Certain statements in this Quarterly Report on Form 10-Q, or this 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. based business with revenues generally 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 generally earn revenue each time a physician treats a patient with the equipment. We believe this arrangement will increase market penetration. We also may sell the laser directly to the customer for certain reasons, including the costs of logistical support and customer preference and especially now as a means of addressing under-performing accounts while still preserving a vendor-customer relationship. We believe that we are thus 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. 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. The Company intends to restructure sales and marketing efforts in operations that have heretofore been dependent upon external infusions of debt capital to fund growth.

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.

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 our 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 a higher 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 our PTL segment from February 27, 2009, the date of acquisition, through June 30, 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 agreed to manufacture a private-label, 980-nanometer diode laser system for AngioDynamics. However, AngioDynamics purchased the assets of a competitive diode laser company and has elected 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 June 30, 2009, our sales and marketing personnel consisted of 63 full-time positions. Of the 63 sales personnel, they are directed to sales as follows: 62 in Domestic XTRAC, Skin Care and PTL and one 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. As of June 30, 2009 we had 9,033,175 shares of common stock outstanding on a post-split basis, taking into account the rounding up of fractional shares. As a result of the stock split, we incurred $35,623 in registration costs.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates in the three and six months ended June 30, 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 outstanding warrants to acquire our common stock contain provisions that protect holders from declines in our 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 June 30, 2009 and recorded $832,494 and $923,716, respectively, as a reduction in the liability associated with these warrants for the three and six months ended June 30, 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. SFAS No. 141R 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 of $1,532,798 and incurred through December 31, 2008 were expensed as of December 31, 2008; acquisition costs of $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 June 30,           Six Months Ended June 30,
                                                         (unaudited)                          (unaudited)
                                                   2009               2008             2009                2008
XTRAC Domestic Services                        $  3,159,303       $  3,433,998     $   5,834,612       $   5,544,705
International Dermatology Equipment Products      1,060,607            697,973         2,059,691           1,866,178
Skin Care (ProCyte) Products                      2,011,730          3,424,557         4,214,189           6,699,249
Photo Therapeutics (PTL) Products                 1,280,588                  -         2,026,636                   -
  Total Dermatology Revenues                      7,512,228          7,556,528        14,135,128          14,110,132

Surgical Products                                   801,081          1,833,251         1,676,524           3,610,481
  Total Surgical Revenues                           801,081          1,833,251         1,676,524           3,610,481

Total Revenues                                 $  8,313,309       $  9,389,779     $  15,811,652       $  17,720,613

Revenues from our Surgical Services segment, in the amount of $1,762,010 and $3,661,749 for the three and six months ended June 30, 2008, respectively, have been accounted for in 2008 as a discontinued operation.

Domestic XTRAC Segment

Recognized treatment revenue for the three months ended June 30, 2009 and 2008 for domestic XTRAC procedures was $2,635,623 and $2,337,148, respectively, reflecting billed procedures of 35,602 and 33,476, respectively. In addition, 1,221 and 1,130 procedures were performed in the three months ended June 30, 2009 and 2008, 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, 2009 and 2008 for domestic XTRAC procedures was $4,672,627 and $3,903,055, respectively, reflecting billed procedures of 71,346 and 62,295, respectively. In addition, 3,026 and 2,649 procedures were performed in the six months ended June 30, 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 periods ended June 30, 2009 compared to the comparable periods in 2008 was largely due to the increased number of laser systems placed with our customers under our consignment program 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 June 30, 2009, we deferred net revenues of $30,285 (461 procedures) under this program compared to deferred net revenues of $58,120 (891 procedures) for the three months ended June 30, 2008. For the six months ended June 30, 2009, we deferred net revenues of $3,901 (59 procedures) under this program

compared to deferred net revenues of $58,847 (901 procedures) for the six months ended June 30, 2008.The change in deferred revenue under this program is presented in the table below.

We defer substantially all sales of treatment codes ordered by and delivered to the customer 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 June 30, 2009 and 2008, we recognized net revenues of $329,166 (5,015 procedures) and $212,519 (3,259 procedures), respectively, under this approach. For the six months ended June 30, 2009 and 2008, we deferred net revenues of $18,251 (277 procedures) and $107,678 (1,648 procedures), respectively, under this approach.

For the three and six months ended June 30, 2009, domestic XTRAC laser sales were $523,680 and $1,161,985, respectively. There were 11 and 25 lasers sold, respectively. 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. 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 preserving the 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, or consignment, 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 June 30,          Six Months Ended June 30,
                                                     (unaudited)                         (unaudited)
                                                2009               2008             2009              2008
Total revenue                              $    3,159,303      $  3,433,998     $   5,834,612     $  5,544,705
Less: laser sales revenue                        (523,680 )      (1,096,850 )      (1,161,985 )     (1,641,650 )
Recognized treatment revenue                    2,635,623         2,337,148         4,672,627        3,903,055
Change in deferred program
Revenue                                            30,285            58,120             3,901           58,847
Change in deferred unused
Treatments                                       (329,166 )        (212,519 )          18,251          107,678
Net billed revenue                         $    2,336,742      $  2,182,749     $   4,694,779     $  4,069,580
Procedure volume total                             36,823            34,606            74,372           64,944
Less: Non-billed procedures                         1,221             1,130             3,026            2,649
Net billed procedures                              35,602            33,476            71,346           62,295
Avg. price of treatments billed            $        65.64      $      65.20     $       65.80     $      65.33
Change in procedures with deferred
program revenue, net                                  461               891                59              901
Change in procedures with deferred
unused treatments, net                             (5,015 )          (3,259 )             277            1,648

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 laser systems and related parts were $1,060,607 for the three months ended June 30, 2009 compared to $697,973 for the three months ended June 30, 2008. We sold 25 and 14 systems in the three-month periods ended June 30, 2009 and 2008, respectively. International sales of our XTRAC and VTRAC laser systems and related parts were $2,059,691 for the six months ended June 30, 2009 compared to $1,866,178 for the six months ended June 30, 2008. We sold 40 and 38 systems in the six-month periods ended June 30, 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 four such used lasers in the three and six months ended June 30, 2009 at an average price of $32,500. We sold two and four such lasers in the three and six months ended June 30, 2008, at an average price of $25,000 and $31,250, 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 targeted to be below our competitors' international dermatology equipment and below our XTRAC laser. In the six months ended June 30, 2009, we sold 13 VTRAC systems all of which occurred in the three months ended June 30, 2009. In the three and six months ended June 30, 2008, we sold three and 13 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,
                                                     (unaudited)                         (unaudited)
                                                2009                2008             2009             2008
Revenues                                   $     1,060,607       $  697,973     $    2,059,691     $ 1,866,178
  Less: part sales                                (208,707 )       (161,973 )         (437,891 )      (391,178 )
Laser revenues                                     851,900          536,000          1,621,800       1,475,000
  Laser systems sold                                    25               14                 40              38
Average revenue per laser                  $        34,076       $   38,286     $       40,545     $    38,816

Skin Care (ProCyte) Segment

For the three months ended June 30, 2009, our Skin Care (ProCyte) segment revenues were $2,011,730 compared to $3,424,557 in the three months ended June 30, 2008. For the six months ended June 30, 2009, our Skin Care (ProCyte) segment revenues were $4,214,189 compared to $6,699,249 in the six months ended June 30, 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 and six months ended June 30, 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 June 30, 2009 were approximately $2.0 million, down from approximately $3.3 million for the three months ended June 30, 2008. Product sales for the six months ended June 30, 2009

were approximately $4.1 million, down from approximately $6.5 million for the six months ended June 30, 2008.

· Included in product sales for the three and six months ended June 30, 2008, were $656,257 and $1,107,834, respectively, of revenues from MD Lash Factor as part of an exclusive license to distribute in the United States. In the three and six months ended June 30, 2009, there were no revenues from this product as we have discontinued marketing MD Lash Factor as of January 31, 2009 under . . .