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, 2008.

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 five business segments:

· Domestic XTRAC,

· International Dermatology Equipment,

· Skin Care (ProCyte),

· Photo Therapeutics (PTL), 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 generally 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. 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 as well as a means of addressing under-performing accounts while still preserving a vendor-customer relationship. We believe that we are able to reach a sector of the laser market that is better suited to a sale model than a per-procedure model at reasonable margins.

For the last several years we have sought to obtain health insurance coverage for 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, we now benefit from the fact that, by our estimates, 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 currently focus our efforts on accelerating the adoption of the XTRAC laser therapy for psoriasis and vitiligo by doctors and patients. Consequently, we have increased the size of our sales force and clinical technician personnel together with increased expenditures for marketing and advertising.

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 treatment after the effect of the initial treatment sessions starts to wear off. We have recently promoted a regional sales director in the Domestic XTRAC segment to head our XTRAC marketing operations, with the aim of helping our less successful customers emulate the business and clinical methods of our more successful customers.

International Dermatology Equipment

In the international market, we derive revenues by selling our dermatology laser and lamp 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 and lamp 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 have expanded the international marketing of the VTRAC since its introduction in 2006. The VTRAC is used to treat psoriasis and vitiligo.

Skin Care (ProCyte)

Our Skin Care segment generates revenues primarily from the sale of skin health, hair care and wound care products. In prior periods, the sale of copper peptide compound in bulk to Neutrogena and royalties from Neutrogena on licenses for our patented copper peptide compound were a significant factor in our revenues. More recently, however, Neutrogena's sales of peptide-based products have declined.

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

Our skin care 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. Our skin care products are formulated, branded and targeted at specific markets. Our 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. In 2009, we have introduced Neova® Skin Care Systems, which are kits of Neova products that target specific conditions with complete treatment programs. The programs are Intense Age Defense, Extremely Clear, and Essential Eye Recovery. These kits make it simpler for physicians to dispense the products and to ensure patient compliance and satisfaction.

Photo Therapeutics (PTL)

Our PTL segment is a developer and provider of non-laser light aesthetic devices for the treatment of a range of clinical and non-clinical dermatological conditions. Our PTL segment has a portfolio of independent, experimental research that supports the efficacy and safety of its Omnilux™ technology system. Based on a patented technology platform comprised of a unique light-emitting diode ("LED") array, this technology delivers narrow-band, spectrally pure light of specific intensity, wavelength and dose to achieve clinically proven results via a process called photo bio-modulation. Since this technology generates no heat, a patient feels no pain or discomfort which results in improved regime compliance and likelihood of repeat procedures; this is in direct contrast to the current laser light-based technologies serving the aesthetics market today.

Our PTL LED products compete in the professional aesthetics device market for LED aesthetic medical procedures. In addition, we have recently developed a line of consumer devices to address the home-use market opportunity. The FDA has issued over the counter ("OTC") clearances for our two hand-held consumer devices.

To date, we have incorporated our PTL technology offering into a range of products targeting both the professional based sector and the larger home-use market. Therefore, our PTL segment's current portfolio of products is divided into three types: professional products comprising the Omnilux™ systems for the medical market; the Lumiere™ systems to address the non-medical professional market; and home-use products to address the consumer market.

The consolidated financial statements include the results of Photo Therapeutics from February 27, 2009, the date of acquisition, through March 31, 2009.

Surgical Products

Our Surgical Products segment generates revenues by selling laser products and disposables to hospitals and surgery centers both within and outside of the United States. Also included in this segment are various non-laser surgical products (e.g. the ClearEss® II suction-irrigation system). We believe that sales of surgical laser systems and the related disposable base will tend to erode as hospitals continue to seek outsourcing solutions instead of purchasing lasers and related disposables for their operating rooms. We are working to offset such erosion by increasing sales from the Diode surgical laser, including original equipment manufacturer ("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 triggered exclusivity for worldwide sale in the peripheral vascular treatment field. Given, however, that AngioDynamics purchased the assets of a competitive diode laser company, we anticipate that it will elect to source its diodes through the assets so purchased instead of through us. We have not shipped any lasers to AngioDynamics since July 1, 2008.

Sales and Marketing

As of March 31, 2009, our sales and marketing organization consists of 75 full-time positions. Of the 75 sales personnel, they are directed to sales as follows: 72 in Domestic XTRAC, Skin Care and PTL and three in International Dermatology Equipment and Surgical Products.

Sale of Surgical Services Business

Our Surgical Services segment was 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 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, with the aid of our financial advisors, to enter into 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 8, 2008, we sold certain assets of the business, including accounts receivable, inventory and equipment, for $3,149,737.

Reverse Stock Split

On January 26, 2009, we completed the reverse split of our common stock in the ratio of 1-for-7, whereby, once effective, every seven shares of our common stock was exchanged for one share of our common stock. Our common stock began trading at the market opening on January 27, 2009 on a split-adjusted basis. The reverse split is intended to enable us to increase our marketability to institutional investors and to maintain our listing on the Nasdaq Global Market, among other benefits. As a result of the reverse stock split, as of March 31, 2009 we had 9,005,175 shares of common stock outstanding, taking into account the rounding up of fractional shares.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates in the three months ended March 31, 2009, except as noted below. 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, 2008.

We adopted Emerging Issues Task Force Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock ("EITF 07-5") effective January 1, 2009. The adoption of EITF 07-5's requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or "down-round" provisions). For example, warrants with such provisions will no longer be recorded as equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. Management evaluated whether warrants to acquire our common stock contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant agreements based on a variable that is not an input to the fair value of a "fixed-for-fixed" option. Management determined that the warrants issued to the Investor, in conjunction with the convertible note contain such provisions, thereby concluding they were not indexed to our stock. In accordance with EITF 07-5, we recognize these warrants as a liability at the fair value on each reporting date. We measured the fair value of these warrants as of March 31, 2009, and recorded a $91,222 reduction in the liability associated with these warrants as of March 31, 2009. We determined the fair values of these securities using a Black-Scholes valuation model.

We adopted SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"). SFAS No. 141R replaces SFAS No. 141 effective January 1, 2009. SFAS No. 141R 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 an acquisition and the goodwill acquired. For example, expenses incurred in an acquisition are to be expensed and not capitalized. This Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This Statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

The acquisition of the subsidiaries of Photo Therapeutics Group Ltd. was completed after December 31, 2008 and therefore SFAS No. 141R applies to the acquisition. Acquisition costs amounting to $1,532,798 and incurred through December 31, 2008 were expensed as of December 31, 2008; acquisition costs amounting to $432,353 and incurred in 2009 were expensed as of February 27, 2009.

Results of Operations

Revenues

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

                                                   Three Months Ended
                                                  March 31, (unaudited)
                                                  2009            2008
XTRAC Domestic Services                        $ 2,675,309     $ 2,110,707
International Dermatology Equipment Products       999,084       1,168,205
Skin Care (ProCyte) Products                     2,202,459       3,274,692
Photo Therapeutics (PTL) Products                  746,048               -
  Total Dermatology Revenues                     6,622,900       6,553,604

Surgical Products                                  875,442       1,777,230
  Total Surgical Revenues                          875,442       1,777,230

Total Revenues                                 $ 7,498,342     $ 8,330,834

Revenues from our Surgical Services segment, in the amount of $1,899,739 through March 31, 2008, have been accounted for in 2008 as a discontinued operation.

Domestic XTRAC Segment

Recognized treatment revenue for the three months ended March 31, 2009 and 2008 for domestic XTRAC procedures was $2,037,004 and $1,565,907, respectively, reflecting billed procedures of 35,744 and 28,819, respectively. In addition, 1,805 and 1,519 procedures were performed in the three months ended March 31, 2009 and 2008, respectively, without billing from us, in connection with clinical research and customer evaluations of the XTRAC laser. The increase in procedures in the period ended March 31, 2009 compared to the comparable period in 2008 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 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 under this program from the sale of XTRAC procedures or equivalent treatments to physicians participating in this program only to the extent the physicians have been reimbursed for the treatments. For the three months ended March 31, 2009, we recognized net revenues of $26,384 (400 procedures) under this program compared to deferred net revenues of $727 (11 procedures) for the three months ended March 31, 2008. The change in deferred revenue under this program is presented in the table below.

We exclude all sales of treatment codes made within the last two weeks of the period in determining the amount of procedures performed by its physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period. For the three months ended March 31, 2009 and 2008, we deferred net revenues of $347,417 (5,266 procedures) and $320,197 (4,891 procedures), respectively, under this approach.

For the three months ended March 31, 2009 and 2008, domestic XTRAC laser sales were $638,305 and $544,800, respectively. There were 14 and 10 lasers sold during these periods, respectively. Laser sales are made for various reasons, including costs of logistical support and customer preferences. We believe that we are able to reach a sector of the laser market that is better suited to a sale model than a per-procedure model at reasonable margins.

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

                                                                   Three Months Ended
                                                                  March 31, (unaudited)
                                                                  2009            2008
Total revenue                                                  $ 2,675,309     $ 2,110,707
Less: laser sales revenue                                         (638,305 )      (544,800 )
Recognized treatment revenue                                     2,037,004       1,565,907
Change in deferred program revenue                                 (26,384 )           727
Change in deferred unused treatments                               347,417         320,197
Net billed revenue                                             $ 2,358,037     $ 1,886,831
Procedure volume total                                              37,549          30,338
Less: Non-billed procedures                                          1,805           1,519
Net billed procedures                                               35,744          28,819
Avg. price of treatments billed                                $     65.97     $     65.47
Change in procedures with deferred program revenue, net               (400 )            11
Change in procedures with deferred unused treatments, net            5,266           4,891

The average price for an XTRAC 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 laser systems and related parts were $999,084 for the three months ended March 31, 2009 compared to $1,168,205 for the three months ended March 31, 2008. We sold 15 and 23 systems in the three-month periods ended March 31, 2009 and 2008, 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 no such used lasers in the three months ended March 31, 2009. We sold two such lasers in the three months ended March 31, 2008, at an average price of $37,500; and

· In addition to the XTRAC laser system (both new and used), we sell the VTRAC, a lamp-based, alternative UVB light source that has a wholesale sales price that is below our competitors' international dermatology equipment and below our XTRAC laser. In the three months ended March 31, 2009, we sold no VTRAC systems. In the three months ended March 31, 2008, we sold seven VTRAC systems.

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

                                     Three Months Ended
                                   March 31, (unaudited)
                                    2009           2008
Revenues                         $  999,084     $ 1,168,205
  Less: part sales                 (229,184 )      (229,205 )
Laser/lamp revenues                 769,900         939,000
  Laser/lamp systems sold                15              23
Average revenue per laser/lamp   $   51,327     $    40,826

Skin Care (ProCyte) Segment

For the three months ended March 31, 2009, our skin care ("ProCyte") segment revenues were $2,202,459 compared to $3,274,692 in the three months ended March 31, 2008. These revenues are generated from the sale of various skin, hair care and wound products and from the sale of copper peptide compound.

· The product sales decreased for the three months ended March 31, 2009 due to macro-economic conditions and to transitioning from our discontinued MD Lash Factor eyelash conditioning product to our internally developed Neova Advanced Essential Lash™ eyelash conditioner, which was launched February 1, 2009. This segment is more susceptible to such economic conditions than our other segments because cosmetic products are more likely to be discretionary and not medically necessary. Product sales for the three months ended March 31, 2009 were approximately $2.1 million, down from approximately $3.2 million for the three months ended March 31, 2008.

· Included in product sales for the three months ended March 31, 2008, were $451,577 of revenues from MD Lash Factor as part of an exclusive license to distribute in the United States. In the three months ended March 31, 2009, there were no revenues from this product as we have discontinued marketing MD Lash Factor as of January 31, 2009 under the terms of an agreement with Allergan, Inc. in settlement of certain patent litigation, and we have replaced it with our own peptide-based conditioner. From the launch date on February 1 through March 31, 2009, we sold $130,192 of Neova Advanced Essential Lash.

· Bulk compound sales decreased by $47,920 for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Minimum contractual royalties from Neutrogena expired in November 2007, and as a result such royalties were immaterial over the two periods.

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

                               Three Months Ended
                              March 31, (unaudited)
                              2009            2008
Product sales              $ 2,121,576     $ 3,242,692
Bulk compound sales             79,920          32,000
Royalties                          963               -
  Total ProCyte revenues   $ 2,202,459     $ 3,274,692

Photo Therapeutics (PTL) Segment

For the period from February 27, 2009 through March 31, 2009, our PTL segment's revenues were $746,048. Since PTL was acquired on February 27, 2009, there are no corresponding revenues for the three months ended March 31, 2008. PTL revenues are generated from the sale of LED devices and milestone payments on a licensing agreement targeting the mass consumer acne market.

The following table illustrates the key changes in our PTL segment for the periods reflected below:

. . .