**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10 - Q**





**x**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                THE**


SECURITIES
        EXCHANGE ACT OF
        1934


**For
      the quarterly period ended March 31, 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 May 10, 2007
      was
      62,798,554 shares.








PHOTOMEDEX,
      INC.





INDEX
      TO
      FORM 10-Q


PAGEPart
                I. Financial Information:ITEM
                1. Financial Statements:a.
            Consolidated
                Balance Sheets, March 31, 2007 (unaudited) andDecember
                31, 2006
            3b.
            Consolidated
                Statements of Operations for the three monthsended
                March 31, 2007 and 2006 (unaudited)
            4c.
            Consolidated
                Statement of Stockholders’ Equity for the three monthsended
                March 31, 2007 (unaudited)
            5d.
            Consolidated
                Statements of Cash Flows for the three monthsended
                March 31, 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
            19ITEM
                3. Quantitative and Qualitative Disclosure about Market
                Risk
            31ITEM
                4. Controls and Procedures
            31Part
                II. Other Information:ITEM
                1. Legal Proceedings
            32ITEM
                1A. Risk Factors
            32ITEM
                6.Exhibits
            32Signatures
            33Certifications
            34




2


**PART
      I - Financial Information**




**ITEM
      1. Financial Statements**




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS




March
                31, 2007
            
            December
                31, 2006(Unaudited)
            
            ***ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            12,046,678
            
            $
            12,729,742Restricted
                cash
            
            
            156,000
            
            
            156,000Accounts
                receivable, net of allowance for doubtful accounts of $508,438 for
                each
                period
            
            
            5,594,227
            
            
            4,999,224Inventories
            
            
            7,823,935
            
            
            7,301,695Prepaid
                expenses and other current assets
            
            
            490,145
            
            
            534,135Total
                current assets
            
            
            26,110,985
            
            
            25,720,796Property
                and equipment, net
            
            
            9,026,327
            
            
            9,054,098Goodwill,
                net
            
            
            16,917,808
            
            
            16,917,808Patents
                and licensed technologies, net
            
            
            1,610,869
            
            
            1,695,727Other
                intangible assets, net
            
            
            3,305,125
            
            
            3,537,625Other
                assets
            
            
            600,995
            
            
            555,467Total
                assets
            
            $
            57,572,109
            
            $
            57,481,521**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Current
                portion of notes payable
            
            $
            150,241
            
            $
            195,250Current
                portion of long-term debt
            
            
            3,242,492
            
            
            3,018,874Accounts
                payable
            
            
            4,914,657
            
            
            3,617,726Accrued
                compensation and related expenses
            
            
            1,272,903
            
            
            1,529,862Other
                accrued liabilities
            
            
            697,785
            
            
            657,293Deferred
                revenues
            
            
            789,681
            
            
            632,175Total
                current liabilities
            
            
            11,067,759
            
            
            9,651,180Long-term
                liabilities:Notes
                payable
            
            
            126,836
            
            
            133,507Long-term
                debt
            
            
            3,703,752
            
            
            3,593,920Total
                liabilities
            
            
            14,898,347
            
            
            13,378,607Commitments
                and ContingenciesStockholders’
                equity:Common
                stock, $.01 par value, 75,000,000 shares authorized; 62,536,054 shares
                issued and outstanding, for each period
            
            
            625,360
            
            
            625,360Additional
                paid-in capital
            
            
            131,606,887
            
            
            131,152,557Accumulated
                deficit
            
            
            (89,558,485
            )
            
            (87,675,003
            )Total
                stockholders’ equity
            
            
            42,673,762
            
            
            44,102,914Total
                liabilities and stockholders’ equity
            
            $
            57,572,109
            
            $
            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 March 31,2007
            
            2006Revenues:Product
                sales
            
            $
            7,252,586
            
            $
            5,243,912Services
            
            
            1,775,982
            
            
            2,837,2509,028,568
            
            
            8,081,162Cost
                of revenues:Product
                cost of revenues
            
            
            2,137,012
            
            
            2,321,669Services
                cost of revenues
            
            
            2,643,557
            
            
            2,386,2294,780,569
            
            
            4,707,898Gross
                profit
            
            
            4,247,999
            
            
            3,373,264Operating
                expenses:Selling
                and marketing
            
            
            3,329,315
            
            
            2,952,939General
                and administrative
            
            
            2,477,677
            
            
            2,407,239Engineering
                and product development
            
            
            248,070
            
            
            242,2046,055,062
            
            
            5,602,382Loss
                from operations
            
            
            (1,807,063
            )
            
            (2,229,118
            )Interest
                expense, net
            
            
            (76,419
            )
            
            (121,143
            )Net
                loss
            
            
            ($
                1,883,482
            )
            
            ($
                2,350,261
            )Basic
                and diluted net loss per share
            
            
            ($0.03
            )
            
            ($0.05
            )Shares
                used in computing basic and diluted net loss per share
            
            
            62,536,054
            
            
            52,173,618




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




4





PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
      THE
      THREE MONTHS ENDED MARCH 31, 2007




(Unaudited)




AdditionalCommon
                Stock
            
            Paid-In
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            Deficit
            
            TotalBALANCE,
                DECEMBER 31, 2006
            
            
            62,536,054
            
            $
            625,360
            
            $
            131,152,557
            
            
            ($87,675,003
            )
            $
            44,102,913Stock
                options issued to consultants for services
            
            
            -
            
            
            -
            
            
            46,626
            
            
            -
            
            
            46,626Stock-based
                compensation expenserelated
                to employee options
            
            
            -
            
            
            -
            
            
            301,150
            
            
            -
            
            
            301,150Issuance
                of restricted stock
            
            
            -
            
            
            -
            
            
            78,544
            
            
            -
            
            
            78,544Issuance
                of warrants for draws under line of credit
            
            
            -
            
            
            -
            
            
            28,011
            
            
            -
            
            
            28,011Net
                loss for the three months ended March 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,883,482
            )
            
            (1,883,482
            )BALANCE,
                MARCH 31, 2007
            
            
            62,536,054
            
            $
            625,360
            
            $
            131,606,887
            
            
            ($89,558,485
            )
            $
            42,673,762




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





5




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)




For
                the Three Months Ended
              March
                31,2007
            
            2006**Cash
                Flows From Operating Activities**:Net
                loss
            
            
            ($
                1,883,482
            )
            
            ($
                2,350,261
            )Adjustments
                to reconcile net loss to net cash provided byoperating
                activities:Depreciation
                and amortization
            
            
            1,149,200
            
            
            1,017,095Stock
                options issued to consultants for services
            
            
            46,626
            
            
            76,622Stock-based
                compensation expense related to employee options and restricted
                stock
            
            
            379,693
            
            
            390,168Amortization
                of deferred compensation
            
            
            -
            
            
            14,718Provision
                for bad debts
            
            
            -
            
            
            58,246Loss
                on disposal of assets
            
            
            40,424
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (595,002
            )
            
            (144,649
            )Inventories
            
            
            (456,920
            )
            
            528,890Prepaid
                expenses and other assets
            
            
            180,769
            
            
            93,236Accounts
                payable
            
            
            1,296,932
            
            
            615,905Accrued
                compensation and related expenses
            
            
            (256,959
            )
            
            336,962Other
                accrued liabilities
            
            
            46,294
            
            
            (188,825
            )Cash
                deposits
            
            
            -
            
            
            (27,000
            )Deferred
                revenues
            
            
            157,506
            
            
            106,092Other
                liabilities
            
            
            (5,806
            )
            
            (5,805
            )Net
                cash provided by operating activities
            
            
            99,275
            
            
            521,394**Cash
                Flows From Investing Activities:**Purchases
                of property and equipment
            
            
            (10,108
            )
            
            (11,366
            )Lasers
                placed into service
            
            
            (899,707
            )
            
            (1,079,167
            )Net
                cash used in investing activities
            
            
            (909,815
            )
            
            (1,090,533
            )**Cash
                Flows From Financing Activities:**Proceeds
                from issuance of restricted common stock
            
            
            -
            
            
            8,600Costs
                related to issuance of common stock
            
            
            -
            
            
            (7,890
            )Proceeds
                from exercise of options
            
            
            -
            
            
            68,400Payments
                on long-term debt
            
            
            (145,541
            )
            
            (58,725
            )Payments
                on notes payable
            
            
            (20,131
            )
            
            (205,718
            )Net
                advancements on lease line of credit
            
            
            293,148
            
            
            819,867Increase
                in restricted cash and cash equivalents
            
            
            -
            
            
            (119
            )Net
                cash provided by financing activities
            
            
            127,476
            
            
            624,415Net
                (decrease) increase in cash and cash equivalents
            
            
            (683,064
            )
            
            55,276Cash
                and cash equivalents, beginning of period
            
            
            12,729,742
            
            
            5,403,036Cash
                and cash equivalents, end of period
            
            $
            12,046,678
            
            $
            5,458,312




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





6




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. On occasion, 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 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
      March 31, 2007, the Company had an accumulated deficit of $89,558,485 and cash
      and cash equivalents $12,202,678, including restricted cash of $156,000, as
      a
      result of the private placement of the Company’s common stock in November 2006.
      The Company has historically financed its operations with cash provided by
      equity financing and from lines of credit and, more recently, 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 without 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.




7


**Summary
      of Significant Accounting Policies:**




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


The
      financial statements as of March 31, 2007 and for the three months ended March
      31, 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 March 31, 2007, and the results
      of
      operations and cash flows for the three months ended March 31, 2007 and 2006.
      The results for the three months ended March 31, 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.




8


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 March 31, 2007 and 2006, the Company deferred $634,613 and
      $421,624, respectively, under this approach.




In
      the
      first quarter of 2003, the Company implemented 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 March 31, 2007, the Company recognized
      an
      additional $65,950, under this program, as all the SAB 104 Criteria for revenue
      recognition had been met. At March 31, 2007, the Company had net deferred
      revenues of $123,832 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:




·
            The
                physician practice must be in an identified location where there
                is an
                insufficiency of insurance companies reimbursing the procedure or
                where a
                particular practice faces similar insurance
                obstacles;




·
            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 quarter ended March 31, 2007 are subject to being credited
      or refunded to the physician. Likewise the Company estimated that 4% of the
      revenues under this program for the quarter ended March 31, 2006 were 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.




9


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.




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 March 31, 2007, 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 March
      31, 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
      March 31, 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 March 31, 2007 and
      during 2006, no such write-down was required.




10




***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 three months ended March 31, 2007 is summarized as
      follows:




March
                31, 2007Accrual
                at beginning of period
            
            $
            123,738Additions
                charged to warranty expense
            
            
            46,250Expiring
                warranties
            
            
            (12,036
            )Claims
                satisfied
            
            
            (17,722
            )Accrual
                at end of period
            
            $
            140,230




***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. With reference to
      FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
      Interpretation of FASB Statement No. 109”, the Company does not believe that its
      historical or expected tax reporting positions, when considered before
      application of the valuation allowance, have had or will have a material impact
      on its consolidated financial statements.




In
      June
      2006, the FASB issued FASB Interpretation No. (“FIN”) 48 “Accounting for
      Uncertainty in Income Taxes” (“FIN 48”). FIN 48 sets forth a recognition
      threshold and measurement attribute for financial statement recognition of
      positions taken or expected to be taken in income tax returns. FIN 48 is
      effective for fiscal years beginning after December 15, 2006. The adoption
      of
      FIN 48 had no material impact on the Company’s consolidated financial
      statements.




***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 11,232,972 and 8,373,000 as of March 31, 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.




11


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 ended March 31, 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 months ended March 31, 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:




Three
                Months Ended March 31,Assumptions
                for Option Grants
            
            2007
            
            2006Risk-free
                interest rate
            
            
            4.78
            %
            
            4.58
            %Volatility
            
            
            86.35
            %
            
            93.51
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Expected
                life
            
            
            8.1
                years
            
            
            7.4yearsEstimated
                forfeiture rate
            
            
            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 months
      ended March 31, 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.




12


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 first
      quarter 2006 with the following weighted average assumptions:




Assumptions
                for Stock Awards
            
            Three
                Months Ended March 31, 2007Risk-free
                interest rate
            
            
            4.32
            %Volatility
            
            
            70
            %Expected
                dividend yield
            
            
            0
            %Expected
                Life
            
            
            4.92
                years




The
      Company calculated expected volatility for restricted stock based on historic
      daily stock price observations of our common stock during the three-year period
      immediately preceding the grant.




There
      was
      $301,149 and $78,544 of compensation expense related to stock options granted
      and restricted stock awarded, respectively, in the three months ended March
      31,
      2007. For the three months ended March 31, 2006, there was $311,624 and $78,544
      of compensation expense related to stock options granted and restricted stock
      awarded, respectively. This expense is recognized in 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 $46,626 was recognized during the three months ended March 31, 2007,
      respectively. For stock options granted to consultants an additional selling,
      general, and administrative expense in the amount of $76,622 was recognized
      during the three months ended March 31, 2006.





***Supplemental
      Cash Flow Information***


During
      the three months ended March 31, 2007, the Company financed certain credit
      facility costs for $36,840 and issued warrants to a leasing credit facility
      which are valued at $28,011, and which offset the carrying value of debt.




During
      the three months ended March 31, 2006, the Company financed insurance
      policies through notes payable for $143,775. During the three months ended
      March
      31, 2006, the Company issued 101,010 shares of its restricted common stock
      to
      Stern Laser srl (“Stern”) due under another milestones under the Master
      Purchase; the cost associated with this issuance is included in the license
      from
      Stern, which is found in patents and licensed technologies. 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
      three months ended March 31, 2007 and 2006, the Company paid interest of
      $202,662 and $138,144, respectively. Income taxes paid in the three months
      ended
      March 31, 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 us beginning with the first quarter of 2008. The Company
      has not yet determined the impact of the adoption of SFAS No. 159 on our
      financial statements and footnote disclosures. It is not expected that the
      adoption of this Statement will have a material effect on the Company's
      consolidated financial statements.




*Note
      2*


**Inventories:**




Set
      forth
      below is a detailed listing of inventories:




March 31, 2007
            
            December
                31, 2006Raw
                materials and work in progress
            
            $
            5,122,836
            
            $
            4,433,917Finished
                goods
            
            
            2,701,099
            
            
            2,867,778Total
                inventories
            
            $
            7,823,935
            
            $
            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 March 31, 2007
      and December 31, 2006, the Company carried specific reserves for excess and
      obsolete stocks against its inventories of $1,352,148 and $1,354,444,
      respectively.




13




*Note
      3*


**Property
      and Equipment:**




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




March
                31, 2007
            
            December
                31, 2006Lasers
                in service
            
            $
            16,737,359
            
            $
            16,234,834Computer
                hardware and software
            
            
            334,490
            
            
            334,490Furniture
                and fixtures
            
            
            335,551
            
            
            331,379Machinery
                and equipment
            
            
            679,252
            
            
            738,636Autos
                and trucks
            
            
            382,690
            
            
            382,690Leasehold
                improvements
            
            
            247,368
            
            
            247,36818,716,710
            
            
            18,269,397Accumulated
                depreciation and amortization
            
            
            (9,690,383
            )
            
            (9,215,299
            )Property
                and equipment, net
            
            $
            9,026,327
            
            $
            9,054,098




Depreciation
      expense was $831,841 and $710,036 for the three months ended March 31, 2007
      and 2006, respectively. At March 31, 2007 and December 31, 2006, net
      property and equipment included $338,325 and $380,875, respectively, of assets
      recorded under capitalized lease arrangements, of which $100,317 and $122,717
      was included in long-term debt at March 31, 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:




March
                31, 2007
            
            December
                31, 2006Patents,
                owned and licensed, at gross costs of $501,657 and $501,657, net
                of
                accumulated amortization of $240,835 and $231,599,
                respectively.
            
            $
            260,822
            
            $
            270,058Other
                licensed or developed technologies, at gross costs of $2,432,258
                and
                $2,432,258, net of accumulated amortization of $1,082,211 and $1,006,589,
                respectively.
            
            
            1,350,047
            
            
            1,425,669$
            1,610,869
            
            $
            1,695,727




Related
      amortization expense was $84,859 and $74,559 for the three months ended
      March 31, 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 (see Note 1). 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.





14




*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 initial appraised
      fair market values:




March
                31, 2007
            
            December
                31, 2006Neutrogena
                Agreement, at gross cost of $2,400,000 net of accumulated amortization
                of
                $978,000 and $858,000, respectively.
            
            $
            1,422,000
            
            $
            1,542,000Customer
                Relationships, at gross cost of $1,700,000 net of accumulated amortization
                of $692,742 and $607,743, respectively.
            
            
            1,007,258
            
            
            1,092,257Tradename,
                at gross cost of $1,100,000 net of accumulated amortization of $224,133
                and $196,632, respectively.
            
            
            875,867
            
            
            903,368$
            3,305,125
            
            $
            3,537,625




Related
      amortization expense was $232,500 and $232,500 for the three months ended
      March 31, 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:




March
                31, 2007
            
            December
                31, 2006Accrued
                warranty
            
            $
            140,230
            
            $
            123,738Accrued
                professional and consulting fees
            
            
            318,678
            
            
            320,331Accrued
                sales taxes
            
            
            238,877
            
            
            213,224Total
                other accrued liabilities
            
            $
            697,785
            
            $
            657,293




*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:




March
                31, 2007
            
            December
                31, 2006Note
                Payable - secured creditor, interest at 6%, payable in monthly principal
                and interest installments of $2,880 through June 2012
            
            $
            152,930
            
            $
            159,213Note
                Payable - unsecured creditor, non-interest bearing, payable in 18
                equal
                monthly installments of $4,326 through October 2007
            
            
            30,285
            
            
            43,265Note
                Payable - unsecured creditor, interest at 8.72%, payable in monthly
                principal and interest installments of $12,119.61 through November
                2007
            
            
            93,862
            
            
            -Note
                Payable - unsecured creditor, interest at 7.42%, payable in monthly
                principal and interest installments of $61,493 through March
                2006
            
            
            -
            
            
            126,279277,077
            
            
            328,757Less:
                current maturities
            
            
            (150,241
            )
            
            (195,250
            )Notes
                payable, net of current maturities
            
            $
            126,836
            
            $
            133,507




15




*Note
      8*


**Long-term
      Debt:**


In
        the
        following table is a summary of the Company’s long-term debt.
 
 March
                  31, 2007
              
              December
                  31, 2006Total
                  borrowings on credit facility
              
              $
              6,845,927
              
              $
              6,490,077Capital
                  lease obligations (see Note 3)
              
              
              100,317
              
              
              122,717Less:
                  current portion
              
              
              (3,242,492
              )
              
              (3,018,874
              )Total
                  long-term debt
              
              $
              3,703,752
              
              $
              3,593,920
 
 *Leasing
        Credit Facility*
 The
        long-term debt is comprised largely of borrowings under a leasing credit
        facility which the Company entered into with GE Capital Corporation (“GE”) on
        June 25, 2004. The credit facility has a commitment term of three years,
        which
        is set to expire on June 25, 2007. For each year of the term various parameters
        are set or re-set. The Company accounts for each draw as a collateralized
        borrowing, taking the form of a capital lease, with equitable ownership in
        the
        lasers remaining with the Company and GE retaining 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.
 
 Each
        draw
        under the credit facility has been set at an interest rate which in the first
        year of the term were set at 577 basis points above the three-year Treasury
        note
        rate, and by the third year were set at 400 basis points above the three-year
        Treasury rate. Each draw in the first year of the term was discounted 7.75%;
        draws made by the third year were discounted 3.5%. The monthly payment set
        for a
        draw is self-amortizing. The first monthly payment is applied against principal.




The
          following table summarizes the monthly payments that the Company expects
          to make
          for the 11 draws made under the credit facility:
  Quarter
                    ending6/30/07
                
                9/30/07
                
                12/31/07
                
                2008
                
                2009
                
                2010Minimum
                    monthly payments
                
                $
                1,049,763
                
                $
                905,018
                
                $
                875,147
                
                $
                3,147,557
                
                $
                1,603,063
                
                $
                109,693
 
 Furthermore,
          with each draw, the Company has issued warrants to purchase shares of the
          Company’s common stock equal to from a high of 5%, now in the third year to 3%,
          of the draw.  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. The effective interest rates are within the range
          of
          17.79% and 12.62%.
 
 In
          the
          quarter ending March 31, 2007, the Company made a draw against the line
          in the
          amount of $1,166,331. The stated interest rate was 8.51%; the effective
          interest
          rate was 12.96%. The Company issued 33,927 warrants to purchase shares of
          the Company’s common stock at an exercise price of $1.28 per share.  The
          warrants have a fair value of $28,011 using the Black-Scholes option-pricing
          model.
 
 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.
 
 GE
          has
          proposed an incremental $6,000,000 to the leasing credit facility to begin
          in
          2007. This increase to the line would bear interest at 375 basis points
          above
          the three-year Treasury rate, and would reduce warrants to 2% of a draw.
          The
          Company has accepted the proposal. The Company expects that this increase
          will
          be in place for a draw in the second quarter of 2007 **.**
 
 *Capital
          Leases*
 The
          obligations under capital leases are at fixed interest rates and are
          collateralized by the related property and equipment (see Note
          3).




16




*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. Under the 2005 Equity Compensation Plan, a maximum of 3,160,000
      shares of the Company’s common stock were reserved for issuance. At March 31,
      2007, 421,000 shares were available for future grants under this Plan. Under
      the
      Outside Director Plan and under the 2005 Investment Plan, 286,250 shares and
      388,000 shares, respectively, were available for issuance as of March 31, 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 three months ended March 31, 2007 was as follows:




Number
                of Options
            
            Weighted
                Average Exercise PriceOutstanding,
                January 1, 2007
            
            
            6,093,725
            
            $
            2.09Granted
            
            
            685,000
            
            
            1.13Exercised
            
            
            -
            
            
            -Cancelled
            
            
            (292,410
            )
            
            1.82Outstanding,
                March 31, 2007
            
            
            6,486,315
            
            $
            2.00Options
                excercisable at March 31, 2007
            
            
            4,114,856
            
            $
            2.08




At
      March
      31, 2007, there was $4,289,175 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 2.13 years. The intrinsic value of options
      outstanding and exercisable at March 31, 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 months ended March 31, 2007 and 2006, the Company did not have
      material revenues from any individual customer.




Unallocated
      operating expenses include costs 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 that was carried at $2,944,423 at March 31, 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 Acculase buy-out in
      the
      amounts of $2,061,096 and $883,327, respectively. Goodwill of $13,973,385 at
      March 31, 2007 from the ProCyte acquisition has been entirely allocated to
      the
      Skin Care segment.




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





Three
                Months Ended March 31, 2007DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                SERVICES
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            1,806,926
            
            $
            678,818
            
            $
            3,485,710
            
            $
            1,820,205
            
            $
            1,236,909
            
            $
            9,028,568Costs
                of revenues
            
            
            1,049,421
            
            
            450,446
            
            
            1,026,648
            
            
            1,565,638
            
            
            688,416
            
            
            4,780,569Gross
                profit
            
            
            757,505
            
            
            228,372
            
            
            2,459,062
            
            
            254,567
            
            
            548,493
            
            
            4,247,999*Gross
                profit %*
            
            
            *41.9*
            *%*
            
            *33.6*
            *%*
            
            *70.5*
            *%*
            
            *14.0*
            *%*
            
            *44.3*
            *%*
            
            *47.0*
            *%*Allocated
                Operating expenses:Selling,
                general and administrative
            
            
            1,537,152
            
            
            24,920
            
            
            1,408,564
            
            
            236,904
            
            
            139,275
            
            
            3,346,815Engineering
                and product development
            
            
            -
            
            
            -
            
            
            96,102
            
            
            -
            
            
            151,968
            
            
            248,070Unallocated
                Operating expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,460,1771,537,152
            
            
            24,920
            
            
            1,504,666
            
            
            236,904
            
            
            291,243
            
            
            6,055,062Income
                (loss) from operations
            
            
            (779,647
            )
            
            203,452
            
            
            954,396
            
            
            17,663
            
            
            257,250
            
            
            (1,807,063
            )Interest
                expense, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (76,419
            )Net
                income (loss)
            
            
            ($779,647
            )
            $
            203,452
            
            $
            954,396
            
            $
            17,663
            
            $
            257,250
            
            
            ($1,883,482
            )





17




Three
                Months Ended March 31, 2006DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
                EQUIPMENT
            
            SKIN
                CARE
            
            SURGICAL
                SERVICES
            
            SURGICAL
                PRODUCTS
              AND
                OTHER
            
            TOTALRevenues
            
            $
            1,059,630
            
            $
            531,065
            
            $
            3,460,561
            
            $
            1,616,034
            
            $
            1,413,872
            
            $
            8,081,162Costs
                of revenues
            
            
            946,612
            
            
            330,290
            
            
            1,052,444
            
            
            1,414,578
            
            
            963,974
            
            
            4,707,898Gross
                profit
            
            
            113,018
            
            
            200,775
            
            
            2,408,117
            
            
            201,456
            
            
            449,898
            
            
            3,373,264*Gross
                profit %*
            
            
            *10.7*
            *%*
            
            *37.8*
            *%*
            
            *69.6*
            *%*
            
            *12.5*
            *%*
            
            *31.8*
            *%*
            
            *41.7*
            *%*Allocated
                Operating expenses:Selling,
                general and administrative
            
            
            1,131,951
            
            
            17,431
            
            
            1,428,174
            
            
            252,076
            
            
            140,807
            
            
            2,970,439Engineering
                and product development
            
            
            -
            
            
            -
            
            
            105,735
            
            
            -
            
            
            136,469
            
            
            242,204Unallocated
                Operating expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,389,7391,131,951
            
            
            17,431
            
            
            1,533,909
            
            
            252,076
            
            
            277,276
            
            
            5,602,382Income
                (loss) from operations
            
            
            (1,018,933
            )
            
            183,344
            
            
            874,208
            
            
            (50,620
            )
            
            172,622
            
            
            (2,229,118
            )Interest
                expense, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (121,143
            )Net
                income (loss)
            
            
            ($1,018,933
            )
            $
            183,344
            
            $
            874,208
            
            $
            (50,620
            )
            $
            172,622
            
            
            ($2,350,261
            )







March
                31, 2007
            
            December
                31, 2006Assets:Total
                assets for reportable segments
            
            $
            44,807,348
            
            $
            43,955,628Other
                unallocated assets
            
            
            12,764,761
            
            
            13,525,893Consolidated
                total
            
            $
            57,572,109
            
            $
            57,481,521




For
      the
      three months ended March 31, 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 March 31,2007
            
            2006Domestic
            
            $
            7,588,240
            
            $
            6,659,378Foreign
            
            
            1,440,328
            
            
            1,421,784$
            9,028568
            
            $
            8,081,162




*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.




18


On
      July
      27, 2005, the Company entered into a Marketing Agreement with KDS Marketing,
      Inc. (“KDS”). Using money invested by each party, KDS has researched market
      opportunities for the Company’s diode laser and related delivery systems, and
      KDS is now marketing the diode laser primarily through a website that physicians
      may access for information about purchasing the lasers. KDS began marketing
      the
      laser in the first quarter 2006 but has faced difficult market conditions and
      has yet to achieve meaningful results.




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 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 agreement covers a protocol
      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. John
      Koo, MD, a member of our Scientific Advisory Board, is guiding the study using
      our high-powered UltraTM excimer laser.




**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.*




19




**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 provide the XTRAC
      laser system to targeted dermatologists at no initial capital cost. Unlike
      our
      international strategy, we generally do not sell the laser system domestically,
      but maintain ownership of the laser and earn revenue each time a physician
      treats a patient with the equipment. We believe that this strategy will create
      incentives for physicians to adopt the XTRAC laser system and will increase
      market penetration. On occasion we have sold and will 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.




We
      increased our dermatology sales force and marketing department as part of the
      acquisition of ProCyte in March 2005. We now have 11 sales representatives
      in
      the domestic XTRAC segment (not including the 9 clinical specialists that we
      have recently hired to train and support our customers) and 20 sales
      representatives in the Skin Care segment. 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.




However,
      we do see that some of our sales and marketing expenses have grown faster than
      the revenues on which the expenses are targeted to have positive impact. 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.




20


**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.




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.




21


**Critical
      Accounting Policies**




There
      have been no changes to our critical accounting policies in the three months
      ended March 31, 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 March 31,2007
            
            2006XTRAC
                Domestic Services
            
            $
            1,806,926
            
            $
            1,059,630International
                Dermatology Equipment Products
            
            
            678,818
            
            
            531,065Skin
                Care (ProCyte) Products
            
            
            3,485,710
            
            
            3,460,561Total
                Dermatology Revenues
            
            
            5,971,454
            
            
            5,051,256Surgical
                Services
            
            
            1,820,205
            
            
            1,616,034Surgical
                Products
            
            
            1,236,909
            
            
            1,413,872Total
                Surgical Revenues
            
            
            3,057,114
            
            
            3,029,906Total
                Revenues
            
            $
            9,028,568
            
            $
            8,081,162




Domestic
      XTRAC Segment




Recognized
      treatment revenue for the three months ended March 31, 2007 and 2006 for
      domestic XTRAC procedures was $1,806,926 and $1,059,630, respectively,
      reflecting billed procedures of 25,016 and 18,760, respectively. In addition,
      1,261 and 1,173 procedures were performed in the three months ended March 31,
      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 period ended March 31, 2007 compared to the comparable period
      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.




In
      the
      first quarter of 2003, we implemented 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 March 31, 2007, we recognized net revenues of $65,950 under
      this program compared to $51,080 for the three months ended March 31, 2006.
      The
      change in deferred revenue under this program is presented in the table
      below.




22


For
      the
      three months ended March 31, 2007, domestic XTRAC laser sales were $348,760.
      There were eight lasers sold which were made for various reasons, including
      costs of logistical support and customer preferences. There were no domestic
      XTRAC laser sales for the three months ended March 31, 2006.




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




Three
                Months Ended March 31,2007
            
            2006Total
                revenue
            
            $
            1,806,926
            
            $
            1,059,630Less:
                laser sales revenue
            
            
            (348,760
            )
            
            -Recognized
                treatment revenue
            
            
            1,458,166
            
            
            1,059,630Change
                in deferred programrevenue
            
            
            65,950
            
            
            51,080Change
                in deferred unusedtreatments
            
            
            128,173
            
            
            110,053Net
                billed treatment revenue
            
            $
            1,652,289
            
            $
            1,220,763Procedure
                volume total
            
            
            26,277
            
            
            19,933Less:
                Non-billed procedures
            
            
            1,261
            
            
            1,173Net
                billed procedures
            
            
            25,016
            
            
            18,760Avg.
                price of treatments billed
            
            $
            66.05
            
            $
            65.07Change
                in procedures with (recognized)/deferred program revenue,
                net
            
            
            998
            
            
            785Change
                in procedures with deferred/(recognized) unused treatments,
                net
            
            
            1,941
            
            
            1,691




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 psoriasis,
      including the XTRAC as first step therapy for moderate to severe psoriasis
      comprising less than 20% body area.




International
        Dermatology Equipment Segment
  International
        sales of our dermatology equipment and related parts were $678,818 for the
        three
        months ended March 31, 2007 compared to $531,065 for the three months ended
        March 31, 2006. We sold 21 and 12 laser systems in the three months ended
        March
        31, 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 three such used lasers
                in
                the three months ended March 31, 2006, and only one such laser in
                the
                three months ended March 31, 2007;
                and




23


·
            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 months
                ended March 31, 2007, we sold one VTRAC
                system.




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




Three
                Months Ended March 31,2007
            
            2006Gross
                Revenues
            
            $
            678,818
            
            $
            531,065Less:
                parts revenues
            
            
            (151,918
            )
            
            (87,267
            )Revenues
                from laser systems
            
            
            526,900
            
            
            443,798Laser
                systems sold
            
            
            11
            
            
            12Average
                revenue per laser
            
            $
            47,900
            
            $
            36,983




Skin
      Care (ProCyte) Segment




For
      the
      three months ended March 31, 2007, ProCyte revenues were $3,485,710 compared
      to
      $3,460,561 in the three months ended March 31, 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.




Revenues
      from Neutrogena decreased by $228,000 for the three months ended March 31,
      2007
      compared to the three months ended March 31, 2006. Included in the decrease
      were
      $52,000 in royalties and $176,000 in bulk compound.




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




Three
                Months Ended March 31,2007
            
            2006
            
            %
                ChangeProduct
                sales
            
            $
            3,330,710
            
            $
            3,077,561
            
            
            8.2
            %Bulk
                compound sales
            
            
            80,000
            
            
            256,000
            
            
            (68.7
            %)Royalties
            
            
            75,000
            
            
            127,000
            
            
            (40.9
            %)Total
                ProCyte revenues
            
            $
            3,485,710
            
            $
            3,460,561
            
            
            0.7
            %




Surgical
      Services Segment




In
      the
      three months ended March 31, 2007 and 2006, surgical services revenues were
      $1,820,205 and $1,616,034, respectively. This increase was primarily due to
      the
      fact that during the first quarter of 2006, we began to work with a regional
      hospital system in central Florida, which has continued to show business growth.




24




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




Three
                Months Ended March 31,2007
            
            2006
            
            %
                ChangeRevenues
            
            $
            1,820,205
            
            $
            1,616,034
            
            
            12.6
            %




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 March 31, 2007, surgical products revenues were $1,236,909
      compared to $1,413,872 in the three months ended March 31, 2006. The decrease
      was due to $147,100 less laser system revenues, as a result of a decrease in
      the
      number of systems sold (11 vs. 18).




The
      increase in average price per laser between the period was largely due to the
      mix of lasers sold and partly due to the trade level at which the laser were
      sold (i.e. wholesale versus retail). Our diode laser has largely replaced our
      Nd:YAG laser, which had a higher sales price. Included in laser sales during
      the
      three months ended March 31, 2007 were sales of 6 diode lasers. There were
      sales
      of 13 diode lasers, during the three months ended March 31, 2006. The diode
      lasers have lower sales prices than our other types of lasers. We expect that
      we
      will continue to sell more diode lasers than our other types of lasers into
      the
      near future.




Fiber
      and
      other disposables sales decreased 3% between the comparable three-month periods
      ended March 31, 2007 and 2006. 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.




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




Three
                Months Ended March 31,2007
            
            2006
            
            %
                ChangeRevenues
            
            $
            1,236,909
            
            $
            1,413,872
            
            
            (12.5
            %)Laser
                systems sold
            
            
            11
            
            
            18
            
            
            (38.9
            %)Laser
                system revenues
            
            $
            320,500
            
            $
            467,600
            
            
            (31.4
            %)Average
                revenue per laser
            
            $
            29,136
            
            $
            25,978
            
            
            12.2
            %




***Cost
      of Revenues***




Our
      cost
      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). Within services cost of revenues are the costs associated with
      the Domestic XTRAC segment and the Surgical Services segment, as well as costs
      associated with royalties and maintenance.




25


Product
      cost of revenues for the three months ended March 31, 2007 was $2,137,012
      compared to $2,321,669 for the three months ended March 31, 2006. Contributing
      to the decrease of $184,657 was a decrease in the cost of sales for Surgical
      Products in the amount of $279,018, reflecting a lower sales volume in the
      current quarter compared to the prior year. Furthermore, the current quarter’s
      sales represent a more favorable mix of disposable units, which are more
      profitable than laser units. Offsetting this decrease in the current quarter
      are
      incremental costs of sales of $120,156 for international XTRAC laser sales.
      This
      is a direct result of an increase in sales volume.




Services
      cost of revenues was $2,643,557 in the three months ended March 31, 2007
      compared to $2,386,229 in the comparable period in 2006. Contributing to the
      $257,328 decrease was a $151,060 increase in the surgical services business
      segment due to increased revenues. This was partially offset by an increase
      of
      $102,809 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.




***Gross
      Margin Analysis***




Gross
      margin increased to $4,247,999 during the three months ended March 31, 2007
      from
      $3,373,264 during the same period in 2006. As a percent of revenues, gross
      margin increased to 47.1% for the three months ended March 31, 2007 from 41.7%
      for the same period in 2006.




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




Three
                Months Ended March 31,**Company
                Margin Analysis**
            
            2007
            
            2006
            
            %
                ChangeRevenues
            
            $
            9,028,568
            
            $
            8,081,162
            
            
            11.7
            %Cost
                of revenues
            
            
            4,780,569
            
            
            4,707,898
            
            
            1.5
            %Gross
                profit
            
            $
            4,247,999
            
            $
            3,373,264
            
            
            25.9
            %Gross
                profit percentage
            
            
            47.1
            %
            
            41.7
            %




The
      primary reasons for the increases in gross margin for the three months ended
      March 31, 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 March
                31,
                2007. The gross margin on these sales are higher, approximately 83%,
                since
                certain of the lasers were previously being
                depreciated.




·
            Surgical
                services revenues increased, and costs related to laser repairs increased
                during the period as well. Overall, the margins improved to 14.0%
                from
                12.5% in 2006.




·
            In
                the surgical products segment, absorbed labor and overhead plant
                costs,
                due to higher production levels, accounted for $148,000 of the decrease
                in
                cost of goods sold for the three months ended March 31,
                2007




·
            Partially
                offsetting the above was an increase in depreciation of $69,000 included
                in the XTRAC domestic cost of sales as a result of increasing the
                overall
                placements of new lasers since the period ended March 31,
                2006.




26


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




Three
                Months Ended March 31,**XTRAC
                Domestic Segment**
            
            2007
            
            2006
            
            %
                ChangeRevenues
            
            $
            1,806,926
            
            $
            1,059,630
            
            
            70.5
            %Cost
                of revenues
            
            
            1,049,421
            
            
            946,612
            
            
            10.9
            %Gross
                profit
            
            $
            757,505
            
            $
            113,018Gross
                profit percentage
            
            
            41.9
            %
            
            10.7
            %




Gross
      margin increased for this segment for the three months ended March 31, 2007
      from
      the comparable period in 2006 by $644,487. The key factors for the increases
      were as follows:




·
            We
                sold XTRAC lasers domestically during the three months ended March
                31,
                2007. The gross margins on these sales are higher, approximately
                83%,
                since certain of the lasers were previously being
                depreciated.




·
            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 33% from 18,760 to 25,016 billed procedures in the
                three
                months ended March 31, 2007 compared to the same period in 2006.
                Price per
                procedure did not change significantly between the
                periods.




·
            The
                cost of revenues increased by $102,809 for the three months ended
                March
                31, 2007. This increase is due primarily to an increase in depreciation
                on
                the lasers in service of $69,000 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.  ·
            During
                the three months ended March 31, 2007, the cost of revenues increased
                by
                approximately $90,000, net of an estimated recovery, as a result
                of
                contaminated laser gas obtained from a vendor and introduced into
                the
                production process.




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




Three
                Months EndedMarch
                31,**International
                Dermatology**
              **Equipment
                Segment**
            
            2007
            
            2006
            
            %
                ChangeRevenues
            
            $
            678,818
            
            $
            531,065
            
            
            27.8
            %Cost
                of revenues
            
            
            450,446
            
            
            330,290
            
            
            36.4
            %Gross
                profit
            
            $
            228,372
            
            $
            200,775
            
            
            13.7
            %Gross
                profit percentage
            
            
            33.6
            %
            
            37.8
            %




Gross
      margin for the three months ended March 31, 2007 increased by $27,597, from
      the
      comparable period in 2006. The key factors for the increase were as
      follows:




·
            We
                sold ten XTRAC laser systems and one VTRAC lamp-based excimer system
                during the three months ended March 31, 2007 and ten XTRAC laser
                systems
                and two VTRAC systems in the comparable period in 2006. The VTRAC
                systems
                have a higher gross margin than the XTRAC laser
                systems.




27


·
            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. Partially offsetting the decrease in the
                number
                of laser systems sold was an increase in the average price of the
                laser
                systems sold. After adjusting the revenue for parts sales of approximately
                $152,000, the average price for lasers sold during this period was
                approximately $47,900 in the three months ended March 31, 2007, up
                from
                $37,000 in the comparable period in 2006.




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




Three
                Months Ended March 31,**Skin
                Care Segment**
            
            2007
            
            2006
            
            %
                ChangeProduct
                revenues
            
            $
            3,330,710
            
            $
            3,077,561
            
            
            8.2
            %Bulk
                compound revenues
            
            
            80,000
            
            
            256,000
            
            
            (68.8
            %)Royalties
            
            
            75,000
            
            
            127,000
            
            
            (40.9
            %)Total
                revenues
            
            
            3,485,710
            
            
            3,460,561
            
            
            0.7
            %Product
                cost of revenues
            
            
            976,998
            
            
            893,564
            
            
            9.3
            %Bulk
                compound cost of revenues
            
            
            49,650
            
            
            158,880
            
            
            (68.8
            %)Total
                cost of revenues
            
            
            1,026,648
            
            
            1,052,444
            
            
            (2.5
            %)Gross
                profit
            
            $
            2,459,062
            
            $
            2,408,117
            
            
            8.1
            %Gross
                profit percentage
            
            
            70.5
            %
            
            69.6
            %




Gross
      margin for the three months ended March 31, 2007 increased by $50,945, for
      the
      comparable periods 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.




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




Three
                Months Ended March 31,**Surgical
                Services Segment**
            
            2007
            
            2006
            
            %
                ChangeRevenues
            
            $
            1,820,205
            
            $
            1,616,034
            
            
            12.6
            %Cost
                of revenues
            
            
            1,565,638
            
            
            1,414,578
            
            
            10.7
            %Gross
                profit
            
            $
            254,567
            
            $
            201,456
            
            
            26.4
            %Gross
                profit percentage
            
            
            14.0
            %
            
            12.5
            %




Gross
      margin in the Surgical Services segment for the three months ended March 31,
      2007 increased by $53,111, from the comparable periods in 2006. The key factor
      impacting gross margin for the Surgical Services business was that we have
      opened a new, contiguous territory in which we have secured a long-term contract
      from which we anticipate growth in procedure volume. For that reason, we have
      relocated our personnel and material from a territory lost in 2005 to the new
      one.




28




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




Three
                Months Ended
              March
                31,**Surgical
                Products Segment**
            
            2007
            
            2006
            
            %
                ChangeRevenues
            
            $
            1,236,909
            
            $
            1,413,872
            
            
            (12.5
            %)Cost
                of revenues
            
            
            688,416
            
            
            963,974
            
            
            (28.9
            %)Gross
                profit
            
            $
            548,493
            
            $
            449,898
            
            
            21.9
            %Gross
                profit percentage
            
            
            44.3
            %
            
            31.8
            %




Gross
      margin for the Surgical Products segment in the three months ended March 31,
      2007 compared to the same periods in 2006 increased by $98,595. 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. The current quarter’s sales represent a more favorable mix of
                the more profitable disposables.




·
            Revenues
                for the three months ended March 31, 2007 decreased by $176,963 from
                the
                three months ended March 31, 2006 while cost of revenues decreased
                by
                $275,558 between the same periods. There were seven less laser systems
                sold in the three months ended March 31, 2007 than in the comparable
                period of 2006. However, the lasers sold in the 2007 period were
                at higher
                prices than in the comparable period in 2006. The increase in average
                price per laser was largely due to the mix of lasers sold. Included
                in the
                laser sales for the three months ended March 31, 2007 and 2006 were
                sales
                of $78,500 and $230,500 of diode lasers, respectively, which have
                substantially lower list sales prices than the other types of surgical
                lasers.




·
            Labor
                and overhead plant costs, due to higher production levels, accounted
                for
                $148,000 of the decrease in cost of goods sold for the three months
                ended
                March 31, 2007.




·
            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, represented a lower percentage of
                revenue
                in the three months ended March 31, 2007 compared to the same period
                in
                2006.




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




For
      the
      three months ended March 31, 2007, selling, general and administrative expenses
      increased $446,814 to $5,806,992 from the three months ended March 31, 2006.
      The
      increase was caused by higher sales costs due to increased staffing and related
      travel of $437,000 and $46,626 for stock options issued to consultants.
      Offsetting a portion of the increases for the three months ended March 31,
      2007,
      was a decrease of $40,471 for stock-based compensation expense and a reduction
      of general administrative employee related costs of $99,000 compared to the
      prior year period.




***Engineering
      and Product Development***




Engineering
      and product development expenses for the three months ended March 31, 2007
      increased to $248,070 from $242,204 for the three months ended March 31, 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.




29




***Interest
      Expense, Net***




Net
      interest expense for the three months ended March 31, 2007 decreased to $76,419,
      as compared to $121,143 for the three months ended March 31, 2006. The decrease
      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 second, third and fourth quarters of 2006.




***Net
      Loss***




The
      aforementioned factors resulted in a net loss of $1,883,482 during the three
      months ended March 31, 2007, as compared to a net loss of $2,350,261 during
      the
      three months ended March 31, 2006, a decrease of 20%. This decrease was
      primarily the result of increased revenues along with the decrease in cost
      of
      sales and resulting increase in gross margin. This was partially offset by
      an
      increase of $132,105 of depreciation and amortization over the comparable three
      month period of the prior year.




Contributing
        to the reduction in the net loss during the three months ended March 31,
        2007
        compared to the net loss during the three months ended March 31, 2006 was
        a 31%
        improvement in the operating results of the combined XTRAC business units
        (Domestic XTRAC plus International Dermatology Equipment).




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




For
                the three months ended March 31,2007
            
            2006
            
            ChangeNet
                loss
            
            $
            1,883,482
            
            $
            2,350,261
            
            $
            467,920Major
                expenses included in net loss:Depreciation
                and amortization
            
            
            1,149,200
            
            
            1,017,095
            
            
            132,105Stock-based
                compensation
            
            
            426,319
            
            
            466,790
            
            
            (40,471
            )Total
                major expenses
            
            $
            1,575,519
            
            $
            1,483,885
            
            $
            91,634




***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
      March
      31, 2007, our current ratio was 2.36 compared to 2.66 at December 31, 2006.
      As
      of March 31, 2007, we had $15,043,226 of working capital compared to $16,069,616
      as of December 31, 2006. Cash and cash equivalents were $12,202,678 as of March
      31, 2007, as compared to $12,885,742 as of December 31, 2006. We had $156,000
      of
      cash that was classified as restricted as of March 31, 2007 compared to $156,000
      as of December 31, 2006. ****




As
      of
      March 31, 2007, we had an accumulated deficit of $89,558,485 and cash and cash
      equivalents $12,202,678, including restricted cash of $156,000, 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, 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
      have accepted a proposal from GE to increase the leasing line of credit under
      a
      fourth tranche. We expect the tranche to be in place in the second quarter
      of
      2007. Net cash provided by operating activities was $99,275 for three months
      ended March 31, 2007, compared to cash provided of $521,394 for the same period
      in 2006. The change was primarily due to an increase in inventory, an
      increase in accounts receivable, a decrease in accrued compensation expense
      and an increase in accounts payable.




30


Net
      cash
      used in investing activities was $909,815 for the three months ended March
      31,
      2007 compared to cash used of $1,090,533 for the three months ended March 31,
      2006. This was primarily for the placement of lasers into service.




Net
      cash
      provided by financing activities was $127,476 for the three months ended March
      31, 2007 compared to $624,415 for the three months ended March 31, 2006. In
      the
      three months ended March 31, 2007 we made payments of $165,672 on certain notes
      payable and capital lease. These payments were offset by the advances under
      the
      lease line of credit, net of payments, of $293,148.




***Commitments
      and Contingencies***




During
      the three months ended March 31, 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
      months ended March 31, 2007 that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.





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**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.




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. We have replied to the Defendants’ motion for summary
      judgment. The motion is to be heard on May 21, 2007. It is not expected that
      this matter will be brought to trial before the fall of 2007.




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., trial is set for May 11, 2007, subject to possible
      scheduling changes. Trial will be to a jury. The plaintiffs are claiming that
      the defendants have injured them and caused economic damages from lost profits
      amounting to $9.5 million. Our defenses to the claims of injury and economic
      and
      punitive damages will rely on fact witnesses as well as on expert witnesses.
      We
      intend to defend against these claims vigorously but cannot guarantee that
      our
      defenses will prevail.




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 have cross-moved for summary judgment on the issue whether
      malicious prosecution is indemnifiable under our insurance policy. We expect
      that this cross-motion will be heard in the latter part of May 2007. In this
      matter too, we intend to argue our motion vigorously but cannot guarantee that
      our motion will prevail.




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
      6. Exhibits**




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





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**SIGNATURES**





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


PHOTOMEDEX,
                INC.Date:
              May 10, 2007
            By:
            /s/
              Jeffrey F. O’DonnellJeffrey
              F. O’DonnellPresident
              and
              Chief Executive Officer Date:
              May 10, 2007
            By:
            /s/
              Dennis M. McGrathDennis
              M. McGrathChief
              Financial Officer




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