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

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934.


                  For the Quarterly Period Ended June 30, 2001


[ ]  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 incorporation           (I.R.S. Employer
                 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

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 _

The number of shares  outstanding of the registrant's  common stock as of August
16, 2001 was 34,971,308 Ordinary Shares, NIS 0.10 par value per share.



<PAGE>



                            ESC MEDICAL SYSTEMS LTD.

                                    FORM 10-Q

                       For the Quarter Ended June 30, 2001


                                      INDEX


PART I.  FINANCIAL INFORMATION...............................................  2

    ITEM 1.  Financial Statements............................................  2

         1)    Independent Accountant's Review Report........................  4

         2)    Consolidated Balance Sheets...................................  5

         3)    Consolidated Statements of Operations.........................  6

         4)    Statement of Changes in Shareholders' Equity..................  7

         5)    Consolidated Statements of Cash Flows.........................  8

         6)    Notes to Condensed Interim Consolidated Financial Statements.. 10

    ITEM 2. Management's  Discussion and Analysis of Financial Condition
              and Results of Operations...................................... 19

    ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk....... 25

PART II. OTHER INFORMATION................................................... 26

    ITEM 1.  Legal Proceedings............................................... 26

    ITEM 6.  Exhibits and Reports on Form 8-K................................ 28


                                   # # # # # #



                                       1

<PAGE>



PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


                     Independent Accountant's Review Report


The Board of Directors
ESC Medical Systems Ltd.
Yokneam


We have  reviewed the  accompanying  interim  consolidated  balance sheet of ESC
Medical  Systems Ltd. ("the Company") and  consolidated  subsidiaries as of June
30, 2001,  the related  interim  consolidated  statements of operations  for the
six-month and three-month  periods ended June 30, 2001 and the related statement
of changes in shareholders' equity and statement of cash flows for the six-month
period ended June 30, 2001. These financial statements are the responsibility of
the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified  Public  Accountants.  A review of financial  information
consists  principally  of applying  analytical  procedures to financial data and
making inquiries of persons responsible for financial and accounting matters. It
is  substantially  less in scope  than an audit  conducted  in  accordance  with
generally accepted auditing standards,  the objective of which is the expression
of an opinion regarding the financial statements taken as a whole.  Accordingly,
we do not express such an opinion.

Based on our review, we are not aware of any material  modifications that should
be made to the  accompanying  financial  statements for them to be in conformity
with accounting principles generally accepted in the United States of America.

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


Tel Aviv
August 20, 2001



                                       2
<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
                       INTERIM CONSOLIDATED BALANCE SHEET
                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                            June 30,   December 31,
                                                                             2001         2000
                                                                           ---------    ---------
                                                                          (Unaudited)
                                                                           ---------
<S>                                                                        <C>          <C>
CURRENT ASSETS
   Cash and cash equivalents                                               $  85,486    $  43,396
   Short-term investments                                                         --          123
   Trade receivables                                                          91,973       54,156
   Prepaid expenses and other receivables                                      9,871        6,949
   Inventories                                                                68,212       50,288
                                                                           ---------    ---------
                                                                             255,542      154,912
                                                                           ---------    ---------

FINISHED GOODS USED IN OPERATIONS                                              8,841        2,758

LONG-TERM INVESTMENTS
   Bank deposits and securities                                                  812          941
   Trade receivables                                                             381          341
   Other                                                                       4,108        6,993

FIXED ASSETS                                                                  12,557        9,695

OTHER ASSETS                                                                 148,625        4,889
                                                                           ---------    ---------


       Total assets                                                        $ 430,866    $ 180,529
                                                                           =========    =========

CURRENT LIABILITIES
   Short-term debt and current maturities of long-term loans               $  49,420    $   4,420
   Accounts payable and accrued expenses                                     144,898       54,316
                                                                           ---------    ---------
                                                                             194,318       58,736
                                                                           ---------    ---------
LONG TERM LIABILITIES
   Bank loans                                                                100,008           18
   Restructuring accrual                                                          --          963
   Accrued severance pay                                                       1,216        1,162
   Subordinated notes                                                         12,904           --
   Convertible subordinated notes                                             81,559       91,787
                                                                           ---------    ---------
                                                                             195,687       93,930
                                                                           ---------    ---------
Total liabilities                                                            390,005      152,666
                                                                           ---------    ---------

SHAREHOLDERS' EQUITY
   Ordinary shares of NIS 0.1 par value: Authorized - 50,000,000 shares;
   Issued and outstanding - 34,118,664 and 27,629,017 shares,
        respectively                                                             739          578
   Additional paid-in capital                                                279,216      137,033
   Unearned compensation                                                          --         (120)
   Accumulated deficit                                                      (238,842)     (96,693)
   Treasury stock, at cost: 36,498 and 1,871,684 shares, respectively           (252)     (12,935)
                                                                           ---------    ---------
      Total shareholders' equity                                              40,861       27,863
                                                                           ---------    ---------


      Total liabilities and shareholders' equity                           $ 430,866    $ 180,529
                                                                           =========    =========
</TABLE>

The  accompanying  notes  are an  integral  part of these  interim  consolidated
financial statements.



                                       3
<PAGE>


<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
                  INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      (In thousands, except per share data)



<TABLE>
<CAPTION>
                                                                     For the six months              For the three months
                                                                       ended June 30,                   ended June 30,
                                                                 -------------------------        -------------------------
                                                                   2001             2000             2001            2000
                                                                 ---------        --------        ---------        --------
                                                                       (Unaudited)                       (Unaudited)
<S>                                                              <C>              <C>             <C>              <C>
REVENUES
   Net sales                                                     $ 124,240        $ 78,543        $  80,372        $ 42,515
COST OF SALES                                                       69,671          34,154           54,109          17,673
                                                                 ---------        --------        ---------        --------

         Gross profit                                               54,569          44,389           26,263          24,842
                                                                 ---------        --------        ---------        --------

OPERATING EXPENSES
   Research and development, net                                     8,439           5,779            5,364           2,973
   In process research and development                              46,650              --           46,650              --
   Selling, marketing and administrative expenses                  131,559          30,189          110,980          15,640
   Amortization of intangible assets                                 2,140              --            2,140              --
   Write-down of investments                                         3,986              --            3,435              --
                                                                 ---------        --------        ---------        --------

         Total operating expenses                                  192,774          35,968          168,569          18,613
                                                                 ---------        --------        ---------        --------

OTHER OPERATING INCOME                                                  --           1,450               --           1,450

         Operating income (loss)                                  (138,205)          9,871         (142,306)          7,679

OTHER INCOME                                                            --             599               --             599

FINANCING EXPENSES, NET                                             (5,360)         (2,648)          (3,991)         (1,608)
                                                                 ---------        --------        ---------        --------

         Income (loss) before income taxes                        (143,565)          7,822         (146,297)          6,670

INCOME TAX  BENEFIT (EXPENSE)                                        1,416              98              (80)             --
                                                                 ---------        --------        ---------        --------

         Income (loss) after income taxes                         (142,149)          7,724         (146,377)          6,670

COMPANY'S SHARE OF LOSSES OF AFFILIATES                                 --             420               --             318
                                                                 ---------        --------        ---------        --------

         Income (loss) before extraordinary item                  (142,149)          7,304         (146,377)          6,352

EXTRAORDINARY GAIN ON PURCHASE
     OF COMPANY'S CONVERTIBLE NOTES                                     --             292               --              --
                                                                 ---------        --------        ---------        --------

         Net income (loss) for the period                        $(142,149)       $  7,596        $(146,377)       $  6,352
                                                                 =========       =========        =========        ========

EARNINGS (LOSS) PER SHARE
   Basic:
   Income (loss) before extraordinary item                       $   (4.96)       $   0.29        $   (4.70)       $   0.25
   Extraordinary gain                                                   --            0.01               --              --
                                                                 ---------        --------        ---------        --------

         Net earnings (loss) per share                           $   (4.96)       $   0.30        $   (4.70)       $   0.25
                                                                 =========       =========        =========        ========

   Diluted:
   Income (loss) before extraordinary item                                        $   0.27                         $   0.23
   Extraordinary gain                                                                 0.01                               --
                                                                                  --------                         --------
         Net earnings (loss) per share                                            $   0.28                         $   0.23
                                                                                  ========                         ========
WEIGHTED AVERAGE NUMBER
   OF SHARES
     Basic                                                          28,671          25,128           31,167          25,183
                                                                 =========       =========        =========        ========
     Diluted                                                                        27,595                           27,802
                                                                                 =========                         ========
</TABLE>


The  accompanying  notes  are an  integral  part of these  interim  consolidated
financial statements.



                                       4
<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
              INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                                   (UNAUDITED)
                                 (In thousands)


<TABLE>
<CAPTION>
                                                       Additional
                                        Share           paid-in         Unearned         Accumulated       Treasury
                                       capital          capital       compensation         deficit           stock          Total
                                       -------          -------       ------------         -------           -----          -----
<S>                                      <C>            <C>              <C>              <C>            <C>             <C>
Balance as of
  December 31, 2000                      $ 578          $ 137,033        $ (120)          $(96,693)      $ (12,935)      $ 27,863

Share issuance to
   Coherent                                132             89,498                                                          89,630

  Grant of options to bank                                  9,704                                                           9,704

Grant of options to
   Employees and consultants                                8,963                                                           8,963

Exercise of options                         20              7,466                                           12,683         20,169

Conversion of notes                          9             10,290                                                          10,299

Amortization of unearned
  compensation                                                             120                                                120

Non-cash compensation                                      16,262                                                          16,262

Net loss for the period                                                                   (142,149)                      (142,149)
                                         -----          ---------      -------           ---------      ---------        --------
Balance as of
  June 30, 2001                          $ 739          $ 279,216      $    --           $(238,842)     $    (252)       $ 40,861
                                         =====          =========      =======           =========      =========        ========
</TABLE>



The  accompanying  notes  are an  integral  part of these  interim  consolidated
financial statements.


                                       5
<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
                  INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                   For the six months
                                                                                     ended June 30
                                                                                ------------------------
                                                                                  2001            2000
                                                                                ---------       --------
<S>                                                                             <C>             <C>
CASH FLOWS - OPERATING ACTIVITIES
  Net income (loss)                                                             $(142,149)      $  7,596
  Adjustments to reconcile net income (loss) to net cash used in operating
   activities -

     Income and expenses not affecting operating cash flows:
       Amortization of unearned compensation                                          120             64
       Grant of options                                                             8,963             --
       Non-cash compensation                                                       14,839             --
       Depreciation and amortization                                                2,945          1,818
       In process research and development                                         46,650             --
       Gain on purchase of Company's convertible notes                                 --           (292)
       Other income                                                                    --           (599)
       Other operating income                                                          --         (1,450)
       Write-down of investments                                                    3,986             --
       Other                                                                           54            236

     Changes in operating assets and liabilities:
       Increase in trade receivables                                               (1,665)        (9,514)
       Decrease (increase) in prepaid expenses and other receivables                  (30)          (102)
       Decrease in inventories (1)                                                  7,908             76
       Increase (decrease) in accounts payable and accrued expenses                45,390        (15,912)
                                                                                ---------       --------
          Net cash -operating activities                                          (12,989)       (18,079)
                                                                                ---------       --------

CASH FLOWS - INVESTING ACTIVITIES
  Purchase of fixed assets, net                                                      (686)        (1,556)
  long term deposit, net                                                              129             --
  Short term deposit, net                                                             123             --
  Sale of subsidiary's operations                                                      --            814
  Short-term investments, net                                                        (758)         4,108
  Payment for operations acquired (Appendix A)                                     (8,888)            --
                                                                                ---------       --------

          Net cash- investing activities                                          (10,080)         3,366
                                                                                ---------       --------

CASH FLOWS - FINANCING ACTIVITIES
  Purchase of convertible notes                                                        --           (873)
  Proceeds from exercise of options                                                20,169          1,787
  Repayment of long-term loans                                                        (10)            (7)
  Increase in short-term bank debt, net                                            45,000             --
                                                                                ---------       --------
          Net cash- financing activities                                           65,159            907
                                                                                ---------       --------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   42,090        (13,806)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   43,396         24,524
                                                                                ---------       --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      $  85,486       $ 10,718
                                                                                =========       ========

CASH PAID DURING THE PERIOD IN RESPECT OF:

   Income taxes                                                                 $     291       $    490
                                                                                ---------       --------

   Interest                                                                     $   2,887       $  2,807
                                                                                ---------       --------
</TABLE>


(1)  Including finished goods used in operations.


The  accompanying  notes  are an  integral  part of these  interim  consolidated
financial statements.


                                       6
<PAGE>



                            ESC MEDICAL SYSTEMS LTD.
                  INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)
                                 (In thousands )

Appendix A - Payments for operation acquired


                                                      For the six months
                                                      ended June 30, 2001
                                                      -------------------
                                                          (Unaudited)
                                                      -------------------

Current assets                                               (71,343)
Fixed assets, net                                             (5,223)
Current liabilities                                           39,263
In process research and development                          (46,650)
Goodwill and other intangibles                              (133,469)
Equity payment (the Company's shares)                         89,630
Cash payment, financed by a long term loan                   100,000
Liability with respect to acquisition                          6,000
Note                                                          12,904
                                                            --------
                                                              (8,888)
                                                            ========


Appendix B - Non cash activities


                                                      For the six months
                                                      ended June 30, 2001
                                                      -------------------
                                                           (Unaudited)
                                                      -------------------
              Conversion of notes                             10,290

              Non cash compensation                            1,423

              Grant of options to bank                         9,704


                                       7
<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)


Note 1 - BASIS OF PRESENTATION

     A.   The unaudited condensed interim  consolidated  financial statements as
          of June 30, 2001 and for the  six-month and  three-month  periods then
          ended  ("interim  financial  statements")  of ESC Medical Systems Ltd.
          (the "Company") and  subsidiaries  should be read in conjunction  with
          the audited  financial  statements  of the Company as of December  31,
          2000 and for the year then ended,  including  the notes  thereto.  The
          results of  operations  for the interim  periods  are not  necessarily
          indicative of the results to be expected on a full-year basis.

     B.   The interim financial statements have been prepared in accordance with
          accounting  principles  generally  accepted  in the  United  States of
          America.

          The accounting  principles applied in the preparation of these interim
          financial  statements are consistent with those principles  applied in
          the   preparation  of  the  most  recent  annual   audited   financial
          statements.


Note 2  - ADDITIONAL INFORMATION

     A.   On February  25,  2001,  the  Company,  its  wholly-owned  subsidiary,
          Lumenis  Holdings  Inc.  (formerly  known as Energy  Systems  Holdings
          Inc.), and Coherent, Inc. ("Coherent"), entered into an Asset Purchase
          Agreement,  dated  as  of  February  25,  2001  (the  "Asset  Purchase
          Agreement"),  pursuant to which Coherent agreed to sell or cause to be
          sold to the Company and certain of its subsidiaries (collectively, the
          "Buyer Group")  substantially all of the assets and liabilities of the
          Coherent Medical Group ("CMG"),  Coherent's  medical products division
          (the "Acquisition").  The assets acquired include, among other things,
          plant, equipment and other physical property.

          On April 30, 2001,  the Buyer Group and Coherent and its  subsidiaries
          completed the Acquisition (the "Closing").  In addition,  on April 30,
          2001, the parties amended the Asset Purchase Agreement.

          At the Closing,  the Coherent  entities received $100,000 in cash (the
          "Cash Purchase Price"),  5,432,099 ordinary shares of the Company (the
          "Shares"),  and an eighteen-month note bearing interest at the rate of
          5% per  annum and in the  principal  amount of  $12,904  (the  "Note",
          together  with the Cash  Purchase  Price and the Shares,  the "Closing
          Consideration").  The  Cash  Purchase  Price  is  subject  to  an  yet
          undetermined  adjustment  based  on the  net  tangible  value,  at the
          Closing,  of CMG's assets acquired.  The Asset Purchase Agreement also
          provides  for a  post-Closing  earn-out  payment to  Coherent of up to
          $25,000,  subject  to  certain  financial  conditions  being  met (the
          "Post-Closing  Consideration").  The amount  and terms of the  Closing
          Consideration  and the Post-Closing  Consideration  were determined by
          arms-length negotiations among the parties.


                                       8
<PAGE>

                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)


Note 2  - ADDITIONAL INFORMATION (Cont.)

     A. (Cont.)

          To finance the  Acquisition,  ongoing  working  capital  needs and, if
          needed,  the refinancing of the Company's 6% convertible  subordinated
          notes  due  September  1,  2002,   the  Company  and  certain  of  its
          subsidiaries   entered  into  various   financing   arrangements  (the
          "Financing")  with  Bank  Hapoalim  B.M (the  "Bank").  The  financing
          consists  of: (a) a  $100,000  six-year  term loan,  (b) up to $50,000
          revolving line of credit until April, 2002 and up to $20,000 revolving
          line of credit  from  April,  2002 to April,  2003 and (c) a letter of
          intent  pursuant  to which the Bank  agreed,  subject to the terms and
          conditions set forth therein,  to provide up to approximately  $92,000
          to refinance  the  Company's  6%  convertible  subordinated  notes due
          September  1, 2002.  Each of the  facilities  is or will be secured by
          substantially all of the assets of the Company,  Lumenis Holdings Inc.
          and certain of their  material  subsidiaries.  In connection  with the
          Financing,  on April 30,  2001,  the Company and the Bank also entered
          into a  five-year  option  agreement  granting  the Bank or any of its
          subsidiaries  the right to purchase  from the Company up to  2,500,000
          ordinary  shares of the Company at a purchase  price of  US$20.25  per
          share, subject to certain adjustments.

          The  Acquisition  was  accounted  for  as a  purchase.  The  aggregate
          consideration  including costs directly attributable to the completion
          of  the  Acquisition  (together,  the  "Purchase  Price"),  have  been
          allocated to the assets and  liabilities  acquired.  The allocation of
          the Purchase Price among the identifiable  intangible assets was based
          upon independent estimates of fair value of those assets. As a result,
          $46,650  was   allocated   to   purchased   in-process   research  and
          development,  which has not yet reached technological  feasibility and
          does not have alternative future uses. This amount has been charged to
          the  Company's   operations  in  accordance  with  generally  accepted
          accounting principles.

          The  Company  examines  on an  ongoing  basis its  long-lived  assets,
          including  those  acquired  in the  Acquisition.  Failure to reach the
          level of  operations  used for the  valuation  of CMG's  tangible  and
          intangible assets or to utilize such assets as currently  anticipated,
          could result in impairment of the associated  assets and could require
          the Company to  accelerate  the time period over which such assets are
          being  amortized,  which could have a material  adverse  effect on the
          Company's result of operations.

          The  interim  consolidated  balance  sheet as of June 30, 2001 and the
          interim  consolidated  statement  of  operations  for the  three-month
          period then ended include, on a consolidated basis, the financial data
          of CMG as of such date and for the period from the Closing to June 30,
          2001, respectively.



                                       9
<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)


Note 2 - ADDITIONAL INFORMATION (Cont.)

     A.   (Cont.)

          The total  purchase  price and the purchase  price  allocation  are as
          follows:

          Total purchase price:
             Equity payment (the company's shares)                      $ 89,630
             Cash payment                                                100,000
             Liability with respect to acquisition                         6,000
             Note                                                         12,904
                                                                        --------
                Total payment                                            208,534
             Assumed liabilities                                          39,263
                                                                        --------
             Total consideration                                         247,797
             Acquisition expenses                                          9,615
                                                                        --------
                Total purchase price                                    $257,412
                                                                        ========

          Purchase price allocation:
             Fair value of net tangible assets acquired from CMG at
                April 30, 2001                                          $ 77,293

          Intangible assets acquired:
             Coherent name                                                 2,990
             Product names                                                 1,420
             Developed technology                                         29,910
             Covenant not to compete                                         878
             Assembled workforce                                           7,719
             In process research and development                          46,650
             Goodwill                                                     90,552
                                                                        --------
                                                                        $257,412
                                                                        ========

          Purchased  technology,  other  intangibles  and goodwill are amortized
          over their estimated useful lives, generally two to fifteen years.

          The  Company  recorded a one-time  charge of $46,650 in the  six-month
          period  ended June 30,  2001 for  purchased  in-process  research  and
          development  related  to a  developed  project  that  had not  reached
          technological  feasibility,  had no  alternative  future use,  and for
          which successful development is uncertain.



                                       10
<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)


Note 2 - ADDITIONAL INFORMATION (Cont.)

     A. (Cont.)

          The  developed  technology  of CMG,  valued  at  $29,910,  focuses  on
          solid-state  lasers and diode lasers that are  developed and optimized
          for  aesthetic,  surgical  and  ophthalmic  application.  The core CMG
          technologies  are in the area of lasers,  optics,  embedded  software,
          electronic controllers,  power supplies, and mechanical design, and in
          their integration in the form of reliable  products.  LightSheer (TM),
          PowerSuite  (TM),  Ultrapulse (R) Encore (TM), and Opal (TM) are major
          products  whose  development  was  completed  during 2000 and 2001 and
          include all the above-mentioned core technologies.

     Pro Forma Financial Results:

          The  following  selected  unaudited  pro  forma  combined  results  of
          operation  for the six  months  ended  June  30,  2001 and 2000 of the
          Company and CMG, have been prepared assuming the Acquisition  occurred
          at the beginning of each of the periods presented.

          The following pro forma financial  information  does not purport to be
          indicative  of the combined  results of operations  future  periods or
          indicative of the results that  actually  would have been realized had
          the entities been a single entity during these periods.

<TABLE>
<CAPTION>
                                                                    For the six months
                                                                      ended June 30
                                                                   ---------------------
                                                                      2001         2000
                                                                   ----------   ---------
                                                                        (Unaudited)
<S>                                                              <C>             <C>
          Revenues                                               $ 185,183       $185,440
          Net income (loss)                                        (99,061)         4,374
          Net earnings (loss) per share                              (3.07)          0.14

          Shares used in calculation of net earnings (loss)
                  per share                                         32,293         30,560
</TABLE>


          The  pro  forma   results  of   operations   give  effect  to  certain
          adjustments, including amortization of purchased intangibles, goodwill
          and deferred stock option expense, acceleration of vesting of options,
          write down of inventories and receivables.

          The $46,650 charge for purchased  in-process  research and development
          has been  excluded  form the pro forma  results,  as it is a  material
          non-recurring charge.


                                       11
<PAGE>

                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)


Note 2 - ADDITIONAL INFORMATION (Cont.)

     B.   In April 2001, the Company  reached a final agreement with the Israeli
          income tax authorities with regard to tax returns filed by the Company
          for the  years up to and  including  1998.  As a result,  the  Company
          recorded a gain from the reversal of the accrual  recorded in previous
          years in a total amount of $ 1,600.

     C.   In the  six-month  period ended June 30, 2001,  the Board of Directors
          approved the  acceleration  of vesting of stock options granted to the
          Company's certain employees and members of the Board of Directors.  As
          a result,  and in accordance  with APB 25,  compensation  expense with
          regard to such  acceleration,  in the  total  amount  of  $15,689,  is
          included in the statement of operations.

          In May 2001, the Board of Directors approved the grant of fully vested
          stock  options,  to  purchase  200,000  shares,  to  employees  of the
          Company,  at an  exercise  price of  $10.90  per  share  (equal to the
          exercise  price of  options  granted  to some of the  Company's  other
          employees prior to the  Acquisition).  As a result,  and in accordance
          with APB 25,  compensation  expense  in the total  amount of $3,300 is
          included in the statement of operations.

     D.   The trade  receivables  as of June 30, 2001 and  December 31, 2000 are
          presented  net of  allowances  of  $25,281  (unaudited)  and $  14,154
          respectively.


Note 3  - INVENTORIES

          Inventories are composed of the following:


                                               June 30,      December 31,
                                                 2001           2000
                                               -------         -------
                                             (Unaudited)
                                               -------

          Raw materials                        $22,622         $30,468
          Work in process                       14,895           8,354
          Finished products                     30,696          11,466
                                               -------         -------
                                               $68,212         $50,288
                                               =======         =======

The cost of sales for the  six-month  and three-  month  periods  ended June 30,
2001,   include  the  write  down  of   inventories  in  the  total  amounts  of
approximately $17,569.


                                       12
<PAGE>

                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)




Note 4 - SEGMENT INFORMATION

     A.   COMPOSITION OF REVENUES BY GEOGRAPHIC AREAS

<TABLE>
<CAPTION>
                                                             For the six months                    For the three months
                                                               ended June 30,                          ended June 30,
                                                       -----------------------------           ----------------------------
                                                          2001                2000                2001               2000
                                                       ----------          ---------           ---------           --------
                                                                 (Unaudited)                            (Unaudited)
                                                       -----------------------------           ----------------------------
<S>                                                      <C>                 <C>                <C>                <C>
          Revenues
            America                                      $ 55,079            $33,385            $38,618            $18,153
            Europe                                         25,864             19,027             14,973             10,506
            Asia                                           35,746             18,253             23,013              9,749
            Other                                           7,551              7,878              3,768              4,107
                                                         --------            -------            -------            -------
             Consolidated                                $124,240            $78,543            $80,372            $42,515
                                                         ========            =======            =======            =======
</TABLE>


     B.   REPORTABLE SEGMENTS


                                                   For the six      For the six
                                                   months ended    months ended
                                                  -------------    -------------
                                                  June 30, 2001    June 30, 2000
                                                  -------------    -------------
                                                   (Unaudited)      (Unaudited)
                                                  -------------    -------------
          Revenues
            Surgical, Aesthetics and Ophthalmic     $ 112,588         $ 67,775
            Dental                                      5,177            2,918
            Industrial                                  6,475            7,850
                                                    ---------         --------
                 Consolidated                       $ 124,240         $ 78,543
                                                    =========         ========

          Operating Income (Loss)
            Surgical and aesthetics                 $(137,746)        $ 11,396
            Dental                                     (1,162)          (1,628)
            Industrial                                    703              103
                                                    ---------         --------
                 Consolidated                        (138,205)           9,871
                                                    =========         ========

          Other income                                     --              599
          Financing expense, net                       (5,360)          (2,648)
                                                    ---------         --------
          Income before income taxes                $(143,565)        $  7,822
                                                    =========         ========

                                                              June 30
                                                                2001
                                                            -----------
                                                            (Unaudited)
                                                            -----------
          Assets
            Surgical, Aesthetics and Ophthalmic               $409,338
            Dental                                              10,207
            Industrial                                          11,321
                                                              --------
                 Consolidated                                 $430,866
                                                              ========



                                       13
<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)


Note 5 - CONTINGENT LIABILITIES

     A.   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 Industries  Limited, a subsidiary of
          the  Company  ("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.

          On December 23, 1999,  the Company  moved to dismiss the  consolidated
          amended  complaint.  On August  31,  2000 the Court  entered  an order
          dismissing the claim against the Laser director and officer defendants
          and denying the remaining  dismissal counts.  The parties have entered
          into a scheduling order and have commenced discovery.

     B.   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  alleged it was misled by the Company and Mr.
          Eckhouse,   who  jointly  presented  it  with  false   representations
          concerning the Epilight  abilities,  thus causing  monetary losses and
          damages.   H.K.   Hashalom  sought  monetary  damages  in  the  amount
          approximately  $2,500 and reserved the right to increase  such amount,
          as well as to request a declaratory judgment that, among other things,
          the Company indemnify it for certain costs and expenses arising out of
          the transaction's between the parties.  After the pre-trial stage, the
          court  advised the parties to resolve  the lawsuit  through  mediation
          procedures.  On June 14, 2001,  the parties  entered into a settlement
          agreement (the "Settlement"),  which terminates all disputes among the
          parties. The Settlement  stipulates that in exchange of dismissing all
          of H.K. Hashalom's action against the Company,  and waiving all of its
          claims  whatsoever,  the  Company  is to  pay  H.K.  Hashalom  amounts
          substantially  less than  originally  sought.  On June 19,  2001,  the
          action was dismissed.

     C.   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  undertakings  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.


                                       14
<PAGE>


                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)


Note 5 - CONTINGENT LIABILITIES (Cont.)

     C. (Cont.)

          On  January  25,  1999,  the  Company,  along  with  three  affiliated
          entities,  brought an action seeking declaratory and injunctive relief
          in the Superior Court of New Jersey,  Somerset  County;  Law Division,
          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 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.  An arbitration  panel has been appointed,  discovery is
          ongoing, and hearings on the merits have been scheduled for Fall 2001.

     D.   On May 8,  2001,  Lumenos,  Inc.  ("Lumenos"),  the  owner of  several
          applications  with the United States  Patent and  Trademark  Office to
          register  the term  "Lumenos" as a  trademark,  filed a complaint  for
          trademark  infringement  against  the  Company  in the  United  States
          District Court for the District of  Massachusetts,  seeking  equitable
          relief and damages.  In its  complaint,  Lumenos  seeks to prevent the
          Company from using or promoting the name  "Lumenis" as a company name,
          trademark  or Internet  domain  name.  If and when this  complaint  is
          served on the Company,  the Company will vigorously defend the action.
          In the  meantime,  the Company is seeking to resolve the dispute in an
          amicable fashion and to avoid further litigation.

     E.   On September  20, 1999,  Dr.  Richard Urso filed what purports to be a
          class action lawsuit against the Company and against a leasing company
          in Harris County,  Texas,  alleging a variety of causes of action.  In
          December 2000,  plaintiff amended his complaint to eliminate the class
          action  claim.  On April 13, 2001 the lawsuit was dismissed and on May
          3, 2001, Dr. Urso and approximately forty-seven physicians and medical
          clinics  re-filed what purports to be a class action lawsuit in Harris
          County,  Texas. The lawsuit was removed to the U.S. District Court for
          the Southern  District of Texas. The current  allegations on behalf of
          plaintiffs  are  breach of  contract,  breach of express  and  implied
          warranties, fraud,  misrepresentation,  conversion, product liability,
          violation  of the  Texas  Deceptive  Trade  Practices  Act  and  Texas
          Securities Act as well as lender liability and unconscionable conduct.
          The Company is defending this case vigorously.

     F.   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 further
          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
          Company's consolidated financial position.


                                       15
<PAGE>

                            ESC MEDICAL SYSTEMS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2001
                      (In thousands, except per share data)


Note 5 - CONTINGENT LIABILITIES (Cont.)

     G.   The statements of operations for the six-month and three-month periods
          ended  June  30,  2001  include  a  provision  of  $26,000  reflecting
          management  estimate of the Company's  potential exposure with respect
          to certain,  not all, legal proceedings,  claims and litigation.  With
          respect to the legal  proceedings,  claims and litigation for 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.


Note 6 - NEW ACCOUNTING PRONOUNCEMENTS

          In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations".
          SFAS No. 141  establishes  new standards for  accounting and reporting
          requirements for business  combinations and requires that the purchase
          method of accounting be used for all business  combinations  initiated
          after June 30, 2001.  Use of the  pooling-of-interests  method will be
          prohibited.  The Company  expects to adopt this  statement  during the
          first quarter of fiscal 2002.

          In June  2001,  the FASB  issued  SFAS No.  142,  "Goodwill  and Other
          Intangible  Assets," which supersedes APB Opinion No. 17,  "Intangible
          Assets". SFAS No. 142 establishes new standards for goodwill and other
          intangibles   acquired  in  a  business   combination  and  eliminates
          amortization of goodwill and intangible  assets with indefinite  lives
          and  instead  sets forth  methods to  periodically  evaluate  them for
          impairment.  The Company  expects to adopt this  statement  during the
          first quarter of fiscal 2002.  During the  three-month  ended June 30,
          2001, goodwill amortization totaled approximately $1,200.


                                       16
<PAGE>



ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

ESC Medical  Systems,  Ltd.  ("ESC" or "the  Company")  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,  surgical and
ophthalmic applications, including photorejuvenation, hair removal, non-invasive
treatment of vascular  lesions and pigmented  lesions,  acne,  ENT,  gynecology,
urinary  lithotripsy,   benign  prostatic  hyperplasia,   open  angle  glaucoma,
secondary  cataracts,  age-related  macular  degeneration,  and  refractive  eye
correction, as well as neurosurgery.  The Company's systems are designed for use
in a variety of medical environments,  ranging from physicians' offices to acute
care hospitals.

On February 25, 2001, ESC, its  wholly-owned  subsidiary,  Lumenis Holdings Inc.
(formerly  known  as  Energy  Systems  Holdings  Inc.  ),  and  Coherent,   Inc.
("Coherent"), entered into an Asset Purchase Agreement, dated as of February 25,
2001 (the "Asset Purchase Agreement"), pursuant to which Coherent agreed to sell
or cause to be sold to ESC and certain of its  subsidiaries  (collectively,  the
"Buyer Group")  substantially  all of the assets and liabilities of the Coherent
Medical   Group   ("CMG")  ,   Coherent's   medical   products   division   (the
"Acquisition").   The  assets  acquired  include,  among  other  things,  plant,
equipment and other  physical  property.  On April 30, 2001, the Buyer Group and
Coherent and its  subsidiaries  completed the Acquisition  (the  "Closing").  In
addition,  on April 30, 2001,  the Asset  Purchase  Agreement was amended by the
parties thereto (the "First Amendment").

At the Closing,  the Coherent entities received  $100,000,000 in cash (the "Cash
Purchase  Price"),   5,432,099  ESC  ordinary  shares  (the  "Shares"),  and  an
eighteen-month  note  bearing  interest  at the rate of 5% per  annum and in the
principal  amount of  $12,904,000  (the "Note",  together with the Cash Purchase
Price and the Shares, the "Closing  Consideration").  The Cash Purchase Price is
subject to an yet  undetermined  adjustment  based on the net tangible value, at
the  Closing,  of CMG's  assets  acquired.  The Asset  Purchase  Agreement  also
provides for a post-Closing  earn-out  payment to Coherent of up to $25,000,000,
subject  to  certain   financial   conditions   being  met  (the   "Post-Closing
Consideration").  The  amount  and terms of the  Closing  Consideration  and the
Post-Closing Consideration were determined by arms-length negotiations among the
parties.

To finance the  Acquisition,  ongoing working capital needs and, if needed,  the
refinancing  of ESC's 6% convertible  subordinated  notes due September 1, 2002,
ESC and certain of its subsidiaries entered into various financing  arrangements
(the  "Financing") with Bank Hapoalim B.M (the "Bank").  The financing  consists
of: (a) a $100,000,000  six-year term loan, (b) a $50,000,000  revolving line of
credit until April,  2002 and up to  $20,000,000  revolving  line of credit from
April 2002 to April,  2003 and (c) a letter of intent pursuant to which the Bank
agreed,  subject to the terms and conditions set forth therein, to provide up to
approximately  $92,000,000 to refinance ESC's 6% convertible  subordinated notes
due  September  1,  2002.  Each  of the  facilities  is or will  be  secured  by
substantially  all of the assets of ESC,  Lumenis  Holding  and certain of their
material subsidiaries.  In connection with the Financing, on April 30, 2001, ESC
and the Bank also entered into a five year option agreement granting the Bank or
any of its  subsidiaries  the right to  purchase  from ESC up to  2,500,000  ESC
ordinary  shares at a purchase  price of US$20.25 per share,  subject to certain
adjustments.

In this Report,  unless the context  otherwise  requires,  all references to the
"Company"  or "ESC" are to ESC Medical  Systems Ltd. and its direct and indirect
wholly owned subsidiaries.


                                       17
<PAGE>


RESULTS OF OPERATIONS

THREE AND SIX MONTH  PERIODS  ENDED JUNE 30,  2001  COMPARED  WITH THREE AND SIX
MONTH PERIODS ENDED JUNE 30, 2000 (In thousands of U.S. Dollars)

Revenues.  The Company's net revenues  increased by 89% to $80,372 for the three
months  ended June 30, 2001  compared to $42,515 for the three months ended June
30, 2000.  The Company's  net revenues  increased by 58% to $124,240 for the six
months ended June 30, 2001 compared to $78,543 for the six months ended June 30,
2000.

The increase in sales reflects mainly the two months  contribution  from the CMG
acquisition.

Gross Profit. Gross profit increased by 6% to $26,263 for the three months ended
June 30, 2001 from $24,842 for the three  months ended June 30, 2000.  Excluding
write  downs of  inventory  and other  charges,  mainly in  connection  with the
acquisition  of CMG, in the total  amount of $17,569 for the three  months ended
June 30,  2001,  gross  profit  increased  by 76%.  As a  percentage  of  sales,
excluding write down of inventory and other charges, the gross profit was 55% in
the three  months  ended June 30,  2001,  compared  to 58% in the same period in
2000. Gross profit increased by 23% to $54,569 for the six months ended June 30,
2001 from $44,389 for the six month period ended June 30, 2000.  Excluding write
down of inventory and other charges,  gross profit  increased by 63% for the six
months ended June 30, 2001. As a percentage of sales,  excluding  write downs of
inventory  and other  charges,  the gross profit was 58% in the six months ended
June 30, 2001 compared to 57% in the same period in 2000.

The  increase in gross  profit,  excluding  write downs of  inventory  and other
charges,  in the three and six  months  ended  June 30,  2001 was due to the two
months of contribution from the CMG acquisition.

The decrease in gross  profit,  excluding  write downs and other  charges,  as a
percentage  of sales in the three  months  ended  June 30,  2001  stems from the
inherently  lower  margins of the CMG product  lines and was  aggravated  by the
product mix.

Research and Development,  net. Net research and development  costs increased by
80% to $5,364 for the three  months  ended June 30, 2001 from $2,973 in the same
period in 2000. As a percentage of sales, research and development costs were 7%
in the three  month  period  ended  June 30,  2001 and 2000.  Net  research  and
development  costs  increased  by 46% to $8,439 for the six month ended June 30,
2001 from $5,779 in the same period in 2000. As a percentage of sales,  research
and  development  costs were 7% in the six month periods ended June 30, 2001 and
2000.

The increase in research and development costs in the six and three months ended
June 30, 2001 is due mainly to the two months contribution from CMG activities.

In process  research  and  development.  In  process  research  and  development
expenses  in the three and six months  ended June 30, 2001  represents  the fair
value  allocated to in process  research and  development of the CMG acquisition
purchase price , based upon independent valuation.



                                       18
<PAGE>


Selling,   marketing  and  administrative  expenses.   Selling,   Marketing  and
Administrative expenses increased by 610% to $110,980 for the three months ended
June 30, 2001  compared to $15,640 for the same period in 2000.  As a percentage
of sales,  Selling  Marketing  and  Administrative  expenses in the three months
ended June 30, 2001 were 138%  compared to 37% in the same period in 2000.  As a
percentage  of  sales,  excluding  one time  charges  (listed  below)  mainly in
connection with the CMG acquisition and Discontinued Business Activities expense
(detailed  below),  selling marketing and  Administrative  expenses in the three
months  ended  June 30 2001  were  31%.  Selling  Marketing  and  Administrative
expenses  increased  by 336% to $131,559  for the six months ended June 30, 2001
compared  to $30,189  for the same  period in 2000.  As a  percentage  of sales,
Selling  Marketing  and  Administrative  in the six months period ended June 30,
2001 were 106%  compared to 38% in the same period in 2000.  As a percentage  of
sales,  excluding one time charges mainly in connection with the CMG acquisition
and  Discontinued   Business  Activities   expenses,   selling,   marketing  and
administration expenses in the six months ended June 30, 2001, were 37%.

The increase in selling  marketing and  administrative  expense in three and six
months ended June 30, 2001 is due to the one time charges,  mainly in connection
with the CMG  acquisition  and  expenses  of  approximately  $4,316 of  business
activities  ("Discontinued  Business  Activities") which represents  duplication
activities  with  little  or no future  economic  benefit  as of June 30,  2001,
incurred post acquisition. In the main, such activities have been already ceased
or definitive actions have been taken to eliminate them in the short term.

Selling,  Marketing and  Administrative  expenses in the three months ended June
30, 2001 include one time charges, mainly in connection with the CMG acquisition
as follows:

o    Write down of accounts  receivables in an amount of approximately  $12,673,
     mainly  in  connection  with  distributors  consolidation.

o    Exceptional personnel cost in an amount of approximately $32,697 in respect
     of termination, retention and bonuses, mostly non-cash.

o    An  amount  of   approximately   $27,760  with  respect  to  certain  legal
     proceedings,   claims  and  litigation,   which  represents  the  Company's
     management  estimation of the Company's potential exposure relating to such
     proceedings.

o    An amount of approximately  $5,537 relating to facility  change,  including
     future lease  commitments,  leases of unused  space and related  cost.

o    An amount of approximately $3,048 of integration related expense.


Amortization of intangible  assets.  Amortization of intangible assets of $2,140
for the three and six  months  ended June 30,  2001,  includes  amortization  of
intangible assets arising from the CMG acquisition.

Write down of  investments.  Write downs of investments for the three months and
six months  ended June 30,  2001 of $3,435 and $3,986  respectively,  represents
mainly impairment of value of investments in affiliated companies.

Other operating  income.  Other  operating  income in the six month period ended
June 30,  2000  include  the  profit  from sale of  operations  of a unit in our
industrial division, Applied Optronics Corporations in the United States.



                                       19
<PAGE>


Operating  Income  (loss).  For the three months ended June 30, 2001,  operating
loss was $142,306, compared to operating income of $7,679 for the same period in
2000.  For the six months  ended June 30,  2001,  operating  loss was  $138,205,
compared to  operating  profit of $9,871 for the same period in 2000.  Excluding
inventory  write downs and other charges,  in process  research and  development
write-downs,  one time charges, litigation expenses,  amortization of intangible
assets,  write downs of Investments and  Discontinued  Business  Activities,  as
mentioned  above,  operating  income for the three and six months ended June 30,
2001, was $13,519 and $19,967,  representing 17% and 16% of sales, respectively.
Excluding  other  income  from  sales  of a  unit  in our  industrial  division,
operating income for the three and six months ended June 30, 2000 was $6,229 and
$8,421, representing 15% and 11% of sales, respectively.

Other  income.  Other  income of $599 in the three  months  ended June 30, 2000,
includes  profits  due to  dilution  of the  Company's  interests  in one of its
high-tech ventures, Galil Medical Ltd.

Financing  expenses,  net. For the three  months ended June 30, 2001,  financing
expenses were $3,991 compared to financing expenses of $1,608 in the same period
in 2000. For the six months ended June 30, 2001,  financing expenses were $5,360
compared to financing expenses of $2,648 in the same period in 2000.

The increase in finance expense is mainly due to financing cost of the long term
bank loan in connection with the CMG acquisition, including amortization of $500
in  respect  of value  of  options  given  to the bank as part of the  financing
agreement,  and an increase in exchange  rates loss to $867 in the three  months
ended June 30, 2001.

Income Tax Benefit (expense). Income tax in the three months ended June 30, 2001
were $80 compared to no Income tax in the same period last year.  Tax's  benefit
for the six months ended June 30, 2001 was $1,416  compared  with expense of $98
in the same period in 2000. On April 2001, the Company reached a final agreement
with the income tax authorities  with regard to tax returns filed by the Company
for the years up to and including 1998. As a result, the Company recorded a gain
of $1,600 from reversal of the accrual  recorded in previous years.  Most of the
Company's  income in Israel is exempt from income taxes,  the Israeli  statutory
tax rate for the  purpose  of  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.  Additionally,  the
Company has over $100,000 of net operating  losses,  mostly in the United States
and Israel.

Company's  share on losses of  affiliates.  For the three  months ended June 30,
2000, the Company's share on losses of affiliates $318. For the six months ended
June 30, 2001, the Company's share on losses of affiliates was $420.

Extraordinary  gain on  purchase of  Company's  convertible  notes.  For the six
months ended June 30, 2000,  extraordinary gain on the purchase of the Company's
convertible notes was $292.

Net Income (loss). As a result of the foregoing factors,  the Company's net loss
was $146,377 for the three months ended June 30, 2001  compared to net income of
$6,352 in the period in 2000.  The  Company's  net loss was $142,149 for the six
months  ended June 30,  2001  compared  to net income of $7,596 in the period in
2000.

The decrease in net income is due to the factors cited above.


                                       20
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES
(in thousands of dollars)

As of June 30,  2001,  the  Company  had cash and cash  equivalents  of  $85,486
compared  to $43,396 on December  31,  2000.  The  increase of $42,090 is mainly
attributable to:

Operating activities
(in thousands of dollars)

For the six months ended June 30, 2001,  cash used for operating  activities was
$12,989.  The  difference  between  the  loss of  $142,149  and  cash  used  for
operations,  was composed  primarily of non-cash  expenses of $46,650 in the six
month  period  ended  June  30,  2001  for  purchased  in-process  research  and
development,  increase in trade  receivables  of $1,665,  increase in  inventory
levels of $7,908  mainly due to the  purchase  of CMG  operations,  increase  in
payables  and accrued  expenses of $45,390  mainly due to a provision of $26,000
reflecting  management estimate of the Company's potential exposure with respect
to  certain  legal  proceedings  and   approximately   $17,000  with  regard  to
integration  and related  provisions due to the purchase of the CMG operations ,
offset by non cash charges of $30,877 mainly due to  acceleration  of vesting of
options and of $8,963 with respect to the grant of options.

Investing Activities
  (in thousands of dollars)

For the six months ended June 30, 2001,  cash used for investing  activities was
approximately $10,080 detailed as follows:

o    Net payment for the  acquisition  of CMG of $8,888.  The total  acquisition
     cost  includes  cash  payment of $100,000  financed  by a  long-term  loan,
     $12,904 notes and 5,432,099 shares.

o    $123 decrease in short term deposits.

o    $686 investment in fixed assets, net and

o    $129 decrease in long term deposits, net.

o    $758 used for short term investments.

Financing Activities
  (in thousands of dollars)

For the six months ended June 30, 2001,  cash  provided by financing  activities
was $65,159 detailed as follows:

o    Proceeds from the exercise of options of $20,169.

o    Short term bank debt of $45,000

As described  above, in connection with the Acquisition of the Coherent  Medical
Group  which  was  completed  on April 30,  2001 the  Company  entered  into the
Financing with the Bank,  consisting of (a) a $100,000 six-year term loan, (b) a
$50,000  line of credit until April 2003 and a $20,000 line of credit from April
2002 to April 2003 and (c) a letter of intent pursuant to which the Bank agreed,
subject to the term and conditions  set forth therein,  to provide up to $92,000
to refinance the Company's 6%  convertible  subordinated  notes due September 1,
2002.

The Company believes that internally  generated  funds,  together with available
cash and funds  available  under the Bank line of credit,  will  suffice over at
least the next 12 months to meet the Company's presently anticipated  day-to-day
operating  expenses,  materials,   commitments,   working  capital  and  capital
expenditure requirements.


                                       21
<PAGE>



CAUTIONARY 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; (7) the
occurrence of unanticipated  events and circumstances;  (8) the inability of the
Company to  integrate  successfully  its  operations  with  those of  Coherent's
medical group (or any other  business which the Company may acquire) and thereby
achieve the anticipated cost savings and other synergies and be in a position to
take  advantage  of  potential  opportunities  for  growth;  and (9) 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 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.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) 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.  Such estimates  include,  but are not limited to,
allocation  of  corporate  expenses,   allowances  for  uncollectible   accounts
receivable  and sales returns  reserves,  inventory  reserves,  warranty  costs,
depreciation and amortization,  income taxes and  contingencies.  Actual results
could differ from those estimates.

CONDITIONS IN ISRAEL

The  Company's  principal  offices  and a  substantial  portion  of its  product
development  and  manufacturing  facilities  are located in the State of Israel.
Accordingly,  the Company is directly  affected by the  political,  economic and
military conditions in Israel. 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 has been a breakdown  in the
negotiations with the Palestinians.  The Company cannot be certain as to whether
or how the  peace  process  will  develop  or what  effect  it may have upon the
Company.

Despite  earlier  progress  towards peace between Israel and its Arab neighbors,
certain  countries,  companies and  organizations  continue to  participate in a
boycott of Israeli  firms and others doing  business with Israel or with Israeli
companies.  The  Company  does not  believe  that the boycott has had a material
adverse effect on the Company.  However, a prolonged  continuation of the recent
increase in hostilities in the region could lead to increased boycotts, further,
restrictive  laws,  policies or  practices  directed  towards  Israel or Israeli
businesses  and these could have a material  adverse  impact on the expansion of
the  Company's  business.  Generally,  all male  adult  citizens  and  permanent
residents of Israel under the age of 48 are obligated, unless exempt, to perform
up to 45 days, or longer under certain  circumstances,  of military reserve duty
annually. Additionally, all such residents are subject to being called to active
duty at anytime under emergency circumstances.  Currently, some of the Company's
senior  officers and key employees are obligated to perform annual reserve duty.
While the Company has operated  effectively  under these  requirements  since it
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 the  Company  of any  expansion  or
reduction of such obligations, particularly if emergency circumstances occur.


                                       22
<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company  maintains an investment  portfolio  which consists mainly of income
securities  with an  average  maturity  of less  than one  year.  The  portfolio
consists of 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  affected  to any
significant degree by a sudden change in market interest rates on its securities
portfolio.

The Company has fixed rate  long-term  debt of  approximately  $94 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
this  exposure by selling and linking its products  mostly to the United  States
dollar.

The Company also enters into foreign  currency  hedging  transactions to protect
the dollar value of its non-dollar denominated trade receivables, mainly in JPY,
British  Sterling  and  EURO.  The gain and  losses  on these  transactions  are
included in the  statement of  operations  in the period in which the changes in
the exchange  rate occur.  There can be no  assurance  that such  activities  or
others will eliminate the negative  financial  impact of currency  fluctuations.
Indeed, such activities may have an adverse impact on earnings.


                                       23
<PAGE>



PART II. OTHER INFORMATION

ITEM 1.  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  Untied
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 or
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.  On August 31, 2000 the Court entered an order
dismissing  the  claim  against  the  Laser  Industries   director  and  officer
defendants and denying the remaining  dismissal counts. The parties have entered
into a scheduling order and have commenced discovery.

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  undertakings 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 field 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 the 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 beach 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
field a response to Light age's demand. An arbitration panel has been appointed,
discovery is ongoing,  and hearings on the merits have been  scheduled  for Fall
2001.

On May 8, 2001, Lumenos,  Inc.  ("Lumenos"),  the owner of several  applications
with the  United  States  Patent  and  Trademark  Office  to  register  the term
"Lumenos" as a trademark,  filed a complaint for trademark  infringement against
the  Company  in  the  United  States   District   Court  for  the  District  of
Massachusetts,  seeking equitable relief and damages. In its complaint,  Lumenos
seeks to prevent the Company  from using or  promoting  the name  "Lumenis" as a
company name,  trademark or Internet  domain name. If and when this complaint is
served on the Company,  the Company will  vigorously  defend the action.  In the
meantime,  the Company is seeking to resolve the dispute in an amicable  fashion
and to  avoid  further  litigation.  Exposure  to the  Company,  should  Lumenos
successfully  pursue  its  complaint  through  to trial,  cannot at this time be
assessed.


                                       24
<PAGE>


On September 20, 1999, Dr. Richard Urso filed what purports to be a class action
lawsuit  against the Company  and  against a leasing  company in Harris  County,
Texas,  alleging a variety  of causes of action.  In  December  2000,  plaintiff
amended his complaint to eliminate the class action claim. On April 13, 2001 the
lawsuit was dismissed and on May 3, 2001, Dr. Urso and approximately forty-seven
physicians  and medical  clinics  re-filed  what  purports to be a class  action
lawsuit in Harris County,  Texas.  The lawsuit was removed to the U.S.  District
Court for the Southern  District of Texas. The current  allegations on behalf of
plaintiffs  are breach of  contract,  breach of express and implied  warranties,
fraud, misrepresentation,  conversion, product liability, violation of the Texas
Deceptive  Trade  Practices  Act and  Texas  Securities  Act as  well as  lender
liability and unconscionable  conduct.  The Company will continue to defend this
case  vigorously.  No assessment of likelihood of outcome or likely damages,  if
any, can be made at this time.

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  against the
Company was a case filed by H.K. Hashalom Medical Centers Ltd. ("H.K. Hashalom")
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 alleged it was misled by the Company and Mr. Eckhouse, who jointly
presented it with false representations  concerning the Epilight abilities, thus
causing  monetary losses and damages.  H.K.  Hashalom sought monetary damages in
the amount of NIS 10,000,000 and reserved the right to increase such amount,  as
well as to request a declaratory  judgment that, among other things, the Company
indemnify  it for certain  costs and  expenses  arising out of the  transactions
between the parties. After the pre-trial stage, the court advised the parties to
resolve the lawsuit through mediation procedures.  On June 14, 2001, the parties
entered into a settlement  agreement (the  "Settlement"),  which  terminates all
disputes  among the  parties.  The  Settlement  stipulates  that in  exchange of
dismissing all of H.K. Hashalom's action against the Company, and waiving all of
its claims whatsoever, the Company is to pay H.K. Hashalom amounts substantially
less than originally sought. On June 19, 2001, the action was dismissed.

Moreover,  the sum of US$30,000 was deposited,  and will be held in trust by the
mediator  (the  "Trust"),  for a period of two years (the "Trust  Period").  The
Trust funds shall be used to indemnify the Company  and/or Mr.  Shimon  Eckhouse
against any claim and/or demand  and/or  damages and losses that shall be caused
to the Company by H.K.  Hashalom's  customers.  The  mediator is to transfer the
remaining sum of the Trust to H.K.  Hashalom at the end of the Trust Period.  On
June 19, 2001, the action was dismissed.

Management believes that none 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 undergone  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.

The  statements of operations  for the six-month and  three-month  periods ended
June 30, 2001 include a provision of $26,000 reflecting  management  estimate of
the  Company's  potential  exposure  with  respect to  certain,  not all,  legal
proceedings,  claims and  litigation.  With  respect  to the legal  proceedings,
claims and  litigation  for 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.


                                       25
<PAGE>


ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

(a)    Exhibits

10.1   Agreement dated May 1, 2001 between the Company and James Holtz

10.3   Agreement dated May 9, 2001 between the Company and Robert Grant

10.4   Agreement dated May 1, 2001 between the Company and Bob DiSilvio

10.5   Agreement dated May 18, 2001 between the Company and Tom Brunner

(b)    Reports on Form 8-K

The Company  filed the  following  Current  Reports on Form 8-K during the three
month period ended June 30, 2001:

      Date of Report            Subject of Report
      --------------            -----------------
      May 15, 2001              Closing  of the  acquisition  by the  Company of
     (Date of earliest event    the Coherent Medical Group and execution of the
     reported:April 30, 2001)   related financing  agreements (reported under
                                Item 2 of Form  8-K).


SIGNATURES

Pursuant  to the  requirements  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.

                                               /s/  Asif Adil
                                               -----------------------------
Date: August 20, 2001                          By: Asif Adil
                                                   (Chief Financial Officer,
                                                   and Duly Authorized Officer)


                                       26
<PAGE>



                                  EXHIBIT INDEX


10.1     Agreement, dated May 1, 2001 between the Company and James Holtz

10.2     Agreement dated May 9, 2001 between the Company and Robert Grant

10.3     Agreement dated  May 1, 2001 between the Company and Bob DiSilvio

10.4     Agreement dated May 18, 2001 between the Company and Tom Brunner



                                       27