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

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.

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.

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

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

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

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 . . .