UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549

                                 FORM 10-K

      [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934 For the fiscal year
             ended December 31, 1999, or


      [   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
             For the transition period from ____ to _____

                      Commission file number: 0-13012

                          ESC MEDICAL SYSTEMS LTD.
           (Exact name of registrant as specified in its charter)


               Israel                                        N.A.
(State or other jurisdiction of                        (I.R.S. Employer
  incorporation or organization)                      Identification No.)


P.O. Box 240, Yokneam, Israel                                20692
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code: 972-4-959-9000

Securities Registered pursuant to Section 12(b) of the Act:  None.

                                                   Name of exchange
Title of each class                                on which registered
-------------------                                -------------------
          None                                            None

Securities registered pursuant to Section 12(g)of the Act:

               Ordinary Shares, NIS 0.10 par value per share
               ----------------------------------------------
                              (Title of Class)

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 X No _

                                  <PAGE>

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]

The number of Ordinary Shares, NIS 0.10 par value per share, of the
registrant outstanding as of March 17, 2000 was 27,629,017.

The aggregate market value of the Ordinary Shares held by non-affiliates of
the registrant, based on the closing price of the Ordinary Shares on March
17, 2000 as reported on the Nasdaq National Market, was approximately
$336,513,374. Ordinary Shares held by each current executive officer and
director and by each person who is known by the registrant to own 5% or
more of the outstanding Ordinary Shares have been excluded from this
computation in that such persons may be deemed to be affiliates of the
Company. Share ownership information of certain persons known by the
Company to own greater than 5% of the outstanding common stock for purposes
of the preceding calculation is based solely on information on Schedule 13G
filed with the Commission and is as of December 31, 1999. This
determination of affiliate status is not a conclusive determination for
other purposes.


                    Documents Incorporated by Reference

Portions of the registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated herein by reference in response to items 10
through 13 in Part III of this report.


                                     2


ITEM 1.    BUSINESS.

GENERAL

ESC Medical Systems Ltd. ("ESC" or the "Company") is a world leader in the
design, manufacture, and marketing of a broad range of pulsed light and
laser-based systems for the aesthetic and medical communities. The Company
is a pioneer in bringing new technologies and applications to these market
segments. ESC offers a broad line of products making ESC one of the largest
companies in each of its market segments. The primary markets served
include dermatology, plastic surgery, cosmetic surgery, general surgery,
ear, nose and throat (ENT), gynecology, oncology, urology, orthopedics,
veterinary medicine, oral surgery and dentistry.

The Company was incorporated in Israel on December 21, 1991. In January
1996, the Company completed an initial public offering ("IPO") in the
United States. Since its IPO, the Company has raised both equity and debt
finance in the public capital market.

The Company has historically expanded its product line through internal
development, joint ventures and strategic business acquisitions. The most
significant of those transactions was the acquisition of Laser Industries
Limited ("Laser Industries"), completed in February 1998. In particular,
the Company seeks products that enhance its ability to adapt to changing
market needs.

Unless the context otherwise requires, all references to the Company or ESC
shall mean ESC and each of its subsidiaries.

MARKET FOCUS

The Company's systems are designed for use in a variety of medical
environments, as well as aesthetic salons and clinics. The principal target
markets for the Company's aesthetic products are physicians with private
practices or clinics, as well as leading beauty/hair removal centers. These
are customers who wish to tap into the vanity market and are looking to
increase their revenues and reduce dependence on reimbursements. The target
market for the Company's surgical products are hospitals and outpatient
clinics that use lasers for surgical procedures.

TECHNOLOGY

Most of the Company's products are based on proprietary technologies using
intense pulsed light ("IPL") or state-of-the-art laser applications
pioneered by the Company.

INTENSE PULSED LIGHT TECHNOLOGY. The Company offers several products that
incorporate patented proprietary IPL technology. Applications of the
Company's IPL products are primarily aimed at the private aesthetic markets
and include: hair removal; non-invasive treatment of varicose veins and
other benign vascular lesions; and removal of benign pigmented lesions; such
as age spots and tattoos. The products include: MultiLight for vascular and
pigmented lesions; VascuLight for both deep and superficial vascular
lesions and pigmented lesions; and EpiLight Hair Removal System for hair
removal. The Company introduced the AestiLight, a compact, lightweight, IPL
hair removal system to selected markets outside the United States in 1999.
The Company has recently introduced several upgrades and added features to
its existing product line.

                                    3

LASER TECHNOLOGY. The Company offers many laser systems, utilizing CO2
ruby, alexandrite, Nd:YAG, erbium, holmium and diode technologies. The
lasers come in a variety of sizes and power levels designed to serve a
broad range of medical procedures in physician offices, out-patient clinics
and hospitals. In addition, the Company offers over 500 application-driven
laser accessories designed for integration with its laser systems. Many of
these accessories are disposables, which generate recurring revenue.

PHOTODYNAMIC THERAPY (PDT). The Company has developed two systems using
PDT, both of which are saleable internationally, but have not been cleared
for use in the United States by the Food and Drug Administration. The
Company holds exclusive worldwide rights to patented technology in the PDT
field, which are intended for use in the treatment of malignant and benign
skin and other tumors.

PRODUCTS AND APPLICATIONS

AESTHETIC APPLICATIONS. The Company's main focus in the past years has been
in the quickly growing aesthetic market, responding to the public's demand
to look better. The primary applications for ESC products are: hair
removal; removal of benign vascular lesions, including leg veins, spider
veins on legs and face, rosaceae and other red spots; removal of benign
pigmented lesions including brown spots, age spots, sunspots and tattoos;
skin rejuvenation and wrinkle removal; and cellulite therapy. In 1999,
aesthetic applications accounted for 53% of the Company's revenues.

SURGICAL APPLICATIONS. Laser Industries, which was acquired by the Company
in 1998, has been a leading force in the surgical applications marketplace
for close to thirty years, with a wide range of product offerings. In 1999,
surgical applications accounted for 22% of the Company's revenues. The
major specialties include:

        EAR, NOSE AND THROAT (ENT). The Company has pioneered several
        applications for ambulatory and operating room procedures including
        snoring and nasal airways. The most recent product introduced to
        the ENT market is OtoLam, for replacing the tubes inserted into
        children's ears when suffering from otitis media. These chronic ear
        infections affect 20% of all children.

        GYNECOLOGY. The Company offers several systems for various
        gynecologic applications including laparoscopy, endometrial
        ablation, microsurgery and tubal infertility and lesions of the
        lower genital tract. The Company's newest product, GyneLase, treats
        menorraghia, excessive menstrual bleeding, using an in-office
        procedure of endometrial ablation. Menorraghia affects 20% of all
        menstruating women.

        NEUROSURGERY. The Company offers lasers and accessories for brain
        tumor and disk microsurgery, and neuroendoscopy.

        ORTHOPEDICS. The Company offers a Holmium laser system for
        orthopedic surgical procedures, including knee and shoulder
        arthroscopic procedures.

        UROLOGY. The Company offers a variety of Nd:YAG lasers in varying
        power ranges and a broad range of fiber delivery devices for laser
        treatment of the bladder, urethra, prostate and external genitalia.
        In addition, the Company offers urologists its Holmium laser for
        lithotripsy (a laser procedure which results in the breakage of
        kidney, urethra and bladder stones) and for various soft tissue
        procedures.

                                        4

        VETERINARY. The Company has developed a compact, easy to use CO2
        laser for the veterinary market. The many surgical applications
        include: removal of cysts, tumors and warts; specialized internal
        procedures, neutering, spaying and declawing.

ORAL SURGERY AND DENTAL APPLICATIONS. The Company has developed several
dental lasers to enable dentists to perform hard and soft tissue
applications including drilling, cavity preparation, gum trimming and
periodontic procedures, as well as teeth whitening.

INDUSTRIAL APPLICATIONS. The industrial unit develops and sells a number of
different laser systems for specialized applications based upon customer
requests. As part of the restructuring program, as described under in Item
7 below, Surgilase of Providence, Rhode Island, an industrial division of
Sharplan Laser Inc. in the United States, was integrated into Spectron UK
so that it could function as the United States sales and marketing arm
of Spectron UK.

PRODUCTS UNDER DEVELOPMENT

In order to maintain its competitive position, the Company believes it is
imperative to develop new products and introduce new technologies.

        INTENSE PULSED LIGHT PRODUCTS (IPL). The Company is continuously
        expanding the applicability of its IPL products. The Company has
        developed an upgrade policy enabling its existing IPL customers to
        enhance the capability of their (PhotoDerm) MultiLight, VascuLight
        and EpiLight units. The Company is developing additional
        applications for these devices and enhancing their safety and
        effectiveness for a variety of aesthetic applications.

        SURGICAL PRODUCTS. Several novel surgical applications are under
        development. These include, among others, lithotripsy with a
        Holmium laser, nasal office procedures for breath improvement with
        a CO2 compact laser and the treatment of very deep veins with a
        novel disposable catheter.

        DENTAL PRODUCTS. The Company is developing a range of dental lasers
        to enable dentists to treat hard tissue and soft tissue
        applications. The most recent product that completed its
        development and was introduced to markets outside of the United
        States is the Opus 20. This device enables the dentist to perform
        hard tissue drilling at speeds equal to high speed mechanical
        drills. The advantage of this device is its painless application.
        The Company is also developing a variety of hand-pieces and
        accessories for its dental lasers.

BUSINESS STRATEGY

The Company intends to maintain its leadership position in the aesthetic
and surgical markets by providing leading edge high quality systems,
accessories and service. While its primary markets are cosmetic medical
practitioners and surgeons, the Company intends to broaden its sales
channels and product offerings to reach a wider audience for its products.
The Company intends to use the resources at its disposal to ensure that it
can compete effectively in each of the markets it has targeted.

                                      5

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Please refer to Note 14 of the Financial Statements with respect to
financial information about industry segments.

MARKETING, DISTRIBUTION AND SALES

As part of the restructuring (referred to in Item 7 hereafter) which took
place during 1999, the Company set up five business units that enable it to
address its markets more effectively. Three of the business units handle
the aesthetic and surgical markets and are organized geographically. The
other two units are the Dental Unit and the Industrial Unit. Each business
unit employs a variety of distribution channels such as direct sales by
Company personnel, independent representatives, and regional distributors,
depending upon the nature of the marketplace.

ESC Americas handles aesthetic and surgical sales for the Company in the
United States, Canada and South America. There is a direct sales force in
the United States in addition to distributors in the United States, Canada
and South America.

ESC Europe coordinates aesthetic and surgical sales for the Company's
European subsidiaries, in the United Kingdom, France, Italy, and Germany,
as well as sales via distributors in other European countries, the Middle
East and Africa.

ESC Asia coordinates aesthetic and surgical sales for the Company's
subsidiary in Japan, with a direct sales force as well as distributors in
Southeast and Northeast Asia.

The Dental Unit is setting up an international sales network made up
primarily of distributors and independent sales agents.

The Industrial Unit designs, manufactures and sells its products using a
direct sales force located in the United Kingdom and United States.

The Company's marketing and distribution practice is based upon the
manufacture and delivery of products to customers based upon specific
orders received from its customers. On average, the Company delivers a
customer order within two to three weeks of receipt of the order and
therefore, does not have, and does not rely upon, any material backlog.

Generally, the Company sells more of its products during the second and the
fourth fiscal quarters as compared with the first and third fiscal
quarters. The Company believes that this is because during the third fiscal
quarters many of the Company's physician customers take summer vacation and
during the first fiscal quarter many hospitals and medical organizations
have yet to assess their needs and budget for the upcoming year.

                                       6


BREAKDOWN OF NET SALES BY REGION



                                              FOR THE YEAR ENDED
                                                   DECEMBER 31
                                          (dollar amounts in thousands)
                                 -----------------------------------------------
                                    1 9 9 9         1 9 9 8          1 9 9 7
                                 --------------  --------------  ---------------

North America..................      $   51,223       $ 117,377        $ 109,687
Europe.........................          40,774          69,968           43,167
Asia...........................          33,662           9,375           16,051
Central and South America......           4,079          13,655           17,671
Other..........................          12,413          14,831            7,407
                                 --------------  --------------  ---------------
                                      $ 142,151       $ 225,206        $ 193,983
                                 ==============  ==============  ===============

To assist customers in financing their purchases of the Company's products,
the Company or its distributors may introduce them to one of a number of
independent leasing companies. As is common in this industry, a substantial
portion of the Company's sales are completed in the last few weeks of each
calendar quarter.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The Company's products are manufactured from a large number of parts, using
standard components and subassemblies supplied by subcontractors and
vendors to the Company's specifications.

The Company's policy is to maintain more than one source for each of its
major components, to the extent possible, although in some cases parts are
supplied by a sole source. Due to their sophisticated nature, certain
components must be ordered three to four months in advance, resulting in a
substantial lead time for each production run. In the event that such
limited source suppliers are unable to meet the Company's requirements in a
timely manner, the Company may experience an interruption in production
until an alternate source of supply can be obtained.

The Company uses an outsourcing vendor to store and stock its raw material
inventory.

The Company orders raw materials, including optical and electronic parts,
which it sends in kits to subcontractors for assembly of components and
subassemblies. Assembly (in part), integration, and quality assurance of the
components and subassemblies are conducted at the Company's manufacturing
facilities. In some cases, quality is tested on-site at the subcontractor's
facility.

RESEARCH AND DEVELOPMENT

The Company's research and development strategy is to develop high-quality
products and related accessories to maintain ESC's competitive advantage.
The Company's research and development expenses, net of participations by
the Israeli Office of the Chief Scientist, were approximately $15.35
million in 1999, $18.68 million in 1998 and $17.37 million in 1997. The
Company believes that the close interaction between its research and
development, marketing, and manufacturing groups allows for timely and
effective realization of the Company's new product concepts.

                                     7

ESC receives certain grants and tax benefits from, and participates in,
programs sponsored by the Government of Israel.

Israeli tax law permits, under certain conditions, a tax deduction in the
year incurred for expenditures (including capital expenditures) in
scientific research and development projects, if the expenditures are
approved by the relevant Israeli Government Ministry (determined by the
field of research), and the research and development is for the promotion
of enterprise and is carried out by or on behalf of a company seeking such
deduction. Expenditures not approved as such are deductible over a three
year period; however; grants made available to the Company by the
Government of Israel are considered taxable income.

Under the Law for the Encouragement of Industrial Research and Development
1984 (the "Research Law"), research and development programs that are
approved by a research committee and meet certain criteria are eligible for
grants against payment of royalties from the sale of the products developed
in accordance with the program. Regulations promulgated under the Research
Law generally provide for the payment of royalties to the Office of the
Chief Scientist of Israel ranging from 3% to 5% on sales of products
developed as a result of a research project and so funded until 100% of the
dollar-linked amount of the grant (carrying an interest rate at LIBOR) is
repaid. The Research Law requires that the manufacture of any product
developed as a result of research and development funded by the Israeli
Government take place in Israel. It also provides that any know-how from
the research and development, that is used to produce the product, may not
be transferred to third parties without the approval of a research
committee. Such approval is not required for the export of any products
resulting from such research and development.

In connection with an initial program approved by the Office of the Chief
Scientist, the Company and an Israeli subsidiary received participation
payments from the State of Israel in the amount of approximately $275,000
for the year ended December 31, 1999. In return for the Government's
participation payments, the Company and its subsidiary are obliged to pay
in full royalties at a rate of 3% to 5% of sales of the developed product.
As of December 31, 1999, the balance of the Company's outstanding
obligation to the State of Israel in connection with the participation
payments is approximately $6,234,000, which will be repaid to the
government in the form of royalties on sales of those products that reach
the market.

COMPETITION

ESC faces keen competition in its different market niches. Competition
arises from utilizing other light products as well as alternate technologies.
Competitors range in size from small single product companies to large
multifaceted corporations, which may have greater resources than those
available to the Company. Major competitors in the aesthetic market place
are: Coherent, Inc., Candela Corporation, Cynosure, Inc., and Laserscope,
Inc.

In addition, the Company competes in a market subject to rapid
technological change. The entry of new companies or new technologies could
have a material adverse effect on the Company.

PATENTS AND INTELLECTUAL PROPERTY

The Company has obtained and now holds approximately 84 patents in the
United States and approximately 38 additional patents outside of the United
States, and has applied for approximately 34 and 64 additional patents in
the United States and outside of the United States, respectively. In
general, however, the Company relies on its research and development
program, production techniques and marketing and service programs to

                                    8

advance its products. The Company also licenses certain of its technologies
from third parties pursuant to various license agreements. Patents filed
both in the United States and Europe have a life cycle of twenty years
from the filing date. However, patents filed in the United States prior to
June 1995 expire either twenty years from filing or seventeen years from
issue date. None of the Company's material patents are expected to expire
in the near future.

Technologies related to the Company's 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.

The Company's 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 of certain of
the Company's license agreements with respect to many third party patents,
could have a material adverse effect on the Company. The patent position of
many inventions in the areas related to the Company's 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
cases or the degree of protection afforded under such patents. As a result,
there can be no assurance that patent applications relating to the
Company's products or technologies will result in patents being issued,
that patents issued or licensed to the Company will provide protection
against competitors or that the Company will enjoy patent protection for
any significant period of time.

It is possible that patents issued or licensed to the Company will be
successfully challenged, or that patents issued to others may preclude the
Company from commercializing its products under development. Litigation to
establish the validity of patents, to defend against infringement claims or
to assert infringement claims against others, if required, can be lengthy
and expensive, and may result in a determination which is adverse to the
Company. There can be no assurance that the products currently marketed or
under development by the Company will not be found to infringe patents
issued or licensed to others. Likewise, there can be no assurance that
other parties will not independently develop similar technologies,
duplicate the Company's technologies or, with respect to patents which are
issued to the Company or rights licensed to the Company, design around the
patented aspects of the technologies. Third parties could also obtain
patents that may require licensing of their patented technology for the
conduct of the Company's business.

Because of the rapid development of technologies which relate to the
Company's products, there may be other patents which relate to basic
relevant technologies and other technologies marketed by the Company. From
time to time, the Company receives inquiries from third-parties contending
that their patents are being infringed by the Company. If such
third-parties were to commence infringement suits against the Company, and
such patents were found by a court to be valid and infringed upon by the
Company, the Company could be required to pay damages and make royalty
payments. Depending on the nature of the patent found to be infringed upon
by the Company, a court order requiring the Company to cease such
infringement could have a material adverse effect on the Company.

GOVERNMENT REGULATION

The products manufactured and marketed by the Company are subject to
regulatory requirements mandated by the United States Food and Drug
Administration (FDA), the European Union and similar authorities in other
countries. The Company believes that its principal products will be
regulated as "devices" under United States Federal law and FDA regulations.

                                     9

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 Good Manufacturing Practice (GMP), or the Quality
System Regulations (QSR), which must be followed at all times. The GMP and
QSR regulations impose certain procedural and documentation requirements
upon a company with respect to design, manufacturing and quality assurance
activities. These GMP and 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. It also includes the
tracing of consignees after distribution as well as documentation of
training, follow-up and customer complaint reporting. Design control was
implemented by the FDA in 1998 as part of the QSR Quality Systems
Requirements.

The Company received a Quality System Certification Award for being in
compliance with ISO 9001. ISO 9001 is a globally recognized standard
established by the International Standard Organization in Geneva,
Switzerland and has been adopted by more than 90 countries worldwide. ISO
9001 embraces all principles of the GMP and QSR and is the most
comprehensive of the quality assurance standards. ISO certification is
based upon adherence to established quality assurance standards and
manufacturing process control.

In 1998, the European Union (EU) determined that marketing or selling any
medical product or devices with the European community required a CE Mark.
The Company has complied with the EU standards and has received the CE Mark
for all our Intense Light and Laser Systems.

A company is now required to obtain the CE Mark prior to sale of certain
medical devices within the EU. 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.

International sales are subject to specific foreign government regulation
and those regulations vary from country to country. The time required to
obtain approval by a foreign country may be longer or shorter than that
required for FDA approval, and the requirements may differ.

EMPLOYEES

As of December 31, 1999, the Company and its subsidiaries had 730 full-time
employees. In Israel there are 280 employees, in the United States 274
employees, in Europe 152 employees and in Asia 24 employees. As of December
31, 1999, there were about 55 employees who had been given a notice of
termination.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT

Please refer to Note 14 of the Financial Statements with respect to
financial information about geographic areas of the Company's business.

The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings
abroad. The Company does not regard these risks as a deterrent to further

                                      10

expansion of its operations abroad. However, the Company closely reviews
its methods of operations and adopts strategies responsive to changing
economic and political conditions.

Within the EU, there has been an evolution toward a single market in
pharmaceuticals, for which Economic and Monetary Union ("EMU"), including
the adoption of the euro as a single currency, marks an important step. The
Company has recognized the strategic significance of this development and
has adopted the euro in the beginning of year 2000 for use in EMU markets.
In this way, the Company is demonstrating its support for the European
Community's industrial policy. The Company is continually seeking to take
advantage of these opportunities to improve the efficiency and productivity
of its EU operations.

For risks related to the Company's operations in Israel, see "Conditions in
Israel."

CONDITIONS IN ISRAEL

GENERAL

The Company is incorporated under the laws of the State of Israel, and
substantially all of its research and development and significant executive
facilities are located in Israel. Accordingly, the Company is directly
affected by political, economic and military conditions in Israel. Our
operations would be materially adversely affected if major hostilities
involving Israel should occur or if trade between Israel and its present
trading partners should be curtailed.

POLITICAL CONDITIONS

Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. However, a peace agreement
between Israel and Egypt was signed in 1979, a peace agreement between
Israel and Jordan was signed in 1994 and, since 1993, several agreements
between Israel and Palestinian representatives have been signed. In
addition, Israel and several Arab States have announced their intention to
establish trade and other relations and are discussing certain projects.
Israel has not entered into any peace agreement with Syria or Lebanon, and
there have been difficulties in the negotiations with the Palestinians. We
cannot be certain as to how the peace process will develop or what effect
it may have upon the Company. Despite the progress towards peace between
Israel, its Arab neighbors and the Palestinians, certain countries,
companies and organizations continue to participate in a boycott of Israeli
firms. The Company does not believe that the boycott has had a material
adverse effect on the Company, but restrictive laws, policies or practices
directed towards Israel or Israeli businesses may have an adverse impact on
the expansion of the Company's business. Generally, all male adult citizens
and permanent residents of Israel under a certain age are obligated to
perform up to 39 days, or longer under certain circumstances, of military
reserve duty annually. Additionally, all such residents are subject to
being called to active duty at any time under emergency circumstances.
Currently, some of our senior officers and key employees are obligated to
perform annual reserve duty. While we have operated effectively under these
requirements since we began operations, no assessment can be made as to the
full impact of such requirements on our workforce or business if conditions
should change, and no prediction can be made as to the effect on us of any
expansion or reduction of such obligations.

                                      11

ECONOMIC CONDITIONS

Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low
foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. The Israeli government has, for these and other
reasons, intervened in various sectors of the economy, employing, among
other means, fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and foreign currency exchange
rates. Until May 1998, Israel imposed restrictions on transactions in
foreign currency. These restrictions affected our operations in various
ways, and also affected the right of non-residents of Israel to convert
into foreign currency amounts they received in Israeli currency, such as
the proceeds of a judgment enforced in Israel. Despite these restrictions,
foreign investors who purchased shares with foreign currency were able to
repatriate in foreign currency both dividends (after deduction of
withholding tax) and the proceeds from the sale of the shares. In 1998, the
Israeli currency control regulations were liberalized significantly, as a
result of which Israeli residents generally may freely deal in foreign
currency and non-residents of Israel generally may freely purchase and sell
Israeli currency and assets. There are currently no Israeli currency
control restrictions on remittances of dividends on the ordinary shares or
the proceeds from the sale of the ordinary shares; however, legislation
remains in effect pursuant to which currency controls can be imposed by
administrative action at any time.

TRADE AGREEMENTS

Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the
International Finance Corporation. Israel is also a signatory to the
General Agreement on Tariffs and Trade, which provides for reciprocal
lowering of trade barriers among its members. In addition, Israel has been
granted preferences under the Generalized System of Preferences from
Australia, Canada and Japan. These preferences allow Israel to export the
products covered by such programs either duty-free or at reduced tariffs.
Israel has entered into preferential trade agreements with the European
Union, the United States and the European Free Trade Association. In recent
years, Israel has established commercial and trade relations with a number
of the other nations, including Russia, China and India, with which Israel
had not previously had such relations.

YEAR 2000 COMPLIANCE

The Company has not experienced any material Year 2000 computer or system
related problems or any supply failures resulting from Year 2000 issues. In
addition, the Company has not received any material Year 2000 complaints
from any of its customers relating to products purchased from the Company.

ITEM 2.    PROPERTIES.

The Company's principal executive offices and principal engineering,
development, manufacturing, shipping and service operations are located in
a facility occupying an aggregate of approximately 30,000 square feet in
Yokneam, Israel. In March 1996, the Company signed a ten-year lease on the
facility in Yokneam from a non-affiliated lessor with annual lease payments
of approximately $200,000 payable in NIS linked to the Israeli CPI. In
March 1998, the Company signed an additional ten-year lease on a new
facility in Yokneam occupying an aggregate of approximately 30,000 square
feet.

                                      12

The Company also leases approximately 32,500 square feet at the Atidim
Science-Based Industrial Park, Neve Sharett, Tel Aviv, Israel which is
primarily utilized for research and development operations. The term of the
lease is for a period of one year ending in November 30, 2000, with an
option to extend the lease for up to nine years thereafter.

During the second half of 1999, the Company had consolidated most of the
manufacturing activities which were conducted at the Tel-Aviv facilities to
the Company's Yokneam headquarters. In addition, the Company's research and
development activities were reorganized, so that most of the research and
development activity for aesthetic/cosmetic lasers and IPL products is
conducted in Yokneam and most of the research and development activity for
medical/surgical and disposable products activity is conducted in Tel-Aviv.

In addition, the Company, through its subsidiaries, maintains the following
premises:


        UNITED STATES

        o  ESC Medical Systems, Inc. Marketing and sales operations are
           located in a facility in Norwood, Massachusetts.

        o  Sharplan Lasers, Inc. Service, marketing and sales operations
           are located in a facility in Allendale, New Jersey.

        o  Luxar Corporation. Manufacturing, operations, administrative and
           research and development facilities are located in Bothell,
           Washington.

        o  Applied Optronics Corporation. Manufacturing, operations and
           research and development facilities are located in South
           Plainfield, New Jersey.


        EUROPE

        o  Sharplan Lasers UK Limited. Operations are conducted from an
           office in London, England.

        o  Sharplan Laser Europe Limited. Operations are conducted from an
           office in London, England.

        o  ESC Medizintechnik Vertriebs GmbH. Operations are conducted from
           an office in Munich, Germany.

        o  Sharplan Lasers Germany. Operations are conducted from an office
           in Munich, Germany.

        o  Spectron. Operations are conducted from a facility in Rugby,
           England.

        o  ESC Medical Systems (Italy) Srl. Operations are conducted from
           an office in Rome, Italy.

        o  ESC Medical Systems (France) SARL. Operations are conducted from
           an office in Paris, France.


        JAPAN

        o  ESC Japan, K.K. Operations are conducted from an office in
           Tokyo, Japan.

LEASE COMMITMENTS

The Company also operates sales offices and research and development and
manufacturing facilities in the United States, the United Kingdom, Italy,
Germany, Japan and France. Aggregate rental expense for the years 1996,
1997, 1998 and 1999 amounted to $1,746,000, $2,626,000, $3,423,000 and
$3,729,000 respectively.

                                       13

Future minimum annual lease payments for operating leases are as follows:

Year                     Lease Payment
----                     -------------
2000                      $3,676,000
2001                      $2,856,000
2002                      $2,555,000
2003                      $2,134,000
2004                      $1,774,000

In connection with the Company's restructuring and the consolidation of its
facilities, $3,484,000 of the above amounts has been accrued and included
in restructuring costs for the year ended December 31, 1999.

ITEM 3.    LEGAL PROCEEDINGS.

The Company is a party to various legal proceedings incident to its
business. 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 consolidated financial position.

The Company has been named in a number of purported class action securities
lawsuits filed in the fall of 1998 that have been consolidated in the
United States District Court for the Southern District of New York. The
consolidated action is captioned In Re ESC Medical Systems Ltd. Securities
Litigation, 98 Civ. 7530 (NRB). On July 9, 1999, a consolidated amended
complaint was filed naming the Company, Salomon Smith Barney Inc., and
several additional current and former directors and officers as defendants.
The consolidated amended complaint seeks damages and attorneys fees under
the United States securities laws for alleged irregularities in the way in
which the Company reported its financial results and disclosed certain
facts throughout 1997 and 1998 and for alleged "tipping" of non-public
information to Salomon Smith Barney Inc. in September 1998. On December 23,
1999, the Company moved to dismiss the consolidated amended complaint. The
plaintiffs' brief in opposition to the Company's motion has been filed and
the Company's reply brief is scheduled to be filed on March 28, 2000.

ESC subsidiaries Laser Industries, Ltd. ("Laser") and Sharplan Lasers, Inc.
("Sharplan") have settled their long-running litigation with Reliant
Technologies, Inc. entitled Laser Industries Ltd. and Sharplan Lasers, Inc.
v. Reliant Technologies, Inc. The litigation commenced in September 1995
when Laser and Sharplan filed suit against Reliant for, among other things,
patent infringement arising from Reliant's introduction of a new laser
resurfacing product. Reliant counterclaimed for antitrust and other
violations, and asserted that the patent was invalid. The Northern District
of California ("California Court") ultimately agreed with Reliant with
respect to the validity of the Laser patent, and held the patent invalid on
summary judgment. Thereafter, the court found that Laser's and Sharplan's
patent suit against Reliant was objectively baseless, and set a trial date
for April 2000 to consider whether filing and pursuing the suit constituted
an antitrust violation. In the meantime, Laser and Sharplan filed an appeal
with the U.S. Court of Appeals for the Federal Circuit of the court's
determination that the patent was invalid.

Under the terms of the settlement, Laser and/or ESC will pay Reliant the
sum of Seven Million Five Hundred Thousand Dollars (U.S.$7,500,000), which
is allocated as follows: (i) $5,750,000 is a lump-sum payment to Reliant;
(ii) $500,000 is the first installment of a three-year consultant
arrangement with Reliant whereby it will make Michael Black, President and
CEO of Reliant, available to provide consulting services to Laser and/or

                                     14

ESC; and (iii) $250,000 is Laser's contribution to a final and complete
settlement of all claims by Reliant's insurer. In addition, ESC granted
Reliant incentive stock options to purchase 100,000 shares of ESC stock at
an exercise price of $9.75 per share.

Further included in the settlement is a complete and mutual release by all
parties of any and all claims that were asserted or might have been
asserted in the litigation. Consistent with this broad release, the parties
have dismissed their claims against each other with prejudice.

On November 5, 1998, Light Age, Inc. ("Light Age") instituted an ex-parte
application in the Tel-Aviv District Court (the "Tel-Aviv Court") against
the Company and others, seeking a temporary injunction against the
development, production and sale of the Company's Alexandrite laser for
dermatological or hair removal treatments. Light Age's principal
contentions are that the Alexandrite laser is based on technology developed
by Light Age and is competing with Light Age's Alexandrite laser, in breach
of the Company's non-disclosure and non-compete undertaking in a supply
agreement with Light Age. In addition, Light Age is seeking a permanent
injunction against the Company engaging in such activities. The Tel-Aviv
Court denied Light Age's request for an ex-parte injunction and ordered
that a hearing be held with both parties present. On March 21, 1999, the
Tel-Aviv Court denied Light Age's motion for a preliminary injunction. The
parties have since agreed to submit their dispute for arbitration.
Accordingly, the parties filed a motion to stay the proceedings, which was
granted by the Tel Aviv Court on October 14, 1999.

On January 25, 1999, the Company, along with three affiliated entities,
brought an action seeking declaratory and injunctive relief in Superior
Court of New Jersey, Somerset County: Law Division, against Light Age,
Inc., entitled Laser Industries Ltd., ESC Medical Systems Inc., Sharplan
Lasers Inc., and ESC Medical Systems Ltd. v. Light Age, Inc., Docket No.
SOM-L-14199. The litigation relates to disputes arising out of an agreement
between Light Age and Laser Industries pursuant to which Light Age supplied
certain medical laser devices to Laser Industries. On March 5, 1999,
defendant Light Age answered the complaint and counterclaimed against
plaintiffs, seeking unspecified damages under thirteen counts alleging a
variety of causes of action such as breach of contract, tortious
interference with contract, unjust enrichment, and misappropriation. On
July 1, 1999 the court granted Light Age's motion to compel the Company and
the three affiliated entities to arbitrate. On August 13, 1999, Light Age
filed a demand for arbitration on its counterclaim with the American
Arbitration Association. On November 22, 1999 the Company and the three
affiliated entities filed a response to Light Age's demand. The parties are
currently awaiting the appointment of the arbitration panel.

On December 31, 1998, the Company and Luxar were named as defendants in an
action filed in the United States District Court for the Southern District
of Florida (the "Florida Court"), entitled LPG USA, Inc. v. ESC Medical
Systems Ltd. and Luxar Corporation, Civ. No. 98-7509 (S.D. Fla.). The
action alleged violations of the Lanham Act (including false advertising
and trade dress infringement) and related state laws (including trade
secret and unfair competition laws). The plaintiffs in the action sought an
injunction and monetary damages of an unspecified amount. The Company and
Luxar filed an answer on February 8, 1999, which also asserted
counterclaims for intentional interference with business relationships and
prospective business relationships, trade libel and product disparagement,
Lanham Act violations, unfair competition and related counterclaims. The
parties have since reached an out of court settlement pursuant to which,
among other things, the Company made a cash payment to the plaintiff and
agreed to become a distributor of LPG products in North America (see note
12 of the Company's financial statement).

                                       15

On September 20, 1999, Dr. Richard Urso filed what purports to be a class
action lawsuit against the Company in the State District Court in Harris
County, Texas. Dr. Urso alleges a number of causes of action including,
breach of contract, breach of warranty, product liability,
misrepresentation and violations of the Texas Deceptive Trade Practices
Act. The complaint purports to be filed on behalf of a national class. The
Company has taken steps to remove the case to Federal court and intends to
vigorously deny all allegations and challenge Plaintiff's class
certification motion when it is filed.

In addition to the foregoing proceedings, the Company is a party in certain
actions in various countries in which the Company sells its products in
which plaintiffs have alleged that the Company's products did not perform
as promised and/or that the Company made certain misrepresentations in
connection with the sale of products to the plaintiffs. The largest single
such case presently pending against the Company is a case filed by H.K.
Hashalom Medical Centers Ltd. in Tel-Aviv District Court against the
Company and Dr. Shimon Eckhouse in connection with the sale of the
Company's EpiLight systems. H.K. Hashalom is seeking monetary damages in
the amount of NIS10,000,000 (approximately $2.5 million at current exchange
rates) but has reserved the right to increase such amount as well as a
declaratory judgment that, among other things, the Company indemnify it for
certain costs and expenses arising out of the transaction between the
parties. On July 15, 1999, the defendants filed a Statement of Defense. The
case has not yet been set for a first hearing.

Apart from H.K. Hashalom's action, management believes that none of the
other of these types of cases that are presently pending individually would
have a material adverse impact on the consolidated financial position
of the Company, although such other proceedings could have a material
effect on quarterly or annual operating results or cash flows when resolved
in a future period.

Finally, the Company also is a defendant in various product liability
lawsuits in which the Company's products are alleged to have caused
personal injury to certain individuals who have received treatments using
the Company's products. The Company maintains insurance against these types
of claims and believes that these claims individually or in the aggregate
are not likely to have a material adverse impact on the business, financial
condition or operating results of the Company.

ITEM 4.    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.

Not applicable.

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.

The Ordinary Shares of the Company have been listed on the Nasdaq National
Market ("Nasdaq") under the symbol ESCMF since the commencement of the
Company's initial public offering on January 24, 1996. The Company began
trading on September 17,1999 under the new ticker symbol, "ESCM.".

The ticker symbol was changed as a result of ESC's new reporting status
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
As of June 23, 1999, ESC was no longer considered a "foreign private
issuer" under the Exchange Act. Rather, the Company started to report under
disclosure obligations applicable to United States issuers, which are

                                     16

broader than the obligations applicable to foreign private issuers which
ESC was subject to prior to June 23, 1999.

As of March 17, 2000, there were 340 shareholders of record of the Company.

The prices set forth below are high and low closing sale prices for the
Ordinary Shares of the Company as reported by the Nasdaq for the period
indicated. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.


1998                                  High           Low
First Quarter                         $38.75         $31.63
Second Quarter                        $35.19         $26.81
Third Quarter                         $35.50         $ 6.50
Fourth Quarter                        $11.50         $ 6.06


1999                                  High           Low
First Quarter                         $11.56         $4.84
Second Quarter                        $ 6.81         $5.50
Third Quarter                         $ 6.47         $3.78
Fourth Quarter                        $ 9.56         $4.13


In May 1996, the shareholders approved a two for three share dividend for
all outstanding Ordinary Shares. All shares, per share amounts and share
prices have been adjusted to give effect to this dividend.

The Company has never paid a cash dividend on its Ordinary Shares and does
not anticipate that it will pay any cash dividend on its Ordinary Shares in
the foreseeable future.

The Company intends to retain its earnings to finance the development of
its business. Any future dividend policy will be determined by ESC's Board
of Directors (the "Board") based upon conditions then existing, including
the Company's earnings, financial condition, tax position and capital
requirements as well as such economic and other conditions as the Board may
deem relevant. Pursuant to ESC's Articles of Association, certain
dividends, referred to as final dividends (which are comparable to annual
dividends) are customarily paid by some United States companies and are not
related to distributions on dissolution or liquidation or similar final
distributions. These dividends are recommended by the Board and may be
approved by shareholders at the annual meeting of shareholders, but only in
the amount per share equal to or less than the amount recommended by the
Board. In addition, depending upon the factors described above, the Board
may declare to pay interim dividends on account of the final dividend. ESC
may only pay dividends in any given fiscal year out of "profits," which
generally are defined for Israeli statutory purposes to be net after tax
earnings. In addition, because ESC has received certain benefits under the
Israeli law relating to "Approved Enterprises," the payment of dividends by
ESC may be subject to certain Israeli taxes to which it would not otherwise
be subject. Furthermore, pursuant to the terms of certain financing
agreements, the Company is restricted from paying dividends to its
shareholders. In the event that cash dividends are declared by the Company,
such dividends will be paid in NIS.

Dividends paid out of income derived from the Approved Enterprise is
subject to a 15% withholding tax. Approved Enterprises may receive
exemption from Israeli tax for up to ten years (see discussion provided
under the caption "Effective Corporate Tax Rate"). Should dividends be paid
out of income earned by the Company from an Approved Enterprise during the

                                      17

period of the tax holiday, such income will be subject to tax at the rate
of up to 25%. The Company does not anticipate paying dividends from income
derived from the Approved Enterprise and any such earnings distributed upon
dissolution will not subject the Company to income taxes.

ITEM 6.    SELECTED FINANCIAL DATA.

The following selected financial data was derived from the Company's
Consolidated Financial Statements, which have been prepared in accordance
with generally accepted accounting principles in the United States ("U.S.
GAAP"). The financial data set forth below should be read in conjunction
with, and are qualified in their entirety by, the Company's Consolidated
Financial Statements, related notes and other financial information
contained in this Annual Report.

                                      18

<TABLE>
<CAPTION>

                                                FOR THE YEAR ENDED DECEMBER 31
                                 -------------------------------------------------------------
                                    1999        1998       1997 (*)     1996 (*)     1995(*)
                                                          (RESTATED)   (RESTATED)  (RESTATED)
                                 ----------- -----------  -----------  ----------  -----------
                                           In thousands of US$ except for share data
Revenues
<S>                                <C>         <C>          <C>         <C>         <C>
   Net Sales                       $ 142,151   $ 225,206    $ 193,983   $ 119,578   $   71,727
   Other Revenues                                      -        2,100           -            -
                                 ----------- -----------  -----------  ----------  -----------
                                     142,151     225,206      196,083     119,578       71,727
Cost of Sales                         96,474      78,585       65,068      37,264       25,653
                                 ----------- -----------  -----------  ----------  -----------
   Gross Profit                       45,677     146,621      131,015      82,314       46,074
                                 ----------- -----------  -----------  ----------  -----------
Operating Expenses
Research and Development,
  Net                                 15,351      18,680       17,371       9,835        5,689
Marketing and Selling                 78,432      76,882       55,877      37,505       22,802

General and Administrative            25,799      14,667       16,091       9,430        8,215
Restructuring costs                   20,530           -            -           -            -
Settlement of litigations             23,780           -            -           -            -
Impairment of intangible and
  tangible assets                     17,616           -            -           -            -
Acquired research and development          -       2,451       11,912       3,500            -

Other                                  4,987           -            -           -            -
                                 ----------- -----------  -----------  ----------  -----------
Total Operating Expenses             186,495     112,680      101,251      60,270       36,706
                                 ----------- -----------  -----------  ----------  -----------

        Operating Income (loss)     (140,818)     33,941       29,764      22,044        9,368

Financing Income (expenses), Net      (3,865)      1,211        1,409       1,608         (715)
                                 ----------- -----------  -----------  ----------  -----------
                                    (144,683)     35,152       31,173      23,652        8,653
Nonrecurring Expenses                      -      28,951        4,650           -        8,125
                                 ----------- -----------  -----------  ----------  -----------
Income (loss) Before Income Taxes   (144,683)      6,201       26,523      23,652          528

Taxes on Income                        4,079       2,201        4,429         308           38
                                 ----------- -----------  -----------  ----------  -----------
Net Income (loss) before
  extraordinary items              $(148,762)$     4,000   $   22,094  $   23,344  $       490
Extraordinary gain on purchase of
  Company's Subordinated
  Convertible Notes                    7,974           -            -           -            -

Net income (loss) for the year     $(140,788)$     4,000   $   22,094  $   23,344  $       490
                                 =========== ===========  ===========  ==========  ===========

Earning (loss) Per Share
   Basic
     Income (loss) before
     extraordinary items           $   (5.79)$      0.15   $     0.86  $     1.00  $      0.03

     Extraordinary gain                 0.31           -            -           -            -

     Net earnings (loss) per shar$     (5.48)$      0.15   $     0.86  $     1.00  $      0.03
                                 =========== ===========  ===========  ==========  ===========

                                             19

   Diluted
     Income (loss) before
     extraordinary items           $   (5.79) $     0.15   $     0.86  $     1.00  $      0.03

     Extraordinary gain                 0.31           -            -           -            -

     Net earnings (loss) per shar  $   (5.48) $     0.15   $     0.86  $     1.00  $      0.03
                                 =========== ===========  ===========  ==========  ===========

Weighted Average Number Of
  Shares
   Basic                              25,674      26,027       25,604      23,445       17,313
                                 =========== ===========  ===========  ==========  ===========

   Diluted                            25,674      27,381       27,194      25,568       19,276
                                 =========== ===========  ===========  ==========  ===========

(*)     Relates to the restatement as a result of the mergers with Laser Industries Ltd.
        and Luxar Corporation.
</TABLE>


BALANCE SHEET DATA:

<TABLE>
<CAPTION>

                                    1999        1998       1997 (*)     1996 (*)     1995(*)
                                                          (RESTATED)   (RESTATED)  (RESTATED)
                                 ----------- -----------  -----------  ----------  -----------
                                                     (In thousands of US$)
<S>                                  <C>         <C>          <C>         <C>           <C>
Cash and cash equivalents            $24,524     $42,950      $54,616     $49,280       $6,944
Total assets                        $174,907    $327,666     $335,646    $142,218      $53,346
Long-term debt                       $96,691    $116,306     $127,427      $4,272      $14,462
Retained earning (deficit)         $(113,975)    $26,813      $22,813       $(144)    $(23,065)
Shareholders' equity (deficit)        $5,943    $155,508     $150,004    $110,834      $18,646


(*)     Relates to the restatement as a result of the mergers with Laser Industries Ltd.
        and Luxar Corporation.
</TABLE>


ITEM 7.    MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
           RESULTS OF OPERATIONS.

ESC is a world leader in the design, manufacture, marketing and servicing
of a broad range of medical devices that incorporate proprietary intense
pulsed light technology, state-of-the-art lasers and accessories as well as
other technologies. The Company's systems incorporate these technologies
for applications in aesthetic dermatology, plastic and re-constructive
surgery, ear, nose and throat procedures and oral and dental surgery, among
others. The Company's systems are designed for use in a variety of medical
environments, ranging from physicians' offices to acute care hospitals.

On September 14, 1999, the Board approved a comprehensive restructuring
program designed to align the Company's cost structure with its revenue
capabilities, while capitalizing on the market potential of its innovative
light technology products, including products in various development and
regulatory stages.

The restructuring plan was developed by the Company's senior management
team, together with the consulting firm of McKinsey & Company. The Company
expects the majority of the plan to be implemented by March 31, 2000. Under
the plan, ESC has:

                                      20

o       Reduced or eliminated certain fixed and variable costs from the
        Company's organizational structure. If those cost savings would
        have been implemented prior to January 1, 1999, management
        estimates that expenses would have been over $40 million lower as
        compared to annualized revenue and expense levels in the first half
        of the year. The cost reductions include over $25 million in
        selling, general and administrative expenses not considered
        essential to the continued growth of sales.

o       Implemented certain changes in management, reduced headcount in
        certain departments, adjusted certain employee compensation plans
        and reduced non-core research and development expenditures.

o       Brought the selling and marketing teams closer to the customers and
        markets being served by reorganizing into regional business units.

o       Reorganized the internal reporting structure of the Company in a
        manner intended to provide all management levels with greater
        accountability.

A number of personnel changes took place during the year and especially
during the second half of the year, some of which were related to the
restructuring. Changes included the replacement of the Company's Chief
Executive Officer and Chief Financial Officer, and the elimination of
certain vice president level positions.

In addition, the Company organized itself into five business units
consisting of (1) three geographical units serving the aesthetic and
surgical market, (2) one unit serving the dental market and (3) one unit
serving the industrial market.

Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
-----------------------------------------------------------------------
(In thousands of dollars)

NET SALES. The Company's net sales decreased by 37% to approximately
$142,151 in 1999 compared to approximately $225,206 in 1998. In 1999, net
sales decreased due to a decrease in unit sales and lower selling prices in
the United States aesthetic market.

The competitive price pressure mainly on hair removal products resulted in
lower price and lower unit sales of the Company's high margin products.
In addition, sales are reflected net of reserves for sales returns.

GROSS PROFIT. Gross profit decreased by 69% to approximately $45,677 in
1999 from approximately $146,621 in 1998. Gross profits decreased mainly
due to the reduction in sales. In addition, in 1999, the Company recorded
inventory write-off and other charges of approximately $30,050.

Gross profit for the year ended December 31,1999 was 32% compared to 65% in
1998. Excluding a write-off of inventory and other reserves, gross profits
for the year ended December 31,1999 was $75,727 or 53% compared to $146,621
or 65% in 1998.

RESEARCH AND DEVELOPMENT COSTS, NET. Net research and development costs in
1999 decreased by 18% to approximately $15,351 from approximately $18,680
in 1998. As a percentage of sales, research and development costs were 11%
in 1999 as compared to 8% in 1998. The decrease in research and development
costs net is due to a reduction in staff and lower material consumption.
Research and development expenses are net of the participation of the
Office of the Chief Scientist in Israel.

                                      21

MARKETING AND SELLING EXPENSES. Marketing and selling expenses increased by
2% to approximately $78,432 in 1999 from approximately $76,882 in 1998. As
a percentage of sales, marketing and selling expenses were 55% in 1999
compared to 34% in 1998.

The increase in marketing and selling expenses as a percentage of sales was
mainly due to the lower level of sales in 1999.

Increased marketing and selling expenses in 1999 were primarily attributed
to the expansion and reorganization of the Company's selling efforts in the
United States. Marketing and selling expenses include $4,800 which related
to the restructuring plan adopted in 1999.

The Company has adopted a restructuring plan which started to effect the
marketing and selling expenses by lowering them drastically. The Company
expects the majority of the plan to be implemented by March 31, 2000.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 76% to approximately $25,799 in 1999 from approximately
$14,667 in 1998. As a percentage of sales, general and administrative
expenses were 18% in 1999 and 7% in 1998.

General and administrative expenses for 1999 included bad debt charges of
$13,430 and litigation expenses of $4,400 which were not part of the legal
settlements which were recorded in settlement of litigations described
below.

RESTRUCTURING COSTS. In the quarter ended March 31, 1999, the Company
developed and started the implementation of a restructuring plan. In
connection with that restructuring plan, the Company recorded charges in
1999 of $5,398 related to its sales and marketing operations and $16,608
related to inventory write-off (included in the cost of goods sold).

In the third quarter of 1999, the Company commenced another restructuring
program. In connection with that restructuring program, the Company
recorded write downs of inventories (included in cost of goods sold) of
approximately $3,130. The restructuring charge which amounted to $15,132 is
comprised of writedowns of fixed assets of $4,592 and severance charges and
a lease contract termination cost of $10,540. The majority of the
restructuring charge was attributable to the Company's divisions in the
United States. The restructuring program provides for a reduction of
approximately 200 employees. In addition, the Company recorded $4,983 of
expenses associated with the same plan which was charged to operating and
income tax expense. The Company expects approximately an additional $2,000
in charges related to the restructuring plan through the year 2000.

SETTLEMENT OF LITIGATIONS. During 1999 the Company had made several legal
settlements mainly related to the Reliant and LPG lawsuits. The total
amounts for the legal settlements was $23,780, which includes both
settlement fees and related legal fees incurred by the Company (see Item 3-
"Legal Proceedings" above).

WRITE-OFF OF INTANGIBLE AND TANGIBLE ASSETS. During 1999 the Company
wrote-off intangible assets for the amount of $16,049 which mainly related
to goodwill from acquisitions and acquired technology in prior years. In
addition, the Company wrote-off tangible assets in the amount of $1,567
that related to the restructuring plan adopted during 1999.

                                      22

ACQUIRED RESEARCH AND DEVELOPMENT. In 1998, there was $2,451 of acquired
research and development expenses in connection with the acquisition of
technology from Ballard Purchase Corporation.

OTHER EXPENSES. For the year ended December 31, 1999, other expenses were
$4,987 comprised mainly of the following:

        1. Fees in the amount of $1,412 related to the McKinsey & Co. work
           on the restructuring plan.

        2. $3,575 of expenses incurred during 1999 in connection with the
           election contest relating to the Company's June 23, 1999
           combined annual and extraordinary general meeting of
           shareholders. The election contest resulted in the reimbursement
           of expenses incurred by certain shareholders in connection with
           the election contest, in accordance with the resolution adopted
           by the Board of Directors and the audit committee of the
           Company, during a meeting held on June 23, 1999, which resolved
           that "all costs and expenses of Messrs. Arie Genger and Barnard
           J. Gottstein and their affiliates in connection with the
           election contest shall be reimbursed by the Company promptly on
           submission of invoices therefor, subject to refund when such
           reimbursement is submitted to shareholders and not approved by
           such shareholders at a meeting noticed for such purpose." The
           Company intends to present the foregoing expense reimbursement
           arrangement to shareholders for approval at the next Annual
           General Meeting of Shareholders. Messrs. Genger and Gottstein
           have submitted to the Company invoices for a sum of
           approximately $1,510. Separate from these shareholder incurred
           expenses, the officers and directors of the Company incurred
           expenses of $2,065 in connection with the election contest that
           were charged to the Company.


OPERATING INCOME (LOSS)

FINANCING INCOME (EXPENSE), NET. For the year ended December 31, 1999,
financing expenses were approximately $3,865 from financing income of
$1,211 in 1998.

Financing income in 1999 consisted of interest income of $5,483 from the
Company's short term and long term investment securities which was offset
by interest and amortization of deferred expenses, in the amount of $7,626
attributable to the Company's 6% subordinated convertible notes and by
other interest and exchange rate differences of $1,722.

At December 31, 1999, approximately $43,841 was invested in short term bank
deposits.

NON-RECURRING EXPENSES. For the year ended December 31, 1998, the Company
incurred expenses in the amount of $28,951 related to the costs associated
with the Laser Industries acquisition.

TAXES ON INCOME. Taxes on income were approximately $4,079 for the year
ended December 31, 1999 compared to approximately $2,201 for the year ended
December 31, 1998. In 1999 the Company wrote off deferred tax assets of
approximately $ 3,300 which is reflected as tax expense in the period.
Because most of the Company's income in Israel is presently exempt from
income taxes, the Israeli statutory tax rate for the purposes of the
reconciliation of the reported tax expense is approximately zero. Income
tax expense in the financial statements relates primarily to the income
taxes of non-Israeli subsidiaries.

                                    23

EXTRAORDINARY GAIN ON PURCHASE OF THE COMPANY'S SUBORDINATED CONVERTIBLE
NOTES. During 1999 the Company had purchased $22,071 principal amount of
its 6% Subordinated convertible notes. As a result of the repurchase the
Company had an extraordinary income of approximately $7,974.

NET INCOME. As a result of the foregoing factors, the Company's net loss
was $140,788 in 1999 from a net income of approximately $4,000 in 1998.

Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
-----------------------------------------------------------------------
(In thousands of dollars)

NET SALES. The Company's net sales increased by 16% to approximately
$225,206 in 1998 compared to approximately $193,983 in 1997. In the first
two quarters of 1998, net sales increased to approximately $123,200 from
$84,100 for the comparable period in 1997 due to an increase in sales of
the Company's intense pulsed light products, including the EpiLight and
PhotoDerm systems. A slowdown in revenue growth occurred in the second half
of the year. The third quarter decrease in revenue was due to a general
slowdown in activity during the summer months, mainly in Europe, as well as
lower sales volumes in South America. In addition, the uncertainty
surrounding elections in Germany and Brazil had delayed the decision making
of some of ESC's customers, thus impacting sales for the quarter. In the
fourth quarter, an additional slowdown in sales was noted. Most of this
shortfall can be attributed to strong price pressures on hair removal
products and by a general slowdown in the United States aesthetic markets.
The competitive price pressure on hair removal products resulted in the
Company reducing the price of its Alexandrite laser. In addition, there was
a decrease in the number of EpiLight hair removal units sold during this
quarter. These changes in the market reduced revenues in the fourth quarter
of 1998 compared to previous quarters, both due to the change in product
mix and a reduction in sales of IPL hair removal products.

GROSS PROFIT. Gross profit increased by 12% to approximately $146,621 in
1998 from approximately $131,015 in 1997. The Company's gross profit margin
in 1998 was 65% (excluding other revenues) as compared to 67% in 1997. In
the first two quarters of 1998, gross profit increased by 43% to
approximately $80,797 from approximately $56,664 for the comparable period
in 1997. The reduction was due to the changes in product price and product
mix discussed above.

RESEARCH AND DEVELOPMENT COSTS, NET. Net research and development costs in
1998 increased by 7.5% to approximately $18,680 from approximately $17,371
in 1997. As a percentage of sales, research and development costs were 8.3%
in 1998 as compared to 9% in 1997. Research and development expenses are
net of the participation of the Office of the Chief Scientist in Israel
which in 1998 were approximately $603.

MARKETING AND SELLING EXPENSES. Marketing and selling expenses increased by
38% to approximately $76,882 in 1998 from approximately $55,877 in 1997. As
a percentage of sales, marketing and selling expenses were 34% in 1998
compared to 29% in 1997. Increased marketing and selling expenses in 1998
were primarily attributable to expansion and re-organization of the
Company's selling efforts in the United States.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by 10% to approximately $14,667 in 1998 from approximately
$16,091 in 1997. As a percentage of sales, general and administrative
expenses were 7% in 1998 and 8% in 1997. The reduced expenditure was
primarily attributable to the integration of Laser Industries into ESC.
Consequently, overlapping positions were consolidated and administrative
expenses were reduced.

                                      24

OTHER EXPENSES. In 1998 there was $2,451 of acquired research and
development expenses in connection with the acquisition of technology from
Ballard Purchase Corporation.

FINANCING INCOME, NET. Financing income decreased to approximately $1,211
(net of $7,832 interest and amortization of deferred expenses attributed to
the Company's 6% subordinated convertible notes) in 1998, from financing
income of approximately $1,409 (net of $2,417 interest and amortization of
deferred expenses attributed to the Company's 6% subordinated convertible
notes) in 1997 (see note 18 to the Company's Financial Statements contained
in this Annual Report). The decrease in the financing income occurred due
to a significant decrease in interest rates in the United States, where the
Company invests in marketable securities, and amortization of deferred
expenses attributed to the Company's 6% subordinated convertible notes.

At December 31, 1998, approximately $46,867 was invested in short-term bank
deposits.

NON-RECURRING EXPENSES. For the year ended December 31, 1998, the Company
incurred expenses in the amount of $28,951 related to costs associated with
the Laser Industries acquisition.

TAXES ON INCOME. Taxes on income were approximately $2,201 for the year
ended December 31, 1998 compared to approximately $4,429 for the year ended
December 31, 1997.

Because most of the Company's income in Israel is exempt from income taxes,
the Israeli statutory tax rate for purposes of the reconciliation of the
reported tax expense is approximately zero. Income tax expense in the
financial statements relates primarily to the income taxes of non-Israeli
subsidiaries.

NET INCOME. As a result of the foregoing factors, the Company's net income
decreased to approximately $4,000 in 1998 from a net income of
approximately $22,094 in 1997. Net income as a percentage of revenues was
2% in 1998 compared to 11% in 1997.

VARIABILITY OF OPERATING RESULTS

The Company's 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, the Company may
be required to reduce prices for its products in the future.

The Company's future results will be affected by a number of factors
including the ability to increase the number of units sold, to develop,
introduce and deliver new products on a timely basis, to anticipate
accurately customer demand patterns and to manage future inventory levels
in line with anticipated demand. These results may also be affected by
currency exchange rate fluctuations and economic conditions in the
geographical areas in which the Company operates. There can be no assurance
that the Company's historical growth in sales, gross profit and net income
will 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.

                                     25

LIQUIDITY AND CAPITAL RESOURCES
(In thousands of dollars)

As of December 31,1999, the Company had cash and cash equivalents of
$24,524 compared to $42,950 at the end of 1998, a decrease of $18,426. The
decrease in cash and cash equivalents was mainly attributable to the
following:

        1. A decrease of trade receivables of $30,232 due to a decrease in
           sales and a substantial increase in collection efforts and
           increase in allowance for bad debt.

        2. An increase in inventory and in prepaid expenses and other
           receivables of $4,825 as a result of inventory and stock
           reduction monitoring as well as a reduction in prepayments.

        3. An increase in accounts payable and accrued expenses of $8,139
           mainly due to the restructuring plan and provision for
           settlement of litigations.

        4. Maturity of long-term investments and purchasing of fixed assets
           of $39,424.

        5. Purchases of the Company's 6% subordinated convertible notes in
           the amount of $14,264, repayment of a bank loan for $3,512 and
           the repurchase of the Company's Ordinary Shares in the amount of
           $10,660 pursuant to a share repurchase program implemented in
           1999.

As of December 31, 1998 the Company had cash and cash equivalents of
$42,950 compared to $54,616 at the end of 1997, a decrease of $11,666. The
decrease in cash and cash equivalents was mainly attributable to the
following:

        1. An increase of trade receivables of $25,521 due to an increase in
           sales and longer payment terms for the distributors.

        2. An increase in inventory of $21,302 due to a shift in mix of
           products and decreased orders from customers.

        3. Payments of long term loans in the amount of $15,025.

        4. Purchase of $7,290 of the Company's Ordinary Shares pursuant to
           a share repurchase program implemented in 1998, offset by
           proceeds from the exercises of options of $7,864 and an increase
           in short term bank debt of $2,373.

        5. Maturity of investments of $39,921 offset by the purchase of
           fixed assets of $4,611, investment in patents and know-how
           totaling $5,523 and payment for the acquisition of new
           technology for $2,450.

The Company does not currently have any plans, arrangements or
understandings with respect to incurring indebtedness in fiscal year 2000.
The Company believes that internally generated funds, together with
available cash, will be sufficient over at least the next 12 months to meet
its presently anticipated day-to-day operating expenses, material,
commitments, working capital and capital expenditure requirements.

                                      26

INVESTING ACTIVITIES
(In thousands of dollars)

For the year ended December 31, 1999, cash provided by investing activities
was approximately $39,424.

The primary changes in the Company's investing activities for the year
ended December 31, 1999, as compared to the year ended December 31, 1998
were: a decrease of long term investments (mainly cash invested for a
period longer than one year) of approximately $43,439 and the purchase of
fixed assets of approximately $4,015.

For the year ended December 31, 1998, cash provided by investing activities
was approximately $27,846.

The primary changes in the Company's investing activities for the year
ended December 31,1998, as compared to the year ended December 31, 1997
were: maturity of investments of $39,921, $2,450 was invested for the
acquisition of Ballard Purchase Corporation, approximately $4,611 was
invested to purchase fixed assets and approximately $5,523 was used to
purchase of investments, patents and know-how.

FINANCING ACTIVITIES
(In thousands of dollars)

For the year ended December 31, 1999, cash used in financing activities was
$27,942.

The financing activities of the Company were primarily the purchase of the
Company's 6% subordinated convertible notes for approximately $14,264,
purchase of treasury shares of approximately $10,660, repayment of notes
payable to banks of approximately $3,531 which were offset by proceeds from
the exercise of warrants and options of approximately $513.

For the year ended December 31,1998, cash used in financing activities was
$12,078.

The financing activities of the Company were primarily the purchase of
treasury stock of approximately $7,290 and loan repayments of approximately
$15,025 mainly by Laser Industries and its subsidiaries. Funds from
financing activities which offset the above were primarily proceeds from
the exercise of warrants and options of approximately $7,864 and an
increase in short-term bank debt of approximately $2,373.

EFFECTIVE CORPORATE TAX RATE

INFLATIONARY ADJUSTMENTS. The Company and Laser Industries are subject to
the Income Tax Law (Inflationary Adjustments), 1985, which provides for an
adjustment to taxable income for the effects of inflation (based on the
Israeli Consumer Price Index) on that portion of shareholders' equity not
invested in inflation resistant assets.

APPROVED ENTERPRISE. The Company and Laser Industries have each received
approval for their investment programs in accordance with the Law for the
Encouragement of Capital Investments, 1959. The Company has chosen to
receive its benefits through the alternative benefits program, and, as
such, is eligible for various benefits. These benefits include accelerated
depreciation of fixed assets used in the investment programs, as well as a
full tax exemption on undistributed income that is derived from the
Approved Enterprise for a period of six years and reduced tax rates for an
additional period of up to four years. Laser Industries is entitled to a

                                    27

full tax exemption for a period of two years and reduced tax rates for an
additional period of up to five years (the rate is dependent on the
percentage of non-Israeli shareholder ownership). The benefits commence
with the date on which taxable income is first earned. Income not derived
from the Approved Enterprise is subject to tax at a rate of 36%. The tax
exemption period for the Company commenced in 1995 and the tax exemption
period for Laser Industries has not yet commenced.

Dividends paid out of income derived from the Approved Enterprise is
subject to a 15% withholding tax. Should dividends be paid out of income
earned during the period of the tax holiday, such income will be subject to
tax at the rate of 25%. The Company does not anticipate paying dividends
from income derived from the Approved Enterprise and any such earnings
distributed upon dissolution will not subject the Company to income taxes.

The Company and Laser Industries have not received final income tax
assessments for years subsequent to 1991.

FORWARD LOOKING STATEMENTS

Certain statements made in this Report or made in press releases or in oral
presentations made by the Company's employees or agents reflect the
Company's estimates and beliefs and are intended to be, and are hereby
identified as, "forward looking statements" for the purposes of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.

The Company cautions readers that such forward looking statements involve
risks and uncertainties that could cause actual results to differ
materially from those expected by the Company or expressed in the Company's
forward looking statements. These factors include, but are not limited to,
the following: (1) uncertainty of market acceptance of the Company's
products; (2) uncertainties with respect to obtaining regulatory approvals
for new products or for the sale of existing products in new markets; (3)
uncertainties associated with the enforcement of intellectual property
rights by the Company and others; (4) limited number of customers for the
Company's products; (5) risks of downturns in economic conditions
generally, and in the health care industry specifically; (6) risks
associated with competition and competitive pricing pressures; and (7)
other risks described in the Company's filings with the Securities and
Exchange Commission.

Readers are cautioned not to place undue reliance on forward-looking
statements made in this Annual Report, or made in press releases or in oral
presentations. Such forward-looking statements reflect management's
analysis only as of the date such statements are made and the Company
undertakes no obligation to revise publicly these forward-looking
statements to reflect events or circumstances that arise subsequently.
Readers should carefully review the risk factors set forth above and
described elsewhere in this document and in other documents the Company
files from time to time with the Securities and Exchange Commission.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company maintains an investment portfolio which consist mainly of
income securities with an average maturity of less than one year. The
portfolio consists of low risk corporate bonds and bank deposits. The
Company's policy is generally to hold its fixed income investments until
maturity and therefore the Company would not expect its operating results
or cash flows to be effected to any significant degree by the effect of a
sudden change in market interest rates on its securities portfolio.

                                   28

The Company has fixed rate long-term debt of approximately $93 million. The
Company believes that a material decrease in interest rates would not have
a material impact on the fair value of this debt.

The Company has foreign subsidiaries, which sell and manufacture its
products in various markets. As a result, the Company's earnings and cash
flows are exposed to fluctuation in foreign currency exchange rates. The
company attempts to limit the exposure by selling and linking its products
to the United States dollar.

The Company does not hedge transactions nor does it use derivative
financial instruments for trading purposes.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Item 14(a) for an index to the consolidated financial statements and
supplementary information, which are set forth on the pages indicated
therein.

ITEM 9.    CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.

On February 10, 2000, the client/auditor relationship between the Company
and Luboshitz Kasierer ("LK"), the Company's independent accountants,
ceased. During the years ended December 31, 1998 and 1997, and the
subsequent interim period through February 10, 2000 (the date LK ceased to
be the Company's independent accountants), (i) there were no disagreements
with LK on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of LK, would have caused LK to make a
reference to the subject matter of the disagreements in connection with its
reports in the financial statements for such years and (ii) there were no
"reportable events" as described in Items 304(a)(1)(iv) of Regulation S-K.
The independent accountant's report of LK on the Company's consolidated
financial statements for the years ended December 31, 1998 and 1997
contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting
principles.

The Company requested that LK furnish it with a letter addressed to the
Securities and Exchange Commission stating whether or not it agreed with
the above statements. A copy of such letter, dated February 10, 2000,
setting forth LK's agreement with the above statements, is filed as Exhibit
16 to this Form 10-K. On January 17, 2000, the Company decided to appoint,
with the approval of the Company's Board of Directors, the firm of
Brightman Almagor & Co., a member firm of Deloitte, Touche, Tohmatsu, as
its independent accountants replacing LK.

PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The required information for this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.

                                      29

ITEM 11.   EXECUTIVE COMPENSATION.

The required information for this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The required information for this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.

ITEM 13.   CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.

The required information for this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.

PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.

(A)     THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:


1.      Financial Statements

                                                                          Page
                                                                          ----
        Independent Auditors' Report..................................... 36-37
        Consolidated Financial Statements:
              Consolidated Balance Sheets................................ 38
              Consolidated Statements of Operations...................... 39
              Consolidated Statements of Changes in Shareholders' Equity. 40
              Consolidated Statements of Cash Flows...................... 41-42
        Notes to Consolidated Financial Statements....................... 43-62

2.      Financial Statement Schedule

        Schedule II - Valuation and Qualifying Accounts.................. 63

                                         30

3.      Exhibits

Exhibit
Number         Description
-------        -----------

2.1            Agreement, dated as of November 9, 1997, between ESC Medical
               Systems Ltd. ("ESC") and Laser Industries Ltd. ("Laser") *I
               (included as Annex A-1 to the Joint Proxy
               Statement/Prospectus forming part of such Registration
               Statement)
2.2            Form of Agreement among Laser and its shareholders *I
               (included as Annex A-2 to the Joint Proxy
               Statement/Prospectus forming part of such Registration
               Statement)
2.3            (4.2) Agreement and Plan of Merger by and among ESC, ESC
               Acquisition Sub, Inc. and Luxar Corporation, dated February
               19, 1997 *F
2.4            Agreement and Plan of Merger by and among ESC Medical
               Systems Ltd., AOC Acquisition Corp. and Applied Optronics
               Corporation, dated November 20, 1997 *O
2.5            Asset Purchase Agreement among Laser Industries Ltd., Orziv
               (Z.K.Y.P.) Ltd., Yehiam Prior
               and Ziv Karni, dated July 1998 *O
3.1            Memorandum of Association (English translation)*A
3.2            Articles of Association *A
3.3 (4.2)      Articles of Association as amended September 5, 1996 *E
4.1            Specimen Certificate for Ordinary Shares *B
4.2            Luxar Corporation 1988 Stock Bonus and Option Plan *G, *N
4.3            Luxar Corporation 1994 Stock Option Plan *G, *N
4.4            Luxar Corporation 1995 Stock Option Plan G,*N
4.5            (4.1) Indenture, dated September 10, 1997, between ESC and
               United States Trust Company of New York *H
4.6            (4.2) Registration Rights Agreement, dated September 10,
               1997, between ESC, Goldman, Sachs & Co., Donaldson Lufkin &
               Jenrette Securities Corporation, Montgomery Securities and
               Smith Barney Inc. *H
4.7 (4.3)      Specimen of Notes *H (included in Exhibit 4.1 from same filing)
4.8 (4.2)      Laser Industries Limited 1988 Share Option Plan *J, *N
4.9 (4.3)      Laser Industries Limited 1990 Share Option Plan *J, *N
4.10 (4.4)     Laser Industries Limited 1991 Share Option Plan *J, *N
4.11 (4.5)     Laser Industries Limited 1994 Share Option Plan *J, *N
4.12 (4.6)     Laser Industries Limited 1995 Share Option Plan *J, *N
4.13 (4.7)     Laser Industries Limited 1996 Share Option Plan *J, *N
4.14 (4.8)     Laser Industries Limited 1997 Share Option Plan *J, *N
10.1           Preferred Shares Purchase Agreement, dated April 16, 1992,
               among ESC, the Founders and the Investors *B
10.2           Share Purchase and Warrant Agreement, dated May 24, 1993,
               among ESC, the Founders and the Investors *B
10.3           Share Purchase and Warrant Agreement, dated February 20,
               1994, among ESC, the Founders, the Investors and Nitzanim *B
10.4           Personal Employment Agreement between ESC and Eli Talmor,
               dated August 2, 1995 *B, *N
10.5           1993 Stock Option Plan, as amended *B, *N
10.6           1995 Section 102 Stock Option/Stock Purchase Plan *B, *N
10.7           Form of Stock Option Plan Restricted Stock Option Agreement
               *B, *N

                                       31

10.8           Form of Stock Option Plan Incentive Stock Option Agreement
               *B, *N
10.9           Form of Section 102 Stock Option/Stock Purchase Plan
               Restricted Stock Option Agreement *B, *N
10.10          Share Purchase Agreement, dated August 2, 1995 between ESC
               and Technion Entrepreneurial Incubator Company Ltd. ("TEIC")
               *B
10.11          Form of Stock Sale Agreement dated August 7, 1995 between
               ESC and individual shareholders of Medic Lightech Ltd.
               (English translation)*B
10.12          Agreement dated August 2, 1995 between ESC, Eli Talmor and
               Medic Lightech Ltd. *B
10.13          Agreement dated August 2, 1995 between ESC, Eli Talmor, TEIC
               and Medic Lightech Ltd. *B
10.14          Letter dated February 27, 1994 from the Technion Research
               Development Foundation Ltd. ("Technion") to Medic Lightech
               Ltd. (English translation) *B
10.15          Assignment of U.S. Patent Application No. 974,619 (Patent
               No. 5,344,434) by Technion to Dimotech Ltd. dated March 13,
               1994 *B
10.16          Assignment of U.S. Patent Application No. 974,619 (Patent
               No. 5,344,434) by Technion to Dimotech Ltd. and Eli Talmor
               dated May 9, 1994 *B
10.17          Letter dated August 2, 1995 from Technion (English
               translation) *B
10.18          Letter dated November 2, 1995 from Dimotech Ltd. and Eli
               Talmor to Dr. Shimon Eckhouse (English translation) *B
10.19          Letter dated December 6, 1995 from Dimotech Ltd. to Dr.
               Shimon Eckhouse (English translation) *B
10.20          Letter dated December 6, 1995 from Technion to ESC *B
10.21          Letter dated December 7, 1995 from Eli Talmor to Dr. Shimon
               Eckhouse (English translation) *B
10.22          Assignment of PhotoDerm Patent (U.S. Patent No. 5,405,368)
               to ESC by Dr. Shimon Eckhouse dated October 16, 1992 *B
10.23          Form of Standard Confidential Disclosure Agreement *B
10.24          Confidentiality Agreement dated November 12, 1992 between
               ESC and Andrie Katz *B
10.25          Letter of Intent between ESC and L.B.T. Ltd. dated May 22,
               1996 *C
10.26(10.1)    Employment Agreement, dated May 1, 1999, between ESC, ESC
               Medical Systems Inc. and Louis Scafuri *K, *N
10.27(10.2)    Stock Option Agreement, dated June 18, 1999, between
               ESC and Louis Scafuri *K, *N
10.28(10.3)    Letter of Agreement, dated June 23, 1999, from
               Messrs. Genger and Gottstein to ESC *K
10.29(10.1)    Employment Agreement, dated as of June 29, 1999,
               between ESC and Yacha Sutton *L, *N
10.30          Purchase Agreement concerning the Purchase by ESC Medical
               Systems of Certain Assets of Ballard Purchase Corporation,
               effective September 10, 1998 *O
10.31          Lease Agreement between Scan Group Yokneam Ltd. and ESC
               (English Translation) *O
10.32          Lease Agreement between Mario Laznik Industrial Buildings
               Ltd. and ESC *O
10.33          Employment Agreement, dated as of October 1, 1996, between
               ESC and Shimon Eckhouse *N, *O
10.34          Employment Agreement, dated as of January 15, 1999, between
               ESC Japan Company, Ltd. and Alon Maor *N, *O
10.35          Amendment to Employment Agreement, dated November 12, 1999
               between ESC Medizintechnik Vertriehs GmbH and Hans Edel *N,
               *O
16(16)         Letter, dated February 28, 2000, from Luboshitz
               Kasierer to the Securities Exchange Commission *M
21             List of Subsidiaries *O

                                      32

23.1           Consent of Brightman Almagor & Co. *O
23.2           Consent of Luboshitz Kasierer *O
25.1           Form T-1 Statement of Eligibility and Qualification under
               the Trust Indenture Act of 1939, as amended, of United
               States Trust Company of New York, as Trustee under the
               Indenture *H
27             Financial Data Schedule *O
99.1           Form of letter to Laser shareholders for the cover page of
               the Joint Proxy Statement *I

Note: Parenthetical references following the Exhibit Number of each
document relate to the exhibit number under which such exhibit was
initially filed.

*A      Incorporated by reference to Registration Statement on Form F-1,
        File #33-80199; filed on December 8, 1995.
*B      Incorporated by reference to Amendment No. 2 to Registration
        Statement on Form F-1, File #33- 80199, filed on January 19, 1996.
*C      Incorporated by reference to Registration Statement on Form F-1,
        File #333-4886, filed on May 28, 1996
*D      Incorporated by reference to Registration Statement on Form F-1,
        File #333-4886, filed on June 25, 1996
*E      Incorporated by reference to Registration Statement on Form S-8,
        File #333-5898, filed on October 31, 1996
*F      Incorporated by reference to Registration Statement on Form F-3,
        File #333-6610, filed on March 12, 1997
*G      Incorporated by reference to Registration Statement on Form S-8,
        File #333-6774, filed on April 11, 1997
*H      Incorporated by reference to Registration Statement on Form F-3,
        File #333-8056, filed on December 9, 1997
*I      Incorporated by reference to Registration Statement on Form F-4,
        File #333-8208, filed on January 14, 1998
*J      Incorporated by reference to Registration Statement on Form S-8,
        File #333-8352, filed on February 13, 1998
*K      Incorporated by reference to Quarterly Report on Form 10-Q for the
        quarterly period ended June 30, 1999, File #0-13012, filed on
        August 13, 1999
*L      Incorporated by reference to Quarterly Report on Form 10-Q for the
        quarterly period ended September 30, 1999, File #0-13012, filed on
        November 15, 1999
*M      Incorporated by reference to Current Report on Form 8-K/A, filed on
        February 29, 2000
*N      Management contract or compensatory plan or arrangement *O Filed
        herewith

(B)     REPORTS ON FORM 8-K

No reports on Form 8-K were filed by the Company during the three-month
period ended December 31, 1999.

                                        33



                          ESC MEDICAL SYSTEMS LTD.



                     CONSOLIDATED FINANCIAL STATEMENTS











                                         34



                          ESC MEDICAL SYSTEMS LTD.






                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                       PAGE

INDEPENDENT AUDITORS' REPORTS                                           36-37

CONSOLIDATED FINANCIAL STATEMENTS

  Consolidated Balance Sheets
    as of December 31, 1999 and 1998                                      38

  Consolidated Statements of Operations
    for the years ended December 31, 1999, 1998 and 1997                  39

  Consolidated Statements of Changes in Shareholders' Equity
    for the years ended December 31, 1999, 1998 and 1997                  40

  Consolidated Statements of Cash Flows
    for the years ended December 31, 1999, 1998 and 1997                41-42

  Notes to the Consolidated Financial Statements                        43-62



                                # # # # # #

                                     35

                        INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
ESC Medical Systems Ltd.:


We have audited the accompanying consolidated balance sheet of ESC MEDICAL
SYSTEMS LTD. (the "Company") and its subsidiaries as of December 31, 1999,
and the related consolidated statement of operations, changes in
shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 1999, and
the consolidated results of their operations, changes in shareholders'
equity and cash flows for the year then ended, in conformity with generally
accepted accounting principles in the United States.





Brightman Almagor & Co.
Certified Public Accountants
A member of Deloitte Touche Tohmatsu

Tel Aviv, Israel
March 30, 2000


                                      36

                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of
ESC Medical Systems Ltd.

We have audited the consolidated balance sheets of ESC Medical Systems Ltd.
(an Israeli Corporation) as of December 31, 1998, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the two years in the period ended December 31, 1998.
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 financial statements
of Laser Industries Ltd. for the year ended December 31, 1997. (Laser
Industries Ltd. was acquired during 1998 in transactions accounted for as a
pooling of interests, as discussed in Note 3). Such statements are included
in the consolidated financial statements of the Company and reflect total
sales constituting 42% in 1997 of the related consolidated totals. These
statements were audited by other auditors whose reports have been furnished
to us and our opinion, insofar as it relates to amounts included for Laser
Industries Ltd., is based solely upon the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards in Israel and in the United States, including those prescribed
under the Auditors' Regulations (Auditor's Mode of Performance), 1973.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 and
the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 1998, and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States.



                                                LUBOSHITZ KASIERER
                                          Member Firm of Arthur Andersen
Haifa, Israel
February 10, 1999

                                      37
<TABLE>
<CAPTION>
T
                          ESC MEDICAL SYSTEMS LTD.
                        CONSOLIDATED BALANCE SHEETS
                      (in thousands except share data)

                                                                                     DECEMBER 31
                                                                              ----------------------------
                                                                 NOTE            1999             1998
                                                                 ----         -----------       ----------
CURRENT ASSETS
<S>                                                               <C>             <C>              <C>
  Cash and cash equivalents                                                    $  24,524        $  42,950
  Short-term investments                                                          43,841           46,867
  Trade receivables (net of allowances of $25,432 and
    $10,480 in 1999 and 1998, respectively)                                       43,360           78,392
  Prepaid expenses and other receivables                          5                5,852           12,824
  Inventories                                                     6               39,516           61,200
                                                                              -----------       ----------
                                                                                 157,093          242,233

LONG-TERM INVESTMENTS
  Bank deposits and securities                                                       879           41,350
  Other                                                                            5,566            5,469

FIXED ASSETS                                                      7                6,549           13,877

OTHER ASSETS                                                      8                4,820           24,737
                                                                              -----------       ----------
       Total assets                                                            $ 174,907        $ 327,666
                                                                              ===========       ==========
CURRENT LIABILITIES
  Short-term debt and current maturities of long-term loans                 $         21      $     3,533
  Accounts payable and accrued expenses                           9               72,252           52,319
                                                                              -----------       ----------
                                                                                  72,273           55,852
                                                                              -----------       ----------
LONG-TERM LIABILITIES
  Bank loans                                                                          42               61
  Restructuring accrual                                           4                2,472                -
  Accrued severance pay                                           10               1,248            1,245
  Convertible subordinated notes                                  11              92,929          115,000
                                                                              -----------       ----------
                                                                                  96,691          116,306
                                                                              -----------       ----------
       Total liabilities                                                         168,964          172,158
                                                                              -----------       ----------
COMMITMENTS AND CONTINGENT LIABILITIES                            12

SHAREHOLDERS' EQUITY                                              13
  Ordinary shares of NIS 0.1 par value:
    Authorized - 50,000,000 shares;
    Issued and outstanding - 27,579,020 shares and
27,314,601 Shares as of December 31, 1999 and 1998,                                  577              553
respectively
  Paid-in capital                                                                137,732          136,001
  Unearned compensation                                                             (117)            (245)
  Retained earnings (accumulated deficit)                                       (113,975)          26,813
  Treasury stock, at cost 2,644,813 shares and 1,054,813
    Shares as of December 31, 1999 and 1998,
      respectively
                                                                                 (18,274)          (7,614)
                                                                              -----------       ----------
       Total shareholders' equity                                                  5,943          155,508
                                                                              -----------       ----------
       Total liabilities and shareholders' equity                              $ 174,907        $ 327,666
                                                                              ===========       ==========


      THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
                                       38

<TABLE>
<CAPTION>

                                        ESC MEDICAL SYSTEMS LTD.
                                 CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (in thousands except per share data)

                                                                                YEAR ENDED DECEMBER 31
                                                                     --------------------------------------------
                                                                         1999            1998           1997
                                                             NOTE                                    (RESTATED)
                                                             ----    -------------  --------------  -------------
REVENUES
<S>                                                           <C>      <C>            <C>             <C>
  Net sales                                                   14       $ 142,151      $ 225,206       $ 193,983
  Other revenues                                                               -              -           2,100
                                                                     -------------  --------------  -------------
                                                                         142,151        225,206         196,083
COST OF SALES                                                 4           96,474         78,585          65,068
                                                                     -------------  --------------  -------------
         Gross profit                                                     45,677        146,621         131,015
                                                                     -------------  --------------  -------------

OPERATING EXPENSES
  Research and development, net                               15          15,351         18,680          17,371
  Marketing and selling                                       4           78,432         76,882          55,877
  General and administrative                                              25,799         14,667          16,091
  Restructuring costs                                         4           20,530              -               -
  Settlement of litigations                                   12          23,780              -               -
  Impairment of intangible and tangible assets               3,7          17,616              -               -
  Acquired research and development                           16               -          2,451          11,912
  Other                                                       17           4,987              -               -
                                                                     -------------  --------------  -------------
         Total operating expenses                                        186,495        112,680         101,251
                                                                     -------------  --------------  -------------
         Operating income (loss)                                        (140,818)        33,941          29,764
FINANCING INCOME (EXPENSES), NET                              18          (3,865)         1,211           1,409
                                                                     -------------  --------------  -------------
                                                                        (144,683)        35,152          31,173
NONRECURRING EXPENSES                                         3                -         28,951           4,650
                                                                     -------------  --------------  -------------
         Income (loss) before income taxes                              (144,683)         6,201          26,523
TAXES ON INCOME                                               19           4,079          2,201           4,429
                                                                     -------------  --------------  -------------
         Net income (loss) before extraordinary items                   (148,762)         4,000          22,094
EXTRAORDINARY GAIN ON PURCHASE OF
COMPANY'S CONVERTIBLE NOTES                                                                 -               -
                                                              11           7,974
                                                                     -------------  --------------  -------------
         Net income (loss) for the year                                $(140,788)      $  4,000       $  22,094
                                                                     =============  ==============  =============
EARNINGS (LOSS) PER SHARE                                     20
  Basic
  Income (loss) before extraordinary item                              $   (5.79)      $   0.15       $    0.86

  Extraordinary gain                                                        0.31           -               -
                                                                     -------------  --------------  -------------
    Net earnings (loss) per share                                      $   (5.48)      $   0.15       $    0.86
                                                                     =============  ==============  =============
  Diluted
  Income (loss) before extraordinary item                              $   (5.79)      $   0.15       $    0.81

  Extraordinary gain                                                        0.31           -               -
                                                                     -------------  --------------  -------------
    Net earnings (loss) per share                                      $   (5.48)      $   0.15       $    0.81
                                                                     =============  ==============  =============
WEIGHTED AVERAGE NUMBER
  OF SHARES
  Basic                                                                   25,674         26,027          25,604
                                                                     =============  ==============  =============
  Diluted                                                                 25,674         27,381          27,194
                                                                     =============  ==============  =============


      THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                                      39

<TABLE>
<CAPTION>

                                             ESC MEDICAL SYSTEMS LTD.
                            CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
                                                  (in thousands)

                                                                         NOTE
                                                                      RECEIVABLE
                                                                         FROM             RETAINED
                                                                   SHAREHOLDERS AND       EARNINGS
                                          SHARE        PAID IN         UNEARNED         (ACCUMULATED      TREASURY
                                         CAPITAL       CAPITAL       COMPENSATION         DEFICIT)         STOCK           TOTAL
                                        ---------     ----------  ----------------      ------------   ------------     ----------
Balance as of
<S>                                     <C>            <C>         <C>                   <C>            <C>             <C>
  January 1, 1997 (restated)            $     520      $ 111,796   $      (1,234)        $     (144)    $     (104)     $110,834
Purchase of treasury stock                                                                                    (220)         (220)
Shares issued in connection
  with acquisition of AOC                       4          7,245                                                           7,249
Tax benefit of options exercised
  by employees                                             3,695                                                           3,695
Exercise of options and warrants                1          4,740                                                           4,741
Amortization of unearned
compensation                                                                 529                                             529
Net income of Luxar for the
  three months ended
  December 31, 1996                                                                             863                          863
Collection of note receivable                                                140                                             140
Translation adjustments                                       79                                                              79
Net income for the year                                                                      22,094                       22,094
                                        ---------     ----------  ----------------      ------------   ------------     ----------
Balance as of
                                              525         127,555           (565)            22,813           (324)      150,004
  December 31, 1997 (restated)
Purchase of treasury stock                                                                                  (7,290)       (7,290)
Exercise of options                            28          7,836                                                           7,864
Amortization of unearned
compensation                                                                 320                                             320
Tax benefit of options
  exercised by employees                                     610                                                             610
Net income for the year                                                                       4,000                        4,000
                                        ---------     ----------  ----------------      ------------   ------------     ----------
Balance as of
                                              553        136,001            (245)            26,813         (7,614)      155,508
  December 31, 1998
Purchase of treasury stock                                                                                 (10,660)      (10,660)
Gain from decrease in holding in
an affiliate                                               1,025                                                           1,025
Exercise of options                            24            489                                                             513
Grant of options                                             217                                                             217
Amortization of unearned
  compensation                                                               128                                             128
Net loss for the year                                                                      (140,788)                    (140,788)
Balance as of
  December 31, 1999                    $      577      $ 137,732       $    (117)        $ (113,975)     $ (18,274)     $  5,943


      THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                                                40

<TABLE>
<CAPTION>


                                              ESC MEDICAL SYSTEMS LTD.
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (in thousands)

                                                                                  YEAR ENDED DECEMBER 31
                                                                          1 9 9 9        1 9 9 8        1 9 9 7
                                                                      -------------  --------------  -------------
                                                                                                       (RESTATED)
CASH FLOWS - OPERATING ACTIVITIES
<S>                                                                    <C>            <C>             <C>
  Net income (loss)                                                    $  (140,788)   $     4,000     $    22,094
  Adjustments to reconcile net income (loss) to net cash provided
      by (used in) operating activities -
      Expenses (income) not affecting operating cash flows:
       Deferred income taxes                                                 4,093         (1,174)         (2,264)
       Amortization of deferred compensation                                   128            320             529
       Nonrecurring expenses in connection  with purchases                       -          8,938          11,912
       Depreciation and amortization                                         8,457          8,922           4,959
       Gain on purchase of Company's convertible notes                      (7,974)             -               -
       Restructuring costs                                                  45,068              -               -
       Impairment of intangible and tangible assets                         17,616              -               -
       Other                                                                   296            543             (26)
      Changes in operating assets and liabilities:
       Decrease (increase) in trade receivables                             30,232        (25,521)        (25,899)
       Decrease in prepaid expenses and other receivables                    2,879            852           2,621
       Decrease (increase) in inventories                                    1,946        (21,302)        (19,811)
       Increase (decrease) in accounts payable and accrued expenses          8,139         (3,012)         22,183
                                                                      -------------  --------------  -------------
       Net cash provided by (used in) operating activities                 (29,908)       (27,434)         16,298
                                                                      -------------  --------------  -------------

CASH FLOWS - INVESTING ACTIVITIES
  Payment for purchase of businesses, net of cash acquired                       -         (2,450)        (17,158)
  Sale of investment                                                             -            368               -
  Purchase of fixed assets                                                  (4,015)        (4,611)         (7,507)
  Investments in patents and know-how                                            -         (5,523)         (4,270)
  Maturity of (additions to) investments                                    43,439         39,921        (107,164)
  Proceeds from disposal of fixed assets                                         -            141              82
                                                                      -------------  --------------  -------------
       Net cash provided by (used in) investing activities                  39,424         27,846        (136,017)
                                                                      -------------  --------------  -------------
CASH FLOWS - FINANCING ACTIVITIES
  Proceeds from issuance of convertible notes, net of expenses                   -              -         110,500
  Purchase of convertible notes                                            (14,264)             -               -
  Proceeds from exercise of warrants and options                               513          7,864           4,086
  Proceeds from long-term debt                                                   -              -          10,260
  Repayment of long-term loans                                                 (19)       (15,025)         (1,216)
  Increase (decrease) in short-term bank debt, net                          (3,512)         2,373             728
  Purchase of treasury stock                                               (10,660)        (7,290)           (220)
  Collection of note receivable from shareholders                                -              -             140
                                                                      -------------  --------------  -------------
       Net cash provided by (used in) financing activities                 (27,942)       (12,078)        124,278
                                                                      -------------  --------------  -------------
NET INCREASE IN CASH OF LUXAR FOR THE
  THREE MONTHS ENDED DECEMBER 31, 1996                                           -              -             777
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           (18,426)       (11,666)          5,336

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              42,950         54,616          49,280
                                                                      -------------  --------------  -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                               $    24,524    $    42,950     $    54,616
                                                                      =============  ==============  =============


      THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                                                 41

<TABLE>
<CAPTION>

                          ESC MEDICAL SYSTEMS LTD.
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
                               (in thousands)

                                                                                  YEAR ENDED DECEMBER 31
                                                                      --------------------------------------------
                                                                       1 9 9 9        1 9 9 8        1 9 9 7
                                                                      -------------  --------------  -------------
                                                                                                       (RESTATED)
<S>                                                               <C>              <C>             <C>
NONCASH ACTIVITIES
  Conversion of subordinated debentures and interest payable to
    common stock                                                      $          -      $        -    $       481
                                                                      -------------  --------------  -------------
  Tax benefit of options exercised by employees                       $          -      $     610     $     3,695
                                                                      -------------  --------------  -------------

CASH PAID DURING THE PERIOD IN RESPECT OF:
  Income taxes                                                        $        649      $     670     $       272
                                                                      -------------  --------------  -------------
  Interest                                                            $      6,654      $   7,510     $       750
                                                                      -------------  --------------  -------------
PURCHASE OF BUSINESSES
  Assets and liabilities at date of purchase:
    Working capital (excluding cash)                                                    $     556     $    (1,632)
    Fixed assets                                                                              (19)         (1,453)
    Intangibles and other assets                                                           (3,987)        (12,763)
    Research and development projects in process                                                -         (10,114)
    Long-term liabilities                                                                       -           1,555
                                                                                     --------------  -------------
                                                                                           (3,450)        (24,407)

    Short-term liabilities incurred in connection with purchase                             1,000               -
    Shares and warrants issued in connection with purchase                                      -           7,249
                                                                                     --------------  -------------
       Cash paid, net                                                                   $  (2,450)    $   (17,158)
                                                                                     ==============  =============



      THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                                              42


                          ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)

NOTE 1   -    GENERAL

              A.     ESC Medical Systems Ltd. (the "Company" or "ESC") is an
                     Israeli company engaged directly and through its
                     subsidiaries (together "the Group") in research,
                     development, production and sale of medical devices
                     based on proprietary intense pulsed light source and
                     laser technology. The market for the Group's devices
                     are principally cosmetic medical professionals
                     worldwide.

              B.     In 1997 and 1998, the Group entered into various
                     merger and acquisition agreements, the most
                     significant of which were with Luxar Corporation
                     ("Luxar") and Laser Industries Limited ("Laser"),
                     which were recorded as pooling-of-interests and the
                     acquisition of Spectron (U.K.) Limited accounted for
                     by the purchase accounting method. See Note 3 for a
                     description of the merger and acquisition activity and
                     the accounting treatment applied thereto.

              C.     In 1999, the Group initiated a restructuring program
                     of its business operations (see Note 4). In the
                     framework of this program, the U.S.-based
                     marketing activity is to be consolidated, the
                     Israel-based manufacturing activity is to be
                     consolidated, and certain products are to be
                     eliminated. Management expects the restructuring
                     program to be fully implemented in 2000.

              D.     The Group's products use proprietary technology and
                     accordingly the Group holds numerous patents and
                     licenses. In addition, the industry in which the Group
                     operates is characterized by rapid technological
                     change and competition. Loss or invalidation of a
                     patent or a license or inability to remain competitive
                     in a rapidly changing economic environment could have
                     an adverse effect on the Group.

              E.     The preparation of financial statements in conformity
                     with generally accepted accounting principles requires
                     management to make estimates and assumptions that
                     affect the reported amounts of assets and liabilities
                     and disclosure of contingent assets and liabilities at
                     the date of the financial statements and the reported
                     amounts of revenues and expenses during the reporting
                     period. Actual results could differ from those
                     estimates.


NOTE 2   -    ACCOUNTING POLICIES

              The financial statements have been prepared in conformity
              with accounting principles generally accepted in the United
              States. The significant accounting policies followed in the
              preparation of the financial statements, on a consistent
              basis, are:

              A.     The accompanying  financial  statements have been
                     prepared in U.S. dollars, as the currency of the
                     primary economic environment in which the operations
                     of the Group are conducted is the U.S. dollar. The
                     majority of the Group's sales are denominated in U.S.
                     dollars, as are the majority of purchases of materials
                     and components. Thus, the functional currency of the
                     Group is the U.S. dollar.

                     Transactions and balances originally denominated in
                     U.S. dollars are presented at their original amounts.
                     Transactions and balances in other currencies are
                     remeasured into U.S. dollars in accordance with
                     Statement No. 52 of the Financial Accounting Standards
                     Board of the United States (FASB). Accordingly, items
                     have been remeasured as follows:

                     o      Monetary items - at the current exchange rate at
                            the balance sheet date.

                                          43


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 2   -    ACCOUNTING POLICIES (CONT.)

                     o      Nonmonetary items - at historical exchange rates.

                     o      Income and expense items (excluding items
                            deriving from nonmonetary items) - at exchange
                            rates current as of the date of recognition of
                            those items.

                     o      Depreciation and other items deriving from
                            nonmonetary items - at historical exchange
                            rates.

                     o      Exchange gains and losses from the
                            aforementioned remeasurement are reflected in
                            the statement of operations.


              B.     PRINCIPLES OF CONSOLIDATION
                     ---------------------------

                     The consolidated financial statements include the
                     accounts of the Company and its subsidiaries. Material
                     intercompany balances and transactions have been
                     eliminated.

                     As a result of the business combinations with Luxar
                     and Laser in 1997 and 1998, all prior period financial
                     statements were restated to include the accounts of
                     Luxar and Laser (see Note 3).

              C.     CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
                     -------------------------------------------

                     All highly liquid investments are considered as cash
                     equivalents if the investments mature within three
                     months from the date of investment. Investments in
                     bank deposits and in commercial paper with original
                     maturities longer than three months but less than a
                     year are reflected as short-term investments.

              D.     ALLOWANCE FOR DOUBTFUL ACCOUNTS
                     -------------------------------

                     The allowance for doubtful accounts is recorded on the
                     basis of specific accounts receivable whose
                     collectibility, based on management's estimate, is
                     uncertain.

              E.     INVENTORIES
                     -----------

                     Inventories are presented at the lower of cost or
                     market. Cost being determined as follows:

                     Raw materials            -  "First-in, first-out" method

                     Finished products and    -  Materials as above, labor and
                     work in process             overhead costs on an average
                                                 basis.

              F.     LONG-TERM INVESTMENTS
                     ---------------------

                     Investments in long-term bank deposits and in debt
                     securities in respect of which the Company has the
                     positive intent and ability to hold to maturity are
                     stated at amortized cost. Investments in nonmarketable
                     equity securities are stated at cost, unless the
                     Company has significant influence as defined in
                     Accounting Principles Board Opinion ("APB") No. 18 in
                     which case the investment is presented on the equity
                     method.

                                            44


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 2   -    ACCOUNTING POLICIES (CONT.)

              G.     FIXED ASSETS
                     ------------

                     Fixed assets are presented at cost (see also I below),
                     net of accumulated depreciation.

                     Annual depreciation is calculated based on the
                     straight-line method over the estimated useful lives
                     of the related assets or terms of the related leases.
                     Annual depreciation rates are as follows:

                                                                 %
                                                               ------
                     Computers and equipment                   10-33
                     Office furniture and equipment             7-20
                     Leasehold improvements         Over the period of the lease
                     Vehicles                                    15

              H.     OTHER ASSETS
                     ------------

                     Intangible assets (patents, know-how and goodwill) are
                     amortized by the straight-line method over periods of
                     principally between five and ten years (see also I
                     below). Debt issuance costs are amortized over the
                     term of the related debt by the straight-line method.

              I.     IMPAIRMENT OF LONG-LIVED ASSETS
                     -------------------------------

                     In accordance with SFAS No. 121, "Accounting for
                     Impairment of Long-Lived Assets and for Long-Lived
                     Assets to be Disposed Of," management reviews
                     long-lived assets for impairment periodically and
                     whenever events or changes in circumstances indicate
                     that the carrying amount of an asset may not be
                     recoverable based on estimated future cash flows.

              J.     RESEARCH AND DEVELOPMENT COSTS
                     ------------------------------

                     Research and development costs are charged to
                     operations as incurred. Amounts received or receivable
                     from the Government of Israel (through the Office of
                     the Chief Scientist) as its participation in certain
                     research and development are offset against the
                     Group's research and development costs.

              K.     REVENUE RECOGNITION
                     -------------------

                     Revenue is recognized upon shipment of products
                     provided that there are no significant uncertainties
                     regarding the customer's acceptance and the
                     collectibility is probable. The costs of insignificant
                     related obligations (initial installations) are
                     accrued when the related revenue is recognized.
                     Deferred revenues from service contracts are
                     recognized on a straight-line basis over the life of
                     the related service contracts. An allowance has been
                     recorded for estimated returns based on Group's
                     experience and management's estimates.

              L.     PRODUCT WARRANTIES
                     ------------------

                     Accrued warranty costs are recorded at the time of
                     sale based on the Group's experience and management
                     estimates.

                                        45

                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 2   -    ACCOUNTING POLICIES (CONT.)

              M.     STOCK-BASED COMPENSATION
                     ------------------------

                     The Group accounts for employee stock-based
                     compensation in accordance with APB No. 25,
                     "Accounting for Stock Issued to Employees". Pursuant
                     to this accounting standard, the Group records
                     compensation for share options granted to employees at
                     the date of grant based on the difference between the
                     exercise price of the options and the market value of
                     the underlying shares at that date. Deferred
                     compensation is amortized to compensation expense over
                     the vesting period of the underlying options. See Note
                     13 for pro forma disclosures required in accordance
                     with SFAS No.123, "Accounting for Stock-Based
                     Compensation," ("SFAS 123") of the FASB. The Group
                     accounts for stock-based compensation to consultants
                     in accordance with SFAS 123.

              N.     DEFERRED TAXES
                     --------------

                     Deferred tax assets and liabilities are determined
                     based on differences between financial reporting and
                     tax bases of assets and liabilities measured using
                     enacted tax rates and laws expected to be in effect
                     when the differences are expected to reverse. A
                     valuation allowance is recorded to the extent that
                     realization is not considered more likely than not.

              O.     EARNINGS PER SHARE
                     ------------------

                     Basic earnings per share is computed based on the
                     weighted average number of ordinary shares outstanding
                     and excludes any potential dilution. Diluted earnings
                     per share reflects potential dilution from exercise of
                     options and warrants or conversion of convertible
                     securities into ordinary shares.


              P.     RECLASSIFICATIONS
                     -----------------

                     Certain reclassification have been made to prior
                     years' financial statements to conform to the current
                     year's presentation.

              Q.     NEW ACCOUNTING PRONOUNCEMENT
                     ----------------------------

                     In June 1998, the Financial Accounting Standards Board
                     issued Statement of Financial Accounting Standards No.
                     133, Accounting for Derivative Instruments and Hedging
                     Activities ("SFAS 133"). The Statement establishes
                     accounting and reporting standards requiring that
                     every derivative instrument be recorded in the balance
                     sheet at its fair value. The Statement requires that
                     changes in the derivative's fair value be recognized
                     currently in earnings unless specific hedge accounting
                     criteria are met. Special accounting for qualifying
                     hedges allows a derivative's gains and losses to offset
                     related results on the hedged item in the income
                     statement.

                     SFAS 133, as amended, is effective for fiscal years
                     beginning after June 15, 2000. The Company believes
                     that the adoption of SFAS 133 will not have a material
                     effect on its financial statements.

                                       46


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 3   -    MERGERS AND ACQUISITIONS

              A.     LUXAR
                     -----

                     In March 1997, Luxar was merged with and into the
                     Company, which merger was accounted for as a pooling
                     of interests. Accordingly, all prior period financial
                     statements have been restated to include the accounts
                     of Luxar.

                     The statement of operations for the year ended
                     December 31, 1997, reflects nonrecurring expenses of
                     approximately $4,650 related to costs associated with
                     the merger.

              B.     LASER ACQUISITION
                     -----------------

                     In February 1998, Laser was acquired by ESC through
                     the issuance of 6,181,013 ordinary shares of ESC and
                     warrants and options exercisable for the purchase of
                     865,089 additional shares. The exchange with Laser was
                     accounted for as a pooling of interests, and
                     accordingly, all prior period financial statements
                     were restated to include the accounts of Laser and
                     reflect the issuance of the shares, warrants and
                     options by ESC.

                     The statement of operations for the year ended
                     December 31, 1998, reflects nonrecurring expenses of
                     approximately $28,951 related to costs associated with
                     the acquisition. Such amount includes principally
                     $7,226 for underwriters, legal and accounting
                     expenses, $7,149 for non-compete payments, bonuses and
                     severance, and $6,638 for inventory writedowns.

              C.     Combined and separate results of ESC and Laser during
                     1997 were as follows:
                     --------------------------------------------------------

                                                 ESC       LASER     COMBINED

             Year ended December 31, 1997:
                 Revenues                      $114,854   $81,229  $196,083
                 Net income                    $ 21,824   $   270  $ 22,094

              D.     SPECTRON ACQUISITION
                     --------------------

                     In April 1997, Laser acquired for cash consideration
                     all of the outstanding shares of Spectron (U.K.)
                     Limited, a U.K. based developer and manufacturer of
                     laser systems for the medical, industrial and
                     scientific markets, in a transaction accounted for
                     under the purchase of accounting method. The total
                     cost of the acquisition was $18,734, of which $4,900
                     was allocated to Spectron's tangible net assets,
                     $8,000 was allocated to acquired technology, and
                     $5,834 was written off as in-process research and
                     development projects. Spectron has been included in
                     the consolidated results of operations since April
                     1997. The results of operations of Spectron for the
                     periods prior to April 1997 are immaterial to the
                     consolidated results of operations.

                     Due to a determination by management regarding the
                     unrecoverability of the acquired technology, the Group
                     wrote off in 1999 an amount of $5,933 representing the
                     entire net book value of the acquired technology
                     recorded as a result of the 1997 acquisition.

                                        47

                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 3   -    MERGERS AND ACQUISITIONS (CONT.)

              E.     AOC ACQUISITION
                     ---------------

                     On December 18, 1997, the Company acquired Applied
                     Optronics Corp. ("AOC") for a total consideration of
                     $7,500. The consideration was comprised of
                     approximately $200 in cash, 164,356 ordinary shares
                     and 84,435 warrants to purchase shares of the Company
                     (see Note 13). AOC is a U.S. company engaged in
                     research, development, manufacturing and marketing of
                     laser diode optoelectronic components and systems.

                     The acquisition was accounted for under the purchase
                     of accounting method. Of the total purchase price,
                     $4,280 was allocated to AOC's research and development
                     projects in process. As these projects had no
                     alternative future use, they were written off as a
                     nonrecurring expense at the date of purchase.
                     Approximately $3,500 of the purchase price was
                     allocated to intangible assets. The balance of
                     approximately $300 represents the net liabilities
                     (deficit) of AOC assumed by the Company.

                     Due to a determination by management regarding the
                     unrecoverability of the intangible assets, the Group
                     wrote off in 1999 an amount of $3,040 representing the
                     entire net book value of the intangible assets
                     recorded as a result of the 1997 acquisition.

                     The operating results of AOC for the year 1997 were
                     immaterial in relation to the Company's consolidated
                     results of operations.

NOTE 4   -    RESTRUCTURING COSTS AND OTHER CHARGES
------        -------------------------------------

              In 1999 the Group recorded a $45,068 charge for comprehensive
              restructuring plans approved on September 14, 1999 by the
              Board of Directors. The plans include, among other things,
              closing locations and reducing staff. The charge includes
              $9,797 for lease terminations and related fixed asset
              disposals, $19,738 for writedowns of inventories, $4,800 for
              writedowns of receivables, $8,758 for severance, and $1,975
              for other costs.

              The writedowns of inventories, pertaining to the Group's
              decision to eliminate the marketing of a number of products,
              amounting to $19,738 were included in cost of goods sold. The
              writedowns of receivables amounting to $4,800 were included
              in the marketing and selling expenses.

              The majority of the restructuring charges relate to the
              Group's operations in the U.S. As of December 31, 1999, the
              unutilized accrual amounted to $7,998, relating to $4,514 for
              severance and $3,484 for lease terminations.

                                        48

                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 5   -    PREPAID EXPENSES AND OTHER RECEIVABLES
------        --------------------------------------

                                                       DECEMBER 31
                                                ----------------------------
                                                1 9 9 9           1 9 9 8
                                                -----------      -----------
             Deferred income taxes             $       653        $    4,732
             Government agencies                     2,278             4,081
             Prepaid expenses                        1,966             2,411
             Other                                     955             1,600
                                                -----------      -----------
                                                $    5,852         $  12,824
                                                ===========      ===========


NOTE 6   -    INVENTORIES

                                                       DECEMBER 31
                                                ----------------------------
                                                1 9 9 9           1 9 9 8
                                                -----------      -----------
             Raw materials                       $  15,998         $  20,309
             Work in process                         8,052            10,106
             Finished products                      15,466            30,785
                                                -----------      -----------
                                                 $  39,516         $  61,200
                                                ===========      ===========


NOTE 7   -    FIXED ASSETS

                                                       DECEMBER 31
                                                ----------------------------
                                                1 9 9 9           1 9 9 8
                                                -----------      -----------
             Computers and equipment            $  5,298          $ 23,480
             Office furniture and equipment        1,851             8,456
             Leasehold improvements                2,154             4,206
             Vehicles                              2,884             2,332
                                                -----------      -----------
                                                  12,187            38,474
             Less - accumulated depreciation       5,638            24,597
                                                -----------      -----------
                                                $  6,549          $ 13,877
                                                ===========      ===========

              Depreciation expense amounted to $3,116, $4,013 and $4,044
              for the years 1997, 1998 and 1999, respectively.

              In connection with the restructuring plans (see Note 4) and
              in connection with the periodic review of long-lived assets (see
              Note 2.I.), fixed assets with a net book value of $5,733 and
              $1,567, respectively, were written off in 1999.

                                      49


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 8  -     OTHER ASSETS
                                                        DECEMBER 31
                                                 ----------------------------
                                                 1 9 9 9           1 9 9 8
                                                 -----------      -----------

             Intangible assets (*)                  $  1,928          $ 30,494
             Debt issuance costs (**)                  3,636             4,500
             Other                                       793             1,961
                                                 -----------      -----------
                                                       6,357            36,955
             Less - accumulated amortization           1,537            12,218
                                                 -----------      -----------
                                                    $  4,820          $ 24,737
                                                 ===========      ============

              (*)    In connection with the periodic review of long-lived
                     assets (see Note 2.I. and Note 3), intangible assets
                     with a net book value of $16,049 were written off in
                     1999.
              (**)   In respect of convertible subordinated notes - see Note
                     11.


NOTE 9  -     ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>

                                                                     DECEMBER 31
                                                             -----------------------------
                                                              1 9 9 9           1 9 9 8
                                                             ------------     ------------
<S>                                                          <C>               <C>
             Trade payables                                  $     8,722       $    15,490
             Deferred income                                       3,324             2,322
             Government agencies                                     744             1,637
             Accruals:
               Payroll and related expenses                        6,462             7,127
               Commissions                                         5,591             5,020
               Income taxes                                        4,543             4,975
               Settlement of litigations (Note 12)                20,213                 -
               Restructuring (Note 4)                              5,526                 -
               Interest                                            1,874             2,362
               Warranty                                            3,913             3,093
               Other expenses                                     11,340            10,293
                                                             ------------     ------------
                                                             $    72,252       $    52,319
                                                             ============     ============

</TABLE>

                                           50

                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 10  -    ACCRUED SEVERANCE PAY

              The Company's obligation to make severance payments to its
              employees is fully covered by the payment of insurance
              premiums in respect thereof and by the accrual in the balance
              sheet. The insurance policies, which are in the form of an
              annuity and/or life insurance, are owned by the Company. The
              amounts funded with insurance companies are not under the
              management or control of the Company, and accordingly,
              neither those amounts nor the corresponding accrual for
              severance pay are reflected in the balance sheet. The
              Company's obligation by law and labor agreements in respect
              of severance pay for those employees not covered by managers'
              insurance policies is presented as an accrued liability.

              Severance pay expenses amounted to $747, $1,019 and $734 for
              the years 1997, 1998 and 1999, respectively. The calculation
              is based on the employee's latest salary and the period of
              employment.

              The subsidiaries in the United States ("U.S. subsidiaries")
              have 401(k) savings plans covering substantially all of the
              employees in the United States who have completed at least three
              months of service. Each employee may contribute up to 15% of
              his or her compensation per year, subject to maximum limits
              imposed by U.S. tax law. The U.S. subsidiaries may make
              discretionary matching contributions based on a formula as
              defined in the plans. To date, the U.S. subsidiaries have
              made no contributions to the plans.


NOTE 11  -    CONVERTIBLE SUBORDINATED NOTES

              In September 1997, the Company issued $115,000 in principal
              amount of 6% convertible subordinated notes due September 1,
              2002, with interest payable semiannually commencing March 1,
              1998. The notes are convertible into approximately 2,470,461
              ordinary shares of the Company at a conversion price of
              $46.55 per share, subject to adjustments in certain events.

              The notes are redeemable at the option of the Company, in
              whole or in part, at 102.4% of their principal amount
              beginning September 2000, and thereafter at prices declining
              annually to 100% on September 1, 2002, plus accrued interest
              to the date of redemption.

              In 1999 the Company purchased $22,071 in principal amount of
              the 6% convertible subordinated notes at a price of $14,264.
              As a result of the purchase the Company recorded a gain of
              $7,974. As of December 31, 1999, the outstanding liability
              with regard to the convertible subordinated notes amounted to
              $92,929.

                                        51

                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 12  -    COMMITMENTS AND CONTINGENT LIABILITIES

              A.     LEASE COMMITMENTS
                     -----------------

                     The Group leases its principal facilities in Yokneam
                     and Tel-Aviv in Israel, and also operates sales
                     offices and manufacturing facilities in the U.S.,
                     U.K., Italy, Germany, Japan and France. Rental expense
                     for the years 1997, 1998 and 1999, amounted to $2,626,
                     $3,423 and $3,729, respectively. Future minimum annual
                     lease payments for operating leases are as follows:

                     2000                              $3,676
                     2001                              $2,856
                     2002                              $2,555
                     2003                              $2,134
                     2004                              $1,774

                     In connection with the Group's restructuring and the
                     consolidation of its facilities, $3,484 of the above
                     amounts have been accrued and included in restructuring
                     costs for the year ended December 31, 1999.

              B.     ROYALTIES
                     ---------

                     The Group is a party to various licensing agreements
                     which require it to pay royalties on certain product
                     sales at various rates - up to 5% of the net selling
                     price of these products.

                     The Group is also obligated to pay to the State of
                     Israel and the BIRD Foundation royalties of 3-5% on
                     the sales of products for which participations were
                     received up to 100% of the amount of the
                     participations. As of December 31, 1999, the balance
                     of the royalty-bearing participations amounted to
                     approximately $6,234.

                     The Group paid royalties of $1,261, $824 and $534 in
                     1997, 1998 and 1999, respectively.

              C.     CONTINGENT LIABILITIES
                     ----------------------

                     (1)    In late 1998 the Company was named in a number
                            of purported class action securities lawsuits
                            that have been consolidated in the United
                            States District Court for the Southern District
                            of New York. In July 1999, a consolidated
                            amended complaint was filed naming among
                            others, the Company and several additional
                            current and former directors and officers of
                            the Company and Laser as defendants. The
                            consolidated amended complaint seeks damages
                            and attorneys' fees under the United States
                            securities laws for alleged "tipping" of
                            non-public information to an investment banker
                            in September 1998 and for alleged
                            irregularities in the way in which the Company
                            reported its financial results and disclosed
                            certain facts throughout 1997 and 1998. The
                            Company's insurance carrier has agreed to
                            assume the defense of the action under a
                            reservation of rights. Laser's insurance
                            carrier's decision as to coverage is currently
                            pending. No accrual has been recorded in the
                            financial statements for this matter.

                                       52


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 12  -    COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

              C.     CONTINGENT LIABILITIES (CONT.)

                     (2)    On September 20, 1999, Dr. Richard Urso filed
                            what purports to be a class action lawsuit
                            against the Company in the State District Court
                            in Harris County, Texas. Dr. Urso alleges a
                            number of causes of action including breach of
                            contract, breach of warranty, product
                            liability, misrepresentation and violations of
                            the Texas Deceptive Trade Practices Act. The
                            complaint purports to be filed on behalf of a
                            national class. The Company has taken steps to
                            remove the case to Federal court and intends to
                            vigorously deny all allegations and challenge
                            plaintiff's class certification motion when it
                            is filed. No accrual has been recorded in the
                            financial statements for this matter.

                     (3)    On May 10, 1999, the Company and a former
                            director and officer were named as defendants
                            in an action filed in Tel-Aviv Court by H.K.
                            Hashalom Ltd. in connection with the sale of
                            the Company's EpiLight systems. H.K. Hashalom
                            is seeking monetary damages in the amount of
                            $2,500 but has reserved the right to increase
                            such amount as well as a declaratory judgment
                            that, inter alia, the Company indemnify it for
                            certain costs and expenses arising out of the
                            transaction between the parties. On July 15,
                            1999, the defendants filed a Statement of
                            Defense. The case has not yet been set for a
                            first hearing. No accrual has been recorded in
                            the financial statements for this matter.

                            (4) On November 5, 1998, Light Age, Inc.
                            ("Light Age") instituted an ex-parte
                            application in the Tel-Aviv District Court (the
                            "Tel-Aviv Court") against the Company and
                            others, seeking a temporary injunction against
                            the development, production and sale of the
                            Company's Alexandrite laser for dermatological or
                            hair removal treatments. On January 25, 1999, the
                            Company, along with three subsidiaries, brought
                            an action in the Superior Court of New Jersey,
                            Somerset County (the "US Court"), against Light
                            Age. The litigation relates to disputes arising
                            out of an agreement between Light Age and Laser
                            pursuant to which Light Age supplied certain
                            medical laser devices to Laser. On July 1,
                            1999, the U.S. Court granted defendant Light
                            Age's motion to compel the Company and the
                            three affiliated entities to arbitrate. On
                            August 13, 1999, Light Age filed a demand for
                            arbitration on its counterclaim with the
                            American Arbitration Association. On November
                            22, 1999, the Company and three affiliated
                            entities filed a response to Light Age's
                            demand. Pending the outcome of the U.S.
                            arbitration, Light Age and the Company agreed
                            to file a motion to stay the proceedings in
                            Tel-Aviv. On October 14, 1999, the Tel-Aviv
                            Court confirmed the motion as requested and
                            stayed the proceedings. No accrual has been
                            recorded in the financial statements for this
                            matter.

                     (5)    As mentioned above, the Company and its
                            subsidiaries are involved in several legal
                            proceedings, claims and litigation in which no
                            accrual has been recorded in the financial
                            statements. Management of the Company is unable
                            to predict the outcome of such matters, the
                            likelihood of an unfavorable outcome or the
                            amount or range of potential loss, if any.

                     (6)    The Company and its subsidiaries are involved
                            in further legal proceedings, claims and
                            litigation arising in the ordinary course of
                            business. In the opinion of management, the
                            outcome of such current legal proceedings,
                            claims and litigation could have a material
                            effect on quarterly or annual operating results
                            or cash flows when resolved in a future period.
                            However, in the opinion of management, each of
                            these matters individually is not likely to
                            materially affect the Group's consolidated
                            financial position.

                                         53

                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)



NOTE 12  -    COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

              D.     SETTLEMENT OF LITIGATIONS
                     -------------------------

                     In 2000, the Group reached settlement agreements with
                     respect to litigation with Reliant Technologies, Inc.
                     and LPG USA, Inc., relating to alleged patent
                     infringement and violations of the Lanham Act and
                     related state laws, respectively. Under the various
                     settlements agreements the Company agreed to pay cash
                     in an aggregate amount of $9,500, to pay consulting
                     fees under a three-year consulting agreement in an
                     amount of $1,500, to purchase products in the amount
                     of $5,000 and to grant 300,000 stock options at
                     exercise prices of $5 to $9.75 (with fair value of
                     $381 as of the dates of the grants under the
                     Black-Scholes model).


NOTE 13  -    SHARE CAPITAL

              A.     ORDINARY SHARES
                     ---------------

                     In March 1997, the Company completed a merger with Luxar
                     and issued 1,976,473 shares under the terms of the
                     agreement - see Note 3. Convertible and redeemable
                     preferred stock of Luxar were converted into ordinary
                     shares of the Company in connection with the merger.

                     In December 1997, the Company issued 164,356 shares in
                     connection with the acquisition of AOC - see Note 3.

                     In February 1998, the Company completed a merger with
                     Laser and issued 6,181,013 ordinary shares and warrants
                     and options exercisable for the purchase of 865,089
                     additional shares.

              B.     SHARES SUBJECT TO OPTIONS
                     -------------------------

                     Until 1997, the Company issued ordinary shares to an
                     independent trustee. The use of these shares is
                     restricted to the granting of options to founding
                     shareholders, employees and consultants to acquire
                     such shares. No shares can be returned to the Company
                     and such shares have voting and dividend rights.
                     Shares issued to the trustee are deemed outstanding,
                     using the treasury stock method, for purposes of
                     earnings per share computations. As of December 31,
                     1999, 315,037 shares were held by the trustee.

                                         54


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 13  -    SHARE CAPITAL (CONT.)

              B.     SHARES SUBJECT TO OPTIONS (CONT.)

                     Transactions during the three years ended December 31,
                     1999, are summarized as follows:

<TABLE>
<CAPTION>

                                                                                           WEIGHTED
                                                                                           AVERAGE
                                                                                        EXERCISE PRICE
                                                                       NO. OF SHARES         U.S.$
                                                                       -------------    --------------

<S>                                     <C>                                 <C>              <C>
                    Outstanding January 1, 1997                             2,466,443
                      Granted                                               1,143,084        21.80
                      Exercised                                            (1,156,380)        2.58
                      Forfeitures                                             (32,713)        3.57
                                                                      -----------------
                    Outstanding December 31, 1997                           2,420,434
                      Granted                                                 233,000        23.35
                      Exercised                                              (663,753)       15.40
                      Forfeitures                                             (80,839)       25.00
                                                                      -----------------
                    Outstanding December 31, 1998                           1,908,842
                      Granted                                               4,639,000         5.25
                      Exercised                                              (364,522)        1.41
                      Forfeitures                                          (1,084,176)        7.48
                                                                      -----------------
                    Outstanding December 31, 1999                           5,099,144
                                                                      =================

                     The weighted average fair values of options
                     granted in 1997, 1998 and 1999 were $11.94,
                     $19.00 and $3.11, respectively.

                     The following table summarizes information about
                     options outstanding at December 31, 1999:

</TABLE>
<TABLE>
<CAPTION>

                                       OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
                      ------------------------------------------------------     -----------------------------------
     RANGE OF             NUMBER             WEIGHTED            WEIGHTED            NUMBER             WEIGHTED
     EXERCISE         OUTSTANDING AT          AVERAGE             AVERAGE        EXERCISABLE AT         AVERAGE
      PRICES           DECEMBER 31           REMAINING        EXERCISE PRICE       DECEMBER 31       EXERCISE PRICE
      U.S.$              1 9 9 9         CONTRACTUAL LIFE          U.S.$             1 9 9 9             U.S.$
   -----------        ---------------    ----------------     --------------     --------------      ---------------
<S>                       <C>              <C>                   <C>                 <C>                <C>
    0.02-2.90                 185,799          5-7.5                 0.70                172,097            0.69
    5.03-6.00               4,133,600          5-9.5                 5.25                  2,100            5.12
    7.94-8.67                 534,650           6-9                  8.00                151,810            8.12
   13.80-18.87                 68,845           2.5                 16.15                 68,845           16.15
   25.50-27.00                176,250         6.5-7.5               25.85                100,375           26.40
                       --------------                                             --------------
                            5,099,144                                                    495,227
                       ==============                                             ==============
</TABLE>
                                         55


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)



NOTE 13  -    SHARE CAPITAL (CONT.)

              B.     SHARES SUBJECT TO OPTIONS (Cont.)
                     -------------------------

                     The Company has received approval from the Israeli
                     Income Tax Authority for a share option plan under
                     Section 102 of the Income Tax Ordinance. This plan
                     provides certain tax benefits to employee participants
                     and restricts the disposal of the shares under option
                     for a period of not less than two years.

                     The option exercise price is determined by the Board
                     of Directors and, if granted below fair market value,
                     compensation expense is recorded over the vesting
                     period of the option in accordance with APB 25. Under
                     APB 25, the compensation cost charged to operations
                     for the years ended December 31, 1997, 1998 and 1999
                     amounted to $529, $320 and $128, respectively.

                     Had compensation cost been determined under the
                     alternative fair value accounting method provided for
                     under FASB Statement No. 123, "Accounting for
                     Stock-Based Compensation", the Company's net income
                     and earnings per share for the years 1997, 1998 and
                     1999 would have been reduced to the following pro
                     forma amounts:
<TABLE>
<CAPTION>

                                                                  1999            1998          1997
                                                             --------------    ------------   ------------
<S>                  <C>                       <C>                 <C>                <C>            <C>
                    Net income             As reported       $    (140,788)     $    4,000     $ 22,094
                                           Pro forma         $    (147,250)     $     (446)    $ 18,326

                    Basic
                      earnings (loss)      As reported       $       (5.48)     $    0.15      $   0.86
                      per share
                                           Pro forma         $       (5.74)     $   (0.02)     $   0.72
                    Diluted
                      earnings (loss)
                      per share            As reported       $       (5.48)     $    0.15      $   0.81
                                           Pro forma         $       (5.74)     $   (0.02)     $   0.67
</TABLE>


                     Under Statement No. 123 the fair value of each option
                     grant is estimated on the date of grant using the
                     Black-Scholes option-pricing model with the following
                     weighted-average assumptions used for grants in 1997,
                     1998 and 1999: (1) expected life of 3 years; (2)
                     dividend yield of 0%; (3) expected volatility of 62%
                     in 1997, 150% in 1998 and 87% in 1999; and (4)
                     risk-free interest rate of 6% in 1997, 5% in 1998, and
                     6% in 1999.

              C.     WARRANTS
                     --------

                     Pursuant to the agreement for the acquisition of AOC
                     entered into in December 1997, warrants to purchase
                     84,435 ordinary shares at a price of $47.25 per share
                     were issued. These warrants are exercisable until
                     December 2002.

                                        56


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)



NOTE 13  -    SHARE CAPITAL (CONT.)

              D.     TREASURY STOCK
                     --------------

                     During 1998 and 1999, the Board of Directors of the
                     Company authorized the purchase of up to 3,000,000
                     ordinary shares, to facilitate the exercise of
                     employee share options under the various plans. As of
                     December 31, 1999, 2,644,813 shares had been
                     repurchased and held as treasury shares in trust.

                                    57


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 14  -    NET SALES

              A.     GEOGRAPHICAL BREAKDOWN OF SALES
                     -------------------------------
<TABLE>
<CAPTION>

                                                                              YEAR ENDED DECEMBER 31
                                                                   ---------------------------------------------
                                                                   1 9 9 9          1 9 9 8            1 9 9 7
                                                                   ----------     ------------       -----------
<S>                                                                <C>              <C>               <C>
                    Export and international                       $ 140,097        $ 220,633         $ 192,348
                    Domestic - Israel                                  2,054            4,573             1,635
                                                                   ----------     ------------       -----------
                                                                   $ 142,151        $ 225,206         $ 193,983
                                                                   ==========     ============       ===========

              B.     COMPOSITION OF SALES BY GEOGRAPHIC AREAS

                                                                              YEAR ENDED DECEMBER 31
                                                                   ---------------------------------------------
                                                                   1 9 9 9          1 9 9 8            1 9 9 7
                                                                   ----------     ------------       -----------
                    North America                                 $   51,223        $ 117,377         $ 109,687
                    Europe                                            40,774           69,968            43,167
                    Asia                                              33,662            9,375            16,051
                    Central and South America                          4,079           13,655            17,671
                    Other                                             12,413           14,831             7,407
                                                                   ----------     ------------       -----------
                                                                   $ 142,151        $ 225,206         $ 193,983
                                                                   ==========     ============       ===========
</TABLE>

NOTE 14  -    NET SALES (CONT.)

              C.     GEOGRAPHICAL SEGMENTS OF PRODUCTION

                     The Company's activities fall within two reporting
                     segments: the U.S.A. segment and the rest of the world
                     (ROW). The following table sets forth segments
                     information for the years ended December 31, 1999,
                     1998 and 1997:

<TABLE>
<CAPTION>

                                                                               YEAR ENDED DECEMBER 31
                                                                   ---------------------------------------------
                                                                     1 9 9 9         1 9 9 8           1 9 9 7
                                                                   ----------     ------------       -----------
                    Revenues
<S>                                                                 <C>               <C>             <C>
                      U.S.A.                                        $   51,223        $ 117,376       $ 109,687
                      ROW                                               90,928          107,830          84,296
                                                                   -----------    -------------      -----------
                          Consolidated                                 142,151          225,206         193,983
                                                                   ===========    =============      ===========
                    Operating income (loss):
                      U.S.A.                                           (91,738)         (19,905)          4,159
                      ROW                                               (4,264)          53,846          25,605
                      Expenses not allocated to a
                       particular segment                              (44,816)              -               -
                                                                   -----------    -------------      -----------
                          Consolidated                                (140,818)          33,941          29,764
                                                                   -----------    -------------      -----------
                      Financing income (expenses),
                        net                                             (3,865)           1,211           1,409

                      Nonrecurring expenses                                  -          (28,951)         (4,650)
                                                                   -----------    -------------      -----------
                          Income (loss) before income
                    taxes                                            $(144,683)      $    6,201       $  26,523
                                                                   ===========    =============      ===========

                    Identifiable assets
                      U.S.A.                                       $    47,847       $  100,762      $   90,653
                      ROW                                              116,399          211,776         231,804
                      Assets not allocated to a
                    particular segment                                  10,661           15,128          13,189
                                                                   -----------    -------------      -----------
                          Consolidated                              $  174,907       $  327,666      $  335,646
                                                                   ===========    =============      ===========
                    Depreciation and amortization
                      U.S.A.                                        $    2,061       $    2,577     $       876
                      ROW                                                4,352            3,953           2,787
                      Depreciation and amortization
                      not allocated to a particular
                      segment                                            2,044            2,392           1,296
                                                                   -----------    -------------      -----------
                          Consolidated                              $    8,457       $    8,922      $    4,959
                                                                   ===========    =============      ===========
</TABLE>

                                            58

                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)



NOTE 15  -    RESEARCH AND DEVELOPMENT COSTS, NET

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                             ---------------------------------------
                                                              1 9 9 9        1 9 9 8        1 9 9 7
                                                             ----------     ----------    ----------
<S>                                                           <C>            <C>            <C>
             Total costs                                      $ 15,626       $ 19,283       $ 18,889
             Less - participation primarily by
               the Government of Israel                            275            603          1,518
                                                             ----------     ----------    ----------
                                                              $ 15,351       $ 18,680       $ 17,371
                                                             ==========     ==========    ==========
</TABLE>

NOTE 16  -    ACQUIRED RESEARCH AND DEVELOPMENT

              Nonrecurring expenses in connection with mergers and
              acquisitions of businesses were as follows:
<TABLE>
<CAPTION>

                                                                                  YEAR ENDED
                                                                         -----------------------------
                                                                                  DECEMBER 31
                                                                            1 9 9 8         1 9 9 7
                                                                         ------------      -----------

<S>                                                                            <C>                <C>
                     Purchase of Spectron                                          -           5,834
                     Purchase of AOC                                               -           4,280
                     Other acquisitions                                        2,451           1,798
                                                                          -----------      -----------
                                                                            $  2,451        $ 11,912
                                                                          ===========      ===========
</TABLE>



NOTE 17  -    OTHER EXPENSES

              A. Other expenses were as follows:

                                                      YEAR ENDED DECEMBER 31
                                                      -----------------------
                                                             1 9 9 9
                                                            ----------
             Proxy expenses (see B below)                   $   3,575
             Other                                              1,412
                                                            ---------
                                                            $   4,987
                                                            =========

              B.  In connection with the director election contest, the
                  Company incurred expenses of $2,065. In addition, in
                  accordance with the resolution of the Board of Directors
                  of the Company in a meeting held on June 23, 1999, all
                  costs and expenses of two major shareholders and their
                  affiliates in connection with the director election
                  contest were reimbursed by the Company.

                                        59


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 18  -    FINANCING INCOME (EXPENSES), NET

<TABLE>
<CAPTION>

                                                                     YEAR ENDED DECEMBER 31
                                                             ----------------------------------------
                                                              1 9 9 9        1 9 9 8        1 9 9 7
                                                              ---------     ----------     ----------
<S>                                                           <C>            <C>            <C>
             Interest income                                  $  5,483       $  8,921       $  5,722
                                                              ---------     ----------     ----------

             Less - Financing expenses
               Interest and amortization in
                 respect of convertible notes                    7,626          7,832          2,417
               Other interest                                      136            871          1,146
               Exchange rates, net                               1,586           (993)           750
                                                              ---------     ----------     ----------
                                                                 9,348          7,710          4,313
                                                              ---------     ----------     ----------
                                                              $ (3,865)      $  1,211       $  1,409
                                                              =========     ==========     ==========
</TABLE>

NOTE 19  -    TAXES ON INCOME

              Inflationary adjustments - The Company and Laser are subject
              to the Income Tax Law (Inflationary Adjustments), 1985, which
              provides for an adjustment to taxable income for the effects
              of inflation (based on the Israeli Consumer Price Index) on
              that portion of shareholders' equity not invested in
              inflation resistant assets.

              "Approved enterprise" - The Company and Laser have received
              approval for their investment programs in accordance with the
              Law for the Encouragement of Capital Investments, 1959. The
              Company has chosen to receive its benefits through the
              alternative benefits program, and, as such, including
              accelerated depreciation of fixed assets used in the
              investment programs, as well as a full tax exemption on
              undistributed income that is derived from the approved
              enterprise for a period of six years and reduced tax rates
              for an additional period of up to four years. Laser is
              entitled to a full tax exemption for a period of two years
              and reduced tax rates for an additional period of up to five
              years (the rate and the length of the benefit period are
              dependent on the percentage of non-Israeli shareholder
              ownership). The benefits commence with the date on which
              taxable income is first earned. Income not derived from the
              approved enterprise is subject to tax at a rate of 36%. The
              tax exemption period for the Company commenced in 1995 and
              the tax exemption period for Laser has not yet commenced.

              Dividends paid out of income derived from the approved
              enterprise is subject to 15% withholding. Should dividends be
              paid out of income earned during the period of the tax
              holiday, such income will be subject to tax at the rate of up
              to 25%. The Company and Laser do not anticipate paying
              dividends from income derived from the approved enterprise
              and any such earnings distributed upon dissolution will not
              subject the Company and Laser to income taxes.

                                       60


                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 19  -    TAXES ON INCOME (CONT.)

              The Company and Laser have not received final income tax
              assessments for years subsequent to 1991.

              The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                           -------------------------------------------
                                                              1 9 9 9        1 9 9 8        1 9 9 7
                                                           -------------    -----------    ------------
<S>                                                        <C>               <C>            <C>
             Current taxes                                 $          -      $   3,375      $   7,693
             Deferred taxes                                      (4,079)        (1,174)        (3,264)
                                                           -------------    -----------    ------------
                                                           $     (4,079)     $   2,201      $   4,429
                                                           =============    ===========    ============
</TABLE>

              As most of the income in Israel is exempt from income taxes,
              the Israeli statutory tax rate for the purposes of the
              reconciliation of the reported tax expense is approximately
              zero. Income tax expense in the financial statements relates
              primarily to the income taxes of subsidiaries.

              The current tax provisions are recorded net of the benefit of
              utilizing net operating loss carryforwards and tax credit
              carryforwards of subsidiaries. Significant components of
              deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>

                                                                                 DECEMBER 31
                                                                      -------------------------------
                                                                         1 9 9 9           1 9 9 8
                                                                      -------------       -----------
             Deferred tax assets:
<S>                                                                          <C>                  <C>
               Accrued liabilities                                               -             1,521
               Inventory adjustments                                             -               657
               Allowance for doubtful accounts                                   -               449
               Net operating loss carryforwards                                653             2,300
                                                                      -------------       -----------
                                                                               653             4,927
                                                                      -------------       -----------
             Deferred tax liabilities:
               Accelerated depreciation                                          -              (164)
               Other                                                             -               (31)
                                                                      -------------       -----------
                                                                                 -              (195)
                                                                      -------------       -----------
               Net deferred tax assets - included in
                 other receivables                                              653             4,732
                                                                      =============       ===========
</TABLE>

                                          61

                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)


NOTE 20  -    EARNINGS PER SHARE
<TABLE>
<CAPTION>

                                             YEAR ENDED                        YEAR ENDED                        YEAR ENDED
                                         DECEMBER 31, 1 9 9 9              DECEMBER 31, 1 9 9 8            DECEMBER 31, 1 9 9 7
                                  ---------------------------------   -----------------------------   ----------------------------
                                                          PER SHARE                        PER SHARE                      PER SHARE
                                    INCOME      SHARES     AMOUNT     INCOME     SHARES     AMOUNT     INCOME     SHARES   AMOUNT
                                  -------------------------------------------------------------------------------------------------
<S>                                <C>             <C>       <C>        <C>         <C>        <C>        <C>        <C>      <C>
Net income (loss)                  (140,788)                            4,000                           22,094
                                  ==========                           ======                          ========
Basic earnings per share
Income (loss) before              (148,762)      25,674      (5.79)     4,000     26,027       0.15     22,094    25,604      0.86
extraordinary items
Extraordinary gain                   7,974       25,674       0.31       -        26,027       -         -        25,604         -
                                  ---------                  ------    ------                 ------   -------              -------
  Income available to
  ordinary shareholders           $(140,388)     25,674       (5.48)   $4,000     26,027       0.15    $22,094    25,604      0.86
                                                             ======                           ======                        =======

Effect of dilutive securities
  Options                                             -                              741                             961
  Warrants                                            -                              613                             629
  Debentures                                          -                                -                               -
                                                --------                          -------                          ------
Diluted earnings per Share
Income (loss) before
extraordinary items               (148,762)      25,674      (5.79)     4,000     27,381       0.15     22,094    27,194       0.81
Extraordinary gain                   7,974       25,674       0.31       -        27,381       -         -        27,194          -
                                  ---------                  ------    ------                 ------   -------              -------
Income (loss) available to
 ordinary shareholders            (140,388)      25,674      (5.48)     4,000     27,381       0.15     22,094    27,194       0.81
                                                             ======                           ======                        =======
</TABLE>

The diluted EPS calculation did not take into account subordinated notes
convertible into weighted average of 2,289,590, 2,470,469 and 1,646,974
ordinary shares, in 1999, 1998 and 1997 respectively, because their effect
is antidilutive.

NOTE 21  -    FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
-------       ------------------------------------------------------

              Financial instruments which potentially subject the Group to
              a concentration of credit risk consist principally of cash,
              short-term and long-term investments and trade receivables.
              Short-term cash investments are placed with high credit-quality
              financial institutions. Other investments are in securities
              of various banks, in U.S. Government securities and in
              commercial paper of industrial companies with high credit
              ratings. The Group performs ongoing credit evaluations of
              its customers and generally does not require collateral. The
              Group maintains allowances for estimated credit losses.

              The carrying amounts of cash, investments, receivables and
              accounts payable approximate fair value. The market value of
              its convertible notes is approximately 75% of the book value.

                                      62



                         ESC MEDICAL SYSTEMS LTD.
               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
               (in thousands except share and per share data)



<TABLE>
<CAPTION>

                                             ESC MEDICAL SYSTEMS LTD.
                                                   SCHEDULE II
                                        VALUATION AND QUALIFYING ACCOUNTS
                                                  (IN THOUSANDS)


                                       BALANCE AT       CHARGE          CHARGE                      BALANCE AT
                                       BEGINNING     TO COSTS AND      TO OTHER                       END OF
                                        OF YEAR         EXPENSES       ACCOUNTS       DEDUCTIONS       YEAR

<S>                                         <C>             <C>          <C>             <C>          <C>
Year ended December 31, 1999:
     Allowance for Doubtful accounts        $10,480         $14,952      -----           -----        $25,432
     Reserve for Warranty                    $3,029            $884      -----           -----         $3,913

Year ended December 31, 1998:
     Allowance for Doubtful accounts         $2,235          $8,245      -----           -----        $10,480
     Reserve for Warranty                    $1,172          $1,857      -----           -----         $3,029

Year ended December 31, 1997:
     Allowance for Doubtful accounts           $804          $1,431      -----           -----         $2,235
     Reserve for Warranty                        $0          $1,172      -----           -----         $1,172
</TABLE>

                                                63


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

ESC MEDICAL SYSTEMS LTD.

By:/S/ Yacha Sutton
   _____________________________
   Yacha Sutton,
   Chief Executive Officer

Dated: March 30, 2000


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature                                   Title                       Date
---------                                   -----                       ----
<S>                          <C>                                 <C>

/s/Yacha Sutton
------------------                 Chief Executive Officer         March 30, 2000
Mr. Yacha Sutton                 (Principal Executive Officer)

/s/Sagi Genger
------------------                 Chief Financial Officer         March 30, 2000
Mr. Sagi Genger                  (Principal Financial Officer)

/s/Raanan Yehiely
------------------                   Corporate Controller          March 30, 2000
Mr. Raanan Yehiely

/s/Jacob A. Frenkel
------------------                     Chairman of the             March 30, 2000
Prof. Jacob A. Frenkel                Board of Directors

/s/Aharon Dovrat
------------------                         Director                March 30, 2000
Mr. Aharon Dovrat

/s/Philip Friedman
------------------                         Director                March 30, 2000
Mr. Philip Friedman

/s/Thomas G. Hardy
------------------                         Director                March 30, 2000
Mr. Thomas G. Hardy

/s/Darrell S. Rigel
------------------                         Director                March 30, 2000
Prof. Darrell S. Rigel

/s/S.A. Spencer
------------------                         Director                March 30, 2000
Mr. S.A. Spencer

/s/Mark H. Tabak
------------------                         Director                March 30, 2000
Mr. Mark H. Tabak

/s/Zehev Tadmor
------------------                         Director                March 30, 2000
Prof. Zehev Tadmor
</TABLE>


                                     64