Note 12

Income Taxes:

The Company accounts for income taxes pursuant to FASB ASC Topic 740, Income Taxes ("ASC Topic 740"). ASC Topic 740 is an asset-and-liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences of events that have been recognized in the Company's financial statements or tax returns. For U.S. Federal and State income tax purposes, as well as U.K tax purposes, there is, unlike the treatment under U.S. generally accepted accounting principles, no step-up in the basis of assets of Pre-merged PhotoMedex as a result of the reverse merger on December 13, 2011. The historical basis of the assets under tax accounting rules carries over from Pre-merged PhotoMedex. As of December 27, 2012, the tax basis of many of those historical assets was increased through a taxable transfer of such assets to a non-consolidated subsidiary.

The Company recorded net income tax expense in 2012 and 2010 and a net tax benefit in 2011. Income tax expense (benefit), net of valuation allowance, consisted of the following:

	Year Ended December 31,
	2012			2011			2010
United States - Federal tax:
Current	$	2,752		$	246		$	3,232
Deferred		(1,572	)		(5,495	)		1,394

United States - State tax:
Current		315			-			457
Deferred		(2,074	)		(243	)		61

Israel:
Current		4,034			3,487			580
Deferred		(50	)		(17	)		563

United Kingdom: (Restated)
Current		-			-			-
Deferred		1,033			-			-

Income tax expense (benefit)	$	4,438		$	(2,022	)	$	6,287

A reconciliation of the effective tax rate with a hypothetical overall rate of 40.5% follows. The overall rate is comprised of a Federal rate of 34% and a blended State rate of 6.5%. The hypothetical rate of 40.5% is merely an expectational or notional rate, and not necessarily the rate that applies to the group in any given instance. There is no material effect from U.K. operations in 2011 through Photo Therapeutics Limited that were part of Pre-merged PhotoMedex.

	Year Ended December 31,
	2012			2011			2010
Net income before tax:
U.S	$	3,152		$	(16,309	)	$	12,386
Israel		20,414			13,980			5,502
U.K.		3,365			-			-
Total		26,931			(2,329	)		17,888
Tax rate		40.5	%		40.5	%		40.5	%


Theoretical Federal and State expense (benefit)	$	10,907		$	( 943	)	$	7,244
Decrease in taxes resulting from differences in tax rates, net		(5,539	)		(4,249	)		(869	)
Increase in taxes from permanent differences in stock-based compensation		737			3,109			158
Decrease in tax position from prior years		(2,325	)		-			-
Other*		658			61			(246	)

Income tax expense (benefit)	$	4,438		$	( 2,022	)	$	6,287

* Resulting mainly in 2011 and 2010 from the changes in the exchange rate of Israeli currency relative to the US dollar. Resulting in 2012, substantially from the use of loss carryforwards.

As of December 31, 2012, the Company had approximately $48 million of Federal net operating loss carryforwards in the United States. Approximately $19.3 million of the loss carryforward has been recognized in the deferred tax account without a valuation allowance. Such recognized carryforward has sufficient expected income and sufficient Section 382 limitation to be used in the 5-year period ending 2017. The balance of the loss carryforward has been placed under a valuation allowance.

After conversion to U.S. dollars, Photo Therapeutics Limited had approximately $9.6 million of net operating loss carryforwards. The Company has completed its evaluation of the effect of the reverse merger and integration of Radiancy's business on those NOLs; management has determined that the NOLs remain usable against future income of the UK subsidiary. These losses have no expiration under British rules.

As of December 31, 2012, the Company's gross deferred tax asset pertaining to State net operating loss carryforwards approximated $974 and expire generally through 2017 to 2032, depending on the particular State's rules. A portion of the State loss carryforwards have been placed under a valuation allowance, approximating $120.

In addition, the Company has approximately $1.5 million of AMT credits. The Company also has foreign tax credit carryforwards approximating $446. None of the Federal research tax credit carryforwards from Pre-merged PhotoMedex are deemed utilizable due to the constraints of Section 382.

The balance of the deferred tax asset at December 31, 2012 has a valuation allowance of $10,075 (as restated), which offsets the gross valuation of Federal and State NOL carryforwards

Deferred tax assets (liabilities) are comprised of the following.

	December 31,
	2012			2011
	(Restated)			(Restated)

Loss carryforwards	$	20,122		$	28,167
AMT credits:		1,495			203
Foreign tax credits:		446			-
Temporary differences
Accrued employment expenses		718			597
Amortization and write-offs		10,557			(5,744	)
Deferred R&D costs		3,670			3,786
Deferred revenues		301			211
Depreciation		5,537			3,760
Doubtful accounts		2,121			1,086
Other accruals and reserves		617			2,050
Return allowances		4,118			2,181

Gross deferred tax asset		49,702			36,297

Less: valuation allowance		(10,075	)		-

Net deferred tax asset	$	39,627		$	36,297

Among current assets	$	19,441		$	10,860
Among other non-current assets		20,186			25,437

PhotoMedex files corporate income tax returns in the United States, both in the Federal jurisdiction and in various State jurisdictions. The Company is subject to Federal income tax examination for calendar tax years 2009 through 2012 and is also generally subject to various State income tax examinations for calendar years 2005 through 2012. Photo Therapeutics Limited files in the United Kingdom. Radiancy (Israel) Limited files in Israel.

With the exception of the Israeli subsidiary, the Company has not received final tax assessments since inception. The Israeli subsidiary has received final tax assessments for the year ended December 31, 2006. In respect of this assessment, the Israeli subsidiary recorded in 2008 an accumulated tax provision in an amount of $500,000 and made a payment of the Israeli tax authority during 2009.

Under Israeli law, the Israeli subsidiary is entitled to various tax benefits by virtue of the "approved enterprise" status that was granted by the Investment Center to a number of its production facilities. The two principal benefits to which the Israeli subsidiary is entitled, are as follows:

Reduced tax rates: The Israeli subsidiary is entitled to reduced tax rates during a benefits period of from seven to ten years (depending on the classification of the Company as a foreign-invested company) and from the year in which the enterprise first earns taxable income. Since the Israeli subsidiary had taxable income in 2001, the benefits period attributable to the approved enterprise commenced in that year.

Income deriving from the approved enterprise will be tax-exempt for the first two years. In the succeeding five to eight years (depending on the classification of the Company as a foreign-invested company) the income will be taxed at a reduced rate. In the event of cash dividends from income which was tax-exempt as above, the Israeli subsidiary would have to pay 25% tax in respect of the mount distributed. The Israeli subsidiary intends to reinvest the amount of such tax-exempt income and not to distribute it as dividends.

On January 2, 2003, the Israeli subsidiary received its second letter of approval from the Investment Center to expand its facilities. The benefits regarding the second letter were granted in respect of the Israeli subsidiary's income that derives from revenues included in the letter of approval, subject to the fulfillment of the terms contained in the letter of approval. The benefits period attributed to this letter of approval commenced in 2003.

On January 25, 2005, the Israeli subsidiary received its third letter of approval from the Investment Center to expand its facilities. The benefits regarding the third letter were granted in respect of the Israeli subsidiary's income that derives from revenues included in the letter of approval, subject to the fulfillment of the terms contained in the letter of approval. The benefits period attributed to this letter of approval commenced in 2005.

Accelerated depreciation. The Company is entitled to accelerate depreciation in respect of equipment used by the approved enterprise during the first five tax years of the operation of each asset.

Conditions for entitlement to the benefits. The entitlement to the above benefits is contingent upon fulfillment of the conditions stipulated by the law, the regulations published thereunder and the letters of approval for the specific investments in the approved enterprise. Failure to comply with the conditions may result in the cancellation of the benefit, in whole or in part, and the Company may have to refund the amounts received, plus linkage differentials and interest. Management of the Israeli subsidiary believes that as of December 31, 2012 the subsidiary was in compliance with the above-mentioned conditions.

On July 23, 2009, as part of the Economic Efficiency Law (Legislative Amendment for the Implementation of the Economic Plan for the years 2009 and 2010) – 2009 (the "Arrangements Law"), Article 126 of the Income Tax Ordinance (New Version) – 1961 was amended, whereby the corporate tax rate would be gradually reduced commencing in the 2011 tax year and thereafter as follows: 2011 – 24%; 2012 – 23%; 2013 – 22%; 2014 – 21%; 2015 – 20% and 2016 and thereafter - 18%. On December 6, 2011, the Law for the Change in the Tax Burden (Legislative Amendments) – 2011 was publicized. As part of the law, among others, the Income Tax Ordinance (New Version) – 1961 were amended whereby, commencing in 2012, the reduction in the corporate tax rates will be cancelled and the Israeli corporate tax rate will be 25%.

Change in U.K. rates. In addition, effective for tax periods beginning on or after March 31, 2012, the United Kingdom tax rate was reduced from 26% to 24%. This change in rate will affect the tax provision with regard to the tax attributes of Photo Therapeutics Limited, the United Kingdom subsidiary.

Uncertainty in income taxes. The Company applies ASC Topic 740 which clarifies the accounting for uncertainty in income taxes recognized in the financial statements. This standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The Company policy is to record penalty and interest in general and administrative expenses.

The Company and its subsidiaries file income tax returns in the United States, Israel and the United Kingdom.

Management has conducted an analysis of the facts and law surrounding the income tax uncertainties underlying a liability, and has found that such liability as may have arisen was of a much lesser magnitude and is able to be extinguished by loss carryforwards and carrybacks,

Reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


Balance at January 1, 2010	$	2,700
Additions / Reductions during 2010		-
Balance December 31, 2010		2,700
Additions/ Reductions during 2011		-
Balance at December 31, 2011		2,700
Additions / Reductions during 2012		(2,325	)
Balance at December 31, 2012	$	375