months ended June 30, 2006. In the
      six
      months ended June 30, 2007 we made payments of $337,734 on certain notes payable
      and capital lease. These payments were offset by the advances under the lease
      line of credit, net of payments, of $1,137,714.




***Commitments
      and Contingencies***




Except
      for items discussed in ***Legal
      Proceedings*** below,
      during the three and six months ended June 30, 2007, there were no other items
      that significantly impacted our commitments and contingencies as discussed
      in
      the notes to our 2006 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 functioning effectively to provide reasonable assurance
      that
      the 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. A control system
      cannot provide absolute assurance, however, that the objectives of the control
      system are met and no evaluation of controls can provide absolute assurance
      that
      all control issues and instances of fraud, if any, within a company have been
      detected.





***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, 2007 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, 2006 for descriptions
      of our legal proceedings.




37


In
        the
        matter we brought against RA Medical Systems, Inc. and Dean Irwin in the
        United
        States District Court for the Southern District of California, the discovery
        process is concluding and pre-trial preparations are being made, although
        a
        trial date has not been set. The presiding judge declined to hear oral argument
        on RA Medical’s motion for summary judgment. No ruling has been made..
 
 In
        the
        matter brought for malicious prosecution in California Superior Court by
        RA
        Medical Systems and Mr. Irwin against us, Jenkens & Gilchrist, LLP and
        Michael R. Matthias, Esq., a settlement has been reached and finalized and,
        at
        the instance of the plaintiffs, the financial terms of the settlement agreement
        are to be kept confidential. The defendants did not admit any liability to
        plaintiffs, and they obtained general releases in their favor. Our insurance
        carrier paid the full amount that we were required to contribute to the
        settlement; however, it claims, and we dispute, a right to recoup from us
        a
        portion of the settlement payment.
 
 In
        the
        matter we have brought against our insurance carrier in the U.S. District
        Court
        for the Eastern District of Pennsylvania for declaratory judgment and breach
        of
        contract, the parties filed on July 30, 2007 their briefs on their cross-motions
        for summary judgment. The primary issues for judgment are (i) whether a claim
        for malicious prosecution which has been resolved by a settlement in which
        there
        is no admission of liability is indemnifiable under our insurance policy
        and
        whether the carrier has a right to recoup a portion of the settlement payment;
        and (ii) whether our insurance carrier may limit its reimbursement to us
        of our
        legal defense fees to $175 per hour or, alternatively, must pay all reasonable
        attorneys’ fees incurred in the defense of the malicious prosecution matter. We
        have argued our motion vigorously. We believe, but cannot guarantee, that
        our
        motion will prevail. We have also sent to the carrier our claim for
        reimbursement of our defense costs, demanding payment in the full amount
        of
        $914,000 and further that the carrier promptly pay us, at a minimum, a partial
        payment for our defense costs of $328,000, which is the total calculated
        under
        the carrier’s asserted $175 per hour limit for attorneys’ fees. We have
        recognized the $328,000 partial billing as an offset to current legal expense;
        we will offset future legal expense by the difference between our full claim
        and
        the demanded partial payment when collectibility is assured.




We
      are
      involved in certain other legal actions and claims arising in the ordinary
      course of business. We believe, based on discussions with legal counsel, that
      such litigation and claims will 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, 2006.




**ITEM
      4. Submission of Matter to a Vote of Security Holders**




We
      held
      our 2007 Annual Meeting of Stockholders on June 26, 2007. Richard J. DePiano,
      Jeffrey F. O’Donnell, Alan R. Novak, Anthony J. Dimun, David W. Anderson, Wayne
      M. Withrow and Stephen P. Connelly the director nominees set forth in the Notice
      of Annual Meeting, were elected to serve as directors. The vote tally is set
      forth below:




**Votes
                For**
            
            **Votes
                Against**
            
            **Votes
                Abstaining**Richard
                J. DePiano
            46,369,595
            
            0
            
            4,772,875Jeffrey
                F. O’Donnell
            46,365,437
            
            0
            
            4,777,033Alan
                R. Novak
            45,343,710
            
            0
            
            5,798,760Anthony
                J. Dimun
            45,347,268
            
            0
            
            5,795,202David
                W. Anderson
            46,369,433
            
            0
            
            4,773,037Wayne
                M. Withrow
            45,348,948
            
            0
            
            5,793,522Stephen
                P. Connelly
            45,346,380
            
            0
            
            5,796,090







Amper,
      Politziner & Mattia, P.C. was ratified to be our independent auditors for
      the year ending December 31, 2007, with 47,484,762 votes for, 3,473,733 votes
      against and 183,974 votes abstaining.




38




An
      amendment to our Certificate of Incorporation to increase the authorized number
      of shares of our common stock from 75,000,000 to 100,000,000 was approved with
      44,582,420 votes for, 6,506,640 votes against and 53,410 votes
      abstaining.




An
      amendment to the 2005 Equity Compensation Stock Option Plan to increase the
      number of shares of our common stock reserved for issuance thereunder from
      3,160,000 to 6,160,000 was approved with 13,218,537 votes for, 7,518,225 votes
      against and 24,513 votes abstaining.




An
      amendment to the Amended and Restated 2000 Non-Employee Director Stock Option
      Plan to increase the number of shares of our common stock reserved for issuance
      thereunder from 1,400,000 to 2,100,000 was approved with 14,090,922 votes for,
      6,631,202 votes against and 39,151 votes abstaining.




**ITEM
      6. Exhibits**




10.34
            
            Restricted
                Stock Agreement, dated May 1, 2007, between PhotoMedex, Inc. and
                Jeffrey
                F. O’Donnell10.35
            
            Restricted
                Stock Agreement, dated May 1, 2007, between PhotoMedex, Inc. and
                Dennis M.
                McGrath10.36
            
            Restricted
                Stock Agreement, dated May 1, 2007, between PhotoMedex, Inc. and
                Michael
                R. Stewart10.37
            
            Amended
                and Restated 2000 Non-Employee Director Stock Option Plan, dated
                as of
                June 26, 2007.10.38
            
            Amended
                and Restated 2005 Equity Compensation Plan, dated as of June 26,
                2007.31.1
            
            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




39




**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 9, 2007
            By:
            /s/
              Jeffrey F. O’DonnellJeffrey
                F. O’Donnell
              President
                and Chief Executive Officer


Date:
                August 9, 2007
              By:
              /s/
                Dennis M. McGrathDennis
                    M. McGrath
                  Chief
                    Financial Officer
 40