In Re Lumenis Ltd. Securities Litigation 02-CV-1989 -Consolidated

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In Re Lumenis Ltd. Securities Litigation 02-CV-1989 -Consolidated Powered By Docstoc
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           Jeffrey M. Haber (JH-1 738)                                                            P
                                                                                                       9 ,
           Abraham I. Katsman (AK-7306)
           10 East 40° Street, 22nd Floor
           New York, NY 10016
           Tel: (212) 779-1414

           GLANCY & BINKOW LLP
           Lionel Z. Glancy
          Neal A. Dubiinsky
          Claudia J. Bugh

          1801 Avenue of the Stars , Suite 311
          Los Angeles, CA 90067
          Tel : (310) 201-9150

          Lead Counsel for Plaintiffs and the Class

                                      UNITED STATES DISTRICT COURT
                                     SOUTHERN DISTRICT OF NEW YORK

           IN RE: LUMENTS, LTD.                             )    MASTER FILE NO.: 02-CV- 1989 (DAB)
           SECT.,JRITIES LITIGATION                         )

           This Document Relates to:                       )
           All Actions                                     )


                  Lead Plaintiffs, Thomas W. Ptuter FBO Stonehedge Securities LLC, Efraina Zweeker, . .

          and Jacob Caspi, individually and on behalf of all other persons similarly situated by and through

          their attorneys, allege upon the investigation of counsel, which included, inter        a review of

          relevant public filings made by Lumenis Ltd. ("Lu menis " or the "Company") with the Securities

          and Exchange Commission (the "SEC"), as well as teleconferences, press releases, news articles,

          analyst reports, and media reports concerning the Company. Plaintiffs' investigation also

          included interviews with former employees of the Company and distributors of the Company's
 products and filings (including a sworn declaration) in this Court by Defendant Asif Adii, former

 Chief Financial Officer of Lumenis. Furthennore, this Complaint is based upon personal

 knowledge as to the named plaintiffs' own acts, and upon information and belief as to all other

 matters, based upon the aforementioned investigation.

                                      SUMMARY OF ACTION

        I.      Lead Plaintiffs bring this action as a class action on behalf of all persons, other

than Defendants, who purchased or otherwise acquired Lumenis securities [luring the period

beginning October 2, 2000, through May 16, 2002, inclusive (the "Class Period"), to recover

damages caused by Defendants' violations of the federal securities laws.

        2.      During the Class Period, Defendants engaged in fraudulent accounting practices,

including, but not limited to, improper revenue recognition, channel stuffing, `Found-tripping",

improper manipulation of accounts for bad debt and inventory, short shipments, and improper

write-offs. Defendants used these improper accounting practices to inflate Lumenis's financial

results, resulting in the artificial inflation of its stock price. The use of these fraudulent practices

rendered the Company's statements of actual and projected financial results materially false and

misleading. Defendants then used the artificially inflated stock as currency in a major

acquisition; used the acquisition to hide financial problems; and discounted and disputed

marketplace rumors about Company operations even as they knew it was being investigated by

the SEC and that its distributors had been contacted by the SEC. Additionally, even after

announcing in a press release that it was subject to an SEC informal inquiry, the Company

continued to hide the fact that it had been aware of the SEC inquiry and had been providing

information to the SEC for several weeks. Further, for months prior to the investigation,


     Defendants were knowingly and/or recklessly engaging in fraudulent accounting practices, as has

     been confirmed by the Company's former Chief Financial O fficer, Defendant Asif AdiI and


               3.      On February 28, 2002, in a conference call, the Company revealed the facts

     concerning the SEC inquiry. These revelations also made in a press release had a material effect

     on the price of Lumenis stock, causing the stock to fall 30% in one day, and more than 69% from

    its Class Period high, and causing plaintiffs to suffer damages. The Company downplayed the

    importance of the SEC probe. Now under the watchful eye of the SEC, Defendants were not able

    to engage in the same fraudulent accounting practices as before on which Defendants had relied

    to create the illusion of financial success. On May 7, 2002, the Company announced that it

    would badly miss earnings projections for Q1 2002. The already depressed stock plunged over

    50% on the news to $3.30 per share, on volume 15 times its daily average . Defendants

    responded with false reassurances of expected profitability, which caused the stock price to

    temporarily recover. On May 16, 2002, however, the SEC announced that it was raising the level

    of its inquiry to a formal investigation of the Company and its accounting practices. The stock

    price dropped 22% on the news. It has never recovered, and currently trades at approximately

    $1.25 per share.

                               -      JURISDICTION AND VENUE

           4.       The claims asserted herein arise under and pursuant to Sections I4(b) and 20(a) of

    the Exchange Act [15 U.S.C. 11 7 8j (b) and 78t(a)] and Rule Iob-5 promulgated under Section

    10 b) by the SEC [17 C.F.R. § 240.IOb-5].

s       y   '    A

                        5.      This Court has jurisdiction over the subject matter of this action pursuant to 28

                U.S,C.1j^J 1331 and 1337 and Section 27 of the Exchange Act [15 U.S,C. § 78aa].

                        6.      Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

                28 U.S.C. 1391(b). Many of the acts and practices complained of herein occurred in substantial

                part in this District . Additionally, Lumenis maintains an office in this District. In connection

                with the acts alleged in this Complaint, Defendants, directly or indirectly, used the means and

                instrumentalities of interstate commerce, including, but not limited to, the mails, interstate

                telephone communications and the facilities of the national securities markets.


                        7.      In an Order dated June 17, 2003, this Court consolidated the then-pending related

                actions for all purposes, and appointed Thomas W, Prater FBO Stonehedge Securities LLC,

                Efraim Zwecker, and Jacob Caspi as Lead Plaintiffs_ Lead Plaintiffs purchased Lumenis

                securities as set forth in the certifications submitted with their lead plaintiff motion, and were

                damaged thereby.

                       8.      Defendant Lumenis is an Israeli corporation with its principal offices at the

                Yokneam Industrial Park, Yokneam 20692, Israel. The Company also maintains a U.S.-based

                office located at 375 Park Avenue, 11th Floor, New York, New York 10152. Lumenis,

            formerly known as ESC Medical Systems Ltd. {"ESC ), designs, manufactures and markets a

            range of pulsed light and laser-based systems for the aesthetic surgical, ophthalmic and medical

            communities. The Company also develops, manufactures and markets medical devices utilizing

            lasers and proprietary intense pulsed light technology for non-invasive hair removal, treatment of

b1    n

      varicose veins and other benign vascular lesions, as well as other clinical applications such as

      ophthalmic and dental.

                9.      Defendants listed below served, at all times relevant to this Complaint, as senior

      officers and/or directors of Lumenis:

                        a.     Yacha Sutton ("Sutton"), President and Chief Executive Officer;

                        b.     Sagi Genger ("S. Genger"), Chief Financial Officer and Chief Operating


                        e.     Asif Adil ("Adil"), Executive Vice-President for Business Development,

     and for part of 2001, Chief Financial Officer;

                        d.     Aric Genger ("A.. Genger"), Director and Vice Chairman of the Board of

     Directors since July 16, 2001, Controlling Shareholder ofLumenis and father of S. Genger; and

                        e.     Jacob Frenkel ("Frenkel"), Chairman of the Board of Directors.

             10.        Defendants Sutton, S. Genger, Adil, and Frenkel are sometimes herein referred to

     as the "Management Defendants." By reason of their management positions and responsibilities

     and/or stock holdings during the time relevant to this Complaint, the Management Defendants

     were "controlling persons" of Lumenis within the meaning of Section 20 of the Exchange Act,

     and had the power and influence to control Lumenis and exercised such control to cause the

     Company to engage in the violations and improper practices complained of herein. The

     Management Defendants, due to their positions as officers and/or directors of Lumens, had

     access to adverse, non-public information about Lurnenis and acted to conceal and misrepresent

     such material information in violation of their duties and responsibilities under the federal

     sectuities laws.


              1I.    It is appropriate to treat the Management Defendants as a group for pleading

      purposes and to presume that the false, misleading, and incomplete information conveyed in the

      Company's public filings, press releases, and other publications as alleged herein are the

      collective actions of the narrowly-defined group of defendants identified above. Each of the

     above officers and directors of Lumenis, by virtue of their high-level positions with the

     Company, directly participated in the management of the Company, was directly involved in the

     day-to-day operations ofthe Company at the highest levels and was privy to confidential

     proprietary information concerning the Company and its business , operations, products, growth,

     financial statements, and financial condition, as alleged herein. These defendants were involved

     in drafting, producing, reviewing and/or disseminating the false and misleading statements and

     information alleged herein, were aware or recklessly disregarded that the false and misleading

     statements were being issued regarding the Company, and approved or ratified these statements,

     in violation of the federal securities laws.

             12.     As officers, directors , and controlling persons of a publicly-held company, whose

     common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the

     NASDAQ National Market System (the "NASDAQ"), and governed by the provisions of the

     federal seem -ides laws, Defendants had a duty to disseminate promptly, accurate and truthful

     inforcnation with respect to the Company's financial condition and performance, growth,

     operations, financial statements, business, products, markets, management, earnings and present

     and future business prospects, and to correct any previously- issued statements that had become

     materially misleading or untrue, so that the market price of the Company's publicly-traded

     securities would he based upon truthful and accurate information. Defendants'


         misrepresentations and omissions during the Class Period violated these specific requirements

         and obligations. Defendants participated in the drafting, preparation, and/or approval of the

        various public shareholder and investor reports and other communications complained of herein

        and were aware of, or recklessly disregarded, the misstatements contained therein and omissions

        therefrom, and were aware of their materially false and misleading nature. Because of their

        directorship and/or executive and managerial positions with Lurnenis, each of the Defendants had

        access to the adverse, undisclosed information about Lumenis's business prospects and financial

        condition and performance as particularized herein and knew (or recklessly disregarded) that

        these adverse facts rendered the positive representations made by or about Lumenis and its

        business issued or adopted by the Company materially false and misleading.

                13.     Defendants, because of their positions of control and authority as officers and/or

        directors of the Company, were able to and did control the content of the various SEC filings,

        press releases and other public statements pertaining to the Company during the Class Period.

        Each Defendant was provided with copies of the documents alleged herein to be misleading prior

        to or shortly after their issuance and/or had the ab ility and/or opportunity to prevent their

        issuance or cause them to be corrected. Accordingly, each Defendant is responsible for the

        accuracy of the public reports and releases detailed herein and is, therefore, primarily and/or

        secondarily liable for the representations contained therein.

                14,    Each of the Management Defendants is liable as a participant in a fraudulent

    scheme and course of business that operated as a fraud or deceit on purchasers of Lumenis

    common stock by disseminating materially false and misleading statements and/or concealing

    material adverse facts. The scheme: (i) deceived the investing public regarding Lumenis's

 business, finances, financial statements and the intrinsic value of Lumenis common stock, and

 (ii) caused plaintiffs and other members of the Class to purchase or otherwise acquire Lurnenis

 securities at artificially inflated prices.


         15.     Lead Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

 Procedure 23(a) and (b)(3) on behalf of all those who purchased or otherwise acquired the

 securities of Lutnenis during the Class Period, and who suffered damages thereby (the "Class").

Excluded from the Class are Defendants , members of the immediate families of the Individual

Defendants , officers and directors of the Company, any affiliate or subsidiary of the Company

and the senior officers and directors of the affiliate or subsidiary, or any entity in which any

excluded person has a controlling interest, and the legal representatives, heirs, successors, and

assigns of any excluded person.

        16.      The members of the Class are so numerous that joinder of all members is

impracticable, During the Class Period, Lumenis had in excess of 27 million shares of common

stock outstanding- While the exact number of Class members is unlmo-,N        to Lead Plaintiffs at

this time and can only be ascertained through appropriate discovery, Lead Plaintiffs believe that

there are hundreds, if not thousands, of members in the proposed Class. Record owners and

other members of the Class may be identified from records maintained by Lumenis or its transfer

agent and may be notified of the pendency of this action by mail, using the form of notice similar

to that customarily used in securities class actions.
         17,       Lead Plaintiffs' claims are typical of the claims of the members of the Class as all

 members of the Class are similarly affected by Defendants' wrongfijl conduct in violation of the

 federal law that is complained of herein,

         18.      Lead P laintiffs will fairly and adequately protect the interests of the members of

 the Class and have retained counsel competent and experienced in class and securities litigation.

         19,      Conunon questions of law and fact exist as to all members          the Class and

predominate over any questions solely affecting individual members of the Class. Among the

 questions of law and fact common to the Class are:

                  a.      whether the federal securities laws were violated by Defendants' acts as

alleged herein;

                  b.      whether statements made by Defendants to the investing public during the

Class Period misrepresented material facts about the business, operations, and financial

statements of Lutnenis; and

                  c.      to what extent the members of the Class have sustained damages and the

proper measure of damages.

        20.       A class action is superior to all other available methods for the fair said efficient

adjudication of this controversy since joinder of all members is impracticable , Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

                               SUMMARY OF THE ALLEGATIONS

         21.      In May, 1999, Defendant Arie Genger engineered a hostile takeover of Lumenis's

 predecessor, ESC Medical Systems, Ltd. {ESC"), a producer of medical and cosmetic laser

 systems. He promptly installed his 27-year of son as Chief Financial Officer, hired Defendant

 Sutton as Chief Executive Officer, stocked the Board of Directors with his associates, and

 granted hundreds of thousands of options to himself, his son, and his newly-installed officers and


         22.     ESC had been a company fraught with problems, including, among other things

 poor product reliability, a raft of product liability and physician lawsuits, increasing inventories,

 and poor collections on accounts receivable. Its stock traded undramatically in the $4-$6 per

 share range for most of 1999.

        23.      Beginning at the end of 1999, under A. Genger's now consolidated control, the

Company began to show dramatically improved financial results, launching the stock price on a

steady climb. However, as described below, these results were more the product of improper

practices and accounting manipulations than actual business success. The Company showed

improved (albeit illusory) earnings by, inter alia, recognizing revenues on sham sales, and

"channel-stuffing" by loading distributors with product, but having undisclosed side agreements

with the distributors granting unlimited return rights and not requiring payment until - if ever --

the distributors "sold-through" the products to customers.

        24,     Defendants were welt-aware of their financial misrepresentations. Defendant Asif

Adil has filed a sworn declaration in a federal employment action against the Company, in which

he states that he learned of several of these illegal Luinenis practices shortly after his hiring as


     Executive Vice President in July, 2000. His protests to S. Genger fell on deaf ears, however. In

     fact, Adil states that he learned that S. Genger was misrepresenting the financial information he

     was providing to the Company' s auditors , with the knowledge of Defendant CEO Sutton.

            25.     The Company' s illusory revenues and earnings could not be totally hidden

     forever; ESC 's accounts receivable began to rise and to age, as the Company was not being paid

     for its channel-stuffed product or sham sales. Yet, the Company was not adequately reserving for

     doubtful accounts or writing off bad debt. In addition, the Company continued to carry on its

    books excess inventory and other items that should have been written off.

            26.     Defendants, however, had a plan for "cleansing" their books of these looming

    liabilities: Defendants continued to release fraudulent financial information in order to keep the

    stock price rising, and then leveraged the artificially-inflated stock by using it as currency in an

    acquisition . In early 2041, the Company bought CMG, using cash and over $100 million of

    inflated stock (then trading at approximately $21 per share). Although claiming - but vastly

    over-estimating - that synergies would ensue from the acquisition, Defendants had an additional

    motive for the acquisition: to camouflage the Company's wide assortment of long-needed write-

    offs as acquisition-related expenses in a single ` Big Bath," cleansing ESCs books of these

    expenses and liabilities; and to create other "cookiejar" accruals and provisions, which could be

    reversed in later quarters to help the Company meet its financial projections.

            27.    Of course, Defendants had an additional motive : The announcement of the CMG

    acquisition and its accompanying hype about (never-to-i aterialize) synergies sent ESC (now

    named L. uzienis) stock to levels over $30 per share, making Defendant's options worth lens of

    millions of dollars. Defendant A. Genger, in fact, promptly sold off $33 million of his stock.

 With the high stock price, the Company could raise substantial, much-needed cash through

 options exercises, and were preparing for a future secondary offering.

         28.    After the merger, in July, 2001, the Company appointed Adil Chief Financial

 Officer. In this role, he learned the extent of the fraudulent activity behind the Company's

 apparent financial success. Over the following weeks, he reported his finding to Defendants

 Sutton and S. Genger. When they refused to heed his protests, he reported his findings to

Defendant Frenkel and the Lumenis Board. The Company reacted by stripping him of his CFO

and management positions, and dispatching him to India.

        29.     Defendants continued their illegal accounting practices, even adding new

fraudulent transactions to their repertoire, such as a self-dealing "sale" to a subsidiary in order to

meet continued public projections of record revenues, reversing accruals, and reversing

allowances for bad debt - even though there had been no improvement in collections.

        30.     Ultimately, these practices drew the attention of the SEC. The Company

disclosed that it was the subject of an informal inquiry in January 2002, news which dropped the

stock price 50% in one day. Now under regulatory scrutiny, Defendants could no longer engage

in rampant accounting misconduct, the secret to Lumenis ' s illusion of success and high-flying

stock price . In May 2002 when the Company disclosed that the SEC inquiry had been raised to a

formal SEC investigation, the stock dropped another 30%. Lumens stock dropped from its $30-

plus level in the summer of 2001 to approximately $ 3.50, 'scarcely nine months later, in May of


        31.    Lead Plaintiffs, and other class members who purchased Lumens stock at those

lofty, fraudulently-inflated prices, have been injured by Defendants' conduct.

                                  CONFIDENTIAL WITNESSES

            32.   Numerous former employees of Lumenis andlor its distributors have informed

Plaintiffs that Defendants caused the Company to report false financial results during the Class

Period through various improper accounting techniques. These witnesses spoke to Lead

Plaintiffs' counsel on a confidential basis and are referred to herein as confidential witnesses I-

 11 ("CW_"). These persons include:

                  a.    CW1 is a former executive who worked at Lurnenis from May 2001

through the Class Period. CWI has personal knowledge of. the SEC inquiry and investigation,

various accounting improprieties including improper revenue recognition, the problematic

integration of Coherent into Lumenis, and other matters relevant to the allegations alleged in this


                  h.    CW2 is a former sales coordinator who worked at Sun Medical, a former

distributor of ESC/Luanenis, from June 1998 through April 2003. In that position, CW2 was

responsible for providing support to Greg Sellards, the CEO of Sun Medical, and Doug Archer,

Sun Medical's President, and assisting the sales representatives that sold ESC/Lumenis medical

lasers. CW2 has personal knowledge of Lumenis' s sales practices - e.g., quotas and channel


                  c.    CW3 is a former senior executive who worked at Premier Medical, a

former distributor of Lumenis and its predecessors. Premier Medical acted as a distributor for

ESC/Lumenis prior to the Class Period and throughout 2000 and early2001. CW2 was

responsible for, inter alia, the distribution of merchandise and the negotiation of distribution

 agreements , including those with Lumenis. CW3 has personal knowledge of Lumenis' s sales

 practices - e... quotas and channel stuffing.

                d.         CW4 is former sales representative who worked at Eclipse Medical, a

 distributor of Lumenis, from prior to the start of the Class Period through May 2001. In that

position, CW4 was responsible for selling Lumenis products such as the Epilight, Vasculight,

 C02 Lasers, and the Urbium Lasers. CW4 has personal knowledge of Luinenis' s sales practices

- e4.. channel stuffing,

                e.      CW5 is a former director of sales for Eclipse Medical, from prior to the

start of the Class Period through July 2000. In that position, CW5 was responsible for selling

Lumens products. CW5 has personal knowledge of Lumenis' s sales practices - ,ems., channel


                f.     CW6 is a former support manager at Eclipse Medical , from prior to the

start of the Class Period through December 2001. in that position , CW6 was responsible for

quality control testing and shipment of Lumens products to the end user. CWG has personal

knowledge of Lumenis ' s sales practices - e&., channel stuffing.

               g.      CW7 is a former credit and collections analyst for Lumenis from

November 2001 through March 2002. In that position, CW7 was responsible for the review of

delinquent accounts, investigation of complaints, verification of charges, and preparation of

reports. CW7 has personal knowledge of many of the matters alleged in this Complaint, such ats

the SEC inquiry and investigation and accounting improprrieties.

               h.      CW8 is a former materials manager, who worked for Luinenis during the

Class Period. In that position, CWS managed parts inventory and system level inventory. CW8

 has personal knowledge of many matters alleged in the Complaint, such as the integration of

 CMG into Luinenis, and accounting techniques related to Lunienis's accounts receivable and

 inventory tracking.

                 i.      CW9 worked as a controller for Lumenis during the Class Period.

                 j.      CW10 is a former Lumenis Senior Manufacturing Engineer who traveled

 extensively to its Company's various facilities and is familiar with the manufacture, quality, and

 sales practices involving Luinenis products.

                 k.      CW 11 is a former administrative assistant for Lumenis. try that position,

 CW I1 was responsible for pulling documents and making copies for the "Lume nis SEC Project."

                                     FACTUAL BACKGROUND

        33.     Lumenis is an Israeli company that develops, manufactures and markets medical

devices utilizing lasers and proprietary intense pulsed light technology for non-invasive treatment

of varicose veins and other benign vascular lesions, as well as other clinical applications. The

Company was formerly known as ESC Medical Systems.

        34.     As described in detail below, the Company engaged in systematic manipu lation of

its financials in order to artificially inflate its stock price. This manipulation utilized several

forms of improper revenue recognition and accounting involving bad debts, write-offs, non-

performing accounts receivables , " channel stuffing", and "sales" to related parties.

Imp ro p er Revenue Recognition

        I.      "Channel Stuffing"

       35-      Among the methods used by the Company to inflate reported revenue was

"channel stuffing." The Company would ship excessive quantities of product to distributors, and

 recognize revenue upon shipment--especially at the end of each quarter. In fact, however, the

 Company would not have any real expectation for receiving timely payment for any of those

 "sales," or even that the distributor would be able to sell that excess product in the foreseeable

 future. The Company would not demand timely payment from the distributors, and/or would

 allow, without conditions, return privileges. These methods have been the subject of the SEC's

investigation into the Company financials.

        36.     The practice of "channel stuffing" was rampant. Lumenis employed similar

agreements with distributors all across the United States and abroad. For example, CWI heard

that the Company's channel stuffed distributors included, among others, Eclipse, Aculight, its

Spanish distributor, and Canadian distributor, Coherent-AMT. Other distributors included

Premier Medical and Sun Medical.

        37_     According to CW3, Lumens loaded Premier Medical, an Ohio-based distributor

of Lumenis surgical laser systems for hospitals, with excessive inventory on a regular basis at the

end of each quarter, especially during 2000-2001. CW3 said that there was a verbal agreement

between Premier Medical and Lumenis wherein the former was never required to pay for the

excess inventory--especially not within the 30-day period listed on the "purchase orders."

Although the purchase orders on these units ostensibly required payment within 30 days, there

was effectively a "sell through" arrangement whereby no payment was required for any units

until Premier Medical sold them to an end user. According to CW3, Lumenis would "ask"

Premier Medical at the end of every quarter to take one or two extra units, even though both sides

knew that Premier Medical had more inventory than it needed. As an incentive for Premier

Medical to agree to the arrangement, Lumenis would offer discounts of 5-10%, and would never

 press for payment for the units, instead offering extended payment terms on its inventory. As

 additional " incentive ", CW3 was told on several occasions that if Premier Medical did not "help

them out," Lumenis would strip Premier Medical of its distributorship. Moreover, according to

CW2, Lunienis granted Premier Medical the right to return unsold units for full credit. CW3

estimates that by early 2002, Premier Medical was holding approximately $800,000 of Lumenis

inventory, which was all ultimately returned to the Company.

        38.     CW5 also stated that Lumenis would ship excess product to Eclipse Medical--

many times during periods with no orders --without requiring payment . CW4 confirmed that

Lumenis stuffed the channels for Eclipse Medical: "We always had a bunch of equipment in the

warehouse with no purchase orders. We weren't supposed to be a stocking distributor but we

were, and we would always have to get rid of [i.e., sell] the inventory that we weren't suppose to

have. Tom O'Brien [Eclipse' s President] would tell its that they received special pricing for the

equipment and so we got extra." On several occasions, CW4 heard both Paul O'Brien [Eclipse's

comptroller] and Tom O' Brien state "Let' s get the equipment from ESC/Lumenis, it is not like

we have to pay for the stuff."

        39.    CW2 said that during 2000 and 2001, Sun Medical routinely took in excess lasers

from ESC/Lumenis at the end of every quarter, and at the end of the year. According to CW2,

the majority of time there were no actual customers . There was an understanding between the

two companies that Sun Medical did not have to pay for the machines until it could make a sale.

Doug Archer, Sun Medical's President, would determine which excess equipment to order so

that Sun Medical could meet the financial quota per the distribution agreement that Sun Medical

was expected to make. According to CW2, it was a very aggressive number, and the result was

 that Sun Medical would "demo" all of the excess lasers for doctors and hospitals in a desperate

 attempt to sell lasers and meet the quota. CW2 said that ESC promised to buy back any unsold

 equipment. By 2001, there was $400,000.00 worth of such ESC lasers in Sun Medical's


        40.     The channel stuffing described by plaintiffs' confidential witnesses is further

evidenced by a comparison of Lumenis's stated revenue recognition policy before and after the

SEC commenced its inquiry into the Company's relationship with its distributors, In the 2001

 1 Q-K (filed with the SEC on April 1, 2002), Lumenis revised its revenue recognition policy,

substantially modifying its prior policy of recording revenue upon shipment. The following

comparison of Lumenis's 2000 revenue recognition policy with its reprised 2001 policy, which

switched from recognizing revenue upon shipment to recognition upon delivery and persuasive

existence of a an agreement, illustrates the point:

        Lumenis' 2000 Form 10-R states, in pertinent part:

               Revenue is recognized upon shipment of products provided that
               there are no significant uncertainties regarding the customers
               acceptance and the collectibility is probable.... fEmphasis added.]

       Lunlenis' 2001 Form 10-R, states, in pertinent part:

               Revenues from product sales are recognized when delivery has
               occurred, persuasive evidence of an agreement exists, the fee is
               fixed or determinable and collectibility is probable.... [Emphasis

       41.     Moreover, beginning in 2002, with the new revenue recognition policy in place,

Luznenis had substantial difficulty providing Wall Street with revenue guidance. This fact serves

 as persuasive evidence that prior to the SEC's inquiry, revenue was inflated based on improper

 revenue recognition at the time of shipment.

        2.      Bad/Debt/Non-pe rforming Accounts Receivable

        42.     According to CW 7, management at the Company indicated that pal of the SEC's

 inquiry "seemed to focus on the fact that there were non-performing accounts receivables which

had been carried on the Coherent/Lumenis books," and were not being written off as bad debt.

CW7 noted that the Company was not promptly recording credit memos , instead holding them

back, thereby not properly recording a write-off of bad debt. By not properly recording a write-

off of bad debt, Defendants were able to overstate the Company's accounts receivable, This

falsely conveyed the message to investors that the receivable would be convertible to cash flow.

CW7 stated that the Company 's management did not want to write off the bad debt because it

would have decreased Lumenis' profitability . CW7 reported having encountered resistance from

the Company's management in writing off any accounts receivable that was non-performing and

should more accurately be categorized as bad debt.

        43.    CW7 said that the Company's senior management knew first-hand about the bad

debt/aging accounts receivable problem because spread sheets were customarily and ordinarily

prepared and provided to management detailing the extent of the problem.

       44.     CW8 stated that the Company's accounts receivables increased following the

merger of the accounting systems from Coherent and ESC. CW8 described it as "a mess"

brought on as a by-product of the integration of operations to the West Coast, but was told by a

supervisor, "don't worry about it."

i.   .n

                45.    CW9 confirmed that there were massive accounts receivables , which the

       Company had inherited along with certain acquisitions. According to CW9, a printout of these

      receivables was over 2 inches thick. CW9 said that attempts to collect on them failed due to lack

      of attention from management in dealing with outstanding receivables, which had been on the

      books beyond the time when they should have been written off as bad debt.

                3.     Manipulation of Allowance for Doubtful Accounts

                46.    Another source of "income" for the Company was receiving parts of an accrual

      allowance into income. Creating accruals and later reversing them into income is sometimes

      referred to as "cookie jar" accruals. The company maintains the "cookie jar" of loss accruals.

      Then, in subsequent periods, when the company needs additional gains/income to offset a

      shortfall in income, it reaches into the cookie jar and reverses the accrual, taking it back into

      income. Based on data from the Company's SEC filings, the Company shrunk its allowance--

      even while there was no improvement in collections, and total receivables continued to mount)--

     as illustrated below.

          Allowance For Doubtful        Q^ 2001             Q3 2001          Q4 2001       QI 2002

          Trade Receivables             117,254             121,696          120,567        131,184
          Allowance                     (25,281)            (26,315)         (19,744)      (17,296)

          Net Trade Receivables         91,873              95,381           100, 823      113,888

          Allowance Percent             21.6%               21 . 6%          16.3%             a

               47.    As the foregoing chart demonstrates , by 4Q 2001, Defendants began reversing the

     Allowance accrual into income. In the fourth quarter 2001, earnings conference call, Defendant

 S. Genger admitted that the prior Allowance (merely from the prior two quarters) was now

 "creating " gains for Luinenis:

                There was a $3.8 million gain for reversal - - a provision for
                receivables from discontinued distributors related to the Coherent

        48.     In the first quarter 2002 conference call, Defendants admitted that the Company

benefitted from reversing 2Q 2001 accruals into income. Kevin Morano ("Morano"), Lumenis's

new CFO, stated the following:

                This was offset by $3.3 million in reductions in previously
                provided accruals for items associated with the CMG acquisition.

Although Morane did not specifically state that this additional reduction in "previously provided

accruals" was a reversal of the Allowance, the foregoing chart shows that the Allowance was

inexplicably reduced again in I Q 2002, to a level approximately 40% lower than two quarters

prior-- all at a time when net receivables had increased by over 15%.

        4.      Related Party "sales"--Aculxght Ltd.

        49.     In order to meet the Company's reassurances of the 4Q 2001 financial projections

(Lumenis had reiterated its expectation of "record fourth quarter" results ofEPS of $0.41 as late

as December.31, 2001), Defendants also manipulated the Company's revenues by counting as a

"sale" existing leases of equipment to its own hair removal products affiliate, Aculight Ltd.

("Acul.ight") (i n addition to the "channel -stuffing" ofAculight discussed above).

        50.    Lumens recognized $4. 8 million in revenue, based on a transaction with

Aculight, a related party, in violation of GAAP. (l( was later revealed by Defendants that the

$6.4 million account receivable had to be restructured with extended payment term.)

         51.    Based on Defendants ' glowing reports of the Company's hair removal business,

 on October 22, 2001, CIBC World Markets, issued an Equity Researob report that estimated

 Lumens hair removal revenue in 4Q 2001 would be $29 million. In reality, however, demand

 was far from strong and 4Q 2001 hair removal revenue - without the $4.8 million revenue from

 Aculiglit - would only have been $8.2 million, well-below the $29 million estimated by analysts.

        5.      Booking of Sham "Sales"

        52.     CWI recalls being privy during most of the Class Period to multiple and repeated

end-of-quarter sales conference calls which were headed by Defendant S. Genger in New York.

Other senior executives participated in these marathon calls. CW1 recalled how Defendant S.

Genger, in many of these conference calls, would approve open credit terms for deals with very

little to no assurance of payment in the future. Thus, the likely conversion into a bona fide

payment was not readily apparent during these end-of-quarter calls. CWI explained that

although the standard operational procedure was to withhold approval until receipt of the

prerequisite backup items (e.g , signed purchase orders, lease approvals, bank deposits,

confirmed checks), on numerous occasions, S. Genger would freely allow exceptions on these

calls and approve sales for shipment, Genger freely granted approval this way in order to

increase the recognized revenue levels for the quarter. These tactics figured prominently in the

Company's reported quarterly sales figures since greater than 50 °%Q of the sales volume was

approved, booked and recorded during the last two weeks of any given quarter.

        53_    CW1 also stated, on the problem of sales that were improperly booked , that there

was an email from the Controller in Europe, dated May 23, 2002, in which two dubious deals

were detailed , both relating to Q1 2002. The Controller referred to them as "potential for sale

 reversal" sales, The first was for a $400,000 "sale" to a Saudi Arabian company, Alamoudi in

 which the purchase order specified "hold delivery" , but the sale was booked and recognized. The

second was for the 240,000 Euros sale to the Company's Russian distributor, Rosslyn Medical

Ltd., in Which payment was not assured, product was held, and the sale should not have been


        6.      Short Shipments)"Ileaclless" Sales

        54.     Concerning improperly recognized sales, CWI stated that, in the first two

quarters of 2002, about $5 million of lasers were sent without their "heads ". "Heads" is a

technical term for a vital component on the machine, and if it was missing, then the machine

would not be functional for the customers . CW I stated, "it was like shipping a car without its

wheels. " The Company did this because, although there were quality problems with the heads,

Defendants, regardless, wanted to ship and book the sales. When doctors complained that no

heads were included in their shipments , the Company would explain the omission away as a

mere accident . CW1, however, stated that this happened numerous times, and was deliberately

done by Lumenis.

       55.     CWIO recounted how amazed employees at the Bothell, Washington location

were when systems started to be shipped out without their accompanying "heads." CWIO also

explained that absent a head , the equipment was missing a major portion of its full value. CWIO

said that these employees were forced to sell things that were not sales worthy.

       7.      Manipulation of Accou nting For Inventory

       56.     Defendants violated GAAP (SFAC No. 11120-12 1), by classifying demonstration

equipment acquired from CMG as inventory on Lumenis's balance sheet rather than as finished

 goods used in operations ("F.G.s"), the balance sheet classification used by Lumenis for

 demonstration equipment. This was materially false and misleading because inventory is an asset

 held for sale, whereas F.G. is a wasting asset € Bing depreciated over 3 years as described in the

Company's 2001 10-K see page F-12). The following chart (derived from the Company's 2001

Form 10-K and 3Q 2001 Form 10-Q, filed November 14, 2001) illustrates that the year end $9

million adjustment was added to the inventory balance sheet account and not the F. G. balance

sheet account.

                           9130101                   12/31/01                Change
 Inventory                 71,381                    83,614                  12,233

 F.G.                      9,860                     9,180                   (680)
 Total                     81.241                    92,794                  11,553

Allegations Against Lu menis by former CIP0

         57.     As described below, Defendant Adil, former CFO of Lunienis, has confirmed the

accounting allegations of this Complaint in the sworn declaration he filed in this Court in an

employment-related lawsuit against the Company.

         58.     Adil joined Lumenis as an Executive Vice President ("EVP") on July 5, 2000.

Shortly thereafter, he discovered numerous accounting irregularities , including carrying

unwarranted high receivables, underfunding accnials, booking write-offs as revenue, and

handling excessive product returns . He first reported his findings to S. Genger, then the

Company's CFO, but S. Genger ignored his findings. Subsequently, Adil learned that the

Company was engaging i n these improper accounting practices at the direction of S. Genger,

 who, with Defendant Sutton's knowledge, had concealed material information from the

 Company's outside auditors,

         59.    Adil subsequently informed Sutton of his findings , requesting that the practices be

 corrected. According to Adil, Sutton declined to act on this request.

         60.    On July 20, 2001, Adil was appointed acting CFO, while continuing to serve as


        61.     Once serving as CFO, Adil learned of additional financial misconduct, including

lack of full disclosure to investors regarding undisclosed insider transactions, undisclosed side

agreements between the Company and its primary lender, mischaractefizations of sales to make

up for earnings shortfalls, and the booking of apparently non-existent sales.

        62.     Adil reported these irregularities to the Liunenis Board in November 2001.

        63.     Within a few weeks, Sutton removed Adif from his CFO position. Adil repeated

his concerns to Sutton regarding Luinenis's GAA.P violations. On January 3, 2002, Adil was

also relieved of his EVP position and dispatched to India to work as a. sales representative.

According to Adil, Defendant S. Genger threatened to fire him and to ruin his reputation in the

business world if he continued to object to Lumenis's financial practices.

The C oherent Merrger

        64.    On February 2, 2000, and on February 29, 2000, ESC issued press releases

announcing FDA approval of its new intense Pulsed Light (IPL' ) technology for hair removal

treatment, touting the "multi-billion" dollar market potential for hair removal in the U.S. alone,

and announcing that hair removal treatment was the "cornerstone" of the Company's growth

strategy. As Defendants later learned, this growth strategy would fail, leading Lurnenis to seek

growth and new markets through its merger with Coherent the following year.

        65.         Following the February 2000 announcements, ESC began to tout its hair removal

line of products, Thus, for example, on March 13, 2000, Lumenis issued the following release:

                "ESC Medical continues to improve on the superiority of IPL
                technology," said Yacha Sutton, President and CEO of ESC
                Medical Systems. "In the past, our customers have benefitted from
                the high efficacy and excellent safety performance of our
                technology . Now we have demonstrated that these products can be
                made compact and affordable, without compromising any of the
                factors that gave IPL the largest number of light-based aesthetic
                procedure devices in the world." [Emphasis added.]

        6G.     At the same time as ESC was promoting its hair removal products as the

"cornerstone" of its growth strategy, the Company was getting sued for product liability and

misrepresentation involving its hair removal equipment and other products. The,following

excerpts from ESC's 1999 Form 10-K, filed with the SEC on March 30, 2000 mentions two

such litigations:


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

               C (3) On May 10, 1999, the Company and a former director and
               officer were named as Defendants in an action filed in Tel-Aviv

                 Court by H.K. Hashalom Ltd. in connection with the sale of the
                 Company's EpiLight systems. H.K. Hashalom is seeking monetary
                 damages in the amount of $2,500 but has reserved the right to
                 increase such amount as well as a declaratory judgment that, inter
                 alia, the Company indemnify it for certain costs and expenses
                 arising out of the transaction between the parties. On July 15,
                 1999, the Defendants fled'a Statement of Defense. The. case has
                 not yet been set for a first hearing. No accrual has been recorded in
                 the financial statements for this matter.

           67.   By the time ESC announced the impending acquisition of CMG, its litigation

troubles were significant. Defendants were desperate to quickly acquire another company with a

respected industry name, significant revenue generating capabilities, and better technology.

CMG, with its thirty years of industry experience and annual revenue of $205,287,000 for year

ended September 30, 2000, made an attractive target.

           68.   On July 25, 2000, Luznenis announced the creation of Aculight, a new business

enterprise intended to place Lumenis hair removal machines into beauty shops, salons, and spas.

The Company' s revenue model was based on customers paying a down payment on the

machines, and commissions from each use. The customers would receive full training,

marketing support, and medical supervision. Defendant Adil was recruited to lead the Aculight


           69.   On July 26, 2000, ESC issued a press release in which it announced the launch of

the Aculight Program to sell hair removal equipment. to non -physician customers . In the release,

Defendant Sutton discussed the purported growth opportunities this program provided the


                 We are expanding into new markets with our proven technologies
                 to take advantage of new growth opportunities. Just yesterday, we
                 announced the launch of a major new market expansion initiative


                   to commercialize our proprietary Intense Pulsed Light (ML)
                   technology and market it as the AcuLi ht `' Photocosmetic
                   Pro am to beauty salons, cosmeticians , electrolo fists and other
                   professionals who provide hair removal services . We are
                   continuing to invest in the future through our ongoing R &D effort
                   and through a variety of investments in start-up ventures including
                   our dental unit . [Emphasis added.]

           70.     As revealed in the ESL's 3Q 2000 Form I0-Q, filed on November 15, 2000

    launch of the Aculight Program caused ESC to invest heavily in its hair removal inventory:

                   OPERATING ACTIVITIES

                  The increase of inventories is due to pre aration for a si gni ficant
                  increase in sales in the fourthquarter and the manufacture of hair
                  removal machines for the Aculi ht pro gram, Under the Aculight
                  program, machines owned by the Company are placed with
                  operators who are charged per usage fees. [Emphasis added.)

           71.   ^ The Company changed its name to Lumenis after the early 2001 acquisition of

CMG for 5.4 million ESC shares (artificially inflated in value to approximately $21 per share due

to Defendants' financial misrepresentations as confirmed by Defendant Adil in sworn papers

fled in this Court) and approximately $112 million in cash and subordinated notes. The

acquisition, which was announced on February 26, 2001, closed on April 30, 2001. According to

the February 26, 2001 issue of Globes , the acquisition was made possible,by "up to $242 million

in financing to consist of a $100 million six-year term loan to fund the cash portion of the

transaction, a $50 million revolver to fund ongoing working capital needs, and draw down rights

of up to $92 million to refinance the outstanding subordinated convertible notes upon maturity.

The draw down rights are subject to certain operational and indebtedness milestones."

        72.     On February 26, 2001, in a company press release, ESC announced its acquisition

 of Coherent Medical Group and the intent to change its name to Lumenis. The press release

stated, in pertinent part:

                ESC Medical Systems (NASDAQ: ES CM) announced today this is
                has signed a definitive purchase agreement with Coherent, Inc.
                (NASDAQ: CCHR) to acquire the operations of Coherent Medical
                Group (CMG), its medical products division, for case, notes and
                stock plus an earnout of up $25 million. The total consideration,
                excluding the earn-out, is valued at approximately $203 million.

               Following closing of the transaction and subject to shareholder
               approval, ESC will change its name to Lumens, derived from
               lumen, Latin for light. Post transaction, ESC will be a global
               Ieader in the design, manufacture and marketing of light-based
               medical solutions. Combined sales for the two businesses in year
               2000 were approximately $360 million with a focus on aesthetics
               (approx. $180 million), ophthalmic (approx. $70 million), surgical
               (approx. $60 million), and service (approx. $50 million). On a pro
               forma basis (assuming the transaction had been consummated on
               January 1, 2002 and assuming full synergies had been achieved),
               ESC estimates that the transaction would be over $0.60 accretive to
               case EPS in 2001

       73.     Although the CMG transaction created integration problems from the start, as

confirmed by CWI, the February 26' press release reflected how Lurnenis's top officials vied

with each other to heap praises for the deal and camouflage the fact that Defendants were relying

on CMG's acquired assets and product lines to bail ESC out of the looming drop-offs in its sales

and excessive inventory problems:

               "We are pleased to join forces with CMG with its stellar reputation
               in the medical community. We believe that combining its high
               quality products and unparalleled customer service with ESC's
               strong record of product innovation will accelerate the profitable
               growth of the new company and delight our customers ," said Prof.
               Jacob A. Frenkei, Chairman of ESC.

                "We are excited about the opportunities that this transaction with
                create for our customers, shareholders and employees," said Yacha
                Sutton, President and CEO of ESC. "CMG's products and
                distribution assets are highly complementary to ESC. In
                combin ation with our awn, they will create critical mass across our
                various markets to better enable us to maximize our innovative
                R&D pipeline quickly on. a global basis," Mr_ Sutton concluded.
                [Emphasis added.]

        74.     CW I recalled that CMG's average days outstanding on accounts receivable prior

to the merger was approximately 70 days, compared to ESC's approxim ately 110 days. CW 1

stated that the Company's management was not overly concerned about its own accounts

receivable aging, as several potentially questionable sales remained in the "past due" category on

the accounts receivable list for extended periods. CW I stated that CMG product lines were state

of the art and of higher quality than ESC's aesthetic lines. CW1 stated that pre-merger, CMG's

annual revenues were around $200 million and ESC's annual revenues were around $165 million.

The tide shifted radically post-merger so that the precursor ESC product lines accounted for only

about $90 million of Luznenis' annual revenues while the precursor CMG lines accounted for the

balance. CW 1 stated that Coherent's Light Sheer product line was a strong one that was well

accepted in the marketplace and which quickly replaced the inferior hair removal line that ESC

had been marketing. So, rather than providing synergies as promised and represented by

Defendants, the Coherent products instead replaced and made redundant the less competitive

ESC hair removal product lines. CW 1 observed that, in particular, the merger did not provide

the SG&A cost savings promised by the Defendants to investors. For example, cost savings were

not realized in the combined companies' marketing, legal or sales expenses.


                                     SUBSTANTI VE ALLEGATIONS

               75.    On October 2, 2000, the Company pre-announced its financial results for the third

     quarter of 2000. In the press release, Lumenis stated that "based on shipments to date, it expects

    to report third quarter revenues of approximately $37 million, 23% more than the same quarter

    last year." Commenting on the expected results, Sutton stated : "I am pleased that our sales have

    continued to grow through our traditionally weak third quarter. We continue to experience

    strong demand for our products and are optimistic about results."

               76.   On October 24, 2000, the Company announced its operating results for the quarter

    ending September 30, 2000. Lumenis reported the following results in the October 246 press


                      Net revenue for the third quarter 2000 was $37.1 million, 23%
                     more than the same quarter last year. Operating income was $5.3
                     million, or 14.3% of revenues, net income was $4.0 million, and
                     .net earnings per basic and fully diluted share were $0.16 and $0.14
                     respectively. Excluding a one-time charge of $0.4 million in
                     litigation settlement expenses and ESC's dental unit's loss of about
                     $0,6 million, the Company' s earnings per basic and fully diluted
                     share were about $0.20 and $0.17 respectively

            77.      The revenue figure reported in the two October earnings releases were materially

    false and misleading for the reasons alleged in 1135-45, 52-53.

            78.      Sutton 's statement concerning " strong demand" for the Company's products was

    materially false and misleading for the reasons alleged in ¶T 35-45, 52-53.

            79.      On January 2, 2001, the Company pre-announced its financial results for the

    fourth quarter of 2000. In the press release, Lumenis stated that "based on shipments to data, it

    expects to report fourth quarter revenues of approximately $46 million, consistent with major

 Wall Street analyst forecasts," representing "an increase of about 15 % over the same quarter last

 year." Corr    enting on the expected results, Sutton stated: "We are delighted that ESC has

 completed a full year of double digit growth and profitability. Continued growth in sales of our

 core high margin proprietary ]PL technology continued to accelerate our momentum through the

 quarter. We intend to report full results for the fiscal year in February and are optimistic that

 they will meet or exceed analyst expectations."

        80.     The revenue figure reported in the January pre-earnings release was materially

 false and misleading for the reasons alleged in ¶j 35-45, 52-53.

        81.     Sutton's statement concerning "[c]ontinued growth in sales" for the Company's

 III, technology proSlucts was materially false and misleading for the reasons alleged in 1135-45,

 52-53. As the expected revenue figures were based on "sales" achieved through improper

accounting techniques, such as channel stuffing, Sutton knew that the Company would "meet or

exceed analyst expectations."

        82.     On February 26, 2001, the Company announced the acquisition of CMG, as

described above. The February 26" press release emphasized the purported synergies that were

supposed to result from the CMG deal:

               Integration teams are being created to capture the best practices of
               both organizations to maximi7e customer benefits and achieve the
               acquisition synergy objectives.... The overall objective is to
               create a rapid and smooth transition that achieves the acquisition
               goals. of strengthening customer relationships, opening now
               opportunities for employees, and generating superior returns for

       83.     Even CMG's CEO, Dr. Bernard Coui llaud, was taken in by the hoopla. The same

press release quoted his reassuring comments:

                  "We are very pleased to enter into this agreement with ESC
                  Medical. I have been impressed with the actions ofESC's
                  management team over the past eighteen months, The creation of a
                  strong and independent medical business benefits Coherent's
                  employees, customers and stockholders. This combination enables
                  our medical group to grow and prosper, while providing us with an
                  opportunity to participate in its future growth. As a result of.this
                  transaction, our cus(omers will have a greater choice of products
                  and services and our employees better job opportunities."

         84.     Financing for the acquisition was provided by Batik Hapoalim . The loans and

lines of credit required ESC to maintain certain financial covenants, including maintaining

certain EBTI DA ratios. As part of the financing, ESC granted Bank Hapoalim options to

purchase 2,500,000 shares of ESC stock at $20.25 per share. The market reacted favorably to the

news. Luntenis stock jumped 27% to close at $20.44 per share.

        85.      On March 12, 2041, the Company announced its operating results for the fourth

quarter and year ended December 31, 2000. Lrunenis reported the following results in a March

121]' press release:

                Net revenue for the fourth quarter 2000 was $46.0 million
                compared to $40.1 million in the same quarter last year. Operating
                income was $7_1 million, or 15% of revenues, net income was $5.7
                million, and earnings per basic and fully diluted share were $0.22
                and $0.20 resjectively. In the fourth quarter of 1999, ESC
                reported a net loss.

                Excluding a $1.0 million loss from ESC's start-up dental tail,'
                OpusDent, and $0,7 loss from the new aculight program, ESC's
                fully diluted EPS was $0.26 per share.

                For fiscal year 2000, net revenue was $161.6 million compared to
                $142.2 million in 1999. Operating income was $22.3 million, or
                14% of revenues, net income was $17.3 million, and net earnings
                per basic and fully diluted share were $0.68 and $0.61 respectively.
                For full year 1999, ESC reported an operating and net loss of

                $140.2 million and $140.8 million respectively.

          G.    Commenting on the reported results, Defendant Sutton stated: "We are delighted

 that ESC is rounding out a full year of growth and profitability. Strength in our key target

markets has accelerated our momentum and we expect it to continue in the first quarter and

moving forward."

        87.     The revenue figures reported in the March 12, 2001 earnings release were

materially false and misleading for the reasons alleged in IT 35-45, 52-53.

        88.     Sutton ' s statement concerning growth and profitability were knowingly false and

misleading for the reasons alleged in 1135-45 , 52-53. Moreover, because reported revenue

figures were based on "sales" achieved through improper accounting techniques , Sutton knew

that the Company would continue the growth spawned by the purported "strength in [the

Company's] key target markets" in the first quarter and beyond.

        89.    On March 30, 2001, ESC filed its Form 10-K, for fiscal year ended December 31,

2000. In the 2000 10-K ESC repeated the reported revenue for the fourth quarter of 2000. As

alleged above in 111 35 -45, 52-53, the reported revenue was materially false and misleading-

       90.     ESC also used its Form la-K to provide assurance on its quality control measures

by touting its ISO 9001 Quality System Certification Award. It would later be revealed in ESC's

2001 Form 10-K that the ISO 9001 award was received back in 1997, with no mention of any

recertification after that period. The 2000 Form 10-K included the following excerpt under the

section entitled "GOVERNMENT REGULATION":

               The Company received a Quality System Certification Award for
               being in compliance with ISO 9001. ISO 9001 is a globally

                 recognized standard established by the International Standard
                 Organization in Geneva, Switzerland and has been adopted by
                 more than 90 countries worldwide. ISO 9001 embraces all
                 principles of the GMP and QSR and is the most comprehensive of
                 the quality assurance standards. ISO certification is based upon
                 adherence to established quality assurance standards and
                 manufacturing process, control.

           91.   On April 19, 2001, Lumenis announced that "it expect[ed] sales for the quarter

ended March 31, 2001, to be about $43 million," an increase of approximately 20% over the

reported figure for the same quarter in 2000. Commenting on the Company's expected results,

Defendant Sutton stated: "We are delighted to have experienced continued strong revenue

growth in the first quarter, seasonally a weaker quarter. Excluding one-time charges, the

revenues generated should translate into strong operating results, to be reported in mid May. The

market reacted approvingly, sending the stock up 6% to $27.94 per share.

           92.   The revenue figure reported in the April 19'x' pre-earnings release was materially

false and misleading for the reasons alleged in 11135-45, 52-53. Moreover, Sutton ' s statement

concerning "continued strong revenue growth" was knowingly false and misleading for the

reasons alleged in ¶¶ 35-45, 52-53. Further, Sutton knew that because the expected revenue

figure was based on "sales" achieved through improper accounting techniques, the Company

would report "strong operating results."

           93.   On May 15, 2001, the Company announced its operating results for the first

quarter ended March 31, 2001. Lumenis reported the following results in the May 15`x' press


                 The results include sales of $43.9 mn, up 22% from the same
                 quarter in 2000. Fully diluted EPS, excluding one time gains and
                 charges was $0.22, up from $0.03 for the corresponding quarter in

                2000. Including one-time charges and gains ESC earned $ 0.14 per
                fully diluted share.

        94.     Commenting on the reported results, Defendant Sutton stated: "Q I demonstrated

the continued growing strength of our business in what is usually a seasonally slow quarter, Pm

particularly satisfied by our continuing margin expansion. Looking ahead, demand continues to

he strong." The market. a.gain.responded with approval, raising the Company's stock price

another 6% to $29.05 per share.

        95.    The revenue and earnings figures reported in the May 15' earnings release were

materially false and misleading for the reasons alleged in ¶¶ 35-45, 52-53. Moreover, Sutton's

statement concerning continued strong demand was knowingly false and misleading for the

reasons alleged in 113 5 -45, 52-53.

       96.     On May 16, 2001, Sutton was quoted in a Globes article, wherein he discussed the

progress of the integration of CMG into Lumenis . In doing so, Sutton led the market to believe

that the integration of the Companies was thus far successful:

               ESC bypasses analysts forecasts (again).

               Where does the Coherent deal stand?

               "We completed bureaucracy procedures at the end of April, so
               Coherent's medical division belongs to us already. Right now,
               ESC is on its way to change its name to Lumenis, after approval of
               shareholders. Regarding the fruit of middle streaming expected
               from the deal of $25 million we already applied a part of them.

               It can be said that we have touched half of the fruit of middle
               streaming. We announced the Boston offices shut down. Parallely
               we announced the closing of the plant in Seattle with 65 employees
               and the moving all of its technology to Israel and the
               manufacturing of products will be here.

               Next week we have a convention with a 100 of our salespeople in
               the U.S. and Europe. The sales people are both of ESC and
               Coherent's medical division. The employees will receive training
               on both companies products, immediately, so we don't lose the
               momentum of sales,

               If we were to begin the merge in the I S` quarter, the sales of the two
               companies would have reached $98 million, so we are on the track
               of $400 million sales, because the completion of the deal will be at
               the end of April, we lost a month ofjoint sales therefore, the joint
               sales for the 2d quarter will be over $80 million."

        97.    As alleged in    73-74, 192-193, Sutton knew that the integration of CMG into

ESC was not going smoothly.

        98,    On May 29, 2001, ESC announced its new post-merger product offerings and

Defendant Sutton again misled the investing public by extolling the complementary product lines

and integrated sales and distribution teams purportedly brought to bear by the CMG acquisition.

As alleged above in 1173-74, 192-193, these comments concealed the fact that the synergies

promised from the combination were illusory ones. The May 29"' press release stated in pertinent


              New Ultra-Portable High -power LightSheer' Lasers

              ESC Medical Systems Ltd. (NASDAQ : ESCM) announced today
              the introduction of two new models of its highly successful
              LightSheer diode lasers for hair removal . The LightSheer ST and
              LightSheer ET feature the same highpower diode laser technology
              as the full-sized LightSheer lasers, in a table-top portable design.
              The LighSheer product line was added to ESC as a part of the
              recent acquisition of Coherent Medical Group.

              Yacha Sutton, CEO and President of ESC Medical commented,
              "We foresee many cross-selling opportunities with these new
              systems, especially with our IPL photo rejuvenation products. The
              ultra compact design and cutting edge technical specifications also

                 open up a new replacement market for existing hair removal
                 systems. Earlier, we only focused on penetrating new accounts."
                 During the next few months ESC will be rolling out an additional
                 four products, all of which hold the promise to become the leader
                 in their respective applications,

                  1. U.S. shipments of the Selecta 7000 to treat open angle
                 glaucoma, the leading cause of preventable blindness for patients
                 over 40 years of age are now under way. FDA clearance for this
                 device was recently granted. Open angle glaucoma affects over 50
                 million people worldwide.

                2. The GyneLase, for treating menarrhagia, or excessive menstrual
                bleeding, will begin large-scale shipments, tinder the multi-million
                dollar arrangement with Karl Stogy GmbH this quarter,

                3. Opus 5, the new dental diode laser for tooth whitening and
                minor soft tissue applications, will be launched this quarter in
                markets around the world,

                4. ClearLight, the breakthrough acne treatment system, is
                beginni ng shipments outside the Un ited States.

                Mr. Sutton concluded, "We are focused on maximizing our strop
                world-wide distribution channel b leveragin g continued internal
                development alongside selective acquisitions of complementary
                product lines."

                Separately, Mr. Sutton commented, "We are continuing to
                exp eri ence strong demand for our products. We are in the final
                stage of setting up integrated sales and distribution teams. Last
                week over 100 salespeople from the US and Europe participated in
                product cross training sessions. Our Asian sales team completed a
                similar program earlier. We have already closed several deals
                involving cross marketing opportunities.

(Emphasis added.)

        99.    ESC announced its post-combination organizational structure in a press release

dated July 10, 2001_ in that press release, Defendant Sutton again falsely touted the synergies

realized by the CMG transact] oil:

                  ESC Medical Announces Organizational Structure

                  Esc Medical Systems (NASDA Q: ESCM) announced today that it
                  has finalized the reorganization of its senior management to reflect
                  the integration of Coherent Medical Group.

                  Excluding our smaller dental and industrial units , ESC will be
                  operating under a matrix organizational structure to allow the
                  newly combined company to focus upstream marketing, R&D, and
                  manufacturing activities within product application areas while
                  integrating efforts geographically to ensure efficient downstream
                  marketing and sales activities . This structure is designed to
                  leverage administration expenses geographically across the
                  organization, while allowing for flexibility in the discreet
                  management of each target market's product lines.

               "Throughout the company, we enjoy a deep base of talent and
               industry expertise. We've now got the key leaders in place to drive
               our continued growth," said President and Chief Executive Officer
               Yacha Sutton. "The establishment of this structure and leadership
               team should facilitate a smooth comp letion of our i ntegration
               efforts. We look forward to continuing to build our business with
               the new organization."

              The members of the corporate team include: Yacha Sutton, CEO
              and President; Louis P. Scafuri, Chief Operating Officer; Sagi A.
              Genger, Chief Financial Officer; Asif Adil, Executive Vice
              President for Business Development; Yossi Gal, Executive Vice
              President for Human Resources; Mono Grencel, Executive Vice
              President for Operations; Hadar Solomon, Executive Vice
               President, General Counsel and Corporate Secretary.

(Emphasis added.)

       100.   As alleged in 1 73-74. 192-193, Sutton knew that the CMG integration was not

going smoothly.

       101.   In a Form 8-K/A, filed as of July 13, 2001, which was almost two weeks after the

closing of the Company's 2Q 2001 books, Defendants presented pro fonna consolidated financial

statements for ESC extending back to March 31, 2001, purporting to show the ESC balance sheet

"as if the Acquisition, which was accounted for as a purchase, was completed as of March 3 I,

2401." Defendants did warn of a "material nonrecurring" R&D related charge in excess of $46

million to be taken in 2Q 200 1. However , in this Forni 8-KJA, Defendants , desperate to project a

solid foundation to the CMG acquisition and to bolster the image that the integration was going

smoothly, failed to warn of other material charges to balance sheet accounts, including

writedowns of assets, large additional liabilities, and substantial shareholder dilution from

accelerating stock options and granting fully vested options. These material changes to the ESC

balance sheet would be revealed only about a month later in Lumenis's August 20, 2001, Form

10-Q for the period ending June 30, 2001, and would also be purportedly as a result of the CMG

acquisition . The Form $-KJA stated in pertinent part:

               Note 2 - Pro Forma Adjustments

                       The unaudited pro forma condensed combining balance
                       sheet has been prepared as if the Acquisition , which was
                       accounted for as a purchase , was completed as of March 3I,

                      The following pro forma adjustments have been made to
                      the pro forma condensed combining financial statements:

                      (4) To record the one-time charge of $46,650 for purchased
                      in-process research and development identified in the
                      allocation of the Purchase Price.

        102.    The From 8-K/A was false and misleading because it gave a false presentation of

the balance sheet as of that date. Defendants knew that the pro forma gave a false picture of the

Company as they knew they were going to book material charges and write- downs to balance

sheet accounts attributed to the CMG acquisition. Defendants wrote off inventory of $17.6

million and receivables of $12.7 million as merger costs and charged $26.1 million to

exceptional personnel costs. The "exceptional personnel" cost was for accelerated stock options

and fully vested options. By failing to disclose the foregoing write-downs and charges,

Defendants presented a false picture of the post-CMG acquisition balance sheet , which would

have less assets and more shareholder dilution.

        103.    On July 20, 2001, in a press release announcing a personnel shift in certain senior

positions, Defendant Sutton again extolled the progress purportedly achieved post-integration of


               We are pleased to report that the itegration is on track and that Q3
               has started out strong. With the integration moving toward
               completion , the company has clearly become the market leader.
               I'm confident that the company will redefine the industry with
               product innovation, superior customer service and brand
               leadership- I look forward to continuing strong contributions from
               our experienced business. and regional managers as well as our
               senior leaders as we move to achieve these goals. [Emphasis

        104.   As alleged above in IT[ 72-73, 192-193, Sutton knew that the integration was not

"on track."

        105.   On July 5, 2001, Luinenis announced that "it expect [ed] revenues for the quarter

ended June 30, 2001 to be in excess of $80 million reflecting the mid quarter closing of the

Coherent Medical Group transaction ," Commenting on the expected results, Defendant Sutton

 stated: "We are very pleased with our strong revenue performance through the initial

restructuring period which is consistent with guidance provided on the last investor conference

call of $80 million, We continue to experience strong demand and are comfortable with the

Street's consensus earnings estimates." Sutton also used the release to discuss the progress of the

integration of CMG into Lumenis: "The integration is proceeding well ahead of schedule. As

previously stated we have already identified and implemented over half of the $25 million in

synergies and we expect to significantly exceed this cost savings target ." (Emphasis added.)

        106.   The revenue figure reported in the July 5`s pre-earnings release was materially

false and misleading for the reasons alleged in IN 33-45, 52-53. Moreover, Sutton's statement

concerning the Company's "strong revenue performance" was knowingly false and misleading

for the reasons alleged in ¶j 33-45, 52-53. Further, Sutton knew that only because the expected

revenue figure was based on "sales" achieved through improper accounting techniques, such as

channel stuffing, the Company would meet its prior guidance. Finally, as alleged in 73-74, 192-

193, Sutton knew that the ESC-CMG integration was not proceeding well and that the Company

was not experiencing the represented synergies and costs savings.

       107.    On August 15, 2001, Lumenis announced its financial results for Q2 2001, with

Defendant Sutton again noting the successful integration with CMG:

               ESC Medical Announces Second Quarter Results

               ESC Medical Systems Ltd. (Nasdaq: ESCM), which is changing its
               name to Lumenis Ltd., reported financial results for the second
               quarter ended June 30, 2001. The results include contributions
               from ESC's acquisition of Coherent Medical Group since the
               closing of the transaction on April 30, 2001.

               Financial Results

Revenues for the second quarter of 2001 grew 89% to $$0.4
million over the $-42.5 million in last year's comparable period.
Continuing operating income for the quarter was $13.5 million
versus $7.7 million in the second quarter of last year, an increase of
76%. Continuing net income was $10.8 million yielding EPS of
$0.30 compared to net income and EPS of $4.6 million and $0.17
respectively (excluding non-recurring gains and losses). in the
corresponding period in year 2000.

Financial results from continuing activities exclude non-cash
charges of about $121.0 million and cash charges of approximately
$36.2 million. These results exclude various charges that have
been previously discussed on the Q2 conference call and
subsequent press releases. These charges include, amongst others:
an R&D in process write-down of $46.7 million, a charge in
connection with several outstanding litigations of $27.8 million,
inventory and receivable write-downs totaling $30.3 million, $32.7
million in extra-ordinary personnel costs associated with the
transaction, and various other charges including expenses related to
discontinued business activities and non-cash amortization.

Commenting on the results, Yacha Sutton, President and Chief
Executive Officer, said, "This was a seminal quarter for our
company. We achieved strong operating results and successfully
completed the acquisition of Coherent Medical Group. We made
significant strides in into atin the two organizations . This has
resulted in taretged savings of $30 million, $5 million more than
we had earlier announced. " He went onto elaborate, "With our
new market focused organization structure and experienced senior
management team, we have begun to capitalize on the tremendous
growth opportunities in the aesthetic, surgical and ophthalmic
markets. Evidence of this is demonstrated by the pace of sales
activity in the third quarter which should put our revenues ahead of
consensus analyst expectations for Q3. Management is now almost
exclusively focused on the continued growth of the business as we
bring- our integration efforts to a successful completion. "


Commenting on the outlook for the upcoming third quarter, Mr.
Sutton said, "Looking ahead, we also do expect continued charges
(mostly non-cash amortization) through the end of the year. These
charges will be significantly lower than those experienced in Q2."

                He went on to emphasize, "The strategic rationale of our decision
                to execute the Coherent transaction is materializing pp all fronts --
                significant cross selling opportunities across geographies and
                products, an improved cost structure, and access to each
                businesses' best practices. Accordingly, we are well poised in Q3
                and beyond, "

(Emphasis added.)

        108.    The revenue and earnings figures reported in the August 156 earnings release were

materially false and misleading for the reasons alleged in ¶¶ 33-45, 52-53. Moreover, Sutton's

statement concerning the purported "pace of sales in the third quarter" was knowingly false and

misleading for the reasons alleged in ¶f 33-45, 52-53.

        109.    Purthennoie, as discussed above, charges were extraordinarily large, mostly

improper and violat ed GAAP, as most of these charges had nothing to do with the Coherent

acquisition . The Company, however, used the acquisition to bury charges accumulated by ESC

which should have been written off earlier, and to "clean up" the ESC balance sheets by

attributing those costs to the acquisition . Furthermore, as shown below, the Company took extra

charges to he used as a "cookie-jar" from which to reverse charges back into income in later

quarters when. sales and revenues were flagging badly, in order to prop up the Company's stock

price. (Taking all those charges at once is often referred to as `Big Bath" charges.)

        110.   As recounted in a Globes article, dated August 15, 2001, Defendant Sutton falsely

presented a rosy picture of post-combination ESC:

               Lumenis beat the forecasts: profit of $10.8 million on revenues
               of $180.4 million,

               Lumenis's swing continues. The company that develops medical
               and cosmetic products based on light technology reported today its

 financial results for the second quarter of the year, and they were
 above analysts forecasts.

 The revenue which partially (2/3) includes Coherent's results,
 which acquisition was completed at the end of April, were a total
 of $80.4 million and the profit, excluding one time articles was a
 total of $10.8 million (30 cents per share), approximately 25%
 above analysts consensus.

As expected, due to the merge, the company registered heavy one
time expenses that caused the company a huge loss of
approximately $141.6 million. Regarding the next quarters, Y.
Stittoii CEO of the company estimated: "We are expecting one
time expenses that are related to the merge until the end of the
year, although they will be significantly lower than the expenses
we registered in the second quarter. In any case, the merge
contributes in many ways. We enlarged our line of products and
geographical layout significantly and improved the expense
structure." This is obviously Sutton's source of optimism.

"I think that the results of the second quarter are very satisfying.
First of all, we met the targets we set for ourselves and even passed
the targets that we set for ourselves in a few parameters. In a
quarter of this. kind to meet the sales forecasts is a big achievement.
As for as profit is concerned one needs to look at the pro forma
results that neutralize the one time expenses, and here the
consensus was for $0.23 per share, where as the most optimistic
analyst estimated about what was needed and we reach $0.30 per

Did      expect such one time expenses?

"Due to the merge, we registered one time expenses which mostly
have nothing to do with the cash flow and the rest didn't. The
results are satisfactory. The write downs that we had in the quarter
match what we told the market in the conference call."

Are you post merge?

"In general we're back to regular work, although there are always
remains. As said, we will register more write downs in the next

                What steps were taken during the merge?

                "We shut down six offices and two plants . We cut down on
                manpower and removed duplicates . As far as we're concerned, it
                is very satisfactory that we progressed well in the process and
                actually also in this target we beat our own forecasts."

                When will the merge have full impact?

               "Full impact will only be in the beginning of the first quarter of
               2002 because there are following activities to the merge that are
               still in 2401. My estimation is that the extra savings from the
               activities will be approximately 13-14 cents per share, in other
               words $5 million."

        Ill.   Ina Globes article, dated August 16, 2001, Defendant Sutton falsely downplayed

the significance of the purported acquisition charges in 2Q 2001 of $ 157 million:

               ESC Medical posts $157 min charge for Q2

               ESC Medical president and CEO Yacha Sutton said , "With our
               new market focused organization structure and experienced senior
               management team, we have begun to capitalize on the tremendous
               grov-th opportu nities in the aesthetic , surgical and ophthalmic
               markets . Evidence if this is demonstrated by the pace of sales
               activity in the third quarter which should put our revenues ahead of
               consensus analyst expectations for Q3."

               Commenting on the outlook for the third quarter, Sutton said,
               "Looking ahead, we also do expect continued charges (mostly non-
               cash amortization) through the end of the year. These charges will
               be significantly tower than those experienced in Q2. The strategic
               rationale of our decision to execute the Coherent transaction is
               materializing on all fronts - significant cross selling opportunities
               across geographies and products, and improved cost structure, and
               access to each businesses' best practices. Accordingly, we are well
               poised in Q3 and beyond."

       112.    On August 20, 2001, the Company filed its Form I O -Q for the quarter ended June

30, 2001. In the August 20, 200114-Q, Lumenis repeated its revenue figure reported on August

5, 2001. In spite of admittedly already having leaned--and informed S. Genger--of numerous

financial irregularities that rendered the financial results reported in the Form I0-Q materially

false and misleading, Defendant Adil nevertheless signed the Form 10-Q as the Company's CFO

and Duly Authorized Officer.

        113,    In the August 20, 2001. Form 10-Q, Defendants reiterated the staggering array of

supposedly nonrecurring charges supposedly taken "mainly in connection with the CMG


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

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

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

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

                a      An amount of approximately $27,76(} with respect to
                       certain legal proceedings, claims and litigation, which
                       represents the Company's management estimation of the
                       Company's potential exposure relating to such proceedings.

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

                       An amount of approximately $3,048 of integration related

(Emphasis added.)

        114.    By September 10, 2001, Globes was reporting that Lumenis was "in need of an

injection of cash," and that Bank Hapoalim, Israel's largest bank and the source of the earlier

financing, was simultaneously providing the Company with cash and flooding the market with

Lumenis shares:

               Sources inform "Globes" that Bank Hapoalim has begun exercising
               its Lumenis options and to date has exercised an estimated few
               million dollars of options, out of the 2.5 million options held by the
               bank. The exercise price for the options is $20.25 per share,
               compared with Lumenis's current $29 market price.

               If Bank Hapoalim exercises all its options, Lurnenis will get $50.6
               million. It appears that Dank HapoaIian will attempt to sell the
               shares from the options on the market, which is liable to create
               short-term pressure on the company share. If the bank exercises all
               its options and sells all the shares at Lurnenis's current market
               price, it will post a $22 million capital gain.

               Bank iIapoalim got its Lumens options through a $240 million
               financing agreement with the company. The money was slated to
               enable Lumenis to acquire the Coherent Group ' s medical division,
               pay off its bonds , and improve the company ' s liquidity.

        115.   On September 20, 2001, Lumenis issued a press release announcing that it would

be holding a conference call that day to discuss its operating performance following "the recent

tragic events in the United States." Defendant ,Sutton represented that demand for the

Company's products "continues to be strong"; that the Company was "currently on track to come

in at or about third quarter analyst consensus revenues estimates"; and that "[w]ith nearly 50% of

our sales coming from medical applications, we are well positioned to withstand any downturn in

the aesthetics market."

        116.    Sutton's continents concerning continued "strong" demand for the Company's

products was knowingly false and misleading for the reasons alleged in ¶¶ 35-41, 49-51, above.

Moreover, Sutton knew that the Company was "currently on track" to meet consensus estimates

because of the accounting machinations and conduct alleged above in 1135-45 , 52-56.

        117.    On October 1, 2001, Lumenis issued a press release announcing that "based on

preliminary shipment information , performance for the third quarter ended September 30, 2001,

should be in line with the $90 million net revenue estimate ..." Defendant Sutton commented

on the announcement, stating in pertinent part:

               We are pleased that the organization appears to have achieved its
               financial goals, even those set earlier this year. I am especially
               heartened because revenue flow in the last three weeks of the
               quarter remained at its normal pace. Moreover, the third quarter is
               traditionally a weaker one, relying most heavily on US sales,
               during the slower European summer months. We remain confident
               in the continued global demand for our products and are optimistic
               that this trend will continue as we enter the fourth quarter.

        118.   The revenue figure reported in the October i" pre-earnings release was materially

false and misleading for the reasons alleged in 1135-45, 52-53. Moreover, Sutton's statement

concerning confidence in "continued . . . demand for [the Company's] products" and optimism

that such demand would continue into the fourth quarter was knowingly false and misleading for

the reasons alleged in 113 5 -45, 52-53.


        119.    Relying on Defendants' repeated hype about the success of the merger, Salomon

Smith Barney, Medical Supplies & Technology Analysts commended the progress of the

Coherent integration, and noted the numerous synergies achieved to date, in its analyst's report

dated October 9, 2001:

                LUME: Stock weak After CRFA Report; We See No Cause
                For Concern: BUY

               At this point, we believe all elements of the Coherent integration
               are in very mood shape, The newly-established distribution system
               is operating efficiently in all respects, in our opinion. aas
               the overhead cost reduction opportunities associated with the
               Coherent integration have turned out to be significantly better than
               the original plan which called for $25 million in synergies.
               Lumens' management said that during the pivotal June quarter it
               had already identified at least $30 million in symergies, and that
               nearly half of those savings had been implemented within just two
               months of the acq uisition, [Emphasis added.]

               Vanity is the main driver of demand for these products, and it
                appears that vanity is not very economically sensitive. We know
               from physicians who perform these procedures that there will often
               be a mix shift in the types of aesthetic procedures during economic
               downturns - away from the most costly procedures such as facelifts
               toward the type of less-expensive procedures such as facial
               resurfacing or hair removal. This sort of mix shift is favorable to
               the laser and IPL companies such as Lumen-is. Furthermore,
               Lumenis continues to diversify its product mix, both within the
               aesthetics business (e.g., the new ClearLight acne treatment) and
               by branching out into its other businesses in ophthahnics, dentistry,
               and a variety of general surgical applications. Management has
               recently that there are far more products in the pipeline than
               it has unveiled or factored intoWall Street's models . [Emphasis

               We are pleased to announce that the organization appe ars to have
               achieved its financial goals, even those set earlier this year. I am
               especially heartened because revenue flow in the last three weeks

                of the quarter remained at its normal pace. Moreover, the third
                quarter is traditionally a Weaker one, relying most heavily on US
                sales during the slower European months. We remain confident in
                the continued global demand for our products and are optimistic
                that this trend will continue as we enter the fourth quarter.

        120.    On November 8, 2001, Lumenis announced the acquisition of HGM Medical

Laser System, Inc. ("I1GM"). In the release, Defendants stated that the integration of HGM was

to be based on the "successful-ESC-CMG integration model." As alleged above in 1135-45, 52-

53, 56, Defendants knew that the ESC-CMG integration was not successful.

        121.    Salomon Smith Barney commended the Company for its acquisition of HGM

Medical Laser Systems and maintained a rating of IS (Buy Speculative) and a one year price

target of $44 per share for the Company in its November 8, 2001 analyst's report:

               November 8, 2001 Salomon Smith Barney (Phil Nalbone)
               LUME: To Acquire HGAM Medical Laser Systems; Deal
               Should be Accretive in 102

               This transaction is part of Lumens' strategy to continue to look for
               good opportunities across all product categories and to grow the
               company through both internal growth and strategic acquisitions.
               HGM will strengthen the company; product offerings in the
               ophthalmic business and we are pleased to see the company
               continue to diversity its business away from aesthetics. Given the
               company's strong performance in the integration of Coherent
               Medical, we expect the integration of this new acquisition to
               proceed smoothly. We maintain our 1 S (Buy, Speculative) rating
               and one-year price target of $44, [Emphasis added.]

        122.   As alleged above in 1173-74 the integration of CMG was not successful.

        123.   On November 14, 2001, Lumenis issued a press release announcing its financial

results for the third quarter of 2001, the period ending September 30, 2001. The Company

reported that revenues for the third quarter were $90.2 million - and EPS was $0.07, "above

 analysts' consensus estimates ." The press release also detailed charges that the Company had

taken during the third quarter as follows:

                Non-recurring and amortization charges for the quarter 2001 arc in
                line with previous guidance and include:

                *$3.7 million for amortization of intangible assets associated with
                the Coherent acquisition

                *$4.4 million for discontinued business activities ; duplicative
                activities with little or no future economic benefit as of September
                30, 2001

                *$3.3 million for personnel costs associated with Coherent

                *$2.0 million for various other integration expenses. The
                Company expects little or no non-recurring charges starting the
                first quarter of 2002.

        124.   Defendant Sutton commented on the results and outlook for the fourth quarter of

2001, stating in pertinent part as follows:

               I am delighted that we are continuing to execute our business plan,
               yielding fully diluted adjusted EPS $0.07 above the analysts'
               consensus estimates- We are especially proud that we
               accomplished these results despite seasonal weakness, the
               disruption resulting from the tragic events on September 11, and
               the slowing global economy ... During the quarter, we
               experienced growth across each of the three business units --
               aestheti ophthahuie td-su.rgieal- -with strong-contriblutions-frorrr--_ .   ----_ --
               key applications including IPL skin treatments, age-related macular
               degenerations and urology...

               Business remains strong . We expect stroizia revenue growth in the
               fourth quarter compared to pro forma revenue of last year. We
               remain comfortable with the analysts' estimates for the fourth
                carter given our diversified businesses and the strong and
               innovative product pipeline associated with each of them.
               [Emphasis added.] .

        125.    The revenue and earnings figures reported in the November 14'x' press release

were materially false and misleading for the reasons alleged in ¶^ 35-45. Moreover, Sutton's

statement concerning quarterly growth was knowingly false and misleading far the reasons

alleged in ¶J 52-53, 56. Sutton knew that Lumenis could "expect strong revenue growth in the

fourth quarter" and "remain comfortable with the analysts' estimates for the fourth quarter"

because such expectations were predicated on "sales" that were achieved through improper

accounting techniques, such as sham sales and channel stuffing.

       126.    The market reacted favorably to the Company' s fraudulent results and projections.

Over the next two days (in which upbeat analyst reports followed the November14 release), the

Company's stock rose over 25% climbing over $21 per share.

       127.    In its 10-Q for the period ending September 30, 2001, filed with the SEC on

November 14, 2001, Lumenis disclosed continuing purported one-time charges arising "mainly

in connection with the CMG Acquisition":

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

               o      $14,043 write down of account receivables mainly in
               connection with distributors consolidation for the nine months
               ended September 30, 2001.

               o       $3,196 and $36,861 of exceptional personnel cost in respect
               of termination, retention and bonuses, mostly non-cash for the
               three and nine months ended September 30, 2001 respectively.

               n       $29,266 with respect to certain legal proceedings , claims
               and litigation, which represents the Company's management
               estimation of the Company's potential exposure relating to such
               proceedings for the nine months ended September 30, 2001.

               o     $5,537 relating to facility change, including future lease
               commitments , leases of unused space and related cost for the nine
               months ended September 30, 2401,

               o       $2,064 and $5,112 of integration related and other expenses
               for the three and nine months ended September 30, 2001,

        128.   Defendant Adil again signed the I 0-Q on behalf of the Company as the Chief

Financial Officer and Duly Authorized Officer, although admittedly fully aware of its falsity.

        129_   Salomon Smith Barney, in its November 15, 2001 analyst report, discussed the

balance sheet issues related to Q3 2001 results for the Company. The report referred to concerns

regarding cash flows, one-time charges and various line items on the balance sheet, including,

inter alia, a $143.3 million item on the balance sheet for accounts payable and accrued expenses.

Ultimately, the report bought into the false re-assurances provided by Defendants:

November 15, 200 1 Salomon Smith Barney

               Lumenis, LTD (LUMP)

               LUNIE: Solid Q3 Results; Balance Sheet Issues Discussed in Detail

               Over the past month, Lumenis' stock has remained weak amid
               concerns about the company's aesthetics business in the face of the
               recessionary environment, concerns about the company's pro
               forma revenue growth, as well as issues related to the balance
               sheet. During the earnings conference call, management addressed
               each of these issues and we feel that the thorough discussion
               should help to alleviate some of the concerns.

               Management devoted a significant amount of time on the earnings
               call to balance sheet issues. There have been significant concerns
               and questions recently regarding cash flows, one-time charges and
               various line items on the balance sheet. We feel that management
               did a thorough job of addressing these issues on the call and we
               will outline the details below.

               A specific item on the balance sheet that has been troubling many
               investors is the $143.3 million in accounts payable and accrued
               expenses. There have been concerns that the company has been
               overly aggressive in taking one-time charges and accruals related to
               the Coherent acquisition and lumping it into the accounts payable
               and accrued expenses line on the balance sheet. To address and
               confront this issue, Management carefully broke down the charges
               included in this line item during the conference call.. The
               breakdown is as follows: $1.8 million in accounts payables, $55.7
               in normal accruals (which includes a $15.2 million in
               compensation expense; $12.6 in service expenses and $10.6
               million in walTanties), $26 million in litigation expenses, $6
               million purchase price payments owed, and $21.8 million in
               accrued integration expenses . We believe that accrued integration
               expenses of $21.8 million are certainly reasonable given the scope
               of the integration which included the closing of 7 facilities, the
               termination of over 200 employees, and the retention of over 100

       430.    Based on Defendant's prior false statements, Dresdner Kleinwort Wasserstein, in

its November 16, 2001, analyst report, similarly passed a favorable judgment on the CMG

integration and noted Lumenis' good sales start to the 4"' Quarter:

               November 16, 2001 Dresdner Kleinwort Wasserstein (Robert
               C. Dunne) DrKVV: L[JME Stock rebounds as sales track to
               expectations and EPS

               With the Coherent integration proceeding well and moving into the
               later stages, management is now better able to turn its attention to
               entering distribution agreements to enhance sales and continue
               with efforts to improve the combined operations. Recent examples
               include the US pact with Paterson Dental lasers to including tooth
               whitening and last week's announcement to acquire HGM Medical
               Lasers to bolster profitability by bringing supply of a key
               ophthalmology component in house. We are encouraged b y th
               good sales start to the fourth quarter and with mana gement's
               comfort in the consensus EPS forecast. In the fourth quarter we are
               looking fora doubling of sales and EPS to $105 million.
               [Emphasis added.]

         131.    On November 18, 2001, Globes reported that Bank Hapoalim had dumped its

 remaining stake in Lumens:

                 Bank Hapoalim makes quick killing in Lumenis

                 Shai Shales and Nir Goldberg

                 18-11.2001 17:23

                 Sou ces inform "Globes" that Bank Hapoalim made a quick profit
                 of over $7 million from its investment in Lumenis (Nasdaq:
                 LUME) (formerly ESC Medical Systems).

                The bank exercised 1.36 million Lumenis options in the third
                quarter, injecting $27.6 million into the company. The exercise
                price was $24,25 per share. Since the beginning of September, the
                share price has fallen sharply, reaching $16.50 at the end of last

                Today it became apparent that Bank Hapoalim had sold all of the
                shares it obtained from exercising its options, earning a handsome

As would be revealed later by Lumenis, Bank Hapoalim was given advance knowledge of the

SEC investigation, news of which had leaked to Lumenis by Noveinber 2001, according to CW 1.

        132.    Dresdner KIeinwort Wasserstein, in its November 26, 2001 analyst report, noted

the positive response of the Lumenis stock to third quarter results and a "sound start to the 41

Quarter." It also noted that the AcuLight program was making "steady but unspectacular


                November 26, 2001 United States Hospital Supply and Medical
                Technology Dresdner Kleinwort Wasserstein

                Shares of Lumenis responded strongly to solid in-line third quarter
                results and a sound start to the fourth quarter. Sales were in line
                with previous company guidance in this seasonally slow period,
                while EPS, excluding charges, of $0.34 easily exceeded our $0.27

                projection , due primarily to lower ongoing SG&A expenses, The
                Coherent (CGHR - $29.30-NR) acquisition (which broadened
                product lines and increased the domestic presence) is proceeding
                well and nearing completion. [Emphasis added.]

                The AcuLight program (hair removal for the masses) is making
                steady but unspectacular progress, mostly in the UK. LUNIE has
                150 systems placed, with another 50 slated to be installed by year-

        133.    Salomon Smith Barney, in its November 28, 2001 analyst report, offered a bullish

assessment of Lurnenis's stock price, and predicted that it would rise to $44 per share and

reiterated its 1S rating for the stock:

                LUME: We See No Fundamental Basis for Sell off; Business
                Strong; Buying Opportunity


               Lumenis shares were under selling pressure yesterday. We believe
               that there is no fundamental basis for the sell-off. We believe all
               business trends at the company remain strong. Lumenis remains
               on track to meet or exceed our December quarter projection for
               sales of $108.2 million and net income of $151 million, or $0.41
               per share. For 2002, we believe that Lumenis is on track to earn at
               least $2.01 per share. We believe Lumenis shares should carrtran
               earnings multiple of approximately 25 times, and based on our
               current EPS estimate of $2.01 per share, the stock should be
               trading at $44 within the next couple of quarters . We view the
               current weakness as a buying opportunity.. We reiterate our I S
               (Buy, Speculative Risk) rating. [Emphasis added.]

        134.   In early December 2001, within a few weeks of Adil's report of financial

irregularities and improper accounting to the Board , Defendant Sutton removed Adil from his

position of Chief Financial Officer. Again, as Defendant Adil has stated in papers and sworn

statements filed with this Court, he repeated to Sutton his prior objections to the Company's

 accounting practices , insisting that the Company was not following GAAP and was obfuscating

material financial information . The Company did not disclose this development.

         135.   On December 17, 2001, CII3C World Markets reiterated its "Buy" rating on

Lumenis, with a $42 price target. In its analyst report, CIBC projected fourth quarter earnings to

double to $42, and revenue growth of 123%.

         136.   In a Globes article dated December 20, 2001, Defendant Sutton falsely expressed

confidence that Lumenis would meet analysts' expectations for Q4 2001:

                Company briefs

                Lumenis (NASDAQ: LLUME) CEO Yacha Sutton in an interview
                with "Globes": "I have no idea why Lumenis shares are falling...
                We will be able to provide indications on our Q4 revenue at the
                beginning of January... Analysts expect us to record revenue of
                more than $100 million in Q4. I don't see any reason why we
                won't meet that target. " [Emphasis added,]

         137.   Sutton's expressed comfort with meeting analysts' targets was materially

misleading. Sutton knew that his statement was based not on existing conditions but on

accounting practices that, as described above, were improper, such as channel stuffing and sham


         138.   On or about December 23, 2041, Defendant Sutton addressed an Oppenheimer

investment bank analysts conference in Tel Aviv regarding Lumens. Following his address,

Oppenheimer gave Lumenis shares a "buy'rating, stressing Lumcnis's supposed expected sales

growth and expected improvement in its balance sheet. Oppenheimer set a target price of $42

per share, over 150% above the market price of $16.70 per share. The stock price jumped

accordingly, rising over 10% over the next two days to $18.50 per share.


             139.   On December 31, 2001, Lumenis reiterated that it expected "a record fourth

     quarter," which would "significantly surpass historical performance," Based on Defendants'

     statements, analysts expected the Company to earn $.41 per share for the quarter.

            140.    On December 31, 2001, the Globes passed along Defendants' rosier-than-reality

    representations regarding the purported success of the integration of CMG. hi fact, this upbeat

    statement was followed by another price jump in the stock, up $4 per share over the next two

    days to just under $23 per share on heavy volume.

            141.    Globes reiterated Defendants' false representations regarding the success of the

    CMG integration in an article dated January 1, 2002:

                    Lamer-Lis (NASDAQ: LUME) climbed over 6% yesterday on high
                    turnover, completing a 19% surge in ten days. The company's
                    president announced that the company would meet its forecasts,
                    but in a more important announcement, the company said the
                    merger with the Coherent medical division was proceeding
                    according to plan, or even better than planned ._ It will eventually be
                    seen that, in addition to selling rt_uore and making higher profits, the
                    company is more efficient . The results will probably be a pleasant
                    surprise for other people, but we expected that. [Emphasis added.]

            142.    On January 3, 2002, in the wake of Defendant Adil's repeated reporting of

    financial irregularities, Defendant Sutton removed Adil from his position as Executive Vice

    President, reassigned Adil to a sales position in Asia, and told Adil to seek other employment.

    The -Board, under Frenkel, shortly thereafter, officially removed Adil from his position as an

    officer of the Company. Although this occurred less than 6 months after assuming the position

    of CFO, these developments were not disclosed to the public at the ti ie.

         143.    At the same time, according to Adil, Defendant S. Genger threatened to fire Adil

if he continued to voice objections to the Company's accounting practices, and threatened to ruin

Adil's reputation in the business community,

         144.   Just four days after removing Adil from his position with no disclosure to the

market, Sutton boasted of the Company's transparency. In a January 7, 2002 interview with.

Globes , Sutton flatly - - and falsely - - denied any accounting or financial impropriety:

                "Globes": Although the share has risen in the past two weeks, it's
                still quite far from its peak. Does this reflect investors' distrust in
                the company's management?

                Sutton: "I don't think there's any basis for suspicion. I think we're
                quite open with the financial community. We try to be as open as
                possible with our accounts and business, to the point where it
                sometimes hurts us competitively. That openness is intended to
                remove suspicion."

                Could the suspicions be derivedfrom your accountancy policy,
                which included a major depreciation?

                "We work according to the accepted US accountancy rules, and we
                naturally have a CPA who oversees our reports, In addition, we
                explained the allowances precisely during our last conference call.
                Considering the acquisitions, the closing of seven offices (two
                production facilities and five sales offices), lay-offs following the
                merger, and the incentives plan for retaining 100 key employees,
                the allowance seems reasonable. It's important to note that the
                share surged following the conference call."

        145.    Defendants' desire to keep the stock price inflated was also revealed in the

interview. Sutton disclosed that Lurnenis was intending to raise money through a secondary

stock offering, but only at a higher share price:

                An issue at the current share price isn't on the agenda. We'll issue
                at a higher price that will dilute the shareholders less, in order to
                improve the balance sheet.

        146.    On January 12 , 2002, the Company announced the open ing of European offices in

Amsterdam, and a branch in Switzerland. In the press release, the Company finally made its first

reference to Adil' s removal and reassignment to Asia.

                Asif Adil, who led the Finance Department and was Executive
                Vice President of Business Development , will now lead an effort to
                develop emerging Asian markets such as India.


                Mr, Adil took a leading role in helping to restructure the Company
                during the turnaround, design the Coherent integration program,
                establish the Aculight franchise, and has recently served as CFO.

        147.    The press release said nothing about the circumstances of his departure, less than

six months after he assumed the CFO position.

        1,48.   On January 21, 2002, reported that the, Company's management

was negotiating for a listing on the Tel Aviv Stock Exchange, to take effect around the time

Lumenis would report its financial results.

        149.    As the Company would later reveal in its February 28, 2002 conference call, it

"learned in January that certain former distributors as well as the current distributors were

contacted by the SEC." According to C W 1, the Company heard rumors as early as November

2001, that the SEC was starting to inquire into the relationship between the Company and its

distributors. CW 11 a former administrative assistant for Luinenis, was assigned to help Lumens

employees in a project to collect documents for transmittal to the SEC. CW11 stated that the

"Lumenis SEC project" began in December, 2001. CW11 says that the project was "hush-hush,"

and was told not to talk about what he was doing.

        150.    On January 29, 2002, Lumcnis pre-announced its financial results for the fourth

quarter of 2001. In the press release, Lumeois stated that:

                its revenues for the fourth quarter ended December 31, 2001 will
                be about $101 million or 8% higher than the combined revenues of
                its legacy businesses, ESC Medical and Coherent Medical Group,
                for the corresponding quarter in 2000. On a local currency basis
                revenues grew by about 10%. Results reflect record fourth quarter
                sales. [Emphasis added.]

               As previously announced, the Company continues to expect one-
               time charges (pre-dominantly non-cash) in Q4 and little or no non-
               recuring charges in Q12002.

       151.    Commenting on the results, Defendant Frenkel stated:

               Management is to be congratulated on delivering to shareholders
               such impressive results. I am particularly pleased by our
               significant progress in cutting costs, over $35 million to date,
               compared with our original target of $25 million, while at the same
               time maintaining strong top line performance. 'llie Connpanyis
               positioned to build on its recent success.

       152.    Sutton was quoted on various balance sheet issues:

               We expect 2002 to be a balance sheet-focused year. We are
               working to improve inventory turns, targeting 4.Ox turns by the end
               of Q12003. Cash generated from this reduction should offset
               dollar growth in receivables stemming from increased sales, We
               also expect to cash out almost all the accruals related to the
               integration which were already charged through the P&L by the
               end of Q12002. Finally, we are expecting about $10 million in
               capital expenditures, significantly higher than usual, as we make
               major investments in infrastructure.

               Adjusted for seasonal weakness of the first quarter, we are off to a
               strong start.

         153.    The revenue figure reported in the January 29th release was materially false and

 misleading for the reasons alleged in 'j( 35-56.

         154.   Frenkel's statement concerning "strong top line performance" was materially false

 and misleading . As alleged in ¶ 35-56, Frenkel knew or recklessly disregarded that such "strong

top line performance" was achieved only through improper practices such as channel stuffing,

sham sales, the manipulation of accounting for inventory, the ever-malleable allowance for

doubtfuI accounts, and the Aculight related-party transaction described above in 11 39-49.

         155.   Sutton's statements were knowingly and misleading for the reasons alleged in TT


         156.   Because hair removal sales were so far below expectations, Defendants had to

quickly generate significant revenue to hide the problem- Defendants managed this by. making an

investment in Aculight, which in turn "purchased" hair removal machines from Lumenis., tile

sale was described as follows in Lumenis's 2001 Form 10-K:

                During 2001 the Group signed an investment agreement with
                Acuiigtht. The Group has significant influence over the operations
                of Aculight and, accordingly, such investment is accounted for
                under the equity method. Following the investment agreement,
                Aculight acquired from the Group products, formerly teased bit
                in the amount of $4,764, to be paid over a three-year period. The
                Group's unrealized gain with respect to such sale, in the amount of
                $1,589 was recorded as deferred income. (Emphasis added]

         157.   However, the 2001 10-K did not disclose that the total "sale" (substantially

identical to the existing lease terms) was actually for $8.2 million, including deferred service

revenue. This was subsequently disclosed by Defendant Sutton, in a Company conference call.

The 10-K also did not filly disclose the true extent of the related party transaction, as it omitted

 to state that Defendants S. Genger and Adil were appointed to the Aculight Board in 2001, as

 was Hadar Soloman, Executive Vice President and Corporate Secretary of Lurncnis , representing

 three of the six Aculight directors.

         158.    Lumenis's recognition of $4.8 million hair removal revenue in 4Q 2001 violated

the following GAAP, and Lumenis ' s own revenue recognition policy, as described below:

a.      Generally Accepted Accounting Principle Revenue Recognition Requirements:

        (1)     In order for revenue to be recognized, it must be realizable , i.e. collectibility must
                be reasonably assured. The following sources of GAAP stand for this well
                established proposition:

                a) ARi3 No. 43, Chapter 1A ¶ 1, adopted 1934:

                Unrealized profit should not be credited to income account of the corporation
                either directly or indirectly, through the medium of charging against such
                unrealized profits amounts which would ordinarily fall to be charged against
                income account. Profit is deemed to be rcalized when a. sale in the ordinary
                course of business is effected, unless the circumstances are such that the
                collection of the sale price is not reasortab1 v assured. (Emphasis added.).

                b) SFAC No, 5 184 (g), issued December 1984:

                If collectibility of assets received for product, services, or other assets is doubtful,
                revenues and gains may be recognized on the basis ofcash received. (Emphasis

b. .... Generally Accepted Accounting Principles for Related Party Transactions:

        (1)      FAS 57,12 requires the following disclosure for material related party

                a)      The nature of the relationship of the related pies ;

                b)     A description of the transactions, including amounts and other pertinent
                       information necessary for an understanding of the effects of the related
                       party transactions, for each period in which an income statement is
                       presented (related party transaction of no or nominal amounts must also be

                c}     The dollar amount of the transactions for each period in which an income
                       statement is presented; also, the effects of any change in terms between the
                       related parties from terms used in prior periods;

                d)     If not apparent in the financial statements, (a) the terms of the related party
                       transactions , (b) the manner of settlement of related party transactions, and
                       (c) the amount due to or from related parties. (Emphasis added.).

        159,    The Aculight "sale" was based on a reciprocal transaction sometimes referred to

as "round tripping". Defendants made an investment in Aculight and "following the investment"

Aculight reciprocated by agreeing to buy devices and services worth $8.2million from Lumenis.

A reciprocal transaction is an inaccurate and misleading representation of the economics of the

transaction and , as such, Defendant' s reported financial results violated GAAP.

        1 60.   GAAP SFAC No. 2,162 does not permit companies to recognize revenue from

transactions without any economic substance. The "sale" to Aculight was simply a ploy used by

Defendants to recognize revenue prematurely. In reality the "sale" was really no different in

terms from the lease it supposedly replaced. The term of years over which Lurncnis depreciated

laser equipment was three years. See 2001 Form 10-K, page F-12 ("Finished products located at

customers sites in respect of support for warranty obligations or finished products used for

promotional purposes are separately classified as finished goods used in operations and are

depreciated over a period of three years. ") (Emphasis added.) Moreover, three years is exactly

the term over which the $6.4 million receivable is due . The only difference achieved by

changing the name of the transaction from a lease to a "sale" is that Defendants wanted to

immediately recognize revenue of $ 4.8 million . Defendants improperly changed the form of the

transaction without changing the substtance of the transaction, for the improper purpose of


    accelerating the revenue recognition into 4Q 2001. As reported by Haaretz , on March 7, 2003, S.

    Genger, personally flew to England at the end of 2001 to finalize the deal.

            161.   Defendants violated ARB No. 43 and SFAC NNo. 5, by recognizing any

    uncollected portions of the $4.8 million in revenue prior to receiving cash payment because at the

    time of the "sale" the collectibility of the receivable was uncertain . In 2000, the Company began

increasing its inventory of hair removal machines in anticipation of expected demand from the

Aculight program. However, so little Aculight demand developed, that by the end of 2000, the

Company was carrying excessive inventories of hair removal equipment with little prospect of

sales. For the second quarter 2001, the Company used the cover of the CMG acquisition to

obscure its write-off of $17.6 million of ESC hair removal equipment as part of its "Sig Bath"

expenses, even though the inventory buildups had occurred months before the CMG acquisition.

As there was so little demand for Aculight products that Lumenis was writing off related

inventories, there was no realistic possibility that Aculight would generate the revenues necessary

to make the $4.8 million payment to Lumenis.

           162.    The Aculight program was a failing. The hair removal equipment was being

written off, hair removal sales were at an all time low, and Acu]ight was reporting losses . In fact,

Lumenis reported a $2.6 million loss in its 2001 1 O-K from. "its investment and transactions with

Acuiight," See 2001 Form 10-K, at 20. The failing nature of the business is born out bya

subsequent disclosure in Lumenis ' 2002 10-K, which revealed that the Aculight receivable had to

be restructured and payment of the still outstanding balance of $6.4 million was extended to 56

months -. (a term well-beyond the useful life of the technology), making collectibiltiy even more

unlikely . Additionally, at the end of 1712002, the receivable was in default, as evidenced by the

 failure of Lumenis to amortize any of the $1.2 million deferred revenue at year end December 31,

2001 into income in I Q 2002. Defendant Sutton stated during the 4Q 2001 conference call on

March 3, 2002 the following about the Aculight deferred revenue: "Our results reflect only about

4.8 million of revenue the balance of which will be recognized as cash transfers to us."   All of

this information would have been known to the Lumenis current and former Chief Financial

Officers, Defendants S. Genger and Adil, both of whom simultaneously sat on the Board of

Aculight and held officer positions at Lumens.

        161    Defendants also violated Lumenis's stated revenue recognition policy. At

December 31, 2001, as disclosed in 2001 10-K, filed on April 1, 2002, at page F-13, Lumens'

Revenue Recognition policy was as follows: "Revenues from product sates are recognized when

delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed or

determinable and collectibility is probable...." (Emphasis added.) For the foregoing reasons, the

collectibility of the $6.4 million account receivable was not "probable" and, therefore, revenue

should not have been recognized until cash was received.

        164.   By not discussing the "one-time" nature of the $4. 8 million included in aesthetic

hair removal sales, Defendants also violated Reg. 17 C.F.R. §229.303(a)(3)(i), which states:

               Results of Operations. Describe any unusual or infrequent events
               or transactions or any significant economic changes that materially
               affected the amount of reported income from continuing operations
               and, in each case, indicate the extent to which income was so
               affected. In addition, describe any other significant components of
               revenues or expenses that, in the registrant's judgment, should be
               described in order to understand the registrant's results of

         165.   The "one-time" nature of the $4. 8 million in revenue recognized in 4Q 2001 based

on the "sale" to Aculight required disclosure and explanation. The $4.8 million materially

distorted the reported revenues for aesthetics sales in 4Q 2001 representing 11% of the reported


         166.   By failing to fully disclose the true nature and extent of the related party

transaction involving Aculight and the $8.2 Million "sale" in 4Q 2001, and failing to disclose

that Sagi Genger and Adil Asif were seated on the Board of Aculight, as was Hadar Soloman,

General Counsel, Executive Vice President, and Corporate Secretary of Lumenis_

         167.   FAS 57 cited above requires very specific disclosures for related party

transactions, as the very nature of the transaction is not "arms-length." Defendants intentionally

omitted the true nature of the related party transaction (Lumcnis officers representing three (3) of

the six (6) Aculight Board members) as they knew investors would question the validity of the

"sale," particularly when the transaction brought in just enough "revenue" for Lumenis to meet

analyst revenue forecasts for 4Q 2001. Defendants also violated FAS 57 12(c) by failing to fully

disclose the dollar amount of the transaction . Defendants SEC Form IO-K only disclosed that the

transaction involved $6.4 million ($4,8 million revenue + $1.6 million deferred gain = $6.4

million) in revenue and deferred gains, which understated the dollar amount of the transaction by

$1.8 million, a significant omission in a transaction purportedly valued at $8 .2M. Finally, the

Defendants violated FAS 5712(b), by failing to provide information on the receivable balance for

each period that an income statement was provided. This was clearly a material omission in Ql

2002, Q2 2002, and Q3 2002, as it wasn 't revealed until 4Q 2002 that the receivable balance was

still $6.3 million, and as such , was not being paid down over the purported 3 year term . Proper

 disclosure of the receivable balance activity would have alerted investors of the problem nature

 of this receivable in a more timely fashion.

         168.   On February 10, 2002, Investec analyst Koby Finkelstein reiterated his "Strong

Buy" for Lumenis, with a fair value of $31. Finkelstein specifically dispelled concerns over the

Company's accounting practices.

        169.    On February 11, 2002, following a week-long slide in its stock price, the

Company falsely reassured investors, in a statement reported in , that it would

meet forecasts. The Company stated in TheMarker.cozn that its focus remained on sales and

market expansion, adding:

                We are always straight with our investors and the media, and they
                know we always say what we have to say.

        170_    The article reported that Investec analyst Koby Finkelstein visited the Company

for six hours on February 6, amid rumors of accounting problems and came out with a positive

report, stating a "Hold rating at this point is a copout . . . we investigated [Lumens] and

everything looks A-OK to us. None of the stories are based on facts." Finkelstein added that if

the Company fails to meet forecasts, "it will collapse, and rightfully so." Reassured by

management, Finkelstein described the price drop as `panic," and concluded that "after the

annual results are released, things will cool off."

        171.    On February 25, 2002, the Company announced in press releases both a new

financing agreement with Bank Hapoalim and "that it had received a request from the U.S.

Securities and-Exchange Commission to voluntarily provide certain documents and information

for he period commencing January 1, 1998. The request primarily relates to the Company's

relationships with its distributors, and also asks for amplification of the Company's explanation

   certain previously disclosed charges and write-downs. The Company intends to famish all

documents and information requested by the Commission."

        172.   In response to the announcement concerning the SEC inquiry the price of Liunenis

stock declined from $12.94 per share to $8.95 per share.

        173.   On February 26, 2002, the Company announced the appointment of a new CFO.

Defendant Sagi Genger, "told Reuters that a change in CFO was not an indication of problems in

accounting, falsely adding he was not aware of why the SEC had asked for information on the

company." The Company, however, would later reveal in its [February 28, 2002] conference call

that it knew the SEC had contacted its distributors , "They are asking for information and we

decided to disclose the request despite the fact we are under no obligation to do so," Genger said.

"Asking for information is not a designation of wrongdoing.... I don't know what drives the

SEC to do what they do. They have an important function," Genger said . "We will be disclosing

what we have in the past. We have always been transparent and will continue to be,"

       174.    The Marker, in an article' dated February 25, 2002, reported the change of CFO as

coming suspiciously at the same time that the Company published its annual financial reports:

               SEC opens Lumenis investigation

               Another matter that might disturb the repose of investors, or at
               least cause them insomnia was the replacement occurred near the
               date for the publication of the annual financial reports. Lumenis
               stated after announcing the change, that the CFO was
               simultaneously holding another position, which is why he was
               replaced only after six months as CFO. It is doubtful whether the
               announcement calmed investors.

        175.    Bloomberg reported on February 26, 2002 that Sutton said the Company only

learned of the SEC investigation one week earlier. "We have full confidence in the integrity of

the financial statements . We need to comply with the request, but there's nothing we should be

concerned about." This contrasts with the information Sutton himself specifically provided in

the Lumenis [February 28, 2002] conference call regarding SEC contacts with distributors.

        176.    On February 28, 2002, Lumenis issued a press release pre-announcing its financial

results for the fourth quarter of 2001, the period ending December 31, 2001. The Company

reported revenues of S 100. 8 million.

        177.   Also on February 28, 2002, after the markets had already opened, Lumenis held a

conference call in which Sutton said, ` m learned in January that certain former distributors as

well as the current distributors were contacted by the SEC

        178.   Contrary to previous representations by Defendants, Sutton admitted prior

knowledge of the SEC investigation and even claimed, "we contacted the SEC and volunteered

our assistance in the matter." Furthermore, despite his previous utterance to Bloomberg

regarding the timing of when he learned of the investigation ("last week"), Sutton went on to say,

"two weeks ago, the SEC contacted us with a three page questionnaire, mostly focusing on

getting documents related to distributors."

        179.   CWI indicated that in addition to the Company' s knowledge of the SEC

investigation two weeks prior to revealing the investigation to the public, there were rumors

internally of an informal investigation as far back as November 2001. Furthermore, CW 11, a

former administrative assistant for Lumens, was assigned to help Lumenis employees in a

project to collect documents for transmittal to the SEC. CW I 1 states that the "Lumenis SEC

project " began in December, 2001. CWI. I says that the project was "hush-hush," and was told

not to talk about what he was doing.

        180.    The revelations made in the press release and in the subsequent conference call

about the ongoing SEC inquiry combined with the Company missing its earlier forecast had a

dramatic effect on the price of Lumenis stock , instantly causing a 31 % drop from its $ 10.55 per

share price at the open of trading, and causing the stock to fall over 50% from its January levels

to $7.26 per share, and resulting in damages to Lead Plaintiffs and the Class.

        181.   Dresdner Kleinwort Wasserstein , in its March 26, 2002 analyst report, noted a

downward revision of its 2002 earnings per share estimate for the Company. The revision was

based mainly on yet additional "non-recurring" charges that the Company would be taking for I Q

2002. It also mentioned the likelihood that the Company would be adding to its bad debt

reserves from outstanding rcceivables offormer distributors of the Company:

               March 26, 2002 Dresdner Kleiuwort Wasserstein (Robert C.
               Dunne) DrKW: LITME Adjusting 2002 estimate to reflect non-
               recurring first quarter

               Analysis: We arc revising our estimate for 2002 from $1.65 to '
               $1.30 per share, mainly to reflect non-recurring expenses that the
               company expects to incur in the first quarter. These costs could
               amount to as much as $14m, reducing first quarter EPS to about
               break-even from our previous forecast of $0.28. The expenses are
               for moving sortie of the former Coherent manufacturing operation
               from Santa Clara to other company facilities. These relocations
               should ultimately reduce costs. Second, Lurenis has taken another
               look at receivables from former distributors, and will most likely
               be adding to bad debt reserves in the first quarter.

         182.    As the Company, now under SEC scrutiny, was no longer able to continue the

 same practices it had used to create the illusion of financial success, it had a disappointing IQ

 2002. On May 7, 2002, Lumenis issued a press release announcing that the Company

 would miss revenue estimates for the first quarter of 2002, the period ending March 3 I, 2002,

 The Comp any reported that net revenues for the first quarter would be $86 million as opposed to

 $90 million. The press release stated in pertinent part:

                Principally as a result of lower sales in Europe in a traditionally
                weak first quarter, we did not meet revenue and earnings estimates.
                The Company has made management changes and reorganized its
                activities in Europe to address the weaker sales levels.
                Additionally, lower prices and an unfavorable product mix
                adversely affected gross margins.

        183.    Investors pummeled the stock, knocking it down over 50%, to S3.30 per share

from $6.79 per share. , (Scarcely 10 months earlier, A. Genger was selling his $33 million of

stock at over $30 per share).

        184.    On April 1, 2002, Defendants caused the Company to file its annual report on

Form 10-K for the year ended December 31, 2001. The 2001 10-K contained false financial

information concerning reported revenues. The 2001 10-K made other misrepresentations as

well. It improperly classified assets in the amount of $9 million as "inventory' when in fact they

were pieces of demonstration equipment that should have been classified as Finished Goods

Used In Operations (F.G) and not Inventory.

        185.    In addition, the 2001 Form 10-K falsely and misleadingly identifying the $9M

adjustment as "inventory", Defendant Sutton, during the fourth quarter 2001, conference call also

falsely claimed that the year end adjustment was for additional "inventor}', as follows:

                Our inventories at the end of the fourth quarter included finished
                goods used in operations (indiscernible) $ 92.8 representing an
                increase of $11.6 million . The change includes $3 . 4M from the
                HGM acquisition, $1.6M writedown in connection with the HGM
                acquisition. It also includes $10.5 million increase stenmiing
                mainly in connection with the p urchase accounting adjustment
                from the physical count of inventory at the end of the year...."
                [Emphasis added.]

        186.   The Defendant Sutton's explanation for the increase in inventory was questioned

by an analyst, who engaged in the following question and answer discussion during the

conference call:

               THE CALLER:

               Let me understand this $10 million , I mean where does this come
               from, the $ 10 million increase in inventory?

               MR. SAGI GENDER;

               The $10 million increase in inventory comes from two different
               parts. One part is coming from, basically the F1.GM inventory that
               was added on.

               THE CALLER:

               But that was a small amount right?

               MR. SAGI GENGER:

               Yeah, that's rift . And the balance basically comes frm a
               difference between what was reported to us an the inventory of
               Coherent Medical Group by the legacy Coherent finance group
               when we bought the, company and what we actually found when
               we did the physical inventory. And effectively that iiiventoryis not
               an inventory that is in the warehou s e, rather it is demo inventory
               sitting out with doctors....... And as we have confirmed that
               inventory, it will be added into the balance sheet that doesn't have
               any P&L impact on the company. [Emphasis added.]

               THE CAI. LER:


                     Okay, but in any of that, it's an item that has consumed cash, it's
                     not. It is not, at some point - it's not realizing cash on the other
                     hand, I mean it's not being sold , so you, you know? [Emphasis

                     MR. SAGI GENGER:

                     John let me try and address your question. I think your question
                     (technical difficulty), but I think we should also get the facts
                     straight and make sure that we are looking at it correctly. First of
                     all, that increase in inventory never consumed cash for our
                     shareholders, it consumed cash for the Coherent shareholders .
                     Number two.... (Emphasis added.]

                     THE CALLER:

                     I understand, but when you buy a business, you know, you are
                     buying assets and some expectation of future cash flow but in any
                     event go ahead.

                    [MR. SAGI GENGER:

                    Anyway (indiscernible) John, I want to thank you very much for
                    the question. I think we are trying to limit to one question per
                    person and I think that we should move on with all due respect.

                    During the conference call discussion, Defendant Genger admitted
                    that the $9 million CMG adjustment was not regular inventory, but
                    rather "demo" inventory sitting out with doctors and not in a
                    warehouse. Therefore, it was improper and a violation of GAAP to
                    classify the equipment as "inventory" held for sale and not as
                    F.G.s, a wasting asset.

             187.   Sutton made upbeat comments to Globes on May 8, 2002, assuring investors that

     "the Company will become quite profitable during the year, so I see no reason to worry". Again,

     this statement was knowingly false because the Company had no expectation of profitability

     absent the fraudulent practices outlined above in 11 35-56,

        188.    CIBC World Markets Equity Research noted the weaknesses in European sales

subsequent to the CMG acquisition and the overall problematic nature of the CMG integration in

a May 14, 2002 analyst report. It also warned of even more charges to come that year:

               May 14, 2002 CTBC World Markets Equity Research

               Lumenis Ltd. Lowers Guidance ; Cash Flow Still Negative;
               Reiterate Hold

               Pro forma for Coherent acquisition, revenues fell 12% because of
               European weakness and combined weakness in hair removal and
               ophthalmic. It seems the Coherent deal is problematic, given
               integration issues , [Emphasis added)

               LUlvlE plans to implement a cost reduction program over the
               remainder of this year in hopes of saving $14 million through the
               elimination of 100 positions, most of which are expected to come
               in G&A, not R&D or sales We also believe that non-core
               businesses such as industrial, dental, and minority investments
               could be sold, spun-off or restructured to improve profitability.

       189.    Ultimately, Defendants conceded that the CMG merger was not as smooth as had

been previously represented. In an interview reported in the San Jose Mercury News on April

14, 2003, Defendant A. Genger stated: "clearly, mistakes have been made. To say the merger

worked exactly as we wanted would not be accurate."

       190.    On May 14, 2002 , Dlpomberg reported additional false and misleading re-

assurances by Defendant Sutton:

       On lower revenue:

               We had revenue of $86 . 1 million, down from our previous
               guidance of $90 million - The njain factor relates to our European
               operations . In Europe we missed by $4.6 million in revenue. It's
               mainly a management issue, not a market issue. We've dealt with
               it, we've brought in new people, and we are fixing the problem.

         On job cuts:

                We've identified $14 million in cost savings through the end of
                2002. it includes some cuts in personnel. We're talking about a
                range of close to 100 people. We have altogether 1,460 people in
                the company, so we're talking roughly 7 percent. The idea isn't to
                impact sales and service operations, which relate to customers, or
                (research and development), which generates the growth for our

         191.   This re-assurance calmed investors somewhat, and the stock price crept back up to

$4.73 per share. However, on May 16, 2002, the Company revealed that the SEC had issued a

formal investigation order, upgrading its February inquiry. The formal investigation gave the

SEC authority to subpoena testimony, as well as phone and bank records. According to a May

16, 2002, BIooniberQ report, the Company had disclosed that the preliminary inquiry requested

information on the Company's relationships with distributors and details on changes and write-

downs. However, Morano stated "We would expect this has to do with revenue recognition." In

reaction, [lie price of Lurnenis stock fell to $3.53 per share.

                                 PAST CLASS PERIOD EVENTS

        192.    Globes, in an article dated May 23, 2002, reported on. the failure of the CMG

acquisition and cast aspersions on the Company's slowly emerging missteps resulting in the

earlier deal:

                Lumenis's coherent woes

                After being down in the dumps, Lumenis (NASDAQ: LUME) rose
                over 54% over a 10 day period, including a 12.6% iise yesterday
                on small turnover. We've finally figured out the real story behind
                Lurenis' unexpected crisis, which was its acquisition of Coherent
                (NASDAQ: COHR). First of all, let us make clear that we think
                the purchase was justified, and in the future, will be seen as a very
                important step. But - with a capital "B" - when Lunlcnis bought

                the leading laser eye treatment company it didn' t assess Coheremt's
                European division properly. With thne, it became clear that the US
                company had a lot of difficulties in Europe. in terms ofsales and
                sales methods. We now know that Coherent Europe is in terrible
                shape, really terrible . But these things only become apparent with

               It could he that Lumenis didn't do proper due diligence, and it
               could be that it was given erroneous information, but that's all
               water under the bridge, Today, a year after the acquisition,
               Lwnenis's management realizes it's stuck with a bad bargain.
               Lurnenis CEO Yacha Sutton hinted at this several times but the
               extent of the problem is far beyond a simple "drop in sales due to
               economic conditions". There was, they tell mg, a real mess over
               there, in all areas from reporting to management . There's no use in
               pointing the finger of blame at one person or another right now
               and, in any case, everyone on Wall Street is convinced that Sutton,
               who has taken on the problem his way, will solve it. Meanwhile,
               whether by choice or by default, Bank Hapoalim will continue
               backing the company and that calms investors. (Emphasis added.)

        193_   Global Equity Research, in its August 9, 2002 analyst report, catalogued the

Company's "staggering number of write-offs, charges, and provisions over recent years" and

pointed out the operational shortcomings at. the Company relating to the failed integration of


               Write-offs and provisions

               The company has made'a staggering number of write-offs, charges,
               and provisions over recent years.

               Table 2: 1999 Write- Offs and Provisions

                Amount (US$m)       Reason

                             30.1   Inventory write down

                             23.8   Litigation Settlement
                             17.6   Impairment of Intangibles

                           13.4    Receivable write down
                           11.2    Severance

                            5.7    Fixed asset write down

                            5.0    Proxy contest

                            4.8    Marketing restructuring costs

                            10     Other restructuring costs

                            1,6    Fixed asset write down

                         115.2     Total

Source: Lumenis Filings with SEC

 Table 3: 2001 Write-Offs and Provisions

  Amount(U,S$m)       Reason

               19.2   Inventory write down

              47.8    In process R&D

              26.1    Accelerated options scheme

              22.2    Litigation

               10.2   Receivable write down
              10.0    Retention Bonuses

               6.4    G&A relating to CMG Acquisition
               5.8    Rebranding and other integration costs

               4.4    Future lease costs of closed facilities
               1.8    Bad debts in Argentina

               1.5    Fixed asset write down

               1.1    Tax charges

               1.1    Reorganization of dental unit
             156.7    Total

Source: Lumeni s Filings with SEC

When it conies to acquisitions it sometimes appears that 1+1= 1.5.
When we consider the impact of the Coherent acquisition on the
Lumenis share price the cynics may argue that until now, 1+1= -1.
We will examine the problems shortly. But when all is said and
done, was there any logic to this deal? Overwhelmingly we would
answer that question in the affirmative. Coherent gave Lumenis
access into the previously untapped ophthalmic market. At the
same time as we will show later, in what is a very fragmented
market, Coherent and Lumenis were really the only two companies
with serious critical mass. The Theory goes that if those
businesses can be well integrated, it will create the industry giant.

So far management has struMed to integrate these two businesses.
In their defense, management would argue that a huge part of the
merged company's operating costs have been stripped out of the
combined business. This is true, but it appears to us that more
fimndamental issues, such as a further reduction in the number of

                  manufacturing facilities, upgrading middle management in some
                  areas (such as Europe), more thought regarding an appropriate
                  sates and distribution network and improved IT systems are all
                  areas where there is more work to do. One good example for
                  further integration that is requi red comes for the fact the finance
                  department of the company still operates with five accounting

                  The sales structure is a particularly interesting issue. There is
                  absolutely no synergy as far as we can tell on the selling-side
                  between the aesthetic division and the new ophthalmic division ,
                  So going forward, should this company establish vertical or
                  horizontal sales units' Today, selling is carried out on a
                  geographic basis, with sales carried out on a division basis within
                  each region. Perhaps it would make more sense selling purely on a
                  division basis? These are issues that we believe management are
                  still grappling with.

(Emphasis added,)

The following charts give a wider view ofthe Company's write-offs and provisions, including

those related to the CMG acquisition.

                                           LUMENIS, LTD.
                                        Selected Financial Data
                                                (In. Millions)

Sources: Company Press Releases and SEC Filin s
                                                2401                                      2002

                               QI       Q2             Q3        Q4       Q1      Q2IA       Q3      Q4

Revertues                      $43.9   $80.4           $90.2     $100.8   $86.1   $93.0      $90.0   $79.4

 Less Cost of Sales            $15.6    $54.1          $39.8     $46.2    $41.0   $42.2      $43.2   $52.7

 Gross Profit                  $28.3   $26.3           $50.4     $54.6    $45.1   $50.8      $46.8

Operating Ex. R&D              $3.1    $5.4         $6.5       $6.8       $ 7.0   $6.8       $ 6.9   $8.3

In-Process R&D                         $46.7        1)         $1.2       0       0          0       0

SG&A                           $19,1   $ 83.2       $38.6      $39.2      $33.1   $37.4     $34.7    $44.3

Litigation Expenses            $1.5    $27.8                   $(7.0)     0       $5.2      0        $3.7

Amort. of Intangibles                  $2. 1        $3.2       $8.7       $ 1.8   $1.8      $1.6     $4.3

               Writedown Investments                       $3.4                 0              $2.1            0              0           0        0

               Total Operating Expenses          $23.7     $168.6               $48.3          $51.0           $41.9          $51,2       $43.2    $60.6

          I    Net Income (Loss )              j $ 4.2     ($146 .4)            $.1            ($3.8)     1 ($2 . 8}          ($1.3)      ($.9)    ($39.1)

                                                                  LUMENLS, LTD.
                                                Write- offs and Non-Recurring Expenses
                                                              (In Millions)

          Sources: Company Press Releases and SEC Filings
                                                              2001                                                                 2002

                                        Q1       Q2         Q3           Q4             Total           Q1             Q2          Q3      Q4       Total

              In-Process R&D                     $46.7                   $1.1           $47.8

              Inventory Writedown                $17.6                   $1.6           $19.2                                              $10.7    $10.7

              Discontinued Ops.                  $4.3       $4.4         $3.3           $12.0                                              $2.8    $2.8

              CMG Transaction Ex.       $2.3                         1                  $2.3

              Legal Expense             $1.5     $27.8                   ($7.0)         $22.3                          $5.2               $3.7     $8.9

              Receivable                $1.3     $12.7                   ($3.8)         $10.2                                             $1.3     $1.3

              Facility Charges                   $5.5                    ($1.1)         $4.4

              Exceptional Personnel              $9.0       $2.5         $4.8           $16.3           ($3.3)                                     ($3.3)

              Severance                                                                                 $2.9                      $1.2             $4.1

              Accelerated Options       $1.0    $23.7       $.7          $.7            $26.1
              & Vesting

              Integration Expenses              $3.1        $2.0         $.7            $5.8

              Argentina Bad Debt                                         $1.7           $1.7

              Reorganization of                                          $1.1           $1.1
              Dental Operations

              Fixed Asset.                                               $1.5           $1.5

              Tax Charge                                                 $1.1           $1.1

              Office Closure Costs                                                                                                        $.$      $.5

          Total                        $6.1     $150.4     $9.6          $5.7           $171.8          $2.9       $5.2           $3,2    $15.7    $25.0

:GSec \LuTnenis,1 I92Tleadings\Coi otidated Amended Complaint.wpd              82
                                                         SCIENTER ALLEGATIONS

                      194.      As alleged herein, Defendants acted with scienter in that Defendants knew that the

           public documents and statements issued or disseminated in the name of the Company were

           materially false and misleading; knew that such statements or documents would be issued or

           disseminated to the investing public; and knowingly and substantially participated or acquiesced

           in the issuance or dissemination of such statements or documents as primary violations of the

           federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their

           receipt of information reflecting the true facts regarding Lumenis, their control over, and/or

           receipt and/or modification of Lumenis's allegedly materially misleading misstatements and/or

           their associations with the Company which made them privy to confidential proprietary

           information concerning Lumenis, participated in the fraudulent scheme alleged herein.

                     195.       There are substantial indicia and evidence of Defendants' scienter. Defendant

          Adil has admitted to his scienter in papers submitted to this Corm and has implicated his co-

          Defendants, as well . Adil signed two quarterly financial statements filed with the SEC, which he

          has admitted under oath to knowing were false. In addition, he infoinned the other Defendants of

          the falsity of the Company's financials, and of the GAAP-violating accounting practices.

          Using Inflated Stock As Acquisition Currency

                     196.      Furthermore, the Company used fraudulently inflated stock as currency in its

          acquisition of Coherent. In early 2001, Defendants acquired CMG, a larger and more established

          company, by using Lunienis stock to fund a significant portion of the purchase price. The terms

          of the CMG acquisition included payment of 5,432,099 shares of Lumens common stock then

          trading at approximately $21 per share, representing around $113 million of the $217 million

          purchase price.

3ASecralLumenis,I 1421PleadingslConsolidalcd Arncnded Corapiainf.wpd   83
                     197,      The Company could only complete the transaction using its fraudulently inflated

          stock as currency. As Defendant Sutton later stated (in a January 7, 2002 interview in Globes },

          "we bought a company larger than ourselves , for which we lacked sufficient cash .... Without

          the use of shares, it would have been hard to close the deal."

          Using Inflated Stock to Raise Cash from Option Exercise

                     198.     Defendants were also motivated to use the inflated stock price as a source of

          funding. Lumenis was in dire need of cash to fund operations, as it had failed to generate

          positive operating cash flow for the past 2 years. The Company, in fact, was speedily losing

          cash: operating cash flow in 1999 and 2000 was ($29.9 million) and ($27.3 million),

         respectively, and 1Q 2001 operating cash flow as ($15.9M) as disclosed in SEC filings.

                    199.      Capitalizing on the inflated stock prices caused by their false claims of synergies -

         and future revenue potential from the CMG acquisition, Defendants hastened to accelerate stock

         options and grant fully vested stock options, primarily in 2Q 2001. These accelerated/fully

         vested stock options were exercised by Lumenis insiders, as anticipated , during 2Q and 3Q 2001

         as the stock price was substantially higher than option exercise prices of approximately $10.90

         per share . In total, the exercise of these accelerated/fully vested options generated approximately

         $20 million in cash for Defendants.

                   200.      The Company' s financing arrangement with Bank Hapoalim , B.M. ("Bank

         Hapoalim," or the `Bank'), included an option for the Bank to purchase 2,500,000 shares of ESC

         stock at $20.25 per share. The option agreement provided that if the ESC stock price was above

         $23 per share, subject to certain conditions, Defendants could demand that the Bank exercise the

         options. On July 17, 2001, Globes reported the following:

                             Now that the haDd-over of the options to the bank has been
                             approved, it is almost certain that they will be exercised . Under the

'1Secra\Commis,l1921P]eadings'Consa1idated Amended Ci m faint-wpd   84
                             terns of the approval, Bank Hapoalim can exercise the options
                             whenever it wishes, but the company can also oblige the bank to
                             exercise 2 million of the options, as long as the share is being .
                             traded above $23. Since the company seems to have no reason not
                             to oblige the bank, the options will apparently be exercised in a
                             matter of days.

                    20!.     During 3Q 2001 , Defendants disclosed that Bank of Hapoalim had exercised the

          option to purchase 1,363,700 shares, generating approximately $27 million cash for the


          Secondary Offering

                   202.      Defendants were also motivated to inflate the stock price in preparation for a

          secondary offering needed to raise cash. In 2Q 2001, as a result of the CMG acquisition,

          Lumens had negative operating cash flow and long-term debt of approximately $190 million.

          This made a secondary offering a highly attractive option. A January 7, 2002 (when the stock

         was trading at approximately $22.50 per share) Globes article, questioned Sutton on this topic,

         as follows:

                             Q: Are you planning a shares issue?

                            A: We're definitely examini ng a possible issue . An issue at the
                            current share price isn't on the agenda. We'Il issue at a higher price
                            that will dilute the shareholders less, in order to improve the
                            balance sheet structure.

                   203.     As expressed by Sutton , Defendants wanted to issue additional shares to

         "improve the balance sheet structure", i.e., eliminate long-term debt and provide cash, but in

         order to have a successful share issue, they needed the stock price to be higher.

S:1SecmUummis,l192TIeadings\Consolidated Amended Comp]sint.wpd   35
            Loan Covenants

                      204.      Defendants also used Lumenis's inflated revenue figures to comply with debt

           coverage ratios enabling them to obtain the cash needed to retire the Company's subordinated


                      205.      The CMG acquisition was made possible, in large part, by the financing package

           from Bank Hapoalim. The financing package included the $100 million long-term loan, a

           revolving line of credit, and a letter of intent to provide funding for ESC to retire $90 million in

           convertible subordinated notes maturing on September 1, 2002, provided that Lumems

           maintained a debt coverage ratio based on its EBITDA. The 2001 Form 10-K described the

           Bank financing package for the CMG acquisition as follows:

                                The financing arrangenient consisted of (a) a $1 Qd,000 six-year
                               term. loan bearing interest at LIBOR plus 1.75% per annum, (b) up
                               to $50,000 revolving line of credit until April, 2002 and up to
                               $20,000 revolving Tine of credit from April, 2002 to April, 2003
                               bearing interest at LIBOR plus 1 % per annum and (c) a letter of
                               undertaking pursuant to which the Bank agreed, subject to the
                               terms and conditions set forth therein, to provide up to
                               approximately $92,000 of a four-year loan convertible into the
                               Company's shares at a price of $20.25 per share. Proceeds from
                               the new convertible loan are to be used solely to refinance the
                               Companys outstanding convertible subordinated notes, which will
                               mature on September 1, 2002. The new loan would bear interest
                               ranging between LIBOR plus 2.25%. and LIBOR plus 3.5%. This
                               amount of the commitment was adjusted to $71,000 following the
                               conversion of $21,120 convertible subordinated notes into shares.
                               In connection with the $100,000 loan, on April 30, 2001, Lumens
                               and the Bank also entered into a five year option agreement
                               granting the Bank or any of its subsidiaries the right to purchase
                               from Lumnenis up to 2,500,000 ordinary shares at a purchase price
                               of $20.25 per share, subject to certain adjustments. The Bank has
                               exercised options for 1,363,700 shares as of December 31, 2001.

                               The terms of the financing restrict certain cash dividends and have
                               limitations on asset dispositions or acquisitions without prior
                               approval of the Bank, In addition, in order to utilize the letter of
                               undertaking, the Company has to maintain a ratio of its debt, as

S;\Seera\Lumenis,I192\P1eadings\Ccrosoiidated Amended Comp1 int,wpd   86
                                    defined, to EBITDA, as defined, of less than three times, As of
                                    December 31, 2001 the Company was in compliance with such
                                    terms and conditions.

                       206.         Thus, in order for Defendants to obtain the additional financing to retire the

            maturing subordinated notes, they were tinder pressure to achieve sufficient revenue in order to

            comply with the debt coverage ratio based on EBITDA. Adding to the pressure, Lurnenis's cash

            position had rapidly deteriorated despite the influx of $50 million from exercised options in 2Q

            2001 and 3Q 2001. Their Company's cash balance fell from $100.5 million on September 30,

            2001, to $31.4 millioii.on December 31,, 2001. Witli the SEC launching its inquiry in January,

           2001, Defendants also knew that their revenue recognition practices would be under close

           scrutiny, making it harder to meet the Bank's required EBIIDA debt coverage ratio . Therefore,

           while they managed to be in compliance with the coverage ratio as of December 31, 2001, due to

          'their various improper revenue recognition and accounting practices, Defendants moved quickly

           thereafter to commit the Bank to provide the funds necessary to retire the subordinated

           convertible notes, closing the new funding agreement on March 26, 2002

                                         APPLICABILITY OF PRESUMPTION OF RELIANCE:
                                               FRAUD-ON-THE-MARKET DOCTRINE

                      207.         At all relevant times , the market for Lumenis securities was an efficient market

           for the following reasons, among others:

                                   (1)      Lumenis stock met the requirements for listing, and was listed and actively

                                            traded on the NASDAQ, a highly efficient and automated market;

                                   (2)      As a regulated issuer, Lumenis filed periodic public reports with the SEC

                                            and the NASDAQ;

S:LSecta\Lumenis,t 12 1P1^-adine   Con o1 ,ted Amended CorMlai„z.wpd   87
                              (3)       Lumens regularly communicated with public investors via established

                                        market communication mechanisms, including through regular

                                        disseminations of press releases on the national circuits of major newswire

                                        services and through other wide-ranging public disclosures, such as

                                       communications with the financial press and other similar reporting

                                       services; and

                              (4)      Lumenis was followed by several securities analysts employed by major

                                       brokerage firms who wrote reports that were distributed to the sales force

                                       and certain customers of their respective brokerage firms. Each of these

                                       reports was publicly available and entered the public marketplace.

                    208.     As a result of the foregoing, the market forLumenis's securities promptly

          digested current information regarding Lumens from all publicly available sources and reflected

          such information in Lumenis's stock price, Under these circumstances, all purchasers of

          Lumenis's securities during the Class Period suffered similar injury through their purchase of

          Lumenis's securities at artificially inflated prices and a presumption of reliance applies.

                                                         NQ SAFE HARBOR

                   209. The statutory safe harbor provided for forward-looking statements under certain
          circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

          Many of the statements pleaded herein reflect present or historical facts, and/or were not

          identified as "forward- looking statements " when made , To the extent there were any

          forward-looking statements, there were no meaningful cautionary statements identifying

         important factors that could cause actual results to differ materially from those in the purportedly

         forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply

S:1Seen/Lumens,I 1920eadingsConso[idatcd Amended Complaint.wpd   81S
             to any forward-looking statements pleaded herein, Defendants are liable for those false

             forward-looking statements because at the time each of those forward-looking statements was

            made, the particular speaker knew that the particular forward-looking statement was false, and/or

            the forward-looking statement was authorized and/or approved by an executive officer of

            Lumens who knew that those statements were false when made.

                                                                      COUNT I

                         Violation Of Section 10(b) Of The Exchange Act And Rule IOb-S
                                        Promu lgated Thereunder Against
              Defendants Lurenis Sutton , S. Gen er FrenkeI and Adil ("Mana gement Defendants"

                      210.      Plaintiffs repeat and reallege each and every allegation contained above as if fully

            set forth herein.

                      211.      During the Class Period, the Management Defendants carried out a plan, scheme

           and course of conduct that was intended to and, throughout the Class Period, did: (i) deceive the

           ingesting public, including Lead Plaintiffs and other Class members, as alleged herein; and (ii)

           cause Lead Plaintiffs and other members of the Class to purchase Lumenis's securities at

           artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct,

           the Management Defendants, and each of them, took the actions set forth herein.

                     212,      The Management Defendants: (a) employed devices, schemes,. and artifices to

          defraud; (b) made untrue statements of material fact and/or omitted to state material facts

          necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course

          of business that operated as a fraud and deceit upon the purchasers of the Company's securities in

          an effort to maintain artificially high market prices for Lumenis's securities in violation of

          Section 10(b) of the Exchange Act and Rule 1015-5 promulgated thereunder. All Management

S'\Seem\1.umenis,11921YleadingslConsolidated Amended Car plaint.wpd    89
            Defendants are stied either as primary participants in the wrongful and illegal conduct charged

            herein or as controlling persons as alleged below.

                      213.      The Management Defendants, individually and in concert, directly and indirectly,

           by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and

           participated in a continuous course of conduct to conceal adverse material information about the

           business, operations and future prospects of Lumenis as specified herein.

                     214.       These Management Defendants employed devices , schemes and artifices to

           defraud, while in possession of material, adverse, non-public information and engaged in acts,

           practices , and a course of conduct as alleged herein in an effort to assure investors of Lumenis's

           value and performance and continued substantial growth, which included the making of, or the

           participation in the making of, untrue statements of material facts and omitting to state material

           facts necessary in order to make the statements made about Luinenis and its business operations

           and future prospects in. the light of the circumstances under which they were made, not

           misleading, as set forth more particularly herein, and engaged in transactions, practices and a

           course of business that operated as a fraud and deceit upon the purchasers of Lumenis securities

           during the Class Period.

                     215.      Each of the Management Defendants' primary liability, and controlling person

          liability, arises from the following facts: (z) the Individual Defendants were high-level executives

          and/or directors at the Company during the Class Period and members of the Company's

          management team or had control thereof; (ii) each of the Management Defendants, by virtue of

          his responsibilities and activities as a senior officer and/or director of the Company was privy to

          and participated in the creation, development and reporting of the Company's internal budgets,

          plans, projections and/or reports; (iiii) each of these defendants enjoyed significant personal

s:\Secra\Lumenis,11921PIeadings\Consalidafed Amendcd Conirlaint.wpd   90

             contact and familiarity with the other Defendants and was advised of and had access to other

             members of the Company's management team, internal reports and other data and information

             about the Company's finances, operations, and sales at all relevant times; and (iv) each of these

             Defendants was aware of the Company's dissemination of information to the investing public

             which they knew or recklessly disregarded was materially false and misleading. The

            Management Defendants had actual knowledge of the misrepresentations and omissions of

            material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

            ascertain and to disclose such facts, even though such facts were available to them. Such

            Defendants' material misrepresentations and/or omissions were done knowingly or recklessly

            and for the purpose and effect of concealing Lumenis's operating condition and future business

            prospects from the investing public and supporting the artificially inflated price of its securities.

           As demonstrated by the Management Defendants' overstatements and misrepresentations of the

           Company's business, operations and earnings throughout the Class Period, Defendants, if they

           did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in

           failing to obtain such knowledge by deliberately refraining from taking those steps necessary to

           discover whether those statements were false or misleading.

                     216.       As a result of the dissemination of the materially false and misleading information

           and failure to disclose material facts, as set forth above, the market price of Lumenis' s securities

           was artificially inflated during the Class Period. In ignorance of the fact that the market prices of

's publicly-traded securities were artificially inflated, and relying directly or indirectly

          on the false and misleading statements made by the Management Defendants, or upon the

          integrity of the market in which the stock trade, and/or on the absence of material adverse

          information that was known to or recklessly disregarded by the Management Defendants but not

SASecra\Lume iis,i 1921P1eadings%Corrsolidated Amended Complaint.wpd   91

            disclosed in public statements by the Management Defendants during the Class Period, Lead

           Plaintiffs and the other members of the Class acquired Lumenis securities during the Class

           Period at artificially high prices and were damaged thereby.

                      217.     At the time of said misrepresentations and omissions, Lead Plaintiffs and other

           members of the Class were ignorant of their falsity, and believed then to be true. Had Lead

           Plaintiffs and the other members of the Class and the marketplace known the truth regarding

           Lumenis, its account finances, and its business practices, which were not disclosed by

           Defendants, Lead Plaintiffs and other members of the Class would not have purchased or

           otherwise acquired their Luinenis securities , or, if they had acquired such securities during the

           Class Period, they would not have done so at the artificially inflated prices that they paid. By

           virtue of the foregoing, the Management Defendants have violated Section 10(b) of the Exchange

          Act, and Rule I Ob-5 promulgated thereunder.

                     218.      As a direct and proximate result of the Management Defendants' wrongful

          conduct, Lead Plaintiffs and the other members of the Class suffered damages in connection with

          the purchases and sales of the Company's securities during the Class Period.

                                                                     COUNT II

                Violation          Section 20(a) Of The Exchange Act Against the Individual Defendants

                    219.      Plaintiffs repeat and reallege each and every allegation contained above as if fully

          set forth herein.

                    220.      The Individual Defendants acted as controlling persons ofLunnenis within the

          meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

          positions, and their ownership and contractual rights, participation in an d/or awareness of the

          Company's operations and/or intimate knowledge of the false financial statements filed by the

S:1Secra'Ltmttnis,1I 2'iPleadin9s\CrmsAdate4 Amended Comp Eaintwpd     92

            Company with the SEC and disseminated to the investing public, the Individual Defendants had

            the power to influence and control and did influence and control, directly or indirectly, the

            decision-making of the Company, including the content and dissemination of the various

            statements that plaintiffs contend are false and misleading . The Individual Defendants were

           provided with or had unlimited access to copies of the Company's reports, press releases, public

           filings and other statements alleged by Lead Plaintiffs to be misleading prior to and/or shortly

           after these statements were issued and had the ability to prevent the issuance of the statements or

           cause the statements to be corrected.

                     221.       In particular, each of these Defendants had direct and supervisory involvement in

           the day-to-day operations of the Company and, therefore, is presumed to have had the power to

           control or influence the particular transactions giving rise to the securities violations as alleged

           herein, and exercised the same. As set forth above, Lumenis and the Individual Defendants each

           violated Section I0(b) and Rule lOb-S by their acts and omissions as alleged in this Complaint.

          By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant

          to Section 20(a) of the Exchange Act. As a direct and proximate result of Defendants ' wrongful

          conduct, plaintiffs and other members of the Class suffered damages in connection with their

          purchases and sales of the Company' s securities during the Class Period.

                     222.      In or around June, 1999, Defendant Arie Genger completed a hostile proxy

          takeover of ESC, the predecessor of Lumenis . Following the takeover, Ai ie Genger appointed

          Defendant Sutton to Chief Executive Officer, and appointed his 27-year old son, Defendant Sagi

          Genger, as the Company's Chief Financial Officer. At that time, the younger Genger had no

          prior experience as a senior executive.

SfSec a\Lumenis,I I921PIeadings\Consolidated Amended Complaint. wpd   93
                      223.      In an interview with Globes following his appointment, S. Genger said,

            "Obviously, I received the appointment because I'm Arie Genger's son. I would not have been

            appointed otherwise." At the time, Defendant Sagi Genger did not mention the fact that he had

            received 250,000 options, a fact which only came to light near the end of 2002. The exercise

            price of 150,000 shares was $5.06, while the price for the remaining shares was $12.

                      224.      Defendant A. Genger was the largest individual shareholder of Lumenis. He had

            conducted the hostile takeover of ESC (described below), and hand-picked most of the directors,

           as well as the CEO, placed his 27-year-old son in the positions of Chief Operating Officer and

           Chief Financial Office-. CW1, a former executive of Lumenis, described A. Genger's degree of

           control over the Company and the alleged fraud, referring to him as the "puppet-master" of the

           Company. Furthennore, in July, 2001, following its completion of the CMG acquisition, A.

           Gengor sold 33 million of Lumenis stock at or near its all-time high price, indicating that he had

           sufficient control of the Company's day-to-day operations that he knew of the undisclosed

           integration failures with CMG, and of undisclosed pressure Lumenis stock would soon come


                                                          PRAYER FOR RELIEF

                    WHEREFORE, Lead Plaintiffs pray for judgment as follows:

                    I)        Declaring this action to be a class action properly maintained pursuant to Rule 23

          of the Federal Rules of CiAl Procedure;

                    2)        Awarding Lead Plaintiffs and the Class damages against each Defendant and in

          favor of Lead Plaintiffs and all other mcnibe-s of the Class in an amount to be determined at trial

          plus prejudgment interest thereon;

S'\Seva\Lumenis,l 1921P1eadingslhnsolidated Amended Complaint.wpd   94
                     3)        Awarding Lead Plaintiffs and the Class the costs and expenses of this litigation,

           including reasonable attorneys' fees, experts' fees and other costs and disbursements; and

                     4)       Awarding Lead Plaintiffs and other members of the Class such other and further

           relief as to this honorable Cowl may seem just and proper.

                                                      JURY TRIAL DEMANDED

                    Lead Plaintiffs hereby demand a trial by jury.

          Dated: August 29, 2003

                                                                   BERNSTEIN LIEBHARD & LIFSHITZ., LLP

                                                                         y   .      aber (JH-1738)
                                                                     br3ha n 1. I    tSIIIan (   -7306}
                                                                   10 East 40th Street, 22nd-Floor
                                                                   New York, NY 10016
                                                                   Tel: (212) 779-1414

                                                                   GLANCY & BINKOW, LLP
                                                                   Lionel Z. Glancy

                                                                   1841 Avenue of the Stars, Suite 311
                                                                   Los Angeles , CA 90067
                                                                   Tel: (310) 201-9150

                                                                   Lead Counsel for Lead Plaintiffs and the Class

;. Secra\ inncnis j 19!T1ezdingsr-ons4da(td Amended Complaintwpd        95