---

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# UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, DC
20549

# Form 20-F

# (Mark One)

|o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
ACT OF 1934
|- | ------------------------------------------------------------------------------------------------

# OR

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

# For the Fiscal year ended December 31, 2008

# OR

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

# OR

|o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|- | -------------------------------------------------------------------------------------------

# Commission file
number: 000-27572

LUMENIS LTD.
(Exact name of
Registrant as specified in its charter)

Not Applicable
(Translation of
Registrants Name into English)

Israel
(Jurisdiction of
Incorporation or Organization)

P.O. Box 240,
Yokneam 20692, Israel
(Address of
Principal Executive Offices)

William Weisel,
General Counsel
Telephone number: 011
972 4 959 9356; E-mail address: bill.weisel@lumenis.com;Facsimile number: 011 972 4
959 9355
Lumenis Ltd., P.O.
Box 240, Yokneam 20692, Israel
(Name, Telephone,
E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

# None

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Ordinary Shares, par
value NIS 0.1
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

# None

Indicate
the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report:

177,262,739 Ordinary Shares, NIS 0.1 par value, including 35,527 treasury shares, at
December 31, 2008.



---

---

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.

Yes oNo x

If
this report is an annual or transitional report, indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

Yes oNo x

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.

Yes xNo o

Indicate
by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).

Yes oNo  o

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

|                          |                     |                        
|------------------------- | ------------------- | -----------------------
|
|
|
|
|Large accelerated filer o | Accelerated filer o | Non-accelerated filer x

Indicate
by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:

|          |                                                       |        
|--------- | ----------------------------------------------------- | -------
|
|
|
|
|US GAAP x | International Financial Reporting Standards as issued | Other o
|          | by the International Accounting Standards Board o     |        

If
"Other" has been checked in response to the previous question, indicate by check mark
which financial statement item the registrant has elected to follow.

Item 17 o  Item 18 o

If
this is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).

Yes oNo x

2

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TABLE OF CONTENTS

|                                                     | Page
|---------------------------------------------------- | ----
|
|
|
|
|TABLE OF CONTENTS                                    | 3   
|CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | 5   
|DEFINITIONS                                          | 5   
|USE OF TRADE NAMES                                   | 5   

|         |                                                         |   
|-------- | ------------------------------------------------------- | --
|
|
|
|
|         | PART I                                                  |   
|ITEM 1.  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   | 6 
|ITEM 2.  | OFFER STATISTICS AND EXPECTED TIMETABLE                 | 6 
|ITEM 3.  | KEY INFORMATION                                         | 6 
|A.       | Selected Financial Data                                 | 6 
|B.       | Not applicable                                         
|C.       | Not applicable                                         
|D.       | Risk Factors                                            | 6 
|ITEM 4.  | INFORMATION ON THE COMPANY                              | 22
|A.       | History and Development of the Company                  | 22
|B.       | Business Overview                                       | 26
|C.       | Organizational Structure                                | 43
|D.       | Property, Plants and Equipment                          | 43
|ITEM 4A. | UNRESOLVED STAFF COMMENTS                               | 44
|ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS            | 44
|A.       | Operating Results                                       | 44
|B.       | Liquidity and Capital Resources                         | 54
|C.       | Research and Development, Patents and Licenses, Etc     | 59
|D.       | Trend Information                                       | 59
|E.       | Off-Balance Sheet Arrangements                          | 59
|F.       | Tabular Disclosure of Contractual Obligations           | 60
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES              | 60
|A.       | Directors and Senior Management                         | 60
|B.       | Compensation of Directors and Senior Management         | 63
|C.       | Board Practices                                         | 64
|D.       | Employees                                               | 70
|E.       | Share Ownership                                         | 70
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 70
|A.       | Major Shareholders                                      | 73
|B.       | Related Party Transactions                              | 73
|C.       | Not applicable                                         
|ITEM 8.  | FINANCIAL INFORMATION                                   | 75
|A.       | Consolidated Statements and Other Financial Information | 77
|B.       | Significant Changes                                     | 77
|ITEM 9.  | THE OFFER AND LISTING                                   | 82
|A.       | Listing Details                                         | 82
|B.       | Not applicable                                         
|C.       | Markets                                                 | 82
|D.       | Not applicable                                         
|E.       | Not applicable                                         
|F.       | Not applicable                                         
|ITEM 10. | ADDITIONAL INFORMATION                                  | 83
|A.       | Not applicable                                         
|B.       | Memorandum and Articles of Association                  | 84
|C.       | Material Contracts                                      | 86
|D.       | Exchange Controls                                       | 86
|E.       | Taxation                                                | 86
|F.       | Not applicable                                         
|G.       | Not applicable                                         
|H.       | Documents on Display                                    | 93
|I.       | Not applicable                                         

3

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|           |                                                                              |    
|---------- | ---------------------------------------------------------------------------- | ---
|
|
|
|
|           |                                                                              |    
|          
|ITEM 11.   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 93 
|ITEM 12.   | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 95 
|          
|           | PART II                                                                      |    
|ITEM 13.   | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 95 
|ITEM 14.   | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 95 
|ITEM 15.   | CONTROLS AND PROCEDURES                                                      | 95 
|ITEM 15T.  | CONTROLS AND PROCEDURES                                                      | 95 
|ITEM 16A.  | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 97 
|ITEM 16B.  | CODE OF ETHICS                                                               | 97 
|ITEM 16C.  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 97 
|ITEM 16D.  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 98 
|ITEM 16E.  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 98 
|ITEM 16F.  | CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT                                 | 98 
|ITEM 16G.  | CORPORATE GOVERNANCE                                                         | 98 
|          
|           | PART III                                                                     |    
|ITEM 17.   | FINANCIAL STATEMENTS                                                         | 98 
|ITEM 18.   | FINANCIAL STATEMENTS                                                         | 98 
|ITEM 19.   | EXHIBITS                                                                     | 98 
|SIGNATURES |                                                                              | 101

4

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# CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS

Certain
information included or incorporated by reference in this annual report on Form 20-F may
be deemed to be forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933,
and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
are often characterized by the use of forward-looking terminology such as may,
will, expect, anticipate, estimate,
continue, believe, should, intend,
project or other similar words, but are not the only way these statements are
identified.

These
forward-looking statements may include, but are not limited to, statements relating to our
objectives, plans and strategies, statements that contain projections of results of
operations or of financial condition and all statements (other than statements of
historical facts) that address activities, events or developments that we intend, expect,
project, believe or anticipate will or may occur in the future.

Forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties. We have based these forward-looking statements on assumptions and
assessments made by our management in light of their experience and their perception of
historical trends, current conditions, expected future developments and other factors they
believe to be appropriate.

Important
factors that could cause actual results, developments and business decisions to differ
materially from those anticipated in these forward-looking statements may be found in
Item 3.D Key Information  Risk Factors, Item 4
Information on the Company and Item 5 Operating and Financial
Review and Prospects, and in this annual report generally. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result
of various factors, including all of the risks discussed in Item 3.D Key
Information  Risk Factors and elsewhere in this annual report. Readers are
urged to carefully review and consider the various disclosures made throughout the
entirety of this annual report, which are designed to advise interested parties of the
risks and factors that may affect our business, financial condition, results of operations
and prospects.

Any
forward-looking statements in this annual report are made as of the date hereof, and we
undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as required by
law.

# DEFINITIONS

In this annual report, unless the
context otherwise requires:

| | references
to Lumenis, the Company, us, weand our refer
to Lumenis Ltd., an Israeli company (the Registrant), and its consolidated
subsidiaries;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | references
to ordinary shares, our shares and similar expressions refer to
the Registrants Ordinary Shares, par value NIS 0.1 per share;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | references
to "dollars", "U.S. dollar" and "$" are to United States Dollars;
|- | ----------------------------------------------------------------------------

| | references
to "shekels" and "NIS" are to New Israeli Shekels, the Israeli currency;
|- | -----------------------------------------------------------------------------------

| | references
to the "Companies Law" are to Israel's Companies Law, 5759-1999, as currently amended;
|- | -------------------------------------------------------------------------------------------------

| | references
to the "Exchange Act" are to the Securities Exchange Act of 1934, as amended;
|- | ----------------------------------------------------------------------------------------

| | references
to "NASDAQ" are to the Nasdaq Stock Market; and
|- | ----------------------------------------------------------

| | references
to the "SEC" are to the United States Securities and Exchange Commission.
|- | ------------------------------------------------------------------------------------

# USE OF TRADE NAMES

Unless
the context otherwise indicates or requires, Lumenis and all product names and
trade names used by us in this annual report are our trademarks in which we have
proprietary rights and that may be registered in certain jurisdictions. These trademarks
are important to our business. Although we have omitted the ®"
and TM trademark designations for such trademarks in this annual
report, all rights to such trademarks are nevertheless reserved.

5

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# PART I

|ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
|------- |  | ------------------------------------------------------

Not
Applicable.

|ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE.
|------- |  | ----------------------------------------

Not
Applicable.

|ITEM 3. |  | KEY INFORMATION.
|------- |  | ----------------

# A. Selected Financial
Data.

The
selected financial data set forth in the table below has been derived from our audited
historical financial statements for each of the years from 2004 through 2008. The selected
consolidated statement of operations data for the years 2006, 2007 and 2008, and the
selected consolidated balance sheet data at December 31, 2007 and 2008, have been
derived from our audited consolidated financial statements set forth elsewhere in this
annual report. The selected consolidated statement of income data for the years 2004 and
2005, and the selected consolidated balance sheet data at December 31, 2004, 2005 and
2006, have been derived from our previously published audited consolidated financial
statements, which are not included in this annual report. The selected financial data
should be read in conjunction with our consolidated financial statements, and are
qualified entirely by reference to such consolidated financial statements.

|                        | Consolidated Statements of Operations Data
For the Year Ended December 31,
|----------------------- | --------------------------------------------------------------------------
|
|
|
|
|Net revenues            |                                                                           
|Operating income (loss) |                                                                           
|Net loss                |                                                                           
|Net loss per share*     |                                                                           

|                                          | Consolidated Balance Sheet Data
As of December 31,
|----------------------------------------- | --------------------------------------------------
|
|
|
|
|Total assets                              |                                                   
|Shareholders equity (deficiency)          |                                                   
|                                          |                                                   
|Weighted average number of shares used in |                                                   
|computing loss per share* (in thousands)  |                                                   
|* Basic and diluted                       |                                                   

# B. Capitalization and
Indebtedness.

Not
Applicable.

C. Reasons for the Offer and Use of Proceeds.

Not
Applicable.

# D. Risk Factors.

The
following summarizes certain risks that may materially affect our business, financial
condition and/or results of operations.

6

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# Risks Related to our
Business.

| | We
are highly leveraged, with indebtedness that is substantial in relation to our
shareholders equity (deficiency) and significant debt service that could have a
material adverse effect on our continuing liquidity and financial condition.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
total bank debt is currently approximately $112.1 million (excluding the sum of
$18.75 million, which our bank has agreed to write off subject to our timely making
certain payments). Prior to our December 2006 debt restructuring and again in 2008 and
2009, we had to seek extensions of principal payment dates and bank waivers due to our
inability to meet financial covenants under our debt restructuring agreement with the
bank. Our ability to comply with the debt covenants under the debt restructuring agreement
is subject to the risk factors described below, and any failure to comply with the
covenants could have a material adverse effect on our liquidity and operations. Following
completion of an amendment to the debt restructuring agreement with the bank on
June 30, 2009, the interest payable on our bank debt is now LIBOR rate plus 1.5%,
LIBOR rate plus 3% or LIBOR rate plus 5.25%. Our substantial debt requires us to dedicate
a substantial portion of our cash flow to debt service, could impair our ability to obtain
additional financing for capital expenditures or other purposes, could hinder our ability
to adjust rapidly to changing market conditions and competitive pressures, and could make
us more vulnerable in the event of a continued downturn in our business or further
deterioration of general economic conditions. For further information concerning our
indebtedness, see Operating Results and Liquidity and Capital
Resources in Item 5 below. An increase in LIBOR interest rates could materially
adversely affect us.

| | Conditions
and changes in the national and global economic environments may adversely affect our
business and financial results.
| | --------------------------------------------------------------------------------------------------------------------------------

Adverse
economic conditions in markets in which we operate can harm our business. Recently,
economic conditions and financial markets have become increasingly negative, and global
financial markets have experienced a severe downturn stemming from a multitude of factors,
including adverse credit conditions impacted by the sub-prime mortgage and general credit
crisis, slower economic activity, concerns about deflation, increased energy costs,
decreased consumer confidence, reduced corporate profits and capital spending, adverse
business conditions and liquidity concerns and other factors. Many economies around the
world, including the economies of most of the principal geographic markets for our
products, are currently in recession. During challenging economic times and in tight
credit markets, many customers may delay or reduce technology purchases. The vanity market
for aesthetic procedures and the market for our higher priced products, are particularly
vulnerable to an economic downturn, since the end users of our products may decrease the
demand for our products when they have less discretionary income. In addition, in many
instances, the ability of our customers to purchase our products depends in part upon the
availability of bank financing at acceptable interest rates. Furthermore, in the surgical
market, hospitals and similar institutions, in an economic downturn, may be less willing
or unable to provide the requisite budget for the purchase of our products. These factors
could result in reductions in sales of our products, longer sales cycles, difficulties in
collection of accounts receivable, slower adoption of new technologies and increased price
competition. In addition, weakness in the end-user market could negatively affect the cash
flow of our distributors and resellers who could, in turn, delay paying their obligations
to us. This would increase our credit risk exposure and cause delays in our recognition of
revenues on future sales to these customers. Any of these events would likely harm our
business, and could have a material adverse effect on our results of operations, cash
flows and financial condition.

| | We
require significant cash funds for our operations, and should we fail to generate or
otherwise raise requisite funds, this could have a material adverse effect on our
continuing liquidity and financial condition.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Internally
generated funds, together with available cash may not be sufficient to meet our presently
anticipated day-to-day operating expenses, commitments, working capital, capital
expenditure and debt payment requirements. In particular, the level of internally
generated funds is subject to the risk factors described herein, and must be viewed in
light of our recent history of substantial operating and net losses and negative cash flow
from operations. If we are unsuccessful in achieving our plans, we will again need to seek
additional sources of financing in order to continue operations. Such financing may not be
available on terms acceptable to us, or at all. If additional financing were to be in the
form of equity, it could result in substantial further dilution to our shareholders as did
our December 2006 recapitalization and, to a lesser extent, our June 2009 equity
financing, as discussed in Recapitalization and Equity Financing in
Item 4.A below.

| | We
have a history of operating losses, and we may not achieve or maintain profitability.
| | ----------------------------------------------------------------------------------------

We
have incurred net losses for each of the last eight years. Our net losses for each of the
last five years have been approximately $24.7 million in 2004, $11.2 million in
2005, $50.3 million in 2006, $28.1 million in 2007 and $44.2 million in
2008. We may not be able to achieve profitability on a quarterly or annual basis. If we
are unable to achieve profitability, this will materially adversely affect our financial
condition and the value of our shares.

| | Many
of our products are mature and our failure to introduce new products may adversely affect
our business and operating results.
| | ----------------------------------------------------------------------------------------------------------------------------------

Many
of our products are mature and, like the products of most of our competitors, are based
upon existing technologies with frequent enhancements and upgrades. However, demand for
our products could be significantly diminished were one or more of our competitors to
introduce new products based upon new technologies that render our products obsolete.
Also, particularly in the aesthetic market, there is a tendency among some of our
competitors to introduce more frequently new products based upon existing technologies.
Accordingly, our failure to introduce new products in one or more of the business segments
in which we operate could reduce our share of the market in that segment and have a
material adverse effect on our business, results of operations and financial condition.

7

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| | In
the market for laser, light-based and radio frequency-based systems medical applications,
we seek to replace traditional procedures and our business will suffer if we fail to
educate customers or if the market does not develop as we expect.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
many cases our products seek to replace traditional medical procedures, such as incisions
for medical procedures and cutting and ablating surgical procedures. We cannot be certain
that a sufficiently broad-based market will emerge for our newer and planned products. A
significant proportion of practitioners in both of these categories of procedures may opt
to continue with traditional procedures with which they are familiar rather than investing
in high technology alternatives. We may not be successful in our effort to educate
potential end-user customers about the benefits of our products. If our markets do not
develop, or develop more slowly than expected, our business, results of operations and
financial condition will be materially adversely affected.

| | The
markets in which we sell our products are intensely competitive, and increased
competition could continue to cause reduced sales levels, reduced gross margins or the
loss of market share, and materially harm our business and results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Competition
in our markets is intense and we expect it to increase. Competition arises from other
light-based products, as well as alternate technologies (not based upon laser technology).
We also face competition from companies selling accessories to our products. Competitors
range in size from small, single product companies to large, multifaceted corporations,
which may have greater financial, technical, marketing and other resources than those
available to us. Some of these competitors may have greater name recognition, broader
product lines, larger customer bases, more extensive relationships with customers and the
ability to devote greater resources than we can to the development, promotion, sale and
support of their products.

Our
major direct competitors in our principal markets are: in the surgical market, Dornier,
SSI, Deka Laser Technologies and AMS (formerly Laserscope); in the aesthetic market, Alma
Lasers, Candela Corporation, Cutera, Cynosure, Deka Laser Technologies, Lasering, Lutronic
Corporation, Palomar Medical Technologies, Sciton, Solta Medical and Syneron Medical Ltd;
and in the ophthalmic market, Alcon Corporation, Ellex Medical Lasers, Carl Zeiss
Meditech, Nidek Technologies, Iridex Corporation and Quantel Corporation. The effect of
increased competition could adversely affect our sales levels, gross margins and market
share and could have a material adverse effect on our business, results of operations and
financial condition. For additional information concerning our competitors, see
Business Overview in Item 4.B below.

Any
business combinations or mergers among our competitors, forming larger competitors with
greater resources, or the acquisition of a competitor by a major medical or technology
corporation seeking to enter this business, could further result in increased competition
and have a material adverse effect on our business, results of operations and financial
condition.

| | Exchange
rate fluctuations between the U.S. dollar or other currencies and the shekel or
other currencies may negatively affect our results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

A
majority of our revenues are in U.S. dollars, while a significant portion of our
expenses, principally salaries and the related personnel expenses for Israeli employees
and consultants, local vendors and subcontractors, are in shekels. The remainder of our
revenues are in currencies other than shekels and U.S. dollars. As a result, we are
exposed to the risk that the U.S. dollar will devalue in relation to the shekel or
that the rate of inflation in Israel will exceed the rate of devaluation of the shekels in
relation to the dollar or other currencies or that the timing of this devaluation lags
behind inflation in Israel. Such currency fluctuations would have the effect of increasing
the dollar cost of our operations and would therefore have a material adverse effect on
our dollar-measured results of operations. The rate of devaluation of the dollar against
the shekel was approximately 1.1% in 2008 and 8.6% in 2007, which in both years was
compounded by inflation in Israel at rates of approximately 3.8% and 3.4%, respectively.
This had the effect of increasing the dollar cost of our operations in Israel.

Furthermore,
because most of our international revenues are denominated in U.S. dollars, a
strengthening of the dollar versus other currencies, in particular the euro and the
Japanese yen, will negatively impact our sales and make collection of receivables more
difficult. In 2007, the exchange rate of the dollar in relation to the euro and the
Japanese yen did not change significantly. However, in 2008, the dollar appreciated in
relation to the euro by 6.4%, although it was devalued in relation to the Japanese yen.

We
cannot predict any future trends in the rate of inflation in Israel or the rate of
devaluation or appreciation of the shekel or other currencies against the dollar.
Although, starting in 2008, we began to engage in currency hedging activities, we may,
nevertheless, not be adequately protected from adverse effects of currency fluctuations
and the impact of inflation in Israel. For additional information relating to the impact
of exchange rate fluctuations, see Impact of Inflation and Currency
Fluctuations in Item 5.A below.

8

---

---

| | We
depend on cooperative arrangements with third parties to develop, introduce and market new products,
product enhancements and new applications. The failure of such arrangements or our inability to enter into future
such arrangements could materially adversely affect our business and results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
depend on both clinical and commercial cooperative arrangements with third parties in
connection with the research innovation and clinical testing of our products. We have
entered into such cooperative arrangements with academic medical centers and physicians.
The failure to make such cooperative arrangements in the future, or the failure of any
current or future cooperative arrangements, could have a material adverse effect on our
ability to introduce new products or applications and therefore could have a material
adverse effect on our business and results of operations.

| | We
face various risks in the manufacture of our products that could result in disruptions
and other constraints on the manufacturing process that could materially adversely affect
our business and results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
manufacture of our lasers and the related delivery devices is a highly complex and precise
process. We assemble critical subassemblies and most of our final products at our
facilities in Salt Lake City, Utah and Yokneam, Israel. In addition, we procure certain
turn-key systems from several suppliers under original equipment manufacturer (OEM)
agreements. We may experience manufacturing difficulties, quality issues or assembly
constraints, both in respect of existing products and with regard to new products that we
may introduce. We may not be able to manufacture sufficient quantities of our products,
which may require that we qualify other manufacturers for our products. Furthermore, we
may experience delays, disruptions, capacity constraints or quality problems in our
manufacturing operations and, as a result, product shipments to our customers could be
delayed, which could materially negatively affect our business and results of operations.

| | Some
of our customers willingness to purchase our products depends on their ability to
obtain reimbursement for medical procedures using our products, and our revenues could
suffer from changes in third-party coverage and reimbursement policies.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
medical segment customers include doctors, clinics, hospitals and other health care
providers whose willingness and ability to purchase our products depends in part upon
their ability to obtain reimbursement for medical procedures using our products from
third-party payers, including private insurance companies, and, in the U.S., from health
maintenance organizations, and federal, state and local government programs, including
Medicare and Medicaid. Third-party payers are increasingly scrutinizing health care costs
submitted for reimbursement and may deny coverage and reimbursement for the medical
procedures made possible by our products. Failure by our customers to obtain adequate
reimbursement from third-party payers for medical procedures that use our products, or
changes in third-party coverage and reimbursement policies, could have a material adverse
effect on our sales, results of operations and financial condition.

| | Some
of our products are complex in design and could contain defects that are not detected
until deployed by our customers and could lead to product liability claims, which could
materially adversely affect our business and results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Laser
and pulsed light systems are inherently complex in design and require ongoing scheduled
maintenance. Despite testing, the technical complexity of our products, changes in our or
our suppliers manufacturing processes, the inadvertent use of defective materials by
us or our suppliers and other factors could decrease product reliability.

If
we are unable to prevent or fix defects or other problems, or fail to do so on a timely
basis, we could experience, among other things:

| |  | Delays
in the recognition of revenues or loss of revenues, particularly in the case of new
products;
| | - | ----------------------------------------------------------------------------------------------------

| |  | Legal
actions by customers, patients and other third parties, which could result in substantial
judgments or settlement costs for us;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | Loss
of customers and market share;
| | - | -----------------------------------

| |  | Failure
to attract new customers or achieve market acceptance;
| | - | --------------------------------------------------------------

| |  | Increased
costs of product returns and warranty expenses;
| | - | ---------------------------------------------------------

| |  | Damage
to our reputation; and
| | - | -----------------------------

| |  | Diversion
of development, engineering and management resources.
| | - | ---------------------------------------------------------------

In
addition, some of our products are combined with products from other vendors, which may
contain defects. As a result, should problems occur, it may be difficult to identify the
source of the problem. There are also risks of physical injury to a patient when treated
with one of our products, even if a product is not defective.

9

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The
coverage limits of our product liability insurance policies may not be adequate to cover
future claims. A successful claim brought against us in excess of, or outside of, our
insurance coverage could have a material adverse effect on our business, operating results
and financial condition.

| | We
may be required to implement a costly product recall, which could materially adversely
affect our business and results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------

In
the event that products that we manufacture or sell prove to be defective, we may
voluntarily recall them or implement a field correction, or the United States Food and
Drug Administration (the FDA) or other regulatory authority could require us
to implement a recall or a field correction, or a manufacturer or distributor of one of
the products that we distribute or manufacture could require us to implement a recall or
field correction.

Though
it is not possible to quantify the economic impact of any future recall or a field
correction, such recall or correction could have a material adverse effect on our
business, operating results and financial condition.

| | If
we fail to accurately forecast component and material requirements for our products, we
could incuradditional costs and significant delays in shipments, which could result in
loss of customers, or we may manufacture in excess of requirements and part of our
inventory may later become obsolete or excessive, any of which could materially adversely
affect our business, financial position and results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Due
to market conditions, our customers and potential customers frequently require delivery of
products within a relatively short time frame, and in certain instances, we manufacture
our products to be available on the shelf for immediate delivery. In order to
meet such deadlines, we must accurately predict the demand for our products, the product
mix and the lead times required to obtain the necessary components and materials. Lead
times for components and materials that we order vary significantly and depend on various
factors, including the specific supplier requirements, the size of the order, contract
terms and current market demand for components. Due to the sophisticated nature of the
components, some of our suppliers may need six months or more lead time. If we
overestimate our component and material requirements, we may have excess inventory, which
could lead to inventory obsolescence and associated impairments, which would increase our
costs, impair our available liquidity and have a material adverse effect on our business,
operating results and financial condition. If we underestimate our component and material
requirements, we may have inadequate inventory, which could interrupt and delay delivery
of our products to our customers, expose us to penalties, strain our relationship with our
customers, and, as a consequence, we may lose future sales to such customers. Any of these
occurrences would negatively impact our net sales, business and operating results and
could have a material adverse effect on our business, operating results and financial
condition.

| | We
have allocated substantial sums to goodwill as a result of the acquisitions made by us
over the years.If it should become necessary to write off a material part of this
goodwill, our results of operationscould be materially adversely affected.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At
December 31, 2008, we had a balance of $50.2 million allocated to goodwill in
connection with various acquisition made by us. Goodwill is tested for impairment annually
or more frequently if impairment indicators are present. Should a test reveal that there
has been an impairment of the value of goodwill, it would be necessary to write-off such
amount. Furthermore, if public trading in our shares resumes, our stock price and,
consequently, our market capitalization, may decline. If the value of our market
capitalization falls below the value of our shareholders equity, it might indicate
that a write-down of our goodwill is required. In 2008, we recorded impairment of goodwill
in the amount of approximately $22.6 million in respect of our Aesthetic business. A
substantial write-off of goodwill could materially adversely affect our results of
operations.

| | If
sales-outstanding increase, we may suffer from a cash shortfall, which could materially
adversely affect our business, financial condition and results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
days sales-outstanding (DSOs) could increase as a result of any one or more of
a number of factors, including customers demands for better payment terms or as a
consequence of the global credit crunch in the capital markets. Should we experience a
significant increase in DSOs, this could result in a cash shortfall, in which event, our
business, results of operations, cash flow and financial position could be materially
adversely affected.

| | We
and some of our subsidiaries have not received final tax assessments for several years
and we may be subject to additional and unexpected tax demands, interest and penalties,
which may adversely affect our results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have not received a final assessment for tax in Israel since 2000. In addition, in a
number of other countries in which we operate, or have operated, we have filed our
statutory tax returns but have not received final assessments and we may be subject to tax
audits and assessments by the applicable tax authorities. We cannot assure you that we
will not be subject to future tax audits or significant assessments for tax (including
value added tax), customs duties, penalties and other levies by applicable authorities. In
such event, we may be required to pay additional amounts, as a result of which our results
of operations and financial condition may be materially adversely affected. See also in
this Item below, under Risk Relating Primarily to Our Location in Israel, for
a discussion of the risk relating to a dispute with the Israel tax authority regarding the
proposed disallowance of certain tax benefits.

10

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| | We
may not be able to protect our proprietary technology, and its unauthorized use by a
third party could materially adversely affect our competitive advantage, business and
results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
rely on a combination of patent, copyright, trademark and trade secret laws,
non-disclosure and confidentiality agreements, licenses, assignments of invention
agreements and other restrictions on disclosure to protect our intellectual property
rights. We have obtained and now hold approximately 250 patents worldwide and have
applied for approximately 80 additional patents worldwide. Our patent applications
may not be approved, and any patents that may be issued may not be adequate to protect our
intellectual property. Additionally, any issued patents may be challenged by third
parties, and patents that we hold may be found by a judicial authority to be invalid or
unenforceable. Other parties may independently develop similar or competing technology or
design around any patents that may be issued to or held by us. We cannot be certain that
the steps that we have taken will prevent the misappropriation of our intellectual
property, particularly in foreign countries in which laws may not protect our proprietary
rights as fully as in the United States. Moreover, if we lose any key personnel, we may
not be able to prevent the unauthorized disclosure or use of our technical knowledge or
other trade secrets by those former employees. For additional details concerning our
intellectual property, see  Business Overview  Patents and Intellectual
Property in Item 4.B below. If we are unable to maintain the security of our
proprietary technology, it could materially adversely affect our business and results of
operations.

| | If
material patents were to expire prior to our developing and patenting successful
innovations to replace such technology, our business and results of operations could be
materially adversely affected.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Patents
filed both in the United States and Europe now generally have a life of twenty years from
the filing date. Patents filed in the United States prior to June 1995 expire the later of
twenty years from filing or seventeen years from their respective issue date. We hold
several important patents that are due to expire in the next few years. If our expired
patents are still material to our business at the time of expiration and we fail to
develop and patent successful innovations before such patents expire, our business and
results of operations could be materially adversely affected.

| | We
are, or may become, subject to litigation regarding intellectual property rights, the
results of which could seriously harm our business and materially adversely affect our
results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
laser and light-based systems industry is characterized by a very large number of patents,
some of which may be of questionable scope, validity or enforceability, and some of which
appear to overlap with other issued patents. As a result, there is a significant amount of
uncertainty in the industry regarding patent protection and infringement. In recent years,
there has been significant litigation in the United States involving patents and other
intellectual property rights. We currently are, and in the future may continue to be, a
party to claims and litigation as a result of alleged infringement by third parties of our
intellectual property, and may also became subject to claims and litigation alleging
infringement by us of third party intellectual property (see Legal Proceedings
in Item 8.A below). These claims and any resulting lawsuits, if resolved adversely to
us, could subject us to significant liability for damages or invalidate or render
unenforceable our intellectual property. In addition, because patent applications can take
many years to issue, there may be applications now pending of which we are unaware, which
may later result in issued patents that our products may infringe. If any of our products
infringes a valid and enforceable patent, or if we wish to avoid potential intellectual
property litigation on its alleged infringement, we could be prevented from selling that
product unless we can obtain a license, which may be unavailable. Alternatively, we could
be forced to pay substantial royalties or redesign a product to avoid infringement. We
also may not be successful in any attempt to redesign our product to avoid any alleged
infringement. A successful claim of infringement against us, or our failure or inability
to develop non-infringing technology or license the infringed technology, on acceptable
terms and on a timely basis, if at all, could materially adversely affect our business and
results of operations. Furthermore, such lawsuits, regardless of their success, would
likely be time-consuming and expensive to resolve and would divert management time and
attention, which could seriously harm our business.

We
have in the past initiated, and may in the future initiate, claims or litigation against
third parties for infringement of our intellectual property to protect our rights or to
determine the scope and validity of our intellectual property or the intellectual property
of competitors. These claims could result in costly litigation, patent invalidation and
the diversion of the attention of our technical and management personnel, and the final
outcome may not be favorable to us. If we take any of these actions, our business and
results of operations may be seriously harmed.

11

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| | We
rely on our direct sales force and network of international distributors to sell our
products, and any failure to maintain our direct sales force and distributor
relationships could harm our business.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
ability to sell our products and generate revenue depends upon our direct sales force and
relationships with independent distributors. Our direct sales force consists of
approximately 200 employees, and any failure to maintain such sales force could
materially adversely affect our business and results of operations. We maintain
relationships with over 90 independent distributors internationally, selling our
products into over 100 countries through our four regional sales and service centers
for the Americas; Europe, the Middle East and Africa (or EMEA); China/Asia Pacific; and
Japan. We generally sell directly in the United States, Italy, Germany, Japan and China
(including Hong Kong), as well as our aesthetic products in the United Kingdom. In other
countries, we generally grant our distributors exclusive territories for the sale of
particular products in specified countries. The amount and timing of resources dedicated
by our distributors to the sales of our products is not within our control. Our sales
outside of the countries in which we sell directly are entirely dependent on the efforts
of these third parties. If any distributor breaches its agreement with us or fails to
generate sales of our products, we may be forced to seek to replace the distributor, and
our ability to sell our products into that exclusive sales territory, and consequently our
results of operations, could be materially adversely affected.

We
do not have any long-term employment contracts with the members of our direct sales force.
We may be unable to replace our direct sales force personnel with individuals of
equivalent technical expertise and qualifications, which may limit our revenues and our
ability to maintain market share. The loss of the services of these key personnel would
harm our business and results of operations. Similarly, our distributorship agreements are
generally terminable at will by either party, and distributors may terminate their
relationships with us, which would affect our international sales and results of
operations.

| | Our
market is characterized by evolving technological changes and standards and changes in
customer requirements, and, if we fail to keep up with such changes, our business and
operating results will be materially adversely affected.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
industry is characterized by extensive research and development, technological change,
frequent modifications and enhancements, innovations, new applications, evolving industry
standards and changes in customer requirements. Our future success depends on our ability
to keep up with these changes and anticipate our customers needs and develop and
introduce product enhancements that address those needs. This will require us to design,
develop, manufacture, assemble, test, market and support upgrades, enhancements and, where
necessary, new products on a timely and cost-effective basis. It also requires continued
substantial expenditure on research and development. In 2008, our research and development
expenses were approximately 7.4% of our net sales and in 2007 and 2006, such expenses had
been in the range of 6% of our net sales. Demand for our products could be significantly
diminished by new technologies or products that replace them or render them obsolete. We
cannot assure that we will successfully identify new technological opportunities and
develop and bring new or enhanced products to market in a timely and cost-effective manner
at all, or, if such products are introduced, that those products will achieve market
acceptance. Our failure to do so and to address the technological changes and challenges
in our markets could have a material adverse effect on our business, results of operations
and financial condition.

| | A
substantial portion of our sales are completed in the last few weeks of each calendar
quarter, and if such anticipated sales do not materialize, this could materially
adversely affect our business and results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
typically receive a disproportionate percentage of orders toward the end of each calendar
quarter, including the fourth quarter. To the extent that we do not receive anticipated
orders, or orders are delayed beyond the end of the applicable quarter or year, our
results of operations could be materially adversely affected. In addition, because a
significant portion of our sales in each quarter result from orders received in that
quarter, we base our production, inventory and operating expenditure levels on anticipated
revenue levels. Thus, if sales do not occur when expected, expenditure levels could be
disproportionately high and operating results for that quarter and potentially future
quarters, would be adversely affected.

| | Our
products are subject to U.S., European Union and other national and international medical
regulations and controls, compliance with which imposes substantial financial costs on us
and can prevent or delay the introduction of new products, which could materially
adversely affect our business and results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
ability to sell our products is subject to various federal, state, national and
international rules and regulations. In the United States, we are subject to inspection
and market surveillance by the FDA to determine compliance with regulatory requirements.
The regulatory process is costly, lengthy and uncertain. Unless an exemption applies, each
device that we intend to market in the United States must receive prior review by the FDA
before it can be marketed. Certain products qualify for a Section 510(k) procedure
under which the manufacturer provides the FDA with pre-market notification of its
intention to commence marketing the product. The manufacturer must, among other things,
establish that the product to be marketed is substantially equivalent to a
previously marketed medical device. In some cases, the manufacturer may be required to
include clinical data gathered under an investigational device exemption, or IDE, granted
by the FDA, allowing human clinical studies. The FDAs 510(k) clearance process
usually takes from four to twelve months, but it can take longer. If a product does not
qualify for the 510(k) procedure, the manufacturer must file a pre-market approval
application, or PMA, based on testing intended to demonstrate that the product is both
safe and effective. The PMA requires more extensive clinical testing than the 510(k)
procedure and generally involves a significantly longer FDA review process.

12

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Approval
of a PMA allowing commercial sale of a product requires pre-clinical laboratory and animal
tests and human clinical studies conducted under an IDE establishing safety and
effectiveness. For products subject to pre-market approval, the regulatory process
generally takes from one to three years or more and involves substantially greater risks
and commitment of resources than the 510(k) clearance process. We may not be able to
obtain necessary regulatory approvals or clearances on a timely basis, if at all, for any
of our products under development, and delays in receipt of, or failure to receive, such
approvals or clearances could have a material adverse effect on our business.

Following
clearance or approval, marketed products are subject to continuing regulation. We are
required to adhere to the FDAs Quality System Regulation, or QSR, and similar
regulations in other countries, which include design, testing, quality control and
documentation requirements. Ongoing compliance with QSR, labeling and other applicable
regulatory requirements is monitored through periodic inspections and market surveillance
by the FDA and by comparable agencies in other countries.

Our
failure to comply with applicable requirements could lead to an enforcement action, which
could have an adverse effect on our business. The FDA can institute a wide variety of
enforcement actions, ranging from a public warning letter to more severe sanctions such
as:

| |  | Fines,
injunctions and civil penalties;
| | - | ---------------------------------------

| |  | Recall
or seizure of our products;
| | - | ----------------------------------

| |  | Requiring
us to repair, replace or refund the cost of our products;
| | - | -------------------------------------------------------------------

| |  | The
issuance of public notices or warnings;
| | - | -------------------------------------------

| |  | Operating
restrictions, partial suspension or total shutdown of production;
| | - | ---------------------------------------------------------------------------

| |  | Refusal
of our requests for 510(k) clearance or pre-market approval of new products;
| | - | ------------------------------------------------------------------------------------

| |  | Withdrawal
of 510(k) clearance or pre-market approvals already granted; and
| | - | ---------------------------------------------------------------------------

| |  | Criminal
prosecution.
| | - | ---------------------

Similarly,
the European Union (the E.U.), determined in 1998 that the marketing or
selling of any medical product or device within the European Union necessitates a CE Mark.
We are now required to comply with the European Medical Device Directives criteria
and obtain the CE Mark prior to the sale of our medical products in any E.U. Member State.
The European Medical Device Directive sets out specific requirements for each stage in the
development of a medical product, from design to final inspection. Our products are
subject to additional similar regulations in most of the international markets in which we
sell our products.

Changes
to existing U.S., E.U. and other national and international rules and regulations could
adversely affect our ability to sell our current and future lines of products in the
United States, the E.U. and internationally, increase our costs and materially adversely
affect our business and results of operations.

| | The
E.U. has issued directives relating to the sale in member countries of certain equipment,
including products sold by us. If our products fail to comply with these directives, as
well as similar regulations issued by other countries in which we carry on business, we
could be subject to penalties and sanctions that could materially adversely affect our
business.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
2003, the E.U. approved a directive on Waste Electrical and Electronic Equipment, or WEEE,
that promotes waste recovery with a view to reducing the quantity of waste for disposal
and saving natural resources, in particular by reuse, recycling, composting and recovering
energy from waste. The directive, which went into effect in August 2005, requires that all
new electrical and electronic equipment placed for sale in the E.U. be appropriately
labeled regarding waste disposal, and contains other obligations regarding the collection
and recycling of waste electrical and electronic equipment. Our products fall within the
scope of the WEEE directive, with which we are not currently fully compliant.

A
further directive issued by the E.U., on the Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment, or RoHS, generally came into effect on
July 1, 2006. Although RoHS does not currently apply to our products and other
medical equipment, it is anticipated that such products may need to be in compliance by
2012. The RoHS directive lists a number of substances, including, among others, lead,
mercury, cadmium and hexavalent chromium, which must either be removed from, or reduced to
within maximum permitted concentrations in, products that are sold within the E.U.

Other
countries in which we have significant sales, in particular China, have introduced
regulations similar, although not identical, to RoHS, and we anticipate that additional
countries will also do so.

13

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If
our products fail to comply with the WEEE or RoHS directives or any other directive or
regulations issued from time to time by the E.U. or other countries, we could be subject
to heavy penalties and other sanctions that could have a material adverse affect on our
results of operations and financial condition.

| | We
have consented to the entry of a permanent civil injunction against future violations of
the antifraud, reporting, books and records and internal control provisions of the
federal securities laws and related SEC rules.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On
April 26, 2006, the SEC brought a civil proceeding against us and against Sagi
Genger, our former Chief Operating Officer, and Kevin Morano, our former Chief Financial
Officer and Senior Vice President for Marketing and Business Development, both of whom are
no longer employed by us. Mr. S. Genger is the son of Arie Genger, one of our
former directors and a former Vice Chairman of our board of directors. The civil
proceeding sought, among other things, an injunction against us, alleging violations of
the antifraud and other provisions of the U.S. federal securities laws in connection
with inappropriate recognition of revenue in our 2001, 2002 and 2003 financial statements.
Concurrently with filing the civil action on April 26, 2006, the SEC approved a
settlement with us and Mr. S. Genger. For additional information concerning this
settlement, see Legal Proceedings  Civil Proceedings By SEC in
Item 8.A below.

As
part of that settlement, we entered into a consent order with the SEC, without admitting
or denying the allegations, pursuant to which we consented to the entry of a permanent
civil injunction against future violations of the antifraud, reporting, books and records
and internal control provisions of the federal securities laws and related SEC rules. The
consent order also disqualified us from benefiting from the protection of the safe harbor
provisions under the Private Securities Litigation Reform Act of 1995 with respect to
forward-looking statements made by us during the three-year period ended April 26,
2009. The existence of the permanent injunction under the consent order, and the lack of
protection under the safe harbor with respect to forward-looking statements made during
the three-year disqualification period, may limit our ability to defend against future
claims, lawsuits and proceedings.

| | We
may experience a decline in selling prices of our products as competition increases,
which could materially adversely affect our results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

We
have in the past experienced decreases in the average selling prices of some of our
products. As competing products become more widely available, the average selling price of
our products may decrease. Trends toward managed care, health care cost containment and
other changes in government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the delivery of more
cost-effective medical therapies, which could also adversely affect prices of our
products. If we are unable to offset the anticipated decrease in our average selling
prices by increasing our sales volumes, our net sales will decline. In addition, to
maintain our gross margins, we must continue to reduce the cost of manufacturing our
products. Further, as average selling prices of our current products decline, we must
develop and introduce new products and product enhancements with higher margins. If we
cannot maintain our net sales and gross margins, our results of operations could be
materially adversely affected, particularly if the average selling prices of our products
decrease significantly.

| | Our
dependence on a limited number of suppliers, and, in some cases, a sole source supplier,
for a key item, exposes us to possible supply interruptions that could delay or prevent
the manufacture of our systems and materially adversely affect our business.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Certain
key components, sub-assemblies and systems used in our products are manufactured or
assembled by a limited number of suppliers or subcontractors and, in certain cases, are
purchased by us from a single source. These components, sub-assemblies and systems may not
be available in the future or we may not accurately forecast our component requirements
sufficiently in advance. In addition, if we experience an increase in demand for our
products, our suppliers may be unable to provide us with the components that we need in
order to meet that increased demand. Furthermore, because our products are regulated as
medical products, changing suppliers, work processes or procedures can be an extremely
burdensome and time-consuming process.

An
interruption of these or other supplies, and the costs associated with developing
alternative sources of supply or assembly, could have a material adverse effect on our
ability to manufacture and ship some of our products, which could have a material adverse
effect on our business and results of operations.

14

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| | Difficulties
in renewing or redesigning old testing equipment could limit our ability to manufacture
certain products, which could materially adversely affect our results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
many instances the testing equipment for our products and sub-assemblies is reaching the
end of its useful life, and, accordingly, such equipment may need to be renewed or
redesigned. Duplicating such testing equipment is often extremely difficult, in
particular, but not limited to, equipment relating to product lines acquired as a result
of mergers and acquisitions or where there may not have been adequate documentation
related to such equipment. Difficulty in renewing or maintaining such systems may limit
our (or our sub-contractors) ability to manufacture assemblies that pass the
required testing procedures, which could have a material adverse effect on our business
and results of operations.

| | Some
of the components to build our older products are no longer readily available, which may
have a material adverse effect on our business and results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Some
of the key components we purchase for building our older products have ceased to be
manufactured and are becoming increasingly difficult to purchase. Where a supplier can be
found, the price of such components may be disproportionately high, and the components are
frequently unavailable in sufficient quantity. Furthermore, such components are often sold
by dealers and, as a result, often lack the manufacturers warranty. These
difficulties may affect the overall cost of production and, in severe cases, may cause
production stoppages, which could have a material adverse effect on our business and
results of operations.

| | We
depend on international sales, and many of our customers operations are also
located outside the U.S. Accordingly, we are exposed to risks associated with the
business environment in those countries, and our business could be materially adversely
affected as a result of exposure to those risks.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Many
of our customers operations are located outside of the U.S. Our net sales are
derived primarily from international sales through our international sales subsidiaries
and exports to foreign distributors and resellers. In 2008, of our total net sales,
approximately 45% were to the Americas; approximately 24% were to Europe, the Middle East
and Africa (or EMEA); approximately 16% were to Japan; and approximately 14% were to the
China/Asia Pacific region. Less than 1% of our net sales were to Israel. We anticipate
that international sales will continue to account for the vast majority of our revenues in
the foreseeable future.

Our
international operations and sales are subject to a number of risks, including:

| |  | Longer
accounts receivable collection periods and greater difficulties in their collection;
| | - | -------------------------------------------------------------------------------------------

| |  | The
impact of recessions on economies worldwide;
| | - | ------------------------------------------------

| |  | The
stability of credit markets;
| | - | --------------------------------

| |  | Reduced
protection for intellectual property in certain jurisdictions;
| | - | ----------------------------------------------------------------------

| |  | Political
and economic instability;
| | - | -----------------------------------

| |  | Regulatory
limitations imposed by foreign governments;
| | - | ------------------------------------------------------

| |  | Impact
of military or civil conflicts, epidemics and other occurrences likely to adversely
affect local economies;
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | Other
political risks;
| | - | ----------------------

| |  | Disruption
or delays in shipments caused by customs brokers or government agencies;
| | - | -----------------------------------------------------------------------------------

| |  | Imposition
by governments of controls that prevent or restrict the transfer of funds;
| | - | -------------------------------------------------------------------------------------

| |  | Unexpected
changes in regulatory requirements, tariffs, customs, duties, tax laws and other trade
barriers;
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Difficulties
in staffing and managing foreign operations;
| | - | ---------------------------------------------------------

| |  | Preference
for locally produced products; and
| | - | ---------------------------------------------

| |  | Potentially
adverse tax consequences resulting from changes in tax laws.
| | - | ------------------------------------------------------------------------

We
are also subject to the risks of fluctuating foreign exchange rates, which could
materially adversely affect the sales price of our products in foreign markets as well as
the costs and expenses of our international subsidiaries.

If
we fail to overcome the challenges that we encounter in our international sales
operations, our business and results of operations could be materially adversely affected.

In
addition to the general risks listed above, our operations in Israel are subject to
certain country-specific risks described below under Risks Relating Primarily to our
Location in Israel.

15

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| | If
we fail to manage growth effectively, our business could be disrupted, which could harm
our operating results.
| | -----------------------------------------------------------------------------------------------------------------

We
have experienced and may continue to experience growth in our business or in certain of
our business units. We have made and expect to continue to make significant investments
to enable our future growth through, among other things, new product innovation and
clinical trials for new applications and products. We must also be prepared to expand our
work force and to train, motivate and manage additional employees as the need for
additional personnel arises. Our personnel, systems, procedures and controls may not be
adequate to support our future operations. Any failure to manage future growth
effectively could have a material adverse effect on our business, results of operations
and financial condition.

| | Any
acquisitions that we make could harm or disrupt our business without bringing the
anticipated synergies.
| | ------------------------------------------------------------------------------------------------------------

We
have in the past made acquisitions of other businesses, technologies and/or assets, and we
continue to evaluate potential strategic acquisitions. In the event of any future
acquisitions, we could: issue shares or other securities that would dilute our current
shareholders percentage ownership; pay cash; incur debt; assume liabilities; or
incur expenses related to in-process research and development, and such acquisitions could
lead to the impairment or amortization of intangible assets.

Such
acquisitions could also involve numerous risks, including:

| |  | Problems
combining the acquired operations, technologies (including information technology
systems) or products with our own;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | Unanticipated
costs or liabilities;
| | - | -----------------------------------

| |  | Adverse
effects on existing business relationships with distributors, suppliers and customers;
| | - | ----------------------------------------------------------------------------------------------

| |  | Entering
markets in which we may have no or limited prior experience;
| | - | ---------------------------------------------------------------------

| |  | Diversion
of management's attention from our core businesses; and
| | - | -----------------------------------------------------------------

| |  | Potential
loss of key employees, particularly those of the purchased organizations.
| | - | -----------------------------------------------------------------------------------

Any
such acquisitions in the future could strain our managerial, operational and financial
resources, as well as our financial and management controls, reporting systems and
procedures. In order to integrate acquired businesses, we must continue to improve
operating and financial systems and controls. If we fail to successfully implement these
systems and controls in a timely and cost-effective manner, our business and results of
operations could be materially adversely affected.

| | We
depend on skilled personnel to operate our business effectively in a rapidly changing
market, and if our
products could be harmed, and our business and results of operations could be materially
adversely affected.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
success depends to a significant extent upon the continued service of our key senior
management, sales, technical and scientific personnel, any of whom could be difficult to
replace. Competition for qualified employees is intense, and our business could be
materially adversely affected by the loss of the services of any of our existing key
personnel, whether through resignation, death or injury. We cannot assure that we will
continue to be successful in hiring and retaining properly trained and experienced
personnel. Our inability to attract, retain, motivate and train qualified new personnel
could have a material adverse effect on our business and results of operations.

| | The
long initial sales cycles for our products may cause us to incur significant expenses
without offsetting revenues, which could materially adversely affect our results of
operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Customers
typically expend significant effort in evaluating, testing and qualifying our products
before making a decision to purchase them, resulting in a lengthy initial sales cycle.
While our customers are evaluating our products, we may incur substantial sales and
marketing, and research and development, expenses to customize our products to customer
needs. We may also expend significant management efforts, increase manufacturing capacity
and order long-lead-time components or materials. Even after this evaluation process, a
potential customer may not purchase our products. As a result, these long initial sales
cycles may cause us to incur significant expenses without ever receiving revenue to offset
those expenses and, in the aggregate, may materially adversely affects our results of
operations.

| | The
use of toxic and other hazardous material in some of the production processes for
products sold by us could
result in claims against us that could materially adversely affect our business and
results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
and/or the manufacturers of products distributed by us use laboratory and manufacturing
materials that could be considered hazardous, and we could be liable for any damage or
liability resulting from accidental environmental contamination or injury. Some of the
gases used in the excimer lasers distributed by us may be highly toxic. The risk of
accidental environmental contamination or injury from such materials cannot be entirely
eliminated. In the event of an accident involving such materials, we could be liable for
any damage, and such liability could exceed the amount of our liability insurance coverage
and the resources of our business, and have a material adverse effect on our business,
operating results and financial condition.

16

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| | We
typically assume warranty obligations in connection with the sale of our products, which
could cause a significant drain on our resources and materially adversely affect our
results of operations if our products perform poorly.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have a direct field service organization that provides service for our products. We
generally provide a 12-month warranty on our laser systems; however, in some instances, we
provide a more extended warranty on systems sold to end-users. After the warranty period,
maintenance and support is provided on a service contract basis or on an individual call
basis. We also provide a limited warranty for refurbished products and used medical
lasers. If our products perform poorly, warranty claims may become significant in the
future, which could cause a significant drain on our resources and materially adversely
affect our results of operations.

If
our facilities were to experience catastrophic loss, our business and results of
operations would be materially adversely affected.

Our
facilities could be subject to a catastrophic loss such as fire, flood or earthquake. One
of our facilities is located near major earthquake faults in California, an area with a
history of seismic events. Any such loss at any of our facilities could disrupt our
operations, delay production, shipments and revenue and result in large expenses to repair
or replace facilities. Any such loss could have a material adverse effect on our business
and results of operations.

| | Man-made
problems such as computer viruses or terrorism may disrupt our operations and materially
adversely affect our results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

Our
servers and equipment are vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering with computer systems. Any such event could have a
material adverse affect on our business. In addition, the continued worldwide threat of
terrorism and heightened security, in response to such threat, or any future acts of
terrorism, may cause further disruptions and create further uncertainties or otherwise
materially harm our business. To the extent that such disruptions or uncertainties result
in delays or cancellations of customer orders or the manufacture or shipment of our
products, our business and results of operations could be materially and adversely
affected.

| | Our
operating results may fluctuate from quarter to quarter and year to year.
| | -----------------------------------------------------------------------------

Our
sales and operating results may vary significantly from quarter to quarter and from year
to year in the future. Our operating results are affected by a number of factors, many of
which are beyond our control. Factors contributing to these fluctuations include, but are
not limited to, the following:

| |  | General
economic uncertainties and political concerns;
| | - | ------------------------------------------------------

| |  | The
cost and timing of the introduction and market acceptance of new products, product
enhancements        and new applications;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | Changes
in demand for our existing line of products;
| | - | ----------------------------------------------------

| |  | The
cost and availability of components and subassemblies, including the ability of our sole
or limited source suppliers to deliver components at the times and prices that we have
planned;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
ability to maintain sales volumes at a level sufficient to cover fixed manufacturing and
operating costs;
| | - | -------------------------------------------------------------------------------------------------------------

| |  | Fluctuations
in our product mix between surgical, aesthetic and ophthalmic products, and in the
proportions of foreign and domestic sales;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
effect of regulatory approval requirements and changes in domestic and foreign regulatory
       requirements;
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | Introduction
of new products, product enhancements and new applications by our competitors, entry of
new competitors into our markets, pricing pressures and other competitive factors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
long and highly variable sales cycle;
| | - | -----------------------------------------

| |  | Changes
in the prices at which we can sell our products;
| | - | --------------------------------------------------------

| |  | The
size and timing of customers orders and changes in customers or potential
customers budgets as a result of, among other things, reimbursement policies of
government programs and private insurers for treatments that use our products;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increased
product innovation costs;
| | - | -----------------------------------

17

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| |  | Foreign
currency fluctuations;
| | - | ------------------------------

| |  | One-time
charges, goodwill write downs and write-offs due to inventory obsolescence; and
| | - | ----------------------------------------------------------------------------------------

| |  | Changes
in accounting rules.
| | - | ----------------------------

In
addition to these factors, our quarterly results have been, and are expected to continue
to be, affected by seasonal factors.

Our
expense levels are based, in part, on expected future sales. If sales levels in a
particular quarter do not meet expectations, we may be unable to adjust operating expenses
quickly enough to compensate for the shortfall of sales, and our results of operations may
be adversely affected. In addition, we have historically made a significant portion of
each quarters product shipments near the end of the quarter. If that pattern
continues, any delays in shipment of products in a particular period could have a material
adverse effect on results of operations for such quarter. Due to these and other factors,
we believe that quarter to quarter and year to year comparisons of our past operating
results may not be meaningful. You should not rely on our results for any quarter or year
as an indication of our future performance. Our operating results in future quarters and
years may be below expectations, which would likely cause a decline in the value of our
shares.

# Risks Relating Primarily
to Our Location in Israel.

| | The
Israeli tax authority has advised us that in its view we did not meet theconditions
required for certain tax benefits in 2000 and 2001, for which we had
beeneligible in prior years. If we are unsuccessful
in our appeal against the tax assessment issued by the tax authorities in this respect or
are unable to satisfy these conditions in the future, then we may be
required to pay significant amounts of taxes to the Israeli tax
authorities, our costs and taxes are likely to increase after we utilize availabletax
losses and our financial condition and results of operations could be materially
adversely affected.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Israeli tax authority (the ITA) has asserted that we are not eligible for
certain tax benefits, primarily a favorable tax rate available to Approved Enterprises,
under the Israeli Law for the Encouragement of Capital Investments, 5719-1959, referred to
as the Investment Law. (See Israeli Tax Considerations and Government
Programs  Law for the Encouragement of Capital Investments in Item 4.B
below.) The ITA has asserted that we filed incomplete local statutory financial statements
for the fiscal years ended December 31, 2000 and 2001. In addition, the ITA has
assessed tax on an alleged deemed dividend to wholly-owned subsidiaries out of our tax
exempt earnings under our Approved Enterprise program for the same period. The ITA has
issued tax assessments for the disallowed tax benefits and alleged deemed dividend in an
aggregate amount of NIS 309 million (approximately $78 million based on the
June 25, 2009 exchange rate), including interest and penalties. We have challenged
the ITAs position in legal proceedings and intend to defend our position vigorously.
We cannot assure you that we will prevail. If we are unsuccessful, it could have a
material adverse effect on our financial condition and results of operations.

In
addition to the requirement to file audited financial statements with the ITA, our
Approved Enterprise status imposes certain other requirements on us. If we do not meet
these other requirements, these tax benefits, if any, may be cancelled and we could be
required to refund any tax benefits that we have already received, plus interest and
penalties thereon. Additionally, if we increase our activities outside of Israel, for
example, via future acquisitions, our increased activities might not be eligible for
inclusion in Israeli tax benefit programs.

| | Regional
instability in Israel may adversely affect our operations and may limit our ability to
produce and sell our products.
| | ------------------------------------------------------------------------------------------------------------------------------

We
are incorporated in Israel and our principal executive offices, one of our two principal
manufacturing facilities and a substantial portion of our research and development
facilities are located in Israel. Political, economic and military conditions in Israel
could directly affect our operations. We could be harmed by any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and its trading
partners or a significant downturn in the economic or financial condition of Israel. In
the event of war, we and our Israeli subcontractors and suppliers may cease operations,
which may cause delays in the development, manufacturing or shipment of our products.
Since September 2000, there has been an increase in unrest and terrorist activity, which
has continued with varying levels of severity. During the Second Lebanon War of 2006,
between Israel and Hezbollah, a militant Islamic movement in Lebanon, rockets were fired
from Lebanon into Israel causing casualties and major disruption of economic activities in
the north of Israel. Our Yokneam facility was within the range of the rocket attacks, and
operations in such facility were significantly curtailed for a period of several weeks.
Recently, there has been an escalation in tension and violence among Israel, the militant
Hamas movement (which controls the Gaza Strip), the Palestinian Authority and other
groups, culminating with Israels military campaign in Gaza in December 2008 and
January 2009 in an endeavor to prevent continued rocket attacks against Israels
southern towns.

18

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Furthermore,
several countries, principally in the Middle East, restrict doing business with Israel and
Israeli companies, and additional countries may impose restrictions on doing business with
Israel and Israeli companies if hostilities in the region continue or intensify. These
restrictions may seriously limit our ability to sell our products to customers in these
countries.

Our
business insurance does not cover losses that may occur as a result of events associated
with the security situation in the Middle East. Although the Israeli government currently
covers the reinstatement value of direct damages that are caused by terrorist attacks or
acts of war, we cannot assure you that this government coverage will be maintained or that
such coverage will be adequate or proportional to the actual direct and indirect damage.
Any losses or damages incurred by us could have a material adverse effect on our business.

| | Our
operations could be disrupted as a result of the obligation of personnel in Israel to
perform military service.
| | -------------------------------------------------------------------------------------------------------------------

Generally,
all male adult citizens and permanent residents of Israel under the age of 45 (or older in
specific instances) are, unless exempt, obligated to perform military reserve duty
annually, and are subject to being called to active duty at any time under emergency
circumstances. Currently, many of our employees are obligated to perform annual reserve
duty. In the event of severe unrest or other conflict, individuals could be required to
serve in the military for extended periods of time. In response to increased tension and
hostilities, there have been occasional call-ups of military reservists, as was the case
most recently in connection with Israels military campaign in Gaza in December 2008
and January 2009, and it is possible that there will be additional call-ups in the future.
Our operations could be disrupted by the absence of a significant number of our employees
related to military service or the absence for extended periods of one or more of our
executive officers or other key employees for military service. Such disruption could
materially adversely affect our business and operating results.

| | The
government grants we received for research and development expendituresrestrict
our ability to manufacture products and transfer know-how outside of
Israeland require us to satisfy specified conditions.
If we fail to comply with suchrestrictions or these conditions, we
may be required to refund grants previouslyreceived,
together with interest and penalties, and may be subject to criminal charges.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
had in the past received grants from the Government of Israel through the Office of the
Chief Scientist of the Ministry of Industry, Trade and Labor for the financing of a
portion of our research and development expenditures in Israel and, following recent
applications, have received the Office of the Chief Scientists approval for certain
new grants. Prior to 2009, we had not received or accrued any such grants since at least
2001, and we cannot assure you that any applications for such grants in the future will be
successful. The terms of the Chief Scientist grants restrict us from manufacturing
products developed using these grants outside of Israel without special approvals. In
addition, decreases of the percentage of manufacturing performed in Israel from that
originally declared in the application to the Office of the Chief Scientist may require us
to notify or to obtain a prior approval from the Office of the Chief Scientist. Even if we
receive approval to manufacture our products outside of Israel, we may be required to pay
an increased total amount of royalties, which may be up to 300% of the grant amount, plus
interest, depending on the manufacturing volume that is performed outside of Israel. In
addition, know-how developed under an approved research and development program may not be
transferred to any third parties, except in certain circumstances and subject to prior
approval. These restrictions may impair our ability to outsource manufacturing or our
ability to enter into agreements with respect to those products or know-how, without the
appropriate approval. We cannot assure that any such approval will be obtained on terms
that are acceptable to us, or at all. In addition, if we fail to comply with any of the
conditions imposed by the Office of the Chief Scientist, including the payment of
royalties with respect to grants received, we may be required to refund any grants
previously received, together with interest and penalties, and, in certain cases, may be
subject to criminal charges. For further details, see Israeli Tax Considerations and
Government Programs  Tax Benefits and Grants for Research and Development in
Item 4.B below.

| | It
may be difficult to enforce a U.S. judgment against us, our officers and directors
in Israel based on U.S. securities laws claims or to serve process on our officers
and directors.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
are incorporated in Israel. The majority of our executive officers and directors are not
residents of the United States, and a substantial portion of our assets and the assets of
these persons are located outside of the United States. Therefore, it may be
difficult for a shareholder, or any other person or entity, to enforce a U.S. court
judgment based upon the civil liability provisions of the U.S. securities laws in a
U.S. or Israeli court against us or any of our executive officers or directors, or to
effect service of process upon such persons in the United States. In addition, it may be
difficult to assert U.S. securities law claims in original actions instituted in
Israel. Israeli courts may refuse to hear a claim based on a violation of
U.S. securities laws because Israel is not the most appropriate forum in which such a
claim should be brought. Even if an Israeli court agrees to hear a claim, it may determine
that Israeli law and not U.S. law is applicable to the claim. If U.S. law is
found to be applicable, the content of applicable U.S. law must be proved as a fact,
which can be a time-consuming and costly process. Also, certain matters of procedure will
be governed by Israeli law.

19

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| | Provisions
of Israeli law could delay, prevent or make difficult a change of control and therefore
depress the price of our shares.
| | -----------------------------------------------------------------------------------------------------------------------------------

The
Companies Law generally provides that a merger be approved by the board of directors and
by the shareholders of a participating company by the vote of a majority of the shares of
each class present and voting on the proposed merger. The Companies Law has specific
provisions for determining the majority of the shareholder vote. Upon the request of any
creditor of a constituent in the proposed merger, a court may delay or prevent the merger
if it concludes that there is a reasonable concern that, as a result of the merger, the
surviving company will be unable to satisfy its obligations to creditors. In general, a
merger may not be completed until the passage of certain statutory time periods. In
certain circumstances, an acquisition of shares in a public company must be made by means
of a tender offer that complies with certain requirements of the Companies Law that differ
from those that apply to U.S. corporations. Israeli tax law treats some acquisitions,
such as stock-for-stock exchanges between an Israeli company and a foreign company, less
favorably than U.S. tax laws. These provisions of Israeli corporate and tax law may
have the effect of delaying, preventing or making more difficult an acquisition of or
merger with us, which, if public trading in our ordinary shares resumes, could depress our
share price.

| | Under
current Israeli law, we may not be able to enforce covenants not to compete, and,
therefore, we may be unable to prevent competitors from benefiting from the expertise of
some of our former employees.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
general, we have entered into non-competition agreements with our employees in the United
States and Israel. These agreements prohibit our employees, if they cease working for us,
from competing directly with us or working for our competitors for a limited period. Under
current law, we may be unable to enforce these agreements, and it may be difficult for us
to restrict our competitors from gaining the expertise that our former employees gained
while working for us. For example, Israeli courts have required employers seeking to
enforce non-compete undertakings of a former employee to demonstrate that the competitive
activities of the former employee will harm one of a limited number of material interests
of the employer that have been recognized by the courts, such as the secrecy of a
companys confidential commercial information or its intellectual property. If we
cannot demonstrate that harm would be caused to our material interests, we may be unable
to prevent our competitors from benefiting from the expertise of our former employees.

| | We
are a foreign private issuer and you will receive less information about us than you
would from a domestic
U.S. corporation.
| | -------------------------------------------------------------------------------------------------------------------------------

As
a foreign private issuer, we are exempt from rules under the Exchange Act that
impose certain disclosure and procedural requirements in connection with proxy
solicitations under Section 14 of the Exchange Act. Our directors, executive officers
and principal shareholders also are exempt from the reporting and short-swing
profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder
with respect to their purchases and sales of our shares. In addition, we are not required
to file periodic reports and financial statements with the SEC as frequently or as
promptly as U.S. companies whose securities are registered under the Exchange Act. As
a result, you may not be able to obtain the same information relating to us as you would
for a domestic U.S. corporation.

# Risks Relating to
Investment in Our Shares.

| | Each
of LM Partners L.P. and Ofer Hi-Tech Investments Ltd. holds a significant portion of our
shares, and their vote may determine the outcome of any matter brought to a shareholder
vote.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

LM
Partners L.P. currently has voting power in respect of approximately 45.1% of the total
voting rights in Lumenis (approximately 48.9% assuming exercise of all remaining warrants
and options beneficially owned by LM Partners L.P. and its general partner) and Ofer
Hi-Tech Investments Ltd. and its affiliates currently have voting power in respect of
approximately 36.4% of the total voting rights in Lumenis (approximately 39.6% assuming
exercise of all remaining warrants held by Ofer Hi-Tech Investments Ltd.). Each initially
acquired its equity and warrants in Lumenis as part of our December 2006 recapitalization,
such equity interest having been increased by its exercise of warrants in June 2007 and
the issuance to it in March 2009 of additional shares pursuant to share adjustment
provisions under the terms of the 2006 recapitalization. Each recently acquired additional
shares and warrants as part of our June 2009 equity financing. The percentages set forth
above for Ofer Hi-Tech Investments Ltd. include voting rights in respect of approximately
1.7% of our outstanding shares held by a third party with whom Ofer Hi-Tech Investments
Ltd. has entered into a voting agreement. (For additional details, see
Recapitalization and Equity Financing in Item 4.A below and
Ownership of Major Shareholders in Item 7.A below.) Although LM Partners
L.P. and Ofer Hi-Tech Investments Ltd. purchased our ordinary shares separately and have
not entered into any voting agreement between themselves with respect to our shares, they
are collectively able to elect a majority of the members of our board of directors, and if
they vote in the same manner on any matter submitted to our shareholders for approval (for
example, any amendment of our articles of association and any approval of a merger), their
vote could determine the result on such matter. Their voting power and the concentration
of voting power in their hands could have the effect of delaying or preventing an
acquisition of our Company on terms that other shareholders might find attractive.

20

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| | Since
our shares are no longer listed on NASDAQ, it is more difficult for investors to trade in
our shares.
| | -----------------------------------------------------------------------------------------------------------

Our
shares were delisted from the NASDAQ National Market in February 2004. In addition, the
SEC revoked their registration under Section 12 of the Exchange Act in April 2006
(see Legal Proceedings  Civil Proceedings By SEC in Item 8.A
below). As a result of the deregistration, our shares could not be quoted or publicly
traded in the United States until we re-registered our shares with the SEC. On May 1,
2007, we filed a registration statement under Section 12 of the Exchange Act,
following which our shares again became eligible for quotation or trading in the United
States. However, our shares remain unlisted, no trading has commenced on a national
securities exchange and we are not aware of any other trading in our shares. We do not
currently plan to apply for listing on NASDAQ or any other securities exchange or
quotation system. We cannot assure you that if we do apply for listing our shares will be
approved for quotation or trading on NASDAQ or on any other securities exchange or
quotation system.

Prior
to their deregistration by the SEC, our shares were quoted in the over-the-counter market
on the Pink Sheets Electronic Quotation Service. Compared to NASDAQ, it was more difficult
to sell our securities on the Pink Sheets. Also, since we were no longer traded on NASDAQ
and the average trading price of our shares was below $5.00 per share when last
traded, trading in our shares was subject to certain other rules of the Exchange Act. Such
rules require additional disclosure by broker-dealers in connection with certain trades
involving stock defined as a penny stock. Penny stock generally
includes any equity security that has a market price of less than $5.00 per share and
is not listed on a U.S. national securities exchange, subject to certain exceptions. These
rules require the delivery of a disclosure schedule explaining the penny stock market and
the risks associated with that market before entering into penny stock transactions. The
rules also impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors. For these
types of transactions, the broker-dealer must make a special suitability determination for
the purchaser and must receive the purchasers written consent to the transaction
prior to the sale. The additional burdens imposed upon broker-dealers by such requirements
could discourage broker-dealers from effecting transactions in our shares (assuming that
trading resumes with respect thereto). This could severely limit the market liquidity of
our ordinary shares and our shareholders ability to sell such shares in the
secondary market.

| | Shareholders,
other than the investors in our 2006 recapitalization and 2009 Equity Financing, may
experience further dilution should we incur losses, indemnities, liabilities and expenses
in excess of insurance in connection with certain litigation or proceedings relating to
the period prior to our 2006 recapitalization.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
purchase agreement in connection with our 2006 recapitalization contains a mechanism for
post-closing adjustments to the number of shares issued to the investors in such
recapitalization. Such adjustments are made for all losses, indemnities, liabilities and
expenses exceeding, or not otherwise covered by, our insurance coverage, in connection
with certain identified actions and proceedings that have now been mostly concluded, as
well as any other action, proceeding or investigation concerning securities and corporate
governance matters and relating, in whole or in part, to matters occurring prior to the
closing of the 2006 recapitalization. Adjustment for this purpose is made by the issuance
to the investors of additional ordinary shares for no additional consideration, as well as
an adjustment to the exercise price under the Closing Warrants (as defined in
Item 4.A below) issued to the investors. Approximately 24.5 million additional
shares were issued in March 2009 to the investors and their assignees under the adjustment
mechanism in connection with the conclusion of most of the identified actions and
proceedings. Assuming no new actions or proceedings to which the adjustment mechanism
would apply are instituted against us, it is currently anticipated that in the event that
additional shares, if any, will be issued in respect of additional indemnities and/or
expenses relating to the identified actions and proceedings, such issuances shall be
significantly less then the adjustment shares previously issued in March 2009. The
adjustment mechanism remains operative until the later of December 2011 or five years
after any relevant matter was first submitted to court. Although we are not aware of any
matters likely to result in the commencement of any future actions, proceedings or
investigations to which the adjustment mechanism would apply, we cannot assure you that no
such matters exist nor that any ensuing adjustment as a consequence thereof could not
result in further material dilution of our shareholders, other than the investors in the
2006 recapitalization and the two new investors who purchased shares in our 2009 Equity
Financing, as described below. See Recapitalization and Equity
Financing  Shares Adjustments Related to Litigation Outcome in
Item 4.A below.

| | If
public trading in our shares resumes, the market price may be volatile, and an investment
in our shares could suffer a decline in value.
| | -------------------------------------------------------------------------------------------------------------------------------------------

Prior
to the deregistration of our ordinary shares in April 2006, the trading price of our
ordinary shares was subject to wide fluctuations in response to a variety of factors, some
of which were beyond our control, including quarterly variations in our operating results,
announcements by us or our competitors of new products or of significant clinical
achievements, changes in market valuations of other similar companies in our industry and
general market conditions. If public trading in our ordinary shares resumes, they could
again be subject to wide fluctuations in response to similar factors as in the past, and
they may also experience an imbalance between supply and demand resulting from low trading
volumes. In addition, the stock market has experienced extreme volatility in the last few
years that has often been unrelated to the performance of particular companies. These
broad market fluctuations could have a significant impact on the market price of our
ordinary shares regardless of our performance.

21

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| | We
may be classified as a passive foreign investment company and, as a result, our U.S.
shareholders may suffer adverse tax consequences.
| | -----------------------------------------------------------------------------------------------------------------------------------------

Generally,
if (taking into account certain look-through rules with respect to the income and assets
of our subsidiaries) for any taxable year 75% or more of our gross income is passive
income, or at least 50% of our assets are held for the production of, or produce, passive
income, we would be characterized as a passive foreign investment company, or PFIC, for
U.S. federal income tax purposes. This characterization could result in adverse U.S. tax
consequences to our U.S. shareholders, including having gains realized on the sale of our
shares be treated as ordinary income, as opposed to capital gain, and having potentially
punitive interest charges apply to such sale proceeds. A decline in the value of our
ordinary shares may result in our becoming a PFIC. U.S. shareholders should consult with
their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our
ordinary shares. Based upon our calculations, we believe that we were not a PFIC in 2008.
However, PFIC status is determined as of the end of the taxable year and depends on a
number of factors, including the value of a corporations assets and the amount and
type of its gross income. Therefore, we cannot assure you that we will not become a PFIC
for fiscal year 2009 or in any future year.

|ITEM 4. |  | INFORMATION ON THE COMPANY.
|------- |  | ---------------------------

A. History and Development of the Company.

Our
legal and commercial name is Lumenis Ltd., and we were incorporated in Israel on
December 21, 1991 initially under the name E.S.C.  Energy Systems Corporation
Ltd. and subsequently, from 1995, under the name ESC Medical Systems Ltd. In January 1996,
we completed an initial public offering of our ordinary shares in the United States. In
2001, following our completion of the purchase of Coherent Medical Group
(CMG), the medical division of Coherent, Inc., we changed our name to Lumenis
Ltd. We are a public limited liability company and operate under the provisions of
Israels Companies Law 5759-1999. Our registered office and principal place of
business is located at 7 Hayitzira Street, Yokneam Industrial Park, Yokneam
20692, Israel and our telephone number in Israel is (+972)-4-959-9000. Our World Wide Web
address is www.lumenis.com. The information contained on the web site is not a part
of this annual report.

We
are engaged in the development, manufacture, marketing, sale and servicing of laser and
energy-based systems and accessories for surgical, aesthetic and ophthalmic applications.
We offer a broad range of laser, intense pulsed light (or IPL) and, to a lesser extent,
radio frequency products, for use in ear, nose and throat (ENT) treatment,
benign prostatic hyperplasia, urinary lithotripsy, gynecology, gastroenterology, podiatry,
general surgery, neurosurgery, skin treatments, photo rejuvenation, hair removal,
non-invasive treatment of vascular lesions and pigmented lesions, acne, psoriasis, open
angle glaucoma, diabetic retinopathy, secondary cataracts and age-related macular
degeneration.

# Recent Business
Developments.

Effective
from January 1, 2008, we reorganized our business into three strategic business
units, Surgical, Aesthetic and Ophthalmic (the latter also known as Lumenis Vision), which
operate as three reportable business segments.

On
June 25, 2008, we entered into Amendment No. 2 to the 2006 Restructuring Agreement
with Bank Hapoalim B.M. relating to the restructuring of our bank debt (which amendment
was later amended on November 10, 2008 and February 22, 2009). For a discussion
of the terms of this amendment, and subsequent amendments thereto, see Liquidity
& Capital Resources  Restructuring of Bank Debt in Item 5.B below.

In
the latter part of 2008, we implemented a reorganization of certain of our operations. The
measures implemented included, among other things: the consolidation of our service and
customer support operations within our Global Operations organization; and the
reorganization of our Latin America sales and marketing operations.

In
November, 2008, we initiated a cost-reduction plan, which has included a reduction in our
work force of approximately 160 employees and a reduction in salary levels in certain
areas.

On
March 18, 2009, we issued an aggregate of 24,466,936 additional shares to our two
major shareholders and certain assignees thereof for no additional consideration, pursuant
to the adjustment provisions under the 2006 Purchase Agreement. See Recapitalization
and Equity Financing  2006 Recapitalization  Shares Adjustments Related to
Litigation Outcome in this Item below.

22

---

---

On
June 25, 2009, we completed an equity financing, consisting of a private placement of
shares and warrants to our two major shareholders and to a new external investor,
investing through two parallel funds. For a discussion of this transaction, see
Recapitalization and Equity Financing  2009 Equity Financing in this
Item below.

On
June 30, 2009, we entered into Amendment No. 3 to the 2006 Restructuring
Agreement with Bank Hapoalim B.M. relating to the restructuring of our bank debt. For a
discussion of the terms of this amendment, see Liquidity & Capital Resources
 Restructuring of Bank Debt in Item 5.B below.

# Principal Capital
Expenditures and Divestitures since January 1, 2006.

In
2006, we sold the building that forms our facility in Salt Lake City, Utah, for
$2.5 million, registering a loss of $0.5 million. The building is currently
leased back to us.

In
the second half of 2007, we commenced implementation of a new company-wide ERP (enterprise
resource planning) system (SAP) that encompasses a significant portion of our transaction
processing. We expended a total of $1.0 million during 2008 and $4.2 million
during 2007 on the implementation of this system, of which $0.7 million and
$2.5 million, respectively, were capitalized. Most other capital expenditures in 2008
(a further $2.3 million), in 2007 (a further $3.3 million), and 2006
($1.7 million) related to machinery, equipment and tooling, computer software and
hardware, and leasehold improvements. The principal capital expenditures currently in
progress are the continued implementation of the ERP system, as well as investment in
machinery, equipment and tooling, and leasehold improvements, primarily in Israel.

# Recapitalization and
Equity Financing.

| | 2006
Recapitalization.
| | ----------------------

In
late 2006, our financial condition was such that we required immediate additional capital
and relief from our substantial Bank debt burden in order to continue our operations. Our
lender, Bank Hapoalim B.M. (the Bank) was unwilling to agree to the
restructuring of our Bank debt, without a significant infusion of new capital. As a result
of an auction process, our board of directors selected LM Partners L.P.
(LM Partners), part of the Viola Partners group, and Ofer Hi-Tech
Investments Ltd. (Ofer Hi Tech), an indirect wholly owned subsidiary of Ofer
Holdings Group Ltd., as the potential investors with the best proposed transaction for our
Company. (For information concerning these investors, see Ownership of Major
Shareholders in Item 7.A below.)

On
December 5, 2006, we completed a recapitalization pursuant to a purchase agreement,
dated as of September 30, 2006, by and among Lumenis, LM Partners and Ofer Hi
Tech (together referred to as the Investors) and LM(GP) L.P. (as the
Investors representative), for the private placement of our ordinary shares and
warrants to the Investors (the 2006 Purchase Agreement) and an agreement,
dated as of September 29, 2006, restructuring our indebtedness to the Bank (as
amended, the Restructuring Agreement). For a discussion of the Restructuring
Agreement, see Liquidity & Capital Resources  Restructuring of Bank
Debt in Item 5.B below.

Below
is a summary of some of the provisions of the 2006 Purchase Agreement. This summary is
qualified in its entirety by reference to the full text of the 2006 Purchase Agreement
and the warrants issued thereunder, which are exhibits to this annual report and are
incorporated herein by reference.

Purchase
and Sale of the Securities under the 2006 Purchase Agreement.

Immediately
prior to the closing of the 2006 Purchase Agreement, we had 37,304,938 shares outstanding
(excluding 35,527 treasury shares). Pursuant to the 2006 Purchase Agreement, the Investors
collectively purchased from us the following:

| |  | Purchased
Shares.  111,919,418 of our shares (65,286,327 by LM Partners
and 46,633,091 by Ofer Hi-Tech.), at a price per share of $1.0722 for an aggregate
purchase price of $120,000,000. Implementation of the post-closing adjustments mechanism
on the number of Purchased Shares (the Post Closing Adjustment Provisions)
have resulted thus far in the issuance to the Investors, on March 18, 2009, for no
additional consideration, of an additional 19,573,551 shares (11,417,905 to LM Partners
and 8,155,646 to Ofer Hi-Tech). This reflects an effective price per share of $0.9126 for
the Purchased Shares. See Shares Adjustments Related to Litigation Outcome in
this Item below.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Closing
Warrants.  Warrants to purchase (initially) 17,000,000 of our shares
(9,916,667 by LM Partners and 7,083,333 by Ofer Hi-Tech), at an initial exercise
price of $1.1794 per share (but subject to adjustment as described below), expiring
December 5, 2011. The terms of the Closing Warrants provide that upon the exercise
of any Additional Warrants (as described below), the numbers of shares to which the
holder would be entitled upon exercise of the Closing Warrants would automatically be
increased by a number that is the product of (i) the number of Closing Warrants
purchasable immediately prior to the exercise of the Additional Warrants multiplied by
(ii) the aggregate exercise price paid for the exercise of the Additional Warrants,
divided by the aggregate amount of the purchase price paid by the respective Investor at
the closing. As all Additional Warrants have been exercised, the number of ordinary
shares purchasable, collectively, under the Closing Warrants was accordingly increased by
4,500,000 shares to an aggregate of 21,250,000 shares (11,936,707 by LM Partners and
9,313,293 by Ofer Hi-Tech).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

---

---

| | The
terms of the Closing Warrants also provide that upon the issuance of additional shares
pursuant to the Post Closing Adjustment Provisions, the exercise price of the Closing
Warrants would automatically be reduced to 110% of the resulting adjusted price per
Purchased Share. As a result of the implementation of the Post-Closing Adjustment
Provisions on March 18, 2009, the adjusted price of the Purchased Shares became
$0.9126 per share. Accordingly, the exercise price of the Closing Warrants was reduced to
110% of such figure, namely $1.0039 per share. In addition, the exercise price of the
Closing Warrants and number of shares issuable upon the exercise of the Closing Warrants
will be adjusted in the event of a stock split, stock dividend, reclassification or
similar transaction.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
of the Closing Warrants are currently outstanding and unexercised. The exercise price of
the Closing Warrants may be paid by cash, check, wire transfer or by the cancellation of
debt owed by us to the holder. In lieu of such payment, the Closing Warrants may also be
exercised via net cashless exercise.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Additional
Warrants.  Warrants to purchase 27,979,855 of our shares (16,321,582
by LM Partners and 11,658,273 by Ofer Hi-Tech), at an aggregate exercise price of
$30,000,000, or $1.0722 per share, expiring June 5, 2007. Immediately after the
closing of the 2006 Purchase Agreement, LM Partners exercised Additional Warrants to
purchase 4,761,239 of our shares for aggregate consideration of $5.105 million,
leaving it with Additional Warrants to purchase 11,560,343 shares. On June 4, 2007,
LM Partners exercised Additional Warrants to purchase 8,537,690 of our shares for
aggregate consideration of $9,154,111, having assigned on June 3, 2007, the
remainder of its Additional Warrants (for the purchase of 3,022,653 shares) to Ofer
Hi-Tech In addition, on June 4, 2007 Ofer Hi-Tech exercised Additional Warrants to
purchase 12,908,871 of our shares for aggregate consideration of $13,840,892 and assigned
the remainder of its Additional Warrants (for the purchase of 1,772,055 shares) to
certain assignees who exercised such warrants for aggregate consideration of $1,899,997.
Consequently, none of the Additional Warrants remain outstanding. The Post Closing
Adjustment Provisions have resulted in the issuance to the Investors and said assignees,
on March 18, 2009, for no additional consideration, of an additional 4,893,385
shares in respect of the shares issued as a result of the exercise of the Additional
Warrants (2,325,845 to LM Partners, 2,257,629 to Ofer Hi-Tech and 309,911 to the
assignees of Ofer Hi-Tech). This reflects an effective exercise price per share under the
Closing Warrants of $0.9126. See Shares Adjustments Related to Litigation Outcome below
in this Item.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Shares
Adjustments Related to Litigation Outcome.

The
2006 Purchase Agreement contains Post Closing Adjustment Provisions, pursuant to which
the number of Purchased Shares (as well as the shares issued upon the exercise of the
Additional Warrants) is to be adjusted for all awards, judgments, losses, liabilities,
indemnities, damages, costs and expenses exceeding, or not otherwise covered by, our
insurance coverage in connection with the then recently concluded investigation of
Lumenis by the SEC, the previously disclosed securities class action lawsuit (in respect
of which a settlement was approved by the Court in August 2008), the SEC proceeding
against our former chief financial officer (concluded in February 2009), and any other
action, proceeding or investigation concerning securities and corporate governance
matters and relating, in whole or in part, to matters occurring prior to the closing (the
Relevant Amounts). Adjustment for this purpose is to be made by the issuance
to the Investors for no additional consideration of a number of additional shares as if
at closing of the 2006 Purchase Agreement the price per share for the Purchased Shares
would have been equal to (x) 40,000,000 less the Relevant Amounts, divided by (y) 37,304,938
(our total issued and outstanding share capital at such time), provided, however, that
adjustment in this respect is not to be made for Relevant Amounts that exceed
$30,000,000. Upon such adjustments, a similar adjustment is to be implemented with
respect to the number of shares issued upon the exercise of the Additional Warrants. The
maximum numbers of such additional shares that could be issued with respect to the
Purchased Shares and the Additional Warrants are 335,739,838 shares and 83,934,959
shares, respectively, and cumulatively, 419,674,797. To the extent that Relevant Amounts
are quantified as a result of a settlement of actions, proceedings or investigations, the
2006 Purchase Agreement provides that any such settlement (i) shall be approved by
our board of directors based on (a) a unanimous recommendation of a special
committee of the board of directors that must include a majority of independent
directors, and (b) shall be supported by an opinion of an independent and qualified
appointed expert stating that the settlement reached is reasonable in the circumstances;
and (ii) shall be subject to such corporate approvals as required by applicable
laws, including the Companies Law, which would generally include approval by the general
meeting of shareholders of the Company by a special majority.

24

---

---

The
2006 Purchase Agreement further provides that in the event that the proposed settlement of
a matter referred to above is to be submitted to the approval of the shareholders in
accordance with the Companies Law (following approval by our audit committee and board of
directors) and such shareholder approval is not obtained, then such failure to obtain
approval would give rise to an adjustment as described above. The relevant amounts for
such purpose will be deemed to be $30,000,000 with respect to settlement of the class
action (for which an adjustment was made, as further described in the next paragraph), and
$30,000,000 with respect to any of the other matters. Adjustment in this respect shall not
be made for relevant amounts that exceed an aggregate amount of $30,000,000. In the event
the relevant amounts total or exceed $30,000,000, the we will be required to issue to the
Investors an additional 419,674,797 ordinary shares. The issuance of ordinary shares
pursuant to these adjustment provisions might require additional corporate approvals under
Israeli laws and regulations. In addition, under the current provisions of the Companies
Law, a full tender offer requirement will be triggered if a shareholder acquires shares
and as a result of such acquisition such shareholder owns in excess of 90% of our issued
and outstanding capital. In the event that certain tests under the Companies Law are met,
the shares held by several shareholders may be required to be aggregated for the purpose
of calculating the number of shares held by a shareholder. If the Investors holdings
will be required to be aggregated then as a result of the implementation of the maximum
relevant amounts provision a full tender offer requirement may be triggered. In such a
case, the Investors may waive an issuance or a portion thereof that would result in the
Investors holding more than 90% of our issued and outstanding share capital.

On
March 18, 2008, after obtaining the approval of our audit committee and board of
directors, and following the procedural requirements of the 2006 Purchase Agreement, we
submitted the terms of settlement of the principal securities class action lawsuit to the
vote of our shareholders at a special general meeting of shareholders convened for such
purpose. The terms of settlement of such class action lawsuit were approved at such
meeting, and, on August 25, 2008, such terms of settlement were approved by the
Court, which brought the action to conclusion. (For details of such class action and the
terms of settlement thereof, as well as details of an ancillary complaint, also now
concluded, see under Legal Proceedings  Securities Class Action
Complaints in Item 8.A below.)

With
the conclusion of the securities class action lawsuit, the ancillary complaint and the SEC
investigations and proceedings (for details, see Legal Proceedings  Civil
Proceedings By SEC in Item 8.A below), there are no longer pending any actions,
proceedings or investigations that give rise to amounts to be included in the Relevant
Amounts. However, a further non-material number of shares may be issued in respect of
additional indemnities and/or expenses relating to these actions. The Post Closing
Adjustment Provisions remain operative until the later of December 2011 or five years
after any relevant matter was first submitted to court. Although we are not aware of any
matters likely to result in the commencement of any future actions, proceedings or
investigations to which these provisions would apply, we cannot assure you that no such
matters exist nor that any ensuing adjustment as a consequence thereof could not result in
further material dilution of our shareholders, other than the Investors (and the new
investors under the 2009 Equity Financing  see below).

Following
confirmation and approval by our audit committee, on March 18, 2009 we issued
24,466,936 shares to the Investors and certain assignees pursuant to the adjustment
mechanism under the 2006 Purchase Agreement (13,743,750 to LM Partners, 10,413,275 to
Ofer Hi-Tech and 309,911 to the assignees of Ofer Hi-Tech). The following table summarizes
the Relevant Amounts taken into account in calculating the number of shares issued.

|  |                                                                     | Amount | Number of additional
shares
|- | ------------------------------------------------------------------- | ------ | ---------------------------
|
|
|
|
| | Our participation in the class action settlement fund               |        |                            
| | The relevant legal and other indemnities, fees and expenses for the |        |                            
|  | period ended December 5, 2008                                       |        |                            
|  |                                                                     |        |                            
|  | Totals                                                              |        |                            
|  |                                                                     |        |                            

In
addition, as a result of the issuance of additional shares under the Post Closing
Adjustment Provisions described above, the exercise price of the Closing Warrant has been
automatically reduced to $1.0039 per share (representing 110% of the resulting adjusted
price per Purchased Share).

2009
Equity Financing.

On
June 25, 2009, we consummated an equity financing (the 2009 Equity
Financing) pursuant to a number of share purchase agreements dated June 21,
2009 (the 2009 Purchase Agreements) with each of LM Partners, Ofer Hi-Tech,
Agate Medical Investments (Cayman) L.P. and Agate Medical Investments L.P., that provided
for the sale and the issue by us to them of an aggregate of 13,636,364 of our shares at a
price of $1.10 per share. The 2009 Purchase Agreements also provided for the grant by
us to such investors of five-year warrants to purchase an aggregate of 6,818,183 of our
shares at an exercise price of $1.30 per share (the 2009 Warrants). The
terms of the 2009 Warrants provide that the exercise price of such warrants and number of
shares issuable upon their exercise will be adjusted in the event of a stock split, stock
dividend, reclassification or similar transaction. All of the 2009 Warrants are currently
outstanding and unexercised. The exercise price of the 2009 Warrants may be paid by cash,
check, wire transfer or by the cancellation of debt owed by us to the holder. In lieu of
such payment, the 2009 Warrants may also be exercised via net cashless exercise. In
addition, we agreed with Agate Medical Investments (Cayman) L.P. and Agate Medical
Investments L.P. that in the event that after the closing of the 2009 Equity Financing, we
issue additional shares to LM Partners and Ofer Hi-Tech pursuant to the Post Closing
Adjustment Provisions of the 2006 Purchase Agreement, then a proportional number of shares
will be issued to them for no additional consideration.

25

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---

The
foregoing is only a summary and is qualified in its entirety by reference to the full text
of the form of the 2009 Purchase Agreements and the form of the 2009 Warrants issued
thereunder, which are exhibits to this annual report and are incorporated herein by
reference.

| | Registration Rights Agreement, as amended.
| | ------------------------------------------

Contemporaneously
with the closing of the 2006 Purchase Agreement and the Restructuring Agreement, we
entered into a Registration Rights Agreement to provide certain share registration rights
to LM Partners and Ofer Hi-Tech, as well as the Bank, and their respective assignees.
On June 25, 2009, contemporaneously with the closing of the 2009 Equity Financing, we
entered into an amendment to the Registration Rights Agreement (the Registration
Rights Agreement Amendment), which extended the provisions of Registration Rights
Agreement to include the shares issued in the 2009 Equity Financing and the shares
issuable upon exercise of the 2009 Warrants. See Related Party Transactions 
Registration Rights Agreement and Amendment in Item 7.B below, for a summary of
the provisions of this agreement, as amended.

# B. Business Overview.

Our
laser and energy-based systems are designed for use in a variety of medical environments.
The principal target markets for our products are as follows:

|           |                                                         
|---------- | --------------------------------------------------------
|
|
|
|
|Market     | Principal Users                                         
|           |                                                         
|Surgical   | Hospitals, outpatient clinics and physicians' offices.  
|Aesthetic  | Physicians with private practices, clinics or hospitals.
|Ophthalmic | Hospitals, outpatient clinics and physicians' offices.  

# Corporate Strategy.

| |  | We
intend to maintain our position as a major player in the global laser and energy-based
medical device market by the development and supply of innovative, customer-centric
clinical solutions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
intend to utilize both direct sales teams and distributors to market our products.
| | - | -------------------------------------------------------------------------------------

| |  | We
intend to expand our sales channels and product offerings to reach a wider customer base
for our products.
| | - | -------------------------------------------------------------------------------------------------------------

| |  | We
intend to use our resources to ensure that we can compete effectively in each of the
markets that we have targeted.
| | - | ----------------------------------------------------------------------------------------------------------------------

# Lumenis Technology.

Most
of our products are based on proprietary technologies, using laser technologies, intense
pulsed light, or radio frequency that we have pioneered or advanced.

Laser
Technologies.  Medical laser systems are generally categorized by the active
material employed in generating the lasers beam. Materials used in our lasers may be
gases, such as CO2, or crystals, such as neodymium-doped
yttrium-aluminum-garnet (or Nd:YAG), erbium-doped yttrium-aluminum-garnet (or Er:YAG) or
holmium-doped yttrium-aluminum-garnet (or Ho:YAG). The active material determines the
wavelength of the light emitted and thus the applications for which various types of
lasers are best suited. We offer laser systems utilizing different technologies, including
the following:

| |  | CO2;
| | - | ----

| |  | Nd:YAG;
| | - | -------

| |  | Er:YAG;
| | - | -------

| |  | Ho:YAG;
| | - | -------

| |  | Varios
diodes; and
| | - | ------------------

| |  | Frequency
multipliers.
| | - | ----------------------

26

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Intense
Pulsed Light Technology (or IPL).  IPL uses thermal energy generated by a broad
band intense pulsed light source to selectively target unwanted lesions without damaging
the surrounding tissue. IPL uses a combination of intense pulses of light and different
cut-off filters. The IPL technology is used in our aesthetic products primarily for: skin
rejuvenation; non-invasive treatment of varicose veins and other benign vascular lesions;
removal of benign pigmented lesions, such as age spots and sunspots; facial vascularity
such as rosacea; and hair removal.

Radio
Frequency Technology  Functional Aspiration Controlled Electrothermal Stimulation
(or FACES). We use FACES to secure the skin in order to allow radio frequency energy to
pass through the epidermis and gently heat the deeper dermal tissue. Radio frequency is
used in our aesthetic products for the treatment of wrinkles.

# Surgical Strategic
Business Unit.

Our Surgical business unit is, in part, the successor to various operations acquired by us,
including Laser Industries, with its Sharplan brand name, acquired in 1998, and CMG, acquired in 2001,
who were leaders in the surgical marketplace for over twenty-five years. We are a leader in holmium
laser technology for the minimally invasive treatment of benign prostatic hyperplasia (or BPH) and
urinary lithotripsy. In addition, our UltraPulse SurgiTouch was the first robotic guided pulsed CO2
laser to offer an intuitive, versatile interface featuring pre-set parameters by specialty, application
and suggested delivery device. UltraPulse SurgiTouch was the first product to result from our
integration of CMG. In 2008, we derived approximately 35% of our revenues from sales by our Surgical
business unit (or approximately 33%, excluding sales of dental and veterinary products).

Strategy.

Our
strategy for our Surgical business focuses on developing products and procedures that lead
to strong clinical outcomes justified by sound health economics. In addition, we have
extensive development programs focusing on delivering light based therapies in innovative,
minimally invasive procedures.

Surgical
Products.

We
offer a broad range of surgical laser systems and accessories for sale to hospitals and
outpatient clinics, and to medical practices to meet the growing in-office procedure
demand. Our laser system surgical products include the following:

VersaPulse
PowerSuite Lasers.  We offer four VersaPulse PowerSuite lasers, which are used
by physicians in minimal, invasive surgical applications. They are:

| |   |                        |                                                                                 
| | - | ---------------------- | --------------------------------------------------------------------------------
|
|
|
|
| |  | 100W Holmium Laser:    | This laser is used for high-power and long-duration procedures including bladder
| |   |                        | stone fragmentation and BPH treatment.                                          
| |  | 80W Holmium Laser:     | This laser is used for incising tough fibrous or cartilaginous material. It is  
| |   |                        | useful for moderate- to high-energy procedures, in particular ear/nose/throat   
| |   |                        | (or ENT).                                                                       
| |  | 20W Holmium Laser:     | This is an alternative choice for performing lithotripsy and some soft tissue   
| |   |                        | procedures, as well as for select ENT applications.                             
| |  | Dual Wavelength Laser: | This system includes a 80W holmium laser and a 100W Nd:YAG laser. This is the   
| |   |                        | most powerful configuration that we offer. Physicians use it for numerous       
| |   |                        | applications in many specialties.                                               

UltraPulse
SurgiTouch.  UltraPulse SurgiTouch is a high-end, high-energy,
short-pulse-duration CO2 laser that serves a broad range of clinical
applications through ablation, vaporization, excision or incision of soft tissues in
otolaryngology (or ENT), gynecology, neurosurgery and general surgery (as well as
aesthetics  see Aesthetic Strategic Business Unit below).

Compact
Series.  This line of Compact CO2 systems, offering powers of 30 or
40 watts, combines portability with performance. These lasers are advantageous for small
operating theatres and physician offices and are easily transported to multiple office
sites. The use of special contact tips and accessories allows the surgeon to apply the
laser energy to target tissue. Char-free single-layer tissue ablation may be performed
with any of our CO2 systems using our SurgiTouch scanning technology.

AcuPulse. This
new CO2 laser was launched at the end of 2008 and will replace the Compact
Series. This laser has an intuitive user interface and a lower manufacturing cost allowing
the customer to have a better user experience while providing us with better gross
margins.

10S
Series.  The 40 watt 1041S model and the 55 watt 1055S model CO2
laser systems feature a precise and consistent control of char-free incision and ablation.
The high energy pulse mode characteristics of each model pro-vide unique high frequency
sequencing that automatically delivers the necessary output for char-free tissue effects
at high and low power settings. A third 10S Series laser, the 80 watt 1080S model, was
manufactured by us until 2007.

27

---

---

In
November 2008, we signed a worldwide distribution agreement with PolyDiagnost GmbH located
in Pfaffenhofen, Germany. Under the agreement, we have the worldwide exclusive right
(except for a small number of countries where PolyDiagnost has previously granted certain
distribution rights) to distribute the Endognost PolyScope flexible endoscope line of
products. We are dependent on Endscopes to access most of the treatment areas in the body
where our lasers and fibers are used. This agreement will provide us with various access
products, thus allowing us to control the majority of the steps in the various
interventional procedures in which our products are used.

Accessories. We
offer a number of surgical accessories for use in conjunction with our laser systems.

Technologies. Our
surgical systems use the following technologies:

| |  | CO2;
| | - | ----

| |  | Ho:YAG;
and
| | - | -----------

| |  | Q-switched
Nd:YAG.
| | - | ------------------

Applications. Physicians
use our surgical systems in a number of applications, including those listed below:

| |  | Ear/Nose/Throat
(ENT or otolaryngology).  We have pioneered several ENT applications for both
operating room and office environments. Our UltraPulse SurgiTouch CO2 system
enables the physician to create precise, hemostatic incisions and excisions and to ablate
soft tissue with minimal thermal necrosis to the surrounding area. Surgical accuracy and
precision is enhanced through the use of the Digital Accublade microsurgery system. These
devices can be easily adapted for freehand surgery, laser microsurgery, and rigid
endoscopy. ENT surgeons use the following products that we offer:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | UltraPulse
SurgiTouch;
| | - | ----------------------

| |  | Compact
30/40C; and
| | - | -------------------

| |  | AcuPulse.
| | - | ---------

| | In
addition, at the end of 2008 we entered into an exclusive agreement with Valam (ARC
Lasers) to distribute their Fox diode laser in the United States. This laser is intended
to be used for the ENT office setting.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Gastroenterology.  Gastroenterologic
surgeons use our lasers for incision, excision, coagulation, ablation and vaporization in
order to perform minimally invasive surgeries. Gastroenterologic surgeons use the
following product that we offer:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | VersaPulse
Power Suite.
| | - | -----------------------

| | In
2008, we launched the SlimLine GI fiber to be used in conjunction with the VersaPulse
Power Suite system for the treatment of stones in the Common Bile Duct using Endoscopic
Retrograde Cholangiopancreotography (ERCP).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | General
Surgery.  General surgeons use our lasers for open, endoscopic and laparoscopic
soft tissue incision, vaporization, ablation and coagulation in connection with
hemorrhoidectomies, surgery of tumors, ulcers and infected lesions. General surgeons use
the following products that we offer:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | UltraPulse
SurgiTouch;
| | - | ----------------------

| |  | Compact
30/40C; and
| | - | -------------------

| |  | 10S
Series.
| | - | -----------

| |  | Gynecology.  Gynecologists
use our lasers for various gynecologic procedures, including laparoscopy, colposcopy,
hysteroscopy, endometrial ablation, and treating lesions of the lower genital tract.
Gynecologists use the following products that we offer:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | VersaPulse
Power Suite;
| | - | -----------------------

| |  | UltraPulse
SurgiTouch; and
| | - | --------------------------

| |  | Compact
30/40C.
| | - | ---------------

28

---

---

| |  | Neurosurgery.  Neurosurgeons
use our lasers for precise cutting procedures. Neurosurgeons use the following products
that we offer:
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | UltraPulse
SurgiTouch; and
| | - | --------------------------

| |  | 10S
Series.
| | - | -----------

| |  | Podiatry.  Podiatrists
require lasers to perform precise hemostatic procedures, such as radical nail excisions,
treat fungal and ingrown nails, plantar warts and neuromas, and perform ablations.
Podiatrists use the following products that we offer:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | UltraPulse
SurgiTouch;
| | - | ----------------------

| |  | Compact
30/40C; and
| | - | -------------------

| |  | 10S
Series.
| | - | -----------

| |  | Thoracic & Pulmonary.  Thoracic
surgeons use lasers for soft tissue incision, excision, ablation and coagulation, as well
as for removing polyps, granulomas, laryngeal lesions and obstructing carcinomas in the
airway and tracheobronchial tree. For these applications, thoracic surgeons use the
following products that we offer:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | VersaPulse
Power Suite;
| | - | -----------------------

| |  | UltraPulse
SurgiTouch;
| | - | ----------------------

| |  | Compact
30/40C; and
| | - | -------------------

| |  | 10S
Series.
| | - | -----------

| |  | Urology/Genitourinary.  Urologists
use our VersaPulse Power Suite family of holmium lasers for two main applications in
urology: ureteral, bladder and kidney stone lithotripsy; and BPH. BPH affects over 60% of
men over the age of 60. Lumenis offers two procedures for BPH Management: Holmium Laser
Ablation of the Prostate (or HoLAP) and Holmium Laser Enucleation of the Prostate (or
HoLEP). We sell our VersaPulse Power Suite with a wide range of fibers, which enable
physicians to penetrate hard-to-reach areas. Urologists use this laser to respect, ablate
and coagulate tissue. Urologists use the following systems that we offer:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | VersaPulse
Power Suite.
| | - | -----------------------

Products
Under Development.

Our surgical
product development platforms focus on improving our VersaPulse Power Suite Holmium and
UltraPulse SurgiTouch and Compact CO2 lasers, as well as creating more surgical
and interventional applications for our products.

Marketing,
Distribution & Sales.

The
strategic planning and strategic marketing for our Surgical business unit takes place in
Santa Clara, California. Our surgical products are distributed and marketed through a
global network of direct sales representatives, medical distributors and strategic
partners. In the United States, our largest surgical market, distribution is carried out
by a combination of direct sales representatives and Boston Scientific Corp. (Boston
Scientific), under a distribution agreement entered into with us in 2001. Our direct
sales organizations sells surgical (as well as ophthalmic) lasers to hospitals, ambulatory
surgery centers and physician offices in five clinical areas: urology, ENT, gynecology,
gastroenterology and ophthalmology. Boston Scientific distributes our holmium laser fibers
for urology. In addition, Boston Scientific and Lumenis co-distribute holmium lasers into
the urology market. In Japan, Boston Scientific has the exclusive distribution rights for
our holmium lasers and fibers for urology. With respect to ENT, gynecology and
gastroenterology, we sell through our own direct or distributor sales channels in all
regions of the world, including the United States. Under our distribution agreement with
PolyDiagnost, entered into in November 2008, we have the worldwide right to distribute the
Endognost PolyScope flexible endoscope line of products.

Manufacture.

All
of our surgical lasers are manufactured in Yokneam, Israel. In addition, we have partnered
with leaders in the field of fiber optics for the manufacture of all of our surgical laser
fibers. However, the majority of the value added manufacturing steps are carried out in
Yokneam, whether or not we partner with third party suppliers. We maintain our core
manufacturing expertise in laser optics, laser physics and software development.

29

---

---

Competitors.

Lumenis
is active in several different markets for surgical applications. The competition varies
significantly between these markets, as well as between the different regions.

Our
principal direct competitors in the surgical market are: AMS (American Medical Systems,
through its acquisition of Laserscope); Bioletic AG / CeramOptec; Deka Laser Technologies,
Inc.; Diomed Inc.; Dornier MedTech; Lisa Laser Products OHG; Olympus Corp. / Gyrus ACMI;
Karl Storz GmbH; Trimedyne Inc.; and SSI.

# Aesthetic Strategic
Business Unit.

We
are a major player in the laser aesthetic market and supply solutions for most of the
laser aesthetic and medical dermatological application. In 2008, we derived approximately
42% of our revenues from our Aesthetic business.

Strategy.

Our
strategy for our Aesthetic business is to address the aesthetic and medical dermatological
needs of our core customers in plastic surgery and dermatology through collaborative
innovation with consultants and service providers from luminary physicians and
institutions. This development path validates new technology for ourselves and for
practicing physicians.

Aesthetic
Products.

The
following are the major products we currently market for aesthetic and dermatological
applications. We have designed some of our systems to have the versatility to treat
several different conditions.

Lumenis
One System.  Our Lumenis One system is our leading aesthetic product and offers
the following three technologies on one multi-technology and multi-application
customizable and upgradeable platform:

| |  | IPL
for skin photorejuvenation and treating vascular and pigmented lesions;
| | - | ---------------------------------------------------------------------------

| |  | LightSheer
diode laser for hair removal; and
| | - | --------------------------------------------

| |  | Adjustable
Multi-Spot Nd:YAG laser for treating leg veins and deeper vascular lesions.
| | - | --------------------------------------------------------------------------------------

IPL
Quantum.  Our IPL Quantum family of systems includes the following:

| |  | IPL
Quantum SR system provides IPL photorejuvenation treatments for the treatment of benign
pigmented lesions, solar lentingos, rosacea and vascular lesions;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | IPL
Quantum DL system that consists of an Nd:YAG laser for treating leg veins and deep
vascular lesions;
| | - | --------------------------------------------------------------------------------------------------------

| |  | IPL
Quantum HR system upgrade that consists of a multiple wavelength IPL for hair removal; and
| | - | ----------------------------------------------------------------------------------------------

| |  | IPL
Quantum QS system upgrade that consists of a Q-switched Nd:YAG laser for tattoo removal.
| | - | --------------------------------------------------------------------------------------------

LightSheer. Our
LightSheer family of systems includes the following:

| |  | LightSheer
system that utilizes an 810nm high-power pulsed diode laser that provide safe and
efficacious permanent hair reduction to patients of all skin types, including tanned
skin. LightSheer has been recognized as an effective, simple-to-operate and
low-maintenance system. The LightSheer is available as both a stand-alone system or as a
module for the Lumenis One multi-technology platform.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | LightSheer
Duet that utilizes a new proprietary hand piece design that allows for significantly
faster and more comfortable hair removal treatment utilizing a unique vacuum assisted
technology.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Aluma. Our
Aluma skin renewal system uses FACES technology in the treatment of wrinkles in a
procedure involving low-downtime and minimal pain.

Ultrapulse
SurgiTouch/ActiveFX and DeepFX.  UltraPulse SurgiTouch is a high-end,
high-energy, short-pulse-duration CO2 laser. The UltraPulse was among the first
that made laser skin resurfacing possible. This high-powered laser provides performance
enhancement over lower-powered CO2 lasers. It is used for performing a wide
range of surgical and aesthetic procedures, including the minimally ablative ActiveFX and
DeepFX procedures and the full face resurfacing procedure, and for blepheroplasty.
ActiveFX is a fractional laser procedure, launched in April 2006, performed in a single
treatment with minimal patient downtime. With the increasing availability of aesthetic
treatments, more and more patients are seeking a remedy for fine lines, wrinkles,
dyschromia, and skin laxity. Many of these patients have active personal and professional
lives, and want a treatment that is both effective and convenient. We offer ActiveFX as a
solution for these patients. During fractional treatment, only a portion of the
skins surface is treated by the laser, leaving small bridges of
untouched skin. This technique makes the healing process quicker and enables patients to
get back to their normal life-styles sooner. DeepFX is a new, fast recovery time
fractional treatment introduced in December 2007. DeepFX treats microscopic columns in
skin for deeper results and effects on wrinkles, sun damage and scars.

30

---

---

Applications.  The
following are the primary applications for our aesthetic systems:

| |  | hair
removal;
| | - | -------------

| |  | removal
of benign pigmented lesions including brown spots, age spots, sunspots, scars and stretch
         marks;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | treatment
of wrinkles;
| | - | ----------------------

| |  | improving
dyschromia, uneven pigment, skin texture and tone, as well as reducing the results of sun
damage, environmental exposure and the effects of aging;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | removal
of benign vascular lesions, including leg veins, spider veins on legs and face, deep
vascular lesions and other red spots; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | treatment
of scars.
| | - | -------------------

Technologies. Our
aesthetic systems utilize the following technologies:

| |  | IPL;
| | - | ----

| |  | CO2lasers;
| | - | ----------

| |  | Radio
Frequency;
| | - | ----------------

| |  | Nd:YAG
lasers; and
| | - | ------------------

| |  | diode
lasers.
| | - | -------------

Products
Under Development

Product
line extensions are in development for the LightSheer Brand, for CO2 systems
and a new multi-application platform that will be the successor product to the Quantum. We
expect to launch these products in the near future.

Marketing,
Distribution & Sales.

The
strategic planning and strategic marketing for our Aesthetic business unit is situated in
Santa Clara, California. We have substantial direct sales presence for our aesthetic and
dermatological products in the United States, China, Japan, Germany, Italy and the United
Kingdom. Elsewhere, sales are generally effected through a network of distributors.

Manufacture.

All
of our aesthetic products are manufactured in Yokneam, Israel and at sub contractors in
the United States and Israel.

Competitors.

Our
principal direct competitors in the aesthetic market are: Alma Lasers Ltd.; Candela
Corporation; Cutera Inc.; Cynosure, Inc.; Deka Laser Technologies, Inc; Lasering s.r.l.;
Lutronic Corporation; Palomar Medical Technologies, Inc.; Sciton Inc.; Solta Medical
Inc.; and Syneron Medical Ltd.

# Lumenis Vision
(Ophthalmic) Strategic Business Unit.

CMG
was a leader in the ophthalmic laser market since its introduction of the first argon
photocoagulator system in 1970 for the treatment of retinal diseases and glaucoma. CMG had
achieved a widespread reputation for innovations and product excellence with an installed
base of over 30,000 ophthalmic lasers in more than 75 countries. Since our acquisition of
CMG, we have been developing products that include both laser and other innovative
technology solutions for the treatment of a variety of sight-threatening diseases. In
2008, we derived approximately 23% of our revenues from our Ophthalmic business.

31

---

---

Strategy.

Our
strategy for our Ophthalmic business is to address the needs of our core customers through
collaborative innovation with consultants and service providers from luminary physicians
and institutions. This development path validates new technology for ourselves and for
practicing physicians.

Ophthalmic
Products.

We
currently market the following products for ophthalmology applications.

Selecta
Lasers.  Our Selecta systems are based upon normal and frequency doubled Nd:YAG
lasers and include single-application systems as well as multi-technology and
multi-application platforms. They consist of the following:

| |  | Selecta
II:  SLT 532 nanometer (nm) Nd:YAG laser for open angle glaucoma;
| | - | -------------------------------------------------------------------------

| |  | Selecta
Duet:  SLT 532 nm Nd:YAG laser for open angle glaucoma and 1064 nm Nd:YAG laser
for cataracts. Our Selecta Duet is the first laser to treat both glaucoma and secondary
cataracts and has been manufactured by another company for us. We have terminated this
manufacturing contract and are developing a replacement product, including some improved
features, which we expect to release in 2009; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Selecta
Trio:  SLT 532 nm Nd:YAG laser for open angle glaucoma and 1064 nm Nd:YAG laser
for cataracts with Q-Switched feature.
| | - | ------------------------------------------------------------------------------------------------------------------------------

Novus
Lasers.  Our Novus systems utilize diode lasers for photocoagulation. They
consist of the following:

| |  | Novus
Varia; and
| | - | ----------------

| |  | Novus
Spectra.
| | - | --------------

Our
Novus Varia as one of the first three-color diode-pumped ophthalmic laser. Our Novus
Spectra, a 532 nm green diode-pumped solid-state photocoagulation laser, was the first
product to result from our integration of HGM Medical Systems, which we acquired in
December 2001.

Aura
PT/Aura II.  The Aura PT and Aura II ophthalmic YAG photodisruptor
laser system represent our latest YAG ophthalmic product offering, and may be used for
anterior-segment procedures such as laser iridotomy and capsulotomy.

Accessories.  We
offer a number of ophthalmology accessories for use in conjunction with our laser systems,
including the LumeProbe Endo Photocoagulation Laser Probes, which ensures that the laser
beam goes directly to the targeted tissue, launched in November 2008.

In
November 2005, we received FDA clearance to market the first coaxial multicolor laser
indirect ophthalmoscope, or LIO, for the delivery of photcoagulator laser energy during
ophthalmic surgery. It is compatible with our Novus 3000 and Novus Varia, and its main
benefits include superior performance, integrated multi-wavelength eye safety filters and
ease-of-use.

Technology.  Our
ophthalmology systems use the following technologies:

| |  | Nd:YAG
lasers;
| | - | --------------

| |  | argon
lasers; and
| | - | -----------------

| |  | diode-pumped
and other solid state lasers.
| | - | ------------------------------------------

Applications. The
following are the primary applications for our ophthalmology systems:

| |  | Open-angle
glaucoma. We offer the following ophthalmic laser systems that provide ophthalmologists
with essential surgical tools that help lower intraocular pressure and control open-angle
glaucoma, a progressive, degenerative disease that threatens the sight of millions of
people worldwide:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Selecta
II;
| | - | -----------

| |  | Selecta
Duet; and
| | - | -----------------

| |  | Selecta
Trio.
| | - | -------------

32

---

---

| |  | Retina.
The retina generally responds well to laser treatment and our ophthalmic lasers offer
treatment versatility and optimize therapeutic effect for todays challenging
retinal procedures. We offer the following lasers for retinal treatment:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Selecta
Trio;
| | - | -------------

| |  | Novus
Varia; and
| | - | ----------------

| |  | Novus
Spectra.
| | - | --------------

| |  | Comprehensive
Ophthalmology. The precision and control of laser light combined with laser delivery
systems offers significant advantages in a wide range of minimally invasive techniques
for ophthalmology. We offer the following ophthalmic lasers used to preserve and improve
vision and treat many sight-threatening diseases, including diabetic retinopathy,
glaucoma, Age-related Macular Degeneration (or AMD), and secondary cataracts:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Selecta
Duet;
| | - | -------------

| |  | Selecta
Trio;
| | - | -------------

| |  | Novus
Varia; and
| | - | ----------------

| |  | Novus
Spectra.
| | - | --------------

For
our ophthalmology systems, set out below are the primary laser tissue interaction:

| |  | Photocoagulation.  The
purpose of this application is to heat or coagulate tissue. The primary application is
the treatment of diabetic retinopathy, an abnormal vascular disease of the retina. The
following products provide photocoagulation treatment:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Novus
Varia;
| | - | ------------

| |  | Novus
Spectra; and
| | - | ------------------

| |  | Novus
Spectra Dual Port.
| | - | ------------------------

| |  | Photodisruption.  A
photodisruptor creates a small optical breakdown, or spark, to separate tissue or drill
holes in the retina. The primary application is capsulotomy or perforation of the
posterior capsule, a membrane left after removal of the cataractous lens. A secondary
application is drilling holes in the iris, laser iridotomy, to relieve pressure in narrow
angle glaucoma. The following products provide photodisruptor treatment:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Selecta
Duet; and
| | - | -----------------

| |  | Aura
PT/Aura II.
| | - | ----------------

| |  | Selective
Laser Trabeculoplasty (or SLT).  SLT is used to selectively target individual
trabecular meshwork cells to activate a biologic response that increases outflow of fluid
to reduce intraocular pressure in open angle glaucoma. SLT is performed using the
following products:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Selecta
II; and
| | - | ---------------

| |  | Selecta
Duet.
| | - | -------------

| |  | Refractive
Correction.  This is the correction of near and far sightedness and
astigmatism. In China, Hong Kong and Japan, Lumenis distributes the Allegretto Wave((1))
laser, manufactured by Wavelight Laser Technologie AG, which has the capability of custom
ablation to achieve better corrective vision for patients.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Products
Under Development.

Our ophthalmic
product development is primarily in two areas: product enhancements focusing on improving
our Novus Varia laser, as well as the Selecta and Spectra Family of products; and product
development focusing on selective retina treatment (or SRT), or a paradigm shift for
retinal laser treatments with the potential to enhance sight preservation for patients
affected by several retinal diseases.

Marketing,
Distribution & Sales.

The
strategic planning and strategic marketing for our Ophthalmic business unit is situated in
Salt Lake City, Utah and Yokneam, Israel. Lumeniss ophthalmic products are
distributed and marketing through a global network of direct sales representative and
medical distributors. In the United States, China, Japan, Germany and Italy, distribution
is generally through direct sales representatives, who sell ophthalmic (as well as
surgical) lasers to hospitals, outpatients and ophthalmologists. Elsewhere, sales are
generally effected through a network of distributors.

---

|(1) This
mark is used by Lumenis under a license from WaveLight Laser Technologie AG.
|-------------------------------------------------------------------------------------

33

---

---

Manufacture.

With
the exception of the Aura PT, all of our ophthalmic lasers are manufactured in Salt Lake
City, Utah. In addition, we have partnered with a fiber optics manufacturer of our endo
ocular laser probes. Whether or not we partner with third party suppliers, we maintain our
core manufacturing expertise in laser optics, laser physics and software development.

Competitors.

Our
principal direct competitors in the ophthalmic market are: Alcon Corporation; Carl Zeiss
Meditech AG; Ellex Medical Lasers Ltd.; Iridex Corporation; Nidek Technologies Inc.;
Optimedica Corporation; and Quantel Corporation.

# Marketing, Distribution
and Sales.

We
have established four regional centers, as described below, to coordinate local sales,
marketing, service and administrative functions for all of our product systems. Strategic
planning and strategic marketing is situated either in the United States or in Israel. In
addition to the sale of products, we generate revenues from service calls, maintenance
agreements, sales of parts and accessories and the distribution of clinical management
software with respect to some of our products. We sell our products directly primarily in
five countries, namely, the United States, Italy, Germany, Japan and China (including Hong
Kong), with sales of our aesthetic products also being effected directly in the United
Kingdom. We sell the remainder of our products through our global distributor networks,
consisting of over 90 independent distributors. These distributors sell our products
in over 100 countries around the world. We generally grant our distributors exclusive
territories for the sale of particular products in specified countries.

We
have a regional sales, service and administrative center in each of the following
geographic areas:

| |  | Americas,
headquartered in Santa Clara, California, which is responsible for sales in the
United States, Canada, Latin America and the Caribbean. (For part of 2008, Latin America
and the Caribbean had, but no longer has, a separate center.) In this market,
approximately 90% of our net sales are in the United States, nearly all of which are
direct to customers through our sales personnel in the United States. The remainder of
sales in the region are almost all distributor sales, through a network of almost 20 distributors.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Europe,
the Middle East and Africa (or EMEA), headquartered near Frankfurt, Germany, which is
responsible for direct sales in Germany, Italy and (aesthetic products only) the United
Kingdom and for distributor sales in the rest of Europe, the Middle East, the countries
of the former Soviet Union and Africa, using a network of approximately 60 distributors.
The European headquarters also manages our main distribution center outside the United
States. In our EMEA market, we have a presence in over 70 countries. Approximately 70% of
our net sales are to distributors, and approximately 30% of our net sales are direct to
customers through our sales personnel. Germany, Italy, the United Kingdom, France and
Spain are our largest Europe sub-markets.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | China,
headquartered in Beijing, China, and Asia Pacific, headquartered in Hong Kong, which are
responsible for direct sales operations in the Peoples Republic of China and Hong
Kong as well as distributor sales in the other countries in Asia and in the rest of the
world, where not covered elsewhere.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Japan,
headquartered in Tokyo, Japan, which is responsible for sales operations in Japan. In our
Japanese market, most of our net sales are direct to customers through our sales
personnel in Japan.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
also have entered into distribution agreements with other manufacturers to grant us rights
to distribute third party products that complement our product offerings, such as
Allegretto Wave laser for laser vision correction and cataracts and Aura photodisruptor
for capsulotomy, all of which we sell through our regional sales and service centers.

Since
2005, we have outsourced our global transportation and warehousing activities to UPS
Supply Chain Solutions, a subsidiary of UPS, which provides logistics, warehouse
management, customs and transportation services for all our activities worldwide and also
provides specialty services, such as critical order management and service parts
logistics. In addition, we have outsourced our global information technology services to
EDS Israel, the Israel subsidiary of EDS, a Hewlett-Packard company.

To
assist customers in financing their purchases of our products, we or our distributors may
introduce such customers to one of a number of independent leasing companies.

# Seasonality of Business.

We
generally sell more of our products during the second and the fourth fiscal quarters than
in the first and third fiscal quarters. We believe that this is because during the third
fiscal quarter many physician customers take summer vacation and during the first fiscal
quarter many hospitals and medical organizations have not yet assessed their needs and
budgets for the upcoming year.

34

---

---

# Breakdown of Net Sales
by Activity and Geographic Market.

See
Breakdown of Net Sales by Activity and Geographic Market in Item 5.A
below for a breakdown of our revenues by category of activity and geographic market for
each of the last three financial years.

# Service and Customer
Support.

Service
and customer support (known as Lumenis Service) is provided globally for our products
either by Lumenis personnel within service departments in the majority of those countries
in which we sell our products directly (see above under Marketing, Distribution and
Sales), or elsewhere, by local independent distributors, supported by our geographic
or global support centers.

We
maintain global support centers at production sites, providing technical solutions to all
technical requests emanating from the regional service departments.

Lumenis
Service is responsible for providing the following main categories of service and customer
support functions for our products:

| |  | Communication
Centers in each of the regional centers for our four geographic sales and marketing
areas (Japan, China/Asia Pacific, the Americas, Europe) with near round-the-clock service
answering support and dispatch during office hours, performing installation, maintenance,
and periodic, preventative servicing activities at the customer site;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Training:
Lumenis Service provides hands-on, practical basic and advanced technical training and
certification of field service engineers for practically all our products. Distributor
service personnel are required to attend such training course and certified to become
authorized;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Configuration
Control: Publishing and controlling all technical documentation  service
manuals, technical bulletins and updates, upgrade kits and online knowledge base enabling
global updated knowledge base; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Spare
Parts and Logistics Channels:We operatewarehouses in each of the above
geographic areas, as well as global distribution centers with thousands of required parts
in inventory with the aim of ensuring long term support to our customers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Manufacturing.

We
manufacture our products in two principal locations: Yokneam, Israel, where surgical and
aesthetic products are manufactured; and Salt Lake City, Utah, where ophthalmic products
are manufactured. We have outsourced the manufacture of some of our aesthetic products.

In
addition, we procure certain full turn-key systems from several suppliers under OEM
agreements.

We
manufacture products based mostly upon sales forecasts and, to a lesser extent, upon
specific orders received from our customers. We deliver products based upon purchase
orders received, and our goal is to fulfill each customers order for products in
regular production within two to eight weeks of receipt of the order.

# Sources and Availability
of Raw Materials.

We
manufacture our products from a large number of parts, using standard components as well
as specially developed subassemblies supplied by subcontractors and vendors worldwide
meeting our specifications.

Some
of our critical components are supplied by sole sources. Due to their sophisticated
nature, certain components must be ordered up to six months in advance, resulting in
substantial lead time for certain production runs. In the event that such limited source
suppliers are unable to meet our requirements in a timely manner, we may experience an
interruption in production until we can obtain an alternate source of supply. In order to
mitigate this risk, we provide our suppliers with a purchasing plan and a three- to
nine-month estimate of future orders.

We
use UPS as our global logistics vendor to provide logistics and related services,
including storing and stocking our raw materials inventory and finished goods inventory,
in most of the geographic areas in which we operate.

We
order raw materials, including optical and electronic parts, which we send in kits to
subcontractors for assembly of components and subassemblies. We conduct assembly (in
part), integration, and quality assurance of the components and subassemblies at our
manufacturing facilities. In some cases, we test quality on-site at the
subcontractors facility.

35

---

---

# Competition.

Competition
in our markets is intense and we expect it to increase. Competition arises from other
light-based products, as well as alternate technologies (not based upon laser technology).
We also face competition from companies selling accessories or services for our products.
Competitors range in size from small single product companies to large multifaceted
corporations, which may have greater resources than those available to us.

The
names of our principal direct competitors (with respect to each of our Business Units) are
listed in the descriptions of the relevant Business Unit above.

Some
of our competitors have substantially greater financial, engineering, product development,
manufacturing, marketing and technical resources than we do. Some companies also have
greater name recognition than we do, and long-standing customer relationships. In
addition, other medical companies, academic and research institutions, or others, may
develop new technologies or therapies, including medical devices, surgical procedures or
pharmacological treatments and obtain regulatory approval for products utilizing such
techniques that are more effective in treating the conditions that we target or are less
expensive than our current or future products. Our technologies and products could be
rendered obsolete by such developments. To compete effectively, we will need to continue
to expand our product offerings, update our existing products, develop innovative
technologies and expand our distribution. Our competitive position depends upon a number
of factors, including the following:

| |  | Brand
recognition;
| | - | ------------------

| |  | Product
performance and efficacy;
| | - | ---------------------------------

| |  | Product
positioning;
| | - | --------------------

| |  | Pricing;
| | - | --------

| |  | Characteristics
and functionality;
| | - | ----------------------------------

| |  | Ease
of use;
| | - | ------------

| |  | Scalability;
| | - | ------------

| |  | Durability
and quality;
| | - | -----------------------

| |  | Warranty
and service; and
| | - | -------------------------

| |  | Cost.
| | - | -----

We
cannot assure that we can compete effectively against such competitors. In addition, we
cannot assure that these or other companies will not succeed in developing technologies,
products or treatments that are more effective than ours or that would render our
technology or products obsolete or non-competitive. Any such developments could have a
material adverse effect on our business, financial condition and results of operations.

# Research and Development.

Our
research and development strategy is to develop high quality products and related
accessories to maintain our competitive advantage. Our research and development efforts
are conducted at our Yokneam, Israel, Salt Lake City, Utah, and Santa Clara,
California facilities. We believe that the close interaction among our research and
development, marketing, and manufacturing groups allows for timely and effective
realization of our new product concepts.

We
have from time to time applied for and received certain grants and tax benefits from, and
participate in, research and development programs sponsored by the Government of Israel.
For further details, see Israeli Tax Considerations and Government Programs 
Tax Benefits and Grants for Research and Development in this Item below.

# Patents and Intellectual
Property.

We
have obtained and now hold approximately 150 patents in the United States and
100 patents outside of the United States and have outstanding applications for
approximately 55 patents in the United States and 25 patents outside of the
United States. In general, however, we rely on our research and development program,
production techniques and marketing, distribution and service programs to advance our
products. We also license certain of our technologies from third parties pursuant to
various license agreements. Patents filed both in the United States and Europe have a life
of twenty years from the filing date. However, patents filed in the United States prior to
June 1995 expire the later of twenty years from filing or seventeen years from the issue
date.

Technologies
related to our business, such as laser and IPL technologies, have been rapidly developing
in recent years. Numerous parties have sought patent protection on developments in these
technologies.

36

---

---

Our
policy is to obtain patents by application, license or otherwise, to maintain trade
secrets and to operate without infringing on the intellectual property rights of third
parties. Loss or invalidation of certain of these patents, or a finding of
unenforceability or limited scope of certain of our intellectual property, could have a
material adverse effect on us. The patent position of many inventions in the areas related
to our business is highly uncertain, involves many complex legal, factual and technical
issues and has recently been the subject of litigation industry-wide. There is no
certainty in predicting the breadth of allowable patent claims in such areas or the degree
of protection afforded under such patents. As a result, there can be no assurance that
patent applications relating to our products or technologies will result in patents being
issued, that patents issued or licensed to us will be useful against competitors or that
we will enjoy patent protection for any significant period of time.

It
is possible that patents issued or licensed to us will be successfully challenged or that
patents issued to others may preclude us from commercializing our products under
development. Litigation to establish or challenge the validity of patents, to defend
against infringement, enforceability or invalidity claims or to assert infringement,
invalidity or enforceability claims against others, if required, can be lengthy and
expensive, and may result in determinations materially adverse to us. We cannot assure you
that the products currently marketed or under development by us will not be found to
infringe patents issued or licensed to others. Likewise, we cannot assure you that other
parties will not independently develop similar technologies, duplicate our technologies
or, with respect to patents that are issued to us or rights licensed to us, design around
the patented aspects of the technologies. Third parties may also obtain patents that we
may need to license from them in order to conduct our business.

Because
of the rapid development of technologies that relate to our products, there may be other
issued patents that relate to basic relevant technologies and other technologies that we
market. From time to time, we receive inquiries from third parties contending that we are
infringing their patents. If such third parties were to commence infringement suits
against us, and such patents were found by a court to be valid, enforceable and infringed
upon by us, then we could be required to pay damages and/or make royalty payments.
Depending on the nature of the patent found to be infringed upon by us, a court order
requiring us to cease such infringement could have a material adverse effect on us. See
Legal Proceedings under Item 8.A below.

We
also rely on protection available under trademark law. We currently hold registered
trademarks in various jurisdictions in connection with approximately 20 different
trade names and marks. However, our current strategy is to concentrate our future
trademark registration activities on the mark Lumenis and certain key product
names, in particular, LightSheer and Ultrapulse.

# Government Regulation.

The
products that we manufacture and market are subject to regulatory requirements mandated by
the U.S. FDA, the European Union (the E.U.) and similar authorities in
other countries. We believe that our principal products will be regulated as
devices under United States federal law and FDA regulations. The process of
obtaining clearances or approvals from the FDA and other regulatory authorities is costly,
time-consuming and subject to unanticipated delays.

Among
the conditions for FDA approval of a medical device is the requirement that the
manufacturers quality control and manufacturing procedures comply with the Quality
System Regulations, or QSR, which must be followed at all times. The QSR impose certain
procedural and documentation requirements upon a company with respect to design,
manufacturing, complaint handling and quality assurance activities. These QSR requirements
control every phase of design and production, from the receipt of raw materials,
components and subassemblies to the labeling of the finished product.

Our
quality system is certified to ISO 13485, a globally recognized standard established
for medical device companies by the International Standards Organization in Geneva,
Switzerland. ISO 13485 embraces principles of the QSR and is a comprehensive quality
assurance standard. ISO certification is based upon adherence to established quality
assurance standards and manufacturing process controls.

In
1998, the E.U. determined that marketing or selling any medical products or devices within
the European community requires a CE Mark according to the European Medical Device
Directive. It is the responsibility of member states to ensure that devices capable of
compromising the health and safety of patients (and users) do not enter the market.
Obtaining a CE Mark for medical devices is regulated according to the European Medical
Device Directive. The medical device must comply with the requirements of the European
Medical Device Directive that applies at each stage, from design to final inspection. We
have complied with the E.U. standards and have received the CE Mark for all of our systems
distributed in the E.U.

International
sales are subject to specific foreign government regulations and those regulations vary
from country to country. The time required to obtain approval for any device to be sold in
any foreign country may be longer or shorter than that required for FDA clearance, and
there can be no assurance that approval in any jurisdiction will be obtained or, if
granted, will not be withdrawn.

37

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# Financial Information
about Foreign and Domestic Operations and Export.

See
Breakdown of Net Sales by Activity and Geographic Market in Item 5.A
below and Note 18 to our consolidated financial statements included in this annual
report for financial information about the geographic areas of our business.

See
Export Sales in Item 8.A below for a breakdown of the amount of our
export sales for each of the last three fiscal years.

Our
worldwide business is subject to risks of currency fluctuations, governmental actions and
other governmental proceedings outside of Israel. We do not regard these risks as a
deterrent to further expansion of our operations outside of Israel. However, we closely
review our methods of operations and adopt strategies responsive to changing economic and
political conditions.

For
risks related to our operations in Israel, see Conditions in Israel in this
Item below.

# Conditions In Israel.

We
are incorporated under the laws of, and our principal offices and manufacturing and
research and development facilities are located in, the State of Israel. Therefore, we are
directly affected by political, economic and military conditions in Israel, including
those discussed in the Risks Relating Primarily to our Location in Israel in
Item 3.D above and in Operating Results in Item 5.A below, which
could affect our results of operations.

# Israeli Tax
Considerations and Government Programs.

The
following is a summary of certain aspects of the current tax structure applicable to
companies in Israel, with special reference to its effect on us (and our operations, in
particular). The following also contains a discussion of the Israeli government programs
benefiting us. To the extent that the discussion is based on new tax legislation that has
not been subject to judicial or administrative interpretation, we cannot assure you that
the tax authorities or the courts will accept the views expressed in this discussion. This
discussion does not address all of the Israeli tax provisions that may be relevant to our
Company. For a discussion of the Israeli tax consequences related to ownership of our
capital stock, please see Israeli Taxation Considerations in Item 10.E
below.

| | General
Corporate Tax Structure in Israel.
| | ------------------------------------------

The
regular rate of corporate tax, which Israeli companies were subject to in 2008 was 27%
(such tax rate has been reduced to 26% in 2009 and will be reduced further to 25% in
2010). Israeli companies are generally subject to Capital Gains Tax at a rate of 25% for
capital gains derived after January 1, 2003 (other than capital gains from the sale
of listed securities, which are subject to the then-current corporate rate applicable to a
company). However, the effective tax rate payable by a company that derives income from an
Approved Enterprise/Privilege Enterprise, discussed further below, may be considerably
less. See Law for the Encouragement of Capital Investments in this Item below.

Following
an additional amendment to the Israeli Income Tax Ordinance (the ITO), which
came into effect on January 1, 2009, an Israeli corporation may elect a 5% rate of
tax (instead of 25%) for income derived from dividend distributions received from a
foreign subsidiary that is distributed and used in Israel in 2009, or within one year
after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to
various conditions, which include conditions with regard to the identity of the
corporation that distributes the dividends, the source of the dividend, the nature of the
use of the dividend income, the period during which the dividend income will be used in
Israel and the amount of loans that the foreign subsidiary received from the corporation.

Pursuant
to the provisions of the Law for Amendment of the Income Tax Ordinance (No. 132),
5762-2002 (the Reform Law), tax at a reduced rate of 25% applies on capital
gains arising after January 1, 2003, instead of the regular tax rate. In case of the
sale of properties purchased before the adoption of the Reform Law, the reduced tax rate
will apply only to the portion of the profit that arose after the adoption of the Reform
Law, as computed according to the law. Further, the Reform Law states that capital losses
carried forward for tax purposes may be offset against capital gains indefinitely. The
Reform Law also provides for the possibility to offset capital losses from sale of
properties outside Israel against capital gains in Israel.

Besides
being subject to the general corporate tax rules in Israel, we have also from time to time
applied for and received certain grants and tax benefits from, and participate in,
programs sponsored by the Government of Israel, described below.

38

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| | Law
for the Encouragement of Capital Investments.
| | -------------------------------------------------

The
Law for the Encouragement of Capital Investments, 5719-1959 (the Investment
Law) provides certain incentives for capital investments in a production facility
(or other eligible assets). Generally, an investment program that is implemented in
accordance with the provisions of the Investment Law, referred to as an Approved
Enterprise, is entitled to benefits. These benefits may include cash grants from the
Israeli government and tax benefits, based upon, among other things, the location of the
facility in which the investment is made or the election of the grantee. We have received
approval for some of our investment programs in accordance with the Investment Law.

The
Investment Law was significantly amended effective April 2005. Tax benefits granted in
accordance with the provisions of the Investment Law prior to its revision remain in
force, but any benefits granted subsequently are subject to the provisions of the amended
Investment Law. Therefore, the following discussion is a summary of the Investment Law
prior to its amendment as well as the relevant changes contained in the new legislation.

Tax
benefits for Approved Enterprises approved before April 1, 2005.

Under
the Investment Law prior to its amendment, a company that wished to receive benefits had
to receive an approval from the Investment Center of the Israeli Ministry of Industry,
Trade and Labor (the Investment Center). Each certificate of approval for an
Approved Enterprise relates to a specific investment program in the Approved Enterprise,
delineated both by the financial scope of the investment and by the physical
characteristics of the facility or the asset.

An
Approved Enterprise may elect to forego any entitlement to the grants otherwise available
under the Investment Law and, instead, participate in an alternative benefits program
under which the undistributed income from the Approved Enterprise is fully exempt from
corporate tax for a defined period of time. We have chosen to receive the benefits through
the alternative benefits program. Under the alternative benefits program, a companys
undistributed income derived from an Approved Enterprise will be exempt from corporate tax
for a period of between two and ten years from the first year of taxable income, depending
upon the geographic location within Israel of the Approved Enterprise. In our case, the
period of exemption is ten years. The benefits commence with the date on that taxable
income is first earned. Upon expiration of the exemption period, the Approved Enterprise
is eligible for the reduced tax rates otherwise applicable under the Investment Law for
any remainder of the otherwise applicable benefits period. The benefits period under
Approved Enterprise status is limited to 12 years from completion of the investment
or commencement of production, or 14 years from the date of the approval, whichever
ends earlier. If a company has more than one Approved Enterprise program or if only a
portion of its capital investments are approved, its effective tax rate is the result of a
weighted combination of the applicable rates. The tax benefits from any certificate of
approval relate only to taxable profits attributable to the specific Approved Enterprise.
Income derived from activity that is not integral to the activity of the Approved
Enterprise will not enjoy tax benefits. Our entitlement to the above benefits is subject
to fulfillment of certain conditions, according to the law and related regulations.

A
company that has an Approved Enterprise program is eligible for further tax benefits if it
qualifies as a Foreign Investors Company (FIC). A FIC eligible for benefits is
essentially a company with a level of foreign investment of more than 25%. The level of
foreign investment is measured as the percentage of rights in the company (in terms of
shares, rights to profits, voting and appointment of directors), and of combined share and
loan capital, that are owned, directly or indirectly, by persons who are not residents of
Israel. The determination as to whether or not a company qualifies as a FIC is made on an
annual basis. A company that qualifies as an FIC will be eligible for an extension of the
period during which it is entitled to tax benefits under its Approved Enterprise status
(so that the benefit periods may be up to ten years) and for further tax benefits if the
level of foreign investment exceeds 49%. If a company that has an Approved Enterprise
program is a wholly owned subsidiary of another company, then the percentage of foreign
investments is determined based on the percentage of foreign investment in the parent
company.

The
tax rates and related levels of foreign investments are set forth in the following table:

| | Percentage of non-Israeli ownership | Tax Rate
| | ----------------------------------- | --------
|
|
|
|
| | Over 25% but less than 49%          |         
| | 49% or more but less than 74%       |         
| | 74% or more but less than 90%       |         
| | 90% or more                         |         

A
company that has elected to participate in the alternative benefits program and that
subsequently pays a dividend out of the income derived from the portion of its facilities
that have been granted Approved Enterprise status during the tax exemption period will be
required to recapture the deferred corporate income tax applicable to the amount
distributed (grossed up to reflect such tax) at the rate that would have been applicable
had such company not elected the alternative route. This rate is generally 10% to 25%,
depending on the extent to which non-Israeli shareholders hold such companys shares.

39

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In
addition, if the dividend is distributed during the tax exemption period or within
12 years thereafter, the dividend recipient is taxed at the reduced withholding tax
rate of 15%, or at the lower rate under an applicable tax treaty. After this period, the
withholding tax is applied at a rate of up to 25%, or at the lower rate under an
applicable tax treaty. In the case of a company with a foreign investment level (as
defined by the Investment Law) of 25% or more, the 12-year limitation on reduced
withholding tax on dividends does not apply.

The
Investment Law also provides that an Approved Enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved investment
program. This benefit is an incentive granted by the Israeli government regardless of
whether the alternative benefits program is elected.

Tax
benefits under an Amendment that became effective on April 1, 2005.

Pursuant
to an amendment to the Investment Law effected on April 1 2005, the approval of the
Investment Center is required only for Approved Enterprises that receive cash grants.
Approved Enterprises that do not receive benefits in the form of governmental cash grants,
but only tax benefits, are no longer required to obtain this approval. Instead, a company
may claim the tax benefits offered by the Investment Law directly in its tax returns,
provided that its facilities meet the criteria for tax benefits set out by the amendment.
These Approved Enterprises may, at their discretion, elect to apply for a pre-ruling from
the Israeli tax authorities confirming that they are in compliance with the provisions of
the law. This amendment applies to new investment programs and investment programs
commencing after 2004, and does not apply to investment programs approved prior to
December 31, 2004.

Tax
benefits are available under the amendment to the Investment Law to production facilities
(or other eligible facilities) that derive more than 25% of their business income from
export to specific markets with a population of at least 12 million. In order to
receive the tax benefits, the amendment states that a company must make an investment that
meets all the conditions set out in the amendment for tax benefits and exceeds a minimum
amount specified in the Investment Law. Such investment allows a company to receive a
privileged status, and may be made over a period of no more than three years ending at the
end of the year in which the company requested to have the tax benefits apply to the
Privileged Enterprise. Where a company requests to have the tax benefits apply to an
expansion of existing facilities, only the expansion will be considered to be a Privileged
Enterprise and the companys effective tax rate will be the weighted average of the
applicable rates. In such case, the minimum investment required in order to qualify as a
Privileged Enterprise must exceed a certain percentage of the value of the companys
production assets before the expansion.

An
industrial enterprise that sells a specific product that constitutes a component in
another product manufactured by another industrial enterprise (which is, or was, a
beneficiary enterprise or an Approved Enterprise) must meet the conditions stipulated in
the relevant regulations regarding the encouragement of capital investments.

Dividends
paid out of income derived by a Privileged Enterprise will be treated similarly to payment
of dividends by an Approved Enterprise under the alternative benefits program. Therefore,
dividends paid out of income derived by a Privileged Enterprise (or out of dividends
received from a company whose income is derived from a Privileged Enterprise) are
generally subject to withholding tax at the rate of 15% or such lower rate as may be
provided in an applicable tax treaty. The reduced rate of 15% is limited to dividends and
distributions out of income derived from a Privileged Enterprise during the benefits
period and actually paid at any time up to 12 years thereafter except with respect to
a FIC, in which case the 12-year limit does not apply.

A
company qualifying for tax privilege under the amendment that pays a dividend out of
income derived by its Privileged Enterprise during the tax exemption period, will be
subject to corporate tax in respect of the gross amount of the dividend at the otherwise
applicable rate of 25%, or lower depending on the level of foreign investment.

As
a result of the amendment, tax-exempt income generated under the provisions of the
Investments Law, as amended, would subject us to taxes upon distribution or liquidation.
As of December 31, 2008, we did not have any income attributed to Privilege
Enterprise status.

The
benefits available to an Approved Enterprise are subject to the fulfillment of conditions
stipulated in the Investment Law and its regulations and the criteria in the specific
certificate of approval, as described above. If a company does not meet these conditions,
it would be required to refund the amount of tax benefits, together with consumer price
index linkage adjustment and interest, or other monetary penalty.

See
Legal Proceedings  Assessment from the Israel Tax Authority in
Item 8.A below for a description of a contested tax assessment from the Israeli Tax
Authority relating to the proposed disallowance for certain tax benefits available under
our Approved Enterprises.

40

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| | Tax
Benefits and Grants for Research and Development.
| | -----------------------------------------------------

Israeli
tax law allows, under specific conditions, a tax deduction for research and development
expenditures, including capital expenditures, relating to scientific research and
development projects, for the year in which they are incurred. These expenditures must be
approved by the relevant Israeli government ministry, determined by the field of research,
and the research and development must be for the promotion or development of the
enterprise. Furthermore, the research and development is carried out by or on behalf of
the company seeking the deduction. However, the amount of such deductible expenses is
reduced by the sum of any funds received through government grants for the finance of such
scientific research and development projects. Expenditures not approved by the relevant
Israeli government ministry, but otherwise qualifying for deduction, are deductible over a
three-year period. However, the amounts of any government grants made available to us are
subtracted from the amount of the deductible expenses.

The
Government of Israel encourages research and development projects through the Office of
the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor (the
OCS), pursuant to the Law for the Encouragement of Industrial Research and
Development, 5744-1984, and the regulations promulgated thereunder (the Research and
Development Law). Under the Research and Development Law, research and development
programs that meet specified criteria and are approved by the research committee of the
OCS are eligible for grants of up to 50% of certain approved expenditures of such
programs, as determined by such committee. In exchange, the recipient of such grants is
required to pay the OCS royalties from the revenues derived from products incorporating
know-how developed within the framework of each such program or derived from such program
(including ancillary services in connection with such program), usually up to an aggregate
of 100% of the dollar-linked value of the total grants received in respect of such program
(or, for grants received on or after January 1, 1999, until 100% of the dollar value
plus LIBOR interest is repaid). The royalty rates range generally from 3% to 5%, depending
on the number of years that lapse between receipt of the grant and repayment.

In
June 2005, an amendment to the Research and Development Law came into effect, which is
designed to make the Research and Development Law more compatible with the global business
environment by, among other things, relaxing restrictions on the transfer of manufacturing
rights outside Israel and on the transfer of OCS-funded know-how outside of Israel, as
further described below. The Research and Development Law generally requires that a
product developed under a program be manufactured in Israel. However, upon the approval of
a governmental committee under the Research and Development Law, some of the manufacturing
volume may be performed outside of Israel, provided that the grant recipient pays
royalties at an increased rate, which may be substantial, and the aggregate repayment
amount is increased up to 300% of the grant, depending on the portion of the total
manufacturing volume that is performed outside of Israel. The recent amendment to the
Research and Development Law further permits the OCS, among other things, to approve the
transfer of manufacturing rights to outside of Israel in exchange for an import of
different manufacturing into Israel as a substitute, in lieu of the increased royalties.
The Research and Development Law also allows for the approval of grants in cases in which
an applicant declares that part of the manufacturing will be performed outside of Israel
or by non-Israeli residents and the research committee is convinced that doing so is
essential for the execution of the program. This declaration will be a significant factor
in the determination of the OCS whether to approve a program and the amount and other
terms of benefits to be granted. For example, the increased royalty rate and repayment
amount will be required in such cases. If we elect to transfer more than an insubstantial
portion of our manufacturing processes to contractors outside of Israel, we may be
required to obtain the consent of the OCS and pay higher royalties to the OCS.

The
technology and know-how developed with government grants may not be transferred to third
parties, including non-residents of Israel, without the prior approval of a governmental
committee under the Research and Development Law. The approval, however, is not required
for the export of any products developed using the grants. Approval of the transfer of
technology and know-how to residents of Israel may be granted in specific circumstances,
only if the recipient abides by the provisions of the Research and Development Law and
related regulations, including the restrictions on the transfer of know-how and the
obligation to pay royalties in an amount that may be increased.

The
Research and Development Law imposes reporting requirements with respect to certain
changes in the ownership of a grant recipient. The law requires the grant recipient and
its controlling shareholders and foreign interested parties to notify the OCS of any
change in control of the recipient or a change in the holdings of the means of control of
the recipient that results in a non-Israeli becoming an interested party directly in the
recipient, and requires the new interested party to undertake to the OCS to comply with
the Research and Development Law. Generally, any non-Israeli who acquires 5% or more of
our ordinary shares will be required to notify the OCS that it has become an interested
party and to sign an undertaking to comply with the Research and Development Law. In
addition, the rules of the OCS may require additional information or representations in
respect of certain of such events.

The
funds available for OCS grants out of the annual budget of the State of Israel have been
reduced in the past and may be further reduced in the future. We cannot predict whether,
if at all, we would be entitled to any future grants or the amounts of any such grants.
Prior to 2009 we and our subsidiaries had not received or accrued participation grants
from the State of Israel since at least 2001. However, we recently applied to the OCS for
certain grants under the Research and Development Law and, in May 2009, we received
approval from the OCS for two of our applications relating to grants in an aggregate
amount of approximately $0.5 million.

41

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In
return for the Israel governments participation payments in programs approved by the
OCS, we and our subsidiaries are obligated to pay royalties at a rate of 3% to 5% of sales
of developed products until the OCS is repaid in full. In the years ended
December 31, 2006, 2007 and 2008, we and our subsidiaries incurred royalty expenses
payable to the OCS in aggregate amounts of $451,000, $344,000 and $678,000, respectively.
As of December 31, 2008, the balance of our outstanding obligation to the State of
Israel in connection with all participation payments was approximately $2.4 million,
which will be repaid to the government in the form of royalties on sales of those products
that reach the market.

| | Tax
Benefits under the Law for the Encouragement of Industry (Taxes).
| | ---------------------------------------------------------------------

According
to the Law for the Encouragement of Industry (Taxes), 5729-1969 (the Industry
Encouragement Law), an industrial company is a company resident in
Israel that derives 90% or more of its income in any tax year (other than government
loans, and specific kinds of passive income such as capital gains, interest and dividends)
from an industrial enterprise that it owns. An industrial
enterprise is defined as an enterprise whose major activity in a given tax year is
industrial production.

Under
the Industry Encouragement Law, industrial companies are entitled to the following tax
benefits, among others:

| |  | Deduction
of purchases of know-how, patents and the right to use a patent over an eight-year period
for tax purposes;
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | Deduction
over a three-year period of expenses related to a public offering;
| | - | ----------------------------------------------------------------------------

| |  | The
right to elect, under specified conditions, to file a consolidated tax return with
additional related Israeli industrial companies; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | Accelerated
depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------

Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority.

We
believe that we currently qualify as an industrial company within the
definition of the Industry Encouragement Law. We cannot assure you that we will continue
to qualify as an industrial company or that the benefits described above will be available
to us in the future.

| | Special
Provisions Relating to Taxation under Inflationary Conditions.
| | ----------------------------------------------------------------------

The
Income Tax Law (Inflationary Adjustments), 5745-1985 (the Inflationary Adjustments
Law) represents an attempt to overcome the problems presented to a traditional tax
system by an economy undergoing rapid inflation. Certain features of the Inflationary
Adjustments Law are described below:

| |  | When
a companys equity, as calculated under the Inflationary Adjustments Law, exceeds
the depreciated cost of fixed assets (as defined in the Inflationary Adjustments Law), a
deduction from taxable income is permitted equal to the excess multiplied by the
applicable annual rate of inflation. The maximum deduction permitted in any single tax
year is 70% of taxable income, with the unused portion permitted to be carried forward,
linked to the Israeli Consumer Price Index (the CPI).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If
the companys depreciated cost of fixed assets exceeds its equity, then the excess
multiplied by the applicable annual rate of inflation is added to taxable income.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject
to specified limitations, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the increase in the CPI.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

In
February 2008, Israels parliament, the Knesset, passed an amendment to the
Inflationary Adjustments Law that limits the scope of the law starting in 2008 and
thereafter. Starting in 2008, the results for tax purposes are measured in nominal values,
excluding certain adjustments for changes in the CPI carried out in the period up to
December 31, 2007. The amended law includes, inter alia, the elimination of the
inflationary additions and deductions and the additional deduction for depreciation
starting in 2008.

42

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The
ITO and regulations promulgated thereunder allow FICs, which maintain their accounts in
U.S. dollars in compliance with the regulations published by the Israeli Minister of
Finance, to base their tax returns on their operating results as reflected in their dollar
financial statements.

# C. Organizational
Structure.

Lumenis
Ltd. is part of a group of which it is the parent company. It has a number of subsidiaries
in Israel and worldwide, the most significant of which are the following wholly owned
subsidiaries:

| |  | Lumenis
Inc. (incorporated in the United States);
| | - | -------------------------------------------------

| |  | Lumenis
(UK) Limited (incorporated in the United Kingdom);
| | - | ----------------------------------------------------------

| |  | Lumenis
(Germany) GmbH (incorporated in Germany);
| | - | -------------------------------------------------

| |  | Lumenis
(Italy) SARI (incorporated in Italy);
| | - | ---------------------------------------------

| |  | Lumenis
(also known as Ke Yi Ren) Medical Laser Equipment Trading (Beijing) Co. Ltd;
(incorporated in        China);
| | - | --------------------------------------------------------------------------------------------------------------------

| |  | Lumenis
(HK) Ltd. (incorporated in Hong Kong); and
| | - | --------------------------------------------------

| |  | Lumenis
Japan Co. Ltd. (incorporated in Japan).
| | - | -----------------------------------------------

(See
also the list of subsidiaries appended to this annual report as Exhibit 8.)

# D. Property, Plants and
Equipment.

Our
principal executive offices are in Yokneam, Israel, and our principal engineering,
development, manufacturing, shipping and service operations are located in facilities in
Yokneam, Israel; Santa Clara, California; and in Salt Lake City, Utah.

All
of our facilities are leased, we do not own any real property. The table below sets forth
details of the square footage of our current leased properties, all of which are fully
utilized, unless otherwise stated. We have no material tangible fixed assets apart from
the properties described below.

|                            | Square Feet
(approximate)
|--------------------------- | -------------------------
|
|
|
|
|Yokneam, Israel (1)         |                          
|Santa Clara, California (2) |                          
|Salt Lake City, Utah (3)    |                          
|Japan (4)                   |                          
|China and Hong Kong (5)     |                          
|Rest of the World (6)       |                          
|                            |                          
|Total                       |                          
|                            |                          

|(1) | The
lease for our initial facility in Yokneam (of approximately                48,100 square
feet, including approximately 5,800 square feet added in                January
2007) expires on July 31, 2011, and the lease for our second                facility
in Yokneam (of approximately 37,200 square feet) expired in                January
2009 but was renewed for a further term expiring on January 28,                2011,
with an option for Lumenis to terminate the lease at any time after                January 28,
2010 upon 120 days prior notice. Also included in the above                table is an
additional warehouse facility in Yokneam, of approximately 1,400                square
feet.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
lease for the Santa Clara facility expires on December 31, 2012.
|--- | --------------------------------------------------------------------

|(3) | The
building that comprises our Salt Lake City facility was owned by us until
               2006, when it was sold and leased back to us under a lease that expires on
               September 30, 2013.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Consists
primarily of sales offices, situated in several cities throughout                Japan.
In August 2009, the Japanese head office will be relocated to a new
               facility in Tokyo.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Consists
primarily of sales offices, situated in several cities throughout                China,
including Hong Kong.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(6) | Consists
primarily of sales/marketing offices, in Germany, India, Italy and the
               United Kingdom. Excludes an empty facility of 19,000 square feet in
               Warwickshire, UK and an office, not currently utilized, of approximately
1,000                square feet in Sao Paulo, Brazil.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43

---

---

On
January 8, 2008, we entered into a lease agreement regarding construction and leasing
of a new Yokneam facility to house our headquarters. The new facility will consolidate in
one building all the operations currently carried on by us at our two present Yokneam
facilities, the leases in respect of which expire in 2011. Pursuant to the agreement, the
developer agreed to purchase the land and build the facility and we have agreed to enter
into a lease for a term of ten years. The project is expected to take two years to
complete and occupancy is expected by approximately January 2010. The lease payments will
be approximately $2.2 million per annum from 2010 through 2019. The agreements
terms stipulate that a portion of the lease payments will be based on amounts invested on
internal build-out of the new facilities requested by us, and, accordingly, the
$2.2 million per annum amount includes our current estimate of nearly
$0.8 million per annum for this variable portion of the expected future lease
payments. Initially, the structure will comprise approximately 170,000 square feet, while
it may possibly be expanded (upon our request) to approximately 260,000 square feet in the
future.

The
only new office opened by us since January 1, 2007 is in Guangzhou, China, which we
opened in December 2007.

Since
January 1, 2007, we have completed the closure of the following facilities at the
indicated times:

| |  | February
2007, administrative offices (2,370 square feet) in Ramat Gan, Israel;
| | - | -------------------------------------------------------------------------------

| |  | March
2007, administrative offices (approximately 5,000 square feet) in New York City, New
York;
| | - | ------------------------------------------------------------------------------------------------

| |  | December
2008, an office (540 square feet) in Amsterdam, Netherlands;
| | - | ---------------------------------------------------------------------

| |  | March
2009, sales and marketing offices (4,230 square feet) in Paris, France; and
| | - | ---------------------------------------------------------------------------------

| |  | June
2009, a warehouse (11,138 square feet) in Salt Lake City, Utah.
| | - | --------------------------------------------------------------------

In
accordance with our logistics services agreement with UPS, we maintain inventory at the
UPS warehouse facilities in Caesarea, Israel; Louisville, Kentucky; and Salt Lake City,
Utah.

The
debt to our Bank is secured by charges on substantially all of our assets. For further
information regarding this debt, see Liquidity & Capital Resources 
Restructuring of Bank Debt in Item 5.B below.

|ITEM 4A. |  | UNRESOLVED STAFF COMMENTS.
|-------- |  | --------------------------

Not
Applicable.

|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
|------- |  | ---------------------------------------------

The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial statements
and the related notes included in this annual report. The discussion below contains
forward-looking statements that are based upon our current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially from these
expectations due to inaccurate assumptions and known or unknown risks and uncertainties,
including those identified in Cautionary Statements Regarding Forward-Looking
Statements and in Item3.D Key Information  Risk Factors.

# A. Operating Results.

# Critical Accounting
Policies and Estimates.

The
preparation of our financial statements requires our management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses
and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our
estimates, including those related to product returns, bad debts, inventories, tangible
and intangible assets, income taxes, financing, warranty obligations, restructuring,
long-term service contracts, contingencies and litigation.

We
base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

We
believe that the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements:

| |  | Revenue
recognition;
| | - | --------------------

| |  | Allowance
for doubtful accounts;
| | - | --------------------------------

| |  | Inventory
valuation and provisions;
| | - | -----------------------------------

| |  | Valuation
of goodwill;
| | - | ----------------------

44

---

---

| |  | Provision
for warranty obligations;
| | - | -----------------------------------

| |  | Legal
contingencies; and
| | - | ------------------------

| |  | Income
tax reserves.
| | - | --------------------

For
a detailed discussion of the application of these and other accounting policies, see
Note 3 to our consolidated financial statements included in this annual report.

Revenue
recognition.  We recognize revenues in accordance with SEC Staff Accounting
Bulletin (or SAB) No. 104, Revenue Recognition in Financial
Statements (SAB 104), which requires that the following four
criteria be met in order to recognize revenue:

| | 1)
Persuasive evidence of an agreement exists;
| | ----------------------------------------------

| | 2) Delivery
has occurred or services have been rendered;
| | --------------------------------------------------------

| | 3) The
selling price is fixed or determinable; and,
| | ---------------------------------------------------

| | 4) Collectibility
is reasonably assured.
| | ----------------------------------------

The
timing of revenue recognition amongst the various products and customers is dependent upon
satisfaction of such criteria and generally varies from shipment to delivery to the
customer depending on the specific shipping terms of a given transaction, as stipulated in
the agreement with each customer. Revenues from service contracts are recognized on a
straight-line basis over the life of the related service contracts.

Our
products sold through agreements with distributors are generally non-exchangeable,
non-refundable, non-returnable and without any rights of price protection or stock
rotation. Accordingly, we generally consider distributors as end-users.

In
general, we do not grant rights of return. However, returns are granted from time to time
for business reasons. We maintain a provision for returns in accordance with Statement of
Financial Accounting Standards (or SFAS) No. 48, Revenue
Recognition When Right of Return Exists issued by the Financial Accounting Standards
Board (or FASB), which is estimated, based primarily on historical experience
as well as management judgment, and is recorded through a reduction of revenue.

Deferred
revenue includes primarily the fair value of unearned amounts of service contracts,
arrangements with specific acceptance provisions that have not been satisfied by the end
of the period and cases where the Company has not completed delivery of goods in
accordance with the agreed-upon delivery terms.

Where
revenue from product sales to end-users includes multiple elements within a single
contract and it is determined that multiple units of accounting exist, our accounting
policy complies with the revenue determination requirements set forth in Emerging Issues
Task Force (or EITF) Issue 00-21, Accounting for Revenue
Arrangements with Multiple Deliveries (EITF 00-21), ratified by the
FASB, relating to the separation of multiple deliverables into individual accounting units
with determinable fair values. These elements are recognized as revenue when the
respective earnings processes have been completed.

The
primary type of transaction in which we engage for which EITF 00-21 is relevant
pertains to orders from customers of our systems in which the sales agreement includes
multiple elements that are delivered at different points in time. Such elements may
include some or all of the following:

| | - | products;
| | - | ---------

| | - | installation
of systems and training; and
| | - | -----------------------------------------

| | - | extended
warranty contracts (most systems are sold with a standard one year warranty).
| | - | --------------------------------------------------------------------------------------

We
consider the sale of a product and the extended warranty element in the related agreement
to be two separate accounting units of the arrangement, and we defer the fair value of the
extended warranty element to the period in which it is earned.

In
respect of sale of products, installation of systems and training, we consider the
elements in the arrangement to be a single unit of accounting. In accordance with
SAB 104, we have concluded that our arrangements are generally consistent with the
indicators suggesting that installation and training are not essential to the
functionality of our systems. Accordingly, installation and training are considered
inconsequential and perfunctory relative to the system, and, therefore, we recognize
revenue for the system, installation and training upon delivery to the customer in
accordance with the agreement delivery terms once all other revenue recognition criteria
have been met, and we provide for installation and training costs as appropriate.

45

---

---

In
accordance with EITF Issue 00-10, Accounting for Shipping and Handling Fees and
Costs, reimbursed shipping and handling costs for product sales are included in
revenue, with the related expense included in cost of revenues.

Allowance
for doubtful accounts.  Credit limits are established through a process of
reviewing the financial history and stability of each customer. Where appropriate, we
obtain credit rating reports and financial statements of customers when determining or
modifying their credit limits and, in some cases, we may obtain letters of credit, bank
guarantees. or third party insurance. Provisions are made for amounts considered to be
uncollectible either as a result of estimated returns, historical collection patterns or
specific circumstances. This policy involves managements judgment and estimates in
establishing the allowances. The allowance for doubtful accounts as of December 31,
2007 and 2008 amounted to $3.3 million and $4.1 million, respectively.

Inventory valuation and provisions. Inventories are stated at the lower of cost or market and
include raw materials, work in process and finished goods. Cost is determined on a standard cost basis
utilizing weighted average of historical purchases, which approximates actual cost. Lower of cost or
market is evaluated by considering obsolescence, excessive levels of inventory and other factors.
Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for
estimated excess, obsolescence or impaired inventory, and are charged to cost of goods sold. Factors
influencing these adjustments include changes in demand, product life cycle and development plans,
component cost trends, product pricing, physical deterioration and quality issues. Revisions to these
adjustments would be required if these factors differ from our estimates. During 2008, 2007 and 2006, we
recorded write-offs for inventory no longer required in amounts of approximately $5.7 million,
$4.0 million and $4.4 million, respectively.

Goodwill
and other intangible assets.  Goodwill has been recorded in our financial
statements as a result of acquisitions. Goodwill represents the excess of the purchase
price in a business combination over the fair value of net tangible and intangible assets
acquired under SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142). Goodwill is not amortized, but rather is subject to an annual
impairment test. SFAS 142 requires goodwill to be tested for impairment at least
annually or between annual tests in certain circumstances, and written down when impaired,
rather than being amortized as previous accounting standards required. Goodwill is tested
for impairment at the reporting unit level by comparing the fair value of the reporting
unit with its carrying value. We perform an annual impairment test during the fourth
quarter of each fiscal year, or more frequently if impairment indicators are present.
Goodwill is reviewed for impairment utilizing a two-step process. The first step of the
impairment test requires us to identify the reporting units, and compare the fair value of
each of these reporting units to the respective carrying values. If the carrying value is
less than the fair value, no impairment exists and the second step does not need to be
completed. If the carrying value is higher than the fair value, there is an indication
that impairment may exist and a second step must be performed to compute the amount of the
impairment.

Effective
January 1, 2008, as a result of the re-organization of our reporting structure into
business segments, we identified three reporting units that represent the three business
reporting segments in which we operate, namely: (i) Surgical; (ii) Aesthetic;
and (iii) Ophthalmic. Accordingly, as of the reorganization date, we reassigned the
carrying amount of goodwill to the each new business reporting segment based on such
segments relative fair value.

In
2007 and 2006, for the purposes of impairment testing of goodwill, we had identified four
reporting units. The four reporting units represented the four geographic regions in which
we operate, namely: (i) the Americas; (ii) Europe (including the Middle East and
Africa); (iii) China-Asia Pacific (China/APAC); and (iv) Japan.

The
basis for our reporting units determination for goodwill impairment testing for 2008 and
2007 and preceding periods was the guidance and criteria outlined in paragraph 30 of
SFAS 142 and EITF D-101 Clarification of Reporting Unit Guidance in
Paragraph 30 of FASB Statement No. 142.

For
purposes of performing Step One of the SFAS 142 impairment test, we estimated the
Business Enterprise Value of each of our reporting units using the Income Approach in the
form of a discounted cash flow (DCF) analysis. Significant estimates used in
the calculation of DCF include estimates of future cash-flows, future short-term and
long-term growth rates and weighted average cost of capital for each reporting unit. In
addition, the Market Approach, which indicates the fair value of a business based on a
comparison of the subject company to comparable and/or model publicly traded companies
and/or based on comparable transactions in its industry, was utilized to corroborate the
overall value for the reporting unit.

In
2008, the first step that used the DCF approach to measure the fair value of the
Aesthetics reporting unit, indicated that the carrying amount of such reporting unit,
including goodwill, exceeded its fair value. The second step was then conducted in order
to measure the amount of impairment loss, by means of a comparison between the implied
fair value of the goodwill and the carrying amount of the goodwill. In the second step, we
assigned the fair value of the Aesthetics reporting unit, as determined in the first step,
to the reporting units individual assets and liabilities, including intangible
assets. The excess of the fair value of the reporting unit over the amounts assigned to
its assets and liabilities represented the amount of the implied fair value of goodwill.
In 2008, we recorded impairment of goodwill in the amount of $22.637 million.

46

---

---

No
impairment was noted as a result of our evaluation of goodwill performed during 2007 or
2006.

Provision
for warranty obligations.  We generally provide a twelve-month warranty on a
majority of our products. However, in some instances we provide a more extended warranty
on systems sold to end users up to two years. The warranty period begins upon shipment,
installation, or delivery, depending upon the specifics of the transaction. We record a
liability for accrued warranty costs at the time of sale of the unit, which represents the
remaining warranty on products sold based on historical warranty costs and
managements estimates. However, should actual product failure rates, material or
service costs differ from historical experience and/or management estimates, increases in
warranty expense could be necessary. As of December 31, 2007 and 2008, warranty
reserves were $5.5 million and $6.4 million, respectively.

Legal
contingencies.  As of the end of each period, we review outstanding legal
matters including obtaining input from outside counsel where deemed appropriate. For those
matters in which management, after consideration of all relevant and available
information, believes that it is probable that a loss will be incurred in the resolution
of such matters and such loss can be reasonably quantified, we record a reserve for such
estimated losses. As new information becomes available regarding each legal matter,
reserves are adjusted accordingly if appropriate. However, upon ultimate resolution of
each legal matter, it is possible that actual outcomes can vary from that which was
estimated and reserved for by management, and such variances could impact our financial
results.

Income
tax reserves.  We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined based on
differences between financial reporting and tax bases of assets and liabilities and
carryforward tax losses. Deferred taxes are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. We provide a
valuation allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.

Deferred
tax liabilities and assets are classified as current or non-current based on the
classification of the related asset or liability for financial reporting, or according to
the expected reversal dates of the specific temporary differences, if not related to an
asset or liability for financial reporting.

In
June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized under SFAS 109. FIN 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return and also provides guidance on
various related matters such as derecognition, interest and penalties, and disclosure. On
January 1, 2007, we adopted FIN 48. The initial application of FIN 48 to
our tax positions did not have an effect on our shareholders equity. We recognize
interest and penalties, if any, related to unrecognized tax benefits in tax expenses.

# Overview.

We
are engaged in research and development, manufacture, marketing, sale and servicing of
laser, light-based and radio frequency-based systems and appliances for surgical,
aesthetic and ophthalmic applications. We offer a broad range of such products that are
used in a variety of applications, including ear, nose and throat treatment, benign
prostatic hyperplasia, urinary lithotripsy, gynecology, gastroenterology, podiatry,
general surgery, neurosurgery, skin treatments, photo rejuvenation, hair removal,
non-invasive treatment of vascular lesions and pigmented lesions, acne, psoriasis, open
angle glaucoma, diabetic retinopathy, secondary cataracts and age-related macular
degeneration.

47

---

---

# Result of Operations.

The
following table presents consolidated statement of operations data for the periods
indicated as a percentage of total sales revenue.

|                                    | For the Year Ended December 31,
|----------------------------------- | -------------------------------
|
|
|
|
|Net sales                           |                                
|Cost of sales                       |                                
|                                    |                                
|Gross profit                        |                                
|Research and development expenses   |                                
|Selling and marketing expenses      |                                
|Impairment of goodwill              |                                
|Restructuring and related costs     |                                
|General and administrative expenses |                                
|                                    |                                
|Total operating expenses            |                                
|Operating loss                      |                                
|Financial income (expenses)         |                                
|Other expenses, net                 |                                
|                                    |                                
|Loss before taxes on income         |                                
|Taxes on income                     |                                
|                                    |                                
|Net loss                            |                                
|                                    |                                
|                                    |                                

# Breakdown of Net Sales
by Activity and Geographic Market.

The
following table presents our net sales by business units for the fiscal years indicated
(in thousands of U.S. dollars and as a percentage of total net sales):

|           | 2008 | 2007 | 2006
|---------- | ---- | ---- | ----
|
|
|
|
|Surgical*  |      |      | $   
|Aesthetic  |      |      |     
|Ophthalmic |      |      |     
|           |      |      |     
|Total      |      |      | $   
|           |      |      |     
|           |      |      |     

* Including  $4,971 thousand,  $8,490 thousand  and  $9,397 thousand  revenues  of the sale of  dental  and
veterinary products in 2008, 2007 and 2006, respectively.

The
following table presents our net sales by geographic area for the fiscal years indicated
(in thousands of U.S. dollars and as a percentage of total net sales):

|                                   | 2008 | 2007 | 2006
|---------------------------------- | ---- | ---- | ----
|
|
|
|
|Americas                           |      |      | $   
|Europe, the Middle East and Africa |      |      |     
|China/Asia Pacific                 |      |      |     
|Japan                              |      |      |     
|                                   |      |      |     
|Total                              |      |      | $   
|                                   |      |      |     

# Year Ended
December 31, 2008 Compared With Year Ended December 31, 2007.

|              |  |  | Increase in
|------------- |  |  | -----------
|
|
|
|
|Net sales     |  |  | $          
|Cost of sales |  |  | $          
|              |  |  |            
|Gross profit  |  |  | $          
|              |  |  |            

Net Sales. Overall, our total net sales for the year 2008 decreased by 4.2% to $256.5 million, from
$267.8 million in 2007. This decrease was mainly attributable to a slow down in the aesthetic market
commencing in the second half of 2008, partly offset by the growth in sales from our Surgical business
in 2008. The sales in respect of our Surgical business (including dental and veterinary products) grew
by 8.2% to $88.9 million in 2008 from $82.2 million in 2007. Excluding dental and veterinary products,
the growth in our Surgical business was 14%, to $84 million in 2008 from $73.7 million in 2007. The sales
from our Aesthetic business, however, decreased by 14% to $108.3 million in 2008 from $126.2 million in
2007 The sales from our Ophthalmic business remained relatively unchanged at $59.2 million in 2008
compared to $59.5 million in 2007.

48

---

---

Sales
in the Americas, which includes the United States, Canada, Central and South America and
the Caribbean, decreased by 11% to $115.2 million in 2008 from $129.1 million in
2007 mainly due to the slowdown in the aesthetic markets. Sales to the EMEA (Europe,
Middle East and Africa) region decreased 9.2% to $62.3 million in 2008 compared with
$68.7 million in 2007. The decrease was due mainly to lower sales in Spain and Italy,
which were slightly offset by an increase in sales in central Europe. Sales in Japan in
2008 were $41.6 million, a 14.9% increase from $36.2 million in 2007. The
increase was due mainly to growth in our Surgical and Ophthalmic sales, partly resulting
from the appreciation of the exchange rate of Japanese yen versus the dollar. Sales in the
China/Asia Pacific region, which includes mainland China, Hong Kong, Australia, Taiwan,
Korea and Southeast Asia, were $37.3 million in 2008 compared with $33.8 million
in 2007. The increase was due mainly to growth in sales of our Surgical and Ophthalmic
products.

Cost
of Sales.  Our cost of sales in 2008 was $151.1 million, a decrease of
1.3% compared with $153.2 million in 2007. This decrease was primarily related to the
decrease in our sales in 2008, partly offset by increased investment by our engineering
group in improving the quality of our products and increases in freight expenses as a
result of higher fuel charges. As a percentage of sales, our cost of revenues increased to
58.9% in 2008 compared to 57.2% in 2007.

|                                |  |  | Increase in
|------------------------------- |  |  | -----------
|
|
|
|
|Research and development        |  |  | $          
|Sales and marketing             |  |  |            
|Impairment of goodwill          |  |  |            
|Restructuring and related costs |  |  |            
|General and administrative      |  |  |            
|                                |  |  |            
|Total operating expenses        |  |  | $          
|                                |  |  |            
|                                |  |  |            

Research
and Development Expenses.  Research and development expenses consist
primarily of employee salaries, development-related raw materials and payments to
subcontractors, as well as other related costs. Our research and development expenses
increased nearly $2.5 million in 2008 to $19.0 million from $16.5 million
in 2007, primarily reflecting increased investment associated with the launch and
anticipated launch of new products in 2008 and 2009. As a percentage of total sales
revenue, research and development expense represented 7.4% of revenues in 2008 compared to
6.1% in 2007.

Selling
and Marketing Expenses.  Selling and marketing expenses consist primarily of
salaries, commissions, advertising, trade shows and exhibitions, travel and other related
expenses. Our selling and marketing expenses increased by $2.3 million in 2008 to
$75.5 million from $73.2 million in 2007. This increase was primarily
attributable to an increase in our sales and marketing personnel in the first part of the
year. Accordingly, selling and marketing expenses as a percentage of total sales revenue
increased in 2008 to 29.4% compared to 27.3% in 2007.

Impairment
of Goodwill.  In 2008, we recorded an impairment of goodwill in the amount
of approximately $22.6 million in respect of our Aesthetic business. The impairment
of goodwill resulted primarily from the global slowdown in the business environment, which
particularly impacted the aesthetic markets and the valuation of our aesthetic related
assets.

Restructuring
Expenses.  In the fourth quarter of 2008, we initiated a cost-saving plan,
which included the reduction in our work force of approximately 160 employees. This
resulted in restructuring expenses of $1.4 million primarily related to one time
severance benefits to those employees rendered redundant by the global economic climate.

General
and Administrative.  General and administrative expenses consist primarily
of expenses relating to our administration, finance and general management personnel,
professional fees, insurance costs, bad debts and other expenses. Our general and
administrative expenses fell in 2008 by 34.7%, to $34.8 million in 2008 compared with
$53.4 million in 2007. This large decrease in 2008 was due primarily to the fact that
in 2007 we recorded approximately $20 million of non-recurring expenses, including
expenses associated with the settlement of various outstanding law suits, legal fees paid
pursuant to an indemnification agreement for one of our former officers, spending
associated with accounting services related to the preparation of our restated financial
statements for 2004 through 2006, and $1.7 million of expenses related to
implementation of our new ERP system. As a percentage of total sales revenue, our general
and administrative expenses in 2008 decreased to 13.6% compared to 19.9% in 2007.

Financial
Income, Net.  In 2008 we recorded net financial income of $1.7 million
as compared to net financial income of $3.9 million in 2007. The decrease in our
financial income was mainly attributable to the decrease in our interest income on cash
balances, which fell to $0.9 million compared with $3.1 million in 2007.

Taxes
on Income.  In 2008 we recorded tax-related income of $2.1 million
compared with a provision for income taxes of $3.5 million in 2007. This increase in
tax-related income was primarily due to (i) a $4.3 million tax benefit resulting
from the impairment of tax deductible goodwill in our Aesthetic business, as well
(ii) lower sales in 2008, which resulted in lower taxable profits.

49

---

---

Net
Loss.  In 2008, we experienced a net loss of $44.2 million, compared
with a net loss of $28.1 million in 2007. This significant increase in our net loss
in 2008 was primarily attributable to the aesthetic-related impairment of goodwill and the
overall slowdown in the global economy commencing in the second half of 2008, which
adversely impacted our operating results.

# Year Ended
December 31, 2007 Compared With Year Ended December 31, 2006.

|              |  |  | Increase in
|------------- |  |  | -----------
|
|
|
|
|Net sales     |  |  | $          
|Cost of sales |  |  | $          
|              |  |  |            
|Gross profit  |  |  | $          
|              |  |  |            

Net
Sales.  Our total net sales increased 1% to $267.8 million in 2007 from
$264.4 million in 2006. The increase was due mainly to increased sales in 2007 in the
Aesthetic business; primarily of our Encore product. Exchange rate fluctuations in some of
our markets also had a positive impact on our sales. These increases were significantly
offset by decreases in ophthalmic, dental and veterinary sales.

Sales
in the Americas remained essentially flat with an increase of 1% to $129.1 million
from $127.9 million in 2006 with significant growth in sales of our Encore aesthetic
systems offset by decreased sales of veterinary systems as well as decreased service
income. Sales to the EMEA region increased 15% to $68.7 million in 2007 compared with
$59.8 million in 2006. The increase was due to stronger aesthetic sales of our Encore
and LightSheer products, as well as the depreciation of the dollar relative to the Euro,
partially offset by a decline in dental sales. Sales in Japan in 2007 were
$36.2 million, 3% below the $37.2 million of 2006. The decline reflected lower
ophthalmic sales of the Selecta system offset in part by increased service income and the
depreciation of the dollar against the Japanese yen. China/Asia Pacific sales were
$33.8 million in 2007 compared with $39.5 million in 2006. This decrease can be
attributed to a decline in aesthetic related sales of the Lumenis One and Quantum systems.
In addition, as a result of a change in our relationship with Wavelight from being a
distributor to a commission based agent, we saw a decrease in associated product sales.

Cost
of Sales.  Cost of sales was $153.2 million in 2007, an increase of
$2.3 million compared with $150.9 million in 2006. This increase was primarily
related to the increase in sales from 2006 and reflected increased sales of higher margin
products offset by increased production costs, as well as the impact of the shekels
appreciation against the dollar, which raised production costs. As a percentage of sales,
cost of sales remained essentially the same in 2007 at 57.2% as compared to 57.1% in 2006.

|                           |  |  | Increase in
|-------------------------- |  |  | -----------
|
|
|
|
|Research and development   |  |  | $          
|Sales and marketing        |  |  |            
|General and administrative |  |  |            
|                           |  |  |            
|Total operating expenses   |  |  | $          
|                           |  |  |            

Research
and Development Expenses.  Research and development expenses increased
nearly $1.1 million in 2007 to $16.5 million from $15.4 million in 2006.
The increase in expenses was due primarily to increased spending on materials for new
product prototypes, as well as the impact of the appreciation of the shekel against the
dollar on such expenses. Research and development expense represented 6.1% and 5.8% of
total sales revenue in 2007 and 2006, respectively.

Selling
and Marketing Expenses.  Selling and marketing expenses increased
$1.3 million in 2007 to $73.2 million from $71.9 million in 2006. The
increase was primarily attributable to higher revenues, which were accompanied by higher
selling and marketing expenses. Accordingly, selling and marketing expenses as a
percentage of total sales revenue remained relatively flat in 2007 as compared to 2006, at
27.3% and 27.2%, respectively.

General
and Administrative.  General and administrative expenses increased 3% to
$53.4 million in 2007 from $52.0 million in 2006. The increase in general and
administrative expense in 2007 was due primarily to the recording of various non-recurring
expenses, including expenses associated with the settlement of various outstanding
litigation ($7.3 million), legal fees paid pursuant to an indemnification agreement
for one of our former officers ($3.3 million) and expenses related to implementation
of our new ERP system ($1.7 million), which were partially offset by decreased
spending associated with accounting services related to the preparation of our restated
financial statements for 2004 through 2006 included in our registration statement on
Form 20-F, filed on May 1, 2007. As a percentage of total sales revenue, general
and administrative expenses remained relatively consistent with the prior year, at 19.9%
and 19.7% in 2007 and 2006, respectively.

50

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Financial
Expense (Income), Net.  In 2007 we recorded financial income, net of
$3.9 million as compared to financial expenses, net of $20.8 million in 2006.
This increase was primarily the result of a change in the accounting treatment of our Bank
debt in which interest expense was capitalized with principal payments in accordance with
SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings (SFAS 15). As a result, no interest expense on our
Bank debt was recorded in 2007 as compared with the recording of interest expense in 2006
prior to our Bank debt restructuring (see Liquidity & Capital Resources 
Restructuring of Bank Debt in Item 5.B below). In addition, in 2007, we
recorded interest income on cash balances of $3.1 million as compared with virtually
no interest income in 2006. Exchange rate related gains in 2007 as compared with losses in
2007 also contributed to the increase in our financial income from 2006 to 2007.

Other
Expense/(Income), net.  Other expense in 2007 of $0.1 million was
primarily the result of the write off of certain system-related assets that became
obsolete with the implementation of our new ERP system. In 2006, we reported other
expenses of $0.5 million, which mainly reflected the loss on the sale of our facility
in Salt Lake City.

Taxes
on Income.  In 2007 we recorded a provision for income taxes of
$3.5 million compared with a $3.2 million provision in 2006. This increase was
primarily the result of increased sales by, and income from, certain of our subsidiaries
that did not have operating loss carry forwards.

Net
Loss.  Net loss in 2007 was $28.1 million compared with a net loss of
$50.3 million in 2006. The decrease in the net loss in 2007 was due primarily to the
aforementioned change in financial expenses resulting from a change in the accounting
treatment of our Bank debt whereby interest payments in 2007 were charged against the bank
debt liability and not to interest expense, as they had been prior to the Bank debt
restructuring in December 2006. In addition, we recorded approximately $3.1 million
of interest income on cash balances in 2007.

# Variability of Operating
Results.

Our
sales and profitability may vary in any given year, and from quarter to quarter, depending
on the number and mix of products sold and the average selling price of the products. In
addition, due to potential competition, uncertain market acceptance and other factors, we
may be required to reduce prices for our products in the future.

Our
future results will be affected by a number of factors including our ability to: increase
the number of units sold; develop, introduce and deliver new products on a timely basis;
accurately anticipate customer demand patterns; and manage future inventory levels in line
with anticipated demand. Our results may also be affected by competitive factors, the
extent to which our cost reduction program succeeds, the availability of working capital,
results of litigation, the enforcement of intellectual property rights, currency exchange
rate fluctuations and economic conditions in the geographic areas in which we operate.
There can be no assurance that our historical performance in sales, gross profit and net
income will improve or even continue, or that sales, gross profit and net income in any
particular quarter will not be lower than those of the preceding quarters, including
comparable quarters. See Item 3.D  Risk Factors above.

# Effective Corporate Tax
Rate.

See
Israeli Tax Considerations and Government Programs  General Corporate Tax
Structure in Israel in Item 4.B above for a discussion of the general tax
structure in Israel and applicable corporate tax rates.

As
we derive a portion of our income from facilities granted Approved Enterprise status, our
effective tax rate may be significantly reduced. See Israeli Tax Considerations and
Government Programs  The Law for the Encouragement of Capital Investments
in Item 4.B above. Income tax expense in the financial statements relates primarily
to the income taxes of subsidiaries, as we have incurred substantial losses in Israel.

Our
income, or income of any of our Israeli subsidiaries, derived from sources other than
Approved Enterprises is taxable at the regular Israeli corporate tax rates described
above. Income earned by non-Israeli subsidiaries is subject to different corporate tax
rates of up to 45%.

As
part of the process of preparing our consolidated financial statements we must estimate
our income taxes in each of the jurisdictions in which we operate. This process involves
our estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes.
Actual income taxes could vary from these estimates due to future changes in income tax
law or results from final tax examinations and reviews.

See
Israeli Tax Considerations and Government Programs  Law for the
Encouragement of Capital Investments in Item 4.B above for a discussion of the
general tax structure in Israel and applicable corporate tax rates.

51

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# Impact of Inflation and
Currency Fluctuations.

| | Foreign
currency exchange risk.
| | -------------------------------

We derive
a majority of our revenues in U.S. dollars. The U.S. dollar is our functional
and reporting currency. However, a significant portion of our headcount related expenses,
consisting principally of salaries and related personnel expenses, are denominated in
currencies other than the U.S. dollar, in particular the shekel, as well as the euro,
the Japanese yen and the Chinese yuan. This currency exposure gives rise to market risk
associated with exchange rate movements vis-à-vis the U.S. dollar.
Furthermore, we anticipate that a material portion of our expenses will continue to be
denominated in non-U.S. dollar currencies.

To
the extent the U.S. dollar weakens against the shekel, we will experience a negative
impact on our profit margins. A devaluation of the shekel in relation to the dollar has
the effect of reducing the dollar amount of our expenses that are payable in shekels,
unless those expenses or payables are linked to the dollar. Conversely, any increase in
the value of the shekel in relation to the dollar has the effect of increasing the dollar
value of our unlinked shekel expenses, which will have a negative impact on our profit
margins. The shekel appreciated against the dollar by approximately 1.1% in 2008 and 8.6%
in 2007, the effect of which in both years was compounded by inflation in Israel at rates
of approximately 3.8% and 3.4%, respectively. (See table following Inflation rated
risks below).

In
Europe and Japan, our revenues are received primarily in euros and yen, respectively, and
such revenues exceed our expenses incurred in such currencies. Accordingly if these
currencies are devalued relative to the dollar, the dollar value of our sales are
adversely impacted, as was the case of the euro in 2008, which was devalued by 6.4% in
relation to the dollar. Alternatively, if these currencies appreciate relative to the
dollar, the dollar value of our sales are positively impacted, as was the case of the yen
in 2008, which appreciated by 22.2% in relation to the dollar.

Since
exchange rates between the dollar and the shekel (as well as between the dollar and the
euro and yen) fluctuate continuously, exchange rate fluctuations would have an impact on
our results and period-to-period comparisons of our results. The effects of foreign
currency re-measurements are reported in our consolidated financial statements of
operations. From 2008, we have engaged in limited currency hedging activities in order to
reduce some of this currency exposure. These measures, however, may not adequately protect
us from material adverse effects due to the impact of inflation in Israel. For a
discussion of our hedging transactions, if any, see Item 11  Quantitative
and Qualitative Disclosures about Market Risk below.

| | Inflation
related risk.
| | -----------------------

We
believe that the rate of inflation in Israel has not had a material impact on our business
to date. However, our costs in Israel in U.S. dollar terms will increase if inflation
in Israel exceeds the devaluation of the shekel against the U.S. dollar or if the
timing of such devaluation lags behind inflation in Israel.

The
dollar cost of our operations is influenced by the extent that any inflation in Israel is
or is not offset, or is offset on a lagging basis, by the devaluation of the shekel in
relation to the dollar. When the rate of inflation in Israel exceeds the rate of
devaluation of the shekel against the dollar, companies experience increases in the dollar
cost of their operations in Israel. Unless offset by a devaluation of the shekel,
inflation in Israel will have a negative effect on our results.

The
following table presents information about the rate of inflation in Israel and the rate of
appreciation (in 2004, 2006, 2007 and 2008) or devaluation (in 2005) of the shekel
relative to the dollar and the gap between them, representing Israels effective
inflation (or devaluation) rate:

|Year Ended December 31, | Israeli
Inflation
Rate | Shekel:Dollar
Appreciation
(Devaluation) | Inflation
(Devaluation)
Gap
|----------------------- | ---------------------- | ---------------------------------------- | ---------------------------
|
|
|
|
|2004                    |                        |                                          |                            
|2005                    |                        |                                          |                            
|2006                    |                        |                                          |                            
|2007                    |                        |                                          |                            
|2008                    |                        |                                          |                            

# Effects of Government
Regulations and Location on our Business.

For
a discussion of the effects of Israeli governmental regulation and our location in Israel
on our business, see Israeli Tax Considerations and Government Programs in
Item 4.B above and the Risks Relating Primarily to our Location in Israel
in Item 3.D above.

52

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# Recent Accounting
Pronouncements.

In
February 2008, the FASB issued FSP FAS No. 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13", and FSP FAS No. 157-2, Effective Date of FASB
Statement No. 157". Collectively, these Staff Positions defer the effective date
of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities except for items that are recognized or disclosed at
fair value on a recurring basis at least annually, and amend the scope of SFAS 157.
As described in Note 3s. to our consolidated financial statements, we adopted
SFAS 157 and the related FASB staff positions except for those items specifically
deferred under FSP No. FAS 157-2.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements, the
identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is prohibited. The impact of SFAS 141R on
our consolidated results of operations and financial condition will depend on the nature
and size of acquisitions, if any, subsequent to the effective date.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes accounting and reporting standards
that require that (i) the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from the parents equity;
(ii) the amount of consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the face of the
consolidated statement of income; and (iii) changes in a parents ownership
interest, while the parent retains its controlling financial interest in its subsidiary,
be accounted for consistently. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. We do not
expect that the adoption of SFAS 160 will have significant impact on our consolidated
financial statements.

In
November 2008, the FASB ratified EITF No. 08-7, Accounting for Defensive
Intangible Assets (EITF 08-7). EITF 08-7 clarifies the accounting
for certain separately identifiable intangible assets which an acquirer does not intend to
actively use but intends to hold to prevent its competitors from obtaining access to them.
EITF 08-7 requires an acquirer in a business combination to account for a defensive
intangible asset as a separate unit of accounting which should be amortized to expense
over the period the asset diminishes in value. EITF 08-7 is effective for fiscal
years beginning after December 15, 2008, with early adoption prohibited. We do not
expect that the adoption of EITF 08-7 will have significant impact on our
consolidated financial statements.

In
April 2008, the FASB issued FSP FAS No. 142-3, Determination of the Useful Life
of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142. FSP
FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and
early adoption is prohibited. The impact of FSP FAS 142-3 on our consolidated results
of operations and financial condition will depend on the amount of intangibles acquired,
if any, subsequent to the effective date.

In
June 2008, the FASB issued EITF No. 07-5 Determining whether an Instrument (or
Embedded Feature) is indexed to an Entitys Own Stock (EITF 07-5).
EITF 07-5 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early application
is not permitted. Paragraph 11(a) of SFAS 133 specifies that a contract that
would otherwise meet the definition of a derivative but is both (a) indexed to the
companys own stock and (b) classified in stockholders equity in the
statement of financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuers own stock and
thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. We
believe adopting EITF 07-5 will not have a material impact on our consolidated financial
statements.

In
May 2008, the FASB issued FSP Accounting Principles Board (APB) 14-1
Accounting for Convertible Debt instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP
APB 14-1 requires the issuer of certain convertible debt instruments that may be
settled in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner that
reflects the issuers non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive basis.
We do not expect that the adoption of FSP APB 14-1 will have significant impact on
our consolidated results of operations and financial condition.

53

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In
April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, (FSP FAS 157-4". The
FSP FAS 157-4 supersedes FSP No. FAS 157-3 and provides additional authoritative
guidance to assist both issuers and users of financial statements in determining whether a
market is active or inactive, and whether a transaction is distressed. The FSP
FAS 157-4 will be effective for the quarter ending June 30, 2009. The adoption
of the FSP FAS 157-4 will not have a material effect on our financial statements.

In June 2009, the FASB issued SFAS
No. 166, Accounting for Transfers of Financial Assets  an amendment of
FASB Statement No. 140 (SFAS 166). SFAS 166 seeks to
improve the relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial statements about a transfer of financial
assets; the effects of a transfer on its financial position, financial performance, and
cash flows; and a transferors continuing involvement, if any, in transferred
financial assets. SFAS 166 is applicable for annual periods beginning after
November 15, 2009 and interim periods therein and thereafter. We have not determined
the impact, if any, SFAS 166 will have on our consolidated financial statements.

# B. Liquidity and Capital
Resources.

At
December 31, 2008, our outstanding indebtedness to Bank Hapoalim B.M. (the
Bank) was approximately $117.1 million of interest bearing debt, which
amount was reduced to approximately $112.1 million by the repayment to the Bank of
$5.0 million on March 31, 2009. These figures exclude an additional sum
($21.875 million at December 31, 2008 reduced to $18.75 million on
March 31, 2009) that does not accrue interest and that the Bank has agreed to write
off in the future, subject to our timely making certain repayments. Also excluded from
these figures are various amounts for which we are obligated to the Bank in respect of
guarantees and letters of credit that it has issued on our behalf to third parties. Our
Bank debt is regulated by a Restructuring Agreement, as amended, which is described below
under the caption Restructuring of Bank Debt.

At
December 31, 2008, we had $20.4 million of cash and cash equivalents, compared
with $58.4 million at December 31, 2007 and $79.6 million at
December 31, 2006. The decrease in 2008 was attributable primarily to our net losses
from operations, together with $6.5 million of interest payments and
$5.0 million of principal repayment to the Bank in connection with our outstanding
Bank debt. The decrease in cash and cash equivalents in 2007 was attributable to net
losses from operations, including significant non-recurring expenses associated with legal
settlements, audit and accounting fees related to the completion of the restatement of our
consolidated financial statements for 2004 through 2006 and our filing of a Form 20-F
registration statement for our ordinary shares in 2007, implementation of a new ERP system
(SAP), legal fees paid pursuant to an indemnification agreement with one of our former
officers, and severance costs for a number of senior executives who left the Company in
2007. These cash usages were only partially offset by a capital infusion of
$24.9 million in June 2007 upon the exercise of warrants for the purchase of
approximately 23.2 million of our shares, pursuant to the 2006 Purchase Agreement.
For further details, see Recapitalization and Equity Financing  2006
Recapitalization in Item 4.A above and Restructuring of Bank Debt
in this Item below.

Our
cash use can be characterized within three categories of activities: operating, investing,
and financing, as discussed below. Despite our overall decrease in cash resources in 2008,
our use of cash in operating and investing activities, as described below, actually
decreased in 2008 relative to 2007, which was not the case in 2007 relative to 2006.
However, on the other hand, our use of cash in financing activities increased in 2008 in
comparison to 2007.

Our
net cash used in operating activities was $30.4 million in 2008 compared to
$40.6 million in 2007 and $38.3 million in 2006. The decrease of net cash used
in operating activities in 2008 compared with 2007 was attributable to an improvement in
our operational results (excluding non-cash goodwill impairment) and to the decrease in
trade and other receivables, which were partly offset by the decrease in trade and other
payables. The increase in net cash used in operating activities in 2007 compared with 2006
reflected the fact that in 2007, in contrast to 2006 and in accordance with the accounting
for the December 2006 restructuring under SFAS 15, interest payments on our debt to
the Bank was included as a component of cash used in operating activities. In addition,
this increase in cash used in operating activities in 2007 relative to 2006 was a result
of increased investment of working capital towards various purposes and payment of
significant non-recurring items, as indicated above, offset in part by a lower net loss in
2007.

Our
net cash used in investing activities was $2.9 million in 2008 compared to
$5.8 million in 2007. These amounts compare to net cash provided by investing
activities of $0.8 million in 2006. Capital expenditures were $2.9 million,
$5.8 million and $1.7 million in 2008, 2007 and 2006, respectively. Capital
expenditures in 2008 were primarily related to machinery and equipments and the
implementation of our new ERP system and in 2007 were also primarily related to the
implementation of the new ERP system as well as leasehold improvements and furniture in
our new Santa Clara location.

During
2008, our net cash used in financing activities was $5.0 million. This compares to
net cash provided by financing activities of $25.6 million in 2007, and net cash
provided by financing activities of $103.6 million in 2006. During 2008, net cash
used in financing activities reflected the repayment to the Bank of a long term loan. The
net cash provided by financing activities of $25.6 million in 2007 primarily
reflected proceeds from the exercise of share warrants, whereas the $103.6 million of
net cash provided by financing activities in 2006 consisted of the net proceeds from the
2006 recapitalization of $118.4 million, partially offset by the repayment to the
Bank of a long term loan of $14.9 million.

54

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During
2008, through arrangements with two banks in Japan, we factored approximately
$3.9 million of promissory notes received from customers in Japan in connection with
the sale of our products. In addition, in 2008, through an arrangement with banks in
Israel, we factored approximately $0.7 million of accounts receivable.

During
2008, we began to engage in currency hedging activities in connection with our exposure to
changes in the dollar/shekel exchange rate and we also entered into a $40 million
interest rate swap transaction.. For details, see Item 11, Quantitative and
Qualitative Disclosure About Market Risk.

We believe that our cash balances and cash generated from operations, including the
$15 million proceeds of the equity financing under the 2009 Purchase Agreement (see
Recapitalization and Equity Financing  2009 Equity Financing in Item 4.A
above), together with the revised schedule for repayment of our Bank debt pursuant to the
amendment to the Restructuring Agreement entered into with the Bank on June 30, 2009
(see under the caption Restructuring of Bank Debt, below), will be sufficient
to meet our currently anticipated cash requirements for the next 12 months. If existing
cash and cash generated from operations are insufficient to satisfy our liquidity and
investment requirements, we may seek to sell additional equity or debt securities or
obtain a credit facility. We cannot be sure that we will not require additional capital
beyond the amounts currently forecasted by us, nor that any such required additional
capital will be available on reasonable terms, if at all. In addition, the level of our
internally generated funds is impacted by various factors, including the risk factors
described above. See Item 3.D  Risk Factors above.

# Restructuring of Bank
Debt.

In
connection with and as a condition to closing of the transactions contemplated by the 2006
Purchase Agreement, we entered into the Restructuring Agreement with the Bank dated
September 29, 2006. The Bank granted additional loans between signing and closing so
that the total amount of outstanding debt (including guarantees and letters of credit) was
approximately $212.1 million immediately prior to the closing of Restructuring
Agreement. Pursuant to the Restructuring Agreement, at the closing, we used
$40 million of the proceeds from the 2006 Purchase Agreement to repay amounts
outstanding under our prior loan agreements with the Bank, and the Bank then wrote off an
additional $25 million due under those prior loan agreements. Consequently, the
principal amount of the Bank debt outstanding immediately after the closing of the
Restructuring Agreement was approximately $147.1 million (plus our obligation to
repay the aforementioned guarantee and letters of credit amounts). All of the prior loan
agreements, except as described below, automatically terminated.

The
terms of the Restructuring Agreement were amended by:

| |  | Amendment
No. 1, entered into December 5, 2006 (the 2006 Bank Debt Amendment),
which dealt primarily with technical issues;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | Amendment
No. 2, entered into on June 25, 2008 (the 2008 Bank Debt Amendment)
(which 2008 Bank Debt Amendment itself was amended on November 10, 2008 and February 22,
2009), the principal provisions of which dealt with rescheduling the repayments of $35 million
of the $40 million principal that had been due for repayment in 2008; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Amendment
No. 3, entered into on June 30, 2009 (the 2009 Bank Debt Amendment),
which amended the repayment schedule and interest rate provisions and modified a number
of covenants in the Restructuring Agreement, the main details of which are set out below.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Without
the Restructuring Agreement and the respective Amendments, we were, or could have been, in
default on our debt obligations to the Bank, which would have entitled the Bank to call
all existing loans immediately due and payable. We were not, at such times, nor are we
now, or expect to be in the foreseeable future, in a position to immediately repay all
such amounts. Therefore, failure to reach agreement with the Bank could have had a
material adverse effect on us and our continuing operations.

| | Repayment
Schedule and Write-Offs.
| | ----------------------------------

Under
the original terms of the Restructuring Agreement, we had agreed to repay to the Bank the
sum $40 million in two installments of $20 million each, by no later than
June 29, 2008 and December 29, 2008, respectively, and the Bank was to write off
the sum of $25 million in two stages of $12.5 million each, at the time of, and
conditional upon, our making such repayments. The remaining balance of our outstanding
indebtedness to the Bank, amounting to approximately $82.13 million, was to be
amortized and repaid via 16 quarterly payments from December 31, 2009 through
September 30, 2013.

55

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The
original repayment provisions under the Restructuring Agreement were modified by the 2008
Bank Debt Amendment, pursuant to which, on June 30, 2008, we repaid to the Bank the
sum of $40 million, representing the repayments that had been due in June and
December 2008. The Bank contemporaneously provided us with the following two new loans,
which were utilized by us to fund the repayment of $35 million of the said
$40 million repayment: (i) a loan for $5 million, which was initially to be
repaid on December 31, 2008, but, following negotiations with the Bank and pursuant
to a subsequent amendment to the 2008 Bank Debt Amendment (dated February 22, 2009
and effective from December 31, 2008), payment was rescheduled for, and actually made
on March 31, 2009; and (ii) a loan for $30 million, which was o be repaid
in three equal payments of $10 million on June 30, 2009, June 30, 2010 and
June 30, 2011. Pursuant to the 2008 Bank Debt Amendment, the two write-offs of
$12.5 million each were delayed and were to be written off pro rata to the new
repayment schedule (that is, write-offs of $3.125 million were effected as a result
of our repayments on each of June 30, 2008 and March 31, 2009, and each
$10 million repayment was to be accompanied by a write-off of $6.25 million).
There was no change regarding the payment schedule of the remaining balance, which was
still to be repaid via 16 quarterly payments from December 31, 2009 through
September 30, 2013.

Accordingly,
immediately prior to the 2009 Bank Debt Amendment, the outstanding amount of the Bank debt
(excluding the guarantee and letter of credit related obligations) was approximately
$130.88 million, of which the Bank had agreed to write off the sum of
$18.75 million subject to our making the initial $30 million of requisite
repayments.

Position
following the 2009 Bank Debt Amendment

The
scheduled dates for repayment of the Bank debt were materially modified by the 2009 Bank
Debt Amendment, pursuant to which we are to make repayments of principal to the Bank in
accordance with the schedule set forth in the table below. The Banks agreement to
write off an aggregate of $18.75 million of our indebtedness remains unchanged,
except that the schedule for such write-off follows the revised repayments schedule, as
set forth in the table below.

|              | Repayment | Write-off
|------------- | --------- | ---------
|
|
|
|
|June 30, 2010 |           |          
|June 30, 2011 |           |          
|June 30, 2012 |           |          
|June 30, 2013 |           |          
|June 30, 2014 |           |          
|June 30, 2015 |           |          
|June 30, 2016 |           |          
|June 30, 2017 |           |          
|              |           |          
|Totals        |           |          
|              |           |          

| | Interest
Rate.
| | --------------

Pursuant
to the terms of the Restructuring Agreement, our restructured loan bore interest at the
three month LIBOR rate plus 1.5%. Until execution of the 2009 Bank Debt Amendment, this
rate of interest had subsequently been modified in the following two instances:

| | (i) | The $5 million
debt initially rescheduled under the 2008 Bank Debt Amendment to be repaid on December 31,
2008 bore interest initially at the three month LIBOR rate plus 1.5%, but pursuant to the
amendment to the 2008 Bank Debt Amendment of February 22, 2009 (which extended
repayment of the $5 million to March 31, 2009), the interest rate on such $5 million
was increased to the three month LIBOR rate plus 3% for the period from January 1,
2009 until payment; this $5 million debt including the accrued interest was repaid
on March 31, 2009;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Under
the 2008 Bank Debt Amendment, the interest rate on the $30 million
               debt that had, under such Amendment, been rescheduled to be repaid by
three                equal annual payments of $10 million was increased to the three
month LIBOR                rate plus 3%.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Position
following the 2009 Bank Debt Amendment

Under the 2009 Bank Debt Amendment, the interest rates, as in effect prior to the 2009 Bank
Amendment are maintained at their previous level, however, in addition, an interest rate of three month
LIBOR rate plus 5.25% is applied solely as regards the period in respect of which repayment of the
rescheduled amount (or the proportionate part thereof) was postponed.

56

---

---

Although
the amount of $18.75 million to be written off, as referred to above, does not bear
interest, in the event that the Bank declares bank debt immediately due and payable as a
result of an event of default, as defined in the Restructuring Agreement, the said
$18.75 million, or any part thereof not previously written off, shall be deemed to be
part of the principal amount to be paid by us and shall accrue, from such time until
repayment, interest at LIBOR rate plus 5.25%.

All
interest payments are due quarterly.

| | Warrants Held by the Bank.
| | --------------------------

Warrants
for the purchase of an aggregate of 9,235,300 of our shares, which had been granted to the
Bank in 2001 and 2003, still remained effective following the consummation of the
Restructuring Agreement, and in connection with the Restructuring Agreement, we granted
the Bank an additional warrant to purchase up to an additional 176,000 of our shares at an
exercise price of $1.1794 per share. In addition, the Restructuring Agreement
provided for the amendment of terms of warrants previously issued to the Bank by, in some
cases, extending the exercise period and, in all cases, reducing the exercise price to
$1.1794 per share. After giving effect to the initial terms of the Restructuring
Agreement, the Bank held two warrants for the purchase of an aggregate of 9,411,300 of our
shares, Warrant no. 5 for 8,000,000 shares, exercisable until November 13, 2013,
and Warrant no. 6 for 1,411,300 shares, exercisable until December 5, 2011.

Position
following the 2009 Bank Debt Amendment

Pursuant to the 2009 Bank Debt Amendment, Warrant no. 5 was amended so that the number of
shares issuable thereunder was increased to 9,411,300 and the exercise price was reduced
to $1.00 per share; and Warrant no. 6 was amended so that the number of shares
issuable thereunder was increased to 2,500,000 and the exercise price was increased to
$1.40 per share. For both warrants the exercise period was extended to June 30, 2014.

The
Bank may pay the exercise price for the warrants in cash, check, wire transfer or by the
cancellation of debt owed by us to the Bank, and also has the right to exercise the
warrants on a cashless basis. The warrants granted to the Bank provide that the exercise
price and number of shares issuable thereunder will be adjusted in the event of a stock
split, stock dividend, reclassification or similar transaction. All such warrants are
currently outstanding and unexercised.

In
addition, in connection with the closing of the 2006 recapitalization, the Bank entered
into the Registration Rights Agreement with us and the Investors. For additional details,
see Related Party Transactions  Registration Rights Agreement in
Item 7.B below

| | Cash
Fee based on our Share Price.
| | ----------------------------------

As
part of our debt restructuring with the Bank in 2003, we had provided a cash fee side
letter in favor of the Bank pursuant to which we are obligated to pay $7.5 million to
the Bank if, prior to November 19, 2013, our share price equals or exceeds $7.00 per
share for 15 consecutive trading days, which continued to remain in effect notwithstanding
the modification of the other terms of our Bank indebtedness under the Restructuring
Agreement. (The 2003 debt restructuring also provided for the payment of additional fees
in the event that our share price reached other prices  lower than $7.00 
which did not remain in effect following the closing under the Restructuring Agreement.)

Position
following the 2009 Bank Debt Amendment

Under
to the 2009 Bank Debt Amendment, the period during which we would be obligated to pay said
cash fee of $7.5 million is extended to March 31, 2017 or the date of repayment
to the Bank in full of our Bank debt, if earlier.

| | Other
Cash Fees Payable to the Bank.
| | ------------------------------------

As
a term of the 2008 Bank Debt Amendment, we had agreed to the payment to the Bank of a cash
fee (the Cash Fee) of $4.0 million upon the earliest to occur of any of
the following events while the loan to the Bank is outstanding:

| |  | We
attain annual earnings before interest, depreciation, taxes and amortization (EBIDTA  as
such terms are defined in the 2008 Bank Debt Amendment) for any year in excess of $50 million;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
make a public offering for the sale of our equity or convertible securities for our own
account (excluding a public offering initiated by the Bank if the shares offered in such
offering are those of the Bank),
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
sell all or substantially all of our assets;
| | - | -----------------------------------------------

| |  | If
one or more of LM Partners, Ofer Hi-Tech and certain related parties (together referred
to as the Relevant Shareholders) transfer their shares in Lumenis to the extent that
their aggregate shareholdings are reduced by at least 40% from their current aggregate
holdings in our shares;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If
the aggregate holdings of the Relevant Shareholders in our outstanding share capital is
reduced by at least 40% from its current level as a result of the issuance by us of
shares at a price above $1.55 per share;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

57

---

---

| |  | A
spin-off of our assets representing at least 30% of our total assets; or
| | - | --------------------------------------------------------------------------

| |  | A
voluntary repayment of at least 75% of the outstanding loan to the Bank.
| | - | --------------------------------------------------------------------------

Position
following the 2009 Bank Debt Amendment

Pursuant
to the 2009 Bank Debt Amendment, the Cash Fee remains payable to the Bank on the
occurrence of the events detailed above, but is increased to $6 million. Furthermore,
in place of the provision requiring us to pay a Cash Fee if we attain EBIDTA for any year
in excess of $50 million, a Cash Fee is now payable if we attain EBIDTA for any year
in excess of $45 million; provided that:

| | (i) | if the
EBITDA for any year exceeds $25 million but does not exceed $35 million then we
shall only be obligated to pay to the Bank a Cash Fee of $2 million; and
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | if
the EBITDA for any year exceeds $35 million but does not exceed                $45 million
then we shall only be obligated to pay to the Bank a Cash Fee                of $4 million,
or a further $2 million, if we have already paid to the                Bank a Cash
Fee of $2 million on the occurrence of the event in                (i) above.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

However,
if the earliest event or events to occur is either or both of the events set forth in (i)
and/or (ii) above, and a later event of the listed events occurs during the time the Bank
debt is outstanding, then upon such later event we shall pay to the Bank a Cash Fee in
amount equal to the difference between the amount previously paid under these provisions
and $6 million.

| | Financial
Covenants.
| | --------------------

Customary
for transactions of this type, the Restructuring Agreement contained certain covenants,
including covenants that required us to provide current audited or reviewed financial
information to the Bank and to comply with certain financial ratios as set out in the
Restructuring Agreement. Under the original provisions of the Restructuring Agreement, the
ratio of total debt to EBITDA were not to exceed 13 for the fiscal year 2008, 6 for the
fiscal year 2009 and 5 for the fiscal year 2010 and each fiscal year thereafter.
Calculations of such ratios were to be made on a quarterly basis for the previous
four-quarter period, commencing at the end of the first quarter of 2008. In addition,
operating income as a percentage of revenues could not be less than 3% in each quarter of
2008, 4% in each quarter of 2009, and 6% in each quarter of 2010 and 2011.

We
were not in compliance with either of these covenants for the first quarter of 2008. The
2008 Bank Debt Amendment eliminated certain covenants (including the above percentage
covenant) and modified the above financial ratio covenant. The financial ratio
calculations were still to be made on a quarterly basis (for the previous four-quarter
period), but were to commence with the four-quarter period ending on March 31, 2009.
We ceased to be subject to the financial ratios covenant for the four-quarter periods
ending in 2008. The ratio of total debt to EBITDA that under the 2008 Bank Debt Amendment
we needed to achieve for the four quarter period ending in said quarter were as follows:
first quarter of 2009 - 6.5; second quarter of 2009 - 5.5; third
quarter of 2009 - 5; fourth quarter of Q2009 - 4.5; and the first
quarter of 2010 and all subsequent quarters until the end of the loan
term - 3.5. In addition, we were required to achieve the following interest
coverage ratios: for the fiscal year ended December 31, 2009 - 1, and for
the fiscal year ended December 31, 2010 and all subsequent fiscal years until the end
of the loan term - 2.

However,
as at the end of the first quarter of 2009, we were not in compliance with the revised
debt to EBITDA covenant and the Bank agreed to a waiver of compliance with such covenants
but only in respect of the first quarter of 2009.

Position
following the 2009 Bank Debt Amendment

Under
the 2009 Bank Debt Amendment, the existing financial covenants were modified. Initially,
the only financial covenant to which we will be subject, commencing as of the end of the
second quarter of 2009 (the quarter ended June 30, 2009) and remaining in effect
until the end of the second quarter of 2011, is the requirement that we have available and
accessible consolidated cash reserves of at least $20 million.

Effective
from the end of the third quarter of 2011 (the quarter ended September 30, 2011)
until repayment of the Bank debt, we will be required to comply with the following
financial covenants:

| |  | The
ratio of Total Debt to EBITDA (as such terms are defined in the 2009 Bank Debt Amendment)
shall not exceed the following (as of the end of the quarters set forth below, calculated
based on the sum of such quarter and the three preceding quarters):
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 6.5-
the third and fourth quarters of 2011 and the first quarter of 2012;
| | - | -------------------------------------------------------------------------

| |  | 5
 - the second, third and fourth quarters of 2012 and the first quarter of 2013;
| | - | ---------------------------------------------------------------------------------

| |  | 4
 - the second, third and fourth quarters of 2013 and the first quarter of 2014; and
| | - | -------------------------------------------------------------------------------------

58

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---

| |  | 3.5-
the second quarter of 2015 and each quarter thereafter.
| | - | ------------------------------------------------------------

| |  | The
Interest Coverage Ratio (as defined in the 2009 Bank Debt Amendment) as of the end of
each of the quarters set forth below, calculated based on the average of such quarter and
the three preceding quarters, shall be at least:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 1
(one)  -the third and fourth quarters of 2011 and the first quarter of 2012; and
| | - | ----------------------------------------------------------------------------------

| |  | 2
(two) -the second quarter of 2012 and each quarter thereafter.
| | - | ----------------------------------------------------------------

| | Negative
Covenants.
| | -------------------

| | The
Restructuring Agreement also contains certain negative covenants, including, among
others, negative covenants that require us to refrain from:
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| |  | encumbering
any of our assets (other than those specifically permitted by the Restructuring
       Agreement);
| | - | --------------------------------------------------------------------------------------------------------------

| |  | incurring
additional debt in excess of $30 million;
| | - | ---------------------------------------------------

| |  | entering
into or approving any merger, consolidation, or scheme of reconstruction; making certain
       acquisitions;
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | entering into certain transactions with related parties; and
| | - | ------------------------------------------------------------

| |  | disposing of assets, except as permitted under the Restructuring Agreement.
| | - | ---------------------------------------------------------------------------

| | Security.
| | ---------

All
of our security agreements in favor of the Bank existing immediately prior to the
Restructuring Agreement remain effective and serve as security on the amounts due under
the Restructuring Agreement. In addition, we granted the Bank security interests in
additional collateral as part of the Restructuring Agreement, as amended. These securities
include a floating charge over our assets, certain fixed charges over our assets and
subsidiaries (including intellectual property), certain pledges of the stock of our
subsidiaries and certain subsidiary guarantees securing our debt.

| | Events
of Default.
| | ------------------

In
the event that we default under the Restructuring Agreement, as amended, the Bank may call
all amounts then outstanding immediately due and payable or declare that all then
outstanding amounts shall be repayable on demand. After an event of default, a default
rate of interest shall apply, which shall be equal to the interest rate previously in
effect plus 2.5%.

The
foregoing is only a summary and is qualified in its entirety by reference to the full text
of the Restructuring Agreement (including the various Amendments thereto), the warrants
issued to the Bank, the Registration Rights Agreement and other agreements with the Bank,
which are exhibits to this annual report and are incorporated herein by reference.

# C. Research and
Development, Patents and Licenses, Etc.

For
a discussion of our research and development policies, see Research and
Development and Israeli Tax Considerations and Government Programs  Tax
Benefits and Grants for Research and Development in Item 4.B above and the
Risks Relating Primarily to our Location in Israel in Item 3.D above.

# D. Trend Information.

For
trend information, see the Risk Factors described in Item 3.D above, as well as
Item 5  Operating and Financial Review and Prospects and
Item 4  Information on the Company above.

# E. Off-Balance Sheet
Arrangements.

We have various off balance-sheet arrangements made in the ordinary course of business, consisting
primarily of guarantees and letters of credit, factoring arrangements, lease obligations and other
long-term obligations.

We
do not believe that our off balance sheet arrangements and commitments have or are
reasonably likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.

59

---

---

# F. Tabular Disclosure of
Contractual Obligations.

The
following table summarizes our known contractual obligations and commitments as of
December 31, 2008 that we expect to require significant cash outlays in the future:

|                               | Payments Due by Period (in US $ in Thousands)
|------------------------------ | ---------------------------------------------
|
|
|
|
|Long-Term Debt Obligations(1)  |                                              
|Operating Lease Obligations(2) |                                              
|Other Long-Term Obligations(3) |                                              
|                               |                                              
|                               |                                              
|                               |                                              

---

|(1) | Includes  future  principal  and interest  payments to the Bank pursuant to the  Restructuring  Agreement,
based  upon the terms of such  Agreement  in effect on  December 31,  2008  (including  the 2008 Bank Debt
Amendment).
Following the 2009 Bank Debt Amendment (see Liquidity & Capital  Resources - Restructuring  of Bank Debt
in Item 5.B above.):
(a)  Long-Term  Debt  Obligations  are revised as follows:  Total - $143,757 thousand;  Less Than 1 Year -
$8,366 thousand;  1-3 Years -  $25,499 thousand;  3-5 Years -  $38,048 thousand;  and More Than  5 Years -
$71,844 thousand; and
(b) the totals for  columns of the table are  revised  as  follows:  Total -$197,620 thousands;  Less Than
1 Year -  $18,995 thousand;  1-3 Years -  $43,214 thousand;  3-5 Years -  $49,696 thousand;  and More Than
5 Years - $85,715 thousand.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
lease obligations for facilities, vehicles and certain equipment,
               including anticipated lease payments for our proposed new facility in
Yokneam,                Israel, intended to house our headquarters. We have entered into
an agreement                with a real estate developer for the construction and lease
to us of such                facility, for which occupancy is estimated by January 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes
obligations under our agreement with our IT systems outsourcer and
               payments due to the landlord of our Santa Clara facilities for certain
building                improvements. For additional related information, see Notes 12
and 13 to                our consolidated financial statements included in this annual
report.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, as of December 31, 2008, we had outstanding guarantees and letters of
credit with various expiration dates of approximately $3.0 million principal amount,
of which approximately $1.7 million related to facilities, $1.0 million related
to a single vendor and the remaining amount related to car leases.

|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
|------- |  | -------------------------------------------

# A. Directors and Senior Management.

The
following table lists the current members of our senior management as of the filing date
of this annual report:

|Name               | Age | Position                                                                       
|------------------ | --- | -------------------------------------------------------------------------------
|
|
|
|
|Dov Ofer           | 55  | Chief Executive Officer                                                        
|Aviram Steinhart   | 38  | Senior Vice President and Chief Financial Officer                              
|Lloyd Diamond      | 41  | Senior Vice President and General Manager of our Surgical Strategic Business   
|                   |     | Unit and of Lumenis Vision Strategic Business Unit                             
|Amnon Harari       | 59  | Senior Vice President for Research and Development                             
|Eckhard Lachenauer | 60  | President of Lumenis Europe                                                    
|Robert Mann        | 52  | Senior Vice President, General Manager of our Aesthetic Strategic Business Unit
|                   |     | and President of Lumenis Americas                                              
|Michael Segev      | 59  | Executive Vice President for Global Operations                                 
|Gideon Sturlesi    | 50  | Executive Vice President, General Manager of Corporate Business Development    
|Alex (Kow) Tanaka  | 56  | President of Lumenis Japan                                                     
|William Weisel     | 55  | Vice President, General Counsel and Corporate Secretary                        
|Zhai Qiying        | 44  | President of Lumenis China and Asia Pacific                                    
|                   |     |                                                                                

The
following table lists our current directors as of the filing date of this annual report:

|Name                | Age | Position                          
|------------------- | --- | ----------------------------------
|
|
|
|
|Harel Beit-On       | 49  | Chairman of the Board of Directors
|Yoav Doppelt        | 40  | Director                          
|Eugene Davis        | 54  | Director                          
|Naftali (Tali) Idan | 57  | Director                          
|Talia Livni         | 65  | Director                          
|                    |     |                                   

60

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# Members of our Senior
Management.

Dov
Oferhas served as our Chief Executive Officer since April 2007. Prior to joining
Lumenis, Mr. Ofer served as the Corporate Vice President and General Manager of
HP-Scitex since the acquisition of Scitex Vision by Hewlett Packard in November 2005.
Prior to such acquisition, Mr. Ofer served as President and Chief Executive Officer
of Scitex Vision Ltd. from February 2002. Prior to joining Scitex, he managed Matan
Digital Printing, one of the pioneering companies in the super-wide format printing
industry. Mr. Ofer holds a bachelors degree in economics from the Hebrew
University of Jerusalem, Israel, and an MBA degree from the University of California
Berkeley.

Aviram
Steinharthas served as our Senior Vice President and Chief Financial Officer since
December 2007. Immediately prior to joining Lumenis, Mr. Steinhart served as
Corporate Vice President, Financial for Alvarion Ltd. from 2006. Prior thereto, he served
as Asia Pacific Controller at Unigrafic Solutions and Corporate Treasurer and Finance
Director at Technomatix Technologies Ltd. from 2002 to 2006; as Corporate Controller for
NetReality from 1999 to 2002; and as a Senior Auditor at KPMG from 1996 to 1999.
Mr. Steinhart holds a bachelors degree in accounting and economics from Haifa
University, Israel, and an MBA degree from the University of Tel Aviv, Israel and is a
certified public accountant in Israel.

Lloyd
Diamondhas served as our Senior Vice President and General Manager of our Surgical
Strategic Business Unit since April 2007 and, at the end of 2008, he assumed
responsibility for managing our US medical sales organization. Effective July 1,
2009, Mr. Diamond will also assume the position of General Manager of Lumenis Vision
Strategic Business Unit (our Ophthalmic business). Prior to joining Lumenis, he served as
Vice President Marketing for Laserscope from July 2005 to November 2006 and played a key
role in the post-acquisition integration progress of Laserscope into American Medical
Systems. Prior to joining Laserscope, Mr. Diamond held several marketing and
management positions, including international responsibilities at leading medical global
companies such as Kyphon Inc., from July 2004 to July 2005, and Linvatec, a division of
Conmed Corporation formerly a division of Bristol Meyers Squibb, from 1997 to 2004.
Mr. Diamond holds a bachelors degree in biochemistry and marketing from Florida
Atlantic University and an MBA degree from Thunderbird, The American Graduate School of
International Management.

Amnon
Harariis our Senior Vice President for Research and Development. He has served as a
Vice President of Lumenis since August 2004, initially and until August 2007, with
responsibility for operations in Europe, and since August 2006, for Research and
Development. Prior to joining Lumenis in 2004, Mr. Harari served as General Manager
of Advanced Heating Technologies from 2002 to 2004, Chief Executive Officer of Partner
Future Communication Ltd. from 2000 to 2002, General Manager of Alcatel Israel from 1999
to 2000, and General Manager of Tadiran Telecommunications Public Switching Division
from 1997 to 1999. He is currently a director of Rapac Communication and Infrastructure
Ltd. Mr. Harari is also a retired Brigadier General of the Israeli Air Force, and
last served as head of the Israeli Air Force Material Directorate. He holds a
bachelors degree in physics from the University of Tel Aviv.

Eckhard
Lachenauer has served as our President of Lumenis Europe since joining Lumenis in
August 2007. From 2004 to 2007, he served as Vice President Business Development,
Marketing and Sales with Daufoss Bionics, a start-up venture in ortopedics and diabetes
management From 2001 to 2004, Mr. Lachenauer was with GE Medical System Information
Technology, where he initially served as General Manager of Operations, Europe and from
2002 as Vice President & General Manager, Asia. Previously, from 2000 to 2001,
Mr. Lachenauer was Vice President, Vascular Intervention, Worldwide with Biotronik
AG, Switzerland. From 1995 to 2000, he served with Boston Scientific Corp. in a number of
senior managerial positions, including its President, Europe, and Division President,
Urology, Worldwide. From 1987 to 1995, Mr. Lachenauer was Division President,
Diagnostic Systems, Europe with Becton Dickinson Corp., France. He holds an MBA degree
from the University of Heidelberg, Germany.

Robert
Mannhas served as our President of Lumenis Americas since January 2007 and as Senior
Vice President and General Manager of Aesthetic Strategic Business Unit since April 2009.
Prior to joining Lumenis, Mr. Mann served with Laserscope, a subsidiary of American
Medical Systems, as its Group Vice President of Global Sales and Marketing for the
Surgical Division from October 2005 to December 2006, as its Group Vice President of Sales
and Marketing for the Surgical and Aesthetic Divisions from January 2005 to October 2005,
as its Vice President of North American Sales and Marketing for the Surgical and Aesthetic
Divisions from January 2004 to January 2005, as its Vice President of North American Sales
and Marketing for the Aesthetic Division from December 2001 to January 2004 and as
Director of its Physician Practice Enhancement Aesthetic Division from May 2001 to
December 2001. Prior to joining Laserscope, Mr. Mann was National Director of Sales
and Operations at a leading national chain of Dermatology and Plastic Surgery Centers from
1998 to May 2001.

Michael
Segevhas been as our Executive Vice President for Global Operations since April 2008
and in December 2008 he also assumed responsibility our Global Service Organization. He
previously held the position of Senior Vice President for Global Operations from joining
Lumenis in October 2007. Prior to joining Lumenis, from 2001 to 2007, Mr. Segev held
various senior positions with General Electric (GE) Healthcare, based in the USA, amongst
these Head of the Global Processes and Operations for the Life-Sciences Division leading
the integration of the former Amersham group into GE, and General Manager of Global
Fulfillment and Global Supply Chain Operations at GE Medical Systems. From 1997 to 2001,
he was with ELGEMS Ltd. (formerly part of Elscint Ltd.) in Haifa, Israel, where he served
in diverse senior roles in customer support, marketing and, ultimately, as Vice President,
Supply Chain Operations. Mr. Segev holds a bachelors degree in electronics
engineering, a masters degree in computer science and an MBA degree in industrial
management, all from the Technion  Israel Institute of Technology, Haifa, (or the
Technion).

61

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---

Gideon
Sturlesi was appointed as an Executive Vice President and General Manager of Lumenis
Vision Strategic Business Unit and Corporate Business Development in December 2008, but is
steping down on June 30, 2009 from the position of General Manager of Lumenis Vision
Strategic Business Unit. He previously served as our Corporate Vice President for Business
Development from November 2007, in which capacity he was also responsible for managing our
intellectual property strategy and portfolio, and in May 2008, he had been appointed to
lead our Ophthalmic business unit in addition to his then existing responsibilities. He
was the founder and general partner of BioMedical Israel Ltd., a life-science private fund
group, heading successful M&A processes, turn-arounds and hands-on
management in its portfolio companies, in which he was active from 2001 until joining
Lumenis. He was also the co-founder, in 1996, of Galil Medical Ltd., a developer of
minimal invasive devices for use in urology, general surgery and other applications, in
which he was actively until 2001. Mr. Sturlesi remains a director of BioMedical
Israel Ltd. and Organitech, Inc. and is also a Venture Partner in the Ofer Hi-Tech Group.
Mr. Sturlesi holds a bachelors degree in mechanical engineering and a
masters degree (cum-laude) in energy from the Technion.

Alex
(Kow) Tanakahas served as our President of Lumenis Japan since June 2007, and brings
to Lumenis many years of experience in sales and business development within the medical
equipment industry. Prior to joining Lumenis, Mr. Tanaka served as Operating Officer
of Fukuda Denshi in Japan for Global Operations and as President of Fukuda USA in Seattle,
Fukuda UK in London, and Kontron Medical in France, from May 2004 to May 2006.
Mr. Tanaka also served in various managerial positions for G.E. Medical Systems Asia,
from November 1990 to May 2004, such as Acting Director of BMD Lunar Business, Clinical
Value Creation Group, and as Product Manager of the Ultrasound Diagnostic Imaging
Division. He holds a degree in Foreign Studies from Aichi Prefectural University in Japan.

William
Weiselhas served as our Vice President, General Counsel and Corporate Secretary since
joining Lumenis in July 2007. Prior to then, he served as Of Counsel to the law firm of
Steel Hector & Davis, representing it in Israel from July 2004 to September 2005.
Mr. Weisel was Vice President and General Counsel for Gilat Satellite Networks Ltd
from 2001 to 2004; General Counsel of ADC Telecommunications Israel (Teledata) from 1999
to 2001; and General Counsel of Scitex Corporation Ltd. from 1995 to 1999, having joined
Scitex in 1992. Prior to that, he worked in Los Angeles law firms for several years as a
litigator. Mr. Weisel holds a bachelors degree in political science from the
University of California, Los Angeles (UCLA) and a JD degree from Loyola Law School
of Los Angeles. Mr. Weisel is a member of both the State Bar of California and the Israel
Bar.

Zhai
Qiyinghas served as our President for Lumenis China and Asia/Pacific since April 2001
when he joined Lumenis as part of the CMG acquisition. In 1992, Mr. Zhai started the
Coherent operation in China and has managed it through our acquisition of CMG. He holds a
bachelors degree in physics from University of Tianjin, China.

# Members of our Board of
Directors.

Harel Beit-On has served as Chairman of our board of directors since December 2006. Mr. Beit-On is a
partner in Carmel Ventures, a leading Israeli venture capital fund, and a co-founder of Viola Partners,
a private equity investment group and a Founder/General Partner in Viola Private Equity investment fund.
Mr. Beit-On has been a member of the board of directors of the general partner of LM Partners L.P. since
November 2006. He serves as a member of the boards of directors of a number of companies, including
Amiad Filtration Systems Ltd., Pulsar Welding Ltd. and Plenus Mezzanine 2006 Ltd., as well as several
private companies that are part of the Carmel Ventures portfolio. Mr. Beit-On served as Chairman of the
Board of Directors of Tecnomatix Technologies Ltd. from 2001 and as a director from 1999 until the
acquisition of Tecnomatix in March 2005 by UGS Corp. From 1996 until 2004, Mr. Beit-On served as the
Chief Executive Officer of Tecnomatix. Mr. Beit-On also served as the President of Tecnomatix from 1995
to 2002. From 1985 to 1999, Mr. Beit-On served in various positions with Tecnomatix and its
U.S.subsidiary. He holds a bachelor's degree in economics from the Hebrew University of Jerusalem and an
MBA degree from the Massachusetts Institute Technology (MIT).

Yoav
Doppelthas served as a director of Lumenis since December 2006. Mr. Doppelt has
served as the Chief Executive Officer of Ofer Hi-Tech Group since 2001. He joined the Ofer
Group in 1996 and has been with Ofer Hi-Tech from its inception in 1997, defining the
vision and operational methodology of its private equity and high-tech investments.
Mr. Doppelt currently also serves as a director of Enzymotec Ltd., MGVS Ltd., Yozma
Funds Management Ltd., YVC Management & Investments Ltd., Coreflow Ltd. and Naiot
Technologies Center Ltd. and is actively involved in numerous investments within the
Israeli private equity and high-tech arena and has successfully led several exit deals and
has extensive experience in exit management. Mr. Doppelt has held various finance and
managerial positions in the Ofer Brothers Group since joining the group in 1996. He holds
a bachelors degree in economics and management from the Faculty of Industrial
Management at the Technion and an MBA degree from Haifa University.

62

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---

Eugene
Davishas served as a director of Lumenis since April 2007. Since 1997, Mr. Davis
has been Chairman and Chief Executive of Pirinate Consulting Group, LLC a privately-held
consulting firm specializing in turn-around management, merger and acquisition consulting,
hostile and friendly takeovers and strategic planning advisory services. Since forming
Pirinate in 1997, Mr. Davis has advised, managed, sold, liquidated and/or acted as a
Chief Executive Officer, Chief Restructuring Officer, Director, Committee Chairman and/or
Chairman of the Board of a number of businesses. From 1998 to 1999, he served also as
Chief Operating Officer of Total-Tel USA Communications, Inc. a telecommunications
provider. Prior thereto, Mr. Davis was a director of Emerson Radio Corp. from 1990 to
1997, where he served in various executive positions, including Vice Chairman, President
and Executive Vice President. From 1996 to 1997, Mr. Davis served as Chief Executive
Officer and a director (and as Vice Chairman in 1997) of Sports Supply Group, Inc. a
distributor of sporting goods and Athletic equipment. Mr. Davis holds a
bachelors degree in international politics from Columbia College, a masters
degree in international law and organization from the School of International Affairs of
Columbia University and a Juris Doctor degree from Columbia University School of Law.
Mr. Davis is a member of the Texas Bar Association.

Natali
(Tali) Idanhas served as a director of Lumenis since September 2007. He has served as
the Executive Vice President and Chief Financial Officer of Ceragon Networks Ltd. since
August 2004. Prior to joining Ceragon, Mr. Idan was Senior Vice President, Chief
Financial Officer of Floware Wireless Systems Ltd. from 2000 to 2001. From 1993 to 1999,
he served as Executive Vice President and Chief Financial Officer of Tecnomatix
Technologies Ltd., and prior thereto, Mr. Idan was with Optrotech Ltd. (now Orbotech
Ltd.) from 1985 to 1992, where he held several positions in finance, the last one being
Vice President, Finance & Administration of its US subsidiary. Mr. Idan holds a
bachelors degree in accounting and economics from Tel Aviv University, Israel and an
M.B.A. from De Paul University, Chicago, and is a certified public accountant in Israel.

Talia
Livnihas served as a director of Lumenis since December 2006. Since 2002,
Ms. Livni has served as President of Naamat  The Movement for the
Advancement of Status of Women. She served as the legal advisor of the Israeli General
Federation of Labor from 1997 to 2001, as Head of the Human Resources Division of the
Israeli Ministry of Defense from 1992 to 1997, and as Senior Deputy Legal Advisor to the
Israeli Ministry of Defense from 1975 until 1992. Ms. Livni also served as a director
of ECtel Ltd. from January to June 2007. Ms. Livni holds an LLB degree from the
Hebrew University of Jerusalem and a masters degree in social sciences from the
Haifa University. She is also a graduate of the National Security Academy.

# Arrangements for
Election of Directors and Members of Management.

Harel Beit-On,
a member of our board of directors, is also a member of the board of directors of the
general partner of LM Partners L.P. LM Partners L.P., together with its
affiliates, is the beneficial owner of 112,902,986 of our ordinary shares (constituting
approximately 48.86% beneficial ownership of our outstanding share capital). In addition,
Yoav Doppelt, who serves on our board of directors, also serves as Chief Executive Officer
of Ofer Hi-Tech Investments Ltd., which, together with its affiliates, collectively
beneficially own 89,795,897 of our ordinary shares, constituting approximately 39.60% of
our outstanding share capital. (See Major Shareholders in Item 7.A
below.) There are, however, no formal arrangements or understandings pursuant to which any
of our directors or members of senior management were elected as such. There are
furthermore no family relationships among any such directors or members of our senior
management.

# B. Compensation of
Directors and Senior Management.

The
following table presents all compensation we paid during the year ended December 31,
2008 to all persons who served as a director or member of senior management at any time
during the year. The table does not include any amounts we paid to reimburse any of these
persons for costs incurred in providing us with services during this period.

|                                                           | Salaries, Fees,
Commissions and
Cash Bonuses Paid(1) | Pension, Retirement
and Other Similar
Benefits Accrued
|---------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------------------
|
|
|
|
|All directors and members of senior management as a group, |                                                      |                                                       
|consisting of 22 persons(2)                                |                                                      |                                                       

(1) Does not include the grant of stock options.
(2) Comprised 5 directors and 17 members of senior management.

Our
audit committee, board of directors and shareholders, in accordance with the provisions of
the Companies Law, have approved the payment of the following directors fees. However,
effective commencing with the fourth quarter of 2008, our board of directors approved a
15% reduction in the fees payable to a majority of our directors.

63

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|                           | Annual Fee | Per Meeting Fee (1)
|-------------------------- | ---------- | -------------------
|
|
|
|
|Harel Beit-On              |            |                    
|Yoav Doppelt               |            |                    
|Eugene Davis               |            |                    
|Our external directors (2) |            |                    

|(1) | The
per meeting fee is paid for each meeting of the board of directors or any
                    committee thereof in which such director participates, except the
first four                     meetings in each year of service, with partial payment for
telephonic meetings                     and actions taken by the directors by resolution
in lieu of meeting, which                     partial payment is determined pursuant to
the applicable Companies Law                     regulations in the case of external
directors, or upon the same basis as such                     regulations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
current external directors, elected pursuant to the Companies Law, are Talia
                    Livni and Naftali (Tali) Idan.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

During
the year ended December 31, 2008, we granted stock options to purchase an aggregate
of 405,000 ordinary shares of Lumenis to six members of our senior management (namely to
six of the persons who served as members of our senior management at any time during that
year). All such options were granted under our 2007 Share Incentive Plan, with an exercise
price of $1.0722 per share, and all such options expire seven years after grant.
There were no stock option grants in 2008 to any of the other 11 persons who served as a
member of our senior management during 2008 nor to any of our directors.

Members
of our senior management are eligible for bonuses each year. The bonuses are payable upon
meeting objectives and targets that are set by our chief executive officer and approved
annually by our board of directors, who also set the bonus targets for our chief executive
officer.

For
a description of the terms of our stock option and share incentive plans, see Share
Ownership  Stock Option and Share Incentive Plans in Item 6.E below.

# C. Board Practices.

# Introduction.

Our
board of directors presently consists of five members. Pursuant to the Companies Law, the
board of directors retains all of the powers in running our Company that are not
specifically granted to our shareholders. Pursuant to the Companies Law and our articles
of association, a resolution proposed at any meeting of the directors, at which a quorum
is present, shall be adopted if approved by a vote of at least a majority of the directors
present at the meeting. A quorum of directors is at least a majority of the directors then
in office who are lawfully entitled to participate in the meeting (until otherwise
unanimously decided by the directors). The board of directors may elect one director to
serve as the chairman of the board of directors to preside at the meetings of the board of
directors, and may also remove that director as chairman. Minutes of the meetings are
recorded and kept at our offices. The board of directors may, subject to the provisions of
the Companies Law, delegate any or all of its powers to committees, each consisting of one
or more directors (except the audit committee, which must consist of at least three
directors and include all of the external directors), and it may, from time to time,
revoke such delegation or alter the composition of any such committees. Unless otherwise
expressly provided by the board of directors, the committees shall not be empowered to
further delegate such powers. The composition and duties of our audit committee and
compensation committee are described in this Item below. Under the Companies Law, the
board of directors of a public company must hold at least one meeting every three months.

# Terms of Directors.

The
Companies Law and our articles of association provide that directors, other than our
external directors described below, are elected annually at the general meeting of our
shareholders by a vote of the holders of a majority of the voting power represented at
that meeting. In addition, any shareholder or group of shareholders holding at least 12%
of the voting rights in the issued share capital of our Company may cause the election of
a director (see Election of Directors in Item 10.B below). Except for the
external directors, each director serves until the next annual meeting of shareholders
following that meeting of shareholders at which the director was elected. Our external
directors, as further described below, serve a three-year term. The board of directors may
at any time appoint any person as a director (other than as an external director), whether
to fill a vacancy on the board of directors or as an additional member to serve along the
existing directors until the next general meeting of shareholders following the
appointment. At such general meeting, the appointed director may then be elected by
shareholders to continue in office. Our shareholders may remove a director from office,
under certain circumstances. There is no requirement that a director own shares of our
Company.

64

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# External Directors.

Qualifications
of External Directors.

Under
the Companies Law, companies incorporated under the laws of Israel whose shares have been
offered to the public in or outside of Israel are required to appoint at least two
external directors. A person may not be appointed as an external director if he or she or
his or her relative, partner, employer or any entity under his or her control has, as of
the date of the persons appointment to serve as an external director, or had, during
the two years preceding that date, any affiliation with:

| |  | the
company;
| | - | ------------

| |  | any
entity controlling the company; or
| | - | --------------------------------------

| |  | any
entity controlled by the company or by an entity controlling the company.
| | - | -----------------------------------------------------------------------------

The
term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control; and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

The
Companies Law defines the term office holder of a company to include a
director, general manager, chief business manager, deputy general manager, vice general
manager, executive vice president, vice president, other manager directly subordinate to
the general manager or any other person assuming the responsibilities of any of the
foregoing positions, without regard to such persons title.

Our
external directors are Talia Livni, elected at our shareholders meeting held on
November 14, 2006, effective December 5, 2006, and Naftali Idan, elected at our
shareholders meeting held on September 20, 2007 with immediate effect.

Pursuant
to the Companies Law, (1) each external director must have either accounting
and financial expertise or professional qualifications (as such terms
are defined in regulations promulgated under the Companies Law) and (2) at least one
of the external directors must have accounting and financial expertise. These
requirements apply to our external directors. Both Ms. Livni and Mr. Idan posses
the requisite professional qualifications and Mr. Idan also has the requisite
accounting and financial expertise.

The
Companies Law prescribes certain qualifications for external directors, in addition to
those described above, including, that no person can serve as an external director if the
persons position or other business creates, or may create, conflicts of interest
with the persons responsibilities as an external director or may otherwise interfere
with the persons ability to serve as an external director.

A
company may not engage an external director as an office holder and cannot employ or
receive services from that person, either directly or indirectly, including through a
corporation controlled by that person, for a period of two years from the termination of
his or her service as an external director.

In
addition, the Companies Law requires that where all members of the board of directors of a
public company are of one gender, at least one external director must be of the other
gender. We comply with such gender requirement.

Election
and Removal of External Directors.

External
directors are elected by a majority vote at a shareholders meeting, provided that
either:

| | (i) at
least one-third of the shares held by non-controlling shareholders voted at the meeting
are voted in favor of the election of the external director (disregarding abstentions);
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | or
| | --

| | (ii) the
total number of shares held by those shareholders described in clause (i) above
voted against the election of the external director does not exceed one percent (1%) of
the aggregate voting rights in the company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

65

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The
initial term of an external director is three years. Ms. Livnis initial term
will expire in December 2009 and Mr. Idans initial term will expire in
September 2010. Thereafter, because our ordinary shares were offered outside of Israel,
the external directors may be reelected by our shareholders for an additional period of up
to three years each, in each case provided that the audit committee and the board of
directors confirm that, in light of the external directors expertise and special
contribution to the operation of the board of directors and its committees, the reelection
for such additional period is beneficial to the company. External directors can be removed
from office only by the same majority of shareholders that was required to elect them, or
by a court, and in each case, only if they cease to meet the statutory qualifications with
respect to their appointment or if they violate their fiduciary duty to the Company, or in
other specific circumstances identified by a court.

Each
committee of a companys board of directors that has the right to exercise powers
delegated by the board of directors is required to include at least one external director,
except for the audit committee, which is required to include all external directors.

# Directors Service
Contracts.

We
do not have any service contracts with our directors. Our directors are not entitled to
any benefits upon termination of their service as our directors.

# Committees of the Board
of Directors.

Our
board of directors only committees are the audit committee and compensation
committee.

Audit
Committee.

Under
the Companies Law, the board of directors of any Israeli public company must appoint an
audit committee, comprised of at least three directors and including all of the external
directors, but excluding:

| |  | the
chairman of the board of directors;
| | - | ---------------------------------------

| |  | any
controlling shareholder or any relative of a controlling shareholder; and
| | - | -----------------------------------------------------------------------------

| |  | any
director employed by the company or who provides services to the company on a regular
basis.
| | - | ------------------------------------------------------------------------------------------------

The
role of the audit committee is to identify irregularities in the management of the
companys business and to examine accounting, reporting, and financial control
practices, inter alia, in consultation with the internal auditor and the companys
independent accountants, suggest appropriate courses of action to amend such
irregularities, and to exercise the powers of the board of directors with respect to such
practices.

The
approval of the audit committee is required under the Companies Law to effect specified
related party actions and transactions, including transactions with office holders, third
parties in which an office holder has a personal interest, and controlling parties, and
transactions with a third party in which a controlling party has a personal interest. A
controlling party includes for this purpose a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of the voting
rights in the company, but excludes a shareholder whose power derives solely from his or
her position as a director of the company or from any other position with the company. For
the purpose of determining holdings, two or more persons holding voting rights in a
company who each have a personal interest in the approval of the same transaction are
deemed to be one holder. The audit committee may not approve an action or a transaction
with a controlling party or with an office holder unless at the time of approval two
external directors are serving as members of the audit committee and at least one of them
is present at the meeting in which an approval is granted. Audit committee approval is
also required in other instances prescribed by the Companies Law, including approval of
the grant of an exemption from the liability for breach of duty of care towards a company,
or provision of insurance or an undertaking to indemnify any office holder (in advance or
retroactively); or approval of engagements between a company and any of its directors
relating to the service or employment of the director.

Our
audit committee currently consists of Talia Livni, Naftali Idan and Eugene Davis.
Mr. Davis serves as the chairman of our audit committee. The current members of our
audit committee meet the requirements for financial literacy under the applicable rules
and regulations of the SEC and NASDAQ. Our board of directors has determined that each of
Mr. Idan and Mr. Davis (i) is an audit committee financial experts as
defined by the SEC rules; (ii) qualifies as having the accounting and financial
expertise required by the Companies Law; and (iii) has the requisite financial
sophistication set forth in the NASDAQ rules and regulations. Our board of directors has
also determined that each of the members of our audit committee is independent within the
meaning of the independent director standards of NASDAQ and the SEC. While we are not
currently subject to the NASDAQ rules and regulations, our board of directors believes
that the standards employed thereunder with respect to director independence and audit
committee qualification are useful for a company such as ours.

66

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Compensation
Committee.

Our
board of directors has appointed a compensation committee, which: (i) makes
recommendations to the board of directors with respect to the grant of stock options to
officers, other employees, and consultants; (ii) recommends policies regarding
compensation of employees; (iii) approves the compensation (including bonuses) of our
chief executive officer and other members of senior management (for subsequent approval by
our board of directors); as well as (iv) deals with any other unusual compensation
issues. The compensation committee consists of Harel Beit-On, Yoav Doppelt and Talia
Livni.

# Remuneration of
Directors.

Remuneration
of directors requires the approval of our audit committee, our board of directors and our
shareholders (in that order).

Our
external directors are entitled to compensation as provided in regulations promulgated
under the Companies Law and are otherwise prohibited from receiving any other
compensation, directly or indirectly, from the Company.

# Internal Auditor.

Under
the Companies Law, the board of directors of a public company must appoint an internal
auditor proposed by the audit committee. The role of the internal auditor is to examine,
among other things, whether a companys conduct complies with applicable law,
integrity and orderly business procedure. The internal auditor has the right to demand
that the chairman of the audit committee convene an audit committee meeting, and the
internal auditor may participate in all audit committee meetings. Under the Companies Law,
the internal auditor may be an employee of a company but may not be an interested
party, an office holder or a relative of the foregoing, nor may the internal auditor
be the companys independent accountant or its representative. The Companies Law
defines an interested party as the holder of 5% or more of a companys
shares, any person or entity who has the right to designate one or more of a
companys directors, the chief executive officer or any person who serves as a
director or chief executive officer. Ariel Albert, one of our employees, has served as our
internal auditor since January 2004.

# Fiduciary Duties of
Office Holders.

The
Companies Law imposes a duty of care and a duty of loyalty on all office holders of a
company, including directors and officers. The duty of care requires an office holder to
act with the level of care with which a reasonable office holder in the same position
would have acted under the same circumstances. The duty of care includes a duty for an
office holder to use reasonable means to obtain:

| |  | information
regarding the advisability of a given action submitted for his or her approval or
performed by him or her by virtue of his or her position; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to such action.
| | - | ----------------------------------------------------------

The
duty of loyalty of an office holder is a duty to act in good faith and for the benefit of
the company, and includes a duty to:

| |  | refrain
from any conflict of interest between the performance of his or her duties for the
company and his or her personal affairs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
from exploiting any business opportunity of the company to receive a personal gain for
himself        or herself or others; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | disclose
to the company any information or documents relating to a companys affairs that the
office holder has received due to his or her position as an office holder.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Approval
of Specified Related Party Transactions with Office Holders under Israeli Law.

Under
the Companies Law, a company may approve an action by an office holder from which the
office holder would otherwise have to refrain, as described above, if:

| |  | the
office holder acts in good faith, and the act or its approval does not cause harm to the
       company; and
| | - | ----------------------------------------------------------------------------------------------------------------

| |  | the
office holder discloses the nature of his or her interest in the transaction to the
company a reasonable time before the companys approval.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

The
approval of the board of directors is required for all compensation arrangements of office
holders who are not directors, and directors compensation arrangements require the
approval of the audit committee, the board of directors and the shareholders, in that
order.

67

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Each
person listed in the tables under Directors and Senior Management in this Item
above is considered an office holder under the Companies Law.

Disclosure
of Personal Interests of an Office Holder.

The
Companies Law requires that an office holder of a company disclose to the company
promptly, and, in any event, not later than the first board meeting at which the
transaction is discussed, any direct or indirect personal interest that he or she may have
and all related material information known to him or her relating to any existing or
proposed transaction by the company.

If
the transaction is an extraordinary transaction, the office holder must also
disclose any personal interest held by:

| |  | the
office holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of such people; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | any
corporation in which the office holder is a 5% or greater shareholder, director or
general manager or in which he or she has the right to appoint at least one director or
the general manager.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under
the Companies Law, an extraordinary transaction is a transaction:

| |  | other
than in the ordinary course of business;
| | - | ----------------------------------------------

| |  | that
is not on market terms; or
| | - | -------------------------------

| |  | that
is likely to have a material impact on a companys profitability, assets or
liabilities.
| | - | ---------------------------------------------------------------------------------------------

If
a transaction is an extraordinary transaction, first the audit committee and
then the board of directors, in that order, must approve the transaction. Under specific
circumstances, shareholder approval may also be required. A director who has a personal
interest in a transaction that is considered at a meeting of the board of directors or the
audit committee, generally may not be present at such meeting or vote on the matter unless
a majority of the directors or members of the audit committee have a personal interest in
the matter.

Disclosure
of Personal Interests of a Controlling Shareholder.

Under the
Companies Law, the disclosure requirements that apply to an office holder also apply to a
controlling shareholder of a public company. A controlling shareholder includes for this
purpose a shareholder that holds 25% or more of the voting rights in a public company if
no other shareholder owns more than 50% of the voting rights in the company, but excludes
a shareholder whose power derives solely from his or her position as a director of the
company or any other position with the company. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal interest, and
the engagement of a controlling shareholder as an office holder or employee, require the
approval of the audit committee, the board of directors and the majority of the voting
power of the shareholders present and voting at a general meeting of the company, provided
that either:

| |  | at
least one-third of the shares of shareholders who have no personal interest in the
transaction and who are present and voting (in person or by proxy) vote in favor; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | shareholders
who have no personal interest in the transaction who vote against the transaction do not
represent more than one percent of the aggregate voting rights in the company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Consistent
with the provisions of the Companies Law, our articles of association include provisions
permitting us to procure insurance coverage for our office holders, exempt them from
certain liabilities and indemnify them, to the maximum extent permitted by law. Under the
Companies Law, exemption from liability, indemnification of, and procurement of insurance
coverage for, our office holders must be approved by our audit committee and our board of
directors and, in specified circumstances, by our shareholders.

# Exculpation, Insurance
and Indemnification of Directors and Officers.

Consistent
with the provisions of the Companies Law, our articles of association include provisions
permitting us to procure insurance coverage for our office holders, exempt them from
certain liabilities and indemnify them, to the maximum extent permitted by law. Under the
Companies Law, exemption from liability, indemnification of, and procurement of insurance
coverage for, our office holders must be approved by our audit committee and our board of
directors and, in specified circumstances, by our shareholders.

68

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Insurance.

Under
the Companies Law, a company may obtain insurance for any of its office holders for:

| |  | a
breach of his or her duty of care to the company or to another person;
| | - | ------------------------------------------------------------------------

| |  | a
breach of his or her duty of loyalty to the company, provided that the office holder
acted in good faith and had reasonable cause to assume that his or her act would not
prejudice the companys interests; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
financial liability imposed upon him or her in favor of another person concerning an act
performed by such office holder in his or her capacity as an officer holder.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
currently have directors and officers liability insurance providing total
coverage of $30 million for the benefit of all our directors and officers based on an
annual premium of $161,150, which expires August 31, 2009. Such insurance does not
cover our directors and officers in the event that trading in our shares resumes, and,
accordingly, in such event, the terms and coverage of our insurance policy will be
reviewed and the appropriate additional coverage sought. In addition, we have run-off
directors and officers liability insurance providing total coverage of
$30 million for the benefit of our directors and officers in office immediately prior
to our 2006 recapitalization, purchased for a one-time premium of $1.1 million,
expiring December 2012, with respect to actions or omissions occurring in their capacity
as office holders prior to the closing of the 2006 recapitalization.

Indemnification.

The
Companies Law provides that a company may indemnify an office holder against:

| |  | a
financial liability imposed on him or her in favor of another person by any judgment
concerning an act performed in his or her capacity as an office holder;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him or her by a court relating to an act performed in his or her capacity as
an office holder, in connection with: (i) proceedings that the company institutes,
or that another person institutes on the companys behalf, against him or her; (ii) a
criminal charge from which he or she was acquitted; or (iii) a criminal charge in
which he or she was convicted for a criminal offense that does not require proof of
criminal thought; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder as a
result of an investigation or proceeding instituted against him or her by an authority
authorized to conduct such investigation or proceeding, provided that (i) no
indictment (as defined in the Companies Law) was filed against such office holder as a
result of such investigation or proceeding; and (ii) no financial liability as a
substitute for the criminal proceeding (as defined in the Companies Law) was imposed upon
him or her as a result of such investigation or proceeding ,or, if such financial
liability was imposed, it was imposed with respect to an offence that does not require
proof of criminal intent.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
articles of association authorize us to indemnify our office holders to the fullest extent
permitted by law. The Companies Law also authorizes a company to undertake in advance to
indemnify an office holder, provided that if such indemnification relates to financial
liability imposed on him or her, as described above, then the undertaking should be
limited:

| |  | to
categories of events that the board of directors determines are likely to occur in light
of the operations of the company at the time that the undertaking to indemnify is made;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
amount or criterion determined by the board of directors, at the time of the giving of
such undertaking to indemnify, to be reasonable under the circumstances.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have entered into indemnification agreements with all of our directors and with executive
officers. Each indemnification agreement provides the office holder with the maximum
indemnification permitted under applicable law. At the time of our 2006 recapitalization,
our then-serving directors and executive officers were parties to indemnification
agreements with us in the form previously approved by us. Upon the closing of the 2006
recapitalization, all directors and officers, including both our newly elected directors
and the directors whose term of service expired, entered into a new form of
indemnification agreement that applies to directors and officers who were also parties to
our pre-existing indemnification agreements, but only in the event that the pre-existing
indemnification agreements are found invalid.

Exemption.

Under
the Companies Law, an Israeli company may not exempt an office holder from liability for a
breach of his or her duty of loyalty, but may exempt in advance an office holder from his
or her liability to the company, in whole or in part, for a breach of his or her duty of
care (other than in relation to distributions). Our articles of association provide that
we may exempt any office holder from liability to us to the fullest extent permitted by
law. Under the indemnification agreements, we exempt and release our office holders from
any and all liability to us related to any breach by them of their duty of care to us to
the fullest extent permitted by law.

69

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Limitations.

The
Companies Law provides that we may not exempt or indemnify an office holder nor enter into
an insurance contract that would provide coverage for any liability incurred as a result
of any of the following: (a) a breach by the office holder of his or her duty of
loyalty unless, (in the case of indemnity or insurance only, but not exemption) the office
holder acted in good faith and had a reasonable basis to believe that the act would not
prejudice us; (b) a breach by the office holder of his or her duty of care if the
breach was carried out intentionally or recklessly (as opposed to merely negligently);
(c) any action taken with the intent to derive an illegal personal benefit; or
(d) any fine levied against the office holder.

The
foregoing descriptions are general summaries only, and are qualified entirely by reference
to the full text of the Companies Law, as well as of our articles of association and our
form of indemnification agreement, which are exhibits to this annual report and are
incorporated herein by reference.

# D. Employees.

The
following table sets forth certain data concerning our workforce (excluding temporary
employees), as at the end of each of the last three fiscal years:

|                                             | As at December 31,
|-------------------------------------------- | ------------------
|
|
|
|
|Numbers of employees by category of activity |                   
|Management and administrative                |                   
|Research and development                     |                   
|Operations                                   |                   
|Sales and marketing                          |                   
|Service                                      |                   
|Sales support                                |                   
|                                             |                   
|Total workforce                              |                   
|                                             |                   
|Numbers of employees by geographic location  |                   
|Israel                                       |                   
|North & South America                        |                   
|Europe                                       |                   
|Japan                                        |                   
|China & Asia Pacific                         |                   
|                                             |                   
|Total workforce                              |                   
|                                             |                   

---

During
the years covered by the above table, we did not employ a significant number of temporary
employees.

The
reduction in the size of our workforce in 2008 was primarily the result of a
cost-reduction plan initiated by us in November 2008.

We
are subject to Israeli labor laws and regulations with respect to our Israeli employees.
These laws principally concern matters such as pensions, paid annual vacation, paid sick
days, length of the workday and work week, minimum wages, overtime pay, insurance for
work-related accidents, severance pay and other conditions of employment. Our employees
are not represented by a labor union. We consider our relationship with our employees to
be good. To date, we have not experienced any work stoppages.

The
employees of our subsidiaries are subject to local labor laws and regulations that vary
from country to country.

# E. Share Ownership.

Although
two of our directors, Harel Beit-On and Yoav Doppelt, are officers or directors of our
major shareholders and/or their affiliates, such individuals disclaim beneficial ownership
of any of the shares held by these major shareholders or their affiliates (except to the
extent of their respective pecuniary interest therein). For details of shares held
by major shareholders, see Major Shareholders in Item 7.A below.

70

---

---

The
following table includes, as of June 21, 2009, the number of our shares owned, and
stock options held, by each of our directors, our chief executive officer and others
members of our senior management as a group.

|Name                                                                                         | Shares of Lumenis (1) | Lumenis stock options (3)
|-------------------------------------------------------------------------------------------- | --------------------- | -------------------------
|
|
|
|
|Harel Beit-On                                                                                |                       |                          
|Yoav Doppelt                                                                                 |                       |                          
|Naftali (Tali) Idan                                                                          |                       |                          
|Talia Livni                                                                                  |                       |                          
|Eugene Davis                                                                                 |                       |                          
|                                                                                             |                       |                          
|Dov Ofer                                                                                     |                       |                          
|All other members of
senior management listed
in Item 6.A above, as 
group (consisting of 10 |                       |                          
|persons)                                                                                     |                       |                          

---

|* | Beneficially
owns less than 1% of our outstanding shares.
|- | ---------------------------------------------------------

|(1) | All
of our shares (including shares held by directors and members of senior
                    management) have identical voting rights.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(2) | In
accordance with Rule 13d-3 under the Exchange Act, percentages shown for
                    individual persons or groups include any stock options held by such
person or                     group that were exercisable for Lumenis shares within 60
days of June 21,                     2009. Further in keeping with such Rule 13d-3,
computation of percentage                     ownership is based upon Lumenis shares
outstanding at June 21, 2009, plus                     such number of Lumenis shares
as such person or group (but not any other person                     or group) had the
right to receive upon the exercise of stock options within 60                     days
thereof.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | For
a description of Lumeniss stock option plans, please see Stock
                    Option and Share Incentive Plans in this Item below.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Each
stock option is exercisable for one ordinary share.
|--- | --------------------------------------------------------

|(5) | Stock
options granted to Mr. Beit-On are held by him in trust for the
                    benefit of the general partner of LM Partners L.P. See Item 7.A                     Major
Shareholders, below for details concerning shares and warrants
                    held by LM Partners L.P.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Percentage
adjusted to reflect effect of the issuance of shares in the 2009
                    Equity Financing.
|--- | -----------------------------------------------------------------------------------------------------------------

|(7) | Pursuant
to the terms of the option awards to Dov Ofer, the exercise price of
                    such options was reduced from the initial $1.0722 per share to an
exercise price                     per share equivalent to the effective price per share
paid by the Investors                     under the 2006 Purchase Agreement, after giving
effect to the adjustments                     resulting from the Post Closing Adjustment
Provisions set forth in such                     agreement. See Recapitalization
and Equity Financing  2006                     Recapitalization  Shares
Adjustments Related to Litigation Outcome                    in Item 4.A
above.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Weighted
average exercise price for all such options is approximately $1.12 per
                    share.
|--- | ----------------------------------------------------------------------------------------------------------

# Stock Option and Share
Incentive Plans.

The
following sets forth certain information with respect to our current stock option and
share incentive plans. The following description is only a summary of the plans and is
qualified in its entirety by reference to the full text of the plans, which are exhibits
to this annual report and are incorporated herein by reference.

All
of our stock option and share incentive plans are administered by our board of directors.
Upon the expiration of the plans, no further grants may be made thereunder, although any
existing awards will continue in full force in accordance with the terms under which they
were granted. Options granted under any of the plans may not expire later than ten years
from the date of grant, although, in recent years, options grants have generally provided
for an expiration date of seven years from the grant date.

71

---

---

As
regards US resident employees, all of the plans (other than the Israel
2003 Share Option Plan) provide for the grant of options that are
qualified, as defined by the U.S. Internal Revenue Code of 1986, as amended,
and options that are not qualified.

1999 Share
Option Plan.

In
November 1999, our board of directors adopted our 1999 Share Option Plan (the
1999 Plan), which was approved by our shareholders in May 2000 and was
subsequently amended in May 2003. The 1999 Plan will expire in November 2009. Our
directors, officers, employees and certain consultants and dealers are eligible to
participate in this plan.

2000 Share
Option Plan.

In
July 2001, we adopted our 2000 Share Option Plan (the 2000 Plan), which
was subsequently amended and restated in May 2005, and was most recently amended in
September 2006. The 2000 Plan will expire in July 2011. Our directors, officers, employees
and certain consultants and dealers are eligible to participate in this plan. Pursuant to
the May 2005 amendment, Israeli grantees who are directors, officers and employees of
Lumenis may be granted options under the 2000 Plan that qualify for special tax treatment
under the capital gains route provisions of Section 102(b)(2) of the
Israeli Income Tax Ordinance (the ITO). Pursuant to such
Section 102(b)(2), qualifying options and shares issued upon exercise of such options
are held in trust and registered in the name of a trustee selected by the board of
directors. The trustee may not release these options or shares to the holders thereof
before the second anniversary of the registration of the options in the name of the
trustee. The Israeli Tax Authority (the ITA), has approved this plan as
required by applicable law. The 2000 Plan also permits the grant to Israeli grantees of
options that do not qualify under Section 102(b)(2). In addition to the grant of
awards under the relevant tax regimes of the United States and Israel, the 2000 Plan
contemplates grant of awards to grantees in other jurisdictions.

Israel
2003 Share Option Plan.

In
March 2003, our board of directors adopted our Israel 2003 Share Option Plan (the
2003 Israel Plan), which was approved by our shareholders in May 2003. The
2003 Israel Plan expires in March 2013. Only our directors, officers and employees who are
residents of Israel are eligible to participate in this plan. Options may be granted under
the 2003 Israel Plan that qualify under the capital gains route provisions of
Section 102(b)(2) of the ITO (see above under 2000 Share Option
Plan) and this plan has been approved by the ITA.

2007 Share
Incentive Plan.

In
January 2007, our board of directors approved and adopted our 2007 Share Incentive Plan
(the 2007 Plan), which expires in January 2017. In September 2007, our board
of directors amended this plan by increasing the number of shares reserved for the
exercise of options granted under the plan from 10,000,000 to 11,500,000. In December
2007, the 2007 Plan, as amended, was approved by our shareholders. Our employees,
directors, officer, consultants, advisors, suppliers and any other person or entity whose
services are considered valuable to us are eligible to participate in this plan. The 2007
Plan provides for the grant of awards consisting of stock options, restricted stock, and
other share-based awards (including cash and stock appreciation rights). This plan
provides for the grant to residents of Israel of options that qualify under the provisions
of Section 102 of the ITO (see under 2000 Share Option Plan, above),
as well as for the grant of options that do not qualify under such provisions. The 2007
Plan has been approved by the ITA. In addition to the grant of awards under the relevant
tax regimes of the United States and Israel, the 2007 Plan contemplates grant of awards to
grantees in other jurisdictions, with respect to which our board of directors is empowered
to make the requisite adjustments in the plan.

The
following table presents certain option data information for the above-described plans as
at June 21, 2009:

|Plan             | Ordinary Shares
Reserved
for Option Grants | Aggregate Number of
Options Exercised | Shares Available
for
Future Grants | Aggregate Number
of Options
Outstanding | Weighted Average
Exercise Price of
Outstanding
Options
|---------------- | ------------------------------------------ | ------------------------------------- | ---------------------------------- | --------------------------------------- | ------------------------------------------------------
|
|
|
|
|1999 Plan        |                                            |                                       |                                    | 5,000,000                               |                                                       
|2000 Plan        |                                            |                                       |                                    | 11,500,000                              |                                                       
|2003 Israel Plan |                                            |                                       |                                    | 2,000,000                               |                                                       
|2007 Plan        |                                            |                                       |                                    | 11,500,000                              |                                                       
|                 |                                            |                                       |                                    |                                         |                                                       
|Totals           |                                            |                                       |                                    | 30,000,000                              |                                                       
|                 |                                            |                                       |                                    |                                         |                                                       

72

---

---

On
January 4, 2008, we filed a registration statement on Form S-8 to register the
issuance of ordinary shares under the above plans to directors, officers, employees and
eligible consultants.

|ITEM 7. |  | MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
|------- |  | --------------------------------------------------

# A. Major Shareholders.

# Ownership of Major Shareholders.

The
following table presents as of June 29, 2009 (unless otherwise noted below) the
beneficial ownership of our ordinary shares by each person who is known by us to be the
beneficial owner of 5% or more of our outstanding ordinary shares (whom we refer to as our
Major Shareholders). The data presented is based on information provided to us
by the holders or disclosed in public filings with the SEC.

Beneficial
ownership of shares is determined under rules of the SEC and generally includes any shares
for which a person exercises sole or shared voting or investment power. The table below
includes the number of shares underlying options, warrants or other convertible securities
that are exercisable or convertible within 60 days after June 29, 2009. Shares
issuable upon the exercise or conversion of such options, warrants or other convertible
securities are deemed to be outstanding for the purpose of computing the ownership
percentage of the person or group holding such options, warrants or other convertible
securities, but are not deemed to be outstanding for the purpose of computing the
ownership percentage of any other person or group. The percentage of outstanding ordinary
shares is based on 215,335,424 ordinary shares outstanding as of June 29, 2009
(excluding 35,527 shares of treasury stock).

Except
where otherwise indicated, and except pursuant to community property laws, we believe,
based on information furnished by such owners, that the beneficial owners of the shares
listed below have sole investment and voting power with respect to such shares. The
shareholders listed below do not have any different voting rights from any of our other
shareholders. We know of no arrangements that would, at a subsequent date, result in a
change of control of our Company.

|Beneficial Owner                                                                         | Shares | Options or
Warrants
Exercisable
within 60
Days | Total
Beneficial
Ownership | Percentage
Ownership
|---------------------------------------------------------------------------------------- | ------ | ---------------------------------------------- | -------------------------- | --------------------
|
|
|
|
|LM Partners L.P.(1) and affiliates, including Harel Beit-On                              |        |                                                |                            |                     
|Delta House, 16 Abba Eban Avenue,
46725 Herzliya Pituach, Israel                         |        |                                                |                            | 97,162,188          
|                                                                                         |        |                                               
|Ofer Hi-Tech Investments Ltd.(2) and affiliates                                          |        |                                               
|9 Andre Saharov Street,                                                                  |        |                                               
|31905 Haifa, Israel                                                                      |        |                                                |                            | 78,346,240          
|                                                                                         |        |                                               
|Bank Hapoalim B.M.(3)
23 Menachem Begin Street, Migdal Levinstein
66183 Tel Aviv, Israel |        |                                                |                            | -                   

---

|(1) | The
beneficial ownership by LM Partners L.P. (LM Partners) of our
          ordinary shares consists of:
|--- | ----------------------------------------------------------------------------------------------------------

| | (a)
97,147,188 shares held directly by LM Partners of which:
| | ------------------------------------------------------------

| | (i) 70,047,566 shares
were purchased on December 5, 2006 pursuant to the 2006 Purchase Agreement and/or
via the exercise of some of the Additional Warrants granted in connection therewith;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) 8,537,690
shares were purchased on June 4, 2007 via the exercise of remaining Additional
Warrants granted in connection with the 2006 Purchase Agreement;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) 13,743,750
shares were issued on March 18, 2009 under the post closing share adjustment
provisions of the 2006 Purchase Agreement (the Post Closing Adjustment Provisions)
(See Recapitalization and Equity Financing  2006 Recapitalization  Shares
Adjustments Related to Litigation Outcomein Item 4.A above); and (iv) 4,818,182
shares were purchased on June 25, 2009 pursuant to the 2009 Equity Financing;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)
15,000 shares held by the estate of the late Mr. Aharon Dovrat, the father of Mr. Shlomo
Dovrat, an affiliate of LM Partners;
| | ---------------------------------------------------------------------------------------------------------------------------------

| | (c)
11,936,707 shares issuable upon the exercise of the Closing Warrants granted in
connection with the 2006 Purchase Agreement and held by LM Partners, all of which are
currently exercisable;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

73

---

---

| | (d) 2,409,091 shares issuable upon the
exercise of the 2009 Warrants granted to LM Partners in connection with the 2009 Equity
Financing, all of which are currently exercisable ;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) 1,360,000 shares
issuable upon the exercise of options held by Mr. Beit-On, Chairman of our board of
directors, in trust for the benefit of the general partner of LM Partners that are
currently exercisable or exercisable by Mr. Beit-On within 60 days of June 29,
2009; and
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) 35,000
shares issuable upon the exercise of options granted to the late Mr. Aharon Dovrat
during his service as a member of our board of directors, all of which are currently
exercisable by the estate of Mr. Aharon Dovrat.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | LM
Partners is a limited partnership formed under the laws of the Cayman Islands. Mr. Beit-On,
Mr. Shlomo Dovrat, Mr. Avi Zeevi and Mr. Eylon Penchas hold indirect
interests in, and are directors in, and/or shareholders of, various entities that are the
general partners of LM Partners and may be deemed to be the beneficial owners of the
shares held by LM Partners. Mr. Beit-On, Mr. Shlomo Dovrat, Mr. Zeevi
and Mr. Penchas disclaim beneficial ownership of the shares held by LM Partners
except to the extent of their respective pecuniary interests therein. LM Partners and the
individuals and entities that control it are part of a group generally known as Viola
Partners.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
beneficial ownership by Ofer Hi-Tech Investments Ltd.  (Ofer           Hi-Tech)
of our ordinary shares consists of:
|--- | -------------------------------------------------------------------------------------------------------------------------

| | (a) 74,227,964
shares held directly by Ofer Hi-Tech, of which:
| | --------------------------------------------------------------

| | (i) 46,633,091
shares were purchased on December 5, 2006 pursuant to the 2006 Purchase Agreement;
| | -------------------------------------------------------------------------------------------------

| | (ii) 12,908,871
shares were purchased on June 4, 2007 via the exercise of Additional Warrants
granted in connection with the 2006 Purchase Agreement;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) 10,413,275
shares were issued on March 18, 2009 under the Post Closing Adjustment Provisions;
and (iv) 4,272,727 shares were purchased on June 25, 2009 pursuant to the 2009
Equity Financing; (Of the above 74,227,964 shares, 8,695,584 shares are held by Ofer
Hi-Tech in trust for certain third parties pursuant to a trust agreement dated as of
September 30, 2006 (the Trust Agreement);
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) 438,310
shares held directly by Lynav Holdings Ltd., an affiliate of Ofer Hi-Tech, of which
373,065 shares were purchased on June 4, 2007 via the exercise of Additional
Warrants granted in connection with the 2006 Purchase Agreement and transferred to Lynav
Holdings Ltd. by an affiliated entity, and 65,245 shares were issued on March 18,
2009 under the Post Closing Adjustment Provisions;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) 3,679,966
shares held by third parties with respect to which Ofer Hi-Tech shares voting power under
the provisions of a Voting and Option Agreement dated August 31, 2007, under which
such third parties have agreed to vote all shares held by them in favor of or in
opposition to any resolution proposed for adoption at any meeting of our shareholders in
the manner voted by Ofer Hi-Tech. Pursuant to said Voting and Option Agreement, Ofer
Hi-Tech has granted such third parties an option to purchase 2,038,925 of the Lumenis
shares held by it;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) 9,313,293 shares
issuable upon the exercise of Closing Warrants held by Ofer Hi-Tech (of which, warrants
for 1,062,500 shares are held by Ofer Hi-Tech in trust for certain third parties
pursuant to the Trust Agreement), all of which are currently exercisable; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) 2,136,364
shares issuable upon the exercise of the 2009 Warrants held by Ofer Hi-Tech (of which,
warrants for 238,637 shares are held by Ofer Hi-Tech in trust for certain third parties
pursuant to the Trust Agreement), all of which are currently exercisable.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ofer
Hi-Tech is an indirect wholly owned subsidiary of Ofer Holdings Group Ltd., a company of
which Orona Investments Ltd. and Lynav Holdings Ltd. are each the direct owners of
one-half of the outstanding ordinary shares. All four of the said companies are
incorporated under the laws of the State of Israel. Orona Investments Ltd. is indirectly
owned 78% by Mr. Udi Angel,   who also indirectly owns 100% of the means of control
of Orona Investments Ltd. Lynav Holdings Ltd. is held 95% by CIBC Bank and Trust Company
(Cayman) Ltd., as trustee of an irrevocable trust established in the Cayman Islands.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Mr. Yoav
Doppelt, a director of Lumenis, is the chief executive officer of Ofer Hi-Tech.
| | ----------------------------------------------------------------------------------------

|(3) | The
beneficial ownership of our ordinary shares by Bank Hapoalim B.M. consists
          solely of shares issuable upon the exercise of warrants held by the Bank. For
          details of theses warrants, see Liquidity & Capital Resources           Restructuring
of Bank Debt in Item 5.B above.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Changes in Percentage
Ownership of Major Shareholders.

In
December 2006, as a result of the purchase of shares under the 2006 Purchase Agreement and
the exercise of certain Additional Warrants issued in connection therewith, the Investors
under the 2006 Purchase Agreement, LM Partners and Ofer Hi-Tech, acquired initial equity
interests of approximately 45.5% and 30.3%, respectively, in our Company. In June 2007,
following the exercise of further Additional Warrants by the Investors under the 2006
Purchase Agreement, the holdings of LM Partners and Ofer Hi-Tech, were approximately 44.4%
and 33.6%, respectively. In March 2009, the holdings of LM Partners and Ofer Hi-Tech,
increased to approximately 45.8% and 34.7%, respectively, as a result of the issuance of
additional shares under the Post Closing Adjustment Provisions of the 2006 Purchase
Agreement (See Recapitalization and Equity Financing  2006 Recapitalization
 Shares Adjustments Related to Litigation Outcome in Item 4.A above). In
June 2009, as a result of the issuance of shares under the 2009 Purchase Agreements, the
shareholdings of LM Partners and Ofer Hi-Tech decreased slightly to approximately 45.1%
and 34.5%, respectively. The said holdings of Ofer Hi-Tech include shares held by Ofer
Hi-Tech in trust for third parties, but exclude shares held by affiliates. (The
computation of percentages in this paragraph is solely based upon issued ordinary shares
and excludes any Lumenis shares that the respective shareholders had the right to receive
upon the exercise by them of warrants or stock options.)

74

---

---

Immediately
prior to implementation of Post Closing Adjustment Provisions under the 2006 Purchase
Agreement in March 2009, Bank Hapoalim B.M. held warrants for the purchase of 9,411,300 of
our shares, which then constituted approximately 5.1% of our outstanding shares, assuming
exercise of such warrants by the Bank. As a consequence of dilution resulting from the
implementation of such adjustment provisions, the Bank ceased to be a beneficial owner of
5% or more of our shares. However, on June 30, 2009, the terms of the warrants held
by the Bank were modified, pursuant to which the number of shares issuable thereunder
increased by 2,500,000, and the Bank again became a beneficial owner of 5% or more of our
shares. (See Liquidity & Capital Resources  Restructuring of Bank
Debt in Item 5.B above.)

# Record Holders.

Based
upon a review of the information provided to us by our transfer agent and the issuance of
shares pursuant to the 2009 Equity Fianancing, there were, as of June 29, 2009, 941
holders of record of our shares, of which 718 record holders holding 36,887,373, or
approximately 17.13%, of our outstanding shares had registered addresses in the United
States. These numbers are not representative of the number of beneficial holders of our
shares nor is it representative of where such beneficial holders reside, since many of
these shares were held of record by brokers or other nominees. As of the said date, CEDE
& Co, the nominee company of the Depository Trust Company, held of record 36,524,117
of our outstanding ordinary shares on behalf of an estimated 120 firms of U.S. brokers and
banks, who in turn held such shares on behalf of several thousand clients and customers.

# B. Related Party
Transactions.

Equity Financing by Major
Shareholders.

On June 25, 2009, we completed
the 2009 Equity Financing, thereby consummating a private placement of our ordinary shares
in consideration of an aggregate equity investment of $15 million in our Company. Our
two major shareholders, LM Partners and Ofer Hi-Tech, were among the parties that
entered into the 2009 Purchase Agreements with us and participated in the equity
investment in amounts of $5.3 million and $4.7 million, respectively. Pursuant
to the 2009 Purchase Agreements, LM Partners and Ofer Hi-Tech purchased,
respectively, 4,818,182 and 4,272,727 of our shares at a price of $1.10 per share and were
granted by us warrants (the 2009 Warrants) to purchase, respectively,
2,409,091 and 2,136,364 of our shares at an exercise price of $1.30 per share. For a
discussion of this transaction, see Recapitalization and Equity Financing 
2009 Equity Financing in Item 4.A above.

Registration Rights
Agreement and Amendment.

In December 2006, contemporaneously
with the closing of the 2006 Purchase Agreement and the Restructuring Agreement, we
entered into a Registration Rights Agreement (the Registration Rights
Agreement) with LM Partners, Ofer Hi-Tech and the Bank to provide certain
registration rights to them, and their respective assignees. On June 25, 2009,
contemporaneously with the closing of the 2009 Purchase Agreements, we entered into an
amendment to the Registration Rights Agreement (the Registration Rights Agreement
Amendment), pursuant to which (i) Agate Medical Investments L.P. and Agate
Medical Investments (Cayman) L.P. (together Agate), a new investor
participating in the 2009 Equity Financing, by execution of Joinders, became a party to
the Registration Rights Agreement, and (ii) the shares issued in the 2009 Equity
Financing and the shares issuable upon exercise of the 2009 Warrants became subject to the
rights granted under the Registration Rights Agreement. (For details of 2006 Purchase
Agreement, the 2009 Purchase Agreements and the Restructuring Agreement, see
Recapitalization and Equity Financing in Item 4.A above and
Liquidity & Capital Resources  Restructuring of Bank Debt in
Item 5.B above.)

The
registration rights provided under the Registration Rights Agreement, as amended by the
Registration Rights Agreement Amendment, relate to the following shares:

| |  | The
shares acquired at the closing under the 2006 Purchase Agreement;
| | - | ---------------------------------------------------------------------

| |  | The
shares acquired at the closing of the 2009 Equity Financing;
| | - | ----------------------------------------------------------------

| |  | The
shares issued upon the exercise of the Additional Warrants granted pursuant to the 2006
Purchase        Agreement;
| | - | ----------------------------------------------------------------------------------------------------------------------

75

---

---

| |  | The
shares issuable upon the exercise of the Closing Warrants granted pursuant to the 2006
Purchase        Agreement;
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | The
shares issuable upon the exercise of the 2009 Warrants;
| | - | -----------------------------------------------------------

| |  | The
shares issuable upon the exercise of the warrants held by the Bank;
| | - | -----------------------------------------------------------------------

| |  | Additional shares issued or issuable pursuant to the Post Closing Adjustment Provisions
under the 2006 Purchase Agreement (see Recapitalization and Equity Financing 
2006 Recapitalization Shares Adjustments Related to Litigation Outcome in
Item 4.A above.) or the 2009 Purchase Agreements with Agate; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Any
other shares issuable in respect of any of the foregoing shares pursuant to any stock
split, stock dividend, reclassification or similar adjustment events.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

All
the above shares are collectively referred to in this annual report as the
registrable shares.

Demand
Registration Rights.  In general, holders of a majority of the then
outstanding registrable shares may demand that a registration statement be filed to
register the resale of their shares (subject to the exclusions contained in the
Registration Rights Agreement, as amended).

Piggyback
Registration Rights.  If we were to effectuate a primary or secondary
offering of securities (except on Form S-8 or a registration relating solely to
a Rule 145 transaction on Form F-4), the holders of registrable shares have a
right to include their registrable shares under the related registration statement.

Shelf
Registration Rights.  Holders of at least 10% of the registrable shares, and
in certain circumstances, the Bank and Agate alone, may demand that a registration
statement be filed for an offering to be made on a delayed or continuous basis pursuant to
Rule 415 of the Securities Act, to register the resale of their shares upon such time
as we have registered our ordinary shares under Section 12(g) of the Exchange Act. If
six shelf registration statements have been filed pursuant to the shelf registration
rights set forth in the agreement and declared effective by the SEC, then holders shall no
longer have any shelf registration rights.

Subsequent
Registration Rights.  Without the consent of the holders of at least 60% of
the registrable shares then held by the holders, we may not grant or agree to grant
registration rights superior to those granted under the Registration Rights Agreement, as
amended. Commencing twelve months after the date of the agreement, we may file a
registration statement for an offering to be made on a delayed or continuous basis
pursuant to Rule 415 of the Securities Act registering the resale from time to time
of securities, provided that at such time holders under the Registration Rights Agreement
are given the opportunity to include their registrable shares in such registration. In
addition, (a) after the earlier of (x) five years after the date of the
Registration Rights Agreement and (y) such time as the holders own, in the aggregate,
less than 45% of the registrable shares, we may grant demand registration rights without
the consent of the holders as set forth above, provided that such demand rights may not be
exercised prior to such time that we have effected at least one demand registration under
the Registration Rights Agreement, and (b) at such time as the holders own, in the
aggregate, less than 25% of the then outstanding registrable shares, we may grant demand
registration rights without the consent of the holders.

Obligations
of the Company.  The Company has undertaken customary obligations in the
Registration Rights Agreement, as amended, including, but not limited to, the preparation
and filing of any required amendments to registration statements, furnishing of
prospectuses and registration and qualification of the securities under applicable Blue
Sky laws. We are required to pay all fees and expenses incident to the registration of the
resale of the registrable shares.

Under
the Registration Rights Agreement, as amended, we have agreed to indemnify each of the
other parties, and they have agreed to indemnify us, against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.

The
foregoing is only a summary and is qualified in its entirety by reference to the full text
of the Registration Rights Agreement and Registration Rights Agreement Amendment, which
are exhibits to this annual report and are incorporated herein by reference.

Issuance of Additional Shares to
Major Shareholders Related to Outcome of Litigation.

The 2006 Purchase Agreement includes
Post Closing Adjustment Provisions whereby the amount of Purchased Shares issued
to Investors under that agreement  and their assignees, and the amount of shares issued as
a result of the exercise of the Additional Warrants, would be adjusted, and the exercise
price of the Closing Warrants would automatically be reduced, to take account for all
losses, indemnities, liabilities and expenses exceeding, or not otherwise covered by, our
insurance coverage in connection with the then concluded investigation by the SEC and
certain litigation, including a securities class action, the settlement of which was
approved by the court in August 2008. (For details, see Recapitalization and Equity
Financing  2006 Recapitalization  Shares Adjustments Related to Litigation
Outcome in Item 4.A above, and Legal Proceedings  Securities Class
Action Complaints in Item 8.A below.) On March 18, 2009, on the first
implementation of the Post Closing Adjustment Provisions (i) we issued 24,466,936
shares to the Investors under the 2006 Share Purchase Agreement and certain assignees and
(ii)  the exercise price of the Closing Warrants was reduced from $1.1794 per share
to $1.0039 per share.

76

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Pulsar Welding Ltd.

During
the first and second quarters of 2008, we paid Pulsar Welding Ltd. (Pulsar),
an Israeli private company, approximately $10,000 for services rendered in the fourth
quarter of 2007 and first quarter of 2008 in connection with certain technological
feasibility tests. Mr. Harel Beit-On, chairman of our board of directors, is a
director and holder (directly or indirectly) of more than 5% beneficial ownership in
Pulsar, and affiliates of LM Partners L.P., one of our major shareholders, hold beneficial
ownership interests of more than 5% in Pulsar. Neither Mr. Beit-On nor LM Partners
nor its affiliates (other than Pulsar) were involved in rendering the aforementioned
services or in any related discussions.

Agam T.E.F.E.N Ltd.

During
2008, we paid Agam T.E.F.E.N Ltd. (Agam), an Israeli private company,
approximately $400,000 for our purchase of raw material in the ordinary course of
business, pursuant to a commercial agreement between Agam and us. Mr. Beit-On,
chairman of our board of directors, and other affiliates of LM Partners are holders
(directly and indirectly) of more than 5% beneficial ownership in Plenus Mezzanine
Management Limited Partnership, an Israeli limited partnership, and Plenus Mezzanine 2006
Ltd., an Israeli private company, which are, respectively, the general partner and the
management company of the Plenus Mezzanine Fund. Mr. Beit-On also serves as a
director of Plenus Mezzanine 2006 Ltd. Agam is controlled by the Plenus Mezzanine Fund.
Neither Mr. Beit-On nor LM Partners nor its affiliates (other than Agam) were
involved in the transaction for the sale of the said raw material or in any related
discussions.

Exculpation,
Indemnification and Insurance of our Office Holders.

Our
articles of association permit us to exculpate, indemnify and insure our office holders to
the fullest extent permitted by the Companies Law. We have entered into agreements with
each of our officer holders, exculpating them from a breach of their duty of care to us to
the fullest extent permitted by law and undertaking to indemnify them to the fullest
extent permitted by law. See Board Practices  Exculpation, Insurance and
Indemnification of Directors and Officers in Item 6.C above.

Pursuant
to the 2006 Purchase Agreement, several of our current officers and directors are entitled
to the benefit of a run-off insurance policy for the coverage of certain liability in
connection with actions or omissions.

Directors and Senior
Management Stock Options.

Each
of our current directors and each member of our senior management has received stock
options for the purchase of Lumenis shares. See Item 6.B  Compensation of
Directors and Senior Management above.

# C. Interests of Experts
and Counsel.

Not
Applicable

|ITEM 8. |  | FINANCIAL
INFORMATION.
|------- |  | ----------------------

# A. Consolidated
Statements and Other Financial Information.

The
consolidated financial statements and other financial information required by
Regulation S-X are included in this annual report beginning on page F-1.

# Export Sales.

The
following table presents total export sales for each of the fiscal years indicated (in
thousands of U.S. dollars):

|                               | 2008 | 2007 | 2006
|------------------------------ | ---- | ---- | ----
|
|
|
|
|Total Export Sales*            |      |      | $   
|as a percentage of Total Sales |      |      |     

* Export sales, as presented, are defined as sales to customers located outside of Israel.

77

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# Legal Proceedings.

We
are a party to various legal proceedings incident to our business. Except as noted below,
there are no legal proceedings pending or threatened against us that we believe are likely
to have a material adverse impact on our business, financial condition, operating results
or cash flows.

Civil
Proceedings By SEC.

In
February 2002, we received a request from the SEC to voluntarily provide certain documents
and information for a period commencing January 1, 1998. The request primarily
related to our relationships with distributors, and also asked for amplification of our
explanation of certain previously disclosed charges and write-downs. In May 2002, the SEC
issued a formal order of investigation on these matters, including as to whether, in
connection therewith, we, in prior periods, may have overstated revenues and related
income and failed to maintain proper books and records and a proper system of internal
controls. On February 18, 2004, the law firm of Debevoise & Plimpton LLP
rendered a report on behalf of our audit committee that concluded that our revenue
recognition was inappropriate with respect to certain transactions during the fiscal years
ended December 31, 2001, December 31, 2002 and December 31, 2003. On
April 26, 2006, the SEC brought a civil proceeding against us and against Sagi
Genger, our former Chief Operating Officer, and Kevin Morano, our former Chief Financial
Officer and Senior Vice President for Marketing and Business Development, both of whom are
no longer employed by us. Mr. S. Genger is the son of Arie Genger, one of our
former directors and former Vice Chairman of our board of directors. The civil proceeding
sought, among other things, an injunction against us, alleging violations of the antifraud
and other provisions of the U.S. federal securities laws in connection with
inappropriately recognizing revenue in our 2001, 2002 and 2003 financial statements.
Concurrently with filing the civil action, on April 26, 2006, the SEC approved a
settlement with us and Mr. S. Genger.

As
part of that settlement, we entered into a consent order with the SEC, without admitting
or denying the allegations, pursuant to which we consented to the entry of a permanent
civil injunction against future violations of the antifraud, reporting, books and records
and internal control provisions of the federal securities laws and related SEC rules. The
consent order also disqualified us from benefiting from the protection of the safe harbor
provisions under the Private Securities Litigation Reform Act of 1995 with respect to
forward-looking statements that we made during the three-year period following our entry
into the consent order, which period expired on April 26, 2009.

As
part of that settlement, Mr. S. Genger consented, without admitting or denying
the allegations, to the entry of (i) a permanent civil injunction against future
violations of the antifraud, reporting, books and records and internal control provisions
of the federal securities laws and related SEC rules, (ii) an order to pay a civil
monetary penalty of $75,000 and (iii) an order prohibiting him from serving as an
officer or director of a publicly traded company for five years. We did not pay
Mr. S. Gengers penalty or reimburse him for it.

In
addition, as part of the settlement, the SEC revoked the registration of our shares
registered under Section 12 of the Exchange Act. As a result of the deregistration,
our shares were not permitted to be quoted or publicly traded in the United States on a
national securities exchange or elsewhere until we re-registered our shares with the SEC.
We have since reregistered our shares under Section 12 of the Exchange Act and our
ordinary shares are eligible once again for quotation or trading in the United States.
However, our ordinary shares remain unquoted and no trading has commenced on a national
securities exchange, and we are not aware of any other trading in our shares. We cannot
assure you that our shares will be approved for quotation or trading on any securities
exchange or that trading will recommence.

Under
the terms of their indemnification agreements, Mr. Morano and Mr. S. Genger
were entitled to indemnification to the fullest extent permitted by law, including advance
of expenses up to the higher of (i) $250 million or (ii) 50% of the market
value of the outstanding ordinary shares prior to the occurrence giving rise to the
indemnifiable event. See Board Practices  Exculpation, Insurance and
Indemnification of Directors and Officers in Item 6.C above.

See also Recapitalization and
Equity Financing  2006 Recapitalization  Shares Adjustments Related to
Litigation Outcome in Item 4.A above, for a discussion of the Post Closing
Adjustment Provisions, under which we are required to issue additional shares to certain
shareholders and the exercise price for certain warrants is reduced as a result of the
losses, indemnities, liabilities and expenses associated with this investigation and
related litigation exceeding, or not otherwise covered by, our insurance coverage.

Securities
Class Action Complaints.

On
June 17, 2003, the U.S. District Court for the Southern District of New York
consolidated nine purported class action complaints filed against us and several former
officers and directors during 2002, and appointed lead plaintiffs counsel and lead
counsel (In re Lumenis, Ltd. Securities Litigation, 02 Civ. 1989
(S.D.N.Y.)(DAB)). On August 29, 2003, lead counsel filed a consolidated amended class
action complaint (CAC), which expanded the alleged class period to cover a
period from October 2, 2000 to May 16, 2002, made new substantive allegations of
alleged securities fraud, and added the then-Vice Chairman of our board of directors, Arie
Genger, as an additional defendant solely on a controlling person theory of liability.
(The CAC continued to name the then-Chairman of our board of directors, Jacob Frenkel, and
former officers Yacha Sutton, Sagi Genger and Asif Adil as defendants.).

78

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On
November 19, 2003, all defendants except Mr. Adil moved to dismiss the CAC on
grounds, among others, of failure to state a claim on which relief can be granted, failure
to plead fraud with particularity, and, in material part, statute of limitations. By
separate counsel, Mr. Adil moved to dismiss on grounds of insufficient service of
process. On March 4, 2005, while the motions to dismiss the CAC remained pending, the
lead plaintiffs sought leave to amend the CAC and to pursue discovery. On March 17,
2005, the Court denied the request to conduct discovery but stated that plaintiffs were
authorized to amend their complaint. On June 10, 2005, lead plaintiffs filed their
Second Amended Consolidated Class Action Complaint (SAC).

On
April 3, 2008, following lengthy mediator-assisted negotiations between the parties
that began in March 2007, approval of our audit committee, board of directors and
shareholders pursuant to the Companies Law, and agreements with our primary and two excess
layer directors and officers liability insurers (the D&O Insurers), we
entered into a Stipulation of Settlement with lead plaintiffs counsel pursuant to
which this class action litigation would be settled and dismissed with prejudice against
us and the other defendants, subject to Court approval. On May 7, 2008, the Court
issued an Order Preliminarily Approving Settlement and Providing Notice, which
preliminarily approved the Stipulation for Settlement, and on August 25, 2008, the
Court issued a Final Judgment and Order of Dismissal with Prejudice approving the
settlement (the Settlement) and dismissal of the class action litigation.
Pursuant to the Settlement, an amount of $20,100,000 was paid into a Settlement Fund, and
of such amount, we directly contributed $2,736,000 toward the Settlement, and the D&O
Insurers collectively contributed the remaining $17,364,000. Furthermore, as part of the
agreement for the Settlement, and subject thereto, we agreed to forgive our primary
D&O Insurer approximately $1,645,000 that it would have otherwise owed to us for
reimbursement of defense fees that we had advanced.

The
Settlement approved by the Court provided for the filing of a third amended and
consolidated class action complaint (TAC) naming the same defendants as are
named in the SAC and incorporating additional allegations and claims based on those
alleged in the SEC civil action referred to above. The TAC amended and enlarged the class
definition to include persons who purchased our shares at any time between October 2,
2000 and March 7, 2006 (the Settlement Class Period). The purchasers of
our shares during the Settlement Class Period constitute the Settlement Class. Excluded
from the Settlement Class were the following: all defendants; the members of individual
defendants immediate families; all individuals who are either current officers
and/or directors, or who served as officers and directors of Lumenis or its subsidiaries
at any time during the Settlement Class Period; any person, firm, trust, corporation, or
entity in which any defendant has a controlling interest or any entity that is related to,
or affiliated with, any defendant; and the legal representatives, agents, affiliates,
heirs, successors and assigns of any such excluded persons.

The
Stipulation of Settlement provided for the suit to proceed as a class action on behalf of
the Settlement Class, and the Court entered an order certifying the Settlement Class for
purposes of this settlement only.

In
its order, as amended, among other things, the Court also approved a form and method of
giving notice to the members of the Settlement Class and set a date (45 days after the
conclusion of the settlement hearing) by which proofs of claim had to be submitted by
members of the Settlement Class who did not opt-out of the Settlement Class and who wished
to participate in the Settlement Fund.

In
addition to the above class action litigation, seventeen purchasers of our shares between
September 2001 and February 2002 originally filed a complaint in the Northern District of
Illinois in February 2003, which was transferred to the Southern District of New York,
where it has been assigned as a related case to the judge who is presiding over the
above-described consolidated class action cases (Aqua Fund, L.P., et al. v. Lumenis
Ltd., et al., 04 Civ. 2239 (S.D.N.Y.)(DAB)). The amended complaint alleged that we and
two former officers, Mr. Sutton and Mr. S. Genger, made material
misrepresentations and/or omissions about our financial results and projections of future
earnings due, among other reasons, to the alleged improper recognition of revenue, and
that defendants also overstated the benefits and the success of our acquisition of CMG.

All
of the Aqua Fund plaintiffs were included in the Settlement Class as defined above, and
none of such plaintiffs opted out from being included as part of the Settlement Class.
Therefore, pursuant to a motion filed by the Company with the Court, and as stipulated
between the parties thereto, the Aqua Fund case was dismissed with prejudice on
January 27, 2009.

See
also Recapitalization and Equity Financing  2006 Recapitalization 
Shares Adjustments Related to Litigation Outcome in Item 4.A above for a
discussion of additional shares issuable to certain shareholders and the reduction in the
exercise price of certain warrants in order to account for losses, indemnities,
liabilities and expenses exceeding, or not otherwise covered by, our insurance coverage in
connection with certain litigation, including the securities class action.

79

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Lawsuit
by Theodore Steliotes.

On
April 7, 2006 Theodore Steliotes filed a lawsuit in the Court of Common Pleas of
Washington County, Pennsylvania against Coherent, Inc. regarding the sale of equipment by
Coherent, Inc. to the plaintiff. The plaintiff was seeking damages in excess of
$ 1.0 million for various causes of action including fraud, negligent
misrepresentation, negligence, breach of warranty and breach of contract. As part of our
2001 acquisition of the medical division of Coherent, Inc., we undertook to defend and
indemnify Coherent against such claims. The matter was settled to the full satisfaction of
the parties on April 3, 2009, upon payment by us of a non-material amount, and the
case was dismissed accordingly.

Lawsuit
by Gerald Coursley.

On
April 24, 2008, Dr. Gerald Coursley filed a complaint against Lumenis Inc. in
the Superior Court of Santa Clara, California for breach of written contract and for
breach of implied covenant of good faith and fair dealing with respect to a Settlement
Agreement (the Agreement) executed by the parties in 2004 arising out of
Dr. Coursleys dissatisfaction with his VascuLight that he purchased in 1999.
Dr. Coursley asserted that we breached the Agreement by failing to deliver parts and
training to which he was entitled under the Agreement. He alleged damages in excess of
$1 million. The matter was settled to the full satisfaction of the parties on
April 20, 2009, upon payment by us of a non-material amount, and the case was
dismissed accordingly.

Lawsuit
by CardioFocus, Inc. for Alleged Patent Infringement.

On
July 20, 2006 CardioFocus, Inc. filed a lawsuit against us in the United States
District Court for the District of Massachusetts. The case alleged that we willfully
infringed three United States patents. We filed an Answer and Counterclaims on
January 2, 2007, and CardioFocus, Inc. replied to the Counterclaims on
January 19, 2007. We asked the Court to bifurcate for trial and separate discovery
regarding the issues of patent ownership, license and whether we have a release from
liability. As part of that request, we asked the Court to stay discovery and trial of all
other claims. On April 5, 2007, the Court granted our motion. On December 19,
2007 the parties entered into a Settlement Agreement that contains confidential terms,
releases of claims and the dismissal of the action. On February 4, 2008, the
stipulation for dismissal of the action was filed by the court.

Lawsuit
by Dr. William P. Young for Alleged Patent Infringement.

On
July 23, 2003, Dr. William P. Young, a veterinarian, filed a patent infringement
lawsuit against Lumenis, Inc. in the United States District Court for the Southern
District of Ohio claiming that we were inducing veterinarians to infringe his Unites
States Patent Number 6,502,579. In November 2005, the court held claims 1-5 of the subject
patent invalid as a matter of law. Claim 6 remained at issue. We filed several motions to
have the remainder of the case dismissed. On March 28, 2006, the court granted two of
our motions for summary judgment. The court dismissed Youngs claim of induced
infringement for the only remaining patent claim, claim 6, and held the patent
unenforceable due to inequitable conduct during the re-examination of the patent. Young
appealed the invalidity and unenforceability decisions but not the non-infringement
holding. A hearing was held on February 9, 2007, and a decision was rendered by the
US Court of Appeals for the Federal Circuit on June 27, 2007 wherein the court
reversed the District Courts decisions regarding the judgment of invalidity and the
grant of summary judgment of patent unenforceability. On December 21, 2007 the
parties entered into a Settlement Agreement that contains confidential terms, releases of
claims and the dismissal of the action. On January 10, 2008, the stipulation for
dismissal of the action with prejudice was filed with the court.

Lawsuits
against Alma Lasers.

On
June 28, 2007, we filed a lawsuit for patent infringement against Alma Lasers Ltd.
and Alma Lasers, Inc. in the U.S. District Court for the Northern District of Illinois
claiming that Almas light-based cosmetic treatment systems, including the Harmony
platform, infringe seven of our U.S. patents. We also alleged that Almas activities
constitute willful infringement of these patents. In this lawsuit, we are seeking an
injunction against further infringement as well as monetary damages.

On
March 26, 2008, we filed a complaint in the Tel Aviv District Court in Israel against
Alma Lasers Ltd and its four founders, Ziv Karni, Yoav Avni, Nadav Bayer, and Ivgeni
Kodritzki, all former employees of Lumenis, claiming misappropriation of our trade secrets
and technology and the use of such technology in Almas primary Harmony products,
which are sold worldwide. We have requested (i) relief from the court in the form of
an injunction against the use of such core technology by Alma in its products and
(ii) monetary damages in the amount of 200 million shekels based on the profits
earned by Alma and its founders from the utilization of our technology. We also requested
from and obtained leave of the U.S. District Court where the infringement action referred
to above was filed to file an amended complaint to include a cause of action for
misappropriation of trade secrets against Alma Lasers, Inc. The complaints allege that
certain core components of Almas Harmony products are virtually identical to Lumenis
components that were developed around the time the Alma founders departed from Lumenis,
and that the designs and technology related to such components were misappropriated by one
or more of Almas founders and utilized in the development and manufacture of
Almas Harmony products. The claim further alleges that Alma has earned significant
revenues from the sale of Harmony products, profits that were unjustly earned as a result
of the use of Lumenis technology, and that Almas founders were recently paid
substantial amounts by TA Associates as part of an investment agreement in Alma, profits
that resulted from value created by Lumenis technology.

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Administrative
Subpoena from U.S. Department of Commerce.

In
or about March 2006, we received an Administrative Subpoena from the Office of Export
Enforcement, Bureau of Industry and Security, U.S. Department of Commerce. The
subpoena sought documents concerning the export of U.S. origin commodities, directly
or indirectly, to the United Arab Emirates or the Islamic Republic of Iran. The
U.S. Government could have assessed a penalty against our U.S. subsidiary,
Lumenis, Inc., because of certain unlicensed exports or reexports to Iran of devices and
associated spare parts and accessories originating with Lumenis, Inc. Exports from the
United States to Iran are subject to two separate sets of regulations, one administered by
the U.S. Department of Commerce and the other administered by the
U.S. Department of the Treasury. We cooperated fully with the
U.S. Governments investigation that was administered by the Commerce
Department, and in October 2006, we submitted a full report of the matter to the Commerce
Department. Upon reviewing the report, the Commerce Department provided verbal
notification to our outside counsel that it was closing its investigation and was not
recommending the imposition of any penalty. In March 2007, we submitted a full report to
the Treasury Department where the matter is now under review. The Commerce
Departments determination not to take further action does not preclude the Treasury
Department from making its own determination that a penalty should be imposed.

Assessment
from the Israel Tax Authority, or ITA.

In
or about October 2005, we received a notice from the ITA assessing income taxes for the
fiscal years ended December 31, 2000 and 2001 in the amount of
NIS 309 million (approximately $78 million based on the June 25, 2009
exchange rate), including interest and penalties. The assessment is primarily based on an
attempt by the ITA to disallow the exemption available for our Approved Enterprises under
the Investment Law, which would then subject our income to the full statutory income tax
rate in those years, by claiming that our audited statutory financial statements submitted
for those years are incomplete. In addition, the ITA assessed tax on an alleged deemed
dividend to a wholly-owned subsidiary out of tax exempt earnings under ourAapproved
Enterprise program for the same period. We have filed an appeal notice with the District
Court in Haifa, Israel against the ITA assessment. The trial on this matter is scheduled
for November 2009. We believe that the entire assessment is in error and that no tax is
due, and we intend to vigorously defend our position in the Israeli courts and under
applicable tax treaties. We believe that we should prevail in this dispute, but cannot
assure you, however, that we will prevail.

Lawsuit
by the Manufacturers Association of Israel.

On
February 26, 2008, the Manufacturers Association of Israel, or MAI, filed a lawsuit
in the Tel-Aviv Regional Labor Court in Israel against us, claiming NIS 450,000
(approximately $133,000 based on the June 23, 2008 exchange rate) plus interest and
linkage to the Israeli Consumer Price Index, for payment of dues for the years 2003
through 2008, even though we are not a member of the MAI. The matter was settled to the
full satisfaction of the parties on March 17, 2009, upon payment by us of a
non-material amount, and the case was dismissed accordingly.

Miscellaneous
Lawsuits.

We
are also a defendant in various product liability lawsuits in which our products are
alleged to have caused personal injury to certain individuals who underwent treatments
using our products and to certain claims alleging that we are in breach of contract with
certain customers. We are also parties to various employment claims in some of the regions
in which we operate. We are defending these claims vigorously, maintain insurance against
the product liability claims and believe that these claims individually or in the
aggregate are not likely to have a material adverse impact on our business, financial
condition, operating results or cash flows.

# Dividend Policy.

We
have never paid cash dividends on our ordinary shares and do not anticipate that we will
pay any cash dividends on our ordinary shares in the foreseeable future.

We
intend to retain our earnings to finance the development of our business. Any future
dividend policy will be determined by our board of directors based upon conditions then
existing, including our earnings, financial condition, tax position and capital
requirements, as well as such economic and other conditions as the board may deem
relevant. Pursuant to our articles of association, dividends may be declared by the board
of directors. Dividends must be paid out of our profits and other surplus funds, as
defined in the Companies Law, as of the end of the most recent year or as accrued over a
period of the most recent two years, whichever is higher, provided that there is no
reasonable concern that payment of a dividend will prevent us from satisfying our existing
and foreseeable obligations as they become due. In addition, because we have received
certain benefits under the Israeli law relating to Approved Enterprises, our payment of
dividends may be subject to certain Israeli taxes to which we would not otherwise be
subject. Furthermore, pursuant to the terms of financing agreements, we are restricted
from paying dividends to our shareholders. In the event that we declare cash dividends, we
may pay those dividends in shekels.

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Dividends
paid out of income derived from an Approved Enterprise under Israeli law are subject to a
15% withholding tax. Approved Enterprises may receive exemption from Israeli tax for up to
10 years. See Israeli Tax Considerations and Government Programs  
The Law for the Encouragement of Capital Investments in Item 4.B above. Should
dividends be paid out of income earned by us from an Approved Enterprise during the tax
exempt period, such income will be subject to tax at the rate of up to 25%.

# B. Significant Changes.

No
significant change, other than as otherwise described in this annual report, has occurred
in our operations since the date of our consolidated financial statements included in this
annual report.

|ITEM 9. |  | THE
OFFER AND LISTING.
|------- |  | ----------------------

# A. Listing Details.

The
following table sets forth, for the periods indicated, the reported high and low closing
sale prices per share for our ordinary shares, as reported by NASDAQ for the NASDAQ
National Market prior to February 6, 2004, and as quoted on the Pink Sheets
Electronic Quotation Service (the Pink Sheets) from February 6, 2004
until April 26, 2006.

|               | Sales Prices
|-------------- | ------------
|
|
|
|
|2004 Annual    |             
|2005 Annual    |             
|2006 Annual    |             
|2007 Annual    |             
|2008 Annual    |             
|2009 (to date) |             

Our
ordinary shares, par value NIS 0.01 per share, are registered on the books of
our transfer agent, American Stock Transfer and Trust Company. There are no transfer
restrictions apart from the requirement that any transfers comply with applicable
securities laws and the rules of applicable securities exchanges. See Markets
in Item 9.C below.

# B. Plan of Distribution.

Not
Applicable.

# C. Markets.

Our
ordinary shares were first listed and began trading on The NASDAQ National Market on
January 24, 1996 under the ticker symbol ESCMF. On September 17,
1999, our shares began trading under the ticker symbol ESM, and on
September 24, 2001, following approval by the Israel Registrar of Companies of the
new name, Lumenis Ltd., our shares began trading under the ticker symbol LUME.
On February 6, 2004, our ordinary shares were delisted from the NASDAQ National
Market and transferred to the Pink Sheets. On April 26, 2006, the SEC revoked the
registration of our shares under Section 12 of the Exchange Act and, although on
May 1, 2007, we filed a registration statement under the said Section 12 for the
re-registration of our shares, which resulted in our ordinary shares once again becoming
eligible for quotation or trading in the United States, our shares have not been listed on
any national securities exchange or quoted on any system since April 26, 2006.

# D. Selling Shareholders.

Not
Applicable.

# E. Dilution.

Not
Applicable.

82

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|F. | Expenses
of the Issue.
|-- | ----------------------

Not
Applicable.

|ITEM 10. |  | ADDITIONAL INFORMATION.
|-------- |  | -----------------------

A. Share Capital.

Not
applicable

B. Memorandum and Articles
of Association.

# Purposes and Objects of
the Company.

We
are a public company registered under Israels Companies Law as Lumenis Ltd.,
registration number 52-004255-7. Pursuant to our memorandum of association, we were formed
for the purpose of engaging in the research, development, manufacture, marketing, sale,
import and export of high output electrical energy systems, systems that will produce
other forms of energy, products that are based on high output technologies, performing
various corporate activities permissible under Israeli law, and engaging in any field that
the management of the company may decide from time to time.

On
February 1, 2000, the Companies Law, 1999-5759, or the Companies Law, came into
effect and superseded most of the provisions of Israels Companies Ordinance (New
Version), 5743-1983, except for certain provisions that relate to bankruptcy, dissolution
and liquidation of companies.

# The Powers of the
Directors.

Under
the provisions of the Companies Law and our articles of association, the management of the
business of the Company shall be vested in our board of directors, which may exercise all
such powers and do all such acts and things as the Company is authorized to exercise and
do. For certain approval requirements, disclosure obligations and limitation on
participation of members in board meetings, see Fiduciary Duties of Officer
Holders  Approval of Related Party Transactions Under Israeli Law in
Item 6.C  Board Practices in this Item above.

The
authority of our directors to enter into borrowing arrangements on our behalf is not
limited, except to the same degree as any other transaction into which we may enter.

Our
articles of association do not impose any mandatory retirement or age-limit requirements
on our directors and our directors are not required to own shares in our Company in order
to qualify to serve as directors.

# Rights Attached to
Shares.

Our
authorized share capital consists of 900,000,000 ordinary shares of a nominal value of
NIS 0.1 each. All outstanding ordinary shares are validly issued, fully paid and
non-assessable. The rights attached to the ordinary shares are as follows:

Dividend
Rights. Our board of directors may, in its discretion, declare that a
dividend be paid pro rata to the holders of ordinary shares. Dividends must be paid out of
our profits and other surplus funds, as defined in the Companies Law, as of the end of the
most recent year or as accrued over a period of two years, whichever is greater, provided
that there is no reasonable concern that payment of a dividend will prevent us from
satisfying our existing and foreseeable obligations as they become due.

Voting
Rights. Holders of our ordinary shares have one vote for each ordinary
share held on all matters submitted to a vote of shareholders. Shareholders may vote at a
shareholder meeting either in person or by proxy. Such voting rights may be affected by
the grant of any special voting rights to the holders of a class of shares with
preferential rights that may be authorized in the future.

The
Companies Law imposes certain duties on our shareholders. A shareholder, in exercising his
or her rights and performing his or her obligations to our other shareholders and us, must
act in good faith and in an acceptable manner, and avoid abusing his or her powers. This
duty is required when voting at general meetings on matters such as changes to our
articles of association, increases to our registered capital, mergers and related party
transactions. A shareholder also has a general duty to refrain from depriving any other
shareholder of his or her rights as a shareholder. In addition, any controlling
shareholder, any shareholder who knows that his or her vote can determine the outcome of a
shareholder vote and any shareholder who, under our amended and restated articles of
association, can appoint or prevent the appointment of an office holder, is required to
act fairly towards the Company. The Companies Law does not specifically define the duty of
fairness, but provides that the remedies generally available upon a breach of contract
will apply also in the event of a breach of the duty to act with fairness. There is no
binding case law that addresses this subject directly. Any voting agreement among
shareholders is also subject to observance of these duties.

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# Election of Directors.

Pursuant
to our articles of association, our directors are elected by the holders of a simple
majority of our ordinary shares present and voting at a general shareholder meeting. See
Item 6.C  Board Practices above. Our ordinary shares do not have
cumulative voting rights for this purpose. As a result, holders of our ordinary shares
that represent more than 50% of the voting power represented at a shareholder meeting at
which a quorum is present have the power to elect any or all of our directors whose
positions are being filled at that meeting, subject to the special approval requirements
for external directors described under Board Practices  External
Directors in Item 6.C above.

In
addition, any shareholder or group of shareholders of the Company holding at least twelve
percent (12%) of the voting rights of the issued share capital of the Company (a
12% Group) may request that the board of directors include in the agenda
of the next general meeting in which directors are due to be elected to the board of
directors, one (1) nominee designated by such 12% Group. The request must be
delivered to the Secretary of the Company not later than 40 days and not more than
one hundred and twenty (120) days prior to the foregoing general meeting. Such
nominee for election as director at the general meeting may not be submitted to the
shareholders if at least 75% of the then-serving directors resolve that his/her nomination
is not in the best interests of the Company. A nominee of a 12% Group shall be deemed
elected if such election is approved by the affirmative vote of either (i) a majority
of the voting power present and voting in person or by proxy at the general meeting or
(ii) all of the members of the 12% Group. In the event that the election of such
nominee(s) is approved under clause (ii), such election shall be deemed effective
regardless of the results of the vote by all shareholders present and voting in person or
by proxy at the general meeting.

LM
Partners L.P. holds 45.12% of our outstanding ordinary shares (excluding treasury shares)
and Ofer Hi-Tech Investments Ltd. holds 34.47% of our outstanding ordinary shares
(excluding treasury shares), which, under the above 12% provisions, would enable them to
elect 3 and 2 of our directors, respectively, except that the election of our external
directors requires compliance with the special approval requirements described in
Board Practices  External Directors in Item 6.C above. The Company
has not to date received a request from any 12% Group for the election of nominees
based upon the said 12% provisions.

# Annual and Special
Meetings.

Our
board of directors must convene an annual general meeting of shareholders at least once
every calendar year, within fifteen months of the last annual general meeting.

A
special general meeting of shareholders may be convened by the board of directors, as it
decides. In addition, our board of directors is required to convene a special general
meeting of our shareholders at the request of (i) two directors or one-quarter of the
members of our board of directors, or (ii) one or more holders of 5% or more of our
share capital and 1% of our voting power, or the holder or holders of 5% or more of our
voting power.

Notices.

Under
our articles of association, notice of general meetings must be given to shareholders only
to the extent required and in accordance with any mandatory provisions of the Companies
Law and the regulations thereunder.

Quorum.

The
quorum required for a general meeting of our shareholders consists of at least two
shareholders present in person or represented by proxy who hold or represent, in the
aggregate, more than one-third of the voting rights of our issued share capital. A meeting
adjourned for lack of a quorum generally is adjourned to the same day in the following
week at the same time and place or any time and place as the chairman of our board of
directors determines. At the reconvened meeting, if the original meeting was convened upon
requisition under the Companies Law, the required quorum consists of one or more
shareholders, present in person or by proxy, and holding the number of shares required for
making such requisition, and, in any other reconvened meeting, the quorum that is required
is any two members present in person or by proxy (regardless of how many shares held
thereby).

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Adoption of Resolutions.

Subject
to the provisions of the Companies Law or as specifically set forth in our articles of
association (for example, see Election of Directors in this Item above), a
shareholders resolution , such as a resolution for an amendment to our articles of
association, shall be deemed adopted if approved by the holders of a majority of the
voting power represented at a shareholders meeting, in person or by proxy, and voting
thereon. Under the Companies Law a resolution to voluntarily wind up the Company requires
approval by holders of 75% of the voting rights represented at a shareholders meeting, in
person or by proxy, and voting on the resolution.

Rights
to Share in the Companys Profits. Our shareholders have the right to
share in our profits distributed as a dividend or via any other permitted distribution.
See Rights Attached to Shares  Dividend Rights, in this Item above.

Rights
to Share in Surplus in the Event of Liquidation. In the event of our
liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to the nominal value of their
holdings. This right may be affected by the grant of preferential dividend or distribution
rights to the holders of a class of shares with preferential rights that may be authorized
in the future.

Limited
Liability. The Company is a limited liability company and therefore each
shareholders liability for the Companys obligations shall be limited to the
payment of the par value of the shares held by such shareholder, subject to the provisions
of the Companies Law.

Limitations
on Any Existing or Prospective Major Shareholder. See Board Practices 
Approval of Specified Related Party Transactions with Office Holder Under Israeli
Law in Item 6.C above.

# Changing Rights Attached
to Shares.

Under
our articles of association, in order to change the rights attached to any class of
shares, unless otherwise provided by the terms of the class, such change must be adopted
by a general meeting of our shareholders and by a separate general meeting of the holders
of the affected class, in each case via a simple majority of the voting power
participating in such meeting.

# Limitations on the
Rights to Own Securities in Our Company.

Neither
our memorandum of association or our articles of association nor the laws of the State of
Israel, restrict in any way the ownership or voting of shares by non-residents, except
with respect to subjects of countries that are in a state of war with Israel.

# Provisions Restricting
Change in Control of Our Company.

The
Companies Law requires that mergers between Israeli companies be approved by the boards of
directors of, and, unless certain requirements described under the Companies Law are met,
general meeting of shareholders of, both parties to the transaction. If the approval of a
general meeting of the shareholders is required, merger transactions may be approved by
holders of a simple majority of our shares present, in person or by proxy, at a general
meeting and voting on the transaction. In determining whether the required majority has
approved the merger, if shares of the company are held by the other party to the merger,
or by any person holding at least 25% of the outstanding voting shares or 25% of the means
of appointing directors of the other party to the merger, then a vote against the merger
by holders of the majority of the shares present and voting, excluding shares held by the
other party or by such person, or anyone acting on behalf of either of them, is sufficient
to reject the merger transaction. If the transaction would have been approved but for the
exclusion of the votes of certain shareholders as provided above, a court may still
approve the merger upon the request of holders of at least 25% of the voting rights of a
company, if the court holds that the merger is fair and reasonable, taking into account
the value of the parties to the merger and the consideration offered to the shareholders.

The
approval of the boards of directors of both companies is subject to such boards
determination that considering the financial position of the merging companies, in its
opinion no reasonable concern exists that after the merger the surviving company will be
unable to fulfill its obligations towards its creditors. Each company must notify its
creditors about a contemplated merger. Upon the request of a creditor of either party to
the proposed merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that as a result of the merger the surviving company will be
unable to satisfy the obligations of any of the parties to the merger. The approval of the
merger by the general meetings of shareholders of the companies may also be subject to
additional approval requirements as specified in the Companies Law and regulations
promulgated thereunder (such as approval by the antitrust authorities). In addition, a
merger may not be completed unless at least (i) 50 days have passed from the
time that the requisite merger proposals have been filed with the Israeli Registrar of
Companies by each merging company and (ii) 30 days have passed since the merger
was approved by the shareholders of each merging company.

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The
Companies Law also provides that an acquisition of shares in a public company must be made
by means of a tender offer if, as a result of the acquisition, the purchaser would become
a 25% or greater shareholder of the company. This rule does not apply if there is already
another 25% or greater shareholder of the company. Similarly, the Companies Law provides
that an acquisition of shares in a public company must be made by means of a tender offer
if, as a result of the acquisition, the purchaser would become a 45% or greater
shareholder of the company, unless there is already a 45% or greater shareholder of the
company. These requirements do not apply if, in general, the acquisition (1) was made
in a private placement that received shareholder approval, (2) was from a 25% or
greater shareholder of the company, which thereby resulted in the acquirer becoming a 25%
or greater shareholder of the company, or (3) was from a 45% or greater shareholder
of the company, which thereby resulted in the acquirer becoming a 45% or greater
shareholder of the company. A tender offer must be extended to all shareholders, but the
offeror is not required to purchase more than 5% of the subject companys outstanding
shares, regardless of how many shares are tendered by shareholders. A tender offer may be
consummated only if (i) at least 5% of the subject companys outstanding shares
will be acquired by the offeror and (ii) the number of shares tendered in the offer
exceeds the number of shares whose holders objected to the offer.

If,
as a result of an acquisition of shares, the acquirer will hold more than 90% of a
companys outstanding shares, the acquisition must be made by means of a tender offer
for all of the outstanding shares. If less than 5% of the outstanding shares are not
tendered in the tender offer, all of the shares that the acquirer offered to purchase will
be transferred to it. The Companies Law provides for appraisal rights if any shareholder
files a request in court within three months following the consummation of a full tender
offer. If more than 5% of the outstanding shares are not tendered in the tender offer,
then the acquiror may not acquire shares in the tender offer that will cause his
shareholding to exceed 90% of the outstanding shares.

Israel
tax law treats stock-for-stock acquisitions between an Israeli company and another company
less favorably than does U.S. tax law. For example, Israeli tax law may, under
certain circumstances, subject a shareholder who exchanges his or her ordinary shares for
shares in another corporation to taxation prior to the sale of the shares received in such
stock-for-stock swap.

Pursuant
to our 1999 Share Option Plan, 2000 Share Option Plan, and Israel
2003 Share Option Plan, in the event of a change of control, all options then held by
our directors, our chief executive officer and other executive officers reporting directly
to the chief executive officer will become exercisable with respect to the entire number
of ordinary shares underlying such options.

# Changes in Our Capital.

Changes
in our capital are subject to the approval of our shareholders at a general meeting by a
simple majority of the votes of shareholders participating and voting in the general
meeting.

The
foregoing description includes only a summary of certain provisions of our Memorandum and
Articles of Association and is qualified in its entirety by reference to the full text of
such documents, which is are exhibits to this annual report and are incorporated herein by
reference.

C. Material Contracts.

We
have not entered into any material contract, other than contracts entered into in the
ordinary course of business, or as otherwise described herein in Item 4.A 
History and Development of the Company above, Item 4.B 
Business Overview above or Item 7.B  Related Party
Transactions above.

D. Exchange Controls.

There
are currently no Israeli currency control restrictions on payments of dividends or other
distributions with respect to our ordinary shares or the proceeds from the sale of the
shares, except for the obligation of Israeli residents to file reports with the Bank of
Israel regarding certain transactions. However, legislation remains in effect pursuant to
which currency controls can be imposed by administrative action at any time.

The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect
to citizens of countries that are in a state of war with Israel, is not restricted in any
way by our memorandum of association or articles of association or by the laws of the
State of Israel.

E. Taxation.

The
following is a short summary of certain provisions of the tax environment to which
shareholders may be subject. This summary is based on the current provisions of tax
law. To the extent that the discussion is based on new tax legislation that has not
been subject to judicial or administrative interpretation, we cannot assure you
that the views expressed in the discussion will be accepted by the appropriate tax
authorities or the courts.

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This
discussion does not address all of the tax consequences that may be relevant to all
purchasers of our ordinary shares in light of each purchasers particular
circumstances and special tax treatment. For example, the discussion below does not
cover the tax treatment of residents of Israel and traders in securities who are
subject to special tax regimes. As individual circumstances may differ, holders of
our ordinary shares should consult their own tax adviser as to the United States,
Israeli or other tax consequences of the purchase, ownership and disposition of
ordinary shares. The following is not intended, and should not be construed, as
legal or professional tax advice and is not exhaustive of all possible tax
considerations. Each individual should consult his or her own tax or legal adviser.

# Israeli Taxation
Considerations.

Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents
of Israel, as defined for Israeli tax purposes, and on the sale of assets located in
Israel, including shares of Israeli companies, by both residents and non-residents of
Israel unless a specific exemption is available or unless a tax treaty between Israel and
the shareholders country of residence provides otherwise.

Israeli resident individuals.

Commencing
as of January 1, 2006, the tax rate applicable to real (non-inflationary) capital
gains derived from the sale of shares, whether listed on a stock market or not, is 20% for
Israeli individuals, retroactive from January 1, 2003, unless such shareholder claims
a deduction for interest and linkage differences expenses in connection with the purchase
and holding of such shares, in which case the gain will generally be taxed at a rate of
25%. Additionally, if such shareholder is considered a significant shareholder
at any time during the 12-month period preceding such sale, the tax rate will be 25%. A
significant shareholder is generally a person who alone, or together with such
persons relative or another person who collaborates with such person on a permanent
basis, holds, directly or indirectly, at least 10% of any of the means of
control of the corporation. Means of control generally include the right
to vote, receive profits, nominate a director or an officer, receive assets upon
liquidation, or order someone who holds any of the aforesaid rights how to act, and all
regardless of the source of such right.

Israeli
individual residents are generally subject to Israeli income tax on the receipt of
dividends paid on our ordinary shares (other than bonus shares or share dividends), which
is withheld at the source at 20%, or 25% for a shareholder that is a significant
shareholder at any time during the 12-month period preceding such distribution (i.e.
such shareholder holds directly or indirectly, including jointly with others, at least 10%
of any means of control in our Company). Dividends paid from income derived from our
Approved Enterprise are subject to withholding at the rate of 15%, although we cannot
assure you that we will designate the profits that are being distributed in a way that
will reduce our shareholders tax liability.

Israeli resident corporations.

Currently
our shares are not listed for trading on any stock market. The tax rate applicable to
capital gains derived by Israeli resident corporations from the sale of shares of an
Israeli company whose shares are not listed on a stock market, such as our Company, is 25%
(unless the following paragraph applies).

The
tax rates applicable for Israeli resident corporations on capital gains derived from the
sale of publicly-traded shares of Israeli companies are the general corporate tax rates.
As described in General Corporate Tax Structure in Item 5A above, recent
changes in the law will have reduced and will continue to reduce the corporate tax rate
from 27% in 2008 to 26% in 2009 and 25% in 2010. Between 2006 and 2009, however,
corporations whose taxable income was not determined immediately before the 2006 Tax
Reform was published, pursuant to part B of the Israeli Income Tax Law (Inflationary
Adjustments), 5745-1985, or pursuant to the Income Tax Regulations (Rules on Bookkeeping
by Foreign Invested Companies and Certain Partnership and Determination of their
Chargeable Income), 1984, or the Dollar Regulations, will generally be taxed at a rate of
25% on their capital gains from the sale of such shares. Currently our shares are not
listed for trading on any stock market and we cannot assure you that our shares will ever
be listed for trading on a stock market.

Generally,
Israeli resident corporations are exempt from Israeli corporate tax on the receipt of
dividends paid on shares of Israeli resident corporations. Dividends distributed from
taxable income accrued during the period of benefit of an Approved Enterprise are taxable
at the rate of 15% if the dividend is distributed during the tax benefit period under the
Investment Law or within 12 years after that period.

Non-Israeli residents.

Non-Israeli
residents (individuals and corporations) are generally subject to Israeli capital gains
tax as applicable to Israeli residents (individuals or corporations, as the case may be)
on any gains derived from the sale of shares of an Israeli company whose shares are not
listed on a stock market, such as our Company, unless a tax treaty between Israel and the
shareholders country of residence provides otherwise.

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Pursuant
to the Convention between the Government of the United States of America and the
Government of Israel with Respect to Taxes on Income, as amended (the United
States-Israel Tax Treaty), the sale, exchange or disposition of shares of an Israeli
company by a person who qualifies as a resident of the United States within the meaning of
the United States-Israel Tax Treaty and who is entitled to claim the benefits afforded to
such person by the United States-Israel Tax Treaty generally will not be subject to the
Israeli capital gains tax. However, this exemption will not apply if (i) such
resident holds, directly or indirectly, shares representing 10% or more of our voting
power during any part of the 12-month period preceding the sale, exchange or disposition,
subject to specified conditions, or (ii) the capital gains from such sale, exchange
or disposition can be allocated to a permanent establishment in Israel. In this case, the
sale, exchange or disposition would be subject to Israeli tax, to the extent applicable.
Under the United States-Israel Tax Treaty, a US resident subject to Israeli capital gains
tax would be permitted to claim a credit for such taxes against the U.S. federal
income tax imposed with respect to such sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The United States-Israel
Tax Treaty does not relate to state or local taxes in the United States.

Non-Israeli
residents (individuals and corporations) will generally be exempt from Israeli capital
gains tax on any gains derived from the sale of shares publicly traded on the Tel Aviv
Stock Exchange (the TASE) or on a recognized stock exchange outside of Israel
provided (i) the gains are not derived through a permanent establishment that the
non-resident maintains in Israel, (ii) the shares remain listed for trading on a
designated stock market, (iii) the shares were purchased after being listed on the
designated stock market, and (iv) such shareholders are not subject to the Inflationary
Adjustment Law. These provisions dealing with capital gains are not applicable to a person
whose gains from selling or otherwise disposing of the shares are deemed to be business
income. We cannot assure you that our shares will be, or will thereafter remain, listed
for trade on a stock market. However, non-Israeli corporations will not be entitled to
such exemption if an Israeli resident (i) has a controlling interest of 25% or more
in such non-Israeli corporation, or (ii) is the beneficiary of, or is entitled to,
25% or more of the revenues or profits of such non-Israeli corporation, whether directly
or indirectly.

In
addition, a temporary provision of the Israeli tax laws exempts certain treaty country
residents from capital gains tax on the sale of shares in Israeli companies purchased
between July 1, 2005 and December 31, 2008. In order for this exemption to
apply, the following conditions need to be met:

| | 1. | An
application is to be submitted to the Israeli Tax Authority (the                ITA)
at the same time as the reporting of the sale and capital gain;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
capital gain does not derive from a permanent establishment of the seller in
               Israel;
| | -- | -------------------------------------------------------------------------------------------------------

| | 3. | The
seller is an individual and has been a resident of a country with which
               Israel has a tax treaty (e.g., the U.S) during the ten continuous years
prior to                the acquisition or is an entity where at least 75% of the means
of control of                the entity are ultimately held, directly or indirectly, by
individual                shareholders who are resident of a country with which Israel
has a tax treaty                (e.g., the U.S) during the ten continuous years prior to
the acquisition. Where                the entity is listed on a non-Israel stock
exchange, this condition is deemed                met automatically in respect of non-material shareholders
and unless                it can be proved otherwise. Material is defined as
a 10% or more                holding, directly or indirectly, of any means of control,
together with related                parties;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
shares were not purchased from a related party and the provision of the part
               of the Israeli Income Tax Ordinance (the ITO) that addresses
capital                gains or a certain tax exemption granted in connection with the
issuance of                shares in exchange for the transfer of ownership in a real
estate property to                the issuer, did not apply to such purchase of shares;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The
sale was reported to the tax authority in the country of the sellers
               residence; and
| | -- | -------------------------------------------------------------------------------------------------------

| | 6. | Within
30 days of the acquisition, the transaction was disclosed in full to the
               ITA.
| | -- | ---------------------------------------------------------------------------------------------------

We
note that pursuant to a recent amendment to the ITO, sale of securities in a private
Israeli company, which were purchased after January 1, 2009, should be exempt from
tax in Israel provided conditions 2 and 4 are met.

In
some instances where our shareholders may be liable for Israeli tax on the sale of their
ordinary shares, the payment of the consideration may be subject to the withholding of
Israeli tax at the source.

Non-Israeli
residents are generally subject to Israeli income tax on the receipt of dividends paid on
our ordinary shares at the rate of 20%- 25%, which tax will be withheld at source, unless
a different rate is provided in a treaty between Israel and the shareholders country
of residence. With respect to a person who is a significant shareholder at the
time of receiving the dividend or on any date in the 12 months preceding it (i.e.,
such person holds directly or indirectly, including jointly with others, at least 10% of
any means of control in the Company), the applicable tax rate is 25%.

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Under
the United States-Israel Tax Treaty, the maximum rate of tax withheld in Israel on
dividends paid to a holder of our ordinary shares who is a U.S. resident (for
purposes of the United States-Israel Tax Treaty) is 25%. The United States-Israel Tax
Treaty further provides that the maximum rate of withholding tax on dividends, not
generated by our Approved Enterprise, that are paid to a U.S. corporation holding at
least 10% or more of our outstanding voting capital throughout the tax year in which the
dividend is distributed as well as the previous tax year, is 12.5%. U.S residents who are
subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction
for Untied States federal income tax purposes in the amount of the taxes withheld, subject
to detailed rules contained in United States tax legislation.

A
non-Israeli resident who receives dividends from which tax was withheld is generally
exempt from the duty to file returns in Israel in respect of such income, provided that
(i) such income was not derived from a business conducted in Israel by the taxpayer,
and (ii) the taxpayer has no other taxable sources of income in Israel.

# U.S. Federal Income
Tax Considerations.

Subject
to the limitations described in the following paragraphs, the discussion below describes
the material U.S. federal income tax consequences to a beneficial owner of our
ordinary shares, referred to in this discussion as a U.S. holder, that is:

| |  | an
individual who is a citizen or resident of the United States for U.S. federal tax
purposes;
| | - | ----------------------------------------------------------------------------------------------

| |  | a
corporation (or other entity treated as a corporation for U.S. federal tax purposes)
created or organized in the United States or under the law of the United States or of any
state or the District of Columbia;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate, the income of which is includible in gross income for U.S. federal income
tax purposes regardless of its source; or
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | a
trust, if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the authority
to control all substantial decisions of the trust or the trust has a valid election in
effect under applicable Treasury regulations to be treated as a United States person.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This
summary is not a comprehensive description of all of the tax considerations that may be
relevant to each persons decision to purchase, hold or dispose of ordinary shares.
This summary considers only U.S. holders that hold ordinary shares as capital assets.

This
discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, (the
Code), current and proposed Treasury regulations, and administrative and
judicial decisions as of the date of this annual report, all of which are subject to
change, possibly on a retroactive basis. This discussion does not address all aspects of
U.S. federal income taxation that may be relevant to any particular shareholder based
on the shareholders individual circumstances. In particular, this discussion does
not address the potential application of the alternative minimum tax or the
U.S. federal income tax consequences to U.S. holders that are subject to special
treatment, including U.S. holders that:

| |  | are
broker-dealers or insurance companies;
| | - | ------------------------------------------

| |  | have
elected mark-to-market accounting;
| | - | ---------------------------------------

| |  | are
tax-exempt organizations;
| | - | -----------------------------

| |  | are
financial institutions or financial services entities;
| | - | ----------------------------------------------------------

| |  | are
partnerships or other entities treated as partnerships for U.S. federal income tax
purposes or partners thereof or members therein;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | hold
ordinary shares as part of a straddle, hedge, conversion or other integrated transaction
with other investments;
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | own
directly, indirectly or by attribution at least 10% of our voting power; or
| | - | -------------------------------------------------------------------------------

| |  | have
a functional currency that is not the U.S. dollar.
| | - | -------------------------------------------------------

In
addition, this discussion does not address any aspect of state, local or non-U.S. tax
laws, or the possible application of the U.S. federal estate or gift tax or any state
inheritance, estate or gift tax.

Material
aspects of U.S. federal income tax law relevant to a holder other than a
U.S. holder, referred to in this discussion as a non-U.S. holder, are also
discussed below.

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Each
prospective investor is advised to consult his or her own tax adviser for the specific tax consequences to that investor of purchasing, holding or disposing of
our ordinary shares.

Taxation of Dividends Paid on
Ordinary Shares.

Subject
to the discussion below under Tax Consequences if We Are a Passive Foreign
Investment Company, a U.S. holder will be required to include in gross income
as ordinary income the amount of any distribution paid on ordinary shares, including any
Israeli taxes withheld from the amount paid, on the date the distribution is received, to
the extent the distribution is paid out of our current or accumulated earnings and profits
as determined for U.S. federal income tax purposes. Dividends that are received
through the taxable year ending December 31, 2010 by U.S. holders that are
individuals, estates or trusts generally will be taxed at the rate applicable to long-term
capital gains (a maximum rate of 15%), provided those dividends meet the requirements of
qualified dividend income. Dividends that fail to meet these requirements, and
dividends taxable to corporate U.S. holders, are taxed at ordinary income rates. No
dividend received by a U.S. holder will be a qualified dividend (1) if the
U.S. holder held the ordinary share with respect to which the dividend was paid for
less than 61 days during the 121-day period beginning on the date that is
60 days before the ex-dividend date with respect to the dividend, excluding for this
purpose, under the rules of Code Section 246(c), any period during which the
U.S. holder has an option to sell, is under a contractual obligation to sell, has
made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise
nonqualified option to buy, or has otherwise diminished its risk of loss by holding other
positions with respect to, the ordinary share (or substantially identical securities); or
(2) to the extent that the U.S. holder is under an obligation (pursuant to a
short sale or otherwise) to make related payments with respect to positions in property
substantially similar or related to the ordinary share with respect to which the dividend
is paid. If we were to be a passive foreign investment company (as the term is
defined in the Code) for any year, dividends paid on our ordinary shares in the year or in
the following year would not be qualified dividends. In addition, a non-corporate
U.S. holder will be able to take a qualified dividend into account in determining its
deductible investment interest (which is generally limited to its net investment income)
only if it elects to do so, in which case the dividend will be taxed at ordinary income
rates. Corporate holders will not be allowed a deduction for dividends received in respect
of our ordinary shares.

Dividends
on our ordinary shares will be foreign source passive income (or in some cases, general
category income) for U.S. foreign tax credit purposes. Distributions in excess of
earnings and profits will be applied against and will reduce, on a share-by-share basis,
the U.S. holders basis in the ordinary shares and, to the extent in excess of
that basis, will be treated as gain from the sale or exchange of ordinary shares.

The
amount of a distribution paid to a U.S. holder in a foreign currency will be the
U.S. dollar value of the foreign currency calculated by reference to the spot
exchange rate on the day the U.S. holder receives the distribution. A
U.S. holder that receives a foreign currency distribution and converts the foreign
currency into U.S. dollars after receipt will have foreign exchange gain or loss
based on any appreciation or depreciation in the value of the foreign currency against the
U.S. dollar, which will generally be U.S. source ordinary income or loss.

U.S. holders
will have the option of claiming the amount of any Israeli income taxes withheld at source
either as a deduction from gross income or as a dollar-for-dollar credit against their
U.S. federal income tax liability. Individuals who do not claim itemized deductions,
but instead utilize the standard deduction, may not claim a deduction for the amount of
the Israeli income taxes withheld, but the amount may be claimed as a credit against the
individuals U.S. federal income tax liability. The amount of foreign income
taxes that may be claimed as a credit in any year is generally subject to complex
limitations and restrictions, which must be determined on an individual basis by each
shareholder. Those limitations include the provisions described in the following
paragraphs, as well as rules that limit foreign tax credits allowable for a class of
income to the U.S. federal income taxes otherwise payable on the net income in that
class.

A
U.S. holder will be denied a foreign tax credit for Israeli income tax withheld from
dividends received on our ordinary shares:

| |  | if
the U.S. holder has not held the ordinary shares for at least 16 days of the
30-day period beginning on the date that is 15 days before the ex-dividend date; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | to
the extent that the U.S. holder is under an obligation to make related payments on
substantially similar or related property.
| | - | --------------------------------------------------------------------------------------------------------------------------------

Any
days during which a U.S. holder has substantially diminished its risk of loss on the
ordinary shares are not counted toward meeting the 16-day holding period required by the
statute.

Taxation of the Disposition of
Ordinary Shares.

Subject
to the discussion below under Tax Consequences if We Are a Passive Foreign
Investment Company, upon the sale, exchange or other taxable disposition of our
ordinary shares, a U.S. holder will recognize capital gain or loss in an amount equal
to the difference between the U.S. holders basis in the ordinary shares, which
is usually the cost to the U.S. holder of the shares, and the amount realized on the
disposition. Capital gain from the sale, exchange or other disposition of ordinary shares
held more than one year is long-term capital gain and is eligible for a reduced rate of
taxation in the case of noncorporate taxpayers. Gain or loss recognized by a
U.S. holder on the sale, exchange or other disposition of ordinary shares generally
will be treated as U.S. source income or loss for U.S. foreign tax credit
purposes. The deductibility of capital losses is subject to limitations.

90

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A
U.S. holder that uses the cash method of accounting calculates the U.S. dollar
value of foreign currency proceeds received on a sale as of the date on which the
U.S. holder receives the foreign currency. However, a U.S. holder that uses an
accrual method of accounting is required to calculate the value of the proceeds of the
sale as of the date of sale and may therefore realize foreign currency gain or loss on a
subsequent disposition of the foreign currency based on any subsequent appreciation or
depreciation in the value of the foreign currency against the U.S. dollar. That gain
on those shares will generally be U.S. source ordinary income or loss.

Tax Consequences if We Are a
Passive Foreign Investment Company.

We
will be a passive foreign investment company (a PFIC), if 75% or more of our
gross income in a taxable year, including our pro rata share of the gross income of any
corporation in which we are considered to own 25% or more of the shares by value (subject
to certain exceptions in the case of a U.S. corporation), is passive income.
Alternatively, we will be considered to be a PFIC if at least 50% of our assets in a
taxable year, ordinarily determined based on the quarter-end average fair market value of
our assets over the taxable year and including the pro rata share of the assets of any
corporation in which we are considered to own 25% or more of the shares by value (subject
to certain exceptions in the case of a U.S. corporation), produce or are held for the
production of passive income.

If
we were a PFIC, and a U.S. holder did not make a timely election either to treat us
as a qualified electing fund or to mark our shares to market, as described below, any
excess distributions we pay to a U.S. holder would be taxed in a special way. Excess
distributions are amounts paid on shares in a PFIC in any taxable year that exceed 125% of
the average distributions paid on those shares in the shorter of:

| |  | the
three previous years; or
| | - | ----------------------------

| |  | the
U.S. holders holding period for ordinary shares before the present taxable
year.
| | - | -------------------------------------------------------------------------------------

Excess
distributions must be allocated ratably to each day that a U.S. holder has held our
ordinary shares. A U.S. holder would then be required to include amounts allocated to
the current taxable year and each prior year in which we were not a PFIC (but not before
our first taxable year beginning after December 31, 1986) in its gross income as
ordinary income for the current year. Further, a U.S. holder would be required to pay
tax on amounts allocated to each prior taxable year in which we were a PFIC at the highest
rate in effect for that year on ordinary income, and the tax for each such year would be
subject to an interest charge at the rate applicable to deficiencies for income tax.

The
entire amount of gain that is realized or treated as realized by a U.S. holder upon
the sale or other disposition of ordinary shares (generally whether or not the disposition
is a taxable transaction) will also be treated as an excess distribution and will be
subject to tax as described in the preceding paragraph.

In
some circumstances a U.S. holders tax basis in our ordinary shares that were
inherited from a deceased person who was a U.S. holder would not equal the fair
market value of those ordinary shares as of the date of the deceaseds death but
would instead be equal to the deceaseds basis, if lower.

The
special PFIC rules described above will not apply to a U.S. holder if that
U.S. holder makes an election to treat us as a qualified electing fund, or QEF, in
the first taxable year in which the U.S. holder owns ordinary shares, provided we
comply with specified reporting requirements. Instead, a U.S. holder who has made
such a QEF election is required for each taxable year in which we are a PFIC to include in
income a pro rata share of our ordinary earnings as ordinary income and a pro rata share
of our net capital gain as long-term capital gain, subject to a separate election to defer
payment of the related tax. If deferred, the taxes will be subject to an interest charge.
We would supply U.S. holders with the information needed to report income and gain
under a QEF election if we were classified as a PFIC.

The
QEF election is made on a shareholder-by-shareholder basis and can be revoked only with
the consent of the Internal Revenue Service (the IRS). A shareholder makes a
QEF election by attaching a completed IRS Form 8621, including the PFIC annual
information statement, to a timely filed U.S. federal income tax return and by filing
a copy of the form with the IRS Service Center in Philadelphia, Pennsylvania. Even if a
QEF election is not made, a United States person who is a shareholder in a PFIC must file
a completed IRS Form 8621 every year.

A
U.S. holder of PFIC shares that are publicly traded may elect to mark the stock to
market annually, recognizing as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of the PFIC
shares and the U.S. holders adjusted tax basis in the PFIC shares. Losses would
be allowed only to the extent of net mark-to-market gain previously included by the
U.S. holder under the election for prior taxable years. If the mark-to-market
election were made, then the rules described above (other than the rules for excess
distributions, which would apply to the first year the election is made if we were a PFIC
in a prior year and a QEF election were not made for the first year we were a PFIC) would
not apply for periods covered by the election. At this time, however, our ordinary shares
are not publicly traded, and therefore this election is not currently available to a U.S.
holder of our ordinary shares.

91

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Although
we do not believe that we were a PFIC in 2008, we cannot assure you that the IRS will
agree with that conclusion or that we will not become a PFIC in 2009 or in a subsequent
year. The tests for determining PFIC status are applied annually, and it is difficult to
make accurate predictions of future income and assets, which are relevant to this
determination. U.S. holders who hold ordinary shares during a period when we are a
PFIC will be subject to these rules, even if we cease to be a PFIC in later years, subject
to specified exceptions for U.S. holders who made a QEF election in the first year
they held our ordinary shares and we were a PFIC or if in a later year they made any of
certain elections to purge the PFIC taint of our ordinary shares, which elections
generally require the payment of tax. U.S. holders are urged to consult their tax
advisers about the PFIC rules, including QEF and mark-to-market elections.

Tax Consequences for Non-U.S. Holders
of Ordinary Shares.

Except
as described in Information Reporting and Back-up Withholding below, a
non-U.S. holder of ordinary shares will not be subject to U.S. federal income or
withholding tax on the payment of dividends on, and the proceeds from the disposition of,
ordinary shares, unless:

| |  | the
income is effectively connected with the conduct by the non-U.S. holder of a trade
or business in the United States and,
| | - | ----------------------------------------------------------------------------------------------------------------------------

| | n | in
the case of a resident of a country that has an income treaty with the United States, the
income          is attributable to a U.S. permanent establishment, or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | in
the case of an individual, the item is attributable to a fixed place of business in the
United          States;
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | the
non-U.S. holder is an individual who holds the ordinary shares as a capital asset
and is present in the United States for 183 days or more in the taxable year of the
disposition and does not qualify for an exemption; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
non-U.S. holder is subject to tax under the provisions of U.S. tax law applicable to
      U.S. expatriates.
| | - | ----------------------------------------------------------------------------------------------------------------

A
non-U.S. holder is a beneficial owner of our ordinary shares that is (1) a
nonresident alien as to the United States for U.S. federal income tax purposes;
(2) a corporation created or organized in or under the law of a country, or any of
its political subdivisions, other than the United States; or (3) an estate or trust
that is not a U.S. holder.

Information Reporting and Back-up
Withholding.

U.S.
holders generally are subject to information reporting requirements for dividends paid in
the United States on ordinary shares. Dividends paid in the United States to a U.S. holder
on ordinary shares are subject to back-up withholding at a rate of 28% (for taxable years
through 2010) unless the U.S. holder provides IRS Form W-9 or establishes
an exemption. U.S. holders generally are subject to information reporting and
back-up withholding at a rate of 28% on proceeds paid from the disposition of ordinary
shares unless the U.S. holder provides IRS Form W-9 or establishes an
exemption.

A
non-U.S. holder who effects the sale of his ordinary shares by or through a
U.S. office of a broker is subject to both information reporting and backup
withholding tax on the payment of the proceeds unless he certifies that he is not a
U.S. person, under penalty of perjury, or otherwise establishes an exemption. If a
non-U.S. holder sells his ordinary shares through a non-U.S. office of a
non-U.S. broker and the sales proceeds are paid to the holder outside the United
States, then information reporting and backup withholding generally will not apply to that
payment. However, information reporting requirements, but not backup withholding, will
apply to a payment of sales proceeds, even if that payment is made to a
non-U.S. holder outside the United States, if the holder sells his ordinary shares
through a non-U.S. office of a broker that is a U.S. person or has some other
contacts with the United States. Those information requirements will not apply, however,
if the broker has documentary evidence in its records that the holder is a
non-U.S. person and certain other conditions are met, or the holder otherwise
establishes an exemption.

Backup
withholding is not an additional tax. Rather, the amount of any backup withholding will be
allowed as a credit against a U.S. or non-U.S. holders U.S. federal income tax
liability, and a taxpayer generally may obtain a refund of any amounts withheld under the
backup withholding rules that exceed the taxpayers U.S. federal income tax liability
by filing a refund claim with the IRS, provided in each case that required information is
furnished to the IRS.

F. Dividends and Paying
Agents.

Not
applicable.

92

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G. Statements of Experts.

Not
applicable.

H. Documents on Display.

We
are subject to the informational requirements of the Exchange Act. In accordance with
these requirements, we are required to file reports and other information with the SEC.
You may read and copy these materials, including this annual report and the accompanying
exhibits and reports and other information that we have previously filed, at the public
reference facilities maintained by the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the public
reference room by calling 1(800)-SEC-0330. The SEC maintains an Internet Site at
http://www.sec.gov that contains reports and other information that we file
electronically. In addition, documents referred to in this annual report may be inspected
at our principal executive offices at Yokneam Industrial Park, P.O. Box 240, Yokneam
20692, Israel.

As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing
the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not
required under the Exchange Act to file periodic reports and financial statements with the
SEC as frequently or as promptly as United States companies whose securities are
registered under the Exchange Act.

I. Subsidiary Information.

Not
Applicable.

|ITEM  11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|--------- |  | -----------------------------------------------------------

Our
functional currency, except for our subsidiaries in Europe and Japan, is the dollar. We
have non-Israeli subsidiaries, which sell our products in various markets. As a result,
our earnings, cash flows and financial position are exposed to fluctuations in foreign
currency exchange rates, mainly the Euro, Japanese Yen and shekel. We attempt to limit
this exposure by selling and linking the sales price of our products mostly to the dollar.

In
order to protect ourselves against the volatility of future cash flows caused by changes
in foreign exchange rates, we use currency forward contracts and currency options. We
hedge the part of our forecasted expenses denominated in shekels. If our currency forward
contracts and currency options meet the definition of a hedge, and are so designated,
changes in the fair value of the contracts will be offset against changes in the fair
value of the hedged assets or liabilities through earnings. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in current earnings
during the period of change. Our hedging program reduces, but does not eliminate, the
impact of foreign currency rate movements, and, due to a general economic slowdown along
with the devaluation of the dollar, our results of operations may be adversely affected by
such currency rate movements, notwithstanding such hedging program.

The
tables below provide information as at December 31, 2008 regarding (a) our
foreign currency-denominated assets and liabilities and (b) our derivative
instruments.

93

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a. Foreign currency
denominated assets and liabilities.

Position
as at December 31, 2008:

|                      | Total as at
December 31,
2008 | Settlement Date | Fair Value as at
December 31,
2008
|--------------------- | ----------------------------- | --------------- | ----------------------------------
|
|
|
|
|Current Assets:       |                               |                 |                                   
|Shekels               |                               |                 |                                   
|Euro                  |                               |                 |                                   
|Japanese Yen          |                               |                 |                                   
|U.K. pound sterling   |                               |                 |                                   
|Chinese Yuan          |                               |                 |                                   
|Other                 |                               |                 |                                   
|                      |                               |                 |                                   
|Total                 |                               |                 |                                   
|                      |                               |                 |                                   
|                      |                               |                
|Long term Assets:     |                               |                
|Shekels               |                               |                 |                                   
|Euro                  |                               |                 |                                   
|Japanese Yen          |                               |                 |                                   
|U.K. pound sterling   |                               |                 |                                   
|Chinese Yuan          |                               |                 |                                   
|Other                 |                               |                 |                                   
|                      |                               |                 |                                   
|Total                 |                               |                 |                                   
|                      |                               |                 |                                   
|                      |                               |                
|Current Liabilities:  |                               |                
|Shekels               |                               |                 |                                   
|Euro                  |                               |                 |                                   
|Japanese Yen          |                               |                 |                                   
|U.K. pound sterling   |                               |                 |                                   
|Chinese Yuan          |                               |                 |                                   
|Other                 |                               |                 |                                   
|                      |                               |                 |                                   
|Total                 |                               |                 |                                   
|                      |                               |                 |                                   
|                      |                               |                
|Long term Liabilities |                               |                
|Shekels               |                               |                 |                                   
|Japanese Yen          |                               |                 |                                   
|Chinese Yuan          |                               |                 |                                   
|                      |                               |                 |                                   
|Total                 |                               |                 |                                   
|                      |                               |                 |                                   

# b. Derivative
Instruments.

Position
as at December 31, 2008:

|                                               | Settlement Date
|---------------------------------------------- | ---------------
|
|
|
|
|Notional amounts to be received/(paid) from    |                
|derivatives relating to commitments in respect |                
|of future salaries, suppliers, and office and  |                
|vehicle rentals to be paid (mainly in respect  |                
|of expected proceeds)                          |                
|In Shekels                                     |                

94

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We
have floating rate debt of approximately $117 million as of December 31, 2008,
which exposes us to potential losses related to changes in interest rates. Our management
from time to time evaluates the risks associated with the interest rates and our
associated payments due in respect of this debt. Accordingly, on March 4, 2008, we
entered into an interest rate swap transaction (the IRS Transaction) for
$40 million, which is due in stages from the third quarter of 2009 until the end of
second quarter of 2013. Under the terms of the IRS Transaction, we will pay a fixed
interest rate of 3.13% and will receive the three month LIBOR rate of interest.

The
fair value of the IRS Transaction was reflected in our long-term liabilities and the
changes in its value were included in our other comprehensive income in 2008. As of
December 31, 2008, we recorded accumulated other comprehensive loss in the amount of
$1.6 million from the IRS Transaction.

|ITEM  12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
|--------- |  | -------------------------------------------------------

Not
Applicable.

# PART II

|ITEM 13. |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
|-------- |  | ------------------------------------------------

The
Restructuring Agreement with the Bank contains covenants that require us to comply with
certain financial ratios. Under the original provisions of the Restructuring Agreement, we
agreed not to exceed a ratio of total debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) (as such terms are defined in the Restructuring
Agreement) of 13 for each quarter of 2008 and 6 for each quarter of 2009. Calculations of
such ratio were to be made on a quarterly basis for the previous four-quarter period
commencing at the end of the first quarter of 2008. We also agreed that our operating
income as a percentage of revenues would not be less than 3% in each quarter of 2008 and
4% in each quarter of 2009. We were not in compliance with either of these covenants for
the first quarter of 2008. Pursuant to the 2008 Bank Debt Amendment, the above financial
ratio covenant was modified and the percentage covenant was eliminated. The financial
ratio calculations were still to be made on a quarterly basis (for the previous
four-quarter period), but were to commence with the four-quarter period ending with the
first quarter of 2009. The ratio of total debt to EBITDA that under the 2008 Bank Debt
Amendment we needed to achieve for the four quarter period ending in said quarter were as
follows: first quarter of 2009 - 6.5; second quarter of 2009 - 5.5;
third quarter of 2009 - 5; fourth quarter of 2009 - 4.5; and the first
quarter of 2010 and all subsequent quarters until the end of the loan
term - 3.5. Although we were not in compliance with this covenant for the first
quarter of 2009, the Bank agreed to a waiver of compliance with the covenant in respect of
such quarter. (For additional details, see Liquidity & Capital Resources 
Restructuring of Bank Debt in Item 5.B above.)

|ITEM 14. |  | MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
|-------- |  | -----------------------------------------------------------------------------

On
March 18, 2009, we issued an aggregate of 24,466,936 additional shares to our two
major shareholders and certain assignees for no additional consideration, pursuant to the
adjustment provisions under the 2006 Purchase Agreement. See Recapitalization and
Equity Financing  2006 Recapitalization  Shares Adjustments Related to
Litigation Outcome in Item 4.A above.

|ITEM 15. |  | CONTROLS
AND PROCEDURES.
|-------- |  | ------------------------

See
Item 15T below.

|ITEM 15T. |  | CONTROLS AND PROCEDURES.
|--------- |  | ------------------------

(a) Disclosure
Controls and Procedures.

We
carried out an evaluation under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, of the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act), as of December 31, 2008, the end of the period
covered by this report. We maintain disclosure controls and procedures designed to ensure
that the information required to be disclosed by us in filings and submissions under the
Exchange Act, is recorded, processed, summarized, and reported within the time periods
specified by the SECs rules and forms, and that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is accumulated and
communicated to management, including the chief executive officer and chief financial
officer, as appropriate to allow timely decisions about required disclosure. In designing
and evaluating our disclosure controls and procedures, our management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and our management necessarily applies
its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based on such evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were effective at the
reasonable assurance level as of December 31, 2008.

95

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(b) Managements
Annual Report on Internal Control Over Financial           Reporting.

Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act). Internal
control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide reasonable
assurance regarding the prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company's assets that could have a material effect on the Company's financial statements.

Internal
control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with general accepted accounting
principals. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect all misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Our
management, including our chief executive officer and chief financial officer, assessed
the effectiveness of our internal control over financial reporting as of December 31,
2008. In making this assessment, management utilized criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control  Integrated Framework, as well as guidance set forth in
releases of the SEC. Based on such assessment, management concluded that, as of
December 31, 2008, our internal control over financial reporting was effective.

Attestation Report of the
Registered Public Accounting Firm.

This
annual report does not include an attestation report of our registered public accounting
firm regarding our internal control over financial reporting. Our managements report
was not subject to attestation by our independent registered public accounting firm
pursuant to temporary rules of the SEC that permit us to provide only managements
report in this annual report.

(c) Changes in Internal Control over
Financial Reporting.

In
our annual report on Form 20-F for the year ended December 31, 2007 filed by us
on June 25, 2008, as amended by Amendment No. 3 thereto filed on May 8,
2009, we disclosed that, based on the assessment performed through the original date of
filing of that annual report, management had identified a number of material weaknesses
and significant deficiencies in the following areas of our internal control over financial
reporting:

| |  | computer
system access controls, change management and use of multiple systems; and
| | - | -----------------------------------------------------------------------------------

| |  | subsidiaries
with insufficient number of professionally qualified accounting personnel.
| | - | ---------------------------------------------------------------------------------------

During
the year ended December 31, 2008, we undertook the following remediation efforts to
address the above-referenced deficiencies:

| |  | System
Related Controls:
| | - | ------------------------

| |  | Management
established and implemented improved formal change management policies and procedures.
Accordingly, testing procedures for new modules and interfaces was properly planned,
executed and reviewed before they were implemented.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Management
performed an extensive analysis of system access authorization rights. Based on this
analysis, management adjusted system access roles and reassigned system access
authorizations in a manner that minimizes access rights that could lead to improper
segregation of duties.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | An
interface between our previous ERP system and our new ERP system was implemented in a
manner that significantly minimized our dependence on manual reconciliation between the
two ERP systems. Our production activities were transitioned from our previous ERP system
to our new ERP system. Information related to service activities remains on our previous
ERP system.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

96

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| |  | Financial
Personnel:
| | - | --------------------

| | We
hired a Vice President for Corporate Finance with the responsibility to oversee financial
closing processes, including appropriate financial statement review, and we added
additional professionally certified personnel in the United States, Europe and Japan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accordingly,
with respect to the remediation described above, and as part of managements
assessment of internal control over financial reporting, we have performed formal testing
of control effectiveness and found that all controls mentioned above were effective.

Except
as described above, there were no changes to our internal control over financial reporting
that occurred during the period covered by this annual report that have materially
affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

|ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT.
|--------- |  | ---------------------------------

Our
board of directors has determined that both Mr. Tali Idan and Mr. Eugene Davis, meet
the requirements of an audit committee financial expert, as defined in
Item 407(d)(5) of the SECs Regulation S-K and Item 16A of SEC
Form 20-F and are independent, as defined in the applicable NASDAQ rules.

|ITEM 16B. |  | CODE OF ETHICS.
|--------- |  | ---------------

We
have adopted a Code of Ethics for Senior Financial Officers (Code of Ethics)
that applies to our chief executive officer, principal financial officers, principal
accounting officer or controller and other persons performing similar functions for us.
The Code of Ethics supplements our Business Conduct Policy, which applies to all of our
employees worldwide. Copies of the Code of Ethics and the Business Conduct Policy are
filed as exhibits to this annual report and are incorporated herein by reference.

|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|--------- |  | ---------------------------------------

The
following table sets forth, for the years ended December 31, 2008 and 2007, the fees
billed to us and our subsidiaries by our principal accountants(1).

| |                    | Year ended December 31,
| | ------------------ | -----------------------
|
|
|
|
| | Audit fees (2)     |                        
| | Audit-related fees |                        
| | Tax fees (3)       |                        
| | All other fees     |                        
| |                    |                        
| | Total              |                        
| |                    |                        

| | (1) | During
2008, we changed independent auditors, appointing Kost Forer Gabbay &               Kasierer,
a member firm of Ernst & Young Global Limited, in place of Ziv                Haft, a
BDO member firm. The above comprises fees billed by Ziv Haft and by                other
member firms of BDO worldwide in 2007 and 2008, as well as fees billed by
               Kost Forer Gabbay & Kasierer and other member firms of Ernst & Young
               Global Limited in 2008.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Audit
fees consist of services that would normally be provided in connection
               with statutory and regulatory filings or engagements, including services
that                generally only the independent registered public accounting firm can
reasonably                provide. The amount stated for 2007 includes fees associated
with the audits of                our financial statements for the years 2004 through
2007 and review of our                registration statement on Form 20-F filed by
us on May 1, 2007, in                which our financial statements for the years
2004 through 2006 were included.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Tax
fees relate to tax compliance, planning and advice.
| | --- | -------------------------------------------------------

97

---

---

Pre-approval
Policies and Procedures

Our
audit committee approves, in advance, all audit, audit-related services, tax services and
other services provided by our principal accountants. Any services provided by our
principal accountant that are not specifically included within the scope of the audit must
be pre-approved by our audit committee prior to any engagement. None of the services
provided by our principal accountants in 2007 or 2008 was approved in a manner that
departed from such pre-approval requirements under the de minimus exception
described in paragraph (c)(7)(i)(C) of Rule 2-01 of SEC Regulation S-X.

|ITEM 16D. |  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
|--------- |  | -----------------------------------------------------------

Not
applicable.

|ITEM 16E. |  | PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
|--------- |  | -----------------------------------------------------------------------

None.

|ITEM 16F. |  | CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT.
|--------- |  | ---------------------------------------------

Not
applicable.

|ITEM 16G. |  | CORPORATE GOVERNANCE.
|--------- |  | ---------------------

Not
applicable.

# PART III

|ITEM 17. |  | FINANCIAL STATEMENTS.
|-------- |  | ---------------------

Not
Applicable.

|ITEM 18. |  | FINANCIAL STATEMENTS.
|-------- |  | ---------------------

The
consolidated financial statements and the related notes required by this Item are included
in this annual report beginning on page F-1.

|Index to Consolidated Financial Statements                                                  | Page      
|------------------------------------------------------------------------------------------- | ----------
|
|
|
|
|Reports of Independent Registered Public Accounting Firms                                   | F-2 to F-4
|Consolidated Balance Sheets at December 31, 2008 and 2007                                   | F-5       
|Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006  | F-6       
|Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for the Years Ended
|December 31, 2008, 2007 and 2006                                                            | F-7       
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006  | F-8       
|Notes to Consolidated Financial Statements                                                  | F-9 to 47 

|ITEM 19. |  | EXHIBITS.
|-------- |  | ---------

|Exhibit |  | Description
|------- |  | -----------

|1.1 |  | Memorandum
of Association of the Registrant, as amended July 26, 2001 (English translation),
incorporated by reference to Exhibit 3.1 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 2001, File #000-27572, filed
with the SEC on April 1, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Articles
of Association of the Registrant, as amended and restated December 26, 2007. *D (1.2)
|--- |  | ----------------------------------------------------------------------------------------------

|4.(b)1 |  | Lease
Agreement dated March 19, 1998 between Skan Group Yokneam Ltd. and Lumenis Ltd.
(English Translation) with respect to the Yokneam, Israel facility, incorporated by
reference to Exhibit 10.31 to the Registrants Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, File #000-27572, filed with the SEC on March 30,
2000.
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)2 |  | Agreement
dated December 25, 2008 between Engel Resources and Development Ltd. and Lumenis Ltd.
(English              Translation) relating to the extension of the Lease dated March 19,
1998 with respect to the Yokneam,              Israel facility. **
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)3 |  | Lease  Agreement dated  September 5,  2006 between Aspen Real Estate Ltd. and Lumenis Ltd. with respect to
second facility proposed new facilities in Yokneam, Israel. *B (4.8)
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

98

---

---

|4.(b)4 |  | Lease
dated as of July 19, 2006 between HDP Associates, LLC. and Lumenis Inc. with respect to
the              Santa Clara, California facility. *B (4.10)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)5 |  | Lease
Agreement dated as of September 27, 2006 between Ascend Realty Investments LLC and
Lumenis Holdings              Inc. with respect to the Salt Lake City facility. *B (4.19)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)6 |  | Construction
and Lease Agreement dated January 8, 2008 between Industrial Buildings Corporation Ltd.
and              Lumenis Ltd. (English Translation) with respect to proposed new Yokneam, Israel
facility. *D (4.(b)6)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)7 |  | Letter
Agreement with Bank Hapoalim B.M dated June 17, 2003. *A (10.5)
|------ |  | ----------------------------------------------------------------------

|4.(b)8 |  | Stock
Pledge Agreement dated as of July 1, 2003 between Bank Hapoalim B.M. and Lumenis Ltd. *A
(10.6)
|------ |  | -----------------------------------------------------------------------------------------------------

|4.(b)9 |  | Stock
Pledge Agreement dated as of July 1, 2003 between Bank Hapoalim B.M. and Lumenis Holdings
Inc.              *A (10.7)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------

|4.(b)10 |  | Cash
Fee-Ltd. Stock Letter, dated as of November 19, 2003, between Lumenis Ltd. and Bank
Hapoalim B.M.,              incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the              Quarterly Period ended September 30,
2003, File #000-27572, filed with the SEC on November 19, 2003.
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)11 |  | Restructuring
Agreement dated as of September 29, 2006 between Lumenis Ltd. and Bank Hapoalim
             B.M.*B (4.21)
|------- |  | ------------------------------------------------------------------------------------------------------------------------

|4.(b)12 |  | Amendment
No. 1 to Restructuring Agreement dated as of December 5, 2006 between Lumenis Ltd. and
Bank              Hapoalim B.M. *B (4.22)
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)13 |  | Amendment
No. 2 to Restructuring Agreement dated June 25, 2008 between Lumenis Ltd. and Bank
Hapoalim              B.M. *D (4.(b)15)
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------

|4.(b)14 |  | Amendment
to Amendment No. 2 to Restructuring Agreement dated November 10, 2008 between Lumenis
Ltd. and              Bank Hapoalim B.M. **
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)15 |  | Amendment
No. 2 to Amendment No. 2 to Restructuring Agreement dated February 22, 2009 between
Lumenis              Ltd. and Bank Hapoalim B.M. **
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)16 |  | Letter
of Waiver from Bank Hapoalim B.M. dated June 17, 2009. **
|------- |  | ----------------------------------------------------------------

|4.(b)17 |  | Amendment
No. 3 to Restructuring Agreement dated June 30, 2009 between Lumenis Ltd. and Bank
Hapoalim              B.M. **
|------- |  | --------------------------------------------------------------------------------------------------------------------------

|4.(b)18 |  | Purchase
Agreement dated as of September 30, 2006 by and among Lumenis Ltd., Ofer Hi-Tech
Investments              Ltd., LM Partners L.P. and LM (GP) L.P.*B (4.20)
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)19 |  | Form
of Purchase Agreements dated June 21, 2009 between Lumenis Ltd. and each of (1) Ofer
Hi-Tech              Investments Ltd., (2) LM Partners L.P. and (3) Agate Medical
Investments (Cayman) L.P. and Agate Medical              Investments L.P. **
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)20 |  | Registration
Rights Agreement dated as of December 5, 2006 by and among Lumenis Ltd., Ofer Hi-Tech
             Investments Ltd., LM Partners L.P. and Bank Hapoalim B.M. *B (4.23)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)21 |  | Amendment
No. 1 to Registration Rights Agreement dated June 25, 2009 by and among Lumenis Ltd.,
Ofer              Hi-Tech Investments Ltd. and LM Partners L.P. **
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)22 |  | Amended
and Restated Warrant No. 5 dated June 30, 2009  issued to Bank Hapoalim B.M. to purchase
             9,411,300 ordinary shares on or before June 30, 2014. **
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)23 |  | Amended
and Restated Warrant No. 6 dated June 30, 2009  issued to Bank Hapoalim B.M. to purchase
             2,500,000 ordinary shares on or before June 30, 2014. **
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)24 |  | Warrant
No. 9 dated June 4, 2007 issued to LM Partners L.P. to purchase 11,936,707 ordinary
shares on or              before December 5, 2011. **
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)25 |  | Warrant
No. 10 dated June 4, 2007 issued to Ofer Hi-Tech Investments Ltd. to purchase 9,313,293
ordinary              shares on or before December 5, 2011. **
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)26 |  | Form
of 2009 Warrant (Warrants Nos. 11 through 14) dated June 25, 2009 issued to (1) Ofer
Hi-Tech              Investments Ltd.; (2) LM Partners L.P.; (3) Agate Medical
Investments (Cayman) L.P.; and (4) Agate              Medical Investments L.P. to
purchase an aggregate of 6,818,183 ordinary shares. **
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)27 |  | Trust
Agreement dated as of September 30, 2006 by and among Ofer Hi-Tech Investments Ltd. and
the              beneficiaries thereunder, incorporated by reference to Exhibit 1 to
Schedule 13D, file #005-54169, filed              by Ofer Hi-Tech Investments Ltd. and
others with the SEC on July 10, 2007.
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)28 |  | Voting
and Option Agreement dated as of August 31, 2007, by and between Eli Azut and Mirkae
Tikshoret              Ltd. of the one part and Ofer Hi-Tech Investments Ltd. of the
other part, incorporated by reference to              Exhibit 1 to Amendment No. 1 to
Schedule 13D, file #005-54169, filed by Ofer Hi-Tech Investments Ltd. and
             others with the SEC on June 23, 2008.
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)1 |  | 1999
Share Option Plan, as amended April 30, 2003. *C (4.1)
|------ |  | -----------------------------------------------------------

|4.(c)2 |  | 2000
Share Option Plan, as amended September 30, 2006. *C (4.2)
|------ |  | ---------------------------------------------------------------

99

---

---

|4.(c)3 |  | Israel
2003 Share Option Plan, as amended May 27, 2003, incorporated by reference to
Exhibit A to the Registrants Definitive Proxy Statement for its 2003 Annual
Meeting of Shareholders filed with the SEC under cover of Schedule 14A on April 30,
2003, File #000-27572.
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)4 |  | 2007 Share
Incentive Plan, as amended September 23, 2007, incorporated by reference to Appendix A
to Exhibit 99.1 to the Registrants Current Report on Form 6-K, File
#000-27572, furnished to the SEC on November 21, 2007.
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)5 |  | Form
of post-2006 recapitalization Indemnification Agreement. *B (4.6)
|------ |  | ----------------------------------------------------------------------

|8 |  | List
of Subsidiaries. **
|- |  | ------------------------

|11.1 |  | Lumenis
Business Conduct Policy. *D (4.(c)7)
|---- |  | --------------------------------------------

|11.2 |  | Lumenis
Code of Business Ethics for Financial Officers. *D (4.(c)8)
|---- |  | -------------------------------------------------------------------

|12.1 |  | Certification
of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13 |  | Certification
of Chief Executive Officer and Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. **
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15.1 |  | Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global Limited,
independent registered public accounting firm. **
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

|15.2 |  | Consent
of Ziv Haft, a BDO member firm, independent registered public accounting firm. **
|---- |  | -----------------------------------------------------------------------------------------

|15.3 |  | Consent
of Blick Rothenberg, independent registered public accounting firm for Lumenis (UK)
Limited until December 31, 2007. **
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

|
|

|Note:
 Where  parenthetical  references  follow the description of an exhibit,  such
 references  relate to the exhibit number under which such exhibit was initially filed.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*A | Incorporated
by reference to said document filed as an exhibit to the Registrants Quarterly
Report on Form 10-Q for the Quarterly Period ended June 30, 2003, File
#000-27572, filed with the SEC on August 19, 2003.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*B | Incorporated
by reference to said document filed as an exhibit to the Registrants Registration
Statement on Form 20-F, File #0-27572, filed with the SEC on May 1, 2007.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*C | Incorporated
by reference to said document filed as an exhibit to a Post-Effective Amendment to the
Registrants Registration Statement on Form S-8, File #333-148460, filed with
the SEC on April 2, 2008.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*D | Incorporated
by reference to said document filed as an exhibit to the Registrants Annual Report
on Form 20-F for the fiscal year ended December 31, 2007, File #000-27572,
filed with the SEC on June 25, 2008.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Filed
herewith.
|-- | ---------------

100

---

---

# SIGNATURES

The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign this
annual report filed on its behalf.

| |  | LUMENIS LTD.By: /s/ Dov Ofer
Dov OferChief Executive Officer
| |  | --------------------------------------------------------------------------

Date: June 30, 2009

101

---

---

# LUMENIS LTD.

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2008

# U.S. DOLLARS

# INDEX

|                                                                        | Page      
|----------------------------------------------------------------------- | ----------
|
|
|
|
|Reports of Independent Registered Public Accounting Firm                | F-2 - F-4 
|                                                                       
|Consolidated Balance Sheets                                             | F-5       
|                                                                       
|Consolidated Statements of Operations                                   | F-6       
|                                                                       
|Consolidated Statements of Changes in Shareholders' Equity (Deficiency) | F-7       
|                                                                       
|Consolidated Statements of Cash Flows                                   | F-8       
|                                                                       
|Notes to the Consolidated Financial Statements                          | F-9 - F-47
|                                                                        |           

F - 1

---

---

| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Kost Forer Gabbay & Kasierer3 Aminadav St.
Tel-Aviv 67067, Israel

Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of

# LUMENIS LTD.

We
have audited the accompanying consolidated balance sheet of Lumenis Ltd. (the
Company) as of December 31, 2008 and the related consolidated statement of
operations, changes in shareholders equity (deficiency) and cash flows for the year
ended December 31, 2008. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at December 31,
2008 and the consolidated results of its operations and its cash flow for the year ended
December 31, 2008, in conformity with accounting principles generally accepted in the
United States.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|                 | /s/ Kost Forer Gabbay & Kasierer
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|June 30, 2009    | A Member of Ernst & Young Global

F - 2

---

---

| |                                              |                                                                                                                                                                       
| | -------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ZIV HAFT
Certified Public Accountants (Isr.) | Head Office: Amot Bituach House Building B
46-48 Menachem Begin Road, Tel-Aviv 66184
Tel: +972 3 638 6868 Fax: +972 3 639 4320
E-mail: zivhaft@bdo.co.il www.bdo.co.il

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
LUMENIS LTD.

We
have audited the consolidated balance sheet of Lumenis Ltd. and its subsidiaries (the
Company) as of December 31, 2007 and the consolidated statements of
operations, changes in shareholders equity and cash flows for both of the two years
in the period ended December 31, 2007. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We
did not audit the balance sheet and profit and loss accounts of a subsidiary, whose
consolidated assets constituted approximately 3.43% of total consolidated assets as of
December 31, 2007, and whose consolidated revenues constituted approximately 11.19% and
8.40% of total consolidated revenues for the years ended December 31, 2007 and 2006,
respectively. The balance sheet and profit and loss accounts of that subsidiary were
audited by another auditor, whose report have been furnished to us, and our opinion,
insofar as it relates to the amounts included in respect of that subsidiary is based
solely on the reports of the other auditor.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.

Our
audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of another auditor, the consolidated
financial statements present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2007, and the related consolidated results of
operations and cash flows for both of the two years in the period ended December 31, 2007,
in conformity with generally accepted accounting principles as applied in the United
States of America.

| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | /s/ Ziv HaftZiv Haft
Certified Public Accountants (Isr.)
A BDO member firm

Tel-Aviv, Israel
June 25, 2008

|                                            |                                               
|------------------------------------------- | ----------------------------------------------
|
|
|
|
|Haifa Tel: 04-8680600, Fax: 04-8620866      | Kiryat Shmona Tel: 04-6951389, Fax: 04-6950004
|Jerusalem: Tel: o2-6546200, Fax: 02-6526633 | Beer Sheva Tel: 08-654432, Fax: 08 6270008    
|                                            |                                               

F - 3

---

---

|12 York Gate
Regents Park
London NW1 4QS
United Kingdom | 
|------------------------------------------------------- | 

25 June 2008

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
LUMENIS (UK) LIMITED

We
have audited the balance sheet of Lumenis (UK) Limited (the Company) as of 31
December 2007 and the profit and loss account for both of the years in the two-year period
ended 31 December 2007 (the financial statements). These financial statements
are the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.

Our
audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, based on our audits, the financial statements present fairly, in all material
respects, the financial position of the Company as of 31 December 2007, and the profit for
both of the two years in the period ended 31 December 2007, in conformity with generally
accepted accounting principles as applied in the United States of America.

|/s/ Blick Rothenberg |  | 
|---------------------------------- |  | 

F - 4

---

---

LUMENIS LTD.

|                                                          
|----------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                               
|                                                          
|U.S. dollars in thousands, except share and per share data

|                                                                                    | December 31
|----------------------------------------------------------------------------------- | -----------
|
|
|
|
|ASSETS                                                                              |            
|CURRENT ASSETS                                                                      |            
|Cash and cash equivalents                                                           |            
|Trade receivables (net of allowance for doubtful accounts of $ 4,072 and $ 3,348 at |            
|December 31, 2008 and 2007, respectively)                                           |            
|Prepaid expenses and other receivables                                              |            
|Inventories                                                                         |            
|                                                                                    |            
|                                                                                    |            
|TOTAL CURRENT ASSETS                                                                |            
|                                                                                    |            
|                                                                                    |            
|FINISHED GOODS USED IN OPERATIONS, NET                                              |            
|                                                                                    |            
|                                                                                    |            
|PROPERTY AND EQUIPMENT, NET                                                         |            
|                                                                                    |            
|                                                                                    |            
|GOODWILL                                                                            |            
|                                                                                    |            
|                                                                                    |            
|INTANGIBLE ASSETS, NET                                                              |            
|                                                                                    |            
|                                                                                    |            
|SEVERANCE PAY FUND                                                                  |            
|                                                                                    |            
|                                                                                    |            
|OTHER ASSETS, NET                                                                   |            
|                                                                                    |            
|                                                                                    |            
|TOTAL ASSETS                                                                        |            
|                                                                                    |            
|                                                                                    |            
|LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)                                   |            
|CURRENT LIABILITIES                                                                 |            
|Payments under restructured debt                                                    |            
|Trade payables                                                                      |            
|Other accounts payable and accrued expenses                                         |            
|Deferred revenue and customer advances                                              |            
|                                                                                    |            
|                                                                                    |            
|TOTAL CURRENT LIABILITIES                                                           |            
|                                                                                    |            
|                                                                                    |            
|LONG-TERM LIABILITIES                                                               |            
|Long term debt                                                                      |            
|Accrued severance pay                                                               |            
|Other long-term liabilities                                                         |            
|                                                                                    |            
|                                                                                    |            
|TOTAL LIABILITIES                                                                   |            
|                                                                                    |            
|                                                                                    |            
|COMMITMENTS AND CONTINGENCIES                                                       |            
|                                                                                    |            
|SHAREHOLDERS' EQUITY (DEFICIENCY)                                                   |            
|Ordinary shares of NIS 0.1 par value;                                               |            
|Authorized: 900,000,000 at December 31, 2008 and 2007; Issued 177,262,739  and      |            
|177,239,738 shares at December 31, 2008 and 2007, respectively and outstanding      |            
|177,222,212 and 177,204,211 shares at December 31, 2008 and 2007, respectively      |            
|Additional paid-in capital                                                          |            
|Accumulated other comprehensive income                                              |            
|Accumulated deficit                                                                 |            
|Treasury shares, at cost (35,527 shares at December 31, 2008 and 2007)              |            
|                                                                                    |            
|                                                                                    |            
|TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)                                             |            
|                                                                                    |            
|                                                                                    |            
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                          |            
|                                                                                    |            
|                                                                                    |            

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

F - 5

---

---

LUMENIS LTD.

|                                                          
|----------------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS                     
|                                                          
|U.S. dollars in thousands, except share and per share data

|                                                                      | Year ended December 31,
|--------------------------------------------------------------------- | -----------------------
|
|
|
|
|Net sales                                                             |                        
|Cost of sales                                                         |                        
|                                                                      |                        
|                                                                      |                        
|Gross profit                                                          |                        
|                                                                      |                        
|                                                                      |                        
|Operating expenses:                                                   |                        
|Research and development expenses                                     |                        
|Selling and marketing expenses                                        |                        
|General and administrative expenses                                   |                        
|Impairment of goodwill                                                |                        
|Restructuring and other related costs                                 |                        
|                                                                      |                        
|                                                                      |                        
|Total operating expenses                                              |                        
|                                                                      |                        
|                                                                      |                        
|Operating loss                                                        |                        
|Financial expenses (income), net                                      |                        
|Other expense, net                                                    |                        
|                                                                      |                        
|                                                                      |                        
|Loss before taxes on income                                           |                        
|Taxes on income                                                       |                        
|                                                                      |                        
|                                                                      |                        
|Net loss                                                              |                        
|                                                                      |                        
|                                                                      |                        
|Basic and diluted net loss per share                                  |                        
|                                                                      |                        
|                                                                      |                        
|Weighted average number of shares used in computing basic and diluted |                        
|loss per ordinary share (in thousands)                                |                        
|                                                                      |                        
|                                                                      |                        

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

F - 6

---

---

LUMENIS LTD.

|                                                                       
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
|                                                                       
|U.S. dollars in thousands                                              

|                                                                        | Ordinary shares | Additional
paid in
capital | Treasury
shares | Accumulated
other
comprehensive
income | Accumulated
deficit | Total
comprehensive
income (loss) | Total
shareholders'
equity
(deficiency)
|----------------------------------------------------------------------- | --------------- | -------------------------- | --------------- | -------------------------------------- | ------------------- | --------------------------------- | ---------------------------------------
|
|
|
|
|Balance as of January 1, 2006                                           |                 |                            |                 | 37,340,465                             |                     | $                                 | 814                                    
|Changes during 2006:                                                    |                 |                           
|Issuance of shares and warrants, net                                    |                 |                            |                 | 116,680,657                            |                     |                                   | 2,765                                  
|Options granted to bank and revaluation                                 |                 |                           
|of issued options (see also note 10)                                    |                 |                            |                 |                                        |                     |                                   |                                        
|Compensation related to employees                                       |                 |                           
|stock option plan                                                       |                 |                            |                 |                                        |                     |                                   |                                        
|Comprehensive loss, net:                                                |                 |                           
|Foreign currency translation adjustments                                |                 |                            |                 |                                        |                     |                                   |                                        
|Net loss                                                                |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                           
|Total comprehensive loss, net                                           |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                           
|Balance as of December 31, 2006                                         |                 |                            |                 | 154,021,122                            |                     |                                   | 3,579                                  
|Changes during 2007:                                                    |                 |                           
|Issuance of shares and warrants, net                                    |                 |                            |                 | 23,218,616                             |                     |                                   | 576                                    
|Compensation related to employees                                       |                 |                           
|stock option plan                                                       |                 |                            |                 |                                        |                     |                                   |                                        
|Comprehensive loss, net:                                                |                 |                           
|Foreign currency translation adjustments                                |                 |                            |                 |                                        |                     |                                   |                                        
|Net loss                                                                |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                           
|Total comprehensive loss, net                                           |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                           
|Balance as of December 31, 2007                                         |                 |                            |                 | 177,239,738                            |                     |                                   | 4,155                                  
|Changes during 2008:                                                    |                 |                           
|Exercise of employees stock options                                     |                 |                            |                 | 23,001                                 |                     |                                   | 1                                      
|Compensation related to employees                                       |                 |                           
|stock option plan                                                       |                 |                            |                 |                                        |                     |                                   |                                        
|Comprehensive loss, net:                                                |                 |                           
|Unrealized losses on the Interest     Rate Swap transaction and foreign |                 |                           
|currency cash flow hedge                                                |                 |                            |                 |                                        |                     |                                   |                                        
|Foreign currency translation adjustments                                |                 |                            |                 |                                        |                     |                                   |                                        
|Net loss                                                                |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                           
|Total comprehensive loss, net                                           |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                           
|Balance as of December 31, 2008                                         |                 |                            |                 | 177,262,739                            |                     | $                                 | 4,156                                  
|                                                                        |                 |                            |                 |                                        |                     |                                   |                                        
|                                                                        |                 |                            |                 |                                        |                     |                                   |                                        

The accompanying notes are an
integral part of the consolidated financial statements

F - 7

---

---

LUMENIS LTD.

|                                     
|-------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     
|U.S. dollars in thousands            

|                                                                | Year ended December 31,
|--------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                           |                        
|Net loss                                                        |                        
|Adjustments to reconcile net loss to net cash used in operating |                        
|activity:                                                       |                        
|Depreciation and amortization                                   |                        
|Impairment of goodwill                                          |                        
|Compensation related to employees stock option plan             |                        
|Options granted to bank and revaluation of previously issued    |                        
|options                                                         |                        
|Interest payments on bank debt in accordance with SFAS 15       |                        
|"Accounting for Trouble Debt Restructurings"                    |                        
|Change in fair value of financial derivatives                   |                        
|Amortization of long term bank fees                             |                        
|Deferred income taxes, net                                      |                        
|Decrease (increase) in trade receivables, net                   |                        
|Increase in inventories                                         |                        
|Loss from sale or disposal of property and equipment            |                        
|Decrease (increase) in finished goods used in operations        |                        
|Decrease (increase) in prepaid expenses and other receivables   |                        
|Increase (decrease) in trade payables                           |                        
|Increase (decrease) in other accounts payables and accrued      |                        
|expenses  (including non-current portion)                       |                        
|Increase (decrease) in accrued severance pay, net               |                        
|                                                                |                        
|                                                                |                        
|Net cash used in operating activities                           |                        
|                                                                |                        
|                                                                |                        
|Cash flows from investing activities:                           |                        
|Purchase of property and equipment                              |                        
|Proceeds from sale of property and equipment                    |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by (used in) investing activities             |                        
|                                                                |                        
|                                                                |                        
|Cash flows from financing activities:                           |                        
|Issuance of share capital, net                                  |                        
|Financing of building improvements provided by landlord         |                        
|Repayments of long-term loans from bank                         |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by (used in) financing activities             |                        
|                                                                |                        
|                                                                |                        
|Foreign currency translation adjustments                        |                        
|                                                                |                        
|                                                                |                        
|Increase (decrease) in cash and cash equivalents                |                        
|Cash and cash equivalents at the beginning of the year          |                        
|                                                                |                        
|                                                                |                        
|Cash and cash equivalents at the end of the year                |                        
|                                                                |                        
|                                                                |                        
|Supplemental disclosure of cash flow activities:                |                        
|Cash paid during the year for interest                          |                        
|                                                                |                        
|                                                                |                        
|Cash paid during the year for taxes                             |                        
|                                                                |                        
|                                                                |                        

The accompanying notes are an
integral part of the financial statements.

F - 8

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 1: |  | GENERAL
|------- | - | -------

| | Lumenis
Ltd. together with its subsidiaries (the Company) is an Israeli company
engaged in research and development, manufacture, marketing, sale and servicing of laser,
light-based and radio frequency-based systems and accessories for surgical, aesthetic and
ophthalmic applications. The Company offers a broad range of products that are used in a
variety of applications, including ear, nose and throat treatment, benign prostatic
hyperplasia, urinary lithotripsy, gynecology, gastroenterology, podiatry, general
surgery, neurosurgery, skin treatments, photo rejuvenation, hair removal, non-invasive
treatment of vascular lesions and pigmented lesions, acne, psoriasis, open angle
glaucoma, diabetic retinopathy, secondary cataracts and age-related macular degeneration.
The Companys products use proprietary technology and accordingly the Company holds
numerous patents and licenses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the second half of 2008, the Company faced an adverse change in the business climate in
which it operates as a result of the current economic and credit crisis. As a result, the
Company concluded that an impairment of goodwill was required based on its annual
impairment test conducted during the fourth quarter of 2008. Accordingly, the Company
recorded in 2008 an impairment of goodwill in the amount of $ 22,637 (see also Note
3i. and Note 8).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is dependent upon sole source suppliers for certain key components used in its
products. Management believes that in most cases other suppliers could provide similar
components at comparable terms. A change of suppliers, however, could cause a material
delay in manufacturing and a possible loss of sales, which could adversely affect the
operating results of the Company and its financial position.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2: |  | RECAPITALIZATION
|------- | - | ----------------

| | On
December 5, 2006, the Company completed a recapitalization (Recap) of its
existing debt and equity structure. The Recap involved a cash investment from a private
equity consortium and restructuring of the then-existing bank debt (see Note 10  Bank
Debt for additional details). LM Partners L.P. and Ofer Hi-Tech Investments Ltd. (Investors)
made an investment of $120,000,000 in cash to acquire 111,919,418 shares of Lumenis
(equating to $1.0722 per share), representing a 75% stake in the Company, pursuant to a
private placement (the Transaction).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, as part of the Transaction, the Investors received Additional Warrants to
purchase 27,979,855 of the Companys shares at an aggregate exercise price of $ 30,000,000,
or $ 1.0722 per share, expiring June 5, 2007. Immediately after the closing of the
purchase agreement and on June 4, 2007, the Investors (including certain assignees of
Ofer Hi-Tech Investments Ltd.) exercised all of these Additional Warrants. Consequently,
there are no remaining Additional Warrants outstanding.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the exercise of the Additional Warrants, the Investors stake (including
the assignees of Ofer Hi-Tech Investments Ltd.) in the Company increased to approximately
79%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Further,
as part of the Recap, the Investors received Closing Warrants to purchase
17,000,000 of the Companys shares initially at an exercise price of $ 1.1794
per share (subject to adjustment as described below), expiring December 5, 2011. The
exercise of the Additional Warrants immediately after the closing and on June 4, 2007
resulted in an adjustment to the number of shares purchasable under the Closing Warrants
such that the total number of shares purchasable under the Closing Warrants increased to
21,250,000 shares.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Investors were also granted certain registration rights. The Company examined the
application of Emerging Issues Task Force (EITF) Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and potentially settled in, a Companys
Own Stock and EITF Issue D-98, Classification and Measurement of Redeemable
Securities, and classified the instruments granted as equity instruments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 2: |  | RECAPITALIZATION (Cont.)
|------- | - | ------------------------

| | In
addition, contemporaneously with the Recap, new options were granted to then-current
directors of the Company as well as to the newly elected directors of the Company who
replaced them. These options carry an exercise price of $ 1.0722 per share and
expire seven or eight years from the date of grant. (See Note 16.)
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amount of shares purchased by the Investors and their assignees, including shares issued
upon the exercise of the Additional Warrants, are subject to adjustment for all losses,
indemnities, liabilities and expenses exceeding, or not otherwise covered by, the Companys
insurance coverage, in connection with the concluded investigation by the United States
Securities and Exchange Commission (the SEC), the securities class action
lawsuits (settled in 2008) and certain other matters relating, in whole or in part, to
matters occurring prior to the closing of the Recap (the Relevant Amounts).
Adjustments for this purpose are made by the issuance to the Investors and their
assignees of additional ordinary shares for no additional consideration. Pursuant to
these adjustment provisions, on March 18, 2009 the Company issued 24,466,936 shares
to the Investors and certain assignees. In addition, an adjustment is to be made to the
exercise price under the Closing Warrants issued to Investors to reflect an exercise
price of 110% of the adjusted price per share paid by the Investors. Based upon Relevant
Amounts incurred by the Company to December 2008, the exercise price of the Closing
Warrants will be reduced to $ 1.0039 per share (subject to further adjustment) (See
also Note 19).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES
|------- | - | -------------------------------

| | The
Consolidated financial statements have been prepared in conformity with generally
accepted accounting principles in the United States of America (US GAAP)
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of estimates
| | -- | ----------------

| | The
preparation of financial statements in conformity with US GAAP requires management to
make estimates, judgments and assumptions that affect the amounts reported in the
financial statements and accompanying notes. The Companys management believes that
the estimates, judgment and assumptions used are reasonable based upon information
available at the time they are made. Actual results could differ from those estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. Intercompany transactions and balances, including profits from
intercompany sales not yet realized outside the Company, have been eliminated upon
consolidation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Financial
statements in U.S. dollars
| | -- | ------------------------------------

| | A
majority of the Companys revenues is generated in U.S dollars. In addition, most of
the Companys costs are denominated and determined in U.S. dollars. The Companys
management believes that the U.S dollar is the currency in the primary economic
environment in which the Company operates. Thus, the functional currency of Lumenis Ltd.
and certain subsidiaries is the U.S dollar
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with Statement of Financial Accounting Standard No. 52, Foreign
Currency Translations. All transaction gains and losses resulting from the
remeasurement of monetary balance sheet items denominated in non-dollar currencies are
reflected in the statements of operations as financial income or expenses as appropriate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements of the Companys subsidiaries whose functional currency is not
the dollar have been translated into dollars. All amounts on the balance sheets have been
translated into the dollar using the exchange rates in effect on the relevant balance
sheet dates. All amounts in the statements of operations have been translated into the
dollar using the exchange rate on the respective date on which those elements are
recognized. The resulting translation adjustments are reported as a component of
accumulated other comprehensive income in shareholders equity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accumulated
other comprehensive income related to foreign currency translation adjustments, net,
amounted to $ 15,693 and $ 14,561 as of December 31, 2008 and 2007,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Cash
and cash equivalents
| | -- | -------------------------

| | Cash
equivalents are short-term highly liquid investments that are readily convertible into
cash with original maturities of three months or less, at the date acquired.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Inventories
| | -- | -----------

| | Inventories
are stated at the lower of cost or market and include raw materials, work in process and
finished goods. Cost is determined as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Raw
Materials, Work in Progress (WIP) and Packaging Materials: Cost is determined
on a standard cost basis utilizing weighted average of historical purchases, which
approximates actual cost.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Finished
Products:Material and Purchased Products  Cost is determined on a standard
cost basis utilizing weighted average of historical purchases, which approximates actual
cost.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Labor
and Overhead  Cost is determined on a standard cost basis utilizing the average
cost over the production period, which approximates actual cost.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventory
provisions, based on management estimates, are provided to cover risks arising from
slow-moving items, technological obsolescence, excess inventories, discontinued products
and market prices lower than cost and are updated periodically.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2008, 2007 and 2006, the Company recorded inventories write-offs for inventory no longer
required in an amount of $ 5,708, $ 4,030 and $ 4,406, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Finished
goods used in operations
| | -- | ---------------------------------

| | Finished
products in respect of support for warranty obligations or finished products, used for
promotional purposes, are separately classified as finished goods used in operations and
are generally depreciated over a period of three years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | g. | Property
and equipment
| | -- | ----------------------

| | Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful lives of the assets, at
the following annual rates:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                    | %                                  
| | ---------------------------------- | -----------------------------------
|
|
|
|
| |                                    | Over the shorter of the term of the
| | Leasehold Improvements             | lease or the life of the asset     
| | Machinery & Equipment              | 10 - 20                            
| | Computers and peripheral equipment | 33                                 
| | Office furniture and equipment     | 10 - 20                            
| | Motor Vehicles                     | 20                                 
| |                                    |                                    

| | h. | Long-
lived assets
| | -- | ------------------

| | The
Companys property and equipment, finished goods used in operations and certain
identifiable intangible assets are reviewed for impairment in accordance with Statement
of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long-lived Assets (SFAS 144), whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to the future undiscounted cash flows expected to be generated by such
asset. If such asset is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value
of the asset. During 2008, 2007 and 2006, no impairment losses were identified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Goodwill
| | -- | --------

| | Goodwill
has been recorded in the Companys financial statements as a result of acquisitions.
Goodwill represents the excess of the purchase price in a business combination over the
fair value of net tangible and intangible assets acquired and is accounted for under SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142).
Goodwill is not amortized, but rather is subject to an annual impairment test. SFAS 142
requires goodwill to be tested for impairment at least annually or between annual tests
in certain circumstances, and written down when impaired, rather than being amortized as
previous accounting standards required. Goodwill is tested for impairment at the
reporting unit level by comparing the fair value of the reporting unit with its carrying
value. The Company performs an annual impairment test during the fourth quarter of each
fiscal year, or more frequently if impairment indicators are present. Goodwill is
reviewed for impairment utilizing a two-step process. The first step of the impairment
test requires the Company to identify the reporting units, and compare the fair value of
each of these reporting units to the respective carrying value. If the carrying value is
less than the fair value, no impairment exists and the second step does not need to be
completed. If the carrying value is higher than the fair value, there is an indication
that impairment may exist, and a second step must be performed to compute the amount of
the impairment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | With
effect from January 1, 2008, as a result of the re-organization of the Companys
reporting structure into business segments, the Company identifies three reporting units
that represent the three business reporting segments in which the Company operates,
namely: (i) Surgical (ii) Aesthetic; and (iii) Ophthalmic. Accordingly, as of the
reorganization date, the Company reassigned the carrying amount of goodwill to each new
business reporting segment based on such segments relative fair value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2007 and 2006, for the purposes of impairment testing of goodwill, the Company identified
four reporting units. The four reporting units represented the four geographic regions in
which the Company operates, namely: (i) the Americas; (ii) Europe (including the Middle
East and Africa); (iii) China-Asia Pacific (China/APAC); and (iv) Japan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
basis for our reporting units determination for 2008 and 2007 and preceding periods for
goodwill impairment testing was the guidance and criteria outlined in paragraph 30 of
SFAS 142 and EITF Topic D-101 Clarification of Reporting Unit Guidance in Paragraph
30 of FASB Statement No. 142".
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
purposes of performing Step One of the SFAS 142 impairment test, the Company estimated
the Fair Value of each of our reporting unit using the Income Approach in the form of a
discounted cash flow (DCF) analysis. Significant estimates used in the
calculation of DCF include estimates of future cash-flows, future short-term and
long-term growth rates and weighted average cost of capital for each reporting unit. In
addition, the Market Approach, which indicates the fair value of a business based on a
comparison of the subject company to comparable/guideline publicly traded companies
and/or transactions in its industry, was utilized to corroborate the overall value for
the reporting units.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2008, the first step which used the DCF approach to measure the fair value of the
Aesthetics reporting unit, indicated that the carrying amount of such reporting unit,
including goodwill, exceeded its fair value. The second step was then conducted in order
to measure the amount of impairment loss, by means of a comparison between the implied
fair value of the goodwill and the carrying amount of the goodwill. In the second step,
the Company assigned the fair value of the Aesthetics reporting unit, as determined in
the first step, to the reporting units individual assets and liabilities, including
intangible assets. The excess of the fair value of the reporting unit over the amounts
assigned to its assets and liabilities represented the amount of the implied fair value
of goodwill. The carrying amount of the goodwill over its implied fair value represented
an impairment loss of goodwill in the amount of $ 22,637.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | No
impairment was noted as a result of the Companys evaluation of goodwill during 2007
and 2006.
| | -------------------------------------------------------------------------------------------------

| | j. | Revenue
recognition
| | -- | -------------------

| | The
Company recognizes revenues in accordance with SEC Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition in Financial Statements(SAB 104),
which requires that the following four criteria be met in order to recognize revenue:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Persuasive
evidence of an agreement exists;
| | -- | -------------------------------------------

| | 2. | Delivery
has occurred or services have been rendered;
| | -- | -----------------------------------------------------

| | 3. | The
selling price is fixed or determinable; and
| | -- | -----------------------------------------------

| | 4. | Collectibility
is reasonably assured.
| | -- | -------------------------------------

F - 13

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
timing for revenue recognition amongst the various products and customers is dependent
upon satisfaction of such criteria and generally varies from shipment to delivery to the
customer depending on the specific shipping terms of a given transaction, as stipulated
in the agreement with each customer. Revenues from service contracts are recognized on a
straight-line basis over the life of the related service contracts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys products sold through agreements with distributors are generally
non-exchangeable, non-refundable, non-returnable and without any rights of price
protection or stock rotation. Accordingly, the Company generally considers distributors
as end-users.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company, in general, does not grant rights of return. However, returns are granted from
time to time for business reasons. The Company maintains a provision for returns in
accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists,
which is estimated, based primarily on historical experience as well as management
judgment, and is recorded through a reduction of revenue.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenue includes primarily the fair value of unearned amounts of service contracts,
arrangements with specific acceptance provisions that have not been satisfied by the end
of the period and cases where the Company has not completed delivery of goods in
accordance with the agreed-upon delivery terms.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Where
revenue from product sales to end-users includes multiple elements within a single
contract and it is determined that multiple units of accounting exist, the Companys
accounting policy complies with the revenue determination requirements set forth in EITF
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliveries(EITF
00-21), relating to the separation of multiple deliverables into individual
accounting units with determinable fair values. These elements are recognized as revenue
when the respective earnings processes have been completed.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
primary type of transaction in which the Company engages for which EITF 00-21 is relevant
pertains to orders from customers of our systems in which the sales agreement includes
multiple elements which are delivered at different points in time. Such elements may
include some or all of the following:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | products;
| | - | ---------

| |  | installation
of systems and training; and
| | - | -----------------------------------------

| |  | extended
 warranty  contracts  (most systems are sold with a standard one year
                            warranty).
| | - | ---------------------------------------------------------------------------------------------------------------------

| | The
Company considers the sale of a product and the extended warranty element in the related
agreement to be two separate accounting units of the arrangement and defers the fair
value of the extended warranty element to the period in which it is earned.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
respect of sale of products, installation of systems and training, the Company considers
the elements in the arrangement to be a single unit of accounting. In accordance with SAB
104, the Company has concluded that its arrangements are generally consistent with the
indicators suggesting that installation and training are not essential to the
functionality of the Companys systems. Accordingly, installation and training are
considered inconsequential and perfunctory relative to the system and therefore the
Company recognizes revenue for the system, installation and training upon delivery to the
customer in accordance with the agreement delivery terms once all other revenue
recognition criteria have been met, and provides for installation and training costs as
appropriate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | In
accordance with EITF Issue No. 00-10, Accounting for Shipping and Handling Fees and
Costs, reimbursed shipping and handling costs for product sales are included in
revenue, with the related expense included in cost of revenues.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | Research
and development costs
| | -- | ------------------------------

| | Research
and development costs are charged to the statement of operations as incurred.
| | --------------------------------------------------------------------------------------

| | l. | Accrued
warranty costs
| | -- | ----------------------

| | The
Company generally warranties the majority of its products against defects and bugs for up
to one-year with certain products carrying a warranty for a more extended period of up to
two years. The warranty period begins upon shipment, installation or delivery depending
upon the specifics of the transaction. The Company records a liability for accrued
warranty costs at the time of sale of a unit, which represents the remaining warranty on
products sold based on historical warranty costs and managements estimates. The
Company periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the Companys warranty allowance during the period are as follows:
| | -----------------------------------------------------------------------------

| |                                      | Year ended December 31,
| | ------------------------------------ | -----------------------
|
|
|
|
| | Balance at the beginning of the year |                        
| | Warranties issued during the year    |                        
| | Settlements made during the year     |                        
| |                                      |                        
| |                                      |                        
| |                                      |                        
| |                                      |                        
| |                                      |                        

| | m. | Advertising
Expenses
| | -- | --------------------

| | Advertising
expenses are expensed as incurred. Advertising expenses for the years ended December 31,
2008, 2007 and 2006 were approximately $ 800, $ 900 and $ 1,300,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Accounting
for income taxes
| | -- | ---------------------------

| | The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS 109). This statement prescribes the use of the
liability method whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and liabilities
and for carryforward tax losses. Deferred taxes are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. The Company
provides a valuation allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value if it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Deferred
tax liabilities and assets are classified as current or non current based on the
classification of the related asset or liability for financial reporting, or according to
the expected reversal dates of the specific temporary differences if not related to an
asset or liability for financial reporting.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized under SFAS 109. FIN 48 prescribes a
recognition threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return and also
provides guidance on various related matters such as derecognition, interest and
penalties, and disclosure. On January 1, 2007, the Company adopted FIN 48. The initial
application of FIN 48 to the Companys tax positions did not have an effect on the
Companys shareholders equity. The Company recognizes interest and penalties,
if any, related to unrecognized tax benefits in tax expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Severance
Pay
| | -- | -------------

| | The
majority of the Companys employees in Israel have subscribed to Section 14 of Israels
Severance Pay Law, 5723-1963 (Section 14). Pursuant to Section 14, the Companys
employees, covered by this section, are entitled only to monthly deposits, at a rate of
8.33% of their monthly salary, made on their behalf by the Company. Payments in
accordance with Section 14 release the Company from any future severance liabilities in
respect of those employees. Neither severance pay liability nor severance pay fund under
Section 14 for such employees is recorded in the Companys balance sheet.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
regards to employees in Israel that are not subject to Section 14, the Companys
liability for severance pay is calculated pursuant to the Severance Pay Law, based on the
most recent salary of the employees multiplied by the number of years of employment as of
the balance sheet date. These employees are entitled to one months salary for each
year of employment or a portion thereof. The Companys liability for these employees
is fully provided for via monthly deposits with severance pay funds, insurance policies
and an accrual. The value of these deposits is recorded as an asset in the Companys
balance sheet.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
deposited funds include profits accumulated up to the balance sheet date. The deposited
funds may be withdrawn only upon the fulfillment of the obligation pursuant to the
Severance Pay Law or labor agreements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded its liability for severance pay as if it was payable at each balance
sheet date (the so called shut-down method) in accordance with EITF 88-1,
Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expenses for the years ended December 31, 2008, 2007 and 2006, were approximately
$3,578, $ 2,365, and $ 2,468, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Company has an unfunded defined benefit plan in respect of its employees in Japan. Such
plan is a defined benefit plan and is unsecured.
| | --------------------------------------------------------------------------------------------------------------------------------------------

| | Below
are the measurement principles employed by the Company with respect to pension expenses
of its Japanese employees:
| | ------------------------------------------------------------------------------------------------------------------------

| | 1. | The
net pension expenses for each accounting period consist of the following
          components:
| | -- | --------------------------------------------------------------------------------------------------

| | a) | Current
service costs  the actuarial increase in the pension liability           relating
to employee pension benefits in respect of the reporting period;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | Current
interest costs  the increase in the pension liability due to the           passage
of time; and
| | -- | --------------------------------------------------------------------------------------------------------

| | c) | Actuarial
losses (profits) recognized during the period, as described in (3)           below.
| | -- | ---------------------------------------------------------------------------------------------

| | 2. | The
net pension liability included in the balance sheet  computed on the
          basis of the liability at the beginning of the period, plus the current service
          costs and the current interest costs, less benefit payments.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
difference, at the balance sheet date, between the pension liability,           computed
as stated in (2) above, and the actuarial liability at the same date           reflects
the balance of actuarial gains or losses which are deferred and are not
          immediately recognized in the financial statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
deferred actuarial gains or losses are calculated on an annual basis at the end of each
year and are recorded in the statements of operations partially in the following year, if
 and only if  at the end of the current reporting year, they amount to more
than 10% of the greater of the following:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | the
actuarial liability for pension payments; or
| | -- | ------------------------------------------------

| | b) | the
fair value of the pension fund assets.
| | -- | ------------------------------------------

| | The
amount in excess of 10%, as stated above, will be recorded in the statements of
operations, commencing from the following year, in equal annual installments over the
anticipated period of employment (7 years) of the Lumenis Japan employees, who are
members of the plan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
actuarial calculations, as set forth below, have been performed in accordance with SFAS
No. 87, Employers Accounting for Pensions.
| | -----------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| |                                                                | December 31,
2008
| | -------------------------------------------------------------- | -----------------
|
|
|
|
| | Change in projected benefit obligation:                        |                  
| |                                                                |                  
| | Projected benefit obligation at beginning of year              |                  
| | Service cost                                                   |                  
| | Interest cost                                                  |                  
| | Actuarial (gain)/loss                                          |                  
| | Currency exchange rate changes                                 |                  
| | Benefits paid                                                  |                  
| |                                                                |                  
| |                                                                |                  
| | Projected benefit obligation at end of year                    |                  
| |                                                                |                  
| |                                                                |                  
| | Net periodic benefit cost :                                    |                  
| |                                                                |                  
| | Service cost                                                   |                  
| | Interest cost                                                  |                  
| |                                                                |                  
| |                                                                |                  
| | Net periodic benefit cost                                      |                  
| |                                                                |                  
| |                                                                |                  
| | Amounts recognized in accumulated other comprehensive income : |                  
| |                                                                |                  
| | Net actuarial loss                                             |                  
| | Prior service cost                                             |                  
| |                                                                |                  
| |                                                                |                  
| | Accumulated other comprehensive income                         |                  
| |                                                                |                  

| |                                              | December 31
| | -------------------------------------------- | -----------
|
|
|
|
| | Assumptions used to calculate amounts above: |            
| |                                              |            
| | Discount rate                                |            
| | Rate of compensation increase                |            
| |                                              |            

| | Benefit
payments are expected to be paid as follows:
| | ----------------------------------------------------

| |           | December 31,
2008
| | --------- | -----------------
|
|
|
|
| | 2009      |                  
| | 2010      |                  
| | 2011      |                  
| | 2012      |                  
| | 2013      |                  
| | 2014-2018 |                  
| |           |                  

| | p. | Employees
contribution plan
| | -- | ---------------------------

| | The
Company has a 401(K) defined contribution plan covering certain employees in the U.S. All
eligible employees may elect to contribute up to 25%, but generally not greater than $ 15.5
per year (for certain employees over 50 years of age the maximum contribution is $ 20.5
per year), of their annual compensation to the plan through salary deferrals, subject to
IRS limits.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Company matches 25% of employee contributions up to the plan limit of $1,000 per annum.
In the years 2008, 2007 and 2006, the Company recorded an expense for matching
contributions in amounts of $ 218, $ 219 and $ 226, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Losses
per share
| | -- | ----------------

| | Basic
net losses per share are computed based on the weighted average number of ordinary shares
outstanding during each year. Diluted net losses per share are computed based on the
weighted average number of ordinary shares outstanding during each year, plus potential
dilutive ordinary shares considered outstanding during the year, in accordance with SFAS
No. 128, Earnings Per Share (SFAS 128).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
outstanding share options and warrants have been excluded from the calculation of the
diluted loss per share since such securities are antidilutive for all of the years
presented.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total weighted average number of shares related to the outstanding options and warrants
that have been excluded from the calculations of diluted net earnings per share was
21,235,053, 20,592,373 and 11,891,836 for the years ended December 31, 2008, 2007 and
2006, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
described in Note 2 above, the amount of shares purchased by the Investors and their
assignees, including shares issued upon the exercise of the Additional Warrants, are
subject to adjustment in accordance with terms of the purchase agreement under which the
Investors purchased the shares and acquired the warrants in the Transaction. While no
additional shares were actually issued during 2008, 2007 and 2006, as a result of these
adjustment terms, expenses were paid or incurred after the date of the Recap that
entitled the Investors to additional ordinary shares. Therefore, in accordance with SFAS
128, the Company has treated the shares to which the Investors are entitled under the
terms of the Transaction purchase agreement as contingently issuable shares for which all
necessary conditions have been satisfied and has included such shares in its calculation
of the weighted average number of shares outstanding in 2008, 2007 and 2006 used in
determining basic loss per share. The number of such contingently issuable shares
included in the 2008, 2007 and 2006 weighted average number of shares used to calculate
losses per share was 18,807,319, 3,546,827 and 0, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Equity
based compensation
| | -- | -------------------------

| | The
Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised
2004), Share-Based Payment (SFAS 123(R)). SFAS 123(R) requires
companies to estimate the fair value of equity-based payment awards on the date of grant
using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as an expense over the requisite service periods in the
Companys consolidated statement of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards granted based on the
straight line method over the requisite service period of each of the awards, net of
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Estimated forfeitures are based on actual historical pre-vesting
forfeitures.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Company estimates the fair value of stock options granted under SFAS 123(R) using the
Black-Scholes option-pricing model that uses the weighted average assumption noted in the
table below.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average fair value of options granted during the year, estimated by using the
Black-Scholes option-pricing model, was $ 0.33, $ 0.29 and $ 0.43 for the
years ended December 31, 2008, 2007 and 2006, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
expected volatility for 2004 through the date on which the Companys shares were
de-registered (April 26, 2006) is based on the historical volatility of the Companys
stock. For the period after the de-registration the volatility is based on volatility of
similar companies whose share prices are publicly available. The risk-free interest rate
is based on the yield of U.S. treasury bonds with equivalent terms. The dividend yield is
based on the Companys historical and future expectation of dividends payouts.
Historically, the Company has not paid cash dividends and has no foreseeable plans to pay
cash dividends in the future. The expected term of options granted represents the period
of time that options granted are expected to be outstanding, and was determined based on
the simplified method in accordance with SAB 107, Share-Based Payment(SAB
107). On December 21, 2007 the SEC issued SAB No. 110 (SAB 110), which,
effective January 1, 2008, amends and replaces SAB 107. The Company currently uses the
simplified method as adequate historical experience is not available to provide a
reasonable estimate. The Company adopted SAB 110 effective January 1, 2008 and will
continue to apply the simplified method until sufficient historical experience is
available to provide a reasonable estimate of the expected term for stock option grants.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | Year ended December 31
| | ----------------------- | ----------------------
|
|
|
|
| | Volatility              | 69%                   
| | Risk-free interest rate | 2.35%                 
| | Dividend yield          | 0%                    
| | Forfeiture rate         | 12%                   
| | Expected life           | 4.6 years             
| |                         |                       

| | The
Companys annual compensation cost for the years ended December 31, 2008, 2007 and
2006 totaled $ 2,126, $ 1,530 and $ 1,441, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | The
total equity-based compensation expense related to all of the Companys equity-based
awards, recognized for the years ended December 31, 2008, 2007 and 2006, was comprised as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         | Year ended December 31
| | --------------------------------------- | ----------------------
|
|
|
|
| | Cost of goods sold                      |                       
| | Research and development                |                       
| | Sales and marketing                     |                       
| | General and administrative              |                       
| |                                         |                       
| |                                         |                       
| | Total equity-based compensation expense |                       
| |                                         |                       
| |                                         |                       

| | The
total unrecognized compensation cost before tax on employees stock options amounted
to $ 1,600 at December 31, 2008, and is expected to be recognized over a weighted
average period of approximately 1.7 years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | s. | Fair
value of financial instruments
| | -- | -----------------------------------

| | The
estimated fair value of financial instruments has been determined by the Company using
available market information and valuation methodologies. Considerable judgment is
required in estimating fair values. Accordingly, the estimates may not be indicative of
the amounts the Company could realize in a current market exchange
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
| | ----------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of cash and cash equivalents approximate their fair value due to the
short-term maturity of such instruments.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of foreign currency contracts (used for hedging purposes) is estimated by
obtaining current quotes from banks. Effective January 1, 2008, the Company adopted SFAS
No. 157, Fair Value Measurements (SFAS 157) and, effective
October 10, 2008, adopted FASB Staff Position (FSP) No. 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not Active(FSP
157-3), except as SFAS 157 applies to the nonfinancial assets and liabilities
subject to FSP No. 157-2, Effective Date of FASB Statement No. 157(FSP
157-2). SFAS 157 clarifies that fair value is an exit price, representing the
amount that would be received upon sale of an asset or paid upon transfer of a liability
in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or a liability. As a basis for considering
such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes
the inputs used in the valuation methodologies in measuring fair value:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
1  Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets. Level 2  Includes other inputs that are directly
or indirectly observable in the marketplace.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
3  Unobservable inputs which are supported by little or no market activity.
| | ----------------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value (see also Note 15).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amount of the Companys bank debt does not approximate its fair value which
amounts to $110,588, based on discounted future cash flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Concentration
of credit risk
| | -- | ----------------------------

| | Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents which include bank deposits, trade receivables
and foreign currency derivative contracts.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of the Companys cash and cash equivalents which include bank deposits are
invested with major banks in Israel and the United States. Such investments in the United
States may be in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Companys
investments are financially sound and accordingly, minimal credit risk exists with
respect to these investments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
trade receivables of the Company and its subsidiaries are derived from sales to customers
located primarily in the Americas, Europe- Middle East- Africa (EMEA) and the
Far East, including Japan. The Company and its subsidiaries perform ongoing credit
evaluations of their customers and may obtain letters of credit and bank guarantees for
certain receivables. In addition, the Company insures certain of its receivables with a
credit insurance company. An allowance for doubtful accounts is provided with respect to
specific debts that the Company has determined to be doubtful of collection, and a
general provision has been provided with respect to the remaining balance based on
historical experience and management judgment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Allowance
for doubtful accounts amounted to $ 4,072 and $ 3,348 as of December 31, 2008 and 2007,
respectively. The Company charges off receivables when they are deemed uncollectible.
Actual collection experience may not meet expectations and may result in increased bad
debt expense. Total doubtful debts expenses during 2008 amounted to $ 642. Total write offs amounted to $ 67 in 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Derivative
instruments
| | -- | ----------------------

| | Statement
of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), requires companies to recognize all of
their derivative instruments as either assets or liabilities in the statement of
financial position at fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
those derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being hedged, as a
fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
derivative instruments that are designated and qualify as a cash flow hedge (i.e.,
hedging the exposure to variability in expected future cash flows that is attributable to
a particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument in excess of the
cumulative change in the present value of future cash flows of the hedged item, if any,
is recognized in current earnings during the period of change. For derivative instruments
not designated as hedging instruments, the gain or loss is recognized in current earnings
during the period of change.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
flow hedging strategy  To hedge against the risk of overall changes in cash flows
resulting from foreign currency trade payables and salary payments during the year, the
Company has instituted a foreign currency cash flow hedging program. The Company hedges
portions of its forecasted expenses denominated in New Israeli Shekels (NIS)
with currency forwards and options. These forward and option contracts are designated as
cash flow hedges, as defined by SFAS 133 and Derivative Implementation Company No. G20,
Cash Flow Hedges: Assessing and Measuring the Effectiveness of a Purchased Option
Used in a Cash Flow Hedge (DIG 20) and are all effective.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the amount recorded in accumulated other comprehensive loss from
the Companys currency forward and option transactions is $8.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Interest
hedging strategy  To hedge against the potential risks related to changes in
interest rates, on March 4, 2008, the Company entered into an interest rate swap (IRS)
transaction with respect to $ 40,000 loan, which is due in stages from the third
quarter of 2009 until the end of the third quarter of 2013. Under the terms of the IRS,
the Company will pay a fixed interest rate of 3.13% and will receive the three month
LIBOR rate of interest. The fair value of the swap was reflected in long-term liabilities
and the changes in the value of such interest rate swap were included in other
comprehensive income. As of December 31, 2008, the Company recorded accumulated other
comprehensive loss in the amount of $ 1,589 from its IRS transaction.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Restructuring
and other related costs:
| | -- | --------------------------------------

| | During
2008, the Company announced that it was implementing a cost reduction plan that included
the layoff of approximately 160 employees. The Company recorded a charge of $ 1,420 as a
result of such process. The Company has accounted for the restructuring plan in
accordance with SFAS No. 146: Accounting for Costs Associated with Exit or Disposal
Activities. The expected completion date of most of the restructuring accrual is by
the end of June 2009.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in accrued restructuring costs during the year ended December 31, 2008, are as follows:
| | -----------------------------------------------------------------------------------------------

| |                                                     | 
| | --------------------------------------------------- | 
|
|
|
|
| | Restructuring costs during 2008                     | 
| | Payments made during 2008                           | 
| |                                                     | 
| |                                                     | 
| | Accrued restructuring costs as of December 31, 2008 | 
| |                                                     | 
| |                                                     | 

| | w. | Transfers
of Financial Assets:
| | -- | ------------------------------

| | SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 140), establishes a standard for
determining when a transfer of financial assets should be accounted for as a sale. The
Company structures applicable the arrangements such that the underlying conditions are
met for the transfer of financial assets to qualify for accounting as a sale.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2008, the Company sold trade receivables to Israeli and
Japanese financial institutions in a total amount of $ 4,636. Control and risk of
those trade receivables were fully transferred in accordance with SFAS 140.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreements, pursuant to which the Company sells its trade receivables, are structured
such that the Company: (i) transfers the proprietary rights in the receivable from the
Company to a financial institution; (ii) legally isolates the receivable from the Companys
other assets, and presumptively puts the receivable beyond the lawful reach of the
Company and its creditors, even in bankruptcy or other receivership; (iii) confers on the
financial institution the right to pledge or exchange the receivable; and (iv) eliminates
the Companys effective control over the receivable, in the sense that the Company
is not entitled and shall not be obligated to repurchase the receivable other than in
case of failure by the Company to fulfill its commercial obligation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | x. | Comprehensive
income (loss)
| | -- | ---------------------------

| | The
Company accounts for comprehensive income (loss) in accordance with SFAS No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income generally represents all changes in
shareholders equity during the period except those resulting from investments by, or distributions
to, shareholders. The Company determined that its items of comprehensive income (loss)
relate to loss on hedging derivatives instruments and unrealized gain from foreign
currency translation adjustments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
total accumulated other comprehensive income, net was comprised as follows:
| | -------------------------------------------------------------------------------

| |                                               | Year ended December 31
| | --------------------------------------------- | ----------------------
|
|
|
|
| |                                               |                       
| | Accumulated losses on derivative              |                       
| | instruments                                   |                       
| | Accumulated foreign currency translation      |                       
| | differences                                   |                       
| |                                               |                       
| |                                               |                       
| | Total accumulated other comprehensive income, |                       
| | net                                           |                       
| |                                               |                       
| |                                               |                       

| | y. | Capitalized
Software Costs
| | -- | --------------------------

| | The
Company follows the accounting guidance as specified in Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.
The Company capitalizes costs incurred in the acquisition or development of software for
internal use, including the costs of the software, materials, and consultants incurred in
developing internal-use computer software once final selection of the software is made.
Costs incurred prior to the final selection of software and costs not qualifying for
capitalization are charged to expense. Capitalized software costs are amortized on a
straight-line basis over three years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | z. | Reclassification
| | -- | ----------------

| | Certain
amounts in prior years financial statements have been reclassified to conform with
the current years presentation.
| | ----------------------------------------------------------------------------------------------------------------------------

| | aa. | Impact
of recently issued accounting standards:
| | --- | -----------------------------------------------

| | In
February 2008, the FASB issued FSP FAS No. 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13",
and FSP FAS No. 157-2, Effective Date of FASB Statement No. 157".
Collectively, the Staff Positions defer the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities
except for items that are recognized or disclosed at fair value on a recurring basis at
least annually, and amend the scope of SFAS 157. As described in Note 3s. above, the
Company adopted SFAS 157 and the related FASB staff positions except for those items
specifically deferred under FSP No. FAS 157-2.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements, the identifiable assets acquired,
the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill
acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of
the nature and financial effects of the business combination. SFAS 141R is effective for
fiscal years beginning after
December 15, 2008. Earlier adoption is prohibited. The impact of SFAS 141R on the Company's
consolidated results of operations and financial condition will depend on the nature and
size of acquisitions, if any, subsequent to the effective date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160).
SFAS 160 establishes accounting and reporting standards that require that (i) the
ownership interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parents equity; (ii) the amount of
consolidated net income attributable to the parent and to the noncontrolling interest be
clearly identified and presented on the face of the consolidated statement of income; and
(iii) changes in a parents ownership interest, while the parent retains its
controlling financial interest in its subsidiary, be accounted for consistently. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008. The Company does not expect that the adoption of SFAS 160
will have significant impact on its consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, Accounting
for Defensive Intangible Assets (EITF 08-7). EITF 08-7 clarifies
the accounting for certain separately identifiable intangible assets which an acquirer
does not intend to actively use but intends to hold to prevent its competitors from
obtaining access to them. EITF 08-7 requires an acquirer in a business combination
to account for a defensive intangible asset as a separate unit of accounting which should
be amortized to expense over the period the asset diminishes in value. EITF 08-7 is
effective for fiscal years beginning after December 15, 2008, with early adoption
prohibited. The Company does not expect that the adoption of EITF 08-7 will have
significant impact on its consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2008, the FASB issued FSP FAS No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142. FSP FAS 142-3
is effective for fiscal years beginning after December 15, 2008 and early adoption is
prohibited. The impact of FSP FAS 142-3 on the Companys consolidated results
of operations and financial condition will depend on the amount of intangibles acquired,
if any, subsequent to the effective date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2008, the FASB issued EITF No. 07-5 Determining whether an Instrument (or
Embedded Feature) is indexed to an Entitys Own Stock (EITF 07-5).
EITF 07-5 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early application is
not permitted. Paragraph 11(a) of SFAS 133 specifies that a contract that would otherwise
meet the definition of a derivative but is both (a) indexed to the Companys own
stock and (b) classified in stockholders equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument or an
embedded feature is indexed to an issuers own stock and thus able to qualify for
the SFAS 133 paragraph 11(a) scope exception. The Company believes adopting this
statement will not have a material impact on the consolidated financial statements
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2008, the FASB issued FSP Accounting Principles Board (APB) 14-1 Accounting
for Convertible Debt instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the issuers
non-convertible debt borrowing rate. FSP APB 14-1
is effective for fiscal years beginning after December 15, 2008 on a retroactive basis.
The Company does not expect that the adoption of FSP APB 14-1 will have significant impact
on its consolidated results of operations and financial condition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

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---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 3: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | In
April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, (FSP FAS 157-4). The FSP
FAS 157-4 supersedes FSP No. FAS 157-3 and provides additional authoritative guidance to
assist both issuers and users of financial statements in determining whether a market is
active or inactive, and whether a transaction is distressed. The FSP FAS 157-4 will be
effective for the quarter ending June 30, 2009. The adoption of the FSP FAS 157-4 will
not have a material effect on the Companys financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assetsan amendment of FASB Statement No. 140 (SFAS 166). SFAS 166
seeks to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a transfer
of financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferors continuing involvement, if any, in
transferred financial assets. SFAS 166 is applicable for annual periods beginning after November
15, 2009 and interim periods therein and thereafter. The Company has not determined the impact,
if any SFAS 166 will have on its consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 4: |  | PREPAID EXPENSES AND OTHER RECEIVABLES
|------- | - | --------------------------------------

| |                                              | December 31,
| | -------------------------------------------- | ------------
|
|
|
|
| | Advances to suppliers                        |             
| | Income/Corporate taxes                       |             
| | VAT and consumption tax                      |             
| | Prepaid expenses                             |             
| | Deposits and restricted cash                 |             
| | Other                                        |             
| |                                              |             
| |                                              |             
| | Total prepaid expenses and other receivables |             
| |                                              |             

|NOTE 5: |  | INVENTORIES
|------- | - | -----------

| |                   | 2008 | 2007
| | ----------------- | ---- | ----
|
|
|
| | Raw materials     |      |     
| | Work in process   |      |     
| | Finished goods    |      |     
| |                   |      |     
| |                   |      |     
| | Total inventories |      |     
| |                   |      |     
| |                   |      |     

|NOTE 6: |  | FINISHED GOODS USED IN OPERATIONS, NET
|------- | - | --------------------------------------

| |                                       | 2008 | 2007
| | ------------------------------------- | ---- | ----
|
|
|
| | Finished goods used in operations     |      |     
| | Accumulated depreciation              |      |     
| |                                       |      |     
| |                                       |      |     
| | Net finished goods used in operations |      |     
| |                                       |      |     

F - 26

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 7: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| |                                   | December 31,
| | --------------------------------- | ------------
|
|
|
|
| | Cost:                             |             
| | Leasehold improvements            |             
| | Machinery and equipment           |             
| | Computer and peripheral equipment |             
| | Office furniture and equipment    |             
| | Motor vehicles                    |             
| |                                   |             
| |                                   |             
| |                                   |             
| |                                   |             
| | Accumulated depreciation:         |             
| | Leasehold improvements            |             
| | Machinery and equipment           |             
| | Computer and peripheral equipment |             
| | Office furniture and equipment    |             
| | Motor vehicles                    |             
| |                                   |             
| |                                   |             
| |                                   |             
| |                                   |             
| |                                   |             
| |                                   |             
| |                                   |             

| | Depreciation
expense was $ 3,126, $ 2,719, and $ 2,892 in the years ended December 31,
2008, 2007 and 2006, respectively.
| | -------------------------------------------------------------------------------------------------------------------------

|NOTE 8: |  | GOODWILL
|------- | - | --------

| | The
Companys balance sheet reflects goodwill, which was obtained as a result of its
acquisitions of Coherent Medical Company (CMG) and HGM Medical Systems (HGM)
in 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                           | 
| | --------------------------------------------------------- | 
|
|
|
|
| | Balance as of December 31, 2006                           | 
| | Changes during 2007:                                      | 
| | Differences from foreign currency translation adjustments | 
| |                                                           | 
| |                                                           | 
| | Balance as of December 31, 2007                           | 
| |                                                           | 
| |                                                           | 
| | Changes during 2008:                                      | 
| | Differences from foreign currency translation adjustments | 
| |                                                           | 
| | Impairment of goodwill (See Note 3i.)                     | 
| |                                                           | 
| |                                                           | 
| | Balance as of December 31, 2008                           | 
| |                                                           | 
| |                                                           | 

F - 27

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 9: |  | INTANGIBLE ASSETS, NET
|------- | - | ----------------------

| | The
Companys balance sheet reflects intangible assets that were obtained as a result of
its acquisitions of CMG and HGM in 2001.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets consisted of the following:
| | ---------------------------------------------

| |                      | Original Amount
as of December 31, | Accumulated Amortization
as of December 31, | Unamortized Balance 
as of December 31,
| | -------------------- | ---------------------------------- | ------------------------------------------- | ---------------------------------------
|
|
|
|
| | Purchased Technology |                                    |                                             | $                                      
| | Product name         |                                    |                                             |                                        
| | Covenant not to      |                                    |                                            
| | compete              |                                    |                                             |                                        
| |                      |                                    |                                             |                                        
| |                      |                                    |                                            
| |                      |                                    |                                             | $                                      
| |                      |                                    |                                             |                                        
| |                      |                                    |                                             |                                        

| | Aggregate
amortization expense for the years ended December 31, 2008, 2007 and 2006 was $ 944,
$ 1,493 and $ 2,879, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | Estimated
amortization expense for the years subsequent to December 31, 2008 is as follows:
| | -------------------------------------------------------------------------------------------

| | Year Ended December 31: | 
| | ----------------------- | 
|
|
|
|
| | 2009                    | 
| | 2010                    | 

|NOTE 10: |  | BANK DEBT
|-------- | - | ---------

| |                                                                   | December 31,
| | ----------------------------------------------------------------- | ------------
|
|
|
|
| | Liabilities under restructured bank debt:                         |             
| | Current Liabilities:                                              |             
| | a) Short term payments under restructured bank debt               |             
| | Long Term Liabilities:                                            |             
| | b) Future cash payments under restructured bank debt              |             
| | c) Gain from debt restructure not recognized under SFAS 15 due to |             
| | contingent payment                                                |             
| |                                                                   |             
| |                                                                   |             
| |                                                                   |             
| |                                                                   |             
| |                                                                   |             
| | Total liabilities under restructured bank debt (a+b+c)            |             
| |                                                                   |             
| |                                                                   |             
| | Total cash payments under restructured debt agreement (a+b) *)    |             
| |                                                                   |             
| |                                                                   |             

| | *) | Amounts
exclude $ 21,875 and $ 25,000 in 2008 and 2007, respectively,                of
principal that is expected to be forgiven as part of the restructuring of the
               bank debt, upon future loan repayments. See below in this Note under the
caption                Recapitalization.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

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---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 10: |  | BANK DEBT (Cont.)
|-------- | - | -----------------

| | For the future cash payments under the new amendment to the restructured bank debt, see Note 19d.
| | -------------------------------------------------------------------------------------------------

| | Prior
to Recapitalization
| | -------------------------

| | Prior
to the recapitalization event, as described in Note 2, the Company had two terms loans
and a revolving credit facility with its bank, Bank Hapoalim BM. The first term loan was
a $ 100,000 loan, which originated in April 2001 (2001 Loan) and carried
an interest rate of LIBOR plus 1.75% immediately prior to the restructuring. The second
term loan was a $ 70,700 loan, which originated in March 2002 (2002 Loan)
and carried an interest rate of LIBOR plus 7.055% immediately prior to the restructuring.
The revolving credit facility originated in April 2001 (Revolving Credit Facility)
and carried an interest rate of LIBOR plus 2.75% on the first $ 35,000 of the
outstanding balance and LIBOR plus 3.00% on the remaining outstanding balance. These
loans were secured by substantially all of the assets of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the original entry into these agreements and in consideration for subsequent
amendments, the Company paid certain fees, entered into certain contingent fee
arrangements and issued options to the bank. These debt issuance costs and the fair value
of options granted as part of the Companys debt agreements are amortized over the
term of the related debt by the effective interest rate method and were recorded as a
discount against the related debt instrument.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recapitalization
| | ----------------

| | As
described in Note 2, the Company completed a recapitalization through an equity
investment by a consortium of investors and a restructuring of its existing credit
facilities with the bank, on December 5, 2006. Prior to the debt restructuring, the
Company was in default on its existing credit facility. As part of the restructuring, the
bank agreed to allow for a non-cash reduction in the overall principal outstanding,
collapse the previous term loans and revolving credit facility into a single term loan,
cancel certain fee arrangements, reduce the interest rate on the credit facility and
waive all default rights under the previous credit facility. In consideration for the
restructuring, the bank received additional warrants to purchase shares of the Company,
received an extension of the exercise period of the warrants previously granted to the
bank and retained one arrangement fee from the prior credit facility.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the restructuring, the bank combined the 2001 Loan, 2002 Loan and Revolving
Credit Facility into a single term loan (Restructured Loan), expiring in
September 2013. The Restructured Loan calls for the forgiveness of $ 50,000 of the
outstanding principal balance over a 24 month period, when scheduled principal payments
are made, with the first reduction of $ 25,000 to have occurred on December 5, 2006.
The remaining $ 25,000 forgiveness of principal was to have occurred in $ 12,500
increments on June 5, 2008 and December 5, 2008 and is non-interest bearing. The interest
rate on the Restructured Loan is the three month LIBOR rate plus 1.5% and is adjusted
quarterly. As part of the restructuring, the bank agreed to retroactively apply the
spread of 1.5% over LIBOR back to April 1, 2006 for the 2001 Loan, the 2002 Loan and the
Revolving Credit Facility. The Company made its first scheduled principal payment of $ 40,000
under the Restructured Loan on December 5, 2006 and $25,000 of principal was forgiven.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 10: |  | BANK DEBT (Cont.)
|-------- | - | -----------------

| | In
2003 and prior, the bank had been issued 9,235,300 warrants to purchase common stock of
the Company as consideration of prior amendments to the 2001 Loan and the 2002 Loan. Of
the warrants held by the bank, 7,824,000 warrants had a price of $ 1.97 per share
and were to expire in November 2013. The remaining 1,411,300 warrants had a price of $ 1.18
per share and were to expire in February 2008. As part of the restructuring, the
expiration date of the 1,411,300 warrants was extended to December 5, 2011. Additionally,
the 7,824,000 warrants were re-priced to $ 1.18 per share. As part of the debt
restructuring, the bank was also granted 176, 000 new warrants to purchase the Companys
shares for $ 1.18 per share, expiring in November 2013.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
restructuring also cancelled existing agreements that called for the Company to pay fees
of $ 3,000 and $ 5,000 to the bank if the Companys share price reached $ 5
and $ 6 per share, respectively. The restructured agreement did retain a previous
provision that called for the Company to pay $ 7,500 to the bank if the Companys
stock price reaches $ 7 per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has considered the restructured bank debt under the criteria of and has accounted
for the restructured bank debt as a troubled debt restructuring in accordance with SFAS
15, which requires that the gross future cash flows of principal and interest be
reflected in the balance sheet. Future cash flows related to interest payments as of
December 31, 2007 were determined based on a rate of 4.70%, which was the three month
LIBOR rate on December 31, 2007 plus 1.5%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 25, 2008, the Company entered into an amendment to the restructuring agreement with
the bank pursuant to which the bank effectively rescheduled principal repayments of $ 30,000
of the $ 40,000 principal that was due for repayment in June and December 2008. The
said $ 30,000 was rescheduled to be paid as follows: $ 10,000 at June 2009, $ 10,000
at June 2010 and $ 10,000 at June 2011.
           Pursuant to the terms of the amendment, the $ 25,000 forgiveness by the bank were also
          rescheduled such that the net repayment of $ 5,000 in June 2008 and the
          repayment of $ 5,000 in December 2008 were each to be accompanied by a
          forgiveness of $ 3,125 and the $ 10,000 repayments in each of 2009,
2010           and 2011 were each to be accompanied by a forgiveness of $ 6,250. The
said           $ 30,000 scheduled for repayment pursuant to the amendment in 2009,
2010           and 2011 bears interest at the 3 month LIBOR rate plus 3.0%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
future cash flows related to interest payments as of December 31, 2008 were determined
based on a rate of 2.90% in respect of the restructured debt and 4.4% in respect of the $ 30,000
of rescheduled for payment under the amendment to the restructuring agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Further,
as part of the June 25, 2008 amendment of the restructuring agreement with the bank, the
Company agreed to a cash fee of $ 4,000 payable to the bank upon the earliest
occurrence of any one of the following events: (a) the Company attains an annual earnings
before interest, depreciation, taxes and amortization, or EBITDA (as defined in the said
amendment), in excess of $ 50,000; (b) the Company makes a public offering for the
sale of its equity or convertible securities (excluding a public offering initiated by
the bank if the shares are those of the bank) ; (c) the Company sells all or
substantially all of its assets; (d) one or more of the Investors referred to in Note 2
above and certain related parties transfer their shares of the Companys stock to
the extent that their aggregate shareholdings are reduced by at least 40% from their
aggregate holdings in the Company as of June 2008; (e) if the aggregate holdings of the
aforesaid persons in the Companys outstanding share capital is reduced by at least
40% from its level as at June 2008 as a result of the issuance by the Company of shares
at a price above $ 1.55 per share, (f) a spin-off of the Companys assets
representing at least 30% of its total assets; or (g) a voluntary repayment by the
Company of at least 75% of the outstanding loan to the bank.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

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LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 10: |  | BANK DEBT (Cont.)
|-------- | - | -----------------

| | During
2008, the Company repaid the bank a principal payment of $5,000. During 2008 and 2007 the
Company paid interest to the bank the amounts of $ 6,440 and $ 8,519, respectively. These
principal and interest payments were deducted from the loan amount as required by SFAS 15.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 and December 31, 2007, the total future cash payments (principal and
variable interest based on 3 month LIBOR as of such dates), in respect of the bank debt,
amounting to $126,031 and $143,729, respectively, resulted in an adjusted unrecognized
gain on restructuring in the amount of $12,774 and $ 6,516 respectively. However,
pursuant to SFAS 15, in light of the contingency arising from the floating LIBOR interest
rate, the Company did not recognize a gain on the restructured debt. For the new amendment to the bank debt, see also Note 19d.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
bank debt is secured by substantially all of the Companys assets See Note 13
| | ----------------------------------------------------------------------------------

| | The
Companys bank debt agreement covenants are described in Note 13 and Note 19.
| | ---------------------------------------------------------------------------------

|NOTE 11: |  | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|-------- | - | -------------------------------------------

| |                                                    | December 31
| | -------------------------------------------------- | -----------
|
|
|
|
| | Compensation related                               |            
| | Income taxes                                       |            
| | Legal costs                                        |            
| | Warranty                                           |            
| | VAT, sales and consumption taxes                   |            
| | Audit, accounting and tax services fees            |            
| | Commissions (external) and other service provision |            
| | IT expenses                                        |            
| | Rent and facilities                                |            
| | Restructuring costs                                |            
| | Other                                              |            
| |                                                    |            
| |                                                    |            
| |                                                    |            
| |                                                    |            
| |                                                    |            

|NOTE 12: |  | OTHER LONG TERM LIABILITIES
|-------- | - | ---------------------------

| |                                                      | December 31
| | ---------------------------------------------------- | -----------
|
|
|
|
| | Deferred tax liability (1)                           |            
| | Income taxes                                         |            
| | Fair value of Interest Rate Swap (See Note 3u.)      |            
| | Obligations to landlord for Santa Clara facility (2) |            
| | Other                                                |            
| |                                                      |            
| |                                                      |            
| |                                                      |            
| |                                                      |            
| |                                                      |            

| | (1) | Amount
relates to deferred tax liability that has been established to reflect                the
tax amortization of goodwill for which no financial statement amortization
               has occurred under U.S. GAAP.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 12: |  | OTHER LONG TERM LIABILITIES (Cont.)
|-------- | - | -----------------------------------

| | (2) | Pursuant
to an amendment dated January 16, 2007 to the Companys lease
               agreement for its Santa Clara, California facilities, the Company agreed
to                repay the landlord with interest for certain building improvements,
which were                funded by the landlord over the remaining period of the lease
term. The Company                has provided the landlord with a letter of credit to
secure payment of such                amounts. The long term principal balance due under
this amendment to the lease                agreement as of December 31, 2008 and December
31, 2007 was $ 473 and                $ 591, respectively.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 13: |  | COMMITMENTS AND CONTINGENT LIABILITIES
|-------- | - | --------------------------------------

| | a. | The
Company leases facilities and vehicles under operating leases that expire on
               various dates through 2019. Lease and rental expenses for the years 2008,
2007                and 2006, amounted to $ 7,226, $ 7,266 and $ 7,134,
respectively.                Future minimum annual lease payments under operating lease
agreements are as                follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |            | Rental of
premises | Lease of
motor vehicles
| | ---------- | ------------------ | -----------------------
|
|
|
|
| | 2009       |                    |                        
| | 2010       |                    |                        
| | 2011       |                    |                        
| | 2012       |                    |                        
| | 2013       |                    |                        
| | Thereafter |                    |                        
| |            |                    |                        
| |            |                    |                        
| |            |                    |                        
| |            |                    |                        
| |            |                    |                        

| | b. | The
Company has entered into an agreement with a real estate developer in Israel
               pursuant to which the developer has agreed to purchase land and build a
new                campus for the Companys facilities in Israel in exchange for the
               Companys agreement to enter into a ten year lease agreement with
specified                terms and conditions. The agreement provides for the delivery of
the premises                for occupancy by the Company no later than December 31, 2009.
The above schedule                of future minimum lease payments includes annual
payments of approximately                $ 2,200 per annum from 2010 through 2019.
The agreements terms                stipulate that a portion of the lease payments
will be based on amounts invested                on internal build-out of the new
facilities requested by the Company. Therefore,                the $ 2,200 per annum
amount includes managements current estimate of                nearly $ 800
per annum for this variable portion of the expected future                lease payments.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
Company has outsourced its IT related services for an eight-year period
               beginning May 2005 for which it expects to incur payment obligations of
               approximately $ 3,600 to $ 4,000 annually through April 2013.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
addition, as of December 31, 2008, the Company has outstanding guarantees and
               letters of credit with various expiration dates of approximately $ 3,000
               principal amounts, of which approximately $1,700 related to facilities,
               $ 1,000 related to a single vendor and the remaining amount related
to car                leases.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Royalty
Payments
| | -- | ----------------

| | The
Company is party to various licensing agreements, which require it to pay royalties on
certain product sales at various rates, ranging from 2.0% to 9.0% of the net selling
price of such products.
           For the years ended December 31, 2008, 2007 and 2006, the Company incurred
          royalty expenses in amounts of $ 2,704, $ 3,045 and $ 3,024
          respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 13: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | The
Company and some of its Israeli subsidiaries are also obligated to pay to the Office of
the Chief Scientist royalties of 3-5% on the sales of products for which participations
were received. The Company incurred royalty expenses of $ 678, $ 344 and $ 451
in 2008, 2007 and 2006, respectively. Royalty-bearing participations not yet paid were
approximately $ 2,400 and $ 3,000 at December 31, 2008 and 2007, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Legal
Contingencies
| | -- | -------------------

| | The
Company is a party to various legal proceedings incident to its business. Based upon the
status of such cases, as determined with the advice of counsel, and managements
assessment and consideration of relevant insurance coverage, management has recorded
provisions for amounts judged to be both quantifiable and probable to be paid. Except as
noted below, there are no legal proceedings pending or threatened against the Company
that management believes are likely to have a material adverse effect on the Companys
business, consolidated financial position, results of operations or cash flows.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Administrative
Subpoena from U.S. Department of Commerce
| | --------------------------------------------------------

| | In
or about March 2006, the Company received an Administrative Subpoena from the Office of
Export Enforcement, Bureau of Industry and Security, U.S. Department of Commerce. The
subpoena sought documents concerning the export of U.S. origin commodities, directly or
indirectly, to the United Arab Emirates or the Islamic Republic of Iran. The U.S.
Government could have assessed a penalty against the Companys U.S. subsidiary,
Lumenis, Inc., because of certain unlicensed exports or reexports to Iran of devices and
associated spare parts and accessories originating with Lumenis, Inc. Exports from the
United States to Iran are subject to two separate sets of regulations, one administered
by the U.S. Department of Commerce and the other administered by the U.S. Department of
the Treasury. The Company cooperated fully with the U.S. Governments investigation
that was administered by the Commerce Department, and in October 2006, the Company
submitted a full report of the matter to the Commerce Department. Upon reviewing the
report, the Commerce Department provided verbal notification to the Companys
outside counsel that it was closing its investigation and was not recommending the
imposition of any penalty. In March 2007, the Company submitted a full report to the
Treasury Department, where the matter is now under review. The Commerce Departments
determination not to take further action does not preclude the Treasury Department from
making its own determination that a penalty should be imposed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Assessment
from the Israel Tax Authority, or (the ITA)
| | --------------------------------------------------------

| | In
or about October 2005, the Company received a notice from the ITA assessing income taxes
for the fiscal years ended December 31, 2000 and 2001 in the amount of $ 81,000,
including interest and penalties. The assessment is primarily based on an attempt by the
ITA to disallow the exemption available for the Companys approved enterprise, which
would then subject the Companys income to the full statutory Israeli income tax
rate in those years, based on the claim that the audited statutory financial statements
submitted for those years are incomplete. In addition, the ITA assessed tax on an alleged
deemed dividend from earnings under the Companys approved enterprise program for
the same period. The Company has filed an appeal notice with the District Court in Haifa,
Israel against the ITA assessment. The trial on this matter is scheduled for November
2009. The Company believes that the entire assessment is in error and that no tax is due,
and it intends to vigorously defend its position in the Israeli courts and under
applicable tax treaties.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 13: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | Miscellaneous
Lawsuits
| | ----------------------

| | The
Company is also a defendant in various product liability lawsuits in which its products
are alleged to have caused personal injury to certain individuals who underwent
treatments using the Companys products, and is furthermore subject to certain
efficacy claims alleging that the Company is in breach of contract with certain
customers. The Company is also a party to various employment claims in some of the
regions in which it operates. The Company is defending itself vigorously, maintains
insurance against the product liability claims and believes that these claims
individually or in the aggregate are not likely to have a material adverse effect on the
Companys business, consolidated financial condition, results of operation or cash
flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 and 2007 the Companys accrual recorded provisions for legal
settlements is in the amount of approximately $ 600 and $ 3,700, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Bank
Covenants
| | -- | --------------

| | The
June 2008 amendment of the Companys restructuring bank debt agreement contains
certain covenants, including covenants that require the Company to comply with certain
financial ratios as set out in the agreement. In addition, $5 million, which was
initially to be repaid on December 31, 2008, but, following negotiations with the
Bank and pursuant to a subsequent amendment (entered into on February 22, 2009) to
the 2008 Bank Debt Amendment, payment was rescheduled for, and actually made on March 31,
2009.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
ratios with which the Company needs to comply under the amended agreement are as follows:
| | ---------------------------------------------------------------------------------------------

| | a) | Debt/EBIDTA:
As of the end of each quarter beginning with the first quarter of           2009, the
Company is required to achieve a Debt/EBIDTA ratio for the four           quarter period
ending in said quarter as follows: first quarter of 2009           6.5, second
quarter of 2009  5.5, third quarter of 2009  5.0, fourth           quarter of
2009  4.5, first quarter of 2010 and all subsequent quarters           until the
end of the loan term  3.5.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | Interest
coverage ratio: As of the end of each fiscal year beginning with           fiscal year
2009, the Company is required to achieve an interest coverage ratio           for such
year as follows: 2009  1; 2010 and all years thereafter until the           end of
the loan term  2.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of the end of the first quarter of 2009, the Company was not in compliance with such
covenants. However, the bank agreed to waive such covenant. See Notes 19b. and 19d.  Subsequent
Events.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Pledges
and Securities
| | -- | ----------------------

| | The
bank debt is secured by a floating charge over the Companys assets, certain fixed
charges over the Companys assets and subsidiaries (including intellectual
property), certain pledges of the stock of our subsidiaries and certain subsidiary
guarantees securing such debt.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 14: |  | FINANCING EXPENSES (INCOME), NET
|-------- | - | --------------------------------

| |                                        | Year ended December 31,
| | -------------------------------------- | -----------------------
|
|
|
|
| | Interest expense and bank charges (1)  |                        
| | Exchange rate (gain) loss, net         |                        
| | Amortization of bank fees (2)          |                        
| |                                        |                        
| |                                        |                        
| | Total expenses (income)                |                        
| | Interest income                        |                        
| |                                        |                        
| |                                        |                        
| | Total financing expenses (income), net |                        
| |                                        |                        
| |                                        |                        

| | (1) | As
discussed above in Note 10  Bank Debt, as a result of the                Companys
bank debt restructuring in December 2006 and in accordance with                SFAS 15,
interest on the Companys debt has been capitalized with the loan.
               Accordingly, interest payments in 2007 and 2008 were recorded against the
bank                debt liability and not as interest expense as they had been prior to
the                restructuring.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
amounts noted in 2006 relate to the amortization of bank fees associated
               with bank loans taken by the Company in years prior to 2005. In December
2006,                the unamortized balances of these fees were written off in
conjunction with the                bank debt restructuring.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 15: |  | FAIR VALUE MEASUREMENTS
|-------- | - | -----------------------

| | In
accordance with SFAS 157, the Company measures its foreign currency derivative
contracts and its Interest Rate Swap derivative liability at fair value using market
approach valuation technique. Foreign currency derivative contracts and fair value of the
Interest Rate Swap derivative liability are classified within Level 2 value hierarchy, as
the valuation inputs are based on quoted prices and market observable data of similar
instruments. As of December 31, 2008, the fair value of foreign currency and the
fair value of the Interest Rate Swap derivative liability, measured on a recurring basis,
was $ 1,597.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 16: |  | SHARE CAPITAL
|-------- | - | -------------

| | Stock
Option and Share Incentive Plans
| | --------------------------------------

| | The
Company has five Stock Option and Share Incentive Plans, described below, all of which
are administered by the Companys board of directors. Options granted under these
plans may not expire later than ten years from the date of grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
regards grants to Israeli grantees who are directors, officers and employees of Lumenis,
such grants may be made in accordance with Section 102 of the Israeli Tax Ordinance (the
Ordinance). Furthermore, pursuant to the 2000 Plan (by virtue of a May 2005
amendment), the 2003 Israel Plan and the 2007 Plan (each as defined below), such Israeli
employees may receive grants that qualify for special tax treatment under the capital
gain route provisions of Section 102(b)(2) of the Ordinance. The Israeli Tax
Authority has approved these plans for such grants. Pursuant to Section 102(b)(2),
qualifying options or shares issued upon exercise of such options are held in trust and
registered in the name of a trustee selected by the Companys board of directors.
The trustee may not release these options or shares to the holders thereof before the
second anniversary of the registration of the options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 16: |  | SHARE CAPITAL (Cont.)
|-------- | - | ---------------------

| | As
regards option grants to US resident employees, the plans (other than the 2003 Israel Plan) provide
for the grant of options that qualify as incentive stock options, as defined
by the U.S. Internal Revenue Code of 1986, as amended, as well as the grant of
non-qualified stock options.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1998
Plan
| | ---------

| | In
1998, the Company acquired Laser Industries Ltd. In connection with the acquisition, the
Company assumed the stock options outstanding under the Laser stock option plans and,
through 1999, granted a number of stock options under one of such plans. No further
options may be granted under the Laser stock option plans. As of December 31, 2008, there
remain 18,000 options outstanding under one of these plans with a weighted average
exercise price of $ 5.38 per share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1999
Share Option Plan (the 1999 Plan)
| | ----------------------------------------

| | The
Companys 1999 Plan permits the grant, through November 2009, of stock options to
directors, officers, employees and certain consultants and dealers of the Company and its
subsidiaries. The following table presents option grant data for the 1999 Plan as of
December 31, 2008:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ordinary Shares Reserved for Option Grants | Options Outstanding | Weighted Average
Exercise Price
| | ------------------------------------------ | ------------------- | -------------------------------
|
|
|
|
| | 5,000,000                                  |                     |                                
| |                                            |                     |                                

| | 2000
Share Option Plan (the "2000 Plan")
| | ----------------------------------------

| | The
 Company's  2000 Plan, as most recently  amended in September  2006,  permits the grant,
              through  July  2011,  of  stock  options  to  directors,  officers,
 employees  and  certain               consultants  and dealers of the Company and its
 subsidiaries.  The following table presents               option grant data for the 2000
Plan as of December 31, 2008:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ordinary Shares Reserved for Option Grants | Options Outstanding | Weighted Average
Exercise Price
| | ------------------------------------------ | ------------------- | -------------------------------
|
|
| | 11,500,000                                 |                     |                                
| |                                            |                     |                                

| | Israel
2003 Share Option Plan (the "2003 Israel Plan")
| | ------------------------------------------------------

| | The
 Company's  2003 Israel Plan permits the grant,  through  March 2013,  of stock  options
              solely to  directors,  officers and  employees of the Company and its
 subsidiaries  who are               residents of Israel.  The  following  table
 presents  option grant data for the 2003 Israel               Plan as of December 31,
2008:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ordinary Shares Reserved for Option Grants | Options Outstanding | Weighted Average
Exercise Price
| | ------------------------------------------ | ------------------- | -------------------------------
|
|
|
| | 2,000,000                                  |                     |                                
| |                                            |                     |                                

F - 36

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 16: |  | SHARE CAPITAL (Cont.)
|-------- | - | ---------------------

| | 2007
Share Incentive Plan (the "2007 Plan")
| | -------------------------------------------

| | In
January  2007,  the Company's  board of directors  approved and adopted the 2007 Plan. In
              September  2007,  the  Company's  board amended this plan and increased the
number of shares               reserved for the exercise of options  granted  under the plan from  10,000,000 to  11,500,000.  The Company's
              employees,  directors,  officers,  consultants,  advisors, suppliers and any other person or
              entity whose  services are  considered  valuable to the Company are eligible to  participate
              in this  plan.  The 2007 Plan  provides  for the  grant,  through  January  2017,  of awards
              consisting of stock options,  restricted  stock,  and other  share-based  awards  (including
              cash and stock appreciation rights).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table presents option grant data for the 2007 Plan as of December 31, 2008:
| | -----------------------------------------------------------------------------------------

| | Ordinary Shares Reserved for Option Grants | Options Outstanding | Weighted Average
Exercise Price
| | ------------------------------------------ | ------------------- | -------------------------------
|
|
|
| | 11,500,000                                 |                     |                                
| |                                            |                     |                                

| | A
summary of the status of the option plans as of December  31, 2008 and changes  during
the               year ended on that date is presented below.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                          | Year ended December 31, 2008 | 
| | ---------------------------------------- | ---------------------------- | 
|
|
|
|
| | Options outstanding at beginning of year |                              | 
| | Changes during the year:                 |                              | 
| | Granted                                  |                              | 
| | Exercised                                |                              | 
| | Forfeited or cancelled                   |                              | 
| |                                          |                              | 
| |                                          |                              | 
| | Options outstanding at end of year       |                              | 
| |                                          |                              | 
| |                                          |                              | 
| | Options exercisable at end of year       |                              | 
| |                                          |                              | 
| |                                          |                              | 

| | The
weighted-average grant-date fair value of options granted during the years ended December
31, 2008, 2007 and 2006 was $ 0.33, $ 0.29 and $ 0.43, respectively. The weighted-average
fair value of the options vested during the year ended December 31, 2008 was $ 0.54. The
total intrinsic value for the options exercised during the years ended December 31, 2008,
2007 and 2006 was $ 0 (in each such year).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 16: |  | SHARE CAPITAL (Cont.)
|-------- | - | ---------------------

| | The
options outstanding as of December 31, 2008, have been separated into ranges of exercise
prices, as follows:
| | ----------------------------------------------------------------------------------------------------------------

| | Range of exercise
prices | Options
outstanding
as of
December 31,
2008 | Weighted
Average
remaining
contractual
life | Weighted
Average
Exercise
Price | Options
exercisable
as of
December
31, 2008 | Weighted
Average
remaining
contractual
life | Weighted
Average
Exercise
Price
| | ------------------------ | ------------------------------------------- | ------------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------- | -------------------------------
|
|
|
|
| | $ 1.00 - $ 1.49          |                                             |                                             |                                 | 12,648,048                                  |                                             |                                
| | $ 1.50 - $ 2.99          |                                             |                                             |                                 | 1,397,776                                   |                                             |                                
| | $ 3.00 - $ 4.99          |                                             |                                             |                                 | 230,416                                     |                                             |                                
| | $ 5.00 - $ 6.99          |                                             |                                             |                                 | 771,025                                     |                                             |                                
| | $ 7.00 - $ 8.99          |                                             |                                             |                                 | 1,129,603                                   |                                             |                                
| | $ 9.00 - $ 10.99         |                                             |                                             |                                 | 1,882,294                                   |                                             |                                
| | $ 11.00 and above        |                                             |                                             |                                 | 898,337                                     |                                             |                                
| |                          |                                             |                                             |                                 |                                             |                                             |                                
| |                          |                                             |                                            
| |                          |                                             |                                             |                                 | 18,957,499                                  |                                             |                                
| |                          |                                             |                                             |                                 |                                             |                                             |                                
| |                          |                                             |                                             |                                 |                                             |                                             |                                

| | On
January 30, 2007 and April 18, 2007, the Company granted its Chief Executive Officer options
to purchase an aggregate of 4,896,959 shares under the 2007 Plan. As part of the Chief
Executive Officers employment agreement, the initial exercise price per share of
the options $ 1.0722 is subject to adjustment to an exercise price per share equivalent
to the effective price per share paid by the Investors under the purchase agreement
relating to the Transaction described above in Note 2, as adjusted to take account
of the issuance of additional shares pursuant to the adjustment mechanism under the
agreement. Based upon the share adjustment, and subject to further adjustment, the
exercise price will be reduced to $ 0.9126 per share. The Company recognizes
compensation expenses related to these options according to the accelerated attribution
method.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 17: |  | INCOME TAXES
|-------- | - | ------------

| | a. | Measurement
of taxable income:
| | -- | ------------------------------

| | According
to the law, until 2007, the results for tax purposes were measured adjusted for changes
in the Israeli CPI.
| | ---------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the Knesset (Israeli parliament) passed an amendment to the
Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law
starting 2008 and thereafter. Starting 2008, the results for tax purposes are measured in
nominal values, excluding certain adjustments for changes in the Israeli CPI carried out
in the period up to December 31, 2007. The amendment to the law includes, inter alia, the
elimination of the inflationary additions and deductions and the additional deduction for
depreciation starting 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the above difference between the reporting currency and the tax basis of
assets and liabilities
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Tax
benefits under Israels Law for the Encouragement of Industry (Taxes),
          1969:
| | -- | ------------------------------------------------------------------------------------------

| | The
Company is Industrial Company, as defined by the Israels Law for the
Encouragement of Industry (Taxes), 1969, and as such, the Company is entitled to certain
tax benefits, mainly amortization of costs relating to know-how and patents over eight
years, accelerated depreciation and the right to deduct public issuance expenses for tax
purposes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 17: |  | INCOME TAXES (Cont.)
|-------- | - | --------------------

| | c. | Tax
benefits under the Israeli Law for the Encouragement of Capital Investments,
               1959 (the Law):
| | -- | -----------------------------------------------------------------------------------------------------------------

| | Certain
of the Companys investment programs have been granted Approved Enterprise status
under the Law. According to the provisions of the Law, the Company has elected the alternative
benefits program and as such is entitled to receive certain tax benefits including
accelerated depreciation of fixed assets in the investment programs as well as a full tax
exemption on undistributed income that is derived from the portion of the Company and its
subsidiaries facilities granted Approved Enterprise status, for a period of 10
years. The benefits commence with the date on which taxable income is first earned. The
period of tax benefits detailed above is subject to expiration upon the earlier of 12
years from the commencement of production or 14 years from receiving the approval.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the Company fulfilling the
conditions stipulated by the Law, regulations published thereunder and the certificates
of approval for the specific investments in an Approved Enterprise. In the
event of failure to comply with these conditions, the benefits may be canceled and the
Company may be required to refund the amount of the benefits, in whole or in part,
including interest.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
this net retained tax-exempt income is distributed, it would be taxed at the corporate
tax rate applicable to such profits as if the Company had not elected the alternative tax
benefits (currently 25% of the gross dividend).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company had approximately $ 133,000 derived from
tax-exempt profits earned by its Approved Enterprises prior to 1999. The
Company has decided not to declare dividends out of such tax-exempt income. Accordingly,
no deferred tax liabilities have been provided on income attributable to the Companys
Approved Enterprises.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
of the Company from sources other than the Approved Enterprise during the
period of benefits will be taxable at regular corporate tax rates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Law came into effect (the Amendment) that
has significantly changed the provisions of the Law (the Old Law). Generally,
investment programs of the Company that have already obtained approval an Approved
Enterprise status from the Investment Center of the Israeli Ministry of Industry, Trade
and Labor (the Investment Center) will continue to be subject to the Old Laws
provisions. With respect to the alternative benefit program, the Amendment
enacted major changes in the manner in which tax benefits are awarded under the Law, such
that companies are no longer required to obtain Investment Center approval in order to
qualify for tax benefits. A qualifying enterprise is a Privileged Enterprise,
rather than Approved Enterprise, as it was previously called. The period of
tax benefits for a new Privileged Enterprise commences in the Year of Commencement.
This year is the later of: (1) the year in which taxable income is first generated by a
company, or (2) year of election of Privileged Enterprise.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 17: |  | INCOME TAXES (Cont.)
|-------- | - | --------------------

| | The
Company has been granted the status of Approved Enterprise, under the Law, with respect
to six investment programs (the Programs). Out of the Programs, the Companys
benefit period related to its first, second and third investment programs has ended,
therefore, the Companys income attributable to these investment programs is no
longer entitled to tax benefits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax benefits attributable to the Companys current Approved Enterprises are
scheduled to expire in phases by 2014.
| | ----------------------------------------------------------------------------------------------------------------------

| | d. | Tax
Assessments:
| | -- | ----------------

| | The
Company has been issued assessments for tax years 2000 and 2001 by the Israel Tax
Authority (ITA) in the amount of approximately $ 81,000, including
interest and penalties. The assessments are primarily based on an attempt by the ITA to
disallow the exemption available for the Companys Approved Enterprises, which would
then subject the Companys income to the full tax rate, and, in addition, tax on an
alleged deemed dividend from earnings under the Companys Approved Enterprise
programs. The Company believes the entire assessment to be an error and that no tax is
due, and intends to vigorously contest the assessments in the courts in Haifa, Israel and
under applicable tax treaties as necessary. The Company believes that it has sufficient
existing reserves for any final settlement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company files income tax returns in various jurisdictions with varying statutes of
limitations. The Company has reached agreements to settle all years through 2006 with no
additional tax due for two of its operating subsidiaries in Israel. The Companys
former European headquarters subsidiary in the Netherlands has received final tax
assessments for all years through 2006 with no taxes due. The Companys subsidiary
in Germany has received final tax assessments for all years through 2003 with no taxes
due and currently is under tax assessment for the years 2004-2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Corporate
Tax Rates in Israel:
| | -- | ------------------------------

| | Taxable
income of Israeli companies is subject to tax at the rate of 27% in 2008, 26% in 2009 and
25% in 2010 and thereafter.
| | -----------------------------------------------------------------------------------------------------------------------------

| | f. | Net
Operating Loss Carry Forward
| | -- | --------------------------------

| | As
of December 31, 2008, the Company had carry forward operating and capital tax losses
totaling approximately $ 305,000 and $ 62,000, respectively, primarily in
Israel, which can be carried forward indefinitely. As a result of applying FIN 48, the
carry forward tax losses exceed the net operating losses used to compute the deferred tax
asset in the Companys financial statement and as shown in Note 17g.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 28, 2006, the Company filed an application for a tax free merger of two of its
Israeli subsidiary companies. In February 2009, the ITA approved the tax free merger,
effective December 31 2006. In accordance with the merger approval, the net operating
losses prior to the merger will be carried forward to subsequent years and may be set off
against the merged companys taxable income, commencing with the tax year
immediately following the merger. The use of the tax loss carry forward from the
effective approved merger date and prior years is limited to the lesser of:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 17: |  | INCOME TAXES (Cont.)
|-------- | - | --------------------

| | 12.5%
of the  aggregate  net operating  loss carry  forwards of the merged  companies
                     prior to the effective date of the merger; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 50%
of the combined companys taxable income in the relevant tax year
| | ---------------------------------------------------------------------

| | The
above-noted limitation on the use of carry forward tax losses applies for a period of
eight years commencing with the tax year immediately following the merger.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the issuance of shares to the Investors on December 5, 2006, the Company
experienced a change in ownership. As a result, the Companys operating loss carry
forwards in the US are subject to limitations as defined under Internal Revenue Code
Section 382 that limit its ability to use substantially all of its US operating loss
carry forwards and certain other deductions in the future.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Deferred
Tax Assets and Liabilities:
| | -- | ------------------------------------

| | Deferred
taxes reflect the net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts recorded for tax
purposes. Significant components of the Companys deferred tax assets and
liabilities are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                | December 31
| | ---------------------------------------------- | -----------
|
|
|
|
| | Deferred tax assets:                           |            
| | Net operating loss carry forward               |            
| | Accrued expenses                               |            
| | Reserves                                       |            
| | Restructured loan (See Note 10)                |            
| | Other                                          |            
| |                                                |            
| |                                                |            
| | Deferred tax assets before valuation allowance |            
| | Valuation allowance                            |            
| |                                                |            
| |                                                |            
| | Deferred tax assets                            |            
| |                                                |            
| |                                                |            
| | Deferred tax liabilities:                      |            
| | Goodwill                                       |            
| |                                                |            
| |                                                |            
| | Deferred tax liabilities                       |            
| |                                                |            
| |                                                |            

| | The
Company has provided valuation allowances in respect of certain deferred tax assets
resulting from tax loss carry forwards and other reserves and allowances due to its
history of losses and uncertainty concerning realization of these deferred tax assets. In
addition, a deferred tax liability has been established to reflect the Companys tax
amortization of goodwill for which no financial statement amortization has occurred under
US GAAP. The decrease in the deferred tax liability amount from 2007 to 2008 resulted
from the impairment of goodwill occurred in 2008 (see also note 8).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 17: |  | INCOME TAXES (Cont.)
|-------- | - | --------------------

| | h. | A
reconciliation of the Companys effective tax expense (benefit) to the
               Companys theoretical statutory tax expense (benefit) is as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Loss before taxes on income, as reported in the |                        
| | consolidated statements of income               |                        
| |                                                 |                        
| | Statutory tax rate in Israel                    |                        
| |                                                 |                        
| | Theoretical tax benefit                         |                        
| | Losses and other items for which a valuation    |                        
| | allowance was provided                          |                        
| | Impairment of goodwill                          |                        
| | Non-deductible expenses                         |                        
| | Other                                           |                        
| |                                                 |                        
| |                                                 |                        
| | Actual tax expense (benefit)                    |                        
| |                                                 |                        
| |                                                 |                        

| | i. | Loss
before taxes on income is comprised as follows:
| | -- | ----------------------------------------------------

| |          |  |  |  
| | -------- |  |  | -
|
|
|
|
| | Domestic |  |  | $
| | Foreign  |  |  |  
| |          |  |  |  
| |          |  | 
| |          |  |  | $
| |          |  |  |  
| |          |  |  |  

| | j. | Taxes
on income are comprised as follows:
| | -- | -----------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Current  |                        
| | Deferred |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | k. | Uncertain
tax positions:
| | -- | ------------------------

| | The
Company adopted the provisions of FIN 48, on January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with SFAS 109 and prescribes a recognition threshold of
more-likely-than-not to be sustained upon examination.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 17: |  | INCOME TAXES (Cont.)
|-------- | - | --------------------

| | A
reconciliation of the beginning and ending amount of total unrecognized tax benefits is
as follows:
| | -----------------------------------------------------------------------------------------------------

| |                                                       | Year ended December 31,
| | ----------------------------------------------------- | -----------------------
|
|
|
|
| | Opening Balance                                       |                        
| | Increases related to prior year tax positions         |                        
| | Decreases related to prior year tax positions         |                        
| | Increases related to current year tax positions       |                        
| | Settlements                                           |                        
| | Decreases related to lapses of statute of limitations |                        
| |                                                       |                        
| |                                                       |                        
| | Closing balance                                       |                        
| |                                                       |                        
| |                                                       |                        

| | The
balance of total unrecognized tax benefits at December 31, 2008, is the potential
benefits of $ 11,732 that, if recognized, would affect the effective rate on the
statement of operations. Uncertain tax positions relate primarily to the on-going Israeli
tax examination, discussed above in Note 17d. and certain withholding taxes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes interest and penalties related to unrecognized tax benefits in tax
expenses. During the years ended December 31, 2008 and 2007, the Company recorded $ 546
and $ 882, respectively for interest and penalties expenses related to uncertain tax
positions. The accrued interest and penalties at December 31, 2008 and 2007 is $
3,456 and $ 2,910, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company files tax returns in many jurisdictions worldwide, but the Companys main
jurisdictions are Israel and the United States. The Company is currently under
examination in Israel with respect to its 2000-2003 tax years for which it cannot
estimate the range of possible changes to unrecognized tax benefits, and is open for
assessment for tax years 2004-2007. The Companys U.S. subsidiaries are open for
assessment for tax years 2001-2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 18: |  | SEGMENTS AND GEOGRAPHIC AREA INFORMATION
|-------- | - | ----------------------------------------

| | a. | General:
| | -- | --------

| | In
2008, following a re-organization (See also Note 3i.) of the reporting structure of the
Company into business units, the Company has determined that it operates under three
reportable segments in accordance with SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information, namely, the development, manufacturing,
marketing sale and service of laser, light based and radio frequency based systems and
appliances for:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Surgical
applications, primarily ear, nose and throat treatment, benign prostatic hyperplasia,
urinary lithotripsy, gynecology, gastroenterology, podiatry, general surgery, and
neurosurgery.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Aesthetic
applications, primarily skin treatments, photo rejuvenation, hair removal, non-invasive
treatment of vascular lesions and pigmented lesions, acne and psoriasis.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Ophthalmic
applications, primarily open angle glaucoma, diabetic retinopathy, secondary cataracts
and age-related macular degeneration.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 18: |  | SEGMENTS AND GEOGRAPHIC AREA INFORMATION (Cont.)
|-------- | - | ------------------------------------------------

| | In
addition, the Company conducts business globally and is managed on a geographic basis of
four separate geographic units, as follows: the Americas, Europe (including the Middle
East and Africa), China/APAC and Japan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Financial
data relating to reportable operating segments:
| | -- | ---------------------------------------------------------

| | 1. | The
following financial information is the information that management uses for
          analyzing the results. The figures are presented on a consolidated basis as
          presented to management. In 2007 and 2006, the Companys reporting
segments           were based on geographical unit (see c. below). Commencing January
2008,           following the re-organization, the Company presents the segment
information           based on its reporting business units. For earlier periods, the
Company presents           only revenues based upon those business units. Other
information for earlier           periods as required by FAS131 is not presented by the
Company as it is           impracticable to do so.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                    | Year ended December 31, 2008
| | ------------------ | ----------------------------
|
|
|
|
| | Revenues           |                             
| |                    |                             
| |                    |                             
| | Gross margin       |                             
| |                    |                             
| | Operating expenses |                             
| | Impairment of      |                             
| | goodwill           |                             
| | Restructuring      |                             
| | expenses           |                             
| |                    |                             
| |                    |                             
| | Operating income   |                             
| | (loss)             |                             
| |                    |                             

| |          | Year ended December 31, 2007
| | -------- | ----------------------------
|
|
|
|
| | Revenues |                             
| |          |                             

| |          | Year ended December 31, 2006
| | -------- | ----------------------------
|
|
|
|
| | Revenues |                             
| |          |                             
| |          |                             

| | (*) | Including
$4,971, $8,490 and $9,397 revenues of the sale of dental and           veterinary
products in 2008, 2007 and 2006, respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | (**) | Unallocated
expenses are primarily related to corporate general and           administrative
expenses, stock based compensation expenses and, amortization of           intangible
assets.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 18: |  | SEGMENTS AND GEOGRAPHIC AREA INFORMATION (Cont.)
|-------- | - | ------------------------------------------------

| | 2. | The
following financial information categories the Companys assets           according
to segments:
| | -- | ----------------------------------------------------------------------------------------------------

| |                      | Year ended December 31, 2008
| | -------------------- | ----------------------------
|
|
|
|
| | Assets (*)           |                             
| | Goodwill             |                             
| | Expenditures in long |                             
| | lived assets         |                             
| | Depreciation and     |                             
| | amortization         |                             
| |                      |                             

| | (*) | Assets
include: trade receivables, inventories, finish goods used in           operations,
property and equipment and other intangibles.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

| | c. | Geographic
information:
| | -- | -----------------------

| |                         | Year ended December 31, 2008
| | ----------------------- | ----------------------------
|
|
|
|
| | Net revenues            |                             
| | Total long-lived assets |                             
| | Depreciation expense    |                             

| |                         | Year ended December 31, 2007
| | ----------------------- | ----------------------------
|
|
|
|
|
| | Net revenues            |                             
| | Total long-lived assets |                             
| | Depreciation expense    |                             

| |                         | Year ended December 31, 2006
| | ----------------------- | ----------------------------
|
|
|
|
| | Net revenues            |                             
| | Total long-lived assets |                             
| | Depreciation expense    |                             
| |                         |                             

|NOTE 19: |  | SUBSEQUENT EVENTS
|-------- | - | -----------------

| | a. | Following
approval by the Companys audit committee and board of directors,                on
March 18, 2009, pursuant to the adjustment mechanism under the purchase
               agreement relating to the Transaction as described above in Note 2 and
based                upon Relevant Amounts incurred by the Company to December 2008, the
Company: (i)                issued 24,466,936 shares to the Investors and their
assignees; and (ii) adjusted                the exercise price under the Closing Warrants
issued to the Investors to                $ 1.0039 per share to reflect the an
exercise price of 110% of the adjusted                price per share paid by the
Investors.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | As
at March 31, 2009, the Company was not in compliance with the Debt/ EBIDTA
               covenant pursuant to the restructuring agreement, as amended, with the
               Companys bank (see Note 13g.). However, the bank agreed to a waiver
of                compliance with the covenant in respect of such quarter.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---

LUMENIS LTD.

|                                              
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                              
|U.S. dollars in thousands                     

|NOTE 19: |  | SUBSEQUENT EVENTS (Cont.)
|-------- | - | -------------------------

| | c. | On
June 25, 2009, the Company consummated a $ 15,000 equity financing,
               pursuant to several share purchase agreements (the 2009 Purchase
               Agreements) entered into with each of LM Partners L.P., Ofer Hi-Tech
               investments Ltd. and two other investors, which provided for the sale and
               issuance by the Company to such investors of an aggregate of 13,636,364 of
the                Companys ordinary shares at a price of $ 1.10 per share.
The 2009                Purchase Agreements also provided for the grant by the Company to
such investors                of five-year warrants to purchase an aggregate of 6,818,183
of the                Companys ordinary shares at an exercise price of $ 1.30
per share.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | On
June 30, 2009, the Company entered into a further amendment (the
               Amendment) to the restructuring agreement with the bank, which
               amended the repayment schedule and interest rate provisions and modified a
               number of covenants in the Restructuring Agreement. The main provisions of
the                Amendment are set out below:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Repayment
schedule, expected forgiveness and interest rate:
| | -- | -----------------------------------------------------------

| | Set
forth in the table below the new scheduled dates for repayment of the bank debt and the
associate expected amounts to be forgiven:
| | --------------------------------------------------------------------------------------------------------------------------------------

| |               | Repayment | Expected Forgiveness
| | ------------- | --------- | --------------------
|
|
|
|
| | June 30, 2010 |           |                     
| | June 30, 2011 |           |                     
| | June 30, 2012 |           |                     
| | June 30, 2013 |           |                     
| | June 30, 2014 |           |                     
| | June 30, 2015 |           |                     
| | June 30, 2016 |           |                     
| | June 30, 2017 |           |                     
| | Totals        |           |                     

| | The
interest rates, as in effect prior to the Amendment are maintained at their previous
level, however, in addition, an interest rate of three month LIBOR rate plus 5.25% is
applied solely as regards to the period in respect of which repayment of the rescheduled
amount (or the proportionate part thereof) was postponed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Warrants
held by the bank:
| | -- | --------------------------

| | The
terms of the warrants held by the bank were modified. One warrant was amended so that the
number of shares issuable thereunder was increased from 8,000,000 to 9,411,300 and the
exercise price was reduced from $1.18 per share to $1.00 per share; and the second
warrant was amended so that the number of shares issuable thereunder was increased from
1,411,300 to 2,500,000 and the exercise price was increased to $1.40 per share. For both
warrants the exercise period was extended to June 30, 2014.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Cash
fees to the bank:
| | -- | ----------------------

| | The
period during which the Company would be obligated to pay the cash fee of $7,500
relating to the market price of the Companys shares is extended to March 31,
2017 or the date of repayment to the bank in full of our bank debt, if earlier. In
addition, the Cash Fee payable to the bank upon the occurrence of certain other events
remains in place but is increased from $4,000 to $6,000 and certain
conditions have been modified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---

| | 4. | Financial
covenants:
| | -- | --------------------

| | The
existing financial covenants were modified. Initially, the only financial covenant to
which the Company will be subject, commencing as of the end of the second quarter of 2009
and remaining in effect until the end of the second quarter of 2011, is the requirement
that the Company has available and accessible consolidated cash reserves of at least $20,000.
Effective from the end of the third quarter of 2011 until repayment of the Bank debt, the
Company will be required to comply with certain financial covenants as further disclosed
in the Amendment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 47

---

---

# INDEX TO EXHIBITS

|Exhibit |  | Description
|------- |  | -----------

|1.1 |  | Memorandum
of Association of the Registrant, as amended July 26, 2001 (English translation),
incorporated by reference to Exhibit 3.1 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 2001, File #000-27572, filed
with the SEC on April 1, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Articles
of Association of the Registrant, as amended and restated December 26, 2007. *D (1.2)
|--- |  | ----------------------------------------------------------------------------------------------

|4.(b)1 |  | Lease
Agreement dated March 19, 1998 between Skan Group Yokneam Ltd. and Lumenis Ltd.
(English Translation) with respect to the Yokneam, Israel facility, incorporated by
reference to Exhibit 10.31 to the Registrants Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, File #000-27572, filed with the SEC on March 30,
2000.
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)2 |  | Agreement
dated December 25, 2008 between Engel Resources and Development Ltd. and Lumenis Ltd.
(English              Translation) relating to the extension of the Lease dated March 19,
1998 with respect to the Yokneam,              Israel facility. **
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)3 |  | Lease
Agreement dated September 5, 2006 between Aspen Real Estate Ltd. and Lumenis Ltd. with
respect to second facility in Yokneam, Israel. *B (4.8)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)4 |  | Lease
dated as of July 19, 2006 between HDP Associates, LLC. and Lumenis Inc. with respect to
the              Santa Clara, California facility. *B (4.10)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)5 |  | Lease
Agreement dated as of September 27, 2006 between Ascend Realty Investments LLC and
Lumenis Holdings              Inc. with respect to the Salt Lake City facility. *B (4.19)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)6 |  | Construction
and Lease Agreement dated January 8, 2008 between Industrial Buildings Corporation Ltd.
and              Lumenis Ltd. (English Translation) with respect to proposed new Yokneam, Israel
facility. *D (4.(b)6)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)7 |  | Letter
Agreement with Bank Hapoalim B.M dated June 17, 2003. *A (10.5)
|------ |  | ----------------------------------------------------------------------

|4.(b)8 |  | Stock
Pledge Agreement dated as of July 1, 2003 between Bank Hapoalim B.M. and Lumenis Ltd. *A
(10.6)
|------ |  | -----------------------------------------------------------------------------------------------------

|4.(b)9 |  | Stock
Pledge Agreement dated as of July 1, 2003 between Bank Hapoalim B.M. and Lumenis Holdings
Inc.              *A (10.7)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------

|4.(b)10 |  | Cash
Fee-Ltd. Stock Letter, dated as of November 19, 2003, between Lumenis Ltd. and Bank
Hapoalim B.M.,              incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the              Quarterly Period ended September 30,
2003, File #000-27572, filed with the SEC on November 19, 2003.
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)11 |  | Restructuring
Agreement dated as of September 29, 2006 between Lumenis Ltd. and Bank Hapoalim
             B.M.*B (4.21)
|------- |  | ------------------------------------------------------------------------------------------------------------------------

|4.(b)12 |  | Amendment
No. 1 to Restructuring Agreement dated as of December 5, 2006 between Lumenis Ltd. and
Bank              Hapoalim B.M. *B (4.22)
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)13 |  | Amendment
No. 2 to Restructuring Agreement dated June 25, 2008 between Lumenis Ltd. and Bank
Hapoalim              B.M. *D (4.(b)15)
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------

|4.(b)14 |  | Amendment
to Amendment No. 2 to Restructuring Agreement dated November 10, 2008 between Lumenis
Ltd. and              Bank Hapoalim B.M. **
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)15 |  | Amendment
No. 2 to Amendment No. 2 to Restructuring Agreement dated February 22, 2009 between
Lumenis              Ltd. and Bank Hapoalim B.M. **
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)16 |  | Letter
of Waiver from Bank Hapoalim B.M. dated June 17, 2009. **
|------- |  | ----------------------------------------------------------------

|4.(b)17 |  | Amendment
No. 3 to Restructuring Agreement dated June 30, 2009 between Lumenis Ltd. and Bank
Hapoalim              B.M. **
|------- |  | --------------------------------------------------------------------------------------------------------------------------

|4.(b)18 |  | Purchase
Agreement dated as of September 30, 2006 by and among Lumenis Ltd., Ofer Hi-Tech
Investments              Ltd., LM Partners L.P. and LM (GP) L.P.*B (4.20)
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)19 |  | Form
of Purchase Agreements dated June 21, 2009 between Lumenis Ltd. and each of (1) Ofer
Hi-Tech              Investments Ltd., (2) LM Partners L.P. and (3) Agate Medical
Investments (Cayman) L.P. and Agate Medical              Investments L.P. **
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)20 |  | Registration
Rights Agreement dated as of December 5, 2006 by and among Lumenis Ltd., Ofer Hi-Tech
             Investments Ltd., LM Partners L.P. and Bank Hapoalim B.M. *B (4.23)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)21 |  | Amendment
No. 1 to Registration Rights Agreement dated June 25, 2009 by and among Lumenis Ltd.,
Ofer              Hi-Tech Investments Ltd. and LM Partners L.P. **
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)22 |  | Amended
and Restated Warrant No. 5 dated June 30, 2009  issued to Bank Hapoalim B.M. to purchase
             9,411,300 ordinary shares on or before June 30, 2014. **
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)23 |  | Amended
and Restated Warrant No. 6 dated June 30, 2009  issued to Bank Hapoalim B.M. to purchase
             2,500,000 ordinary shares on or before June 30, 2014. **
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

---

|4.(b)24 |  | Warrant
No. 9 dated June 4, 2007 issued to LM Partners L.P. to purchase 11,936,707 ordinary
shares on or              before December 5, 2011. **
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)25 |  | Warrant
No. 10 dated June 4, 2007 issued to Ofer Hi-Tech Investments Ltd. to purchase 9,313,293
ordinary              shares on or before December 5, 2011. **
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)26 |  | Form
of 2009 Warrant (Warrants Nos. 11 through 14) dated June 25, 2009 issued to (1) Ofer
Hi-Tech              Investments Ltd.; (2) LM Partners L.P.; (3) Agate Medical
Investments (Cayman) L.P.; and (4) Agate              Medical Investments L.P. to
purchase an aggregate of 6,818,183 ordinary shares. **
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)27 |  | Trust
Agreement dated as of September 30, 2006 by and among Ofer Hi-Tech Investments Ltd. and
the              beneficiaries thereunder, incorporated by reference to Exhibit 1 to
Schedule 13D, file #005-54169, filed              by Ofer Hi-Tech Investments Ltd. and
others with the SEC on July 10, 2007.
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)28 |  | Voting
and Option Agreement dated as of August 31, 2007, by and between Eli Azut and Mirkae
Tikshoret              Ltd. of the one part and Ofer Hi-Tech Investments Ltd. of the
other part, incorporated by reference to              Exhibit 1 to Amendment No. 1 to
Schedule 13D, file #005-54169, filed by Ofer Hi-Tech Investments Ltd. and
             others with the SEC on June 23, 2008.
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)1 |  | 1999
Share Option Plan, as amended April 30, 2003. *C (4.1)
|------ |  | -----------------------------------------------------------

|4.(c)2 |  | 2000
Share Option Plan, as amended September 30, 2006. *C (4.2)
|------ |  | ---------------------------------------------------------------

|4.(c)3 |  | Israel
2003 Share Option Plan, as amended May 27, 2003, incorporated by reference to
Exhibit A to the Registrants Definitive Proxy Statement for its 2003 Annual
Meeting of Shareholders filed with the SEC under cover of Schedule 14A on April 30,
2003, File #000-27572.
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)4 |  | 2007 Share
Incentive Plan, as amended September 23, 2007, incorporated by reference to Appendix A
to Exhibit 99.1 to the Registrants Current Report on Form 6-K, File
#000-27572, furnished to the SEC on November 21, 2007.
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)5 |  | Form
of post-2006 recapitalization Indemnification Agreement. *B (4.6)
|------ |  | ----------------------------------------------------------------------

|8 |  | List
of Subsidiaries. **
|- |  | ------------------------

|11.1 |  | Lumenis
Business Conduct Policy. *D (4.(c)7)
|---- |  | --------------------------------------------

|11.2 |  | Lumenis
Code of Business Ethics for Financial Officers. *D (4.(c)8)
|---- |  | -------------------------------------------------------------------

|12.1 |  | Certification
of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13 |  | Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. **
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15.1 |  | Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global Limited,
independent registered public accounting firm. **
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

|15.2 |  | Consent
of Ziv Haft, a BDO member firm, independent registered public accounting firm. **
|---- |  | -----------------------------------------------------------------------------------------

|15.3 |  | Consent
of Blick Rothenberg, independent registered public accounting firm for Lumenis (UK)
Limited until December 31, 2007. **
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

|
|

|Note:
 Where  parenthetical  references  follow the description of an exhibit,  such
 references  relate to the exhibit number under which such exhibit was initially filed
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*A | Incorporated
by reference to said document filed as an exhibit to the Registrants Quarterly
Report on Form 10-Q for the Quarterly Period ended June 30, 2003, File
#000-27572, filed with the SEC on August 19, 2003.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*B | Incorporated
by reference to said document filed as an exhibit to the Registrants Registration
Statement on Form 20-F, File #0-27572, filed with the SEC on May 1, 2007.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*C | Incorporated
by reference to said document filed as an exhibit to a Post-Effective Amendment to the
Registrants Registration Statement on Form S-8, File #333-148460, filed with
the SEC on April 2, 2008.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*D | Incorporated
by reference to said document filed as an exhibit to the Registrants Annual Report
on Form 20-F for the fiscal year ended December 31, 2007, File #000-27572,
filed with the SEC on June 25, 2008.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Filed
herewith.
|-- | ---------------



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