-
                                  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 September 30, 2002

|_|   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

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

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

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

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

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 November
12, 2002 was 36,941,914 Ordinary Shares, NIS 0.10 par value per share.


<PAGE>

                                  LUMENIS LTD.

                                    FORM 10-Q

                    For the Quarter Ended September 30, 2002

                                      INDEX

<TABLE>
<CAPTION>
<S>                                                                                                      <C>
PART I. FINANCIAL INFORMATION                                                                             1
     ITEM 1. Financial Statements                                                                         1
        1) Independent Accountant's Review Report                                                         1
        2) Consolidated Balance Sheets                                                                    2
        3) Consolidated Statements of Operations                                                          3
        4) Statement of Changes in Shareholders' Equity                                                   4
        5) Consolidated Statements of Cash Flows                                                          5
        6) Notes to Unaudited Condensed Consolidated Financial Statements                                 7
     ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
             Operations                                                                                  18
     ITEM 3. Quantitative and Qualitative Disclosure about Market Risk                                   27
     ITEM 4. Controls and Procedures                                                                     27
PART II. OTHER INFORMATION                                                                               27
     ITEM 1. Legal Proceedings                                                                           27
     ITEM 4. Submission of Matters to a Vote of Security Holders                                         32
     ITEM 6. Exhibits and Reports on Form 8-K                                                            32
</TABLE>

                                   # # # # # #

<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                     Independent Accountant's Review Report

The Board of Directors
Lumenis Ltd.
Yokneam

We have reviewed the accompanying interim consolidated balance sheet of Lumenis
Ltd. ("the Company") and its subsidiaries as of September 30, 2002, and the
related interim consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2002 and the related statement of changes
in shareholders' equity and statement of cash flows for the nine-month period
ended September 30, 2002. 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
November 19, 2002


<PAGE>


                                  LUMENIS LTD.
                       INTERIM CONSOLIDATED BALANCE SHEETS
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                      September 30,   December 31,
                                                                           2002           2001
                                                                      -------------   ------------
                                                                       (Unaudited)
                                                                      -------------
<S>                                                                    <C>            <C>
 CURRENT ASSETS
    Cash and cash equivalents                                           $  20,033      $  31,400
    Trade receivables, net                                                108,442        100,823
    Prepaid expenses and other receivables                                 13,918         10,968
    Inventories                                                            85,544         83,614
                                                                        ---------      ---------
                                                                          227,937        226,805
                                                                        ---------      ---------

 FINISHED GOODS USED IN OPERATIONS                                         11,644          9,180

 LONG-TERM INVESTMENTS
    Bank deposits and securities                                               --            970
    Investments in non marketable equity securities                         3,397          3,337
    Long term trade receivables                                             3,853          3,134

 FIXED ASSETS, NET                                                         18,348         16,198

    Goodwill, net of accumulated amortization
      of $4,627 in 2001                                                    87,750         85,752
    Other purchased intangible assets, net
      of accumulated amortization of
      $14,552 and $9,351                                                   23,676         28,877
    Other assets, net                                                      11,947         13,021
    Total assets                                                        $ 388,552      $ 387,274
                                                                        =========      =========

 CURRENT LIABILITIES
    Short-term bank debt                                                $   4,905      $      --
    Current maturities of long-term loan                                   20,000         10,000
    Trade payables                                                         35,142         25,763
    Accounts payable and accrued expenses                                  86,749         90,749
    Subordinated note                                                      12,904         12,904
                                                                        ---------      ---------
                                                                          159,700        139,416
                                                                        ---------      ---------

 LONG-TERM LIABILITIES
    Bank loan                                                             146,750         90,000
    Deferred income                                                           733          1,172
    Accrued severance pay, net                                              1,395          1,169
    Convertible subordinated notes                                             --         70,667
    Other long-term liabilities                                               469          5,484
                                                                        ---------      ---------
                                                                          149,347        168,492
                                                                        ---------      ---------
    Total liabilities                                                     309,047        307,908
                                                                        ---------      ---------

 SHAREHOLDERS' EQUITY
    Ordinary shares of NIS 0.1 par value: Authorized -- 100,000,000
      shares; Issued and outstanding -- 36,941,488 shares and
      36,667,070 shares, respectively                                         805            800
    Additional paid-in capital                                            325,947        321,230
    Accumulated other comprehensive loss                                     (183)            --
    Accumulated deficit                                                  (246,961)      (242,561)
    Treasury stock, 14,898 shares at cost                                    (103)          (103)
                                                                        ---------      ---------
    Total shareholders' equity                                             79,505         79,366
                                                                        ---------      ---------
    Total liabilities and shareholders' equity                          $ 388,552      $ 387,274
                                                                        =========      =========
</TABLE>

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


                                      - 2 -
<PAGE>

                                  LUMENIS LTD.
                  INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                          For the three months           For the nine months
                                                          ended September 30,            ended September 30,

                                                          2002           2001            2002            2001
                                                        --------       --------       ---------       ---------
                                                              (Unaudited)                    (Unaudited)
<S>                                                     <C>            <C>            <C>             <C>
NET REVENUES                                            $ 90,004       $ 90,173       $ 269,091       $ 214,413
COST OF REVENUES                                          43,176         39,807         126,427         109,478
                                                        --------       --------       ---------       ---------
Gross profit                                              46,828         50,366         142,664         104,935
                                                        --------       --------       ---------       ---------
OPERATING EXPENSES
    Research and development, net                          6,944          6,465          20,792          14,904
    In process research and development                       --             --              --          46,650
    Selling, marketing and administrative expenses        34,676         38,616         105,185         140,909
    Litigation expenses                                       --             --           5,201          29,266
    Amortization of intangible assets                      1,569          3,217           5,201           5,357
    Write-down of investment                                  --             --              --           3,986
                                                        --------       --------       ---------       ---------
Total operating expenses                                  43,189         48,298         136,379         241,072
                                                        --------       --------       ---------       ---------
Operating income (loss)                                    3,639          2,068           6,285        (136,137)
FINANCING EXPENSES, NET                                    3,951          1,735          11,286           7,095
OTHER INCOME                                                  --             --           1,720              --
                                                        --------       --------       ---------       ---------
Income (loss) before income taxes                           (312)           333          (3,281)       (143,232)
    INCOME TAX BENEFIT (EXPENSE)                            (586)          (200)         (1,090)          1,216
                                                        --------       --------       ---------       ---------
Income (loss) after income taxes                            (898)           133          (4,371)       (142,016)
COMPANY'S SHARE IN LOSSES OF AN AFFILIATE                     30             --             121              --
                                                        --------       --------       ---------       ---------
    Net income (loss) before extraordinary item             (928)           133          (4,492)       (142,016)
EXTRAORDINARY  GAIN ON PURCHASE OF
      COMPANY'S  CONVERTIBLE NOTES                            --             --              92              --
                                                        --------       --------       ---------       ---------
Net income (loss) for the period                        $   (928)      $    133       $  (4,400)      $(142,016)
                                                        ========       ========       =========       =========
EARNINGS PER SHARE
Basic:
     Loss before extraordinary item                     $  (0.02)      $     --       $   (0.12)      $   (4.60)
     Extraordinary gain                                       --             --              --              --
                                                        --------       --------       ---------       ---------
     Net loss per share                                 $  (0.02)      $     --       $   (0.12)      $   (4.60)
                                                        ========       ========       =========       =========
Diluted:
     Loss before extraordinary item                     $  (0.02)      $     --       $   (0.12)      $   (4.60)
     Extraordinary gain                                       --             --              --              --
                                                        --------       --------       ---------       ---------
     Net loss per share                                 $  (0.02)      $     --       $   (0.12)      $   (4.60)
                                                        ========       ========       =========       =========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic                                                     37,264         35,254          37,158          30,866
                                                        ========       ========       =========       =========
Diluted                                                   37,264         39,536          37,158          30,866
                                                        ========       ========       =========       =========
</TABLE>

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


                                     - 3 -
<PAGE>

                                  LUMENIS LTD.
              INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                                   (UNAUDITED)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                      Accumulated
                                         Additional      other
                             Share        paid-in    comprehensive  Accumulated     Treasury                  Comprehensive
                            capital       capital         loss        deficit         Stock         Total          loss
<S>                          <C>         <C>             <C>         <C>             <C>          <C>           <C>
Balance as of December
  31, 2001                   $ 800       $ 321,230       $  --       $(242,561)      $ (103)      $ 79,366
Exercise of options              2             791          --              --           --            793
Issuance of shares in
  settlement of
  litigation                     3           3,926          --                                       3,929
Hedge transaction                                         (183)                                       (183)          (183)
Net loss for the period                                     --          (4,400)                     (4,400)        (4,400)
                             -----       ---------       -----       ---------       ------       --------       --------

Balance as of
  September, 2002            $ 800       $ 325,947        (183)      $(246,961)      $ (103)      $ 79,505       $ (4,583)
                             =====       =========       =====       =========       ======       ========       ========
</TABLE>

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


                                      - 4 -
<PAGE>

                                  LUMENIS LTD.
                  INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                  For the nine months ended
                                                                                        September 30,
                                                                                  -------------------------
                                                                                    2002            2001
                                                                                  --------       ---------
<S>                                                                               <C>            <C>
CASH FLOWS -- OPERATING ACTIVITIES
Net loss                                                                          $ (4,400)      $(142,016)
Adjustments to reconcile net loss to net cash used in operating activities -
  Income and expenses not affecting operating cash flows:
  Amortization of unearned compensation                                                 --             120
  Grant of options                                                                      --           8,963
  Non-cash compensation                                                                 --          16,400
  Decrease in long-term deferred income                                               (439)             --
  Depreciation and amortization                                                     13,168           7,935
  In process research and development                                                   --          46,650
  Extraordinary gain on purchase of Company's convertible notes                        (92)             --
  Company's share in losses of an affiliate                                            121              --
  Write-down of investments                                                             --           3,986
  Amortization of other long-term assets                                             2,327           1,806
  Gain on sale of an impaired investment                                            (1,720)             --
  Other                                                                                 28          (1,567)

  Changes in operating assets and liabilities:
  Increase in trade receivables                                                     (8,338)         (5,952)
  Increase in prepaid expenses and other receivables                                (2,950)         (4,598)
  Decrease (Increase) in inventories (1)                                            (8,541)          3,720
  Increase in accounts payable, accrued expenses and other long-term
    liabilities                                                                      6,385          42,914
                                                                                  --------       ---------
       Net cash-operating activities                                                (4,451)        (21,639)
                                                                                  --------       ---------
CASH FLOWS -- INVESTING ACTIVITIES
  Purchase of fixed assets, net                                                     (5,994)         (2,091)
  Investment in other long-term assets                                              (1,250)           (500)
  Investments, deposits and securities, net                                            970             (24)
  Proceeds from sale of subsidiary's operations                                        144              --
  Proceeds from sale of an impaired investment                                       1,720              --
  Investment in an affiliate                                                          (151)
  Payment for business acquired (Appendix A)                                        (1,286)       (109,744)
                                                                                  --------       ---------
       Net cash-investing activities                                                (5,847)       (112,359)
                                                                                  --------       ---------
CASH FLOWS -- FINANCING ACTIVITIES
  Purchase of convertible notes                                                    (16,447)             --
  Repayment of  convertible notes                                                  (54,128)             --
  Proceeds from exercise of options                                                    793          49,434
  Increase in long-term loans, net                                                  66,667          99,131
  Repayment of liability to Coherent                                                (2,859)             --
  Short-term bank debt, net                                                          4,905          42,580
                                                                                  --------       ---------
       Net cash-financing activities                                                (1,069)        191,145
                                                                                  --------       ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   (11,367)         57,147
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    31,400          43,396
                                                                                  --------       ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        $ 20,033       $ 100,543
                                                                                  ========       =========
CASH PAID DURING THE PERIOD IN RESPECT OF:
  Income taxes                                                                    $    446       $     422
                                                                                  ========       =========
  Interest                                                                        $  7,801       $   6,600
                                                                                  ========       =========
</TABLE>

(1) Including finished goods used in operations.

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


                                      - 5 -
<PAGE>

                                  LUMENIS LTD.
                  INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                              For the nine months ended
                                                                    September 30,
                                                             --------------------------
                                                                2002            2001
                                                             ---------       ----------
                                                                     (Unaudited)
<S>                                                           <C>            <C>
Appendix A -- Payments for business acquired
Current assets                                                     259         (71,343)
Fixed assets                                                        --          (5,223)
Current liabilities                                                 --          39,524
In process research and development                                 --         (46,650)
Goodwill and other intangibles                                  (2,098)       (134,761)
Liability in respect to acquisition                                553           6,175
                                                                (1,286)       (212,278)
                                                             =========       =========
Less - amount acquired by issuance of shares                        --          89,630
Less - amount acquired by issuance of subordinated note            553          12,904
                                                             ---------       ---------
                                                             $  (1,286)      $(109,744)
                                                             =========       =========
</TABLE>

<TABLE>
<CAPTION>
                                                              For the nine months ended
                                                                     September 30,
                                                              -------------------------
                                                                 2002            2001
                                                               -------         -------
                                                                     (Unaudited)
<S>                                                            <C>              <C>
Appendix B -- Non cash activities
      Conversion of notes                                           --          21,120
                                                               =======         =======
      Non cash compensation                                         --           1,423
                                                               =======         =======
      Grant of options to bank                                      --           9.704
                                                               =======         =======
      Issuance of shares in settlement of a litigation           3,929              --
                                                               =======         =======
</TABLE>

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


                                      - 6 -
<PAGE>

                                  LUMENIS LTD.
                NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
            FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 2002
                      (In thousands, except per share data)

Note 1 -- BASIS OF PRESENTATION

   The accompanying unaudited condensed consolidated financial statements of
   Lumenis Ltd. (the "Company") and its subsidiaries (collectively "the Group")
   as of September 30, 2002 and for the three month and nine month periods then
   ended are unaudited and reflect all adjustments (consisting only of normal
   recurring adjustments) which are, in the opinion of management, necessary for
   a fair presentation of the financial position and operating results for the
   interim period. The condensed consolidated financial statements should be
   read in conjunction with the consolidated financial statements and notes
   thereto, contained in the Company's Annual Report on Form 10-K for the fiscal
   year ended December 31, 2001 (the "2001 Form 10-K"). The results of
   operations for the three month and nine month periods ended September 30,
   2002 are not necessarily indicative of the results for the entire fiscal year
   ending December 31, 2002.

   Certain prior period balances have been reclassified to conform to current
   period presentation.

Note 2 -- NEW ACCOUNTING PRONOUNCEMENT

   Effective January 1, 2002, the Company adopted Statement of Financial
   Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
   Assets" under which pre-existing goodwill will no longer be amortized.
   Intangible assets will continue to be amortized over their useful lives. The
   criteria for recognizing intangible assets have also been revised. SFAS 142
   requires that goodwill be tested for impairment initially within one year of
   adoption and at least annually thereafter. If an impairment loss exists as a
   result of the transitional goodwill impairment test, the implementation of
   SFAS 142 could result in a one-time charge to earnings as a cumulative effect
   of an accounting change. The goodwill impairment test is a two-step process
   that requires goodwill to be allocated to reporting units. In the first step,
   the fair value of the reporting unit is compared to the carrying value of the
   reporting unit. If the fair value of the reporting unit is less than the
   carrying value of the reporting unit, goodwill impairment may exist, and the
   second step of the test is performed. In the second step, the implied fair
   value of the goodwill is compared to the carrying value of the goodwill and
   an impairment loss will be recognized to the extent that the carrying value
   of the goodwill exceeds the implied fair value of the goodwill. As of June
   30, 2002 the Company completed its review for impairment of goodwill and
   found no indication of impairment of its approximately $84 million of
   goodwill. The Company intends to re-evaluate its goodwill for impairment
   during the fourth quarter of 2002 as part of the required annual impairment
   evaluation. For the three and nine months periods ended September 30, 2001
   goodwill amortization expenses amounted to $1,530 and $2,730, respectively.

   In June 2001, the FASB issued SFAS No. 143 ("SFAS 143"), "Accounting for
   Asset Retirement Obligations". SFAS 143 addresses financial accounting and
   reporting for obligations associated with the retirement of tangible
   long-lived assets and the associated asset retirement costs. SFAS 143 is
   effective for fiscal years beginning after June 15, 2002. While the Company
   is currently evaluating the impact the adoption of SFAS 143 will have on its
   financial position and results of operations, it does not expect such impact
   to be material.

   Effective January 1, 2002, the Company adopted Statement of Financial
   Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
   Disposal of Long-Lived Assets." This statement addresses financial accounting
   and reporting for the impairment of long-lived assets. The statement also
   broadens the definition of what constitutes a discontinued operation and how
   the results of a discontinued operation are to be measured and presented. The
   adoption of this statement did not have a material impact on the Company's
   results of operations or financial position.

   In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
   "Reporting Gains and Losses from Extinguishments of Debt" ("SFAS 4"), SFAS
   No. 44, "Accounting for Intangible Assets of Motor Carriers" ("SFAS 44") and
   SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
   Requirements" ("SFAS 64") and amends SFAS No. 13, "Accounting for Leases"
   ("SFAS 13"). This statement updates,


                                      - 7 -
<PAGE>

   clarifies and simplifies existing accounting pronouncements. As a result of
   rescinding SFAS 4 and SFAS 64, the criteria in APB 30 will be used to
   classify gains and losses from extinguishments of debt. SFAS 44 was no longer
   necessary because the transitions under the Motor Carrier Act of 1980 were
   completed. SFAS 13 was amended to require that certain lease modifications
   that have economic effects similar to sale-leaseback transactions be
   accounted for in the same manner as sale-leaseback transactions and makes
   technical corrections to existing pronouncements. The Company does not expect
   the adoption of this pronouncement to have a material impact on its results
   of operations or financial position.

   In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for
   Costs Associated with Exit or Disposal Activities", which addresses
   accounting for restructuring and similar costs. SFAS 146 supersedes previous
   accounting guidance, principally Emerging Issues Task Force Issue No. 94-3.
   The Company will adopt the provisions of SFAS 146 for restructuring
   activities initiated after December 31, 2002. SFAS 146 requires that the
   liability for costs associated with an exit or disposal activity be
   recognized when the liability is incurred. Under Issue 94-3, a liability for
   an exit cost was recognized at the date of the Company's commitment to an
   exit plan. SFAS 146 also establishes that the liability should initially be
   measured and recorded at fair value. Accordingly, SFAS 146 may affect the
   timing of recognizing future restructuring costs as well as the amounts
   recognized. The Company does not expect the adoption of this pronouncement to
   have a material impact on its results of operations or financial position.

Note 3 -- MERGERS AND ACQUISITIONS

   On April 30, 2001 (the "Closing"), the Group acquired from Coherent, Inc.
   ("Coherent") all of the assets and assumed certain liabilities of the
   Coherent Medical Group ("CMG"), Coherent's medical group division. The assets
   acquired included among other things, plant, equipment, certain technology,
   goodwill and other physical property. CMG focuses on solid-state lasers and
   diode lasers that are developed for aesthetic, surgical and ophthalmic
   applications. The core CMG technologies are in the area of lasers, optics,
   embedded software, electronic controllers, power supplies, and mechanical
   design.

   Pro Forma Financial Results:

   The following selected unaudited pro forma results of operations for nine
   months ended September 31, 2001 of the Group and CMG, have been prepared
   assuming the CMG acquisition occurred at the beginning of 2001.

<TABLE>
<CAPTION>
                                                                        For the nine months
                                                                               ended
                                                                        September 30, 2001
                                                                        ------------------
                                                                            (Unaudited)
                                                                        ------------------
<S>                                                                         <C>
   Net Revenues                                                             $ 275,356
   Net loss                                                                 $ (98,928)
   Basic net loss per share                                                 $   (2.87)
   Diluted net loss per share                                               $   (2.87)
   Weighted  average number of shares used in calculation of basic net
       loss per share                                                          34,487
   Weighted  average  number of shares used in  calculation of diluted
       net loss per share                                                      34,487
</TABLE>

   The pro forma results of operations give effect to certain adjustments,
   including amortization of purchased intangibles, goodwill and options granted
   in connection with financing and write down of inventories and receivables.
   Such unaudited information does not purport to be indicative of the combined
   results of operations of future periods or indicative of the results that
   actually would have been realized had the entities been a single entity
   during the period presented.

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


                                      - 8 -
<PAGE>

Note 4 -- TRADE RECEIVABLES

   The trade receivables as of September 30, 2002 and December 31, 2001 are
   presented net of allowance for doubtful accounts of $16,835 and $19,744,
   respectively, and provision for returns of $3,217 and $2,849, respectively.

Note 5 -- INVENTORIES

   Inventories are composed of the following:

                            September 30, 2002     December 31, 2001
                            ------------------     -----------------
                               (Unaudited)
Raw materials                    $21,931                $29,718
Work in process                   11,761                 14,835
Finished products                 51,852                 39,061
                                 -------                -------
                                 $85,544                $83,614
                                 =======                =======

   Inventories presented above do not include $11,644 and $9,180 of finished
   goods used in operations at September 30, 2002 and December 31, 2001,
   respectively.

Note 6 -- SEGMENT INFORMATION

   A. REPORTABLE SEGMENTS

   Commencing January 1, 2002, the Company began to evaluate its business on the
   basis of four separate business units, as follows: Aesthetics, Ophthalmic,
   Surgical, and Other. Those business units were identified as operating
   segments in accordance with SFAS No. 131, "Disclosure about Segments of an
   Enterprise and Related Information". The information evaluated by the
   Company's decision makers in deciding how to allocate resources to these
   segments are net revenues and gross profit.

                    For the three months ended September 30, 2002 (Unaudited)
                ---------------------------------------------------------------
                Aesthetics    Ophthalmic    Surgical      Other    Consolidated
                ----------    ----------    --------    ---------  ------------

Net Revenues     $ 37,894      $21,596      $14,917      $15,597     $ 90,004
Gross Profit     $ 24,604      $10,122      $ 8,429      $ 3,673     $ 46,828


                    For the nine months ended September 30, 2002 (Unaudited)
                ---------------------------------------------------------------
                Aesthetics    Ophthalmic    Surgical      Other    Consolidated
                ----------    ----------    --------    ---------  ------------

Net Revenues     $116,269      $60,905      $42,914      $49,003     $269,091
Gross Profit     $ 79,150      $28,413      $23,957      $11,144     $142,664


                                      - 9 -
<PAGE>

                                        For the periods ended September 30, 2001
                                            Three months        Nine months
                                          ----------------    ---------------
                                                      (Unaudited)
 Net Revenues
  Surgical, aesthetics and ophthalmic         $ 85,497           $ 198,085
  Dental                                         2,301               7,478
  Industrial                                     2,375               8,850
      Consolidated                            $ 90,173           $ 214,413
 Operating income (loss)
  Surgical, aesthetics and ophthalmic         $    269           $(137,477)
  Dental                                         3,547               2,385
  Industrial                                    (1,748)             (1,045)
      Consolidated                               2,068            (136,137)
Financing expenses, net                          1,735               7,095
Income (Loss) before income taxes             $    333           $(143,232)

   B. GEOGRAPHIC INFORMATION:


   The following presents net revenues based on the location of the customer:

<TABLE>
<CAPTION>
                                   For the three months         For the nine months
                                    ended September 30,         ended September 30,
                                 -----------------------     -------------------------
                                    2002          2001          2002           2001
                                 ---------     ---------     ---------       ---------
                                       (Unaudited)                  (Unaudited)
<S>                               <C>           <C>           <C>            <C>
Net Revenues
    North and Latin America       $40,640       $43,816       $131,758       $ 98,895
    Europe                         21,719        17,286         52,000         43,150
    Asia                           24,350        26,264         74,523         62,010
    Israel                            555           421          2,509          1,576
    Other                           2,740         2,386          8,301          8,782
                                  -------       -------       --------       --------
    Consolidated                  $90,004       $90,173       $269,091       $214,413
                                  =======       =======       ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                            September 30,  December 31,
                                                                2002           2001
                                                            -------------  ------------
                                                                    (Unaudited)
<S>                                                           <C>            <C>
Assets
North and Latin America                                       $239,636       $193,866
Europe                                                          79,459         88,446
Asia                                                            19,292         34,023
Israel                                                          50,165         70,939
                                                              --------       --------
Consolidated                                                  $388,552       $387,274
                                                              ========       ========
</TABLE>

Note 7 -- FINANCING ACTIVITIES

   During August 2002, the Company drew down its $70,667 four-year loan from
   Bank Hapoalim, B.M. in accordance with a prior agreement between the parties
   entered into on March 26, 2002. The proceeds of the loan were used to repay
   the Company's existing convertible subordinated notes due September 1, 2002
   in the amount of $54,128 and to repay borrowings of $16,489 under its
   revolving credit agreement. The $70,667 loan


                                     - 10 -
<PAGE>

   matures four years from date of draw down and bears interest at LIBOR plus
   6.55% increasing to 7.80% over the life of the loan. In accordance with the
   March 26, 2002 agreement, the Company also increased its revolving credit
   facility to $35,000 from $20,000. In connection with the loan, the Company
   paid Bank Hapoalim a $4,000 fee, which will be amortized over the life of the
   loan and is recorded net against the loan on the balance sheet.

   In its three financing arrangements with Bank Hapoalim, the Company is
   required to maintain a ratio of its debt, as defined, to EBITDA, as defined,
   of less than three times. At September 30, 2002 the Company had outstanding
   $175,572 under the three agreements. At September 30, 2002, the Company was
   not in compliance with this covenant and does not expect to be in compliance
   as of December 31, 2002. On November 19, 2002, the Company received a waiver
   of this requirement for September 30, 2002 and an amendment of the ratio to a
   maximum of 3.7 times for the quarter ending December 31, 2002. Additionally,
   among other things, the interest rate on borrowings under the revolving
   credit facility will be increased by 1.25% to LIBOR plus 2.25% effective
   November 19, 2002. Based on its current plans, the Company expects to be in
   compliance with the ratio. See "Cautionary Statements" in Item 2 below with
   respect to this forward looking statement.

   During October 2002, the Company and Coherent, Inc. reached a mutual
   agreement to modify the terms of the subordinated note, dated as of April 30,
   2001, in the principal amount of $12,904, which was due on October 30, 2002.
   The Company and Coherent agreed that (i) the principal amount shall be due as
   follows: (A) three (3) equal monthly installments, each in the amount of
   $1,075 on October 31, 2002, November 30, 2002 and December 31, 2002,
   respectively, and (B) thereafter, seven (7) equal monthly installments, each
   in the amount of approximately $1,383, with the first such payment due on
   January 31, 2003; and (ii) interest on the unpaid principal amount shall
   accrue at the rate of nine percent (9%) per annum and shall be payable
   monthly, commencing on October 31, 2002. The repayment agreement is subject
   to certain acceleration provisions in the event the Company secures
   additional financing.

Note 8 -- CONTINGENT LIABILITIES

   The Company is a party to various legal proceedings incident to its business.
   Except as noted below or set forth in the "Legal Proceedings" section of the
   2001 Form 10-K, 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.

   In February 2002, the Company received a request from the United States
   Securities and Exchange Commission ("SEC") to voluntarily provide certain
   documents and information for a period commencing January 1, 1998. The
   request primarily relates to the Company's relationships with distributors,
   and also asks for amplification of the Company's explanation of certain
   previously disclosed charges and write-downs which were taken in 1999
   (inventory and other charges of approximately $30,050; bad debt charges of
   $13,430; and litigation expenses of $4,400) and 2001 (write-down of accounts
   receivable of $14,043 and write-downs of inventory and other charges (amounts
   not given)). On May 15, 2002, the Company learned that the SEC had issued a
   formal order of investigation on these matters, including as to whether, in
   connection therewith, the Company, in prior periods, may have overstated
   revenues and related income and failed to maintain proper books and records
   and a proper system of internal controls. This was followed by the issuance
   of a subpoena on August 19, 2002 relating to the above-mentioned requested
   information, as well as documents of the Company's present auditors,
   Brightman, Almagor & Co., and its previous auditors, Luboshitz Kasierer. The
   Company believes, as of the date of this report, that it has substantially
   completed the production of documents to the SEC in response to the requests
   previously received with respect to the transactions involving U.S.
   distributors and certain charges taken in 1999 and 2001. The Company intends
   to continue to cooperate with the SEC in its investigation. Having reviewed,
   among other things, the information gathered for the SEC investigation, the
   Company does not believe that a restatement of the Company's reported
   financial statements is warranted. The SEC investigation, however, is ongoing
   and, accordingly, the Company is unable to predict the duration or outcome of
   this process.

   During March, April and May 2002, eight purported class action lawsuits were
   filed in the United States District Court for the Southern District of New
   York on behalf of purchasers of Lumenis securities between January 7 and
   February 28, 2002 (the "Class Period"). The named defendants include, in
   addition to the


                                     - 11 -
<PAGE>

   Company, certain present and former officers and directors of the Company,
   including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and Asif Adil.
   The complaints generally allege that the defendants violated U.S. Federal
   securities laws by issuing materially false and misleading statements
   throughout the Class Period that had the effect of artificially inflating the
   market price of the Company's securities. The complaints allege that
   throughout the Class Period, defendants discounted and disputed marketplace
   rumors about the Company's operations even as the Company knew it was being
   investigated by the SEC and that its distributors had been contacted by the
   SEC.

   The Company has been served with a summons and complaint in some but not all
   of these actions. There is currently pending before the Court a motion by
   plaintiffs to appoint a lead plaintiff and for approval of selection of lead
   counsel. Upon the disposition of this motion, it is anticipated that a
   consolidated complaint will be filed. The Company's time to respond to the
   complaints has been extended. It is anticipated that, following the
   appointment of a lead plaintiff and approval of lead class counsel, and
   subject to review and evaluation of any consolidated complaint that is filed,
   the Company will file a motion to dismiss for failure to state a claim and
   failure to plead fraud with particularity as required by the Private
   Securities Litigation Reform Act of 1995 and Rule 9(b) of the Federal Rules
   of Civil Procedure.

   In May 2002, another purported class action complaint was filed in the United
   States District Court for the Southern District of New York on behalf of
   purchasers of the Company's securities between August 2, 2001 and May 7, 2002
   (the "Extended Class Period"). In addition to the Company, the named
   defendants include certain present and former officers and directors of the
   Company, including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and Asif
   Adil. The complaint alleges that the defendants violated U.S. Federal
   securities laws by making a series of material misrepresentations to the
   market during the Extended Class Period regarding the Company's financial
   performance, successful execution of its business plan and strong demand for
   the Company's products, thereby artificially inflating the price of Lumenis
   securities. The Company has not been served with a summons and complaint in
   this action.

   The Company believes that all the allegations and claims in all of the above
   purported class action lawsuits are baseless, and the Company intends to
   vigorously defend against them.

   On September 12, 2002, the Company filed a claim in the Tel Aviv - Jaffa
   District Court against Syneron Medical Ltd. and Messrs. Shimon Eckhouse,
   Michael Kreindel, Mark Aronovitz, Avner Lior and Hans Edel (the "Syneron
   Defendants"). The Company alleges that the Syneron Defendants, all former
   employees of the Company, used confidential business information and
   technology gained during their work at the Company, for the production and
   distribution of products essentially similar to the Company's products for
   hair removal and skin treatment (the "Copied Products"). The Company also
   alleges that Syneron Medical Ltd. and the Syneron Defendants (collectively
   the "Defendants") used information with regard to the Company's distributors
   and customers for the purpose of marketing the Copied Products. The Company
   is seeking the following remedies against the Defendants: a permanent
   injunction restraining the Syneron Defendants from using any business
   information or technology or trade secrets of the Company, a mandatory
   injunction ordering the Defendants to demolish all of the Copied Products
   that were produced by the Defendants, an order for the delivery of accounts,
   the appointment of a receiver and a monetary judgment in the amount of
   approximately $6,250. On October 20, 2002, the Defendants filed their
   Statement of Defense in which they denied the Company's claims, pleading,
   inter alia, that the Company's Intense Pulsed Light technology (the "IPL
   Technology") is within the public domain; that the Company has no
   intellectual property rights in it; and that, consequently, the Defendant's
   technology (the "ELOS Technology") does not breach the Company's IPL
   Technology. In addition, the Defendants pleaded, that there is no similarity
   between the ELOS Technology and the IPL Technology. On November 4, 2002, the
   Company filed its response to the Defendants Statement of Defense. In its
   response, the Company claimed, inter alia, that the Defendants are prohibited
   from pleading that the Company does not have any intellectual property rights
   in the IPL technology, due to the fact that the Syneron Defendants themselves
   assisted the Company in registering patents which constitute the Company's
   intellectual property in the IPL technology. A court hearing has yet to be
   scheduled.

   On September 20, 2002, Lumenis Inc. field a lawsuit against Syneron Inc.
   (Canada), Syneron, Inc. (Delaware), and certain former Lumenis employees,
   Brian D. Lodwig, J. Scott Callihan, Mark Lazinski, and Stephen Harsnett, in
   the Superior Court of California for the County of Santa Clara for breach of
   contract, intentional


                                     - 12 -
<PAGE>

   interference with prospective economic advantage, misappropriation of trade
   secrets, breach of duty of loyalty, conspiracy, unjust enrichment, and unfair
   competition, seeking unspecified damages and injunctive relief. Lumenis
   Inc.'s request for expedited discovery was granted by the court, and Lumenis
   served initial discovery demands. On or about October 22, 2002, Syneron Inc.
   (Canada) filed a motion to quash service upon it for lack of personal
   jurisdiction. Lumenis' response to that motion is not yet due. On or about
   October 25, 2002, Lumenis Inc. filed an amended complaint adding former
   Lumenis Inc. employee David J. Maslowski as a defendant in the action. Other
   than the motion to quash filed by Syneron Inc. (Canada), the defendants have
   not yet responded to the complaint.

   On October 28, 2002, Lumenis Ltd. and Lumenis Inc. (collectively, "Lumenis")
   filed a complaint in the United States District Court for the Central
   District of California alleging that Syneron Medical Ltd., Syneron Inc. and
   Syneron Canada Corp. (collectively "Syneron") are infringing six U.S. patents
   held by Lumenis by, inter alia, selling Syneron's Aurora DS and Aurora SR
   devices. Lumenis is seeking a temporary restraining order and a preliminary
   and permanent injunction against further infringement as well as an award of
   as yet undetermined damages and lost profits resulting from Syneron's
   infringement and Lumenis' attorneys fees and costs. Oral argument on the
   request for a temporary restraining order and preliminary injunction was held
   on November 1, 2002. Citing the complexity of the patent issues involved, the
   court declined to grant the Company's request for a temporary restraining
   order. However, the Company's request for a preliminary injunction was
   continued until February 7, 2003. The court also granted the Company's
   request for expedited discovery, and ordered the appointment of an
   independent expert to advise the court on the patent infringement issues
   raised by the lawsuit.

   On October 24, 2002, Lumenis Inc. filed a complaint in the United States
   District Court for the Northern District of California (the "Federal Action")
   against Palomar Medical Technologies, Inc. ("Palomar") and the General
   Hospital Corp. ("General"). The complaint seeks a declaratory judgment that
   two U.S. patents, which are owned by General and sublicensed by Palomar to
   Lumenis Inc. pursuant to a 1998 license agreement (the "License Agreement"),
   are invalid and/or unenforceable and/or are not infringed by Lumenis. The
   complaint has not been served on Palomar or General.

   In connection with the Federal Action, Lumenis has refused to pay royalties
   under the License Agreement. In response, Palomar filed a complaint on
   October 29, 2002 against Lumenis Ltd., Lumenis Inc., ESC Medical Systems,
   Ltd., ESC Medical Systems, Inc. and "ESC/Sharplan Laser Industries Ltd.
   "(collectively, "Lumenis") in the Superior Court of the Commonwealth of
   Massachusetts. The complaint alleges that Lumenis has breached the License
   Agreement by failing to make certain royalty payments, that Lumenis' actions
   have breached the implied covenant of good faith and fair dealing arising
   with respect to the License Agreement and that Lumenis' actions constitute
   unfair and deceptive trade practices in violation of M.G.L., Chap. 93A,
   Sections 2 and 11. Palomar seeks an award of unspecified compensatory
   damages, a trebling of such damages, its costs and attorneys' fees and
   pre-judgment interest. The complaint has not been served upon Lumenis.

   On September 30, 2002, an action was filed by Mr. Asif Adil, the Company's
   former Executive Vice President - Business Operations and Chief Financial
   Officer, in the Superior Court of New Jersey, Somerset County; Law Division
   against the Company and certain senior executives, including Prof. Jacob A.
   Frenkel, Yacha Sutton and Sagi Genger. The complaint alleges, among other
   things, that the Company removed Mr. Adil from these positions and terminated
   his employment in retaliation for his report to the Company of alleged
   accounting and disclosure irregularities. The action seeks, among other
   things, compensatory damages and reinstatement of his employment. The Company
   believes that the allegations and claims are baseless, and the Company
   intends to vigorously defend against them. On October 29, 2002, defendants
   removed the action to the United States District Court for the District of
   New Jersey. The Company has been informed that on November 13, 2002 Mr. Adil
   filed a first amended complaint in the District Court, adding Lumenis Inc. as
   a defendant in the action.

   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 the plaintiffs, seeking
   unspecified damages under thirteen counts alleging a variety of


                                     - 13 -
<PAGE>

   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. Light Age claims that it incurred damages of
   up to $41.4 million, including interest. A hearing on the merits was held in
   December 2001 and closing arguments were held on January 30, 2002. On or
   about June 12, 2002, the Company was advised that the arbitrators issued an
   interim award to Light Age in the amount of approximately $6.88 million plus
   interest. On or about July 25, 2002, the Company was advised that the
   arbitrators issued a final award in the amount of approximately $9.1 million,
   which includes pre-judgment interest, an award of certain out of pocket
   expenses incurred by Light Age, and an increase of approximately $375
   thousand due to a computational error made by the arbitrators. The Company
   recorded a charge of $5.2 million in the three-month period ended June 30,
   2002 in addition to its previous reserve of $4.6 million. The request by
   Light Age for approximately $2.78 million in attorneys' fees and
   disbursements was denied in its entirety. Approximately $180 of Light Age's
   request for reimbursement of out-of-pocket-costs and $36 of Light's request
   for pre-judgment interest was also denied. Pursuant to a settlement agreement
   entered into on August 27, 2002, and amended on October 1, 2002 and October
   31, 2002, Lumenis agreed to the entry of a final judgment on consent in the
   amount of the award amount as follows: (i) on August 27, 2002, the sum of
   $650; (ii) on October 1, 2002, the sum of approximately $5,393 plus
   post-judgment interest on such amount at 8% per annum from July 26 through
   September 3, 2002 and at 5.5% per annum from September 4 through October 1,
   2002 (which amount has been paid); (iii) on November 4, 2002, the sum of $500
   and (iv) on December 1, 2002 the sum of $2,600 plus post-judgment interest on
   such amount at 8% per annum from July 26 through September 3, 2002 and at
   5.5% per annum from September 4 through October 1, 2002 and at 8% per annum
   from October 2 through November 1, 2002 plus post-judgment interest on $650
   at 8% per annum from July 26 through September 3, 2002 and interest on the
   sum of $500 from July 26, 2002 through September 3, 2002, at the rate of 8%
   per annum, plus post-judgment interest on said sum from September 4, 2002
   through October 1, 2002 at 5.5% per annum, and thereafter post-judgment
   interest accruing on any unpaid portion of said sum at 8% per annum.

   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-eight physicians and medical clinics re-filed what
   purports to be a class action lawsuit in Harris County, Texas. Plaintiffs
   filed a motion to remove the case to Federal Court. 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. In March 2002, the plaintiffs filed a motion to amend their
   complaint to dismiss the class action and securities allegations and to add
   several new plaintiffs and in June 2002, the motion was granted. The
   plaintiffs subsequently filed a motion to remand the cases to State Court,
   which was granted. The Company denies the allegations and will continue to
   defend this case vigorously. No assessment of likelihood of outcome or likely
   damages, if any, can be made at this time.

   On October 12, 2001, Lumenis Inc., a subsidiary of the Company, commenced an
   action for patent infringement in the United States District Court for the
   Southern District of New York against Altus Medical Inc. ("Altus") seeking,
   among other things, an injunction and damages. The complaint alleges that
   Altus infringed two U.S. patents owned by Lumenis Inc. Altus answered the
   complaint denying that it was infringing the asserted patents and filed
   counterclaims seeking a declaratory judgment that the asserted patents are
   invalid and were not infringed. Lumenis filed a reply denying the material
   allegations of the counterclaims. Altus filed a motion seeking to transfer
   the action to the United States District Court for the Northern District of
   California ("NDCA") for the convenience of the parties and witnesses. Lumenis
   Inc. consented to the motion to transfer. On December 12, 2001 the action was
   transferred to the NDCA. The parties entered into a settlement agreement and
   license agreement, both effective as of June 11, 2002, pursuant to which
   Altus became a non-exclusive licensee under the patents at issue in this
   lawsuit.

   On January 18, 2002, Lumenis Inc. commenced an action for patent infringement
   against Trimedyne, Inc. ("Trimedyne") in the United States District Court for
   the Central District of California. The complaint alleges


                                     - 14 -
<PAGE>

   that Trimedyne has willfully infringed and is willfully infringing two
   Lumenis Inc. U.S. patents. Lumenis Inc. seeks (i) an injunction enjoining
   Trimedyne's infringement; (ii) an award of damages sustained by Lumenis as a
   result of such infringement; (iii) a trebling of such damage award; and (iv)
   an award of its costs and attorneys' fees incurred in the action. On or about
   February 26, 2002, Trimedyne filed an answer and counterclaims in this action
   denying Lumenis' material allegations of infringement and asserting
   counterclaims alleging that: (i) Trimedyne is entitled to a declaratory
   judgment that Trimedyne is not infringing the patents; (ii) Lumenis Inc. has
   violated certain U.S. and California antitrust and trade practices laws;
   (iii) Lumenis Inc. has disseminated false and misleading statements in
   violation of the California Business and Professions Code and/or California's
   trade libel laws; (iv) certain Lumenis Inc. products infringe Trimedyne's
   patents; (v) Lumenis has tortiously interfered with Trimedyne's prospective
   economic relationships; and (vi) Trimedyne is entitled to a declaratory
   judgment that it is entitled to a refund of an alleged overpayment of
   royalties by Trimedyne of approximately $130 under a 1994 patent license.
   Trimedyne seeks: (i) an injunction enjoining Lumenis Inc. from the allegedly
   wrongful acts; (ii) unspecified damages arising from Lumenis Inc.'s allegedly
   wrongful acts and a trebling of such damages; (iii) Lumenis Inc.'s profits
   derived from Lumenis Inc.'s allegedly wrongful acts; (iv) unspecified
   punitive damages for Lumenis' allegedly wrongful acts; (v) a refund of the
   alleged royalty overpayment, plus interest thereon; and (vi) Trimedyne's
   costs and attorneys fees incurred in connection with this action. The Company
   believes the counterclaims are baseless, will vigorously defend against them
   and will continue to vigorously prosecute its claims against Trimedyne. On
   April 29, 2002, the Company moved to: (i) dismiss the federal and state
   antitrust counterclaims, the counterclaims for trade libel and the
   counterclaim for tortious interference with prospective economic
   relationships on the grounds that Trimedyne has failed to state a claim upon
   which relief can be granted; (ii) dismiss or stay the claims related to the
   1994 patent license as those claims are subject to a compulsory arbitration
   clause; and (iii) strike certain of the affirmative defenses asserted by
   Trimedyne. On June 3, 2002, Trimedyne served an amended answer and
   counterclaims re-asserting all of the claims from its original complaint
   other than the claims relating to the 1994 patent license. The parties have
   commenced negotiations to attempt to settle this action and have agreed to
   suspend proceedings until December 5, 2002, at which time Lumenis Inc. must
   reply to the counterclaims or file a motion to dismiss the counterclaims.

   On August 19, 2002, Cool Laser Optics, Inc. ("Cool Laser") commenced an
   arbitration proceeding before the American Arbitration Association by filing
   a demand for arbitration claiming that Lumenis Inc. violated an August 1996
   patent license agreement (that was entered into by Cool Laser and Coherent
   Inc. and assigned to Lumenis Inc.) by not paying royalties thereunder
   respecting sales of Lumenis Inc.'s LightSheer systems and that as a result
   the license agreement has been or is terminated and Lumenis Inc.'s sales of
   the LightSheer systems constitute infringement of certain of Cool Laser's
   U.S. patents. The demand for arbitration seeks an unspecified amount in
   damages and an injunction against further sales of the LightSheer system. On
   October 3, 2002, Lumenis Inc. filed and served an answering statement denying
   the material allegations of the demand for arbitration, denying that the
   LightSheer system infringes the referenced patents, denying that Lumenis Inc.
   owes any royalties under the license agreement and denying that Cool Laser
   has any right to terminate the license agreement. Lumenis Inc.'s answering
   statement also asserts that the Cool Laser patents are invalid and
   unenforceable and that Cool Laser is estopped from asserting them and further
   asserts that the arbitrators do not have jurisdiction to hear a claim for
   patent infringement. Lumenis Inc.'s answering statement seeks, inter alia,
   the dismissal of all of Cool Laser's claims with prejudice.

   In addition to the actions described above or set forth in the 2001 Form
   10-K, the Company is a party in certain actions in various countries,
   including the U.S., in which the Company sells its products in which it is
   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. Management believes that none of these actions
   (other than those set forth above or in the 2001 Form 10-K) that are
   presently pending individually would have a material adverse impact on the
   consolidated financial position of the Company, although such actions in the
   aggregate 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 underwent treatments using the Company's
   products. The Company is defending itself vigorously, maintains insurance
   against these types of


                                     - 15 -
<PAGE>

   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 balance sheet as of September 30, 2002 includes an accrual of $18.1
   million (including the provision of $8.9 million due to the settled 1998
   class-action lawsuits, as disclosed in the 2001 Form 10-K and a provision of
   $9.2 million for the Light Age matter) reflecting management's estimate of
   the Company's potential exposure with respect to certain, but not all, legal
   proceedings, claims and litigation. With respect to the pending legal
   proceedings and claims for which no accrual has been recorded in the
   financial statements, Company management 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 9 -- EARNINGS PER SHARE (Unaudited)

<TABLE>
<CAPTION>
                                        Three month ended                 Three month ended
                                        September 30, 2002                September 30, 2001
                                  ------------------------------    ------------------------------
                                                           Per                              Per
                                                          Share                            Share
                                   Income     Shares      Amount     Income      Shares    Amount
                                  --------   --------    -------    --------    --------  --------
<S>                                 <C>       <C>         <C>          <C>       <C>        <C>
Net income (loss)                   (928)                              113
                                   =====                             =====
Basic earnings per share
Income (loss) before
    extraordinary items             (928)     37,264      (0.02)       133       35,254        --
Extraordinary gain                    --      37,264         --         --       35,254        --
                                   =====                  =====      =====                  =====
Income available to ordinary
    shareholders                    (928)     37,264      (0.02)       133       35,254        --
                                   =====                  =====      =====                  =====
Effect of diluting securities
    Options                                       --                              4,282
    Warrants                                      --                                 --
                                             -------                            -------
Diluted earnings per share
Income (loss) before
    extraordinary items             (928)     37,264      (0.02)       133       39,536        --
Extraordinary gain                    --      37,264         --         --       39,536        --
                                   =====                  =====      =====                  =====
Income (loss) available to
    ordinary shareholders           (928)     37,264      (0.02)       133       39,536        --
                                   =====                  =====      =====                  =====
</TABLE>


                                     - 16 -
<PAGE>

<TABLE>
<CAPTION>
                                             Nine month ended                          Nine month ended
                                            September 30, 2002                        September 30, 2001
                                   ------------------------------------     --------------------------------------
                                                                 Per                                        Per
                                                                Share                                      Share
                                    Income        Shares        Amount        Income         Shares        Amount
                                   --------      --------      --------     ----------      --------      --------
<S>                                 <C>           <C>           <C>          <C>             <C>           <C>
Net income (loss)                   (4,400)           --           --        (142,016)           --
                                   =======                                   ========
Basic earnings per share
Income (loss) before
    extraordinary items             (4,492)       37,158        (0.12)       (142,016)       30,866        (4.60)
Extraordinary gain                      92        37,158           --              --        30,866           --
                                   =======                     ======        ========                     ======
Income available to
    ordinary shareholders           (4,400)       37,158        (0.12)       (142,016)       30,866        (4.60)
                                   =======                     ======        ========                     ======
Effect of diluting securities
    Options                                           --                                         --
    Warrants                                          --                                         --
Diluted earnings per share
Income (loss) before
    extraordinary items             (4,492)       37,158        (0.12)       (142,016)       30,866        (4.60)
Extraordinary gain                      92        37,158           --              --        30,866           --
                                   =======                     ======        ========                     ======
Income (loss) available to
    ordinary shareholders           (4,400)       37,158        (0.12)       (142,016)       30,866        (4.60)
                                   =======                     ======        ========                     ======
</TABLE>


                                     - 17 -
<PAGE>

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

OVERVIEW

Lumenis Ltd. ("Lumenis" or "the Company") is a world leader in the design,
manufacture, marketing and servicing of laser and light based systems for
aesthetic, ophthalmic, surgical and dental applications. Lumenis offers a broad
range of laser and intense pulsed light ("IPL") systems which are used in skin
treatments, hair removal, non-invasive treatment of vascular lesions and
pigmented lesions, acne, psoriasis, ear, nose and throat ("ENT"), gynecology,
urinary lithotripsy, benign prostatic hyperplasia, open angle glaucoma,
secondary cataracts, age-related macular degeneration, refractive eye
correction, neurosurgery, dentistry and veterinary medicine.

The Company's systems are designed for use in a variety of medical environments.
The principal target markets for the Company's aesthetic products are physicians
with private practices or clinics, as well as leading beauty/hair removal
centers. Many of these are customers who wish to access the vanity market and
are looking to increase their revenues and reduce dependence on insurance
reimbursements. The target markets for the Company's surgical products are
hospitals and outpatient clinics that use lasers for certain procedures.
Ophthalmologists are the primary target market for the ophthalmic products; and
dentists are the primary target market for the dental products.

On April 30, 2001, the Company completed the purchase of Coherent Medical Group
("CMG"), the medical division of Coherent, Inc. ("Coherent"). This acquisition
approximately doubled the Company's sales, expanded its leading position in
sales of pulsed light and laser based systems for the aesthetic and surgical
markets, made it a significant competitor in the ophthalmic portion of the
medical laser market, expanded its proprietary technology and increased its
critical mass by country and customer type for the marketing and cross-selling
of its products. After completion of this acquisition, the Company changed its
name from ESC Medical Systems Ltd. ("ESC") to Lumenis Ltd.

On November 30, 2001, the Company completed the acquisition of the stock of
FISMA Corporation, Instruments for Medicine & Diagnostics, Inc. and Instruments
for Surgery (collectively "HGM") from the Estate of William H. McMahan
("McMahan"). HGM is a Salt Lake City developer and manufacturer of medical laser
devices. The purchase price for HGM was $9.9 million in cash. This transaction
expands the Company's ophthalmic product offerings, provides specialized
technologies to help reduce the cost of manufacturing certain parts and
accessories and enables the Company to transfer certain manufacturing operations
from higher cost locations. The purchase included HGM's manufacturing
facilities. In January 2002, the Company exercised its right of first refusal to
purchase from McMahan the adjacent premises for the purchase price of $900,000.

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

RESULTS OF OPERATIONS

THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 (In thousands of U.S. Dollars,
except per share data)

The Company reported net revenues of $90,004 and $269,091 for the three and
nine-months ended September 30, 2002, respectively, compared to net revenues of
$90,173 and $214,413 for the three and nine-months ended September 30, 2001,
respectively. The net loss for the three and nine-months ended September 30,
2002 was $928 and $4,400, respectively, or a diluted net loss per share of $0.02
and $0.12, respectively, compared to a net income of $133 and net loss of
$142,016 for the three and nine-months ended September 30, 2001, respectively,
or a diluted net earnings per share of less than $0.01 and a diluted net loss
per share of $4.60, respectively. Commencing January 1, 2002, we began to
evaluate our business based on four separate business units, as follows:
Aesthetics, Ophthalmic, Surgical, and Other. These business units are identified
as operating segments in accordance with SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". The information evaluated


                                     - 18 -
<PAGE>

by the Company's senior management in deciding how to allocate resources to
these segments is net revenues and gross profit.

Revenues. The Company's net revenues of $90,004 for the three months ended
September 30, 2002 were flat compared to $90,173 for the three months ended
September 30, 2001. The Company's net revenues increased by 26% to $269,091 for
the nine months ended September 30, 2002 compared to $214,413 for the nine
months ended September 30, 2001. The increase in sales for the nine months
reflects mainly the contribution from the CMG acquisition.

By business unit, revenues for the three months ended September 30, 2002
compared to revenues for the three months ended September 30, 2001 and revenues
for the nine months ended September 30, 2002 compared to actual reported
revenues for the nine months ended September 30, 2001 and compared to pro-forma
revenues for the same period adjusted as if the acquisition of CMG had occurred
as of January 1, 2001 are shown below.

<TABLE>
<CAPTION>
                                                                                         Three months ended
                                                            Three months ended         September 30, 2001, as
           Segment                                          September 30, 2002                reported
<S>                                                              <C>                          <C>
          Aesthetic                                              $37,894                      $39,124
          Ophthalmic                                              21,596                       20,139
           Surgical                                               14,917                       15,534
            Other                                                 15,597                       15,376
            Total                                                $90,004                      $90,173

<CAPTION>

                                                               Nine months                  Nine months
                                                                  ended                        ended
                              Nine months ended       September 30, 2001, pro-forma      September 30, 2001
           Segment            September 30, 2002                for CMG                      as reported
<S>                                <C>                          <C>                          <C>
          Aesthetic                $116,269                     $124,278                     $100,081
          Ophthalmic                 60,905                       54,542                       35,365
           Surgical                  42,914                       44,822                       35,905
            Other                    49,003                       51,714                       43,062
            Total                  $269,091                     $275,356                     $214,413
</TABLE>

The decrease in revenues for the nine months ended September 30, 2002 compared
to the nine months ended September 30, 2001, on a pro-forma basis for the CMG
acquisition, is mainly due to higher than usual sales of CMG hair removal
products prior to the acquisition, offset in part by the increase in sales
mainly due to the introduction of the new Selecta and refractive products in the
Ophthalmic unit. In the three months ended September 30, 2002 the Company
experienced lower aesthetic sales in the U.S. due to the loss of sales people to
a new start-up competitor. The sales people have since been replaced.

Gross Profit. Gross profit decreased by 7% to $46,828 for the three months ended
September 30, 2002 from $50,366 for the three months ended September 30, 2001.
As a percentage of sales, the gross profit was 52% in the three months ended
September 30, 2002, compared to 56% in the same period in 2001. Gross profit
increased by 36% to $142,664 for the nine months ended September 30, 2002 from
$104,935 for the nine-month period ended September 30, 2001. Excluding write
down of inventory and other charges incurred mainly in connection with the CMG
acquisition in the amount of $17,569, gross profit increased by 16% for the nine
months ended September 30, 2002. As a percentage of sales, the gross profit was
53% in the nine months ended September 30, 2002 compared to 57% excluding
write-downs of inventory and other charges, in the same period in 2001.

Gross profit in the three month period ended September 30, 2001, reflects an
additional charge of $2,100 relating to inventory writedowns in respect of
discontinued products following the CMG acquisition.

The increase in gross profit, excluding write downs of inventory and other
charges, in the nine months ended September 30, 2002 was due principally to the
CMG acquisition offset by sales of lower margin products, in the nine-month
period ended September 30, 2002.

As a percentage of sales, the decrease in gross profit, excluding write downs
and other charges, in the three and nine months ended September 30, 2002, stems
from the inherently lower margins of the CMG product lines and was also


                                     - 19 -
<PAGE>

affected by sales of lower margin products, principally refractive products sold
pursuant to the Company's distribution arrangement with Wavelight Laser
Technologie AG.

Research and Development, net. Net research and development costs increased by
7% to $6,944 for the three months ended September 30, 2002 from $6,465 in the
same period in 2001. As a percentage of sales, research and development costs
were 8% and 7% in the three-month periods ended September 30, 2002 and 2001,
respectively. Net research and development costs increased by 40% to $20,792 for
the nine months ended September 30, 2002 from $14,904 in the same period in
2001. As a percentage of sales, research and development costs were 8% and 7% in
the nine-month periods ended September 30, 2002 and 2001, respectively.

The increase in research and development costs for the three month period was
due to higher costs associated with new product introductions. The increase in
research and development costs in the nine months ended September 30, 2002 is
due mainly to the contribution from CMG activities.

In process research and development. In process research and development
expenses in the nine months ended September 30, 2001 in the amount of $46,650,
represents the fair value allocated to in process research and development of
the CMG acquisition, based upon an independent valuation.

Selling, Marketing and Administrative expenses. Selling, Marketing and
Administrative expenses decreased by 10% to $34,676 for the three months ended
September 30, 2002 compared to $38,616 for the same period in 2001. As a
percentage of sales, Selling, Marketing and Administrative expenses in the three
months ended September 30, 2002 were 39% compared to 43% in the same period in
2001. As a percentage of sales, excluding one-time charges in the amount of
approximately $5,260 mainly in connection with the CMG acquisition, Selling,
Marketing and Administrative expenses in the three months ended September 30,
2001 were 37%.

Selling, Marketing and Administrative expenses decreased by 25% to $105,185 for
the nine months ended September 30, 2002 compared to $140,909 for the same
period in 2001. As a percentage of sales, Selling, Marketing and Administrative
expenses in the nine-month period ended September 30, 2002 were 39% compared to
66% in the same period in 2001. As a percentage of sales, Selling, Marketing and
Administrative expenses in the nine months ended September 30, 2002 and 2001,
excluding one time charges in the amount of $61,551 during the nine months ended
September 30, 2001, were 39% and 37%, respectively.

Selling, Marketing and Administrative expenses for the three (where applicable)
and nine months ended September 30, 2001 include unusual charges, mainly in
connection with the CMG acquisition, as follows:

*  Write-down of accounts receivable mainly in connection with terminated
   distributors of $14,043 in the nine months ended September 30, 2001.

*  Severance for terminated employees of $1,049 and $3,237 in the three and
   nine-month periods ended September 30, 2001, respectively.

*  Retention bonuses of $1,436 and $8,260 in the three and nine-month periods
   ended September 30, 2001, respectively.

*  Costs incurred for outside consultants, travel costs during the integration
   and other integration costs of $2,064 and $5,112 in the three and nine-month
   periods ended September 30, 2001, respectively.

*  Approximately $5,537 relating to accrued future lease costs of closed or
   unused facilities and relocation costs incurred during the nine-month period
   ended September 30, 2001.

Other unusual charges in the three and nine months ended September 30, 2001 also
included the following:

*  Non-cash compensation related to special option grants and accelerated
   vesting of previously granted options in the amount of $711 and $25,362 in
   the three and nine months ended September 30, 2001, respectively.


                                     - 20 -
<PAGE>

Selling, Marketing and Administrative expenses for the three and nine months
ended September 30, 2002, excluding one time expenses, increased due to
contribution from the CMG acquisition, costs of approximately $2 million in the
third of quarter 2002 associated with the SEC investigation and higher legal and
integration costs.

Litigation expenses. Litigation expenses for legal settlements and related costs
amounted to $5,201 for the nine-month period ended September 30, 2002, which
resulted from the arbitration award in the Light Age matter (see Part II, Item
1- "Legal Proceedings", below), compared to $29,266 for the nine-month period
ended September 30, 2001, which represented management's estimate of the
Company's potential exposure relating to certain legal proceedings, claims and
litigation, including but not limited to the 1998 class action litigation
settlement, Light Age and other matters. No litigation expenses were incurred in
the three-month periods ended September 30, 2002 and 2001, respectively.

Amortization of intangible assets. Amortization of intangible assets of $1,569
and $5,201 for the three and nine months ended September 30, 2002, respectively,
compared to $3,217 and $5,357 for the three and nine-month periods ended
September 30, 2001, include mainly amortization of intangible assets arising
from the CMG acquisition. Amortization in the three and nine months ended
September 30, 2001 include amortization of the identified intangible assets and
goodwill arising from the CMG acquisition compared to the three and nine months
ended September 30, 2002 which included only amortization of identified
intangibles.

Write down of investments. Write downs of investments for the nine months ended
September 30, 2001 of $3,986 represent mainly impairment of value of investments
in affiliated companies, principally the Company's investment in Galil Medical
Ltd.

Other income. Other income for the nine months ended September 30, 2002 of
$1,720 represents the gain arising from the sale of the investment in Galil
Medical Ltd., an investment for which the Company took an impairment reserve in
2001. Based on the terms of the sale the Company has the right to receive
additional consideration in the event of a sale or public offering by Galil for
a period of two years.

Financing expenses, net. For the three months ended September 30, 2002,
financing expenses were $3,951 compared to financing expenses of $1,735 in the
same period in 2001. For the nine months ended September 30, 2002, financing
expenses were $11,286 compared to financing expenses of $7,095 in the same
period in 2001.

The increase in financing expenses for the three months ended September 30, 2002
is mainly due to an exchange loss of approximately $450 compared to an exchange
gain of approximately $1,900 in the three months ended September 30, 2001 and
lower cash balances offset by lower interest rates.

The increase in financing expenses in the nine months ended September 30, 2002
is mainly due to lower cash balances, interest expense on debt incurred in
connection with the CMG acquisition and higher exchange rate losses in the nine
months ended September 30, 2002.

Income Tax Benefit (expense). Income tax expense in the three months ended
September 30, 2002 was $586 compared to $200 in the same period last year. Tax
expense for the nine months ended September 30, 2002 was $1,090 compared with a
tax benefit of $1,216 in the period ended September 30, 2001. In April 2001, the
Company reached a final agreement with the Israeli 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. The (Israel) Law for Amendment of the Income Tax
Ordinance (the "New Law") was enacted on July 24, 2002. The New Law may have a
significant impact on international investments of Israeli companies. The New
Law may also affect the local taxation of individuals and companies such as
Lumenis. The Company is assessing the potential impact of the New Law on the
Company together with its tax advisors, but believes the impact will not be
material. Additional regulations under the New Law are expected to be enacted
and the Company will have to assess the potential impact of the New Law once the
regulations are introduced.

Company's share in losses of affiliates. For the nine months ended September 30,
2002, the Company's share in Aculight (UK) Limited's losses amounted to $121. In
the three months ended September 30, 2002, the Company's


                                     - 21 -
<PAGE>

share in the losses of Aculight (UK) Limited was $30 net after realizing a
portion of deferred income that resulted from the sale of products to Aculight
in 2001.

Extraordinary gain on purchase of Company's convertible notes. For the nine
months ended September 30, 2002, extraordinary gain on the purchase of the
Company's convertible notes was $92.

Net Income (loss). As a result of the foregoing factors, the Company's net loss
was $928 for the three months ended September 30, 2002, compared to net income
of $133 in the same period in 2001. The Company's net loss was $4,400 for the
nine months ended September 30, 2002, compared to net loss of $142,016 in the
same period in 2001.

LIQUIDITY AND CAPITAL RESOURCES
(In thousands of dollars)

As of September 30, 2002, the Company had cash and cash equivalents of $20,033
compared to $31,400 on December 31, 2001. The decrease of $11,367 is mainly
attributable to:

Operating activities

For the nine months ended September 30, 2002, cash used for operating activities
was $4,451, attributable mainly to a $13,444 increase in operating assets and
liabilities that resulted from an increase in inventory of $8,541, an increase
in trade receivables of $8,338 and prepaid expenses and other receivables of
$2,950 partially offset by an increase in accounts payable, accrued expenses and
other long-term liabilities of $6,385. The increase in trade receivables was due
to the effect of foreign currency translation of approximately $3,908 and to
processing difficulties associated with the integration of the accounting
systems of ESC and CMG. The increase in inventory resulted almost entirely from
an increase in spare parts and inventory used in the Company's service network.
An increase of $4,886 in accrued expenses is attributable to the increase in the
Light Age arbitration award provision, net of a $650 payment made during the
three month period ended September 30, 2002. $12,550 of the decrease in accounts
payable and accrued expenses was for payments of previously accrued one-time
charges in respect of the CMG acquisition, of which $5,258 was paid for
severance and retention bonuses, $2,573 was paid in respect of integration costs
and $4,719 was paid mainly for termination of agreements with distributors and
lease agreements of abandoned facilities for which no sub-lease has been
arranged. The remaining balance of the accrued one-time integration expenses in
the amount of $4,181 is expected to be paid before the end of the first quarter
of 2003. The balance of the increase in accounts payable and accrued expenses
relate to higher trade payables in part related to the higher inventories.

Investing Activities

For the nine months ended September 30, 2002, cash used for investing activities
was approximately $5,847. Investment in fixed assets was $5,994, which includes
an investment of approximately $900 for the purchase of a building in Salt Lake
City. Payments of $1,286 were made in respect of liabilities related to the
acquisition of CMG and HGM that were paid during this period and $1,250 was used
for other long-term investments. The sale of the investment in Galil Medical
Ltd. resulted in proceeds of $1,720.

Financing Activities

For the nine months ended September 30, 2002, cash used for financing activities
was $1,069. During August 2002, the Company drew down its $70,667 four-year loan
from Bank Hapoalim, B.M. in accordance with a prior agreement between the
parties entered on March 26, 2002. The proceeds of the loan were used to repay
the Company's existing convertible subordinated notes due September 1, 2002 in
the amount of $54,128 and to repay borrowings of $16,539 under its revolving
credit agreement. The revolver was used by the Company mainly to repurchase
$16,447 of its convertible subordinated notes during the six-month period ended
June 30, 2002. The $70,667 loan matures four years from date of draw down and
bears interest at LIBOR plus 6.55% increasing to 7.80% over the life of the
loan. In accordance with the March 26, 2002 agreement, the Company also
increased its revolving credit facility to $35,000 from $20,000. As of September
30, 2002, $4,905 was outstanding under the


                                     - 22 -
<PAGE>

revolving credit facility principally for working capital purposes. In
connection with the loan, the Company paid Bank Hapoalim a $4,000 fee, which
will be amortized over the life of the loan and is recorded net against the loan
on the balance sheet.

In its three financing arrangements with Bank Hapoalim, the Company is required
to maintain a ratio of its debt, as defined, to EBITDA, as defined, of less than
three times. At September 30, 2002, the Company had outstanding $175,572 under
the three agreements. At September 30, 2002, the Company was not in compliance
with this covenant and does not expect to be in compliance as of December 31,
2002. On November 19, 2002, the Company received a waiver of this requirement
for September 30, 2002 and an amendment of the ratio to a maximum of 3.7 times
for the quarter ending December 31, 2002. Additionally, among other things, the
interest rate on borrowings under the revolving credit facility will be
increased by 1.25% to LIBOR plus 2.25% effective November 19, 2002. Based on its
current plans, the Company expects to be in compliance with the ratio. See
"Cautionary Statements" below.

During October 2002, the Company and Coherent, Inc. agreed to modify the terms
of the subordinated note, dated as of April 30, 2001, in the principal amount of
$12,904 which was due on October 30, 2002. The Company and Coherent agreed that
(i) the principal amount shall be due as follows: (A) three equal monthly
installments of $1,075 on Occtober 31, 2002, November 30, 2002 and December 31,
2002, respectively, and thereafter (B) seven equal monthly installments, each in
the amount of $1,383, with the first such payment due on January 31, 2003; and
(ii) interest rate on the unpaid principal amount shall be nine percent (9%) per
annum and shall be payable monthly, commencing on October 31, 2002. The amended
repayment terms are subject to certain acceleration provisions in the event the
Company secures additional financing.

The Company believes that internally generated funds, together with available
cash and funds available under the revolving credit agreement will be sufficient
to meet the Company's presently anticipated day-to-day operating expenses,
commitments, working capital, capital expenditure and debt payment requirements.

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:

   o  The Company is the subject of an investigation by the U.S. Securities and
      Exchange Commission with respect to its relationship with distributors,
      and certain charges and write-offs taken. The Company and several officers
      and directors have been named as defendants in several purported class
      action lawsuits (see Part II, Item 1- "Legal Proceedings", below) alleging
      violations of U.S. Federal securities laws.

   o  The Company is highly leveraged, with indebtedness that is substantial in
      relation to its shareholders' equity. This requires the Company to
      dedicate a substantial portion of its cash flow to debt service, could
      impair its ability to obtain additional financing for capital expenditures
      or other purposes, hinder its ability to adjust rapidly to changing market
      conditions, and could make the Company more vulnerable in the event of a
      downturn in its business or further deterioration of general economic
      conditions. Since much of the Company's debt is at floating rates, an
      increase in interest rates could adversely affect the Company. The Company
      was unable to comply with a debt coverage covenant in its bank agreements,
      and was required to obtain a waiver. See Note 8 to the unaudited financial
      statements.

   o  The Company's future success depends on its ability to develop and
      successfully introduce new and enhanced products that meet the needs of
      its customers.

   o  The Company's market is unpredictable and characterized by rapid
      technological changes and evolving standards, and, if the Company fails to
      keep up with such changes, its business and operating results will be
      harmed.


                                     - 23 -
<PAGE>

   o  The Company must spend heavily on research and development.

   o  The Company's products are subject to U.S., E.U. and international medical
      regulations and controls, which impose substantial financial costs on it
      and which can prevent or delay the introduction of new products.

   o  Recent court decisions and enforcement actions in Japan may have the
      result of restricting or prohibiting altogether the sale of the Company's
      hair removal products to spas and salons in that country.

   o  The closure of the manufacturing facilities in Santa Clara and their
      transition to Salt Lake City and Israel might impact the Company's ability
      to supply products in a timely manner.

   o  The Company depends on its facilities in Israel and on its international
      sales. Many of its customers' operations are also located outside the U.S.

   o  The Company faces challenges as it integrates new and diverse operations.

   o  Any acquisitions the Company makes could harm or disrupt its business
      without bringing the anticipated synergies.

   o  The Company depends on skilled personnel to operate its business
      effectively in a rapidly changing market, and if the Company is unable to
      retain existing or hire additional personnel, its ability to develop and
      sell its products could be harmed.

   o  The Company anticipates a decline in selling prices of its products as
      competition increases, which could adversely affect its operating results.

   o  The Company may not be able to protect its proprietary technology, which
      could adversely affect its competitive advantage.

   o  The Company could become subject to litigation regarding intellectual
      property rights, which could seriously harm its business.

   o  The sales cycles for the Company's products may cause it to incur
      significant expenses without offsetting revenues and adversely affect cash
      flow. The Company typically realizes most of its quarterly revenues in the
      final month of a quarter.

   o  The markets in which the Company sells its products are intensely
      competitive and increased competition could cause reduced sales levels,
      reduced gross margins or the loss of market share.

   o  If the Company fails to accurately forecast component and material
      requirements for its products, it could incur additional costs and
      significant delays in shipments, which could result in loss of customers.

   o  The Company's dependence on sole source suppliers for certain components
      exposes it to possible supply interruptions that could delay or prevent
      the manufacture of its systems.

   o  Some of the Company's medical customers' willingness to purchase its
      products depends on their ability to obtain reimbursement for medical
      procedures using its products and its revenues could suffer from changes
      in third-party coverage and reimbursement policies.

   o  Some of the Company's laser and intense pulsed light (IPL) systems are
      complex in design and may contain defects that are not detected until
      deployed by its customers and could lead to product liability claims.

   o  The Company may be required to implement a costly product recall.


                                     - 24 -
<PAGE>

   o  The Company uses laboratory and manufacturing materials that could be
      considered hazardous; and it could be liable for any damage or liability
      resulting from accidental environmental contamination or injury.

   o  If the Company's facilities located in Israel or near major earthquake
      faults in California were to experience catastrophic loss, its operations
      would be seriously harmed.

   o  Conditions in Israel affect the Company's operations and may limit its
      ability to produce and sell its products.

   o  The Company's operations could be disrupted as a result of the obligation
      of key personnel in Israel to perform military service.

   o  The Company receives tax benefits from the Israeli government that may be
      reduced or eliminated in the future.

   o  It may be difficult for a plaintiff or judgment creditor to enforce a
      judgment rendered by a U.S. court against the Company, its officers and
      directors in Israel or to serve process on the Company's officers and
      directors in Israel.

   o  The new Israeli Companies Law may cause uncertainties regarding corporate
      governance.

   o  Under current Israeli law, the Company may not be able to enforce
      covenants not to compete and therefore may be unable to prevent
      competitors from benefiting from the expertise of some of its former
      employees.

   o  Risks of downturns in economic conditions generally, and in the healthcare
      industry specifically.

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, in the 2001 Form 10-K 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

General

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

Political Conditions

Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and


                                     - 25 -
<PAGE>

economic problems for Israel. Additionally, Israel is currently experiencing
intense violence and terrorism and from time to time in the past, Israel has
experienced civil unrest, primarily in the West Bank and in the Gaza Strip
administered by Israel since 1967. 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 pursuant to which certain territories in the
West Bank and Gaza Strip were handed over to the Palestinian administration. The
implementation of these agreements with the Palestinians representatives has
been subject to difficulties and delays and a resolution of all of the
differences between the parties remains uncertain. Recently the political
conflict with the Palestinians has worsened. Since October 2000, there has been
a significant increase in violence primarily in the West Bank and Gaza Strip, as
well as in Israel itself, which intensified during 2001 and 2002. Negotiations
between the parties have almost entirely ceased. As of the date hereof, Israel
has not entered into any peace agreement with Syria or Lebanon. In November 2002
the National Unity Government was dissolved, and general elections are likely to
take place within the next few months. The Company cannot predict the outcome of
such general elections, whether any other agreements will be entered into
between Israel and its neighboring countries, whether a final resolution of the
area's problem will be achieved, the nature of any resolution of this kind, or
whether the current violence will continue and to what extent this violence will
have an adverse impact on Israel's economic development, on the Company's
operations in the future or what other effects it may have upon the Company.

Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms and others doing business with Israel or with Israeli
companies. Although the Company is restricted from marketing the Company's
product in these countries, the Company does not believe that the boycott has
had a material adverse effect on the Company. However, a prolonged continuation
of the increased hostilities in the region could lead to increased boycotts and
further restrictive laws, policies or practices directed towards Israel or
Israeli businesses, and these could have a material adverse impact on the
Company's business.

Generally, all male adult citizens and permanent residents of Israel under the
age of 45 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 any time under
emergency circumstances and many have been so called over the past few months.
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 its workforce or business if hostilities
continue, 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.

The September 11, 2001 terror attacks on the U.S. and the military response by
the U.S. and its international allies in Afghanistan, have created additional
uncertainty. The U.S. threatened war against Iraq, and increased interest in
fighting terrorist groups activities in the Middle East, could more directly
affect the Company's business.

Economic Conditions

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


                                     - 26 -
<PAGE>

The Israeli Government's monetary policy contributed to relative price and
exchange rate stability in recent years, despite fluctuating rates of economic
growth and a high rate of unemployment. There can be no assurance that the
Israeli Government will be successful in its attempts to keep prices and
exchange rates stable.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company has fixed rate debt of approximately $12,904. 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 fluctuations 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 and to protect
revenues, mainly in Yen and EURO. The gains and losses on these transactions are
included in the statement of operations or as part of the other comprehensive
loss, as appropriate, 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.

ITEM 4. CONTROLS AND PROCEDURES.

Within the 90 days prior to the date of this report, under the supervision and
with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective in
timely identifying material information required to be included in the Company's
periodic SEC filings. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.

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 or set forth in the "Legal Proceedings" section of the
2001 Form 10-K, 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.

In February 2002, the Company received a request from the United States
Securities and Exchange Commission ("SEC") to voluntarily provide certain
documents and information for a period commencing January 1, 1998. The request
primarily relates to the Company's relationships with distributors, and also
asks for amplification of the Company's explanation of certain previously
disclosed charges and write-downs which were taken in 1999 (inventory and other
charges of approximately $30,050; bad debt charges of $13,430; and litigation
expenses of $4,400) and 2001(write-down of accounts receivable of $14,043 and
write-downs of inventory and other charges (amounts not given)). On May 15,
2002, the Company learned that the SEC had issued a formal order of
investigation on these matters, including as to whether, in connection
therewith, the Company, in prior periods, may have overstated revenues and
related income and failed to maintain proper books and records and a proper
system of internal controls. This was followed by the issuance of a subpoena on
August 19, 2002 relating to the above-mentioned requested information, as well
as documents of the Company's present auditors, Brightman Almagor & Co., and its
previous auditors, Luboshitz Kasierer. The Company believes, as of the date of
this report, that it has substantially completed the production of documents to
the SEC in response to the requests previously received with respect to the
transactions involving U.S. distributors and certain charges taken in 1999 and
2001. The Company intends to continue to cooperate with the SEC in its
investigation. Having reviewed, among other things, the


                                     - 27 -
<PAGE>

information gathered for the SEC investigation, the Company does not believe
that a restatement of the Company's reported financial statements is warranted.
The SEC investigation, however, is ongoing and, accordingly, the Company is
unable to predict the duration or outcome of this process.

During March, April and May 2002, eight purported class action lawsuits were
filed in the United States District Court for the Southern District of New York
on behalf of purchasers of Lumenis securities between January 7 and February 28,
2002 (the "Class Period"). The named defendants include, in addition to the
Company, certain present and former officers and directors of the Company,
including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and Asif Adil. The
complaints generally allege that the defendants violated U.S. Federal securities
laws by issuing materially false and misleading statements throughout the Class
Period that had the effect of artificially inflating the market price of the
Company's securities. The complaints allege that throughout the Class Period,
defendants discounted and disputed marketplace rumors about the Company's
operations even as the Company knew it was being investigated by the SEC and
that its distributors had been contacted by the SEC.

The Company has been served with a summons and complaint in some but not all of
these actions. There is currently pending before the Court a motion by
plaintiffs to appoint a lead plaintiff and for approval of selection of lead
counsel. Upon the disposition of this motion, it is anticipated that a
consolidated complaint will be filed. The Company's time to respond to the
complaints has been extended. It is anticipated that, following the appointment
of a lead plaintiff and approval of lead class counsel, and subject to review
and evaluation of any consolidated complaint that is filed, the Company will
file a motion to dismiss for failure to state a claim and failure to plead fraud
with particularity as required by the Private Securities Litigation Reform Act
of 1995 and Rule 9(b) of the Federal Rules of Civil Procedure.

In May 2002, another purported class action complaint was filed in the United
States District Court for the Southern District of New York on behalf of
purchasers of the Company's securities between August 2, 2001 and May 7, 2002
(the "Extended Class Period"). In addition to the Company, the named defendants
include certain present and former officers and directors of the Company,
including Prof. Jacob A. Frenkel, Yacha Sutton, Sagi Genger and Asif Adil. The
complaint alleges that the defendants violated U.S. Federal securities laws by
making a series of material misrepresentations to the market during the Extended
Class Period regarding the Company's financial performance, successful execution
of its business plan and strong demand for the Company's products, thereby
artificially inflating the price of Lumenis securities. The Company has not been
served with a summons and complaint in this action.

The Company believes that all the allegations and claims in all of the above
purported class action lawsuits are baseless, and the Company intends to
vigorously defend against them.

On September 12, 2002, the Company filed a claim in the Tel Aviv - Jaffa
District Court against Syneron Medical Ltd. and Messrs. Shimon Eckhouse, Michael
Kreindel, Mark Aronovitz, Avner Lior and Hans Edel (the "Syneron Defendants").
The Company alleges that the Syneron Defendants, all former employees of the
Company, used confidential business information and technology gained during
their work at the Company, for the production and distribution of products
essentially similar to the Company's products for hair removal and skin
treatment (the "Copied Products"). The Company also alleges that Syneron Medical
Ltd. and the Syneron Defendants (collectively the "Defendants") used information
with regard to the Company's distributors and customers for the purpose of
marketing the Copied Products. The Company is seeking the following remedies
against the Defendants: a permanent injunction restraining the Defendants from
using any business information or technology or trade secrets of the Company, a
mandatory injunction ordering the Defendants to demolish all of the Copied
Products that were produced by the Defendants, an order for the delivery of
accounts, the appointment of a receiver and a monetary judgment in the amount of
approximately $6,250,000. On October 20, 2002, the Defendants filed their
Statement of Defense in which they denied the Company's claims, pleading, inter
alia, that the Company's Intense Pulsed Light technology (the "IPL Technology")
is within the public domain; that the Company has no intellectual property
rights in it; and that, consequently, the Defendants' technology (the "ELOS
Technology") does not breach the Company's rights in its IPL Technology. In
addition, the Defendants pleaded, that there is no similarity between the ELOS
Technology and the IPL Technology. On November 4, 2002, the Company filed its
response to the Defendants' Statement of Defense. In its response, the Company
claimed, inter alia, that the Defendants are prohibited from pleading that the
Company does not have any intellectual property rights in the IPL technology,
due to the fact that


                                     - 28 -
<PAGE>

the Defendants themselves assisted the Company in registering patents which
constitute the Company's intellectual property in the IPL technology. A court
hearing has yet to be scheduled.

On September 20, 2002, Lumenis Inc. field a lawsuit against Syneron Inc.
(Canada), Syneron, Inc. (Delaware), and certain former Lumenis employees, Brian
D. Lodwig, J. Scott Callihan, Mark Lazinski, and Stephen Harsnett, in the
Superior Court of California for the County of Santa Clara for breach of
contract, intentional interference with prospective economic advantage,
misappropriation of trade secrets, breach of duty of loyalty, conspiracy, unjust
enrichment, and unfair competition, seeking unspecified damages and injunctive
relief. Lumenis Inc.'s request for expedited discovery was granted by the court,
and Lumenis served initial discovery demands. On or about October 22, 2002,
Syneron Inc. (Canada) filed a motion to quash service upon it for lack of
personal jurisdiction. Lumenis' response to that motion is not yet due. On or
about October 25, 2002, Lumenis Inc. filed an amended complaint adding former
Lumenis Inc. employee David J. Maslowski as a defendant in the action. Other
than the motion to quash filed by Syneron Inc. (Canada), the defendants have not
yet responded to the complaint.

On October 28, 2002, Lumenis Ltd. and Lumenis Inc. (collectively, "Lumenis")
filed a complaint in the United States District Court for the Central District
of California alleging that Syneron Medical Ltd., Syneron Inc. and Syneron
Canada Corp. (collectively "Syneron") are infringing six U.S. patents held by
Lumenis by, inter alia, selling Syneron's Aurora DS and Aurora SR devices.
Lumenis is seeking a temporary restraining order and a preliminary and permanent
injunction against further infringement as well as an award of as yet
undetermined damages and lost profits resulting from Syneron's infringement and
Lumenis' attorneys' fees and costs. Oral argument on the request for a temporary
restraining and preliminary injunction was held on November 1, 2002. Citing the
complexity of the patent issues involved, the court declined to grant the
Company's request for a temporary restraining order. However, the Company's
request for a preliminary injunction was continued until February 7, 2003. The
court also granted the Company's request for expedited discovery, and ordered
the appointment of an independent expert to advise the court on the patent
infringement issues raised by the lawsuit.

On October 24, 2002, Lumenis Inc. filed a complaint in the United States
District Court for the Northern District of California (the "Federal Action")
against Palomar Medical Technologies, Inc. ("Palomar") and the General Hospital
Corp. ("General"). The complaint seeks a declaratory judgment that two U.S.
patents, which are owned by General and sublicensed by Palomar to Lumenis Inc.
pursuant to a 1998 license agreement (the "License Agreement"), are invalid
and/or unenforceable and/or are not infringed by Lumenis. The complaint has not
been served on Palomar or General.

In connection with the Federal Action, Lumenis has refused to pay royalties
under the License Agreement. In response, Palomar filed a complaint on October
29, 2002 against Lumenis Ltd., Lumenis Inc., ESC Medical Systems Ltd., ESC
Medical Systems Inc. and "ESC/Sharplan Laser Industries Ltd.". (collectively,
"Lumenis") in the Superior Court of the Commonwealth of Massachusetts. The
complaint alleges that Lumenis has breached the License Agreement by failing to
make certain royalty payments, that Lumenis' actions have breached the implied
covenant of good faith and fair dealing arising with respect to the License
Agreement and that Lumenis' actions constitute unfair and deceptive trade
practices in violation of M.G.L., Chap. 93A, Sections 2 and 11. Palomar seeks an
award of unspecified compensatory damages, a trebling of such damages, its costs
and attorneys' fees and pre-judgment interest. The complaint has not been served
on Lumenis.

On September 30, 2002, an action was filed by Mr. Asif Adil, the Company's
former Executive Vice President - Business Operations and acting Chief Financial
Officer, in the Superior Court of New Jersey, Somerset County; Law Division
against the Company and Prof. Jacob A. Frenkel, Yacha Sutton and Sagi Genger.
The complaint alleges, among other things, that the Company removed Mr. Adil
from these positions and terminated his employment in retaliation for his report
to the Company of alleged accounting and disclosure irregularities. The action
seeks, among other things, compensatory damages and reinstatement of his
employment. The Company believes that the claims are without merit, and the
Company intends to defend itself vigorously. On October 29, 2002, defendants
removed the action to the United States District Court for the District of New
Jersey (the "District Court"). On November 13, 2002, Mr. Adil filed a first
amended complaint in the District Court, adding Lumenis Inc. as a defendant in
the action.

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.,


                                     - 29 -
<PAGE>

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 the 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. Light Age claims
that it incurred damages of up to $41.4 million, including interest. A hearing
on the merits was held in December 2001 and closing arguments were held on
January 30, 2002. On or about June 12, 2002, the Company was advised that the
arbitrators issued an interim award to Light Age in the amount of approximately
$6.88 million plus interest. On or about July 25, 2002, the Company was advised
that the arbitrators issued a final award in the amount of approximately $9.1
million, which includes pre-judgment interest, an award of certain out-of-pocket
expenses incurred by Light Age, and an increase of approximately $375,000 due to
a computational error made by the arbitrators. The Company recorded a charge of
$5.2 million for the three-month period ended June 30, 2002 in addition to its
previous reserve of $4.6 million. The request by Light Age for approximately
$2.78 million in attorneys' fees and disbursements was denied in its entirety.
Approximately $180,000 of Light Age's request for reimbursement of out-of-pocket
costs and $36,000 of Light's request for pre-judgment interest was also denied.
Pursuant to a settlement agreement entered into on August 27, 2002, and amended
on October 1, 2002 and October 31, 2002, Lumenis agreed to the entry of a final
judgment on consent in the amount of the award amount as follows: (i) on August
27, 2002, the sum of $650,000; (ii) on October 1, 2002, the sum of $5,392,969
plus post-judgment interest on such amount at 8% per annum from July 26 through
September 3, 2002 and at 5.5% per annum from September 4 through October 1, 2002
(which amount has been paid); (iii) on November 4, 2002, the sum of $500,000;
and (iv) on December 1, 2002 the sum of $2,600,000 plus post-judgment interest
on such amount at 8% per annum from July 26 through September 3, 2002 and at
5.5% per annum from September 4 through October 1, 2002 and at 8% per annum from
October 2 through November 1, 2002 plus post-judgment interest on $650,000 at 8%
per annum from July 26 through September 3, 2002 and interest on the sum of
$500,000 from July 26, 2002 through September 3, 2002 at the rate of 8% per
annum, plus post-judgment interest on said sum from September 4, 2002 through
October 1, 2002 at 5.5% per annum, and thereafter post-judgment interest
accruing on any unpaid portion of said sum at 8% per annum.

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-eight
physicians and medical clinics re-filed what purports to be a class action
lawsuit in Harris County, Texas. Plaintiffs filed a motion to remove the case to
Federal Court. 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. In March 2002, the
plaintiffs filed a motion to amend their complaint to dismiss the class action
and securities allegations and to add several new plaintiffs and in June 2002,
the motion was granted. The plaintiffs subsequently filed a motion to remand the
cases to State Court, which was granted. The Company denies the allegations and
will continue to defend this case vigorously. No assessment of likelihood of
outcome or likely damages, if any, can be made at this time.

On October 12, 2001, Lumenis Inc., a subsidiary of the Company, commenced an
action for patent infringement in the United States District Court for the
Southern District of New York against Altus Medical Inc. ("Altus") seeking,
among other things, an injunction and damages. The complaint alleges that Altus
infringed two U.S. patents owned by Lumenis Inc. Altus answered the complaint
denying that it was infringing the asserted patents and filed counterclaims
seeking a declaratory judgment that the asserted patents are invalid and were
not infringed. Lumenis filed a reply denying the material allegations of the
counterclaims. Altus filed a motion seeking to transfer the action to the United
States District Court for the Northern District of California ("NDCA") for the
convenience of the parties and witnesses. Lumenis Inc. consented to the motion
to transfer. On December 12, 2001 the action was transferred to the NDCA. The
parties entered into a settlement agreement and license agreement, both
effective as of June 11, 2002, pursuant to which Altus became a non-exclusive
licensee under the patents at issue in this lawsuit.


                                     - 30 -
<PAGE>

On January 18, 2002, Lumenis Inc. commenced an action for patent infringement
against Trimedyne, Inc. ("Trimedyne") in the United States District Court for
the Central District of California. The complaint alleges that Trimedyne has
willfully infringed and is willfully infringing two Lumenis Inc. U.S. patents.
Lumenis Inc. seeks (i) an injunction enjoining Trimedyne's infringement; (ii) an
award of damages sustained by Lumenis as a result of such infringement; (iii) a
trebling of such damage award; and (iv) an award of its costs and attorneys'
fees incurred in the action. On or about February 26, 2002, Trimedyne filed an
answer and counterclaims in this action denying Lumenis' material allegations of
infringement and asserting counterclaims alleging that: (i) Trimedyne is
entitled to a declaratory judgment that Trimedyne is not infringing the patents;
(ii) Lumenis Inc. has violated certain U.S. and California antitrust and trade
practices laws; (iii) Lumenis Inc. has disseminated false and misleading
statements in violation of the California Business and Professions Code and/or
California's trade libel laws; (iv) certain Lumenis Inc. products infringe
Trimedyne's patents; (v) Lumenis has tortiously interfered with Trimedyne's
prospective economic relationships; and (vi) Trimedyne is entitled to a
declaratory judgment that it is entitled to a refund of an alleged overpayment
of royalties by Trimedyne of approximately $130,000 under a 1994 patent license.
Trimedyne seeks: (i) an injunction enjoining Lumenis Inc. from the allegedly
wrongful acts; (ii) unspecified damages arising from Lumenis Inc.'s allegedly
wrongful acts and a trebling of such damages; (iii) Lumenis Inc.'s profits
derived from Lumenis Inc.'s allegedly wrongful acts; (iv) unspecified punitive
damages for Lumenis' allegedly wrongful acts; (v) a refund of the alleged
royalty overpayment, plus interest thereon; and (vi) Trimedyne's costs and
attorneys fees incurred in connection with this action. The Company believes the
counterclaims are baseless, will vigorously defend against them and will
continue to vigorously prosecute its claims against Trimedyne. On April 29,
2002, the Company moved to: (i) dismiss the federal and state antitrust
counterclaims, the counterclaims for trade libel and the counterclaim for
tortious interference with prospective economic relationships on the grounds
that Trimedyne has failed to state a claim upon which relief can be granted;
(ii) dismiss or stay the claims related to the 1994 patent license as those
claims are subject to a compulsory arbitration clause; and (iii) strike certain
of the affirmative defenses asserted by Trimedyne. On June 3, 2002, Trimedyne
served an amended answer and counterclaims re-asserting all of the claims from
its original complaint other than the claims relating to the 1994 patent
license. The parties have commenced negotiations to attempt to settle this
action and have agreed to suspend proceedings until December 5, 2002, at which
time Lumenis Inc. must reply to the counterclaims or file a motion to dismiss
the counterclaims.

On August 19, 2002, Cool Laser Optics, Inc. ("Cool Laser") commenced an
arbitration proceeding before the American Arbitration Association by filing a
demand for arbitration claiming that Lumenis Inc. violated an August 1996 patent
license agreement (that was entered into by Cool Laser and Coherent Inc. and
assigned to Lumenis Inc.) by not paying royalties thereunder respecting sales of
Lumenis Inc.'s LightSheer systems and that as a result the license agreement has
been or is terminated and Lumenis Inc.'s sales of the LightSheer systems
constitute infringement of certain of Cool Laser's U.S. patents. The demand for
arbitration seeks an unspecified amount in damages and an injunction against
further sales of the LightSheer system. On October 3, 2002, Lumenis Inc. filed
and served an answering statement denying the material allegations of the demand
for arbitration, denying that the LightSheer system infringes the referenced
patents, denying that Lumenis Inc. owes any royalties under the license
agreement and denying that Cool Laser has any right to terminate the license
agreement. Lumenis Inc.'s answering statement also asserts that the Cool Laser
patents are invalid and unenforceable and that Cool Laser is estopped from
asserting them and further asserts that the arbitrators do not have jurisdiction
to hear a claim for patent infringement. Lumenis Inc.'s answering statement
seeks, inter alia, the dismissal of all of Cool Laser's claims with prejudice.

In addition to the actions described above or set forth in the 2001 Form 10-K,
the Company is a party in certain actions in various countries, including the
U.S., in which the Company sells its products in which it is 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. Management believes that none of these actions (other than those set
forth above or in the 2001 Form 10-K) that are presently pending individually
would have a material adverse impact on the consolidated financial position of
the Company, although such actions in the aggregate 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 underwent treatments using the Company's products. The
Company is defending itself vigorously, 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.


                                     - 31 -
<PAGE>

The balance sheet as of September 30, 2002 includes an accrual of $18.1 million
(including the provision of $8.9 million due to the settled 1998 class-action
lawsuits, as disclosed in the 2001 Form 10-K and a provision of $9.2 million for
the Light Age matter) reflecting management's estimate of the Company's
potential exposure with respect to certain, but not all, legal proceedings,
claims and litigation. With respect to the pending legal proceedings and claims
for which no accrual has been recorded in the financial statements, Company
management 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.

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

The Company held its Annual General Meeting of the Company's shareholders on
August 4, 2002 (the "Annual Meeting"). The following sets forth each matter
which was presented to the Company's shareholders and voted upon at the meeting
and the number of votes cast for and against as well as the number of
abstentions for each such matter:

1. To elect the directors of the Company to serve until the next Annual General
Meeting. The nominees for election were: Prof. Jacob A. Frenkel, Mr. Arie
Genger, Dr. Bernard Couillaud, Mr. Aharon Dovrat, Mr. Philip Friedman, Mr.
Thomas G. Hardy, Prof. Darrell S. Rigel, Mr. Sash A. Spencer, and Prof. Zehev
Tadmor. This matter was approved by the following votes:

      FOR: 31,300,839           WITHHOLD: 258,797

In addition, Mr. Mark H. Tabak continues as an "Outside Director" appointed
under the Israeli Companies Law.

2. To approve the appointment of Brightman Almagor & Co., a member firm of
Deloitte, Touche & Tohmatsu, as the Company's independent auditors to audit the
consolidated financial statements of the Company and its subsidiaries for fiscal
year 2002. This matter was approved by the following votes:

      FOR: 31,331,901           AGAINST: 209,204        ABSTAIN: 18,531

3. To approve the engagement of Mr. Thomas G. Hardy, a director of the Company,
as a consultant of the Company. This matter was approved by the following votes:

      FOR: 28,917,684           AGAINST: 384,014        ABSTAIN: 2,257,938

4. To approve the compensation for 2002 of (i) the Company's directors and (ii)
Prof. Jacob Frenkel and Mr. Arie Genger, the Chairman and Vice Chairman,
respectively. This matter was approved by the following votes:

      FOR: 30,568,339           AGAINST: 943,928        ABSTAIN: 47,369

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

10.1 Employment Agreement dated as of July 1, 2001 between the Company and Sagi
Genger

10.2 Pledge Agreement dated as of June 1, 2002 between the Company and Sagi
Genger

10.3 Letter Agreement dated October 22, 2002 between the Company and Coherent,
Inc., relating to the Promissory Note, dated as of April 30, 2001.

10.4 Second Amendment to Sublease, dated as of October 21, 2002, between the
Company and Coherent, Inc.

10.5 Termination of Consulting Agreement, dated November 8, 2002, from Thomas G.
Hardy to the Company.

10.6 Letter Agreement dated November 19, 2002 between the Company and Bank
Hapoalim B.M.


                                     - 32 -
<PAGE>

(b) Reports on Form 8-K

On August 15, 2002, the Company filed a Current Report on Form 8-K disclosing
(under Item 9) the certification made by the Company's chief executive officer
and chief financial officer under Section 906 of the Sarbanes-Oxley Act with
respect to the Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2002.

                                        SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                         Lumenis Ltd.

                                         /s/  Kevin Morano
                                         ---------------------------------------
Date: November 19, 2002                  By:  Kevin Morano
                                              (Chief Financial Officer,
                                              and Duly Authorized Officer)

                                 CERTIFICATIONS

I, Yacha Sutton, certify that:

   1) I have reviewed this quarterly report on Form 10-Q of Lumenis Ltd.;

   2) Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

   3) Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

   4) The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      a) designed such disclosure controls and procedures to ensure that
         material information relating to the registrant, including its
         consolidated subsidiaries, is made known to us by others within those
         entities, particularly during the period in which this quarterly report
         is being prepared;

      b) evaluated the effectiveness of the registrant's disclosure controls and
         procedures as of a date within 90 days prior to the filing date of this
         quarterly report (the "Evaluation Date"); and

      c) presented in this quarterly report our conclusions about the
         effectiveness of the disclosure controls and procedures based on our
         evaluation as of the Evaluation Date;

   5) The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of the registrant's board of directors (or persons performing
      the equivalent function):


                                     - 33 -
<PAGE>

      a) all significant deficiencies in the design or operation of internal
         controls which could adversely affect the registrant's ability to
         record, process, summarize and report financial data and have
         identified for the registrant's auditors any material weaknesses in
         internal controls; and

      b) any fraud, whether or not material, that involves management or other
         employees who have a significant role in the registrant's internal
         controls; and

   6) The registrant's other certifying officers and I have indicated in this
      quarterly report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.


Date: November 19, 2002                By: /s/ Yacha Sutton
                                          --------------------------------------
                                               Yacha Sutton
                                               Chief Executive Officer


                                     - 34 -
<PAGE>

I, Kevin Morano, certify that:

   1) I have reviewed this quarterly report on Form 10-Q of Lumenis Ltd.;

   2) Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

   3) Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

   4) The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      a) designed such disclosure controls and procedures to ensure that
         material information relating to the registrant, including its
         consolidated subsidiaries, is made known to us by others within those
         entities, particularly during the period in which this quarterly report
         is being prepared;

      b) evaluated the effectiveness of the registrant's disclosure controls and
         procedures as of a date within 90 days prior to the filing date of this
         quarterly report; and

      c) presented in this quarterly report our conclusions about the
         effectiveness of the disclosure controls and procedures based on our
         evaluation as of the Evaluation Date;

   5) The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of the registrant's board of directors:

      a) all significant deficiencies in the design or operation of internal
         controls which could adversely affect the registrant's ability to
         record, process, summarize and report financial data and have
         identified for the registrant's auditors any material weaknesses in
         internal controls; and

      b) any fraud, whether or not material, that involves management or other
         employees who have a significant role in the registrant's internal
         controls; and

   6) The registrant's other certifying officers and I have indicated in this
      quarterly report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.


Date: November 19, 2002               By: /s/ Kevin Morano
                                          --------------------------------------
                                              Kevin Morano
                                              Chief Financial Officer


                                      - 1 -
<PAGE>

                                  EXHIBIT INDEX

10.1  Employment Agreement dated as of July 1, 2001 between the Company and Sagi
      Genger

10.2  Pledge Agreement dated as of June 1, 2002 between the Company and Sagi
      Genger

10.3  Letter Agreement dated as of October 22, 2002 between the Company and
      Coherent, Inc., relating to the Promissory Note, dated as of April 30,
      2001.

10.4  Second Amendment to Sublease, dated as of October 21, 2002, between the
      Company and Coherent, Inc.

10.5  Termination of Consulting Agreement, dated November 8, 2002, from Thomas
      G. Hardy to the Company.

10.6  Letter Agreement dated November 19, 2002 between the Company and Bank
      Hapoalim B.M.


                                      - 2 -
<PAGE>