Gadsden Properties (GADS) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

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

For the quarterly period ended June 30, 2008

OR

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

For the transition period from _________ to ___________

Commission File Number 0-11365

PHOTOMEDEX, INC.

(Exact name of registrant as specified in its charter)

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

147 Keystone Drive, Montgomeryville, Pennsylvania 18936

(Address of principal executive offices, including zip code)

(215) 619-3600

(Registrant's telephone number, including area code)

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

Yes x           No o

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

Large accelerated filer o         Accelerated filer o

Non-accelerated filer o           Smaller reporting company x

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

Yes o         No x

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

PHOTOMEDEX, INC.

INDEX TO FORM 10-Q

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

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PART I - Financial Information

ITEM 1. Financial Statements

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

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

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended June 30,
	2008			2007
Revenues:
Product sales	$	7,028,605		$	5,675,852
Services		2,361,174			1,634,744
		9,389,779			7,310,596
Cost of revenues:
Product cost of revenues		2,989,481			2,326,656
Services cost of revenues		1,045,623			976,547
		4,035,104			3,303,203
Gross profit		5,354,675			4,007,393
Operating expenses:
Selling and marketing		3,755,834			3,056,846
General and administrative		2,237,259			2,565,952
Engineering and product development		218,344			185,505
		6,211,437			5,808,303
Loss from continuing operations before interest expense, net		(856,762	)		(1,800,910	)
Interest expense, net		(281,765	)		(161,967	)
Loss from continuing operations		(1,138,527	)		(1,962,877	)
Discontinued operations:
Income from discontinued operations		77,069			126,919
Estimated loss on sale of discontinued operations		(545,844	)		—
Net loss		($ 1,607,302	)		($ 1,835,958	)
Basic and diluted net loss per share:
Continuing operations		($0.02	)		($0.03	)
Discontinued operations		($0.01	)		—
Basic and diluted net loss per share		($0.03	)		($0.03	)
Shares used in computing basic and diluted net loss per share		63,032,207			62,709,147

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Six Months Ended June 30,
	2008			2007
Revenues:
Product sales	$	13,763,772		$	11,272,410
Services		3,956,841			3,246,550
		17,720,613			14,518,960
Cost of revenues:
Product cost of revenues		5,853,932			4,548,684
Services cost of revenues		2,299,202			1,996,750
		8,153,134			6,545,434
Gross profit		9,567,479			7,973,526
Operating expenses:
Selling and marketing		7,868,799			6,100,795
General and administrative		4,381,701			5,045,343
Engineering and product development		657,032			401,473
		12,907,532			11,547,611
Loss from continuing operations before interest expense, net		(3,340,053	)		(3,574,085	)
Interest expense, net		(509,137	)		(238,386	)
Loss from continuing operations		(3,849,190	)		(3,812,471	)
Discontinued operations:
Income from discontinued operations		245,870			93,031
Estimated loss on sale of discontinued operations		(545,844	)		—
Net loss		($ 4,149,164	)		($ 3,719,440	)
Basic and diluted net loss per share:
Continuing operations		($0.06	)		($0.06	)
Discontinued operations		($0.01	)		—
Basic and diluted net loss per share		($0.07	)		($0.06	)
Shares used in computing basic and diluted net loss per share		63,032,207			62,623,079

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2008

(Unaudited)

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

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1

Basis of Presentation:

The Company:

Background

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

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

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

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

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

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

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

Liquidity and Going Concern

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

Summary of Significant Accounting Policies:

Quarterly Financial Information and Results of Operations

The financial statements as of June 30, 2008 and for the three and six months ended June 30, 2008 and 2007, are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2008, and the results of operations and cash flows for the three and six months ended June 30, 2008 and 2007. The results for the three and six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the entire year. While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. The surgical services business segment is presented as discontinued operations for all periods presented.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and be based on events different from those assumptions. Future events and their effects cannot be predicted with certainty; estimating, therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired, or as additional information is obtained.

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

Revenue Recognition

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

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

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

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

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

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

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

For per-procedure surgical services, the Company recognizes revenue upon the completion of the procedure. Revenue from maintenance service agreements is deferred and recognized on a straight-line basis over the term of the agreements. Revenue from billable services, including repair activity, is recognized when the service is provided.

Impairment of Long-Lived Assets and Intangibles

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or the fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group are classified as held for sale and are presented separately in the appropriate asset and liability sections of the balance sheet. With respect to the long-lived assets and intangibles held for sale as of June 30, 2008, an impairment was identified where the aggregate fair value was $320,844 less than the carrying value. As of June 30, 2008 and December 31, 2007, no such impairment existed related to continuing operations.

Patent Costs and Licensed Technologies

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

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

Management evaluates the recoverability of intangible assets based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value. As June 30, 2008, no such write-down was required. (See Impairment of Long-Lived Assets and Intangibles).

Other Intangible Assets

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

Management evaluates the recoverability of such other intangible assets based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value. As of June 30, 2008 no such write-down was required.

Goodwill

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

Management evaluates the recoverability of such goodwill based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value. As of June 30, 2008 no such write-down was required.

Accrued Warranty Costs

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

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

Income Taxes

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

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

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

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

Net Loss Per Share

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

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

Share-Based Compensation

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

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

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

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

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

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

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

- 12 -

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

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

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

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

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

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

Supplemental Cash Flow Information

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

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

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

Recent Accounting Pronouncements

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

- 13 -

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

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

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

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

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

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

Note 2

Discontinued Operations:

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

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

- 14 -

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

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

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

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

Note 3

Inventories:

Set forth below is a detailed listing of inventories:

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

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

Note 4

Property and Equipment:

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

	June 30, 2008			December 31, 2007
Lasers in service	$	17,365,458		$	15,117,055
Computer hardware and software		341,407			341,407
Furniture and fixtures		526,511			361,174
Machinery and equipment		732,786			870,986
Leasehold improvements		247,368			247,368
		19,213,530			16,937,990
Accumulated depreciation and amortization		(9,962,478	)		(8,846,128	)
Property and equipment, net	$	9,251,052			8,091,862

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

- 15 -

Note 5

Patents and Licensed Technologies:

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

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

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

Note 6

Other Intangible Assets:

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

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

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

Note 7

Other Accrued Liabilities:

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

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

- 16 -

Note 8

Notes Payable:

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

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

Note 9

Long-term Debt:

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

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

Leasing Credit Facility, Term Note Facility

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

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

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

- 17 -

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

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

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

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

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

Capital Leases

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

Note 10

Employee Stock Benefit Plans

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

- 18 -

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

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

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

Note 11

Business Segment and Geographic Data:

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

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

- 19 -

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

	Three Months Ended June 30, 2008
	DOMESTIC XTRAC			INTERN’L DERM. EQUIPMENT			SKIN CARE			SURGICAL PRODUCTS AND OTHER			TOTAL
Revenues	$	3,433,998		$	697,973		$	3,424,557		$	1,833,251		$	9,389,779
Costs of revenues		1,483,806			336,039			1,180,012			1,035,247			4,035,104
Gross profit		1,950,192			361,934			2,244,545			798,004			5,354,675
Gross profit %		56.8	%		51.9	%		65.5	%		43.5	%		57.03	%
Allocated operating expenses:
Selling, general and administrative		2,064,442			64,393			1,480,392			165,607			3,774,834
Engineering and product development		—			—			106,446			111,898			218,344
Unallocated operating expenses		—			—			—			—			2,218,259
		2,064,442			64,393			1,586,838			277,505			6,211,437
Income (loss) from operations		(114,250	)		297,541			657,707			520,499			(856,762	)
Interest expense, net		—			—			—			—			(281,765	)
(Loss) income from continuing operations		(114,250	)		297,541			657,707			520,499			(1,138,527	)
Discontinued operations:
Income from discontinued operations														77,069
Loss on sale of discontinued operations														(545,844	)
Net (loss) income		($114,250	)	$	297,541		$	657,707		$	520,499			($1,607,302	)

	Three Months Ended June 30, 2007
	DOMESTIC XTRAC			INTERN’L DERM. EQUIPMENT			SKIN CARE			SURGICAL PRODUCTS AND OTHER			TOTAL
Revenues	$	2,215,926		$	618,953		$	3,094,697		$	1,381,020		$	7,310,596
Costs of revenues	��	1,190,669			230,204			1,001,517			880,813			3,303,203
Gross profit		1,025,257			388,749			2,093,180			500,207			4,007,393
Gross profit %		46.3	%		62.8	%		67.6	%		36.2	%		54.8	%
Allocated operating expenses:
Selling, general and administrative		1,448,670			44,479			1,420,406			160,793			3,074,348
Engineering and product development		—			—			99,599			85,906			185,505
Unallocated operating expenses		—			—			—			—			2,548,450
		1,448,670			44,479			1,520,005			246,699			5,808,303
Income (loss) from operations		(423,413	)		344,270			573,175			253,508			(1,800,910	)
Interest expense, net		—			—			—			—			(161,967	)
(Loss) income from continuing operations		(423,413	)		344,270			573,175			253,508			(1,962,877	)
Discontinued operations:
Income from discontinued operations														126,919
Loss on sale of discontinued operations														—
Net (loss) income		($423,413	)	$	344,270		$	573,175		$	253,508			($1,835,958	)

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	Six Months Ended June 30, 2008
	DOMESTIC XTRAC			INTERN’L DERM. EQUIPMENT			SKIN CARE			SURGICAL PRODUCTS AND OTHER			TOTAL
Revenues	$	5,544,705		$	1,866,178		$	6,699,249		$	3,610,481		$	17,720,613
Costs of revenues		2,914,584			906,688			2,140,464			2,191,398			8,153,134
Gross profit		2,630,121			959,490			4,558,785			1,419,083			9,567,479
Gross profit %		47.4	%		51.4	%		68.0	%		39.3	%		54.0	%
Allocated operating expenses:
Selling, general and administrative		4,055,941			137,881			3,405,099			307,878			7,906,799
Engineering and product development		168,214			20,790			247,634			220,394			657,032
Unallocated operating expenses		—			—			—			—			4,343,701
		4,224,155			158,671			3,652,733			528,272			12,907,532
Income (loss) from operations		(1,594,034	)		800,819			906,052			890,811			(3,340,053	)
Interest expense, net		—			—			—			—			(509,137	)
(Loss) income from continuing operations		(1,594,034	)		800,819			906,052			890,808			(3,849,190	)
Discontinued operations:
Income from discontinued operations														245,870
Loss on sale of discontinued operations														(545,844	)
Net (loss) income		($1,594,034	)	$	800,819		$	906,052		$	890,808			($4,149,164	)

	Six Months Ended June 30, 2007
	DOMESTIC XTRAC			INTERN’L DERM. EQUIPMENT			SKIN CARE			SURGICAL PRODUCTS AND OTHER			TOTAL
Revenues	$	4,022,852		$	1,297,771		$	6,580,407		$	2,617,930		$	14,518,960
Costs of revenues		2,293,047			595,704			2,027,731			1,628,952			6,545,434
Gross profit		1,729,805			702,067			4,552,676			988,978			7,973,526
Gross profit %		43.0	%		54.1	%		69.2	%		37.8	%		54.9	%
Allocated operating expenses:
Selling, general and administrative		2,992,743			69,399			2,767,119			306,537			6,135,798
Engineering and product development		—			—			191,091			210,382			401,473
Unallocated operating expenses		—			—			—			—			5,010,340
		2,992,743			69,399			2,958,210			516,919			11,547,611
Income (loss) from operations		(1,262,938	)		632,668			1,594,466			472,059			(3,574,085	)
Interest expense, net		—			—			—			—			(238,386	)
(Loss) income from continuing operations		(1,262,938	)		632,668			1,594,466			472,059			(3,812,471	)
Discontinued operations:
Income from discontinued operations														93,031
Loss on sale of discontinued operations														—
Net (loss) income		($1,262,938	)	$	632,668		$	1,594,466		$	472,059			($3,719,440	)

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

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

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

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

Note 12

Significant Alliances/Agreements:

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

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

Note 13

Subsequent Event:

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

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

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

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

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

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

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

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

Introduction, Outlook and Overview of Business Operations

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

· Domestic XTRAC,

· International Dermatology Equipment,

· Skin Care (ProCyte), and

· Surgical Products.

Domestic XTRAC

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

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

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

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

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

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

International Dermatology Equipment

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

Skin Care (ProCyte)

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

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

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

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

Surgical Products

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

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

Sale of Surgical Services Business

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

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

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

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

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

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

Critical Accounting Policies

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

Results of Operations

Revenues

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

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

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Domestic XTRAC Segment

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

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

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

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

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

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

International Dermatology Equipment Segment

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

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

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

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

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

Skin Care (ProCyte) Segment

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

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

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

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

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

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

Surgical Products Segment

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

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

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

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

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

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

Cost of Revenues

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

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

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

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

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

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

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

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

Gross Profit Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Selling, General and Administrative Expenses

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

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

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

· An increase of $70,000 in royalties;

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

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

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

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

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

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

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

Engineering and Product Development

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

Interest Expense, Net

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

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

Net Loss

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

Commitments and Contingencies

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

Impact of Inflation

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

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

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

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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Change in Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during the three and six months ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - Other Information

ITEM 1. Legal Proceedings

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

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

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

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

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

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

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

ITEM 1A. Risk Factors

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

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ITEM 6. Exhibits

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

SIGNATURES

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

PHOTOMEDEX, INC.

Date: August 8, 2008

By:  /s/ Jeffrey F. O’Donnell

Jeffrey F. O’Donnell

President and Chief Executive Officer

Date: August 8, 2008

By:  /s/ Dennis M. McGrath

Dennis M. McGrath

Chief Financial Officer

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