**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10 - Q**
 
 **ý** **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
  **For
        the quarterly period ended September 30, 2005**
  **OR**
  ** ̈** **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
  **For
        the transition period from _________ to ___________**
  Commission
        File Number 0-11365
  **PHOTOMEDEX,
        INC.**
 (Exact
        name of registrant as specified in its charter)
  **Delaware**
              **59-2058100**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  No.)
  147
        Keystone Drive, Montgomeryville, Pennsylvania 18936
 (Address
        of principal executive offices, including zip code)
  (215)
        619-3600
 (Registrant's
        telephone number, including area code)
  Indicate
        by check mark whether the registrant: (i) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (ii) has been subject to such filing requirements
        for
        the past 90 days.
 Yes ý No  ̈
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act.)
 Yes ý No  ̈
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act.)
 Yes  ̈ No ý
  The
        number of shares outstanding of the issuer's Common Stock as of November
        8, 2005
        was 51,285,725 shares.
  1
  PHOTOMEDEX,
        INC. AND SUBSIDIARIES
 
 INDEX
  Part
                  I. Financial Information:
              PAGEITEM
                  1. Financial Statements:a.
              Consolidated
                  Balance Sheets, September 30, 2005 (unaudited) and
                December
                  31, 2004
              3b.
              Consolidated
                  Statements of Operations for the three months
                ended
                  September 30, 2005 and 2004 (unaudited)
              4c.
              Consolidated
                  Statements of Operations for the nine months
                ended
                  September 30, 2005 and 2004 (unaudited)
              5d.
              Consolidated
                  Statement of Stockholders’ Equity for the nine months
                ended
                  September 30, 2005 (unaudited)
              6e.
              Consolidated
                  Statements of Cash Flows for the nine months
                ended
                  September 30, 2005 and 2004 (unaudited)
              7f.
              Notes
                  to Consolidated Financial Statements (unaudited)
              8ITEM
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              25ITEM
                  3. Quantitative and Qualitative Disclosure about Market
                  Risk
              44ITEM
                  4. Controls and Procedures
              44Part
                  II. Other Information:ITEM
                  1. Legal Proceedings
              45ITEM
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              45ITEM
                  3. Defaults Upon Senior Securities
              45ITEM
                  4. Submission of Matters to a Vote of Security Holders
              45ITEM
                  5. Other Information
              45ITEM
                  6. Exhibits
              45Signatures
              46Certifications
              47
  2
  **PART
        I - Financial Information**
 
 **ITEM
        1. Financial Statements**
 
 PHOTOMEDEX,
        INC. AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
  September
                  30, 2005
              
              December
                  31, 2004(Unaudited)
              
              ***ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              5,177,150
              
              $
              3,884,817Restricted
                  cash
              
              
              206,802
              
              
              112,200Accounts
                  receivable, net of allowance for doubtful accounts of $675,795
                  and
                  $736,505, respectively
              
              
              4,718,423
              
              
              4,117,399Inventories
              
              
              7,818,794
              
              
              4,585,631Prepaid
                  expenses and other current assets
              
              
              984,916
              
              
              401,989Total
                  current assets
              
              
              18,906,085
              
              
              13,102,036Property
                  and equipment, net
              
              
              6,677,895
              
              
              4,996,688Goodwill,
                  net
              
              
              16,375,384
              
              
              2,944,423Patents
                  and licensed technologies, net
              
              
              1,473,123
              
              
              929,434Other
                  intangible assets, net
              
              
              4,700,125
              
              
              -Other
                  assets
              
              
              289,579
              
              
              989,345Total
                  assets
              
              $
              48,422,191
              
              $
              22,961,926**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Current
                  portion of notes payable
              
              $
              481,117
              
              $
              69,655Current
                  portion of long-term debt
              
              
              1,457,163
              
              
              873,754Accounts
                  payable
              
              
              2,979,704
              
              
              3,515,293Accrued
                  compensation and related expenses
              
              
              956,871
              
              
              963,070Other
                  accrued liabilities
              
              
              938,002
              
              
              924,054Deferred
                  revenues
              
              
              531,328
              
              
              636,962Other
                  current liabilities
              
              
              23,252
              
              
              -Total
                  current liabilities
              
              
              7,367,437
              
              
              6,982,788Long-term
                  liabilities:Notes
                  payable
              
              
              170,728
              
              
              26,736Long-term
                  debt
              
              
              2,043,425
              
              
              1,372,119Other
                  liabilities
              
              
              24,671
              
              
              -Total
                  liabilities
              
              
              9,606,261
              
              
              8,381,643Commitments
                  and ContingenciesStockholders’
                  equity:Common
                  stock, $.01 par value, 75,000,000 shares authorized; 51,247,881
                  and
                  40,075,019 shares issued and outstanding, respectively
              
              
              512,478
              
              
              400,750Additional
                  paid-in capital
              
              
              117,758,742
              
              
              90,427,632Accumulated
                  deficit
              
              
              (79,385,225
              )
              
              (76,246,562
              )Deferred
                  compensation
              
              
              (70,065
              )
              
              (1,537
              )Total
                  stockholders' equity
              
              
              38,815,930
              
              
              14,580,283Total
                  liabilities and stockholders’ equity
              
              $
              48,422,191
              
              $
              22,961,926
  *
        The
        December 31, 2004 balance sheet was derived from our 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
                September
                  30,2005
              
              2004Revenues:Product
                  sales
              
              $
              4,537,938
              
              $
              1,401,981Services
              
              
              3,085,900
              
              
              3,053,4157,623,838
              
              
              4,455,396Cost
                  of revenues:Product
                  cost of revenues
              
              
              1,956,022
              
              
              747,689Services
                  cost of revenues
              
              
              2,347,362
              
              
              1,753,7274,303,384
              
              
              2,501,416Gross
                  profit
              
              
              3,320,454
              
              
              1,953,980Operating
                  expenses:Selling,
                  general and administrative
              
              
              4,526,178
              
              
              2,634,394Engineering
                  and product development
              
              
              304,935
              
              
              428,2064,831,113
              
              
              3,062,600Loss
                  from operations
              
              
              (1,510,659
              )
              
              (1,108,620
              )Other
                  income
              
              
              244,988
              
              
              -Interest
                  expense, net
              
              
              (84,229
              )
              
              (47,189
              )Net
                  loss
              
              
              ($
                  1,349,900
              )
              
              ($
                  1,155,809
              )Basic
                  and diluted net loss per share
              
              
              ($0.03
              )
              
              ($0.03
              )Shares
                  used in computing basic and diluted net loss per share
              
              
              51,198,095
              
              
              38,960,250
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  4
  PHOTOMEDEX,
        INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 
 (Unaudited)
  For
                  the Nine Months Ended
                September
                  30,2005
              
              2004Revenues:Product
                  sales
              
              $
              11,718,700
              
              $
              4,823,738Services
              
              
              8,943,640
              
              
              7,980,02220,662,340
              
              
              12,803,760Cost
                  of revenues:Product
                  cost of revenues
              
              
              4,856,858
              
              
              2,512,794Services
                  cost of revenues
              
              
              6,301,086
              
              
              5,114,05711,157,944
              
              
              7,626,851Gross
                  profit
              
              
              9,504,396
              
              
              5,176,909Operating
                  expenses:Selling,
                  general and administrative
              
              
              11,944,593
              
              
              7,511,265Engineering
                  and product development
              
              
              819,845
              
              
              1,325,39912,764,438
              
              
              8,836,664Loss
                  from operations
              
              
              (3,260,042
              )
              
              (3,659,755
              )Other
                  income
              
              
              333,655
              
              
              -Interest
                  expense, net
              
              
              (212,276
              )
              
              (66,297
              )Net
                  loss
              
              
              ($
                  3,138,663
              )
              
              ($
                  3,726,052
              )Basic
                  and diluted net loss per share
              
              
              ($0.07
              )
              
              ($0.10
              )Shares
                  used in computing basic and diluted net loss per share
              
              
              47,972,456
              
              
              38,428,632
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  5
  PHOTOMEDEX,
        INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS’ EQUITY
 FOR
        THE
        NINE MONTHS ENDED SEPTEMBER 30, 2005
 (Unaudited)
 
 Common
                  StockShares
              
              Amount
              
              Additional
                  Paid-InCapital
              
              AccumulatedDeficit
              
              DeferredCompensation
              
              TotalBALANCE,
                  DECEMBER 31, 2004
              
              
              40,075,019
              
              $
              400,750
              
              $
              90,427,632
              
              
              ($76,246,562
              )
              
              ($
                  1,537
              )
              $
              14,580,283Exercise
                  of warrants
              
              
              73,530
              
              
              735
              
              
              146,325
              
              
              -
              
              
              -
              
              
              147,060Exercise
                  of stock options
              
              
              310,358
              
              
              3,103
              
              
              552,582
              
              
              -
              
              
              -
              
              
              555,685Stock
                  options issued to consultants for services
              
              
              
              
              
              
              
              
              31,859
              
              
              
              
              
              
              
              
              31,859Issuance
                  of stock
              
              
              248,395
              
              
              2,484
              
              
              523,416
              
              
              
              
              
              
              
              
              525,900Issuance
                  of stock in connection with the acquisition of ProCyte
              
              
              10,540,579
              
              
              105,406
              
              
              26,197,732
              
              
              -
              
              
              (132,081
              )
              
              26,171,057Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              62,019
              
              
              62,019Reversal
                  of unamortized portion of deferred compensation for terminated
                  employee
              
              
              -
              
              
              -
              
              
              (1,534
              )
              
              -
              
              
              1,534
              
              
              -Registration
                  expenses
              
              
              -
              
              
              -
              
              
              (161,739
              )
              
              -
              
              
              -
              
              
              (161,739
              )Issuance
                  of warrants
              
              
              
              
              
              
              
              
              42,469
              
              
              
              
              
              
              
              
              42,469Net
                  loss for the nine months ended September 30, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,138,663
              )
              
              -
              
              
              (3,138,663
              )BALANCE,
                  SEPTEMBER 30, 2005
              
              
              51,247,881
              
              $
              512,478
              
              $
              117,758,742
              
              
              ($79,385,225
              )
              
              ($70,065
              )
              $
              38,815,930
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  6
  PHOTOMEDEX,
        INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 (Unaudited)
  For
                  the Nine Months Ended
                September
                  30,2005
              
              2004**Cash
                  Flows From Operating Activities**:Net
                  loss
              
              
              ($
                  3,138,663
              )
              
              ($
                  3,726,052
              )Adjustments
                  to reconcile net loss to net cash usedin
                  operating activities:Depreciation
                  and amortization
              
              
              2,216,715
              
              
              1,314,435Stock
                  options issued to consultants for services
              
              
              31,859
              
              
              48,192Amortization
                  of deferred compensation
              
              
              62,019
              
              
              4,879Nonmonetary
                  exchange of assets
              
              
              (88,667
              )
              
              -Provision
                  for bad debts
              
              
              276,124
              
              
              239,120Loss
                  on disposal of assets
              
              
              64,937
              
              
              -Changes
                  in operating assets and liabilities, net of effects on acquired
                  assets and
                  liabilities:Accounts
                  receivable
              
              
              260,265
              
              
              (654,562
              )Inventories
              
              
              (403,335
              )
              
              (254,118
              )Prepaid
                  expenses and other assets
              
              
              545,943
              
              
              202,354Accounts
                  payable
              
              
              (1,110,661
              )
              
              147,038Accrued
                  compensation and related expenses
              
              
              (157,504
              )
              
              (113,450
              )Other
                  accrued liabilities
              
              
              (977,626
              )
              
              168,626Cash
                  deposits
              
              
              8,000
              
              
              (125,500
              )Deferred
                  revenues
              
              
              (201,070
              )
              
              71,733Other
                  liabilities
              
              
              (4,962
              )
              
              -Net
                  cash used in operating activities
              
              
              (2,616,626
              )
              
              (2,677,305
              )**Cash
                  Flows From Investing Activities:**Purchases
                  of property and equipment
              
              
              (87,488
              )
              
              (578,051
              )Lasers
                  placed into service
              
              
              (2,548,535
              )
              
              (1,021,766
              )Licensed
                  technology acquisition
              
              
              -
              
              
              (108,273
              )Cash
                  received from acquisition, net of costs incurred
              
              
              5,578,416
              
              
              -Net
                  cash provided by (used in) investing activities
              
              
              2,942,393
              
              
              (1,708,090
              )**Cash
                  Flows From Financing Activities:**Proceeds
                  from issuance of common stock, net of direct issuance
                  costs
              
              
              (169,524
              )
              
              11,199Proceeds
                  from exercise of options
              
              
              555,685
              
              
              98,837Proceeds
                  from exercise of warrants
              
              
              147,060
              
              
              3,086,468Payments
                  on long-term debt
              
              
              (202,199
              )
              
              (330,086
              )Payments
                  on notes payable
              
              
              (617,799
              )
              
              (446,875
              )Net
                  advancements on lease line of credit
              
              
              1,347,945
              
              
              654,427Increase
                  in restricted cash and cash equivalents
              
              
              (94,602
              )
              
              (110,062
              )Net
                  cash provided by financing activities
              
              
              966,566
              
              
              2,963,908Net
                  increase (decrease) in cash and cash equivalents
              
              
              1,292,333
              
              
              (1,421,487
              )Cash
                  and cash equivalents, beginning of period
              
              
              3,884,817
              
              
              6,633,468Cash
                  and cash equivalents, end of period
              
              $
              5,177,150
              
              $
              5,211,981
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  7
  PHOTOMEDEX,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 *Note
        1*
 
 **Basis
        of Presentation:**
 
 **The
        Company:**
 
 ***Background***
 PhotoMedex,
        Inc. and 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 develops, manufactures and
        markets excimer-laser-based instrumentation designed to phototherapeutically
        treat psoriasis, vitiligo, atopic dermatitis and leukoderma. In January 2000,
        the Company received the first Food and Drug Administration (“FDA”) clearance to
        market an excimer laser system, the XTRAC® system, for the treatment of
        psoriasis. In March 2001, the Company received FDA clearance to treat vitiligo;
        in August 2001, the Company received FDA clearance to treat atopic dermatitis;
        and in May 2002, the FDA granted 510(k) clearance to market the XTRAC system
        for
        the treatment of leukoderma. The Company launched the XTRAC phototherapy
        treatment system commercially in the United States in August 2000.
 
 As
        a
        result of the acquisition of Surgical Laser Technologies, Inc. (“SLT”) on
        December 27, 2002, the Company also develops, manufactures and markets
        proprietary lasers and delivery systems for both contact and non-contact
        surgery
        and provides surgical services utilizing these and other manufacturers’
        products.
 
 Through
        the acquisition of ProCyte Corporation (“ProCyte”) on March 18, 2005, the
        Company also develops, manufactures and markets products for skin health,
        hair
        care and wound care.  Many of the Company’s products incorporate its
        patented copper peptide technologies.
 
 ***Liquidity
        and Going Concern***
 The
        Company has incurred significant losses and negative cash flows from operations
        since emerging from bankruptcy in May 1995. As of September 30, 2005, the
        Company had an accumulated deficit of $79,385,225. The Company has reduced
        its
        net loss for the nine months ended September 30, 2005 by $587,389, a 16%
        improvement, compared to the nine months ended September 30, 2004. The Company
        has historically financed its activities from operations and the private
        placement of equity securities. To date, the Company has dedicated most of
        its
        financial resources to research and development, marketing and general and
        administrative expenses.
 
 Cash
        and
        cash equivalents as of September 30, 2005 were $5,383,952, including restricted
        cash of $206,802. Management believes that the existing cash balance together
        with its existing financial resources, including the leasing credit line
        facility with a remaining availability of $2,972,082 (see Note 9), and any
        revenues from sales, distribution, licensing and manufacturing relationships,
        will be sufficient to meet the Company’s operating and capital requirements
        beyond the third quarter of 2006. The 2005 operating plan reflects anticipated
        growth from an increase in per-treatment fee revenues for use of the XTRAC
        system based on wider insurance coverage in the United States and continuing
        cost savings from the integration of business operations acquired from ProCyte.
        In addition, the 2005 operating plan calls for increased revenues and profits
        from the ProCyte business and the continued growth of its skin care products.
        However, depending upon the Company’s rate of growth and other operating
        factors, the Company may require additional equity or debt financing to meet
        its
        working capital requirements or capital expenditure needs for the balance
        of
        2005. There can be no assurance that additional financing, if needed, will
        be
        available when required or, if available, can be obtained on terms satisfactory
        to the Company.
 
 Since
        2002, the Company has made significant progress in obtaining more extensive
        reimbursement approval from the Centers for Medicare and Medicaid Services
        and
        various private health plans for the treatment of skin disorders using the
        XTRAC
        system.
 
 The
        Company plans to continue to focus on securing reimbursement from more private
        insurers and to devote sales and marketing efforts where such reimbursement
        has
        become available. As approvals for reimbursements are obtained, the Company
        will
        increase spending on the marketing of its psoriasis, vitiligo, atopic dermatitis
        and leukoderma treatment products and, if necessary, expansion of its
        manufacturing facilities. Notwithstanding the approval for reimbursement
        by
        Centers for Medicare and Medicaid Services and recent approvals by certain
        private insurers, the Company may continue to face resistance from some private
        healthcare insurers to adopt the excimer-laser-based therapy as an approved
        procedure or to provide adequate levels of reimbursement. Management cannot
        provide assurance that the Company will market the product successfully or
        operate profitably in the future, or that it will not require significant
        additional financing in order to accomplish its business plan objectives.
  8
  The
        Company’s future success depends in part upon increased patient acceptance of
        its excimer-laser-based systems for the treatment of a variety of skin
        disorders. The Company’s ability to introduce successful new products may be
        adversely affected by a number of factors, such as unforeseen costs and
        expenses, technological change, economic downturns, increased competition
        or
        other factors beyond the Company’s control. Consequently, the Company’s
        historical operating results cannot be relied on to be an indicator of future
        performance, and management cannot predict whether the Company will obtain
        or
        sustain positive operating cash flow or generate net income in the
        future.
 
 **Summary
        of Significant Accounting Policies:**
 
 ***Quarterly
        Financial Information and Results of Operations***
 The
        financial statements as of September 30, 2005 and for the nine months ended
        September 30, 2005 and 2004, 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
        September 30, 2005, and the results of operations and cash flows for
        the
        nine months ended September 30, 2005 and 2004. The results for the
        nine
        months ended September 30, 2005 are not necessarily indicative of
        the
        results to be expected for the entire year. While management of the Company
        believes that the disclosures presented are adequate to make the information
        not
        misleading, these consolidated financial statements should be read in
        conjunction with the consolidated financial statements and the notes included
        in
        the Company's Annual Report on Form 10-K for the fiscal year ended December
        31,
        2004.
 
 ***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 ***Revenue
        Recognition*** for
        discussion of updates and changes in estimates for XTRAC domestic revenues
        in
        accordance with Staff Accounting Bulletin Nos. 101 and 104 and Statement
        of
        Financial Accounting Standards (“SFAS”) No. 48.
 
 See
        “Summary of Significant Accounting Policies” in the Company’s 2004 Annual Report
        on Form 10-K for a discussion of the estimates and judgments necessary in
        the
        Company’s accounting for cash and cash equivalents, accounts receivable,
        inventories, property, equipment and depreciation, product development costs
        and
        fair value of financial instruments.
 
 ***Revenue
        Recognition***
 The
        Company has two distribution channels for its phototherapy treatment equipment.
        The Company either (i) sells the laser through a distributor or directly
        to a
        physician or (ii) places the lasers in physician’s offices (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 physician, revenue is recognized when the following four criteria under
        Staff Accounting Bulletin No. 104 have been met: (i) the product has been
        shipped and the Company has no significant remaining obligations; (ii)
        persuasive evidence of an arrangement exists; (iii) the price to the buyer
        is
        fixed or determinable; (iv) and collection is probable (the “SAB 104 Criteria”).
        At times, units are shipped, but revenue is not recognized until all of the
        criteria are met, and until that time, the unit is carried on the books of
        the
        Company as inventory.
  9
  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 that do not
        fully
        satisfy the collection criteria are recognized when invoiced amounts are
        fully
        paid.
 
 Under
        the
        terms of the distributor agreements, the distributors do not have the right
        to
        return any unit that they have purchased. However, the Company does allow
        products to be returned by its distributors in redress of product defects
        or
        other claims.
 
 When
        the
        Company places a laser in a physician’s office, it recognizes service revenue
        based on the number of patient treatments used by the physician. Treatments
        in
        the form of random laser-access codes that are sold to physicians, 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 inasmuch
        as
        the treatments can only be performed on Company-owned equipment. Once the
        treatments are delivered to a patient, this obligation has been satisfied.
 
 The
        calculation of unused treatments has historically been based upon an estimate
        that at the end of each accounting period, 15 unused treatments existed at
        each
        laser location. This was based upon the reasoning that the Company generally
        sells treatments in packages of 30 treatments. Fifteen treatments generally
        represents about one-half the quantity purchased by a physician or approximately
        a one-week supply for 6 to 8 patients. This policy had been used on a consistent
        basis. The Company believed this approach to have been reasonable and systematic
        given that: (a) physicians have little motivation to purchase quantities
        (which
        they are obligated to pay for irrespective of actual use and are unable to
        seek
        a credit or refund for unused treatments) that will not be used in a relatively
        short period of time, particularly since in most cases they can obtain
        incremental treatments instantaneously over the phone; and (b) senior management
        regularly reviews purchase patterns by physicians to identify unusual buildup
        of
        unused treatment codes at a laser site. Moreover, the Company continually
        looks
        at its estimation model based upon data received from its
        customers.
 
 In
        the
        fourth quarter of 2004, the Company updated the calculations for the estimated
        amount of unused treatments to reflect recent purchasing patterns by physicians
        near year-end. The Company estimated the amount of unused treatments at December
        31, 2004 to include all sales of treatment codes made within the last two
        weeks
        of the period. Management believes this approach more closely approximates
        the
        actual amount of unused treatments that existed at that date than the previous
        approach. Accounting Principles Board (“APB”) Opinion No. 20 provides that
        accounting estimates change as new events occur, as more experience is acquired,
        or as additional information is obtained and that the effect of the change
        in
        accounting estimate should be accounted for in the current period and the
        future
        periods that it affects. The Company accounted for this change in the estimate
        of unused treatments in accordance with APB No. 20 and SFAS No. 48. Accordingly,
        the Company’s change in accounting estimate was reported in revenues for the
        fourth quarter of 2004, and was not accounted for by restating amounts reported
        in financial statements of prior periods or by reporting pro-forma amounts
        for
        prior periods.
 
 The
        Company has continued this approach or method for estimating the amount of
        unused treatments at September 30, 2005. Due to this updated approach in
        estimates, XTRAC domestic revenues were increased by $159,000 and $97,000
        for
        the three and nine months ended September 30, 2005, respectively, as compared
        to
        the prior method of estimation.
 
 In
        the
        first quarter of 2003, the Company implemented a program to support certain
        physicians in addressing treatments with the XTRAC system that may be denied
        reimbursement by private insurance carriers. The Company recognizes service
        revenue from the sale of treatment codes to physicians participating in this
        program only if and to the extent the physician has been reimbursed for the
        treatments. For the three and nine months ended September 30, 2005,
        the
        Company deferred an additional $25,375 and $58,090, respectively, under this
        program as all the criteria for revenue recognition had not been met.
 
 Under
        this program, the Company may reimburse qualifying doctors for the cost of
        the
        Company’s fee but only if they are ultimately denied reimbursement after appeal
        of their claim with the insurance company. The key components of the program
        are
        as follows:
  10
  ·
              The
                  physician practice must be in an identified location where there
                  is still
                  an insufficiency of insurance companies reimbursing the
                  procedure;
 
 ·
              The
                  program only covers medically necessary treatments of psoriasis
                  as
                  determined by the treating physician
                  ;
 
 ·
              The
                  patient must have medical insurance and a claim for the treatment
                  must be
                  timely filed with the patient’s insurance company;
 
 ·
              Upon
                  denial by the insurance company (generally within 30 days of filing
                  the
                  claim), a standard insurance form called an EOB (“Explanation of
                  Benefits”) must be submitted to the Company’s in-house appeals group, who
                  will then prosecute the appeal. The appeal process can take 6 to
                  9
                  months;
 
 ·
              After
                  all appeals have been exhausted by the Company and the claim remains
                  unpaid, the physician is entitled to receive credit for the treatment
                  he
                  or she purchased from the Company (our fee only) on behalf of the
                  patient
                  and
 
 ·
              Physicians
                  are still obligated to make timely payments for treatments purchased,
                  irrespective of whether reimbursement is paid or denied. Future
                  sale of
                  treatments to a physician can be denied if timely payments are
                  not made,
                  even if a patient’s appeal is still in process.
  Historically,
        the Company estimated a contingent liability for potential refunds under
        this
        program by estimating when the physician was paid for the insurance claim.
        In
        the absence of a two-year historical trend and a large pool of homogeneous
        transactions to reliably predict the estimated claims for refund as required
        by
        Staff Accounting Bulletin Nos. 101 and 104, the Company previously deferred
        revenue recognition of 100% of the current quarter revenues from the program
        to
        allow for the actual denied claims to be identified after processing with
        the
        insurance companies. After more than 106,000 treatments in the last 2 years
        and
        detailed record keeping of denied insurance claims and appeals processed,
        the
        Company has estimated that approximately 11% of a current quarter’s revenues
        under this program are subject to being credited or refunded to the
        physician.
 
 As
        of
        December 31, 2004, the Company updated its analysis to reflect this level
        of
        estimated refunds. This change from the past process of deferring 100% of
        the
        current quarter revenues from the program represents a change in accounting
        estimate, and Management recorded this change in accordance with the relevant
        provisions of SFAS No. 48 and APB No. 20. These pronouncements state that
        the
        effect of a change in accounting estimate should be accounted for in the
        current
        period and the future periods that it affects. A change in accounting estimate
        should not be accounted for by restating amounts reported in financial
        statements of prior periods or by reporting proforma amounts for prior periods.
        Due to this updated approach in estimates, XTRAC domestic revenues were
        increased by $33,000 and $89,000 for the three and nine months ended September
        30, 2005 as compared to the prior method of estimation.
 
 The
        net
        impact on revenue recognized for the XTRAC domestic segment as a result of
        the
        above two changes in accounting estimate was to increase revenues by
        approximately $192,000 and $186,000 for the three and nine months ended
        September 30, 2005, respectively.
 
 Through
        its surgical businesses, the Company generates revenues primarily from two
        channels. The first is through product sales of laser systems, related
        maintenance service agreements, recurring laser delivery systems and laser
        accessories; the second is through per-procedure surgical services. The Company
        recognizes revenues from surgical laser and other product sales, including
        sales
        to distributors, 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.
 
 The
        Company generates revenues from the acquired business of ProCyte primarily
        through three channels. The first is through product sales for skin health,
        hair
        care and wound care; the second is through sales of the copper peptide compound,
        primarily to Neutrogena; a Johnson and Johnson Company, and the third is
        through
        royalties generated by our licenses, principally to Neutrogena. The Company
        recognizes revenues on the products and copper peptide compound when they
        are
        shipped, net of returns and allowances. The Company ships the products FOB
        shipping point. Royalty revenues are based upon sales generated by our
        licensees. The Company recognizes royalty revenue at the applicable royalty
        rate
        applied to shipments reported by our licensee.
  11
  ***Impairment
        of Long-Lived Assets and Intangibles***
 In
        accordance with SFAS No. 144, “Accounting for the Impairment of Disposal of
        Long-Lived Assets”, long-lived assets, such as property and equipment, and
        purchased intangibles subject to amortization, are reviewed for impairment
        whenever events or changes in circumstances indicate that the carrying amount
        of
        an asset may not be recoverable. Recoverability of assets to be held and
        used is
        measured by a comparison of the carrying amount of an asset to estimated
        undiscounted future cash flows expected to be generated by the asset. If
        the
        carrying amount of an asset exceeds its estimated future cash flows, an
        impairment charge is recognized by the amount by which the carrying amount
        of
        the asset exceeds the fair value of the asset. Assets to be disposed of would
        be
        separately presented in the balance sheet and reported at the lower of the
        carrying amount or 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 September 30, 2005, no such
        impairment existed.
 
 ***Patent
        Costs and Licensed Technologies***
 Costs
        incurred to obtain or defend patents and licensed technologies are capitalized
        and amortized over the shorter of the remaining estimated useful lives or
        8 to
        12 years. Developed technology was recorded in connection with the purchase
        in
        August 2000 of the minority interest of Acculase, a former subsidiary of
        the
        Company, and is being amortized on a straight-line basis over seven years.
        Developed technology was also recorded in connection with the acquisition
        of
        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
        September 30, 2005, no such write-down was required.
 
 ***Other
        Intangible Assets***
 Other
        intangible assets were recorded in connection with the acquisition of ProCyte
        in
        March 2005. The assets are being amortized on a straight-line basis over
        5 to 10
        years.
 
 Management
        evaluates the recoverability of such other intangible assets based on estimates
        of undiscounted future cash flows over the remaining useful life of the asset.
        If the amount of such estimated undiscounted future cash flows is less than
        the
        net book value of the asset, the asset is written down to fair value. As
        of
        September 30, 2005, 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. The Company provides for the estimated future warranty claims on
        the
        date the product is sold. The activity in the warranty accrual during the
        nine
        months ended September 30, 2005 is summarized as follows:
  September
                  30, 2005Accrual
                  at beginning of period
              
              $
              196,890Additions
                  charged to warranty expense
              
              
              63,000Claims
                  paid and expiring warranties
              
              
              (46,147
              )Accrual
                  at end of period
              
              $
              213,743
  ***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.
  12
  The
        Company’s deferred tax asset has been fully reserved under a valuation
        allowance, reflecting the uncertainties as to realizability 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 future,
        the acquired goodwill of ProCyte will be reduced.
 
 ***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 8,371,824 and 6,587,193 as of September 30, 2005 and 2004,
        respectively, were excluded from the calculation of fully diluted earnings
        per
        share since their inclusion would have been anti-dilutive.
 
 ***Exchanges
        of Nonmonetary Assets***
 Exchanges
        under SFAS No. 153, “Exchanges of Nonmonetary Assets,” are measured based on the
        fair value of the assets exchanged. Further, SFAS No. 153 eliminates the
        previous narrow exception for nonmonetary exchanges of similar productive
        assets
        and replaces it with a broader exception for exchanges of nonmonetary assets
        that do not have “commercial substance.” Although SFAS No. 153 is generally
        effective for financial statements for fiscal years beginning after June
        15,
        2005, the Company elected to adopt this Statement for the current fiscal
        year.
        For the nine months ended September 30, 2005, the Company has recognized
        $88,667
        recorded as Other Income in accordance with this Statement.
 
 ***Stock
        Options***
 The
        Company applies the intrinsic-value-based method of accounting prescribed
        by APB
        Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
        interpretations, to account for its fixed-plan stock options. Under this
        method,
        compensation expense is recorded on the date of grant only if the current
        market
        price of the underlying stock exceeds the exercise price. Under the provisions
        of SFAS No. 123 (revised 2004), “Share Based Payment,” the Company will,
        starting January 1, 2006, discontinue intrinsic-value-based accounting and
        recognize compensation expense for stock options under fair-value-based
        accounting.
 
 Options
        that were assumed from ProCyte and that were unvested as of March 18, 2005
        were
        re-measured as of March 18, 2005 under intrinsic-value-based accounting.
        Unearned compensation of $132,081 was recorded and will be amortized over
        the
        remaining vesting period, which is an average of two years.
  13
  Had
        stock
        compensation cost for the Company’s common stock options been determined based
        upon the fair value of the options at the date of grant, as prescribed under
        SFAS No. 123, the Company’s net loss and net loss per share would have been
        increased to the following pro-forma amounts:
 
 
 Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Net
                  loss:As
                  reported
              
              ($1,349,900)
              
              ($1,155,809)
              
              ($3,138,663)
              
              ($3,726,052)Less:
                  stock-based employee compensation expense included in reported
                  net
                  loss
              
              
              17,787
              
              
              1,638
              
              
              62,019
              
              
              4,879Impact
                  of total stock-based compensation expense determined under
                  fair-value-based method for all grants and awards
              
              
              (483,008
              )
              
              (437,000
              )
              
              (1,264,476
              )
              
              (1,309,524
              )Pro-forma
              
              
              ($1,815,121
              )
              
              ($1,591,171
              )
              
              ($4,341,120
              )
              
              ($5,030,697
              )Net
                  loss per share:As
                  reported
              
              
              ($0.03
              )
              
              ($0.03
              )
              
              ($0.07
              )
              
              ($0.10
              )Pro-forma
              
              
              ($0.04
              )
              
              ($0.04
              )
              
              ($0.09
              )
              
              ($0.13
              )
  The
        above
        pro-forma amounts may not be indicative of future pro-forma amounts because
        future options are expected to be granted.
 
 The
        fair
        value of the options granted is estimated using the Black-Scholes option-pricing
        model with the following weighted average assumptions applicable to options
        granted in the three-month and nine-month periods:
  Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Risk-free
                  interest rate
              3.99%
              
              3.695%
              
              4.04%
              
              3.164%Volatility
              94.689%
              
              100%
              
              97.89%
              
              100%Expected
                  dividend yield
              0%
              
              0%
              
              0%
              
              0%Expected
                  option life
              5
                  years
              
              5
                  years
              
              5
                  years
              
              5
                  years
  ***Supplemental
        Cash Flow Information***
 In
        connection with the purchase of ProCyte in March 2005, the Company issued
        10,540,579 shares of common stock and assumed options of 1,354,973 shares
        of
        common stock (see Note 2).
 
 During
        the nine months ended September 30, 2005, the Company financed insurance
        policies through notes payable for $978,252, financed leasehold improvements
        through a note payable for $195,000, financed certain credit facility costs
        for
        $70,977 and issued warrants to a leasing credit facility which are valued
        at
        $42,469, and which offset the carrying value of debt. During the nine months
        ended September 30, 2005, the Company issued 218,895 shares of common stock
        to
        Stern Laser srl (“Stern”) upon attainment of certain milestones under a Master
        Purchase Agreement, which is included in patents and licensed technologies.
 
 During
        the nine months ended September 30, 2004, the Company financed insurance
        policies through note payables for $530,977, financed vehicle purchases of
        $140,064 under capital leases, financed certain credit facility costs for
        $202,027 and issued warrants to a leasing credit facility which are valued
        at
        $75,521, and which offset the carrying value of debt. During the nine months
        ended September 30, 2004, the Company issued 113,877 shares of common stock
        to
        Stern upon attainment of certain milestones under a Master Purchase Agreement,
        which is included in patents and licensed technologies.
  14
  For
        the
        nine months ended September 30, 2005 and 2004, the Company paid interest
        of
        $259,734 and $98,972, respectively. Income taxes paid in the nine months
        ended
        September 30, 2005 and 2004 were immaterial.
 
 ***Recent
        Accounting Pronouncements***
 In
        May
        2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections - replacement of APB Opinion No.
        20
        and FASB Statement No. 3” was issued. SFAS No. 154 changes the accounting for
        and reporting of a change in accounting principle by requiring retrospective
        application to prior periods’ financial statements of changes in accounting
        principle unless impracticable. SFAS No. 154 is effective for accounting
        changes
        made in fiscal years beginning after December 15, 2005. Management believes
        the
        adoption of this Statement will not have an effect on the consolidated financial
        statements.
 
 On
        December 16, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
        is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. In March
        2005
        the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 expresses
        views of the SEC staff regarding the interaction between SFAS 123R and certain
        SEC rules. SFAS No. 123(R) requires all share-based payments to employees,
        including grants of employee stock options, to be valued at fair value on
        the
        date of grant, and to be expensed over the applicable vesting period. Pro-forma
        disclosure of the income statement effects of share-based payments will no
        longer be an alternative. SFAS No. 123(R) is effective for all stock-based
        awards granted on or after January 1, 2006. In addition, companies must also
        recognize compensation expense related to any awards that are not fully vested
        as of the effective date. Compensation expense for the unvested awards will
        be
        measured based on the fair value of the awards previously calculated in
        developing the pro-forma disclosures in accordance with the provisions of
        SFAS
        No. 123.
 
 The
        Company plans to adopt SFAS No. 123(R) on January 1, 2006. The Company has
        not
        completed the calculation of the impact of applying SFAS No. 123(R). The
        Company
        currently accounts for share-based payments to its employees using the intrinsic
        value method; consequently the results of operations have not included the
        recognition of compensation expense for the issuance of stock option awards.
 
 On
        November 24, 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which is an
        amendment to ARB No. 43, Chapter 4. It clarifies the accounting for abnormal
        amounts of idle facility expense, freight, handling costs, and wasted material
        (spoilage). Under this Statement, these costs should be expensed as incurred
        and
        not included in overhead. Further, SFAS No. 151 requires that allocation
        of
        fixed production overheads to conversion costs should be based on normal
        capacity of the production facilities. SFAS No. 151 is effective for inventory
        costs incurred during fiscal years beginning after June 15, 2005. Management
        believes the adoption of this Statement will not have a material effect on
        the
        consolidated financial statements.
 
 In
        December 2003, the FASB issued FASB Interpretation No. 46 (revised December
        2003), “Consolidation of Variable Interest Entities,” (“VIEs”) (“FIN 46R”) which
        addresses how a business enterprise should evaluate whether it has a controlling
        financial interest in an entity through means other than voting rights and
        accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
        No. 46, “Consolidation of Variable Interest Entities,” which was issued in
        January 2003. The Company has adopted FIN 46R as of March 31, 2004 for variable
        interests in VIEs. For any VIEs that were created before January 1, 2004
        and
        that must therefore be consolidated under FIN 46R, the assets, liabilities
        and
        noncontrolling interests of the VIE initially would be measured at their
        carrying amounts with any difference between the net amount added to the
        balance
        sheet and any previously recognized interest being recognized as the cumulative
        effect of an accounting change. If determining the carrying amounts is not
        practicable, fair value at the date FIN 46R first applies may be used to
        measure
        the assets, liabilities and noncontrolling interest of the VIE. The adoption
        of
        FIN 46R did not have an effect on the consolidated financial statements inasmuch
        as the Company has no interests in any VIEs.
 
 *Note
        2*
 **Acquisitions:**
 
 ***ProCyte
        Transaction***
 On
        March
        18, 2005, the Company completed the acquisition of ProCyte Corporation, which
        was organized in 1986. ProCyte develops, manufactures and markets products
        for
        skin health, hair care and wound care.  Many of the Company’s products
        incorporate its patented copper peptide technologies.  ProCyte’s
        focus since 1996 has been to provide unique products primarily based upon
        patented technologies for selected applications in the dermatology, plastic
        and
        cosmetic surgery and spa markets. The Company 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.
  15
  ProCyte’s
        products address the growing demand for skin health and hair care products,
        including products designed to enhance appearance and to address the effects
        of
        aging on the skin and hair. ProCyte’s products are formulated, branded for 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 later added to expand into
        a
        comprehensive approach for incorporation into a patient’s skin care regimen.
 
 The
        aggregate purchase price of $27,543,784 consisted of the issuance of 10,540,579
        shares of common stock valued at $2.29 per share, the assumption of 1,354,973
        common stock options valued at $2,033,132 net of deferred compensation of
        $132,081, and $1,372,726 of transaction costs. The merger consideration resulted
        in the equivalent of a fixed ratio of 0.6622 shares of PhotoMedex common
        stock
        for each share of ProCyte common stock. As the exchange ratio was fixed,
        the
        fair value of PhotoMedex common stock for accounting purposes was based upon
        a
        five-day average stock price of $2.29 per share. The five-day average included
        the closing prices on the date of the announcement of the planned merger
        and the
        two days prior and afterwards.
 
 Based
        on
        the purchase price allocation, the following table summarizes the estimated
        fair
        value of the assets acquired and liabilities assumed at the date of
        acquisition:
  Cash
                  and cash equivalents
              
              $
              6,272,540Accounts
                  receivable
              
              
              1,137,413Inventories
              
              
              2,845,698Prepaid
                  expenses and other current assets
              
              
              134,574Property
                  and equipment
              
              
              340,531Patents
                  and licensed technologies
              
              
              200,000Other
                  intangible assets
              
              
              5,200,000Other
                  assets
              
              
              38,277Total
                  assets acquired
              
              
              16,169,033Accounts
                  payable
              
              
              (605,520
              )Accrued
                  compensation and related expenses
              
              
              (158,610
              )Other
                  accrued liabilities
              
              
              (1,143,761
              )Deferred
                  revenues
              
              
              (95,436
              )Other
                  liabilities
              
              
              (52,883
              )Total
                  liabilities assumed
              
              
              (2,056,210
              )Net
                  assets acquired
              
              $
              14,112,823
  The
        purchase price exceeded the fair value of the net assets acquired by
        $13,430,961, which was recorded as goodwill.
  16
  The
        accompanying consolidated financial statements do not include any revenues
        or
        expenses related to the acquisition on or prior to March 18, 2005, the closing
        date. Following are the Company’s unaudited pro-forma results for the three and
        nine months ended September 30, 2005 and 2004, assuming the acquisition had
        occurred on January 1, 2004:
  Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Net
                  revenues
              
              $
              7,623,838
              
              $
              7,692,498
              
              $
              23,631,905
              
              $
              22,945,300Net
                  loss
              
              
              (1,349,900
              )
              
              (1,166,644
              )
              
              (3,240,715
              )
              
              (3,905,527
              )Basic
                  and diluted loss per share
              
              
              (0.03
              )
              
              (0.02
              )
              
              (0.06
              )
              
              (0.08
              )Shares
                  used in calculating basic and diluted loss per share
              
              
              51,198,095
              
              
              49,500,829
              
              
              50,906,830
              
              
              48,969,211
  These
        unaudited pro-forma results have been prepared for comparative purposes only
        and
        do not purport to be indicative of the results of operations which would
        have
        actually resulted had the acquisition occurred on January 1, 2004, nor to
        be
        indicative of future results of operations.
 
 **Stern
        Laser Transaction**
 On
        September 7, 2004, the Company closed the transactions set forth in a Master
        Asset Purchase Agreement (the “Master Agreement”) with Stern Laser srl
        (“Stern”). As of September 30, 2005, the Company has issued to Stern 362,272
        shares of its restricted common stock in connection with the execution of
        the
        Master Agreement. The Company also agreed to pay Stern up to an additional
        $650,000 based on the achievement of certain remaining milestones relating
        to
        the development and commercialization of certain licensed technology and
        the
        licensed products, which may be developed under such arrangement and may
        have
        certain other obligations to Stern under these arrangements. The Company
        retains
        the right to pay all of these conditional sums in cash or in shares of its
        common stock, in its discretion. To secure the latter alternative, the Company
        has reserved for issuance, and placed into escrow, 337,728 shares of its
        unregistered stock. The per-share price of any future issued shares will
        be
        based on the average closing price of the Company’s common stock during the 10
        trading days ending on the date of achievement of a particular milestone
        under
        the terms of the Master Agreement. Stern also has served as the distributor
        of
        the Company’s XTRAC laser system in South Africa and Italy since 2000.
 
 The
        Company assigned $809,515 as the fair value of the license it acquired from
        Stern. Amortization of this intangible is on a straight-line basis over 10
        years, which began in January 2005. As Stern completes further milestones
        under
        the Master Agreement, the Company expects to continue to increase the carrying
        value of the license.
 
 *Note
        3*
 **Inventories:**
 
 Set
        forth
        below is a detailed listing of inventories:
  September 30, 2005
              
              December 31, 2004Raw
                  materials and work in progress
              
              $
              4,757,029
              
              $
              2,968,728Finished
                  goods
              
              
              3,061,765
              
              
              1,616,903Total
                  inventories
              
              $
              7,818,794
              
              $
              4,585,631
  Work-in-process
        is immaterial, given the typically short manufacturing cycle, and therefore
        is
        disclosed in conjunction with raw materials. Finished goods includes $61,213
        and
        $84,000 as of September 30, 2005 and December 31, 2004, respectively,
        for
        laser systems shipped to distributors, but not recognized as revenue until
        all
        the SAB 104 Criteria have been met.
  17
  *Note
        4*
 **Property
        and Equipment:**
 
 Set
        forth
        below is a detailed listing of property and equipment:
  September
                  30, 2005
              
              December
                  31, 2004Lasers
                  in service
              
              $
              11,874,388
              
              $
              9,333,591Computer
                  hardware and software
              
              
              334,490
              
              
              256,340Furniture
                  and fixtures
              
              
              331,151
              
              
              239,520Machinery
                  and equipment
              
              
              684,815
              
              
              522,643Autos
                  and trucks
              
              
              382,690
              
              
              400,570Leasehold
                  improvements
              
              
              209,536
              
              
              110,44113,817,070
              
              
              10,863,105Accumulated
                  depreciation and amortization
              
              
              (7,139,175
              )
              
              (5,866,417
              )Property
                  and equipment, net
              
              $
              6,677,895
              
              $
              4,996,688
  Depreciation
        expense was $1,556,847 and $1,187,871 for the nine months ended
        September 30, 2005 and 2004, respectively. At September 30,
        2005 and
        December 31, 2004, net property and equipment included $576,596 and $710,957,
        respectively, of assets recorded under capitalized lease arrangements, of
        which
        $363,047 and $565,246 was included in long-term debt at September 30,
        2005
        and December 31, 2004, respectively (see Note 9).
 
 *Note
        5*
 **Patents
        and Licensed Technologies:**
 
 Set
        forth
        below is a detailed listing of patents and licensed technologies:
  September
                  30, 2005
              
              December
                  31, 2004Patents,
                  owned and licensed, at gross costs of $464,659 and $403,023, net
                  of
                  accumulated amortization of $185,293 and $155,522,
                  respectively
              
              $
              279,366
              
              $
              247,501Other
                  licensed or developed technologies, at gross costs of $1,846,515
                  and
                  $1,177,568, net of accumulated amortization of $652,758and $495,635,
                  respectively
              
              
              1,193,757
              
              
              681,933$
              1,473,123
              
              $
              929,434
  Related
        amortization expense was $186,893 and $126,564 for the nine months ended
        September 30, 2005 and 2004, respectively. Included in other licensed
        and
        developed technologies is $200,000 in developed technologies acquired from
        ProCyte.
 
 *Note
        6*
 **Other
        Intangible Assets:**
 
 Set
        forth
        below is a detailed listing of other intangible assets, all of which were
        acquired from ProCyte and which have been recorded at their appraised fair
        market values:
  September
                  30, 2005Neutrogena
                  Agreement, at gross cost of $2,400,000 net of accumulated amortization
                  of
                  $258,000.
              
              $
              2,142,000Customer
                  Relationships, at gross cost of $1,700,000 net of accumulated amortization
                  of $182,748.
              
              
              1,517,252Tradename,
                  at gross cost of $1,100,000 net of accumulated amortization of
                  $59,127.
              
              
              1,040,873$
              4,700,125
  Related
        amortization expense was $499,875 for the nine months ended September 30,
        2005. Under the Neutrogena Agreement, the Company has licensed to Neutrogena
        rights to its copper peptide technology and 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.
  18
  *Note
        7*
 **Other
        Accrued Liabilities:**
 
 Set
        forth
        below is a detailed listing of other accrued liabilities:
  September
                  30, 2005
              
              December
                  31, 2004Accrued
                  warranty
              
              $
              213,743
              
              $
              196,890Accrued
                  liability from matured notes
              
              
              -
              
              
              245,849Accrued
                  professional and consulting fees
              
              
              505,949
              
              
              412,019Accrued
                  sales taxes
              
              
              166,954
              
              
              61,142Other
                  accrued expenses
              
              
              51,357
              
              
              8,154Total
                  other accrued liabilities
              
              $
              938,003
              
              $
              924,054
  During
        2002, SLT assumed direct control of $223,000 of funds previously set aside
        for
        the payment of SLT’s subordinated notes, which matured and ceased to bear
        interest on July 30, 1999, and $31,000 of funds previously set aside to pay
        related accrued interest. As of December 31, 2004, the matured principal
        and
        related interest was $245,849. As of July 31, 2005, the outstanding notes,
        and
        the related funds, were no longer redeemable.
 
 *Note
        8*
 **Notes
        Payable:**
 
 Set
        forth
        below is a detailed listing of notes payable. The stated interest rate
        approximates the effective cost of funds from the notes:
  September
                  30, 2005
              
              December
                  31, 2004Note
                  payable - secured creditor, interest at 16.47%, payable in monthly
                  principal and interest installments of $2,618 through December
                  2006.
              
              $
              33,309
              
              $
              51,489Note
                  payable - unsecured creditor, interest at 5.75%, payable in monthly
                  principal and interest installments of $44,902 through January
                  2005.
              
              
              -
              
              
              44,902Note
                  payable - unsecured creditor, interest at 7.42%, payable in monthly
                  principal and interest installments of $21,935 through November
                  2005
              
              
              43,466
              
              
              -Note
                  payable - unsecured creditor, interest at 7.42%, payable in monthly
                  principal and interest installments of $15,600 through November
                  2005
              
              
              30,914
              
              
              -Note
                  Payable - unsecured creditor, interest at 7.42%, payable in monthly
                  principal and interest installments of $61,493 through March
                  2006
              
              
              354,899
              
              
              -Note
                  Payable - secured creditor, interest at 6%, payable in monthly
                  principal
                  and interest installments of $2,880 through June 2012
              
              
              189,257
              
              
              -651,845
              
              
              96,391Less:
                  current maturities
              
              
              (481,117
              )
              
              (69,655
              )Notes
                  payable, net of current maturities
              
              $
              170,728
              
              $
              26,736
  19
  *Note
        9*
 **Long-term
        Debt:**
 
 Set
        forth
        below is a detailed listing of the Company’s long-term debt:
  September
                  30, 2005
              
              December
                  31, 2004Borrowings
                  on credit facility
              
              $
              3,137,541
              
              $
              1,680,627Capital
                  lease obligations (see Note 4)
              
              
              363,047
              
              
              565,2463,500,588
              
              
              2,245,873Less:
                  current portion
              
              
              (1,457,163
              )
              
              (873,754
              )Total
                  long-term debt
              
              $
              2,043,425
              
              $
              1,372,119
  The
        Company entered into a leasing credit facility with GE Capital Corporation
        (“GE”) on June 25, 2004. The credit facility has a commitment term of three
        years, expiring on June 25, 2007. The Company accounts for each draw as funded
        indebtedness taking the form of a capital lease, with equitable ownership
        in the
        lasers remaining with the Company. GE retains title as a form of security
        over
        the lasers. The Company depreciates the lasers over their remaining useful
        lives, as established when originally placed into service. Each draw against
        the
        credit facility has a self-amortizing repayment period of three years and
        is
        secured by specified lasers, which the Company has sold to GE and leased
        back
        for continued deployment in the field.
 
 Under
        the
        first tranche, GE made available $2,500,000 under the line. A draw under
        that
        tranche is set at an interest rate based on 522 basis points above the
        three-year Treasury note rate. Each such draw is discounted by 7.75%; the
        first
        monthly payment is applied directly to principal. With each draw, the Company
        agreed to issue warrants to purchase shares of the Company’s common stock equal
        to 5% of the draw. The number of warrants is determined by dividing 5% of
        the
        draw by the average closing price of the Company’s common stock for the ten days
        preceding the date of the draw. The warrants have a five-year term from the
        date
        of each issuance and bear an exercise price set at 10% over the average closing
        price for the ten days preceding the date of the draw.
 
 As
        of
        September 30, 2005, the Company had made three draws against the first tranche
        of the line, as follows:
  Draw
                  1
              
              Draw
                  2
              
              Draw
                  3Date
                  of draw
              
              6/30/04
              
              9/24/04
              
              12/30/04Amount
                  of draw
              
              $
              1,536,950
              
              $
              320,000
              
              $
              153,172Stated
                  interest rate
              
              
              8.47
              %
              
              7.97
              %
              
              8.43
              %Effective
                  interest rate
              
              
              17.79
              %
              
              17.14
              %
              
              17.61
              %Number
                  of warrants issued
              
              
              23,903
              
              
              6,656
              
              
              3,102Exercise
                  price of warrants per share
              
              $
              3.54
              
              $
              2.64
              
              $
              2.73Fair
                  value of warrants
              
              $
              62,032
              
              $
              13,489
              
              $
              5,946
  The
        fair
        value of the warrants granted under the draws is estimated using the
        Black-Scholes option-pricing model with the following weighted average
        assumptions applicable to the warrants granted:
  Warrants
                    granted under:Draw
                    1
                
                Draw
                    2
                
                Draw
                    3Risk-free
                    interest rate
                3.81%
                
                3.70%
                
                3.64%Volatility
                99.9%
                
                100%
                
                99.3%Expected
                    dividend yield
                0%
                
                0%
                
                0%Expected
                    option life
                5
                    years
                
                5
                    years
                
                5
                    years
  For
        reporting purposes, the carrying value of the liability is reduced at the
        time
        of each draw by the value ascribed to the warrants. This reduction will be
        amortized at the effective interest rate to interest expense over the term
        of
        the draw.
  20
  The
        Company obtained from GE a second tranche under the leasing credit facility
        for
        $5,000,000 on June 28, 2005. The Company accounts for draws under this second
        tranche in the same manner as under the first tranche except that: (i) the
        stated interest rate is set at 477 basis points above the three-year Treasury
        note rate; (ii) each draw is discounted by 3.50%; and (iii) with each draw,
        the
        Company has agreed to issue warrants to purchase shares of the Company’s common
        stock equal to 3% of the draw. The number of warrants is determined by dividing
        3% of the draw by the average closing price of the Company’s common stock for
        the ten days preceding the date of the draw. The warrants have a five-year
        term
        from the date of each issuance and bear an exercise price set at 10% over
        the
        average closing price for the ten days preceding the date of the draw.
 
 As
        of
        September 30, 2005, the Company had made 2 draws against the second tranche,
        as
        follows:
  Draw
                  4
              
              Draw
                  5Date
                  of draw
              
              6/28/05
              
              9/26/05Amount
                  of draw
              
              $
              1,113,326
              
              $
              914,592Stated
                  interest rate
              
              
              8.42
              %
              
              8.42
              %Effective
                  interest rate
              
              
              12.63
              %
              
              12.94
              %Number
                  of warrants issued
              
              
              14,714
              
              
              13,191Exercise
                  price of warrants per share
              
              $
              2.50
              
              $
              2.29Fair
                  value of warrants
              
              $
              23,257
              
              $
              19,106
  The
        fair
        value of the warrants granted under the draws is estimated using the
        Black-Scholes option-pricing model with the following weighted average
        assumptions applicable to the warrants granted:
  Warrants
                  granted under:Draw
                  4
              Draw
                  5Risk-free
                  interest rate
              3.76%
              4.11%Volatility
              94.6%
              93.75%Expected
                  dividend yield
              0%
              0%Expected
                  option life
              5
                  years
              5
                  years
  For
        reporting purposes, the carrying value of the liability is reduced at the
        time
        of each draw by the value ascribed to the warrants. This reduction will be
        amortized at the effective interest rate to interest expense over the term
        of
        the draw.
 
 As
        of
        September 30, 2005 the Company had available $2,972,082 from the second tranche
        of the line of credit with GE from which to draw on in the future.
 
 The
        obligations under capital leases are at fixed interest rates and are
        collateralized by the related property and equipment (see Note 4).
 
 *Note
        10*
 **Warrant
        Exercises:**
 
 In
        the
        nine months ended September 30, 2005, the Company received $147,060 from
        the
        exercise of 73,530 warrants. The warrants were issued in connection with
        a
        private placement of securities in June 2002 and bore an exercise price of
        $2.00.
 
 In
        the
        nine months ended September 30, 2004, 2,104,138 warrants on the common stock
        of
        the Company were exercised, resulting in an increase to the Company’s shares
        outstanding as of the end of the period by the same amount. The Company received
        $3,086,468 in cash proceeds from the exercises. Of these proceeds, $1,226,112
        was from the exercise of warrants that were exercisable at $1.16 per share
        and
        were set to expire on September 30, 2004.
  21
  *Note
        11*
 **Business
        Segment and Geographic Data:**
 
 Segments
        are distinguished by the Company’s management structure, products and services
        offered, markets served and types of customers. The Domestic XTRAC business
        derives revenues from procedures performed by dermatologists in the United
        States. The International XTRAC segment, in comparison, generates revenues
        from
        the sale of equipment to dermatologists outside the United States through
        a
        network of distributors. 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. 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. For the three and
        nine months ended September 30, 2005 and 2004, the Company did not
        have
        material revenues from any individual customer.
 
 Unallocated
        operating expenses include costs incurred for administrative and accounting
        staff, general liability and other insurance, professional fees and other
        similar corporate expenses. Unallocated assets include cash, prepaid expenses
        and deposits. Goodwill that is carried at $2,944,423 at September 30,
        2005
        and December 31, 2004 has been allocated to the domestic and international
        XTRAC
        segments based upon its fair value as of the date of the Acculase buy-out
        in the
        amounts of $2,061,096 and $883,327, respectively. Goodwill of $13,430,961
        at
        September 30, 2005 from the ProCyte acquisition has been entirely allocated
        to
        the Skin Care (ProCyte) segment.
 
 The
        following tables reflect results of operations from our business segments
        for
        the periods indicated below:
  Three
                    Months Ended September 30, 2005DOMESTIC
                  XTRAC
                
                INTERN’L
                  XTRAC
                
                SURGICAL
                    SERVICES
                
                SURGICAL
                    PRODUCTS
                  AND
                    OTHER
                
                SKIN
                    CARE
                
                TOTALRevenues
                
                $
                1,019,184
                
                $
                299,176
                
                $
                1,903,336
                
                $
                1,473,461
                
                $
                2,928,681
                
                $
                7,623,838Costs
                    of revenues
                
                
                859,061
                
                
                244,065
                
                
                1,465,502
                
                
                865,351
                
                
                869,405
                
                
                4,303,384Gross
                    profit
                
                
                160,123
                
                
                55,111
                
                
                437,834
                
                
                608,110
                
                
                2,059,276
                
                
                3,320,454*Gross
                    profit %*
                
                
                *15.7*%**
                
                
                *18.4%*
                
                
                *23.0%*
                
                
                *41.3%*
                
                
                *70.3%*
                
                
                *43.6%*Allocated
                    Operating expenses:Selling,
                    general and administrative
                
                
                703,924
                
                
                46,407
                
                
                308,701
                
                
                157,269
                
                
                1,574,059
                
                
                2,790,360Engineering
                    and product development
                
                
                —
                
                
                —
                
                
                —
                
                
                161,987
                
                
                142,948
                
                
                304,935Unallocated
                    Operating expenses
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,735,819703,924
                
                
                46,407
                
                
                308,701
                
                
                319,256
                
                
                1,717,007
                
                
                4,831,114Income
                    (loss) from operations
                
                
                (543,801
                )
                
                8,704
                
                
                129,133
                
                
                288,854
                
                
                342,269
                
                
                (1,510,660
                )Other
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                244,988Interest
                    expense, net
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (84,228
                )Net
                    income (loss)
                
                
                ($543,801
                )
                $
                8,704
                
                $
                129,133
                
                $
                288,854
                
                $
                342,269
                
                
                ($1,349,900
                )
 
  22
  Three
                    Months Ended September 30, 2004DOMESTIC
                  XTRAC
                
                INTERN’L
                  XTRAC
                
                SURGICAL
                  SERVICES
                
                SURGICAL
                  PRODUCTS
                  AND
                  OTHER
                
                SKIN
                  CARE
                
                TOTALRevenues
                
                $
                945,755
                
                $
                155,024
                
                $
                2,059,714
                
                $
                1,294,903
                
                
                -
                
                $
                4,455,396Costs
                    of revenues
                
                
                429,842
                
                
                160,588
                
                
                1,291,004
                
                
                619,982
                
                
                -
                
                
                2,501,416Gross
                    profit
                
                
                515,913
                
                
                (5,564
                )
                
                768,710
                
                
                674,921
                
                
                -
                
                
                1,953,980*Gross
                    profit %*
                
                
                *54.5*
                *%*
                
                *(3.6*
                *)%*
                
                *37.3*
                *%*
                
                *52.1*
                *%*
                
                *-*
                *%*
                
                *43.9*
                *%*Allocated
                    Operating expenses:Selling,
                    general and administrative
                
                
                407,673
                
                
                32,849
                
                
                337,502
                
                
                162,887
                
                
                -
                
                
                940,911Engineering
                    and product development
                
                
                167,377
                
                
                104,781
                
                
                -
                
                
                156,048
                
                
                -
                
                
                428,206Unallocated
                    Operating expenses
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,693,483575,050
                
                
                137,630
                
                
                337,502
                
                
                318,935
                
                
                -
                
                
                3,062,600Income
                    (loss) from operations
                
                
                (59,137
                )
                
                (143,194
                )
                
                431,208
                
                
                355,986
                
                
                -
                
                
                (1,108,620
                )Interest
                    expense, net
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (47,189
                )Net
                    income (loss)
                
                
                ($59,137
                )
                
                ($143,194
                )
                $
                431,208
                
                $
                355,986
                
                
                -
                
                
                ($1,155,809
                )
 
  Nine
                    Months Ended September 30, 2005DOMESTIC
                  XTRAC
                
                INTERN’L
                  XTRAC
                
                SURGICAL
                    SERVICES
                
                SURGICAL
                    PRODUCTS
                  AND
                    OTHER
                
                SKIN
                    CARE
                
                TOTALRevenues
                
                $
                2,542,373
                
                $
                901,561
                
                $
                5,977,366
                
                $
                4,166,844
                
                $
                7,074,196
                
                $
                20,662,340Costs
                    of revenues
                
                
                1,952,232
                
                
                637,815
                
                
                4,283,181
                
                
                2,130,016
                
                
                2,154,700
                
                
                11,157,944Gross
                    profit
                
                
                590,141
                
                
                263,746
                
                
                1,694,185
                
                
                2,036,828
                
                
                4,919,496
                
                
                9,504,396*Gross
                    profit %*
                
                
                *23.2*
                *%*
                
                *29.3*
                *%*
                
                *28.3*
                *%*
                
                *48.9*
                *%*
                
                *69.5*
                *%*
                
                *46.0*
                *%*Allocated
                    Operating expenses:Selling,
                    general and administrative
                
                
                1,909,846
                
                
                200,034
                
                
                930,000
                
                
                460,665
                
                
                3,735,087
                
                
                7,235,632Engineering
                    and product development
                
                
                -
                
                
                -
                
                
                -
                
                
                509,184
                
                
                310,661
                
                
                819,845Unallocated
                    Operating expenses
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4,708,9611,909,846
                
                
                200,034
                
                
                930,000
                
                
                969,849
                
                
                4,045,748
                
                
                12,764,438Income
                    (loss) from operations
                
                
                (1,319,705
                )
                
                63,712
                
                
                764,185
                
                
                1,066,982
                
                
                873,748
                
                
                (3,260,042
                )Other
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                333,655Interest
                    expense, net
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (212,276
                )Net
                    income (loss)
                
                
                ($1,319,705
                )
                $
                63,712
                
                $
                764,185
                
                $
                1,066,982
                
                $
                873,748
                
                
                ($3,138,663
                )
 23
  Nine
                  Months Ended September 30, 2004DOMESTIC
                XTRAC
              
              INTERN’L
                XTRAC
              
              SURGICAL
                  SERVICES
              
              SURGICAL
                  PRODUCTS
                AND
                  OTHER
              
              SKIN
                  CARE
              
              TOTALRevenues
              
              $
              2,215,619
              
              $
              1,190,538
              
              $
              5,633,254
              
              $
              3,764,349
              
              
              -
              
              $
              12,803,760Costs
                  of revenues
              
              
              1,456,969
              
              
              853,348
              
              
              3,551,079
              
              
              1,765,455
              
              
              -
              
              
              7,626,851Gross
                  profit
              
              
              758,650
              
              
              337,190
              
              
              2,082,175
              
              
              1,998,894
              
              
              -
              
              
              5,176,909*Gross
                  profit %*
              
              
              *34.2*
              *%*
              
              *28.3*
              *%*
              
              *37.0*
              *%*
              
              *53.1*
              *%*
              
              *-*
              *%*
              
              *40.4*
              *%*Allocated
                  Operating expenses:Selling,
                  general and administrative
              
              
              1,368,548
              
              
              283,895
              
              
              1,004,569
              
              
              465,801
              
              
              -
              
              
              3,122,813Engineering
                  and product development
              
              
              510,597
              
              
              319,641
              
              
              -
              
              
              495,161
              
              
              -
              
              
              1,325,399Unallocated
                  Operating expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,388,4521,879,145
              
              
              603,536
              
              
              1,004,569
              
              
              960,962
              
              
              -
              
              
              8,836,664Income
                  (loss) from operations
              
              
              (1,120,495
              )
              
              (266,346
              )
              
              1,077,606
              
              
              1,037,932
              
              
              -
              
              
              (3,659,755
              )Interest
                  expense (income), net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (66,297
              )Net
                  income (loss)
              
              
              ($1,120,495
              )
              $
              (266,346
              )
              $
              1,077,606
              
              $
              1,037,932
              
              
              -
              
              
              ($3,726,052
              )
 
  September
                  30, 2005
              
              December
                  31, 2004Assets:Total
                  assets for reportable segments
              
              $
              42,032,156
              
              $
              18,547,510Other
                  unallocated assets
              
              
              6,390,035
              
              
              4,414,416Consolidated
                  total
              
              $
              48,422,191
              
              $
              22,961,926
  For
        the
        three and nine months ended September 30, 2005 and 2004, there were
        no
        material net revenues attributed to any individual foreign country. Net revenues
        by geographic area were, as follows:
  For
                  the Three Months Ended
                September
                  30,
              
              For
                  the nine Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Domestic
              
              $
              6,986,126
              
              $
              4,089,123
              
              $
              18,669,378
              
              $
              11,045,962Foreign
              
              
              637,712
              
              
              366,273
              
              
              1,992,962
              
              
              1,757,798$
              7,623,838
              
              $
              4,455,396
              
              $
              20,662,340
              
              $
              12,803,760
  *Note
        12*
 **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 will act as master distributor in the Pacific Rim for the Company’s
        XTRAC excimer laser, (including the UltraTM 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 will engage Sanders Ergas, who is a principal of GlobalMed, and Dr.
        Matlock as consultants to explore further business opportunities for the
        Company. In connection with this engagement, each consultant will receive
        options to purchase up to 25,000 shares of the common stock of the Company,
        granted with an exercise price based on fair market value.
  24
  On
        July
        27, 2005, the Company entered a Marketing Agreement with KDS Marketing, Inc.
        (“KDS”). Using money invested by each party, KDS will research market
        opportunities for the Company’s diode laser and related delivery systems, and
        KDS will then market the diode laser, primarily through a website on which
        physicians may access for information about the lasers and which they may
        use to
        purchase the lasers. KDS’s return on its investment will be based primarily on
        commissions earned on diode lasers that are sold under the program.
  **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, 2004 and that are discussed with respect to risks
        relevant to the acquisition and business operations of ProCyte Corporation
        under
        the section entitled “Risks Factors” in Pre-Effective Amendment No. 1 to our
        Registration Statement No. 333-121864 on Form S-4 filed with the Commission
        on
        January 21, 2005.*
 
 *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
                  XTRAC,
 
 ·
              Surgical
                  Services,
 
 ·
              Surgical
                  Products, and
 
 ·
              Skin
                  Care (ProCyte).
 
 **Domestic
        XTRAC**
 
 The
        Domestic XTRAC segment is a U.S. business with revenues derived from procedures
        performed by dermatologists. We are engaged in the development, manufacturing
        and marketing of our proprietary XTRAC® excimer laser and delivery systems and
        techniques used in the treatment of inflammatory skin disorders, **** including
        psoriasis, vitiligo, atopic dermatitis and leukoderma. In January 2000, we
        received approval of our 510(k) submission from the Food and Drug
        Administration, or FDA, establishing that our XTRAC system is substantially
        equivalent to currently marketed devices for the treatment of
        psoriasis.
 
 As
        part
        of our commercialization strategy in the United States, we provide the XTRAC
        system to targeted dermatologists at no initial capital cost to them. We
        maintain ownership of the laser and earn revenue each time the physician
        treats
        a patient with the equipment. We believe that this strategy will create
        incentives for these dermatologists to adopt the XTRAC system and will increase
        market penetration.
  25
  During
        2003, we introduced a more reliable version of the XTRAC and increased our
        efforts to obtain more favorable reimbursement policies from both the Centers
        for Medicare and Medicaid Services and from private insurance plans. To help
        encourage the adoption of favorable reimbursement policies, we also commissioned
        a clinical and economic study of the use of the XTRAC laser as a second-step
        therapy for psoriasis.
 
 In
        2004,
        our primary focus was to secure favorable reimbursement policies from private
        health plans for treatment of psoriasis using the XTRAC® excimer
        laser. **** As
        of the
        date of this Report, we have received approval from Regence, Wellpoint, Aetna,
        Anthem, Cigna, United Healthcare and Independence Blue Cross of Pennsylvania,
        and we are under consideration by other plans. We cannot at this time provide
        assurance that other plans will adopt the favorable policies that we desire,
        and
        if they do not, what further requirements may be asked of us.
 
 In
        October 2004, we received FDA concurrence under a 510(k) to market the new
        XTRAC
        UltraTM, a smaller-size dermatology laser with increased functionality for
        inflammatory skin disorders. The increased functionality of the laser extends
        its utility, broadens its clinical applications and allows shorter treatment
        times.
 
 In
        2005,
        we are continuing our efforts to secure a wider base of private insurance
        coverage for psoriasis patients in the United States and are expanding our
        selling efforts for the XTRAC in combination with the increased dermatology
        sales force obtained in connection with the ProCyte merger.
 
 **International
        XTRAC**
 
 In
        the
        international market, we derive revenues from the XTRAC by selling the
        dermatology laser system 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.  Compared
        to the domestic segment, the international XTRAC business is more influenced
        by
        competition from similar laser technologies as well as non-laser lamp
        alternatives. Over time, this competition has reduced the prices we charge
        to
        international distributors for our XTRAC products.
 
 While
        the
        number of lasers sold was greater for the three months ended September 30,
        2005
        compared to the same period for 2004, the average price per laser system
        and
        parts was less in the 2005 period ($59,835) than in the 2004 period ($77,512).
        For the nine months ended September 30, 2005, the average price per laser
        system
        and parts $56,348 compared to the prior year period $66,141 and the number
        of
        lasers sold was less in the 2005 period than in the 2004 period. In addition,
        of
        the 18 lasers recognized in the nine months ended September 30, 2004, four
        of
        those lasers had been shipped in 2003, but not recognized as sales due to
        the
        application of the SAB 104 Criteria.
 
 Due
        to
        the significant financial investment requirements,  we
        were
        reluctant previously to implement an international XTRAC fee-per-use revenue
        model, similar to the domestic revenue model. However, as reimbursement in
        the
        domestic market has become more widespread, we have recently started to offer
        version of this model overseas.
 
 In
        2005,
        we also are exploring new product offerings in the treatment of dermatological
        conditions to our international customers as a result of our recent acquisition
        of worldwide rights to certain proprietary light-based technology from Stern
        Laser.
 
 **Surgical
        Services**
 
 The
        Surgical Services segment generates revenues by providing fee-based procedures
        typically using our mobile surgical laser equipment delivered and operated
        by a
        technician at hospitals and surgery centers in the United States. Although
        we
        intend to increase our investment in this business segment for 2005, we will
        continue to pursue a very cautious growth strategy in order to conserve our
        cash
        resources for the XTRAC business segments. We experienced revenue growth
        in
        Surgical Services in 2004 and are experiencing continued growth in 2005.
 
 We
        have
        growing, but still 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 pose different
        challenges compared to those that we have encountered in the past. There
        can be
        no assurance that we will be able to overcome such challenges.
  26
  **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. Although surgical product revenues increased in 2005 compared
        to
        2004, we expect that sales of surgical laser systems and the related disposable
        base may begin to erode as hospitals continue to seek outsourcing solutions
        instead of purchasing lasers and related disposables for their operating
        rooms.
        We are working at offsetting this erosion by expanding our surgical services
        segment and by increasing sales from the CO2 and diode surgical lasers
        introduced in 2004.
 
 In
        the
        second quarter 2004, we received from the FDA concurrence to market two new
        surgical lasers: the LaserPro® Diode Laser System and the LaserPro® CO2 Laser
        System. Each system has been designed for rugged use in our Surgical Services
        business and will assist us in finding end-user buyers domestically and
        overseas. We are also actively exploring opportunities to supply on an OEM
        basis
        or under manufacturing-marketing collaborations.
 
 In
        July
        2004, we entered into an agreement with AzurTec, Inc. to develop a device
        that
        rapidly and accurately detects the presence of cancerous cells in excised
        tissue. We intend to assist in the development of FDA-compliant prototypes
        for
        AzurTec’s product and have collected payments under the agreement aggregating
        $240,000 through September 30, 2005. Continuing development of this project
        requires additional investment by AzurTec. We will resume development once
        this
        investment has been satisfied.
 
 **Skin
        Care (ProCyte)**
 
 On
        March
        18, 2005, we completed the acquisition of ProCyte Corporation. ProCyte 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. The skin care business as integrated into
        the
        operations of the company, now has 45 employees, consisting of 23 in sales,
        12
        in marketing, 8 in warehouse/research and development and 2 in
        administration.
 
 The
        operating results of ProCyte for the nine months ended September 30, 2005
        are
        included from March 19, 2005 through September 30, 2005. Under purchase
        accounting rules, the operating results of ProCyte for prior periods are
        not
        included in our Statement of Operations. A description of transaction and
        proforma operating results are disclosed as part of Note 2, *Acquisitions* to the
        financial statements.
 
 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
        goals
        for this acquisition are summarized below:
 
 ·
              ProCyte's
                  presence in the skin health and hair care products market will
                  present a
                  growth opportunity for PhotoMedex to market its existing
                  products;
 
 ·
              the
                  addition of ProCyte's sales and marketing personnel will enhance
                  our
                  ability to market the XTRAC excimer
                  laser;
  27
  ·
              the
                  addition of ProCyte's operations and existing cash balances will
                  improve
                  PhotoMedex's operating results and strengthen its balance
                  sheet;
 
 ·
              the
                  combination of the senior management of ProCyte and PhotoMedex
                  will allow
                  complementary skills to strengthen the overall management team;
                  and
 
 ·
              the
                  combined company may reap short-term cost savings and have the
                  opportunity
                  for additional longer-term cost
                  efficiencies.
 
 Since
        the
        acquisition date, we have made progress toward the achievement of these goals.
        In addition, we had targeted reasonable growth in revenues from ProCyte’s skin
        care products, but have yet to realize this expected growth while we are
        in the
        process of integrating the sales personnel from the Skin Care and the Domestic
        XTRAC segments.
 
 **Critical
        Accounting Policies**
 
 The
        discussion and analysis of our financial condition and results of operations
        in
        this Report are based upon our Consolidated Financial Statements, which have
        been prepared in accordance with accounting principles generally accepted
        in the
        United States. The preparation of financial statements requires management
        to
        make estimates and judgments that affect the reported amounts of assets and
        liabilities, revenues and expenses and related disclosures at the date of
        the
        financial statements. On an on-going basis, we evaluate our estimates,
        including, but not limited to, those related to revenue recognition, accounts
        receivable, inventories, impairment of property and equipment and of
        intangibles, deferred taxes and accruals for warranty claims. We use
        authoritative pronouncements, historical experience and other assumptions
        as the
        basis for making estimates. Actual results could differ from those estimates.
        Management believes that the following critical accounting policies affect
        our
        more significant judgments and estimates in the preparation of our Consolidated
        Financial Statements. These critical accounting policies and the significant
        estimates made in accordance with them have been discussed with our Audit
        Committee.
 
 ***Revenue
        Recognition***
 
 *XTRAC-Related
        Operations*
 
 We
        have
        two distribution channels for our phototherapy treatment equipment. We either
        (i) sell the laser through a distributor or directly to a physician, or (ii)
        place the laser in a physician’s office (at no charge to the physician) and
        charge the physician a fee for an agreed upon number of treatments. When
        we sell
        an XTRAC laser to a distributor or directly to a 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 we have 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
        (“SAB 104 Criteria”). At times, units are shipped, but revenue is not recognized
        until all of the criteria are met, and until that time, the unit is carried
        on
        our books as inventory. We ship most of our products FOB shipping point,
        although from time to time certain customers, for example, governmental
        customers, will insist on FOB destination. Among the factors we take 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
        the distributors that do not fully satisfy the collection criteria are
        recognized when invoiced amounts are fully paid.
 
 Under
        the
        terms of the distributor agreements, our distributors do not have the right
        to
        return any unit that they have purchased. However, we allow products to be
        returned by our distributors in redress of product defects or other claims.
 
 When
        we
        place a laser in a physician’s office, we recognize service revenue based on the
        number of patient treatments used by the physician. Treatments in the form
        of
        random laser-access codes that are sold to physicians, but not yet used,
        are
        deferred and recognized as a liability until the physician performs the
        treatment. Unused treatments remain our obligation inasmuch as the treatments
        can only be performed on equipment made by us. Once the treatments are delivered
        to a patient, this obligation has been satisfied.
  28
  The
        calculation of unused treatments has historically been based upon an estimate
        that at the end of each accounting period, 15 unused treatments existed at
        each
        laser location. This was based upon the reasoning that we generally sell
        treatments in packages of 30 treatments. Fifteen treatments generally represents
        about one-half the purchase quantity by a physician or approximately a one-week
        supply for 6-8 patients. This policy had been used on a consistent basis.
        We
        believed this approach to have been reasonable and systematic given that:
        (a)
        physicians have little motivation to purchase quantities (which they are
        obligated to pay for irrespective of actual use and are unable to seek a
        refund
        for unused treatments) that will not be used in a relatively short period
        of
        time, particularly since in most cases they can obtain incremental treatments
        instantaneously over the phone; and (b) senior management regularly reviews
        purchase patterns by physicians to identify unusual buildup of unused treatment
        codes at a laser site. Moreover, we continually look at our estimation model
        based upon data received from our customers.
 
 In
        the
        fourth quarter of 2004, we updated the calculations for the estimated amount
        of
        unused treatments to reflect recent purchasing patterns by physicians near
        year-end. We have estimated the amount of unused treatments at December 31,
        2004
        to include all sales of treatment codes made within the last two weeks of
        the
        period. We believe this approach more closely approximates the actual amount
        of
        unused treatments that existed at that date than the previous approach. APB
        No.
        20 provides that accounting estimates change as new events occur, as more
        experience is acquired, or as additional information is obtained and that
        the
        effect of the change in accounting estimate should be accounted for in the
        current period and the future periods that it affects. We accounted for this
        change in the estimate of unused treatments in accordance with APB No. 20
        and
        SFAS No. 48. Accordingly, our change in accounting estimate was reported
        in
        revenues for the fourth quarter of 2004 and was not accounted for by restating
        amounts reported in financial statements of prior periods or by reporting
        proforma amounts for prior periods.
 
 We
        have
        continued this approach or method for estimating the amount of unused treatments
        at September 30, 2005. Due to this updated approach in estimates, XTRAC domestic
        revenues were increased by $159,000 and $97,000 for the three and nine months
        ended September 30, 2005, respectively, as compared to the prior method of
        estimation.
 
 In
        the
        first quarter of 2003, we implemented a program to support certain physicians
        in
        addressing treatments with the XTRAC system that may be denied reimbursement
        by
        private insurance carriers. We recognize service revenue from the sale of
        treatment codes to physicians participating in this program only if and to
        the
        extent the physician has been reimbursed for the treatments. For the three
        and
        nine months ended September 30, 2005, we deferred an additional $25,375 and
        $58,090, respectively, under this program as all the criteria for revenue
        recognition were not met. At September 30, 2005, we had net deferred revenues
        of
        $153,136 under this program.
 
 Under
        this program, we may reimburse qualifying doctors for the cost of our fee
        but
        only if they are ultimately denied reimbursement after appeal of their claim
        with the insurance company. The key components of the program are as
        follows:
 
 ·
              The
                  physician practice must be in an identified location where there
                  is still
                  an insufficiency of insurance companies reimbursing the
                  procedure;
 
 ·
              The
                  program only covers medically necessary treatments of psoriasis
                  as
                  determined by the treating
                  physician;
 
 ·
              The
                  patient must have medical insurance and a claim for the treatment
                  must be
                  timely filed with the patient’s insurance company;
 
 ·
              Upon
                  denial by the insurance company (generally within 30 days of filing
                  the
                  claim), a standard insurance form called an EOB (“Explanation of
                  Benefits”) must be submitted to our in-house appeals group, who will then
                  prosecute the appeal. The appeal process can take 6-9
                  months;
 
 ·
              After
                  all appeals have been exhausted by us and the claim remains unpaid,
                  the
                  physician is entitled to receive credit for the treatment he or
                  she
                  purchased from us (our fee only) on behalf of the patient;
                  and
 
 ·
              Physicians
                  are still obligated to make timely payments for treatments purchased,
                  irrespective of whether reimbursement is paid or denied. Future
                  sale of
                  treatments to the physician can be denied if timely payments are
                  not made,
                  even if a patient’s appeal is still in
                  process.
  29
  Historically,
        we estimated a contingent liability for potential refunds under this program
        by
        estimating when the physician was paid for the insurance claim. In the absence
        of a two-year historical trend and a large pool of homogeneous transactions
        to
        reliably predict the estimated claims for refund as required by Staff Accounting
        Bulletin Nos. 101 and 104, we previously deferred revenue recognition of
        100% of
        the current quarter revenues from the program to allow for the actual denied
        claims to be identified after processing with the insurance companies. After
        more than 106,000 treatments in the last 2 years and detailed record keeping
        of
        denied insurance claims and appeals processed, we have estimated that
        approximately 11% of a current quarter’s revenues under this program are subject
        to being credited or refunded to the physician.
 
 As
        of
        December 31, 2004, we updated our analysis to reflect this level of estimated
        refunds. This change from the past process of deferring 100% of the current
        quarter revenues from the program represents a change in accounting estimate,
        and we recorded this change in accordance with the relevant provisions of
        SFAS
        No. 48 and APB No. 20. These pronouncements state that the effect of a change
        in
        accounting estimate should be accounted for in the current period and the
        future
        periods that it affects. A change in accounting estimate should not be accounted
        for by restating amounts reported in financial statements of prior periods
        or by
        reporting proforma amounts for prior periods.  Due
        to
        this updated approach in estimates, XTRAC domestic revenues were increased
        by
        $33,000 and $89,000 for the three and nine months ended September 30, 2005
        as
        compared to the prior method of estimation.
 
 The
        net
        impact on revenue recognized for the XTRAC domestic segment as a result of
        the
        above two changes in accounting estimate was to increase revenues by
        approximately $192,000 and $186,000 for the three and nine months ended
        September 30, 2005, respectively.
 
 *Surgical
        Products and Service Operations*
 
 We
        recognize revenues from surgical lasers and other product sales, including
        sales
        to distributors, when the SAB 104 Criteria have been met. At times, units
        are
        shipped but revenue is not recognized until all of the criteria are met,
        and
        until that time, the unit is carried on our books of as inventory. We ship
        most
        of our products FOB shipping point, although from time to time certain
        customers, for example governmental customers, will insist on FOB destination.
        Among the factors we take 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.
 
 For
        per-procedure surgical services, we recognize revenue upon the completion
        of the
        procedure. Revenue from maintenance service agreements is deferred and
        recognized on a straight-line basis over the term of the agreements. Revenue
        from billable services, including repair activity, is recognized when the
        service is provided.
 
 *Skin
        Care Operations*
 
 Through
        the acquisition of ProCyte, we generate revenues primarily through product
        sales
        for skin health, hair care and wound care; sales of the copper peptide compound,
        primarily to Neutrogena; and royalties generated by our licenses, principally
        to
        Neutrogena.
 
 We
        recognize revenues on the products and copper peptide compound when they
        are
        shipped. We ship the products FOB shipping point. Royalty revenues are based
        upon sales generated by our licensees. We recognize royalty revenue at the
        applicable royalty rate applied to shipments reported by our
        licensee.
 
 ***Inventory*** **.** We
        account for inventory at the lower of cost (first-in, first-out) or market.
        Cost
        is determined to be the purchased cost for raw materials and the production
        cost
        (materials, labor and indirect manufacturing cost) for work-in-process and
        finished goods. Throughout the laser manufacturing process, the related
        production costs are recorded within inventory. Work-in-process is immaterial,
        given the typically short manufacturing cycle and therefore is disclosed
        in
        conjunction with raw materials. We perform full physical inventory counts
        for
        the XTRAC and cycle counts on the other inventory to maintain controls and
        obtain accurate data.
 
 Our
        XTRAC
        laser is either (i) sold to distributors or physicians directly or (ii) placed
        in a physician's office and remains our property. The cost to build a laser,
        whether for sale or for placement, is accumulated in inventory. When a laser
        is
        placed in a physician’s office, the cost is transferred from inventory to
“lasers in service” within property and equipment. At times, units are shipped
        to distributors, but revenue is not recognized until all of the SAB 104 criteria
        have been met, and until that time, the cost of the unit is carried on our
        books
        as finished goods inventory. Revenue is not recognized from these distributors
        until payment is either assured or paid in full.
  30
  Reserves
        for slow moving and obsolete inventories are provided based on historical
        experience and product demand. Management evaluates the adequacy of these
        reserves periodically based on forecasted sales and market trend.
 
 ***Allowance
        for Doubtful Accounts*** **.** Accounts
        receivable are reduced by an allowance for amounts that may become uncollectible
        in the future. The majority of receivables related to phototherapy sales
        are due
        from various distributors located outside of the United States and from
        physicians located inside the United States. The majority of receivables
        related
        to surgical services, surgical products and skin care products are due from
        various customers and distributors located inside the United States. From
        time
        to time, our customers dispute the amounts due to us, and, in other cases,
        our
        customers experience financial difficulties and cannot pay on a timely basis.
        In
        certain instances, these factors ultimately result in uncollectible accounts.
        The determination of the appropriate reserve needed for uncollectible accounts
        involves significant judgment. A change in the factors used to evaluate
        collectibility could result in a significant change in the reserve needed.
        Such
        factors include changes in the financial condition of our customers as a
        result
        of industry, economic or customer-specific factors.
 
 ***Property
        and Equipment.*** As of
        September 30, 2005 and December 31, 2004, we had net property and equipment
        of
        $6,677,895 and $4,996,688, respectively. The most significant component of
        these
        amounts relates to the XTRAC lasers placed by us in physicians’ offices. We own
        the equipment and charge the physician on a per-treatment basis for use of
        the
        equipment. The recoverability of the net carrying value of the lasers is
        predicated on increasing revenues from the physicians’ use of the lasers. XTRAC
        lasers-in-service are depreciated on a straight-line basis over the estimated
        useful life of three years. Surgical lasers-in-service are depreciated on
        a
        straight-line basis over an estimated useful life of seven years if new and
        five
        years or less if used equipment. The straight-line depreciation basis for
        lasers-in-service is reflective of the pattern of use. For other property
        and
        equipment, including property and equipment acquired from ProCyte, depreciation
        is calculated on a straight-line basis over the estimated useful lives of
        the
        assets, primarily three to seven years for computer hardware and software,
        furniture and fixtures, automobiles, and machinery and equipment. Leasehold
        improvements are amortized over the lesser of the useful lives or lease terms.
        Useful lives are determined based upon an estimate of either physical or
        economic obsolescence.
 
 ***Intangibles*** **.** As of
        September 30, 2005 and December 31, 2004, we had $22,548,633 and $3,873,857,
        respectively, of goodwill and other intangibles, accounting for 47% and 17%
        of
        our total assets at the respective dates. The determination of the value
        of such
        intangible assets requires management to make estimates and assumptions that
        affect our consolidated financial statements. We test our goodwill for
        impairment, at least annually. This test is usually conducted in December
        of
        each year in connection with the annual budgeting and forecasting process.
        Also,
        on a quarterly basis, we evaluate whether events have occurred that would
        negatively impact the realizable value of our intangibles or goodwill.
  31
  There
        has
        been no change to the carrying value of goodwill that is allocated to the
        XTRAC
        domestic segment and the XTRAC international segment in the amounts of
        $2,061,096 and $883,327, respectively. The allocation of goodwill to each
        segment was based upon the relative fair values of the two segments as of
        August
        2000, when we bought out the minority interest in Acculase and thus recognized
        the goodwill. In connection with the acquisition of ProCyte on March 18,
        2005,
        we acquired certain intangibles recorded at fair value as of the date of
        acquisition and allocated fully to the Skin Care (ProCyte) segment. Included
        in
        these acquired intangibles were the following:
  ProCyte
                  Neutrogena Agreement
              
              $
              2,400,000ProCyte
                  Customer Relationships
              
              
              1,700,000ProCyte
                  Tradename
              
              
              1,100,000ProCyte
                  Developed Technologies
              
              
              200,000Goodwill
              
              
              13,430,961Total
              
              $
              18,830,961
  ***Deferred
        Income Taxes.*** We
        have a
        deferred tax asset that is fully reserved by a valuation allowance. We have
        not
        recognized the deferred tax asset, given our historical losses and the lack
        of
        certainty of future taxable income. However, if and when we become profitable
        and can reasonably foresee continuing profitability, then under SFAS No.
        109 we
        may recognize some of the deferred tax asset. The recognized portion may
        go in
        some measure to a reduction of acquired goodwill and in some measure to benefit
        the statements of operations.
 
 ***Warranty
        Accruals*** **.** We
        establish a liability for warranty repairs based on estimated future claims
        for
        XTRAC systems and based on historical analysis of the cost of the repairs
        for
        surgical laser systems. However, future returns on defective laser systems
        and
        related warranty liability could differ significantly from estimates, and
        historical patterns, which could adversely affect our operating
        results.
 
 **Results
        of Operations**
 
 ***Revenues***
 The
        following table illustrates revenues from our five business segments for
        the
        periods listed below:
  Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004XTRAC
                  Domestic Services
              
              $
              1,019,184
              
              $
              945,755
              
              $
              2,542,373
              
              $
              2,215,619XTRAC
                  International Products
              
              
              299,176
              
              
              155,024
              
              
              901,561
              
              
              1,190,538Total
                  XTRAC Revenues
              
              
              1,318,360
              
              
              1,100,779
              
              
              3,443,934
              
              
              3,406,157Surgical
                  Services
              
              
              1,903,336
              
              
              2,059,714
              
              
              5,977,366
              
              
              5,633,254Surgical
                  Products
              
              
              1,473,461
              
              
              1,294,903
              
              
              4,166,844
              
              
              3,764,349Total
                  Surgical Revenues
              
              
              3,376,797
              
              
              3,354,617
              
              
              10,144,210
              
              
              9,397,603Skin
                  Care (ProCyte) Revenues
              
              
              2,928,681
              
              
              -
              
              
              7,074,196
              
              
              -Total
                  Revenues
              
              $
              7,623,838
              
              $
              4,455,396
              
              $
              20,662,340
              
              $
              12,803,760
  32
  ***Domestic
        XTRAC Segment***
 
 Recognized
        revenue for the three months ended September 30, 2005 and 2004 for domestic
        XTRAC procedures was $1,019,184 and $945,755, respectively, reflecting billed
        procedures of 13,876 and 12,672, respectively. In addition, 1,814 and 1,169
        procedures, respectively, were performed in the three months ended September
        30,
        2005 and 2004, respectively, without billing from us, in connection with
        clinical research and customer evaluations of the XTRAC laser. Recognized
        revenue for the nine months ended September 30, 2005 and 2004 for domestic
        XTRAC
        procedures was $2,542,373 and $2,215,619, respectively, reflecting billed
        procedures of 38,991 and 34,197, respectively. In addition, 4,620 and 3,069
        procedures, respectively, were performed in the nine months ended September
        30,
        2005 and 2004, respectively, without billing from us in connection with clinical
        research and customer evaluations of the XTRAC laser. The increase in procedures
        in the periods ended September 30, 2005 compared to the comparable periods
        in
        2004 was largely related to our continuing progress in securing favorable
        reimbursement policies from private insurance plans. Increases in these levels
        are dependent upon more widespread adoption of the CPT codes with comparable
        rates by private healthcare insurers and on instilling confidence in our
        physician partners that the XTRAC procedures will benefit their patients
        and be
        generally reimbursed to their practices.
 
 In
        the
        first quarter of 2003, we implemented a program to support certain physicians
        who may be denied reimbursement by private insurance carriers for XTRAC
        treatments. In accordance with the requirements of Staff Accounting Bulletin
        No.
        104, we recognize service revenue during this program from the sale of XTRAC
        procedures or equivalent treatments, to physicians participating in this
        program
        only to the extent the physician has been reimbursed for the treatments.
        For the
        three months ended September 30, 2005, we deferred net revenues of $25,375
        under
        this program compared to $96,323 of net recognized revenue for the three
        months
        ended September 30, 2004. For the nine months ended September 30, 2005, we
        deferred net revenues of $58,090 under this program compared to $153,438
        for the
        nine months ended September 30, 2004. The change in deferred revenue under
        this
        program is presented in the table below.
 
 In
        the
        three and nine months ending September 30, 2005, recognized revenues for
        the
        domestic XTRAC segment increased by approximately $33,000 and $89,000,
        respectively, due to a change in accounting estimate for potential credits
        or
        refunds under the reimbursement program. In addition, in the three and nine
        months ending September 30, 2005, recognized revenues for the domestic XTRAC
        segment increased by approximately $159,000 and by approximately $97,000,
        respectively, due to a change in the accounting estimate for unused physician
        treatments that existed at September 30, 2005. The net impact on revenue
        recognized for the XTRAC domestic segment as a result of the above two changes
        in accounting estimate was to increase revenues by approximately $192,000
        and
        $186,000 for the three and nine months ended September 30, 2005,
        respectively.
 
 The
        following table illustrates the above analysis for the Domestic XTRAC segment
        for the periods reflected below:
  Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Recognized
                  revenue
              
              $
              1,019,184
              
              $
              945,755
              
              $
              2,542,373
              
              $
              2,215,619Change
                  in deferred program revenue
              
              
              25,375
              
              
              (96,323
              )
              
              58,090
              
              
              153,438Change
                  in deferred unused treatments
              
              
              (128,091
              )
              
              (9,513
              )
              
              (32,291
              )
              
              (32,863
              )Net
                  billed revenue
              
              $
              916,468
              
              $
              839,919
              
              $
              2,568,172
              
              $
              2,336,194Procedure
                  volume total
              
              
              15,690
              
              
              13,841
              
              
              43,611
              
              
              37,266Less:
                  Non-billed procedures
              
              
              1,814
              
              
              1,169
              
              
              4,620
              
              
              3,069Net
                  billed procedures
              
              
              13,876
              
              
              12,672
              
              
              38,991
              
              
              34,197Avg.
                  price of treatments billed
              
              $
              66.05
              
              $
              66.28
              
              $
              65.87
              
              $
              68.32Change
                  in procedures with deferred/(recognized) program revenue,
                  net
              
              
              384
              
              
              (1,453
              )
              
              882
              
              
              2,246Change
                  in procedures with recognized unused treatments, net
              
              
              (1,939
              )
              
              (144
              )
              
              (490
              )
              (481)
  33
  The
        average price for a treatment 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 been generally practical to use our therapy to
        treat
        severe psoriasis patients, but, this may change as our new product, the XTRAC
        Ultra, has shorter treatment times.
 
 ***International
        XTRAC Segment***
 
 International
        XTRAC sales of our excimer laser system and related parts were $299,176 for
        the
        three months ended September 30, 2005 compared to $155,024 for the three
        months
        ended September 30, 2004. We sold five and two laser systems in the three
        months
        ended September 30, 2005 and 2004, respectively. International XTRAC sales
        of
        our excimer laser system and related parts were $901,561 for the nine months
        ended September 30, 2005 compared to $1,190,538 for the nine months ended
        September 30, 2004. We sold 16 laser systems in the nine months ended September
        30, 2005 compared to 18 laser systems in the nine months ended September
        30,
        2004. Compared to the domestic business, the international XTRAC operations
        are
        more influenced by competition from similar laser technology from other
        manufacturers and from non-laser lamps, which over time, has served to reduce
        the prices we charge to international distributors. In addition, of the 18
        lasers recognized in the nine months ended September 30, 2004, four of those
        lasers had been shipped in 2003, but not recognized as sales due to the
        application of the SAB 104 Criteria.
 
 The
        following table illustrates the key changes in the International XTRAC segment
        for the periods reflected below:
  Three
                  Months Ended September 30,
              
              Nine
                  Months Ended September 30,2005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              299,176
              
              $
              155,024
              
              $
              901,561
              
              $
              1,190,538Laser
                  systems sold
              
              
              5
              
              
              2
              
              
              16
              
              
              18Average
                  revenue per laser
              
              $
              59,835
              
              $
              77,512
              
              $
              56,348
              
              $
              66,141
  ***Surgical
        Services Segment***
 
 In
        the
        three months ended September 30, 2005 and 2004, surgical services revenues
        were
        $1,903,336 and $2,059,714, respectively, representing a 7.6% decrease from
        the
        comparable period in 2004. This decrease was primarily due to the three
        territories that we closed during 2005 and business interruption in New Orleans
        and Alabama from the hurricanes. In the nine months ended September 30, 2005
        and
        2004, surgical services revenues were $5,977,366 and $5,633,254, respectively
        representing a 6.1% increase from the comparable period in 2004. This increase
        was primarily due to growth in urological procedures performed with laser
        systems purchased from a third-party manufacturer. Such procedures included
        a
        charge for the use of the laser and the technician to operate it, as well
        as a
        charge for the third party’s proprietary fiber delivery system.
  34
  The
        following table illustrates the key changes in the Surgical Services segment
        for
        the periods reflected below:
  Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              1,903,336
              
              $
              2,059,714
              
              $
              5,977,366
              
              $
              5,633,254Percent
                  (decrease)/increase
              
              
              (7.6
              %)
              
              
              
              
              6.1
              %Cost
                  of revenues
              
              
              1,465,502
              
              
              1,291,004
              
              
              4,283,180
              
              
              3,551,079Gross
                  profit
              
              $
              437,834
              
              $
              768,710
              
              $
              1,694,186
              
              $
              2,082,175Percent
                  of revenue
              
              
              23.0
              %
              
              37.3
              %
              
              28.3
              %
              
              37.0
              %
  ***Surgical
        Products Segment***
 
 Surgical
        Products revenues include revenues derived from the sales of surgical laser
        systems together with sales of related laser fibers and laser disposables.
        Sales
        of laser systems create recurring sales of laser fibers and laser disposables
        that are more profitable than laser systems.
 
 For
        the
        three months ended September 30, 2005, surgical products revenues were
        $1,473,461 compared to $1,294,903 in the three months ended September 30,
        2004.
        The increase was almost entirely due to $259,000 in additional laser system
        revenues reflecting the increase in the number of systems sold (15 vs. 4),
        partially offset by a decline in the average price per laser sold.
 
 For
        the
        nine months ended September 30, 2005, surgical products revenues were $4,166,846
        compared to $3,764,349 in the nine months ended September 30, 2004. The increase
        was almost entirely due to $426,000 in additional laser system revenues
        reflecting the increase in the number of systems sold (32 vs. 13), partially
        offset by a decline in the average price per laser sold.
 
 The
        decrease in average price per laser was largely due to the mix of lasers
        sold.
        Included in the laser sales for the three and nine months ended September
        30,
        2005 were sales of nine and nineteen diode lasers, respectively, which have
        lower sales prices than the other types of lasers. There was only one sale
        of
        these lasers for the nine months ended September 30, 2004, since they were
        introduced in June 2004.
 
 Disposables
        and fiber sales were relatively level between the comparable three-month
        and
        nine-month periods ended September 30, 2005 and 2004. We have expected that
        the
        disposables base may continue to erode over time as hospitals continue to
        seek
        outsourcing solutions instead of purchasing lasers and related disposables
        for
        their operating rooms. We have continued 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. With the introduction of our CO2 and diode surgical lasers in the
        second quarter of 2004, we hope to offset the decline in laser and disposables
        revenues.
  35
  The
        following table illustrates the key changes in the Surgical Products segment
        for
        the periods reflected below:
  Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              1,473,461
              
              $
              1,294,903
              
              $
              4,166,846
              
              $
              3,764,349Percent
                  increase
              
              
              13.8%
              
              
              
              
              
              10.7%Laser
                  systems sold
              
              
              15
              
              
              4
              
              
              32
              
              
              13Laser
                  system revenues
              
              $
              452,750
              
              $
              194,000
              
              $
              1,102,445
              
              $
              654,302Average
                  revenue per laser
              
              $
              30,183
              
              $
              48,500
              
              $
              34,451
              
              $
              50,331
  ***Skin
        Care (ProCyte) Segment***
 
 For
        the
        three and nine months ended September 30, 2005, ProCyte revenues were $2,928,681
        and $7,074,196. Since ProCyte was acquired on March 18, 2005, there are no
        corresponding revenues for the three and nine months ended September 30,
        2004.
        ProCyte revenues are generated from the sale of various skin and hair care
        products, from the sale of copper peptide compound and from royalties on
        licenses, mainly from Neutrogena.
 
 The
        following table illustrates the key changes in the Skin Care (ProCyte) segment
        for the periods reflected below:
  Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Product
                  sales
              
              $
              2,704,340
              
              $
              -
              
              $
              6,164,280
              
              $
              -Bulk
                  compound sales
              
              
              84,000
              
              
              -
              
              
              587,550
              
              
              -Royalties
              
              
              140,341
              
              
              
              
              
              322,366Total
                  ProCyte revenues
              
              $
              2,928,681
              
              $
              -
              
              $
              7,074,196
              
              $
              -
  ***Cost
        of Revenues***
 
 Product
        cost of revenues for the three months ended September 30, 2005 were $1,956,022
        compared to $747,689 for the three months ended September 30, 2004. The
        $1,208,333 increase reflected the inclusion of $869,405 of costs for the
        ProCyte
        business acquired in 2005, and an increase of $255,452 for surgical products,
        due to increased laser system sales, and $83,476 associated with the increase
        in
        sales of XTRAC laser equipment sold outside the United States.
 
 Product
        cost of revenues for the nine months ended September 30, 2005 was $4,856,857
        compared to $2,512,794 for the nine months ended September 30, 2004. The
        $2,344,063 increase reflected the inclusion of $2,154,699 of costs for the
        ProCyte business acquired in 2005, and an increase of $404,898 for surgical
        products due to increased laser system sales. These increases were, partly
        offset by a $215,534 decrease related to the decline in sales of XTRAC laser
        equipment sold outside the United States.
 
 Services
        cost of revenues was $2,347,361 in the three months ended September 30, 2005
        compared to $1,753,727 in the comparable period in 2004. Contributing to
        the
        $593,634 increase was a $164,415 increase in the surgical services business
        associated with the increase in urological procedures performed with laser
        systems purchased from a third-party manufacturer, which carry a higher cost
        of
        sale due to the disposable fiber purchased from the third-party manufacturer
        than a fiber which we manufacture. In addition, cost of revenues in the Domestic
        XTRAC business segment increased $429,219 due to manufacturing inefficiencies,
        an increase in excess and obsolete inventory reserve and increased depreciation
        on the lasers compared to the same period in 2004. The XTRAC manufacturing
        facility located in Carlsbad, California relocated to a nearby facility in
        July
        2005 and contributed to the inefficiencies experienced in the three months
        ended
        September 30, 2005.
  36
  Services
        cost of revenues was $6,301,085 in the nine months ended September 30, 2005
        compared to $5,114,057 in the comparable period in 2004. Contributing to
        the
        $1,187,028 increase was a $691,764 increase in the surgical services business
        associated with the increase in urological procedures performed with laser
        systems purchased from a third-party manufacturer, which carry a higher cost
        of
        sale due to the disposable fiber purchased from the third-party manufacturer
        than a fiber which we manufacture. In addition, cost of revenues in the Domestic
        XTRAC business segment increased $495,264 due to manufacturing inefficiencies,
        an increase in excess and obsolete inventory reserve and increased depreciation
        on the lasers compared to the same period in 2004.
 
 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, which are placed in
        physicians’ offices domestically or sold internationally. The unabsorbed costs
        are allocated to the domestic XTRAC and the international XTRAC segments
        based
        on actual production of lasers for each segment. Included in these allocated
        manufacturing costs are unabsorbed labor and direct plant costs.
 
 ***Gross
        Margin Analysis***
 
 Gross
        margin increased to $3,320,454 during the three months ended September 30,
        2005
        from $1,953,980 during the same period in 2004, primarily reflecting the
        impact
        of the ProCyte acquisition on March 18, 2005. As a percent of revenues, the
        gross margin remained relatively unchanged for the three months ended September
        30, 2005, 43.6% compared to 43.9% for the same period in 2004.
 
 Gross
        margin increased to $9,504,396 during the nine months ended September 30,
        2005
        from $5,176,909 during the same period in 2004, primarily reflecting the
        impact
        of the ProCyte acquisition on March 18, 2005. As a percent of revenues, the
        gross margin increased for the nine months ended September 30, 2005 to 46.0%
        from 40.4% for the same period in 2004.
 
 The
        following table analyzes changes in our gross margin for the periods reflected
        below:
  **Company
                  Margin Analysis**
              
              Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              7,623,838
              
              $
              4,455,396
              
              $
              20,662,340
              
              $
              12,803,760Percent
                  increase
              
              
              71.1%
              
              
              
              
              
              61.7%Cost
                  of revenues
              
              
              4,303,384
              
              
              2,501,416
              
              
              11,157,944
              
              
              7,626,851Percent
                  increase
              
              
              72.0%
              
              
              
              
              
              46.3%Gross
                  profit
              
              $
              3,320,454
              
              $
              1,953,980
              
              $
              9,504,396
              
              $
              5,176,909Percent
                  of revenue
              
              
              43.6%
              
              
              43.9%
              
              
              46.0%
              
              
              40.4%
  The
        primary reasons for changes in gross margin for the three and nine months
        ended
        September 30, 2005, compared to the same periods in 2004 were as
        follows:
 
 ·
              We
                  acquired ProCyte on March 18, 2005, so only the activity after
                  that date
                  is recorded in our financial statements. There was no activity
                  recorded in
                  our financial statements in 2004.
 
 ·
              We
                  increased treatment procedures and lowered field service costs
                  for the
                  XTRAC laser. The increase in procedure volume was a direct result
                  of
                  improving insurance reimbursement. The lower field service costs
                  were a
                  direct result of the planned quality upgrades in 2003 and 2004
                  for all
                  lasers-in-service.
 
 ·
              We
                  increased sales on surgical laser systems due to the introduction
                  of the
                  diode laser.
  37
  The
        following table analyzes our gross margin for our Domestic XTRAC segment
        for the
        periods presented below:
  **XTRAC
                  Domestic Segment**
              
              Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              1,019,184
              
              $
              945,755
              
              $
              2,542,373
              
              $
              2,215,619Percent
                  increase
              
              
              7.8%
              
              
              
              
              
              14.7%Cost
                  of revenues
              
              
              859,061
              
              
              429,842
              
              
              1,952,233
              
              
              1,456,969Percent
                  increase
              
              
              99.9%
              
              
              
              
              
              34.0%Gross
                  profit
              
              $
              160,123
              
              $
              515,913
              
              $
              590,140
              
              $
              758,650Percent
                  of revenue
              
              
              15.7%
              
              
              54.6%
              
              
              23.2%
              
              
              34.2%
  The
        gross
        margin decreased for this segment for the three and nine months ended September
        30, 2005 from the comparable periods in 2004 by $355,790 and $168,510. The
        key
        factors were as follows:
 
 ·
              A
                  key driver in increased revenue in this segment is insurance
                  reimbursement. In 2004, we focused on encouraging private health
                  insurance
                  plans to adopt the XTRAC laser therapy as an approved medical procedure
                  for the treatment of psoriasis. Since January 2004, several major
                  health
                  insurance plans instituted medical policies to pay claims for the
                  XTRAC
                  therapy, including Regence, Wellpoint, Aetna, Anthem, Cigna, United
                  Healthcare and Independence Blue Cross of
                  Pennsylvania.
 
 ·
              Procedure
                  volume increased 9.5% from 12,672 to 13,876 billed procedures in
                  the three
                  months ended September 30, 2005 compared to the same period in
                  2004.
                  Procedure volume increased 14% from 34,197 to 38,991 billed procedures
                  in
                  the nine months ended September 30, 2005 compared to the same period
                  in
                  2004.
 
 ·
              Price
                  per procedure was not a meaningful component of the revenue change
                  between
                  the periods.
 
 ·
              The
                  cost of revenues increased by $429,219 and $495,264 for the three
                  and nine
                  months ended September 30, 2005. This increase is due to under-absorption
                  of overhead due to the shut down of the plant for relocation during
                  the
                  quarter, an increase in depreciation on the lasers in service and
                  an
                  increase in the excess and obsolete inventory reserve, due to the
                  introduction of the Ultra, the new smaller and faster excimer laser.
                  The
                  planned increases in production volume in subsequent periods should
                  lead
                  to more favorable absorption of overhead. The depreciation costs
                  will
                  continue to increase in subsequent periods as the business
                  grows.
 
 The
        following table analyzes our gross margin for our International XTRAC segment
        for the periods presented below:
  **XTRAC
                  International Segment**
              
              Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              299,176
              
              $
              155,024
              
              $
              901,561
              
              $
              1,190,538Percent
                  increase/(decrease)
              
              
              93.0%
              
              
              
              
              
              (24.3%
              )Cost
                  of revenues
              
              
              244,064
              
              
              160,588
              
              
              637,815
              
              
              853,348Percent
                  increase/(decrease)
              
              
              52.0%
              
              
              
              
              
              (25.3%
              )Gross
                  profit/(loss)
              
              $
              55,112
              
              
              ($5,564
              )
              $
              263,746
              
              $
              337,190Percent
                  of revenue
              
              
              18.4%
              
              
              (3.6%
              )
              
              29.3%
              
              
              28.3%
  38
  The
        gross
        profit for the three and nine months ended September 30, 2005 increased by
        $60,676 and decreased by $73,444, respectively, from the comparable periods
        in
        2004. The key factors in this business segment were as follows:
 
 ·
              We
                  sold five XTRAC laser systems during the three months ended September
                  30,
                  2005 and two lasers in the comparable period in 2004. We sold 16
                  XTRAC
                  laser systems during the nine months ended September 30, 2005 and
                  18
                  lasers in the comparable period in 2004. In addition, four lasers
                  for a
                  total of $310,000, which had been shipped in 2003, were not recognized
                  as
                  sales until the first quarter of 2004 due to the application of
                  the SAB
                  104 Criteria.
 
 ·
              The
                  International XTRAC operations are influenced by competition from
                  similar
                  laser technology from other manufacturers and from non-laser lamp
                  alternatives for treating inflammatory skin disorders, which has
                  served to
                  reduce the prices we charge international distributors for our
                  excimer
                  products. After adjusting the revenue for parts sales of approximately
                  $50,000, the average price for lasers sold during this period was
                  approximately $49,800 in the three months ended September 30, 2005,
                  down
                  from $58,900 in the comparable period in 2004. After adjusting
                  the revenue
                  for the nine months ended September 30, 2005 for parts sales of
                  approximately $145,000, the average price for lasers sold during
                  this
                  period was approximately $47,250 compared to $59,800 in the same
                  period in
                  2004.
 
 The
        following table analyzes our gross margin for our Surgical Services segment
        for
        the periods presented below:
  **Surgical
                  Services Segment**
              
              Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              1,903,336
              
              $
              2,059,714
              
              $
              5,977,366
              
              $
              5,633,254Percent
                  (decrease)/increase
              
              
              (7.6%
              )
              
              
              
              
              6.1%Cost
                  of revenues
              
              
              1,465,502
              
              
              1,291,004
              
              
              4,283,180
              
              
              3,551,079Percent
                  increase
              
              
              13.5%
              
              
              
              
              
              20.6%Gross
                  profit
              
              $
              437,834
              
              $
              768,710
              
              $
              1,694,186
              
              $
              2,082,175Percent
                  of revenue
              
              
              23.0%
              
              
              37.3%
              
              
              28.3%
              
              
              37.0%
  Gross
        margin in the Surgical Services segment for the three and nine months ended
        September 30, 2005 decreased by $330,876 and $387,989, respectively, from
        the
        comparable periods in 2004. The key factors impacting gross margin for the
        Surgical Services business were as follows:
 
 ·
              A
                  significant part of the revenue was in urological procedures performed
                  with laser systems we purchased from a third party manufacturer.
                  Such
                  procedures included a charge for the use of the laser and the technician
                  to operate it, as well as a charge for the third party’s proprietary fiber
                  delivery system. This procedure has a lower gross margin as a percent
                  of
                  revenues than other types of procedures. As the volume of these
                  procedures
                  increases, the overall gross margin percentage decreases. In 2005,
                  there
                  was a 25% price increase on the third party’s proprietary fiber delivery
                  system, which also contributed to the decrease in gross margin
                  in 2005.
                  Revenues for this procedure were $550,603 and $1,882,898 for the
                  three and
                  nine months ended September 30, 2005 compared to $524,950 and $1,067,820
                  for the same periods in 2004.
 
 ·
              We
                  have closed three geographic areas of business due to unacceptable
                  operating profit. Although closing these territories will save
                  costs and
                  improve profitability over time, the costs saved for the three
                  and nine
                  months ended September 30, 2005 have not kept pace with the revenues
                  lost
                  by closing these territories during the three and nine months ended
                  September 30, 2005.
 
 ·
              We
                  have suffered business interruption due to hurricanes in the New
                  Orleans
                  and Alabama territories.
  39
  The
        following table analyzes our gross margin for our Surgical Products segment
        for
        the periods presented below:
  **Surgical
                  Products Segment**
              
              Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              1,473,461
              
              $
              1,294,903
              
              $
              4,166,846
              
              $
              3,764,349Percent
                  increase
              
              
              13.8%
              
              
              
              
              
              10.7%Cost
                  of revenues
              
              
              865,351
              
              
              619,982
              
              
              2,130,017
              
              
              1,765,454Percent
                  increase
              
              
              39.6%
              
              
              
              
              
              20.6%Gross
                  profit
              
              $
              608,110
              
              $
              674,921
              
              $
              2,036,829
              
              $
              1,998,895Percent
                  of revenue
              
              
              41.3%
              
              
              52.1%
              
              
              48.9%
              
              
              53.1%
  Gross
        margin for the Surgical Products segment in the three and nine months ended
        September 30, 2005 compared to the same periods in 2004 decreased by $66,811
        and
        increased by $37,934, respectively. The key factors in this business segment
        were as follows:
 
 ·
              This
                  segment includes product sales of surgical laser systems and laser
                  disposables. Disposables are more profitable than laser systems,
                  but the
                  sale of laser systems generates the subsequent recurring sale of
                  laser
                  disposables.
 
 ·
              Revenues
                  for the three months ended September 30, 2005 increased by $178,558
                  from
                  the three months ended September 30, 2004 while cost of revenues
                  increased
                  by $245,368 between the same periods. There were 11 more laser
                  system sold
                  in the three months ended September 30, 2005 than in the comparable
                  period
                  of 2004. Revenues for the nine months ended September 30, 2005
                  increased
                  by $402,497 from the nine months ended September 30, 2004 while
                  cost of
                  revenues increased by $364,563 between the same periods. There
                  were 19
                  more laser system sales in the nine months ended September 30,
                  2005 than
                  in the comparable period of 2004. However, the lasers sold in the
                  2004
                  period were at higher prices than in the comparable period in 2005.
                  This
                  revenue increase was partly offset by a decrease in sales disposables
                  between the periods.
 
 ·
              Disposables,
                  which have a higher gross margin as a percent of revenues than
                  lasers,
                  represented a lower percentage of revenue in the three and nine
                  months
                  September 30, 2005 compared to the same periods in
                  2004.
  40
  The
        following table analyzes our gross margin for our SkinCare (ProCyte) segment
        for
        the periods presented below:
 **Skin
                  Care (ProCyte) Segment**
              
              Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Product
                  revenues
              
              $
              2,704,340
              
              $
              -
              
              $
              6,164,280
              
              $
              -Bulk
                  compound revenues
              
              
              84,000
              
              
              -
              
              
              587,550
              
              
              -Royalties
              
              
              140,341
              
              
              -
              
              
              322,366
              
              
              -Total
                  revenues
              
              
              2,928,681
              
              
              -
              
              
              7,074,196
              
              
              -Product
                  cost of revenues
              
              
              817,272
              
              
              -
              
              
              1,744,225
              
              
              -Bulk
                  compound cost of revenues
              
              
              52,133
              
              
              -
              
              
              410,475
              
              
              -Total
                  cost of revenues
              
              
              869,405
              
              
              -
              
              
              2,154,700
              
              
              -Gross
                  profit
              
              $
              2,059,276
              
              $
              -
              
              $
              4,919,496
              
              $
              -Percent
                  of revenue
              
              
              70.3%
              
              
              
              
              
              69.5%
  The
        key
        factors in this business segment were as follows:
  ·
              Copper
                  Peptide bulk compound is sold at a substantially lower gross margin
                  than
                  skin care products, while revenues generated from licensees have
                  no
                  significant costs associated with this revenue
                  stream
  ·
              Product
                  revenues come primarily from U.S.
                  dermatologists.
  ·
              Lesser
                  product revenues come from sales directed to consumers at spas
                  and from
                  marketing directly to the consumer (e.g.
                  infomercials).
 
 ***Selling,
        General and Administrative Expenses***
 
 For
        the
        three months ended September 30, 2005, selling, general and administrative
        expenses increased $1,891,784 to $4,526,178 from the three months ended
        September 30, 2004. Selling, general and administrative expenses related
        to the
        ProCyte business accounted for $1,574,058 of the increase with the remaining
        increase related to $224,000 in salaries, benefits and travel expenses
        associated with an increase in the sales force, particularly in the domestic
        XTRAC segment; an increase in legal and accounting expenses of $231,000;
        and an
        increase in corporate insurance of $83,000. Offsetting some of the increases
        for
        the three months ended September 30, 2005, was a reduction of bad debt expense
        of $200,000 compared to the prior year period.
 
 For
        the
        nine months ended September 30, 2005, selling, general and administrative
        expenses increased $4,433,328 to $11,944,593 from the nine months ended
        September 30, 2004. Selling, general and administrative expenses related
        to the
        ProCyte business accounted for $3,735,087 of the increase with the remaining
        increase related to a $330,000 increase in salaries, benefits and travel
        expenses associated with an increase in the sales force, particularly in
        the
        domestic XTRAC segment, and increases in legal and accounting expenses of
        $358,000 and in corporate insurance of $163,000. Offsetting some of the
        increases for the nine months ended September 30, 2005, was a reduction in
        bonus
        expense of $199,000 in the current year compared to the prior year
        period.
 
 ***Engineering
        and Product Development***
 
 Engineering
        and product development expenses for the three months ended September 30,
        2005
        decreased to $304,935 from $428,206 for the three months ended September
        30,
        2004. Engineering and product development expenses for the nine months ended
        September 30, 2005 decreased to $819,845 from $1,325,399 for the nine months
        ended September 30, 2004. The decreases are mainly in the XTRAC segments
        due to
        product development expenses in 2004 for the Ultra, the new smaller and faster
        excimer laser, which were offset, in part, by the engineering and product
        development expenses related to the ProCyte business of $142,948 and $310,661,
        respectively.
  41
  ***Other
        Income***
 
 Other
        income for the three months ended September 30, 2005 was $244,988, reflecting
        the expiration of the SLT subordinated notes. There was no other income in
        the
        comparable periods in 2004.
 
 Other
        income for the nine months ended September 30, 2005 was $333,655 reflecting
        a
        non-monetary exchange of assets during June 2005 of two depreciable engineering
        development prototypes in exchange for four product units to be held for
        sale
        and the expiration of the SLT subordinated notes. There was no other income
        in
        the comparable periods in 2004.
 
 ***Interest
        Expense, Net***
 
 Net
        interest expense for the three months ended September 30, 2005 increased
        to
        $84,228, as compared to $47,189 for the three months ended September 30,
        2004.
        Net interest expense for the nine months ended September 30, 2005 increased
        to
        $212,276, as compared to $66,297 for the nine months ended September 30,
        2004.
        The increase in net interest expense was the result of the draws on the lease
        line of credit during the second, third and fourth quarters of 2004 and the
        second quarter of 2005.
 
 ***Net
        Loss***
 
 The
        aforementioned factors resulted in a net loss of $1,349,900 during the three
        months ended September 30, 2005, as compared to a net loss of $1,155,809
        during
        the three months ended September 30, 2004, an increase of 16.8%. This increase
        was primarily the result of the increase in cost of sales and resulting decrease
        in gross margin. The aforementioned factors resulted in a net loss of $3,138,663
        during the nine months ended September 30, 2005, as compared to a net loss
        of
        $3,726,052 during the nine months ended September 30, 2004, a decrease of
        15.8%.
        This decrease was primarily the result of the increase in revenues and resulting
        gross margin, mainly related to the acquisition of ProCyte.
 
 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.
 
 On
        March
        18, 2005, we acquired ProCyte. The skincare products and royalties provided
        by
        ProCyte increased revenues for the three and nine months ended September
        30,
        2005 and we expect revenues of the combined companies to increase throughout
        2005 as compared to 2004. We expect to realize cost savings from the
        consolidation of the administrative and marketing infrastructure of the combined
        company. Additionally, once the consolidated infrastructure is in place,
        we
        expect our revenues to grow without proportionately increasing the rate of
        growth in our fixed costs.
 
 At
        September 30, 2005, the ratio of current assets to current liabilities was
        2.57
        to 1.00 compared to 1.88 to 1.00 at December 31, 2004. As of September 30,
        2005,
        we had $11,538,647 of working capital compared to $6,119,248 as of December
        31,
        2004. Cash and cash equivalents were $5,383,952 as September 30, 2005, as
        compared to $3,997,017 as of December 31, 2004. These increases were mainly
        due
        to the acquisition of ProCyte. $206,802 of cash was classified as restricted
        as
        of September 30, 2005 compared to $112,200 at December 31, 2004.
 
 We
        believe that our existing cash balance together with our other existing
        financial resources, including access to lease financing for capital
        expenditures, and revenues from sales, distribution, licensing and manufacturing
        relationships, will be sufficient to meet our operating and capital requirements
        beyond the third quarter of 2006. The 2005 operating plan reflects costs
        savings
        from the integration of ProCyte and PhotoMedex as well as increases in
        per-treatment fee revenues for use of the XTRAC system based on wider insurance
        coverage in the United States and. In addition, the 2005 operating plan calls
        for increased revenues and profits from our newly acquired business, ProCyte,
        and the continued growth of its skin care products. We cannot give assurances
        that our business plan will not encounter obstacles which may require us
        to
        obtain additional equity or debt financing to meet our working capital
        requirements or capital expenditure needs. Also, if our growth exceeds the
        business plan projections, we may require additional equity or debt financing.
        There can be no assurance that additional financing, if needed, will be
        available when required or, if available, will be on terms satisfactory to
        us.
  42
  On
        June
        25, 2004, we entered into a leasing credit facility from GE Capital Corporation
        (“GE”). The credit facility has a commitment term of three years, expiring on
        June 25, 2007. We account for each draw as funded indebtedness taking the
        form
        of a capital lease, with equitable ownership in the lasers remaining with
        us. GE
        retains title as a form of security over the lasers. We continue to depreciate
        the lasers over their remaining useful lives, as established when originally
        placed into service. Each draw against the credit facility has a repayment
        period of three years and is secured by specific lasers, which we have sold
        to
        GE and leased back for deployment in the field. A summary of the activity
        under
        the GE leasing credit facility is presented in Note 9, “Long-term
        Debt.”
 
 Net
        cash
        used in operating activities was $2,616,625 for nine months ended September
        30,
        2005, compared to $2,677,305 for the same period in 2004. The decrease was
        mostly due to the payment of various previously recorded costs associated
        with
        the acquisition and increases in accounts receivables.
 
 Net
        cash
        provided by investing activities was $2,942,393 for the nine months ended
        September 30, 2005 compared to cash used of $1,708,090 for the nine months
        ended
        September 30, 2004. During the nine months ended September 30, 2005, we received
        cash of $5,578,416, net of acquisition costs, in the ProCyte acquisition
        and
        used $2,548,535 for production of our lasers in service compared to $1,021,766
        for the same period in 2004.
 
 Net
        cash
        provided by financing activities was $966,565 for the nine months ended
        September 30, 2005 compared to $2,963,908 for the nine months ended September
        30, 2004. In the nine months ended September 30, 2005 we made payments of
        $819,998 on certain notes payable and capital lease obligations and $169,524
        in
        registration costs. These payments were offset, in part, by the advances
        under
        the lease line of credit, net of payments, of $1,347,945 and by receipts
        of
        $702,744 from the exercise of common stock options and warrants. In the nine
        months ended September 30, 2004, we received $3,185,305 from the exercise
        of
        common stock options and warrants and a net increase of $654,427 from the
        lapse
        of the bank line of credit and the initiation of the leasing line of credit
        from
        GE. These cash receipts were offset by $776,961 for the payment of certain
        notes
        payable and capital lease obligations.
 
 Our
        ability to expand our business operations is currently dependent in significant
        part on financing from external sources. There can be no assurance that changes
        in our manufacturing and marketing, engineering and product development plans
        or
        other changes affecting our operating expenses and business strategy will
        not
        require financing from external sources before we will be able to develop
        profitable operations. There can be no assurance that additional capital
        will be
        available on terms favorable to us, if at all. To the extent that additional
        capital is raised through the sale of additional equity or convertible debt
        securities, the issuance of such securities could result in additional dilution
        to our stockholders. Moreover, our cash requirements may differ materially
        from
        those now planned because of results of marketing, product testing, changes
        in
        the focus and direction of our marketing programs, competitive and technological
        advances, the level of working capital required to sustain our planned growth,
        litigation, operating results, including the extent and duration of operating
        losses, and other factors. In the event that we experience the need for
        additional capital, and are not able to generate capital from financing sources
        or from future operations, management may be required to modify, suspend
        or
        discontinue our business plan.
 
 ***Commitments
        and Contingencies***
 
 In
        April
        2005, we entered into a long-term lease for approximately 8,000 square feet
        in
        Carlsbad, California. We moved our excimer manufacturing facility into this
        space in July 2005, after tenant improvements had been completed. For $195,000
        of the improvements, we have agreed to pay $2,880 monthly over a self-amortizing
        five-year term. We have posted a stand-by letter of credit to secure this
        obligation. Monthly rent and operating expenses for our new space amounts
        to
        $8,880 compared to $11,900 for our former space.
 
 During
        the three and nine months ended September 30, 2005, there were no other items
        that significantly impacted our commitments and contingencies as discussed
        in
        the notes to our 2004 annual financial statements included in our Annual
        Report
        on Form 10-K. In addition, we have no significant off-balance sheet
        arrangements.
  43
  ***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**
 
 ***Disclosure
        Controls***
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our reports filed or submitted pursuant
        to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is to
        be recorded, processed, summarized and reported within the time periods
        specified in the Securities and Exchange Commission’s rules and forms.
        Disclosure controls and procedures include, without limitation, controls
        and
        procedures designed to ensure that such information is accumulated and
        communicated to our management, including our Chief Executive Officer and
        Chief
        Financial Officer, as appropriate, to allow timely decisions regarding required
        disclosure.
 
 Our
        management, including the Chief Executive Officer and Chief Financial Officer,
        conducted an evaluation of the effectiveness of our disclosure controls and
        procedures as of September 30, 2005. Based upon the evaluation, the Chief
        Executive Officer and Chief Financial Officer concluded that our disclosure
        controls and procedures were effective as of September 30, 2005.
 
 ***Changes
        in Internal Controls***
 
 There
        has
        been no significant change in our internal controls over financial reporting
        that occurred during the third quarter 2005 that has materially affected,
        or is
        reasonably likely to materially affect, our internal control over financial
        reporting, except for the addition of ProCyte’s internal control structures.
        Management processed ProCyte transactions through existing ProCyte internal
        control structures through the second quarter of this year, and has begun
        to
        process such transactions through existing PhotoMedex internal control
        structures in the third quarter of this year. Management will evaluate in
        2005
        the other ProCyte internal control structures and determine what structures
        should be adopted, conformed or eliminated.
  44
  **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, 2004 for descriptions
        of our legal proceedings.
 
 In
        the
        action brought by the Company against Edwards Lifesciences Corporation and
        Baxter Healthcare Corporation in the Superior Court for Orange County,
        California, the defendants have answered our amended complaint Each of the
        defendant and the plaintiff is engaged in discovery activity in preparation
        for
        trial, notwithstanding that each of the defendant and the plaintiff has brought
        a motion for summary judgment.
 
 In
        the
        matter brought against us by City National Bank of Florida, our former landlord
        in Orlando, Florida, our motion for summary judgment was heard in limine
        and
        denied. After a trial of the facts, judgment was awarded to the landlord
        in the
        amount of $77,000. Offsetting the judgment are proceeds, approximating $43,000,
        which are held by the landlord from the sale of assets left on the leased
        premises by the party that bought the assets from us. We have reached a
        settlement with the landlord which embodies terms which we deem favorable
        and
        which have mooted post-trial motions and appeals.
 
 In
        the
        matter brought by us against RA against Medical Systems, Inc. and Dean Stewart
        Irwin in the United States District Court for the Southern District of
        California, a new magistrate judge in the case has ruled that discovery will
        be
        stayed until the trial judge rules on the defendants’ motion for summary
        judgment, based on a theory of res judicata.
 
 In
        the
        matter brought by us against RA Medical Systems, Inc. and Dean Stewart Irwin
        in
        the Superior Court for San Diego County, California, Defendants have petitioned
        the Superior Court for further fees and costs incurred in collecting the
        judgment and defending against our appeal. The petition has not been heard
        by
        the Court, insofar as the trial judge originally set to hear the matter has,
        at
        our objection, recused himself as has the new judge assigned the matter.
 
 In
        the
        matter brought for malicious prosecution by RA Medical Systems and Dean Irwin
        against PhotoMedex, Inc., et al., we filed our appeal brief and respondents
        have
        filed their opposition brief.  Our reply brief is due the end of November,
        2005.
 
 In
        the
        matter brought by Vida Brown in the Circuit Court, 20 th Judicial
        Circuit for Charlotte County, Florida, we have begun to respond to the
        plaintiff’s requests for discovery.
 
 **ITEM
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds**
 
 ***Recent
        Issuances of Unregistered Securities***
 
 None.
 
 **ITEM
        3. Defaults Upon Senior Securities**
 
 Not
        applicable.
 
 **ITEM
        4. Submission of Matter to a Vote of Security Holders**
 
 None.
 
 **ITEM
        5. Other Information**
 
 None.
 
 **ITEM
        6. Exhibits**
  31.1
              Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer31.2
              Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
              Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 200232.2
              Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002
  45
  **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: November
                  9, 2005
                By:
                /s/ Jeffrey
                  F. O’DonnellJeffrey
                  F. O’DonnellPresident
                  and Chief Executive Officer
  Date: November
                  9, 2005
                By:
                /s/ Dennis
                  M. McGrathDennis
                  M. McGrathChief
                  Financial Officer
 
 
 
  46