**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, 2008**
 
 **OR**
  o
                **TRANSITION
                    REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE****SECURITIES
                    EXCHANGE ACT OF
                    1934**





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





Commission
      File Number 0-11365





**PHOTOMEDEX,
      INC.**


(Exact
      name of registrant as specified in its charter)





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





147
      Keystone Drive, Montgomeryville, Pennsylvania 18936


(Address
      of principal executive offices, including zip code)





(215)
      619-3600


(Registrant's
      telephone number, including area code)




Indicate
      by check mark whether the registrant: (i) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (ii) has been subject to such filing requirements
      for
      the past 90 days.


Yes x No o





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




Large
      accelerated filer o Accelerated
      filer o




Non-accelerated
      filer o Smaller
      reporting company x





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


Yes o No x





The
      number of shares outstanding of the issuer's Common Stock as of May 9, 2008
      was
      63,032,207 shares.







PHOTOMEDEX,
      INC.





INDEX
      TO
      FORM 10-Q




PAGEPart
                  I. Financial Information:ITEM
                  1. Financial Statements:
              3a.
                  Consolidated Balance Sheets, March 31, 2008 (unaudited) and December
                  31,
                  2007
              3b.
                  Consolidated Statements of Operations for the three months ended
                  March 31,
                  2008 and 2007 (unaudited)
              4c.
                  Consolidated Statement of Stockholders’ Equity for the three months ended
                  March 31, 2008 (unaudited)
              5d.
                  Consolidated Statements of Cash Flows for the three months ended
                  March 31,
                  2008 and 2007 (unaudited)
              6e.
                  Notes to Consolidated Financial Statements (unaudited)
              7ITEM
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              21ITEM
                  3. Quantitative and Qualitative Disclosure about Market
                  Risk
              34ITEM
                  4. Controls and Procedures
              34Part
                  II. Other Information:ITEM
                  1. Legal Proceedings
              34ITEM
                  1A. Risk Factors
              35ITEM
                  5. Other Information
              35ITEM
                  6. Exhibits
              36Signatures
              36Certifications
              37


2


**PART
      I – Financial Information**




**ITEM
      1. Financial Statements**




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS




March 31, 2008
            
            December 31, 2007(Unaudited)
            
            ***ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            9,407,555
            
            $
            9,837,303Restricted
                cash
            
            
            117,000
            
            
            117,000Accounts
                receivable, net of allowance for doubtful accounts of $558,246 and
                $542,983, respectively
            
            
            6,130,308
            
            
            6,759,060Inventories
            
            
            7,568,559
            
            
            7,929,542Prepaid
                expenses and other current assets
            
            
            372,582
            
            
            508,384Total
                current assets
            
            
            23,596,004
            
            
            25,151,289Property
                and equipment, net
            
            
            10,482,588
            
            
            10,143,808Patents
                and licensed technologies, net
            
            
            1,367,300
            
            
            1,408,248Goodwill,
                net
            
            
            16,917,808
            
            
            16,917,808Other
                intangible assets, net
            
            
            2,425,125
            
            
            2,607,625Other
                assets
            
            
            443,611
            
            
            457,925Total
                assets
            
            $
            55,232,436
            
            $
            56,686,703**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Current
                portion of notes payable
            
            $
            135,360
            
            $
            129,305Current
                portion of long-term debt
            
            
            4,823,361
            
            
            4,757,133Accounts
                payable
            
            
            4,299,438
            
            
            3,634,519Accrued
                compensation and related expenses
            
            
            1,264,489
            
            
            1,581,042Other
                accrued liabilities
            
            
            1,101,129
            
            
            674,374Deferred
                revenues
            
            
            955,322
            
            
            668,032Total
                current liabilities
            
            
            12,579,099
            
            
            11,444,405Long-term
                liabilities:Notes
                payable
            
            
            99,132
            
            
            106,215Long-term
                debt
            
            
            5,136,093
            
            
            5,602,653Total
                liabilities
            
            
            17,814,324
            
            
            17,153,273Commitments
                and ContingenciesStockholders’
                equity:Common
                stock, $.01 par value, 100,000,000 shares authorized; 63,032,207
                shares
                issued and outstanding
            
            
            630,322
            
            
            630,322Additional
                paid-in capital
            
            
            133,358,900
            
            
            132,932,357Accumulated
                deficit
            
            
            (96,571,110
            )
            
            (94,029,249
            )Total
                stockholders’ equity
            
            
            37,418,112
            
            
            39,533,430Total
                liabilities and stockholders’ equity
            
            $
            55,232,436
            
            $
            56,686,703




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





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


3




PHOTOMEDEX,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS




(Unaudited)




For
                the Three Months Ended
              March
                31,2008
            
            2007Revenues:Product
                sales
            
            $
            6,731,980
            
            $
            5,596,557Services
            
            
            3,498,593
            
            
            3,432,01110,230,573
            
            
            9,028,568Cost
                of revenues:Product
                cost of revenues
            
            
            2,864,452
            
            
            2,222,026Services
                cost of revenues
            
            
            2,770,683
            
            
            2,638,2435,635,135
            
            
            4,860,269Gross
                profit
            
            
            4,595,438
            
            
            4,168,299Operating
                expenses:Selling
                and marketing
            
            
            4,326,797
            
            
            3,280,003General
                and administrative
            
            
            2,144,443
            
            
            2,479,391Engineering
                and product development
            
            
            438,688
            
            
            215,9686,909,928
            
            
            5,975,362Loss
                from operations
            
            
            (2,314,490
            )
            
            (1,807,063
            )Interest
                expense, net
            
            
            (227,371
            )
            
            (76,419
            )Net
                loss
            
            $
            (2,541,861
            )
            $
            (1,883,482
            )Basic
                and diluted net loss per share
            
            $
            (0.04
            )
            $
            (0.03
            )Shares
                used in computing basic and diluted net loss per share
            
            
            63,032,207
            
            
            62,536,054





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, 2008




(Unaudited)




AdditionalCommon
                Stock
            
            Paid-In
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            Deficit
            
            TotalBALANCE,
                DECEMBER 31, 2007
            
            
            63,032,207
            
            $
            630,322
            
            $
            132,932,357
            
            
            ($94,029,249
            )
            $
            39,533,430Stock
                options issued to consultants for services
            
            
            -
            
            
            -
            
            
            46,914
            
            
            -
            
            
            46,914Stock-based
                compensation expenserelated
                to employee options
            
            
            -
            
            
            -
            
            
            276,007
            
            
            -
            
            
            276,007Compensation
                expenserelated
                to restricted stock
            
            
            -
            
            
            -
            
            
            103,622
            
            
            -
            
            
            103,622Net
                loss for the three months ended March 31, 2008
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,541,861
            )
            
            (2,541,861
            )BALANCE,
                MARCH 31, 2008
            
            
            63,032,207
            
            $
            630,322
            
            $
            133,358,900
            
            
            ($96,571,110
            )
            $
            37,418,112




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
                31,2008
            
            2007**Cash
                Flows From Operating Activities**:Net
                loss
            
            $
            (2,541,861
            )
            $
            (1,883,482
            )Adjustments
                to reconcile net loss to net cash provided byoperating
                activities:Depreciation
                and amortization
            
            
            1,214,612
            
            
            1,149,200Stock
                options issued to consultants for services
            
            
            46,914
            
            
            46,626Stock-based
                compensation expense related to employee options and restricted
                stock
            
            
            379,629
            
            
            379,693Provision
                for bad debts
            
            
            27,571
            
            
            -Loss
                on disposal of assets
            
            
            145
            
            
            40,424Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            601,181
            
            
            (595,002
            )Inventories
            
            
            353,772
            
            
            (456,920
            )Prepaid
                expenses and other assets
            
            
            238,772
            
            
            180,769Accounts
                payable
            
            
            664,919
            
            
            1,296,932Accrued
                compensation and related expenses
            
            
            (316,553
            )
            
            (256,959
            )Other
                accrued liabilities
            
            
            426,755
            
            
            46,294Deferred
                revenues
            
            
            287,290
            
            
            157,506Other
                liabilities
            
            
            -
            
            
            (5,806
            )Net
                cash provided by operating activities
            
            
            1,383,146
            
            
            99,275**Cash
                Flows From Investing Activities:**Purchases
                of property and equipment
            
            
            (88,069
            )
            
            (10,108
            )Lasers
                placed into service
            
            
            (1,172,900
            )
            
            (899,707
            )Net
                cash used in investing activities
            
            
            (1,260,969
            )
            
            (909,815
            )**Cash
                Flows From Financing Activities:**Payments
                on long-term debt
            
            
            (32,664
            )
            
            (145,541
            )Payments
                on notes payable
            
            
            (126,324
            )
            
            (20,131
            )Net
                repayments on lease line of credit
            
            
            (392,937
            )
            
            293,148Net
                cash (used in) provided by financing activities
            
            
            (551,925
            )
            
            127,476Net
                decrease in cash and cash equivalents
            
            
            (429,748
            )
            
            (683,064
            )Cash
                and cash equivalents, beginning of period
            
            
            9,837,303
            
            
            12,729,742Cash
                and cash equivalents, end of period
            
            $
            9,407,555
            
            $
            12,046,678





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, utilizing a direct sales force, derives revenues from
      both a fee-per-use procedures-based model and also by selling laser systems
      to
      dermatologists in the United States. Under the procedures-based model, the
      Company’s XTRAC laser system is placed in a dermatologist’s office without any
      initial capital cost to the dermatologist, and the Company charges a fee-per-use
      to treat skin disease. At times, however, the Company sells XTRAC lasers to
      customers, due generally to customer circumstances and preferences. In
      comparison to the Domestic XTRAC segment, the International Dermatology
      Equipment segment only generates revenues from the sale of equipment and
      replacement parts 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 XTRAC is approved
      by
      Underwriters’ Laboratories; it is also CE-marked, and accordingly a third party
      regularly audits the Company’s quality system and manufacturing facility. The
      manufacturing facility for the XTRAC is located in Carlsbad,
      California.




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




***Liquidity
      and Going Concern***


As
      of
      March 31, 2008, the Company had an accumulated deficit of $96,571,110. Cash
      and
      cash equivalents, including restricted cash of $117,000, was $9,524,555. The
      Company has historically financed its operations with cash provided by equity
      financing and from lines of credit and, more recently but not yet consistently,
      from positive cash flow generated from operations. Management believes that
      the
      existing cash balance together with its other existing financial resources,
      including its credit line facility with a remaining availability of $2,065,612
      (see Note 8), and any revenues from sales, distribution, licensing and
      manufacturing relationships, will be sufficient to meet the Company’s operating
      and capital requirements beyond the end of the second quarter of 2009. The
      2008
      operating plan reflects anticipated growth from an increase in per-treatment
      fee
      revenues for use of the XTRAC laser system based on increased utilization and
      wider insurance coverage in the United States and cost savings from the growth
      of the Company’s skincare products.




7




**Summary
      of Significant Accounting Policies:**




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


The
      financial statements as of March 31, 2008 and for the three months ended March
      31, 2008 and 2007, are unaudited and, in the opinion of management, include
      all
      adjustments (consisting only of normal recurring adjustments) necessary to
      present fairly the financial position as of March 31, 2008, and the results
      of
      operations and cash flows for the three months ended March 31, 2008 and 2007.
      The results for the three months ended March 31, 2008 are not necessarily
      indicative of the results to be expected for the entire year. While management
      of the Company believes that the disclosures presented are adequate to make
      the
      information not misleading, these consolidated financial statements should
      be
      read in conjunction with the consolidated financial statements and the notes
      included in the Company's Annual Report on Form 10-K for the year ended December
      31, 2007.




***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 Annual Report on
      Form 10-K for the year ended December 31, 2007 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.
      The critical accounting policies are presented below.




***Revenue
      Recognition***


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




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




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.




8




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




The
      Company excludes all sales of treatment codes made within the last two weeks
      of
      the period in determining the amount of procedures performed by its
      physician-customers. Management believes this approach closely approximates
      the
      actual amount of unused treatments that existed at the end of a period. For
      the
      three months ended March 31, 2008 and 2007, the Company deferred $883,533 and
      $634,613, respectively, under this approach.




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 its
      licensees. The Company recognizes royalty revenue at the applicable royalty
      rate
      applied to shipments reported by its licensee.




The
      Company generates revenues from its Surgical 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, 2008, 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 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, 2008, no such write-down was required. (See ***Impairment
      of Long-Lived Assets and Intangibles*** ).




***Other
      Intangible Assets***


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




9




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, 2008, no such write-down was required.




***Goodwill***


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




Management
      evaluates the recoverability of such goodwill based on estimates of undiscounted
      future cash flows over the remaining useful life of the asset. If the amount
      of
      such estimated undiscounted future cash flows is less than the net book value
      of
      the asset, the asset is written down to fair value. As of March 31, 2008 no
      such
      write-down was required.




***Accrued
      Warranty Costs***


The
      Company offers a warranty on product sales generally for a one to two-year
      period. In 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 based on historical claims. The activity in
      the
      warranty accrual during the three months ended March 31, 2008 is summarized
      as
      follows:




March 31, 2008Accrual
                at beginning of period
            
            $
            218,587Additions
                charged to warranty expense
            
            
            87,000Expiring
                warranties
            
            
            (10,974
            )Claims
                satisfied
            
            
            (22,048
            )Accrual
                at end of period
            
            $
            272,565




***Income
      Taxes***


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




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




Utilization
      of the Company’s net operating loss carryforwards is subject to various
      limitations of the Internal Revenue Code, principally Section 382. Utilization
      of loss carryforwards from previous acquisitions (e.g. Acculase, SLT, ProCyte)
      have already been limited by this provision by the acquisition itself and by
      any
      later changes of ownership in the parent company. If the Company should undergo
      a further change of ownership under Section 382, the utilization of the
      Company’s loss carryforwards may be materially limited.




***Net
      Loss Per Share***


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




In
      these
      consolidated financial statements, diluted net loss per share 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 11,264,835 and 11,232,972 as of March 31, 2008 and 2007,
      respectively, were excluded from the calculation of fully diluted earnings
      per
      share since their inclusion would have been anti-dilutive.




10




***Share-Based
      Compensation***


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




Under
      the
      modified prospective approach, SFAS No. 123R applies to new grants of options
      and awards of stock as well as to grants of options that were outstanding on
      January 1, 2006, the date of adoption, and that may subsequently be repurchased,
      cancelled or materially modified. Under the modified prospective approach,
      compensation cost recognized for the three months ended March 31, 2008 and
      2007
      includes compensation cost for all share-based payments granted prior to, but
      not yet vested on, January 1, 2006, based on fair value as of the prior
      grant-date and estimated in accordance with the provisions of SFAS No. 123R.




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




Three Months Ended March 31,Assumptions
                for Option Grants
            
            2008
            
            2007Risk-free
                interest rate
            
            
            3.725
            %
            
            4.782
            %Volatility
            
            
            84.16
            %
            
            86.35
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Expected
                life
            
            
            8.1
                years
            
            
            8.1
                yearsEstimated
                forfeiture rate
            
            
            12
            %
            
            12
            %




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, 2008 and 2007, the Company has adopted the simplified method
      authorized in Staff Accounting Bulletin No. 107. SFAS No. 123R also requires
      that estimated forfeitures be included as a part of the estimate of expense
      as
      of the grant date. The Company has used historical data to estimate expected
      employee behaviors related to option exercises and forfeitures.




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




With
      respect to awards of restricted stock, the Company uses the Monte-Carlo pricing
      model to estimate fair value of restricted stock awards. There were no
      restricted stock awards for the three months ended March 31, 2008. The awards
      made in the first and second quarters 2007 were estimated with the following
      weighted average assumptions:





Assumptions
                for Stock Awards
            
            ThreeMonths
              Ended
                March
              31,
                2007Risk-free
                interest rate
            
            
            4.52
            %Volatility
            
            
            74.64
            %Expected
                dividend yield
            
            
            0
            %Expected
                Life
            
            
            5.07
                years




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




Compensation
      expense for the three months ended March 31, 2008 included $276,006 from stock
      options grants and $103,623 from restricted stock awards. Compensation expense
      for the three months ended March 31, 2007 included $301,149 from stock options
      grants and $78,544 from restricted stock awards.




11




Compensation
      expense is presented as part of the operating results in selling, general and
      administrative expenses. For stock options granted to consultants, an additional
      selling, general, and administrative expense in the amount of $46,914 was
      recognized during the three months ended March 31, 2008. 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.




***Reclassifications***


Certain
      prior period amounts have been reclassified to conform to the current year
      presentation.





The
      Company revised its previously reported unaudited consolidated statement of
      operations for the three months ended March 31, 2007 to reflect a reclass from
      service to product sales revenues. In addition, there was a reclass from product
      and service cost of revenues to operating expenses, which resulted in a decrease
      in gross profit. These revisions correct a misclassification made in the
      previous presentation of the Company’s results. The correction had no effect on
      the Company’s previously reported net loss, consolidated balance sheet, or net
      cash flows, and is not considered material to any previously reported
      consolidated financial statements.





***Supplemental
      Cash Flow Information***


During
      the three months ended March 31, 2008, the Company financed certain insurance
      policies through notes payable for $119,382.




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.




For
      the
      three months ended March 31, 2008 and 2007, the Company paid interest of
      $297,015 and $202,662, respectively. Income taxes paid in the three months
      ended
      March 31, 2008 and 2007 were immaterial.




***Recent
      Accounting Pronouncements***




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




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




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




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




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




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




12




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




In
      December 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No.
      07-1, “Accounting for Collaborative Arrangements.” EITF 07-1 provides guidance
      concerning: determining whether an arrangement constitutes a collaborative
      arrangement within the scope of the Issue; how costs incurred and revenue
      generated on sales to third parties should be reported in the income statement;
      how an entity should characterize payments on the income statement; and what
      participants should disclose in the notes to the financial statements about
      a
      collaborative arrangement. The provisions of EITF 07-1 will be adopted in 2009. The
      Company does not expect the adoption of this EITF to have a material impact
      on
      the Company's consolidated financial statements.




In
      February 2007, the 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 has become effective for the Company
      beginning with the first quarter of 2008 The
      adoption of this Statement has not had a material effect on the Company’s
      consolidated financial statements.




Staff
      Accounting Bulletin No. 110 (“SAB 110”), “Share-Based Payment” expresses the
      views of the staff regarding the use of a “simplified” method, as discussed in
      SAB No. 107 (“SAB 107”), in developing an estimate of expected term of “plain
      vanilla” share options in accordance with SFAS No. 123R (revised 2004),
“Share-Based Payment”.




*Note
      2*


**Inventories:**




Set
      forth
      below is a detailed listing of inventories:




March 31, 2008
            
            December 31, 2007Raw
                materials and work in progress
            
            $
            4,863,285
            
            $
            4,527,708Finished
                goods
            
            
            2,705,273
            
            
            3,401,834Total
                inventories
            
            $
            7,568,559
            
            $
            7,929,542




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, 2008
      and December 31, 2007, the Company carried specific reserves for excess and
      obsolete stocks against its inventories of $1,165,641 and $1,124,345,
      respectively.




13






*Note
      3*


**Property
      and Equipment:**




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




March 31, 2008
            
            December 31, 2007Lasers
                in service
            
            $
            20,797,321
            
            $
            19,754,416Computer
                hardware and software
            
            
            341,407
            
            
            341,407Furniture
                and fixtures
            
            
            415,455
            
            
            364,319Machinery
                and equipment
            
            
            891,919
            
            
            870,986Autos
                and trucks
            
            
            470,631
            
            
            454,631Leasehold
                improvements
            
            
            247,368
            
            
            247,36823,164,101
            
            
            22,033,127Accumulated
                depreciation and amortization
            
            
            (12,681,513
            )
            
            (11,889,319
            )Property
                and equipment, net
            
            $
            10,482,588
            
            $
            10,143,808




Depreciation
      expense was $929,255 and $831,841 for the three months ended March 31, 2008
      and
      2007, respectively. At March 31, 2008 and December 31, 2007, net property and
      equipment included $418,795 and $471,385, respectively, of assets recorded
      under
      capitalized lease arrangements, of which $215,599 and $254,178 was included
      in
      long-term debt at March 31, 2008 and December 31, 2007, respectively (see Note
      8).




*Note
      4*


**Patents
      and Licensed Technologies:**




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




March 31, 2008
            
            December 31, 2007Patents,
                owned and licensed, at gross costs of $516,112 and $510,942, net
                of
                accumulated amortization of $277,776 and $268,540,
                respectively.
            
            $
            238,336
            
            $
            242,402Other
                licensed or developed technologies, at gross costs of $2,438,997
                and
                $2,432,258, net of accumulated amortization of $1,310,033 and $1,266,412,
                respectively.
            
            
            1,128,964
            
            
            1,165,846$
            1,367,300
            
            $
            1,408,248




Related
      amortization expense was $52,857 and $84,859 for the three months ended March
      31, 2008 and 2007, respectively. Included in other licensed and developed
      technologies is $200,000 in developed technologies acquired from ProCyte and
      $114,982 for the license with AzurTec. On March 31, 2006, the Company closed
      the
      transaction provided for in the License Agreement with Mount Sinai School of
      Medicine of New York University (“Mount Sinai”). Pursuant to the license
      agreement, the Company reimbursed $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 appraised fair
      market values:




March 31, 2008
            
            December 31, 2007Neutrogena
                Agreement, at gross cost of $2,400,000 net of accumulated amortization
                of
                $1,458,000 and $1,338,000, respectively.
            
            $
            942,000
            
            $
            1,062,000Customer
                Relationships, at gross cost of $1,700,000 net of accumulated amortization
                of $1,032,738 and $947,739, respectively.
            
            
            667,262
            
            
            752,261Tradename,
                at gross cost of $1,100,000 net of accumulated amortization of $334,137
                and $306,636, respectively.
            
            
            765,863
            
            
            793,364$
            2,425,125
            
            $
            2,607,625




Related
      amortization expense was $232,500 for the three months ended March 31, 2008
      and
      2007, respectively. Under the Neutrogena Agreement, the Company licenses to
      Neutrogena rights to its copper peptide technology for which the Company
      receives royalties. Customer Relationships embody the value to the Company
      of
      relationships that ProCyte had formed with its customers. Tradename includes
      the
      name of “ProCyte” and various other trademarks associated with ProCyte’s
      products.




*Note
      6*


**Other
      Accrued Liabilities:**




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




March 31, 2008
            
            December 31, 2007Accrued
                warranty
            
            $
            272,565
            
            $
            218,587Accrued
                professional and consulting fees
            
            
            288,500
            
            
            225,820Cash
                deposit
            
            
            350,000
            
            
            -Accrued
                sales taxes and other accrued liabilities
            
            
            190,064
            
            
            229,967Total
                other accrued liabilities
            
            $
            1,101,129
            
            $
            674,374





The
      cash
      deposit relates to the supply agreement with AngioDynamics.




15


*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, 2008
            
            December 31, 2007Note
                Payable – secured creditor, interest at 6%, payable in monthly
                principal and interest installments of $2,880 through June 2012
            
            $
            126,835
            
            $
            133,507Note
                Payable – unsecured creditor, interest at 4.8%, payable in monthly
                principal and interest installments of $12,202 through December
                2008
            
            
            107,657
            
            
            -Note
                Payable – unsecured creditor, interest at 5.44%, payable in monthly
                principal and interest installments of $51,354 through February
                2008
            
            
            -
            
            
            102,013234,492
            
            
            235,520Less:
                current maturities
            
            
            (135,360
            )
            
            (129,305
            )Notes
                payable, net of current maturities
            
            $
            99,132
            
            $
            106,215




*Note
      8*


**Long-term
      Debt:**




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




March 31, 2008
            
            December 31, 2008Total
                borrowings on credit facilities
            
            $
            9,743,855
            
            $
            10,105,608Capital
                lease obligations (see Note 3)
            
            
            215,599
            
            
            254,178Less:
                current portion
            
            
            (4,823,361
            )
            
            (4,757,133
            )Total
                long-term debt
            
            $
            5,136,093
            
            $
            5,602,653




*Leasing
      Credit and Term-Note Facilities*


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




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




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




16




The
      beginning principal of each component was $4,724,699, $1,612,626, and
      $3,990,000, respectively. The effective interest rate for the first draw was
      12.50%. The pay-off of each component is 27, 30, and 36 months, respectively.
      On
      March 31, 2008, the Company made a draw under the credit facility for $840,000.
      This draw is amortized over 36 months at an effective interest rate of 8.55%.
      As
      of March 31, 2008, the Company had available $2,065,612 under the credit
      facility, reflecting pay-down of the principal balance in the course of the
      quarter.




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




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




Nine Months
              Ending
            
            Year Ending December 31,12/31/08
            
            2009
            
            2010
            
            2011Future
              minimum
              payments
            
            $
            4,254,605
            
            $
            4,192,726
            
            $
            2,321,226
            
            $
            79,140





*Capital
      Leases*


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




*Note
      9*


**Employee
      Stock Benefit Plans**




The
      Company has three active, stock-based compensation plans available to grant,
      among other things, incentive and non-incentive stock options to employees,
      directors and third-party service-providers as well as restricted stock to
      key
      employees. As of September 26, 2007, the stockholders approved an increase
      in
      the number of shares reserved for the 2005 Equity Compensation Plan and for
      the
      Outside Director Plan. Under the 2005 Equity Compensation Plan, a maximum of
      6,160,000 shares of the Company’s common stock have been reserved for issuance.
      At March 31, 2008, 2,063,050 shares were available for future grants under
      this
      plan. Under the Outside Director Plan and under the 2005 Investment Plan,
      695,000 shares and 388,000 shares, respectively, were available for issuance
      as
      of March 31, 2008. The other stock options plans are frozen and no further
      grants will be made from them.




17


Stock
      option activity under all of the Company’s share-based compensation plans for
      the three months ended March 31, 2008 was as follows:




Number of
              Options
            
            Weighted
              Average
              Exercise
              PriceOutstanding, January 1, 2008
            
            
            6,129,671
            
            $
            2.00Granted
            
            
            1,133,200
            
            
            0.91Exercised
            
            
            -Cancelled
            
            
            (147,619
            )
            
            1.88Outstanding,
                March 31, 2008
            
            
            7,115,252
            
            $
            1.83Options
                exercisable at March 31, 2008
            
            
            4,614,426
            
            $
            2.04




At
      March
      31, 2008, there was $3,932,677 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 2.80 years. The intrinsic value of options
      outstanding and exercisable at March 31, 2008 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, 2008 and 2007, the Company did not have
      material revenues from any individual customer.




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




18


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




Three Months Ended March 31, 2008DOMESTIC
              XTRAC
            
            INTERN’L
              DERM.
              EQUIPMENT
            
            SKIN CARE
            
            SURGICAL
              SERVICES
            
            SURGICAL
              PRODUCTS
              AND
              OTHER
            
            TOTALRevenues
            
            $
            2,110,707
            
            $
            1,168,205
            
            $
            3,274,692
            
            $
            1,899,739
            
            $
            1,777,230
            
            $
            10,230,573Costs
                of revenues
            
            
            1,430,778
            
            
            570,649
            
            
            960,452
            
            
            1,517,104
            
            
            1,156,152
            
            
            5,635,135Gross
                profit
            
            
            679,929
            
            
            597,556
            
            
            2,314,240
            
            
            382,635
            
            
            621,078
            
            
            4,595,438*Gross
                profit %*
            
            
            *32.2*
            *%*
            **
            *51.2*
            *%*
            **
            *70.7*
            *%*
            **
            *20.1*
            *%*
            **
            *34.9*
            *%*
            **
            *44.9*
            *%*Allocated
                operating expenses:Selling,
                general and administrative
            
            
            1,991,499
            
            
            73,488
            
            
            1,924,707
            
            
            213,832
            
            
            142,271
            
            
            4,345,797Engineering
                and product development
            
            
            168,214
            
            
            20,790
            
            
            141,188
            
            
            -
            
            
            108,496
            
            
            438,688Unallocated
                operating expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,125,4432,159,713
            
            
            94,278
            
            
            2,065,895
            
            
            213,832
            
            
            250,767
            
            
            6,909,928Income
                (loss) from operations
            
            
            (1,479,784
            )
            
            503,278
            
            
            248,345
            
            
            168,803
            
            
            370,311
            
            
            (2,314,490
            )Interest
                expense, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (227,371
            )Net
                income (loss)
            
            $
            (1,479,784
            )
            $
            503,278
            
            $
            248,345
            
            $
            168,803
            
            $
            370,311
            
            $
            (2,541,861
            )





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
            
            
            1,102,378
            
            
            365,500
            
            
            1,026,214
            
            
            1,618,040
            
            
            748,137
            
            
            4,860,269Gross
                profit
            
            
            704,548
            
            
            313,318
            
            
            2,459,496
            
            
            202,165
            
            
            488,772
            
            
            4,168,299*Gross
                profit %*
            
            
            *39.0*
            *%*
            **
            *46.2*
            *%*
            **
            *70.6*
            *%*
            **
            *11.1*
            *%*
            **
            *39.5*
            *%*
            **
            *46.2*
            *%*Allocated
                operating expenses:Selling,
                general and administrative
            
            
            1,544,073
            
            
            24,920
            
            
            1,346,713
            
            
            236,053
            
            
            145,744
            
            
            3,297,503Engineering
                and product development
            
            
            -
            
            
            -
            
            
            91,492
            
            
            -
            
            
            124,476
            
            
            215,968Unallocated
                operating expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,461,8911,544,073
            
            
            24,920
            
            
            1,438,205
            
            
            236,053
            
            
            270,220
            
            
            5,975,362Income
                (loss) from operations
            
            
            (839,525
            )
            
            288,398
            
            
            1,021,291
            
            
            (33,888
            )
            
            218,553
            
            
            (1,807,063
            )Interest
                expense, net
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (76,419
            )Net
                income (loss)
            
            $
            (839,525
            )
            $
            288,398
            
            $
            1,021,291
            
            $
            (33,888
            )
            $
            218,553
            
            $
            (1,883,482
            )




19





March 31, 2008
            
            December 31, 2007Assets:Total
                assets for reportable segments
            
            $
            45,261,226
            
            $
            46,211,976Other
                unallocated assets
            
            
            9,971,210
            
            
            10,474,727Consolidated
                total
            
            $
            55,232,436
            
            $
            56,686,703




For
      the
      three months ended March 31. 2008 and 2007 there were no material net revenues
      attributed to any individual foreign country. Net revenues by geographic area
      were as follows:




Three Months Ended March 31,2008
            
            2007Domestic
            
            $
            8,120,296
            
            
            7,588,240Foreign
            
            
            2,110,277
            
            
            1,440,328$
            10,230,573
            
            $
            9,028,568




The
      Company discusses segmental details in its Management Discussion & Analysis
      found elsewhere in its Form 10-Q for the period ending March 31,
      2008.




*Note
      11*


**Significant
      Alliances/Agreements:**




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




On
      March
      30, 2006, the Company entered a strategic relationship with AzurTec to resume
      development, and to undertake the manufacture and distribution, of AzurTec's
      MetaSpex Laboratory System, a light-based system designed to detect certain
      cancers of the skin. The Company issued 200,000 shares of its restricted common
      stock in exchange for 6,855,141 shares of AzurTec common stock and 181,512
      shares of AzurTec Class A preferred stock, which represent a 14% interest in
      AzurTec on a fully diluted basis. The Company will assist
      in
      the development of FDA-compliant prototypes for AzurTec’s product. Continuing
      development of this project requires additional investment by AzurTec, which
      AzurTec undertook to raise. The Company granted AzurTec an additional 12 months
      (i.e. until December 30, 2007) in which to raise the additional investment,
      which AzurTec has not done. The Company is evaluating whether to grant a further
      extension or to take an assignment from AzurTec of its intellectual property
      and
      return to AzurTec its investment in that company.




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




On
      April
      14, 2006, the Company entered into a Clinical Trial Agreement protocol with
      the
      University of California at San Francisco. The protocol was originally for
      a
      phase 4, randomized, double-blinded study to evaluate the safety and efficacy
      of
      the XTRAC laser system in the treatment of moderate to severe psoriasis. The
      protocol was revised to be an open-label study in order to facilitate greater
      patient recruitment into the study. John Koo, MD, a member of our Scientific
      Advisory Board, guided the study using our high-powered UltraTM excimer laser.
      Dr. Koo presented the favorable findings of the study at the Hawaii Dermatology
      Seminar in March, 2008. Dr. Koo concluded that the
      XTRAC
      Excimer Laser may be appropriate for the majority of moderate to severe
      psoriasis sufferers. It also allows dermatologists to treat those patients
      with
      a high level of safety, as opposed to the use of many systemic products. Other
      phototherapy treatments such as broadband or narrow band UVB can also be used;
      however, undesirable aspects of these treatments include exposure of healthy
      skin to UVB light, and the inconvenience of extended treatment periods, which
      are often necessary for moderate to severe patients .
      We
      expensed $189,000 in the quarter ended March 31, 2008 in payment for this study.




20




**ITEM
      2.**  **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.**




*Certain
      statements in this Quarterly Report on Form 10-Q, or the Report, are
“forward-looking statements.” These forward-looking statements include, but are
      not limited to, statements about the plans, objectives, expectations and
      intentions of PhotoMedex, Inc., a Delaware corporation (referred to in this
      Report as “we,” “us,” “our” or “registrant”) and other statements contained in
      this Report that are not historical facts. Forward-looking statements in this
      Report or hereafter included in other publicly available documents filed with
      the Securities and Exchange Commission, or the Commission, reports to our
      stockholders and other publicly available statements issued or released by
      us
      involve known and unknown risks, uncertainties and other factors which could
      cause our actual results, performance (financial or operating) or achievements
      to differ from the future results, performance (financial or operating) or
      achievements expressed or implied by such forward-looking statements. Such
      future results are based upon management's best estimates based upon current
      conditions and the most recent results of operations. When used in this Report,
      the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,”
“estimate” and similar expressions are generally intended to identify
      forward-looking statements, because these forward-looking statements involve
      risks and uncertainties. There are important factors that could cause actual
      results to differ materially from those expressed or implied by these
      forward-looking statements, including our plans, objectives, expectations and
      intentions and other factors that are discussed under the section entitled
“Risk
      Factors,” in our Annual Report on Form 10-K for the year ended December 31,
      2007.*




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




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




We
      view
      our 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 derived from procedures
      performed by dermatologists or from the direct sale of equipment to the
      physician. We are engaged in the development, manufacturing and marketing of
      our
      proprietary XTRAC® excimer laser and delivery systems and techniques used in the
      treatment of inflammatory skin disorders, **** including
      psoriasis, vitiligo, atopic dermatitis and leukoderma.




As
      part
      of our commercialization strategy in the United States, we offer, utilizing
      a
      direct sales force, the XTRAC laser system to targeted dermatologists at no
      initial capital cost. Under this contractual arrangement, we maintain ownership
      of the laser and earn revenue each time a physician treats a patient with the
      equipment. We believe this arrangement will increase market penetration. We
      also
      sell the laser directly to the customer for certain reasons, including the
      costs
      of logistical support and customer preference. We are finding that through
      sales
      of lasers we are able to reach, at respectable margins, a sector of the market
      that is better suited and more receptive to a sale model than a per-procedure
      model.




21




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




Our
      29-person XTRAC sales organization includes 14 sales representatives, 12
      clinical specialists and 3 marketing support personnel. Our 28-person skin
      care
      sales organization includes 20 sales representatives, 6 customer service
      representatives and 2 marketing support personnel. The sales representatives
      of
      each segment provide follow-up sales support and share sales leads to enhance
      opportunities for cross-selling. Our marketing department has been instrumental
      in expanding the advertising campaign for the XTRAC laser system.




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




**International
      Dermatology Equipment**




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




**Skin
      Care (ProCyte)**




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




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




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




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




22




**Surgical
      Services**




The
      Surgical Services segment typically generates revenues by providing fee-based
      procedures using our mobile surgical laser equipment delivered and operated
      by a
      technician at hospitals and surgery centers in the United States. We have
      pursued a cautious growth strategy for this business segment in order to
      conserve our cash resources for the XTRAC business segments.




We
      have
      limited marketing experience in expanding our surgical services business. The
      majority of this business is in the southeastern part of the United States.
      New
      procedures and geographical expansion, together with new customers and different
      business habits and networks, will likely continue to pose different challenges
      compared to those that we have encountered in the past.




**Surgical
      Products**




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




In
      September 2007, we entered into a three-year OEM agreement with AngioDynamics
      under which we manufacture for AngioDynamics, on a non-exclusive basis, a
      private-label, 980-nanometer diode laser system. The system is designed for
      use
      with AngioDynamics’ NeverTouchTM VenaCure® patented endovenous therapy for
      treatment of varicose veins. The OEM agreement provides that we shall supply
      this laser on an exclusive basis to AngioDynamics, should AngioDynamics meet
      certain purchase requirements. Having received from AngioDynamics a purchase
      order that exceeded the minimum purchase requirement for delivery of lasers
      over
      the first contract year, we will now provide this laser exclusively to
      AngioDynamics for worldwide sale in the peripheral vascular treatment field.




**Critical
      Accounting Policies**




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




23




**Results
      of Operations**




***Revenues***




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




Three Months Ended
              March 31,2008
            
            2007XTRAC
                Domestic Services
            
            $
            2,110,707
            
            $
            1,806,926International
                Dermatology Equipment Products
            
            
            1,168,205
            
            
            678,818Skin
                Care (ProCyte) Products
            
            
            3,274,692
            
            
            3,485,710Total
                Dermatology Revenues
            
            
            6,553,604
            
            
            5,971,454Surgical
                Services
            
            
            1,899,739
            
            
            1,820,205Surgical
                Products
            
            
            1,777,230
            
            
            1,236,909Total
                Surgical Revenues
            
            
            3,676,969
            
            
            3,057,114Total
                Revenues
            
            $
            10,230,573
            
            $
            9,028,568




Domestic
      XTRAC Segment




Recognized
      treatment revenue for the three months ended March 31, 2008 and 2007 for
      domestic XTRAC procedures was $1,565,907 and $1,462,386, respectively,
      reflecting billed procedures of 28,819 and 25,016, respectively. In addition,
      1,519 and 1,261 procedures were performed in the three months ended March 31,
      2008 and 2007, respectively, without billing from us, in connection with
      clinical research and customer evaluations of the XTRAC laser. The increase
      in
      procedures in the three months ended March 31, 2008 compared to the comparable
      period in 2007 was largely related to our continuing progress in securing
      favorable reimbursement policies from private insurance plans and to our
      increased marketing programs. Increase in procedures is dependent upon building
      market acceptance through marketing programs with our physician partners and
      their patients demonstrating that the XTRAC procedures will be of clinical
      benefit and be generally reimbursed.




We
      have a
      program to support certain physicians who may be denied reimbursement by private
      insurance carriers for XTRAC treatments. In accordance with the requirements
      of
      SAB No. 104, we recognize service revenue during the program only to the extent
      the physician has been reimbursed for the treatments. For the three months
      ended
      March 31, 2008, we deferred revenues of $727 (11 procedures) net, under this
      program, compared to deferred revenues of $65,470 (989 procedures) net, under
      this program for the three months ended March 31, 2007. The decrease is due
      to
      the success in securing favorable reimbursement policies from private carriers.
      The change in deferred revenue under this program is presented in the table
      below.




For
      the
      three months ended March 31, 2008 and 2007, domestic XTRAC laser sales were
      $544,800 and $344,540, respectively. There were 10 and 8 lasers sold,
      respectively. Overall, laser sales have been made for various reasons, including
      costs of logistical support and customer preferences. We are finding that
      through sales of lasers we are able to reach, at reasonable margins, a sector
      of
      the market that is better suited and more receptive to a sale model than a
      per-procedure model.




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




24




Three Months Ended
              March 31,2008
            
            2007Total
                revenue
            
            $
            2,110,707
            
            $
            1,806,926Less:
                laser sales revenue
            
            
            (544,800
            )
            
            (344,540
            )Recognized
                treatment revenue
            
            
            1,565,907
            
            
            1,462,386Change
                in deferred program Revenue
            
            
            727
            
            
            65,470Change
                in deferred unused Treatments
            
            
            320,197
            
            
            128,173Net
                billed revenue
            
            $
            1,886,831
            
            $
            1,656,029Procedure
                volume total
            
            
            30,338
            
            
            26,277Less:
                Non-billed procedures
            
            
            1,519
            
            
            1,261Net
                billed procedures
            
            
            28,819
            
            
            25,016Avg.
                price of treatments billed
            
            $
            65.47
            
            $
            66.20Change
                in procedures with deferred program revenue, net
            
            
            11
            
            
            989Change
                in procedures with deferred unused treatments, net
            
            
            4,891
            
            
            1,936




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 newer product, the XTRAC Ultra, has shorter
      treatment times.




International
      Dermatology Equipment Segment




International
      sales of our XTRAC and VTRAC systems and related parts were $1,168,205 for
      the
      three months ended March 31, 2008 compared to $678,818 for the three months
      ended March 31, 2007. We sold 24 systems in the three months ended March 31,
      2008 compared to 11 systems in the three months ended March 31, 2007. 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 at times
      to reduce the prices we charge to international distributors. The average price
      of dermatology equipment sold internationally also varies due to the quantities
      of refurbished domestic XTRAC systems and VTRACs sold. Both of these products
      have lower average selling prices than new XTRAC laser systems, however, by
      adding these to our product offerings along with expanding into new geographic
      territories where the products are sold, we have been able to increase overall
      international dermatology equipment revenues.




·
            We
                sell refurbished domestic XTRAC laser systems into the international
                market. The selling price for used equipment is substantially less
                than
                for new equipment, some of which may be substantially depreciated
                in
                connection with its use in the domestic market. We sold two of these
                used
                lasers in the three months ended March 31, 2008 at an average price
                of
                $37,500. We sold one of these used lasers at an average price of
                $30,000
                for the three months ended March 31, 2007;
                and




●
            In
                addition to the XTRAC laser system (both new and used) we sell the
                VTRAC,
                a lamp-based, alternative UVB light source that has a wholesale sales
                price that is below our competitors’ international dermatology equipment
                and below our XTRAC laser. In the three months ended March 31, 2008
                and
                2007, we sold seven VTRAC systems and one VTRAC system,
                respectively.




25





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




Three
                Months Ended
              March
                31,2008
            
            2007Revenues
            
            $
            1,168,205
            
            $
            678,818Less:
                part sales
            
            
            (229,205
            )
            
            (151,918
            )Laser
                revenues
            
            
            939,000
            
            
            526,900Laser
                systems sold
            
            
            24
            
            
            11Average
                revenue per laser
            
            $
            39,125
            
            $
            47,900




Skin
      Care (ProCyte) Segment




For
      the
      three months ended March 31, 2008, ProCyte revenues were $3,274,692 compared
      to
      $3,485,710 in the three months ended March 31, 2007. ProCyte revenues are
      generated from the sale of various skin, hair care and wound products, from
      the
      sale of copper peptide compound and from royalties on licenses, mainly from
      Neutrogena.




Bulk
      compound sales decreased by $48,000 for the three months ended March 31, 2008
      compared to the three months ended March 31, 2007. These sales are mainly from
      Neutrogena and will affect future royalties earned from Neutrogena. Minimum
      contractual royalties from Neutrogena expired in November 2007 and as such
      the
      royalties decreased $75,000 for the three months ended March 31, 2008 compared
      to the same period in the prior year.




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




Three
                Months Ended
              March
                31,2008
            
            2007Product
                sales
            
            $
            3,242,692
            
            $
            3,330,710Bulk
                compound sales
            
            
            32,000
            
            
            80,000Royalties
            
            
            -
            
            
            75,000Total
                ProCyte revenues
            
            $
            3,274,692
            
            $
            3,485,710




Surgical
      Services Segment




In
      the
      three months ended March 31, 2008 and 2007, surgical services revenues were
      $1,899,739 and $1,820,205, respectively. These increases were primarily due
      to
      an increase in revenue from urology procedures delivered using a laser system
      purchased from a third party manufacturer. Such procedures included a charge
      to
      the customer for the use of the laser and the technician to operate it, as
      well
      as a charge to the customer for the third party’s proprietary fiber delivery
      system.




Surgical
      Products Segment




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





26





For
      the
      three months ended March 31, 2008, surgical products revenues were $1,777,230
      compared to $1,236,909 in the three months ended March 31, 2007. The increase
      is
      mainly due to our OEM contract with AngioDynamics, which had initial shipments
      in December 2007. We believe that this OEM arrangement will continue to help
      grow this segment of the business.




As
      set
      forth in the table below, the decrease in average price per laser between the
      periods was largely due to the mix of lasers sold and partly due to the trade
      level at which the lasers were sold (i.e. wholesale versus retail). Our diode
      laser has replaced our Nd:YAG laser, which had a higher sales price. Included
      in
      laser sales during the three months ended March 31, 2008 and 2007 were sales
      of
      62 and 6 diode lasers, respectively. The diode lasers have lower sales prices
      than our other types of lasers, and thus the increase in the number of diodes
      sold reduced the average price per laser. We expect that we will continue to
      sell more diode lasers than our other types of lasers into the near
      future.




Fiber
      and
      other disposables sales decreased 12% between the comparable three month periods
      ended March 31, 2008 and 2007. We expect that our disposables base may erode
      over time as hospitals continue to seek outsourcing solutions instead of
      purchasing lasers and related disposables for their operating rooms. 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.




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




Three
                Months Ended
              March
                31,2008
            
            2007Revenues
            
            $
            1,777,230
            
            $
            1,236,909Laser
                systems sold
            
            
            64
            
            
            11Laser
                system revenues
            
            $
            972,745
            
            $
            320,500Average
                revenue per laser
            
            $
            15,199
            
            $
            29,136




***Cost
      of Revenues***




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




Product
      cost of revenues for the three months ended March 31, 2008 was $2,864,452,
      compared to $2,222,026 in the comparable period in 2007. The $642,426 increase
      is due to the increases in product cost of sales for domestic XTRAC laser sales
      in the amount of $91,220, international dermatology equipment sales in the
      amount of $205,149, and surgical products of $411,819, all due to increased
      number of laser sales. These increases were offset, in part, by a decrease
      of
      $65,762 for skincare products.




Services
      cost of revenues was $2,770,683 in the three months ended March 31, 2008
      compared to $2,638,243 in the comparable period in 2007. Contributing to the
      $132,440 increase was a $237,180 increase in the Domestic XTRAC business segment
      due to increased depreciation on the lasers of $148,600 and an increase in
      excess and obsolete inventory reserve. This increase was offset, in part, by
      a
      decrease of $104,740 for surgical services.




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.





27





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




Three
                Months Ended
              March
                31,2008
            
            2007Product:XTRAC
                Domestic
            
            $
            201,893
            
            $
            110,673International
                DermatologyEquipment
            
            
            570,649
            
            
            365,500Skin
                Care
            
            
            960,452
            
            
            1,026,214Surgical
                products
            
            
            1,131,458
            
            
            719,639Total
                Product costs
            
            $
            2,864,452
            
            $
            2,222,026Services:XTRAC
                Domestic
            
            $
            1,228,885
            
            $
            991,705Surgical
                Services
            
            
            1,541,798
            
            
            1,646,538Total
                Services costs
            
            $
            2,770,683
            
            $
            2,638,243Total
                Costs of Revenues
            
            $
            5,635,135
            
            $
            4,860,269




***Gross
      Profit Analysis***




Gross
      profit increased to $4,595,438 during the three months ended March 31, 2008
      from
      $4,168,299 during the same period in 2007. As a percentage of revenues, gross
      margin decreased to 44.9% for the three months ended March 31, 2008 from 46.2%
      for the same period in 2007.




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




**Company
                Profit Analysis**
            
            Three
                Months Ended
              March
                31,2008
            
            2007Revenues
            
            $
            10,230,573
            
            $
            9,028,568Percent
                increase
            
            
            13.3
            %Cost
                of revenues
            
            
            5,635,135
            
            
            4,860,269Percent
                increase
            
            
            15.9
            %Gross
                profit
            
            $
            4,595,438
            
            $
            4,168,299Gross
                margin percentage
            
            
            44.9
            %
            
            46.2
            %




The
      primary reasons for the changes in gross profit and the gross margin percentage
      for the three months ended March 31, 2008, compared to the same period in 2007
      were as follows




·
            We
                sold a greater number of surgical laser systems due to the OEM arrangement
                with AngioDynamics. These lasers were sold at a gross margin of
                approximately 35%.




·
            An
                increase in depreciation of $148,600 included in the XTRAC Domestic
                cost
                of sales as a result of increasing the overall placements.




·
            XTRAC
                Domestic deferred revenues increased $127,381 between the periods
                without
                any offsetting reduction in the cost of revenues which is consistent
                with
                a procedures-based model.




·
            We
                sold approximately $489,000 worth of additional international dermatology
                equipment for the three months ended March 31, 2008 compared to the
                same
                period in 2007.




28





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




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




**XTRAC
                Domestic Segment**
            
            Three
                Months Ended
              March
                31,2008
            
            2007Revenues
            
            $
            2,110,707
            
            $
            1,806,926Percent
                increase
            
            
            16.8
            %Cost
                of revenues
            
            
            1,430,778
            
            
            1,102,378Percent
                increase
            
            
            29.8
            %Gross
                profit
            
            $
            679,929
            
            $
            704,548Gross
                margin percentage
            
            
            32.2
            %
            
            39.0
            %




Gross
      profit decreased for this segment for the three months ended March 31, 2008
      from
      the comparable period in 2007 by $24,619. The key factors for the changes were
      as follows:




·
            XTRAC
                Domestic Deferred Revenues increased $127,381 between the periods
                without
                any offsetting reduction in the cost of revenues which is consistent
                with
                a procedures-based model




·
            We
                sold approximately $200,000 worth of additional domestic XTRAC lasers
                in
                the three months ended March 31, 2008 at lower margins compared to
                the
                same period in 2007. Certain of these lasers were previously being
                depreciated, since they were placements. The margin on these capital
                equipment sales was 63% in 2008 compared to 68% in
                2007.




·
            The
                cost of revenues increased by $328,400 for the three months ended
                March
                31, 2008. This increase is due to an increase in depreciation on
                the
                lasers-in-service of $148,600 over the comparable prior three-month
                period
                and an increase in certain allocable XTRAC manufacturing overhead
                costs
                that are charged against the XTRAC service revenues. The depreciation
                costs will continue to increase in subsequent periods as the business
                grows.




·
            Key
                drivers in increasing the fee-per-procedure revenue from in this
                segment
                are insurance reimbursement and increased direct-to-consumer advertising
                in targeted territories. Improved insurance reimbursement, together
                with
                greater consumer awareness of the XTRAC therapy, increase treatment
                revenue accordingly. Our clinical support specialists focus their
                efforts
                on increasing physicians’ utilization of the XTRAC laser system.
                Consequently and offsetting the above decreases to gross profit and
                gross
                margin percentages, procedure volume increased 15% from 25,016 to
                28,819
                billed procedures in the three months ended March 31, 2008 compared
                to the
                same period in 2007. Price per procedure did not change significantly
                between the periods. Each incremental treatment procedure carries
                negligible variable cost.




29





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




**International
                Dermatology**
              **Equipment
                Segment**
            
            Three
                Months Ended
              March
                31,2008
            
            2007Revenues
            
            $
            1,168,205
            
            $
            678,818Percent
                increase
            
            
            72.1
            %Cost
                of revenues
            
            
            570,649
            
            
            365,500Percent
                increase
            
            
            56.1
            %Gross
                profit
            
            $
            597,556
            
            $
            313,318Gross
                margin percentage
            
            
            51.2
            %
            
            46.2
            %




The
      gross
      profit for the three months ended March 31, 2008 increased by $284,238 from
      the
      comparable prior three-month period. The key factors in this business segment
      were as follows:




·
            We
                sold 17 XTRAC laser systems and 7 VTRAC lamp-based excimer systems
                during
                the three months ended March 31, 2008 and 10 XTRAC laser systems
                and 1
                VTRAC system in the comparable period in 2007. Consequently, gross
                profit
                increased as a result of an increase in the volume of units sold.
                The
                gross margin percentage for the VTRAC is higher than the
                XTRAC.




·
            International
                part sales, which have a higher margin percent than system sales,
                increased for the three months ended March 31, 2008 by approximately
                $77,000 compared to the same period in
                2007.




·
            Increased
                volume in system sales also serves to spread fixed manufacturing
                costs
                over more units thereby improving margin
                percentages.




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




**Skin
                Care (ProCyte) Segment**
            
            Three
                Months Ended
              March
                31,2008
            
            2007Product
                revenues
            
            $
            3,242,692
            
            $
            3,330,710Bulk
                compound revenues
            
            
            32,000
            
            
            80,000Royalties
            
            
            -
            
            
            75,000Total
                revenues
            
            
            3,274,692
            
            
            3,485,710Product
                cost of revenues
            
            
            937,668
            
            
            976,564Bulk
                compound cost of revenues
            
            
            22,784
            
            
            49,650Total
                cost of revenues
            
            
            960,452
            
            
            1,026,214Gross
                profit
            
            $
            2,314,240
            
            $
            2,459,496Gross
                margin percentage
            
            
            70.7
            %
            
            70.6
            %




The
      gross
      profit for the three months ended March 31, 2008 decreased by $145,256 from
      the
      comparable prior three-month period. The key factors in this business segment
      were as follows:




·
                  The
                      gross margin for our skin care products is relatively consistent
                      from
                      period to period, 70.7% in 2008 and 70.6% in 2007. The decrease
                      in total
                      cost of revenues of $65,762 in 2008 from 2007 is directly related
                      to the
                      decrease in revenues between the
                      periods.




30





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




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


**Surgical
                  Services Segment**
              
              Three
                  Months Ended
                March
                  31,2008
              
              2007Revenues
              
              $
              1,899,739
              
              $
              1,820,205Percent
                  increase
              
              
              4.4
              %Cost
                  of revenues
              
              
              1,517,104
              
              
              1,618,040Percent
                  decrease
              
              
              (6.2
              )%Gross
                  profit
              
              $
              382,635
              
              $
              202,165Gross
                  margin percentage
              
              
              20.1
              %
              
              11.1
              %




Gross
      profit in the Surgical Services segment for the three months ended March 31,
      2008 increased by $180,470, from the comparable period in 2007. The key factor
      impacting gross margin for the Surgical Services business was:




·
            Although
                our revenues have increased by 4.4%, our product cost of revenue
                has
                decreased 6.2%. This is due to a continuing change in the mix of
                procedures performed. A certain urological procedure performed on
                a laser
                purchased from an unrelated party has a lower gross margin than margins
                obtained from procedures performed on lasers manufactured by us.




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




**Surgical
                Products Segment**
            
            Three
                Months Ended
              March
                31,2008
            
            2007Revenues
            
            $
            1,777,230
            
            $
            1,236,909Percent
                increase
            
            
            43.7
            %Cost
                of revenues
            
            
            1,156,152
            
            
            748,137Percent
                increase
            
            
            54.5
            %Gross
                profit
            
            $
            621,078
            
            $
            488,772Gross
                margin percentage
            
            
            34.9
            %
            
            39.5
            %




Gross
      profit for the Surgical Products segment in the three months ended March 31,
      2008 compared to the same period in 2007 increased by $132,306. 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.




31





·
            Revenues
                for the three months ended March 31, 2008 increased by $540,321 from
                the
                three months ended March 31, 2007 while cost of revenues increased
                by
                $408,015 between the same periods. There were 53 more laser systems
                sold
                in the three months ended March 31, 2008 than in the comparable period
                of
                2008. However, the lasers sold in the 2007 period were at higher
                prices
                than those sold in the comparable period in 2008. The decrease in
                average
                price per laser was largely due to the mix of lasers sold and volume
                discounts. Included in the laser sales for the three months ended
                March
                31, 2008 and 2007 were sales of $888,000, representing 62 systems,
                and
                $78,500, representing 6 systems, of diode lasers, respectively, which
                have
                substantially lower list sales prices than the other types of surgical
                lasers. The sales of diode systems included 50 sales due to our OEM
                arrangement.




·
            Additionally
                there was a decrease in sales of disposables between the periods.
                Fiber
                and other disposables sales decreased 12% between the comparable
                periods
                ended March 31, 2008 and 2007.




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




For
      the
      three months ended March 31, 2008, selling, general and administrative expenses
      increased to $6,471,240 from $5,759,394 for the three months ended March 31,
      2007 for the following reasons:




●
            We
                have increased our investment in sales and marketing to respond to
                the
                improved reimbursement environment related to our domestic XTRAC
                business.
                We expect this investment to increase future
                revenues;




●
            The
                majority of the increase related to a $596,000 increase in salaries,
                benefits and travel expenses associated with an increase in the sales
                force and increased revenues, particularly in the Domestic XTRAC
                segment;




●
            An
                increase of $278,000 in marketing and advertising;




●
            An
                increase of $52,000 in additional warranty expense due to the increase
                in
                lasers sold; and




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




***Engineering
      and Product Development***




Engineering
      and product development expenses for the three months ended March 31, 2008
      increased to $438,688 from $215,968 for the three months ended March 31, 2007.
      The increase was due to meeting our financial sponsorship obligations in March
      2008 for the severe psoriasis study by Dr. Koo, MD, of the University of
      California at San Francisco, of $189,000. During the 2008 and 2007 periods,
      the
      engineers at the Carlsbad plant were primarily focused on manufacturing efforts,
      and therefore, their costs have been reflected in cost of goods
      sold.




***Interest
      Expense, Net***




Net
      interest expense for the three months ended March 31, 2008 increased to
      $227,371, as compared to $76,419 for the three months ended March 31, 2007.
      The
      change in net interest expense was the result of the interest earned on cash
      reserves in the three months ended March 31, 2007 due to the equity financing
      in
      November 2006, which offset interest expense in that period.




***Net
      Loss***




The
      aforementioned factors resulted in a net loss of $2,541,861 during the three
      months ended March 31, 2008, as compared to a net loss of $1,883,482 during
      the
      three months ended March 31, 2007, a increase of 35%.





32





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 31,2008
            
            2007
            
            ChangeNet
                loss
            
            $
            2,541,861
            
            $
            1,883,482
            
            $
            658,379Major
                expenses included in net loss:Depreciation
                and amortization
            
            
            1,214,612
            
            
            1,149,200
            
            
            65,412Stock-based
                compensation
            
            
            426,543
            
            
            426,319
            
            
            224Total
                major expenses
            
            $
            1,641,155
            
            $
            1,575,519
            
            $
            65,636




Income
      taxes were immaterial, given our current period losses and operating loss
      carryforwards.




***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, 2008, our current ratio was 1.88 compared to 2.20 at December 31, 2007.
      As
      of March 31, 2008, we had $11,016,905 of working capital compared to $13,705,775
      as of December 31, 2007. Cash and cash equivalents were $9,524,555 as of March
      31, 2008, as compared to $9,954,303 as of December 31, 2008. We had $117,000
      of
      cash that was classified as restricted as of March 31, 2008 and December 31,
      2007.




We
      believe that our existing cash balance together with our other existing
      financial resources, including access to debt financing for capital
      expenditures, and revenues from sales, distribution, licensing and manufacturing
      relationships, will be sufficient to meet our operating and capital requirements
      beyond the second quarter of 2009. The 2008 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 2008 operating plan calls for increased revenues
      and profits from our Skin Care business.




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




Net
      cash
      provided by operating activities was $1,383,146 for the three months ended
      March
      31, 2008, compared to $99,275 for the three months ended March 31, 2007. The
      increase was mostly due to the decreases in accounts receivable and inventory
      and increases in accounts payable and other accrued liabilities.




Net
      cash
      used in investing activities was $1,260,969 for the three months ended March
      31,
      2008 compared to $909,815 for the three months ended March 31, 2007. This was
      primarily for the placement of lasers into service.




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




Net
      cash
      used in financing activities was $551,925 for the three months ended March
      31,
      2008 compared to net cash provided by financing activities of $127,476 for
      the
      three months ended March 31, 2007. In the three months ended March 31, 2008
      we
      repaid $392,937 on the lease and term-note lines of credit, net of advances,
      $158,988 for the payment of certain notes payable and capital lease
      obligations.





33





***Commitments
      and Contingencies***




Except
      for items discussed in ***Legal
      Proceedings*** below,
      during the three months ended March 31, 2008, there were no other items that
      significantly impacted our commitments and contingencies as discussed in the
      notes to our 2007 annual financial statements included in our Annual Report
      on
      Form 10-K. In addition, we have no significant off-balance sheet
      arrangements.




***Impact
      of Inflation***




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




**ITEM
      3. Quantitative and Qualitative Disclosure about Market
      Risk**




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




**ITEM
      4. Controls and Procedures**




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





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





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





No
      change
      in our internal control over financial reporting occurred during the three
      months ended March 31, 2008 that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.




**PART
      II - Other Information**




**ITEM
      1. Legal Proceedings**




Reference
      is made to Item 3, ***Legal
      Proceedings*** ,
      in our
      Annual Report on Form 10-K for the year ended December 31, 2007 for descriptions
      of our legal proceedings.




***Litigation***
 In
        the
        matter brought by the Company in January 2004 against Ra Medical Systems,
        Inc.
        and Dean Irwin in the United States District Court for the Southern District
        of
        California, the Company appealed from the new judge’s grant of summary judgment
        to the defendants and has filed its brief with the Ninth Circuit Court of
        Appeals.
 34
  In
          the
          matter which Ra Medical and Mr. Irwin brought against the Company in June
          2006
          for unfair competition and which the Company removed to the United States
          District Court for the Southern District of California, the Company filed
          a
          petition to file an interlocutory appeal from the new judge’s dismissal, among
          other things, of the Company’s counterclaim of misappropriation. The plaintiffs
          have opposed the petition. The District Court will hear the matter on May
          16,
          2008. As of May 1, 2008, Plaintiffs have now moved for summary adjudication
          on
          their sole claim they filed against the Company in June 2006. The claim
          is that
          the Company violated provisions of the Health & Safety Code and thus
          violated Section 17200 of the Business & Professions Code. Our opposition is
          set for May 30, 2008, and hearing is set for July 24, 2008.
  In
          March
          2008, the Company and St. Paul settled the action which the Company had
          brought
          in the United States District Court for the Eastern District of Pennsylvania.
          In
          consideration of a further contribution by St. Paul in defrayal of the
          Company’s
          defense fees and costs in the underlying malicious prosecution, Company
          and St.
          Paul released each other of claims and counterclaims and dismissed the
          action
          with prejudice. The Company agreed to maintain as confidential the amount
          of the
          contribution. The Company continues to avail itself of the insurance services
          of
          St. Paul.
  In
          the
          patent infringement suit brought in November 2007 by Allergan, Inc. against
          PhotoMedex, Inc., as well as against a number of other co-defendants in
          the
          United States District Court for the Central District of California, the
          Federal
          judge ruled that the Company would not be dismissed from the case, but
          ruled,
          contrary to his preliminary opinion, that ProCyte had made the first filing
          in
          the Western District of Washington, and therefore would be free to pursue
          its
          declaratory judgment suit there, if the judge sitting in that action agreed
          to
          retain jurisdiction. However, the judge sitting in the Western District
          of
          Washington ruled that ProCyte’s action should be transferred to the Central
          District of California. ProCyte’s action for declaratory judgment remains, at
          this time, a distinct suit from the action brought by Allergan against
          the
          Company, but the two suits will be consolidated for all purposes.
  The
          US
          Patent Office issued in April 2008 a new patent to Allergan which has claims
          allegedly covering MD Lash FactorTM eyelash conditioner. The new patent is US
          Patent No. 7,351,404. It is expected that a Third Amended Complaint will
          be
          filed by Allergan alleging that PhotoMedex and ProCyte infringe this new
          patent.
  In
          the
          patent infringement action brought in February 2008 by Cardiofocus, Inc.
          against
          PhotoMedex, Inc., as well as against a number of other co-defendants, the
          defendants have filed their answers to the complaint.
  In
          the
          patent infringement action brought by Bella Bella, Inc. against a number
          of
          companies, including PhotoMedex, Inc., in the United States District Court
          for
          the Central District of California, the Company has filed its answer to
          the
          complaint and counterclaim.
  The
          Company is involved in certain other legal actions and claims arising in
          the
          ordinary course of business. The Company believes, based on discussions
          with
          legal counsel, the above litigation and claims will likely be resolved
          without a
          material effect on our consolidated financial position, results of operations
          or
          liquidity.


**ITEM
      1A. Risk Factors**




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




**ITEM
        5. Other Information**
 
 On
        May 7,
        2008, we entered into amended and restated employment agreements with Jeffrey
        F.
        O’Donnell (our President and Chief Executive Officer), Dennis M. McGrath (our
        Chief Financial Officer and Vice President of Finance and Administration)
        and
        Michael R. Stewart (our Chief Operating Officer)(the “Amended and Restated
        Agreements”). The Amended and Restated Agreements provide for clarifying
        amendments to certain provisions in order to comply with Section 409A of
        the
        Internal Revenue Code.


35





**ITEM
      6. Exhibits**




10.40
            
            Amended
                and Restated Employment Agreement, dated May 6, 2008, between PhotoMedex,
                Inc. and Jeffrey F. O’Donnell10.41
            
            Amended
                and Restated Employment Agreement, dated May 6, 2008, between PhotoMedex,
                Inc. and Dennis M. McGrath10.42
            
            Amended
                and Restated Employment Agreement, dated May 6, 2008, between PhotoMedex,
                Inc. and Michael R. Stewart31.1
            
            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 to 
                Section 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 to 
                Section 906 of the Sarbanes-Oxley Act of 2002





**SIGNATURES**





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





PHOTOMEDEX,
                INC.Date:
                May 9, 2008
            By:
            /s/
                Jeffrey F. O’DonnellJeffrey
                F. O’DonnellPresident
                and Chief Executive OfficerDate:
                May 9, 2008
            By:
            /s/
                Dennis M. McGrathDennis
                M. McGrathChief
                Financial Officer





36