FILE

FILE COPYBERNSTEIN LIEBHARD & LIFSHITZ, LLP 05 JUN,Jeffrey M. Haber (JH-1738)Abraham, L Katsman (AK-7306)10 East 40 Street, 22nd Floor U.S, D}sT o COURTNew York, NY 10016Tel: {212} 779-1414

GLANCY BINKOW & GOLDBERG LLPLionel Z . GlancyNeal A. DublinskyAvi N. Wagner1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067Tel: (310) 201-9150

Lead Counsel for Plaintiff s and the Class

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

IN RE: LUMENIS, LTD. ) MASTER FILE NO.: 02-CV- 1989 (DAB)SECURITIES LITIGATION

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This Document Relates to: )All Actions }

SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT

Lead Plaintiffs, Thomas W. Pruter FBD Stonehedge Securities LLC, Efraiwra Zwecker, 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 alma a review of relevant

public filings made by Lumenis Ltd. ("Lumenis" 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 ofthe Company and distributors of the Company' s products

and court filings (including a sworn declaration) by Defendant Asif Adil, former Chief Financial

Officer of Lumenis, in his lawsuit, origina lly filed in the federal court in New Jersey , against the

Company. Defendant Adil's complaint against Lurnenis is attached hereto as Exhibit ("Ex.") A,

and the Declaration ofAsifAdil fled in that action is attached as Ex . 13 hereto.

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

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

Defendants, who purchased or otherwise acquired Lumenis securities during 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.

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 sold more than $45 inil lion of Lurnenis stock at artificially inflated

prices; used artificially inflated Lumenis 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. For months prior to the investigation, Defendants

were knowingly and/or recklessly engaging in fraudulent accounting practices, as confirmed by

the Company's former Chief Financial Officer, Defendant Asif Adil, and others. Additionally,

even after announcing in a press release that it was subject to an informal inquiry by the SEC, 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.

4. On February 28, 2002, in a conference call, the Company revealed the SEC

investigation. This revelation caused the market to question the propriety ofLumenis's reported

financial results and caused the price of Luznenis stock to fall 30% in one day, and more than 69%

from its Class Period high, damaging plaintiffs thereby. This price decline was a foreseeable result

of the fraudulent conduct complained of herein.

5. Nonetheless, artificial inflation remained in Lumenis's share price, as the full

effects of the SEC's investigation and the impact ofthe accounting machinations complained of

herein had not yet been revealed to the market. Now under the watchful eye of the SEC,

Defendants were not able to engage in the same fraudulent accounting practices as before, and on

which Defendants had relied to create the illusion of financial success. As a result, 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 ku-m a! investigation of the Company and its

accounting practices. The stock price dropped 22% on the news.

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6. The Company's share price has not recovered from Defendants ' fraud, and

currently trades at under $2 per share . This figure stands in marked contrast to the $21431 per

share at which certain Defendants sold their shares . In the aftermath of this collapse, defendants

Sutton and S. Genger were terminated (defendant Adil was tent inated during the Class Period

after complaining ofthe fraud alleged herein).

7. Further, on February 5, 2004 , the Company announced its delisting from the

NASDAQ National Exchange to the pink sheets where it now trades. The fraud complained of

also led to the resignation of Lumenis' Class Period auditors in May 2004. Finally, the Company

announced on February 21, 2005 that it received a notification -- referred to as a "Wells Notice"

-- from the Boston District Office ofthe SEC notifying the Company ofthe SEC's intention to

recommend that a civil proceeding brought against the Company for violations of the antifraud

and other provisions of the U.S. federal securities laws in connection with the Company's 2002

and 2003 financial reporting.

JURISDICTION AND VENUE

8. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

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

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

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

U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act [15 U.S.C. § 78aaj.

10. 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

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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.

PARTIES

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

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

Efrain 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.

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

Yokneam Industrial Park, Yokncam 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

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

ophthalmic and dental.

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

officers and/or directors of Lumems:

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

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

Officer;

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

and for part of 2001, Chief Financial Officer,

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

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

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

14. 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 Managerneni Defendants

were "controlling persons" of Lumens within the meaning ofSection 20 ofthe 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 f.u nis, had

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

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

securities laws.

15. The Management Defendants signed various SEC filings made by Lumenis as

follows:

Defendant Lumenis Quarterly and Annual FilingsSigped

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Yacha Sutton 10-K: Fiscal 2000 (including all amendments);

l0-K: Fiscal 2001

Sagi Genger 10-Q: 3d Quarter 2000; 10-K: Fiscal 2000(including all amendments); 10-Q: 18` Quarter2001;

Asif Adil IQ-Q 2d Quarter 2001; 10-Q 3d Quarter2001;

Arie Genger 10-K: Fiscal 2001; 10-K: Fiscal 2002

Jacob Frenkel 10-K: Fiscal 2000 (including all amendments);

10-K: Fiscal 2001; 10-K: Fiscal 2002

16. 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 ofthe narrowly-dcfincd group ofdefendants identified above. Each of the above officers

and directors ofLunrenis, 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 of the 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 End/or disseminating the false and misleading statements and information

alleged herehi, 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.

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17. 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 securities laws, Defendants had a duty to disseminate promptly, accurate and truthful

information 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 be 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 Lumenis, 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.

18. 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 ability 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.

19. Each of the Management f}efendants 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 Lumens

securities at artificially inflated prices.

CLASS ACTION ALLEGATIONS

20. 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 Lumens 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.

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

impracticable. During the Class Period, Lumenis had in excess of27 million shares of common

stock outstanding and approximately 270 shareholders of record. While the exact number of

Class members is unknown 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 Lumens 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.

22. 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' wrongful conduct in violation of the

federal law that is complained of herein.

23. Lead Plaintiffs 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.

24. Common questions of law and fact exist as to all members ofthe Class and

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

questions of law and fact common to the Class arc:

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 Lumenis; and

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

proper measure of damages.

25. A class action is superior to all other available methods for the fair and efficient

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

damages suffered by individual Class members maybe relatively small, the expense and burden of

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

wrongs done to I here There will be no difficulty in the management of this action as a class

action.

SUMMARY OF TUUE ALLEGATIONS

Defendant A . Gen er Takes Over FSC Improper Practices and Accounting Mani irtilaonsEnsue

26. In May, 1999, Defendant Arie Genger engineered a hostile takeover of ESC_ He

promptly installed his 27-year old son as Chief Financial Officer, hired Defendant Sutton as Chief

Executive Officer, stacked the Board of Directors with his associates, and granted hundreds of

thousands of options to himself, his son, and his newly-installed officers and directors.

27. 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,

28 Begin iinig at the end of 1999, under A. Genger's now consolidated contra I, 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

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

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

"channei-staffing" 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.

29. Defendants were well-aware of their financial misrepresentations. Defendant Asif

Adil has filed a complaint and a sworn declaration in his action for wrongful termination against

the Company, in which he states that he learned of several ofthese illegal and improper

accounting practices shortly after his hiring as Executive Vice President in July, 2000. His

repeated protests about Lumenis's improper accounting practices to defendants Sutton, S. Genger

and Frenkel 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.

30. 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

charnel-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 Garryun its

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

ESC Merges. With C oherent Group to Mask ESL's Improper Machinations and Allow

Defendants to Take Advantage of ES Artificially Inflated Stock Pric

31. 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

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

acquisition. In early 2001, the Company bought Coherent Medical Group ('CMG" or

"Coherent"), using cash and over $100 million of inflated stock (then trading at approximately

$21 per share). The Management Defendants promptly sold millions ofdollars of artificially

inflated stock. Although claiming - but vastly exaggerating - that synergies would ensue from the

acquisition, Defendants had additional motives 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 ESC's books ofthese 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-

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

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

named Lurnenis) stock to levels over S30 per share, making Defendants' options to purchase

Lumenis stock worth tens 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 prepare for a future secondary offering.

33. 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 fbllowing 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 Lumens Board. The Company reacted by stripping him of his CFO

and management positions, and dispatching him to India,

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34. 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 forbad debt - even though there had been no improvement in collections.

35. 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-fying 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°%a. Lumenis stock dropped from its $30-plus level in

the summer of 2001 to approximately $3.50, scarcely nine months later, in May of 2002.

36. Lead Plaintiffs, and other class members who purchased Lumenis stock at those

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

CONFIDENTIAL WITNESSES

37. Numerous former employees of Lumenis and/or 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 1-11

("CW "). These persons include:

a. CW 1 is a former executive who worked at Lumenis from May 2001

through the end of the Class period and beyond. CW I has personal knowledge of: the SEC

inquiry and investigation, various accounting improprieties including improper revenue

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recognition, the problematic integration of CMG into Lumens, and other matters relevant to the

allegations alleged in this Complaint.

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

distributor of ISC/Lumenis, 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

stuffing.

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

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

ESC/Lumenis prior to the Class Period and throughout 2000 and early 2001. CW3 was

responsible for, Lntex alia the distribution ofmerchandise and the negotiation ofdistrbution

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

practices - e.&,, quotas and channel stuffing.

ci. CW4 is a 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 Lumerus products such as the Epil.ighi, Vasculight,

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

e.g chaimel 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

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

stuffing.

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 Lumcnis products to the end user. CW6 has personal

knowledge of Lumcnis's sales practices - e g , 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 as the SEC inquiry

and investigation and accounting improprieties.

h. CW8 is a former materials manager, who worked for Lumenis from March

2000 through January 2002. In that position, CW8 managed parts inventory of 4000 sku's valued

at $6.9 million and system level inventory of $12 million- CW9 has personal knowledge of many

matters alleged in the Complaint, such as the integration of CMG into Lumens, and accounting

techniques related to Lumenis's accounts receivable and inventory tracking.

i. CW9 worked as a controller for Lumenis during the year 2001. By virtue

of this position, CW9 had access to Lumenis's MSG-PRO accounting system which CW9 said

produced a document that tracked weekly sales calls and gave a clear picture as to the level of

sales. CW9 indicated that this document was provided to all senior management in the US and

Israel.

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J. CW 10 worked as Senior Manufacturing Engineer at Lurnenis before, after

and throughout the entire Class Period. In this capacity, CWIO traveled extensively to the

Company's various facilities and is familiar with the manufacture, quality, and sales practices

involving Lumenis products.

k. CWI I is a former administrative assistant for Lumenis. In that position,

CW1 I was responsible for pulling documents and making copies for the "Lumens SEC Project."

FACTUAL BACKGROUND

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

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

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

Company was formerly known as ESC.

39. As described in detail below, the Company engaged in systematic manipulation 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, nun-performing

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

Improper Revenue Recognition

1. "Channel Stuffing"

40. Anwng the methods used by the Company to inflate reported revenue was

"channel stuffing." Although Lumenis emphasized that its marketing and distribution practice was

"based upon the manufacture and delivery of products to customers based upon specific orders

received from its customers," this representation , repeated in each ofthe Company's Class Period

10-Ks was materially false and misleading . In reality, the Company would ship excessive

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quantities ofproduet to distr ibutors, and recognize revenue upon shipment-especially at the end

of each quarter. Moreover, 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 Cornpanywould 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 publicly reported revenues.

41. The practice of"channel stuffing" was rampant. Lurnenis 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 (Guissepe), and Canadian distributor, Coherent-AMT. Other distributors

whose channels Defendants' stuffed included Premier Medical and Sun Medical.

42. Defendant Adil has admitted that the Company engaged in such practices, noting

that while employed at Lumenis he learned that the Company was "inflating earnings by [, inter

alia,] booking sales to distributors with the understanding that the product could be returned, by

giving recourse financing to increase apparent sales when such sales were actually contingent and

not bona fide, and by charging ongoing expenses to a reserve account, rather than against sales,

so that the net sales numbers would not be reduced." Ex. B at 115.

43. According to CW3, Lurnenis loaded Premier Medical, an Ohio-based distributor of

Lurnenis 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," which

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CW3 personally reviewed. 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. CW3 referred to this

as "a look the other way arrangement, it wasn't written down., it was verbal" According to CW3,

Lumens would pressure Premier Medical at the end ofevery 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, Liunenis 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 CW3, Lumens granted Premier Medical the right to return unsold units

for felt credit. CW3 estimates that by early 2002, Premier Medical was holding approximately

$800,000 of Lumenis inventory beyond that which it could sell, and all ofwhich was ultimately

returned to the Company.

44. 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

Lumens 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 us that they received special pricing for the

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

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

have to pay for the stuff."

45. Lumenis's stuffing of Eclipse Medical's distribution channels is also evident from

the fact that following the Class Period, when Eclipse Medical's distribution agreement with

Lumenis terminated, the Company contended, in a November 24, 2004 press release, that Eclipse

Medical owed it $1.2 million in outstanding loans. Lumenis ultimately forgave these loans in

connection with its settlement of other disagreements with Eclipse MedicaL

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

from ESC/Lunienis at the end of every quarter, and at the end ofthe 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 fnancial 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

warehouse.

47. CW7 also confirmed that following the merger with Coherent, Lumenis customers

were receiving incorrect invoices that failed to reflect unwritten sales discount agreements.

48. The channel stuffing described by these confidential witnesses is further evidenced

by a comparison ofl.,urnenis's stated revenue recognition policy before and after the SEC

20

commenced its inquiry into the Company's relationship with its distributors. In the 2001 10-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 ofLumenis's 2000 revenue recognition policy with its revised 2001 policy, which

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

existence ofa an agreement, illustrates the point:

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

Revenue is recognized np_on shipment of products provided thatthere are no significant uncertainties regarding the customer'sacceptance and the collectbility is probable.... [Emphasis added.]

Lumens' 2001 Form 10-K, states in pertinent part:

Revenues from product sales are recognized when delivery hasoccurred, persuasive evidence of an agreement exists, the fee isfixed or determinable and collectibility is probable.... [Emphasisadded.]

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

Lumenis 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 ofshipment.

2. Bad Debt/Non=perfurming_Accounts Receiva ble

50. As alleged above, defendant Adil has, in a sworn statement , stated that the

Company carried unwarranted high receivables due to its improper revenue recognition- Ex. B at

T, 15.

21

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

inquiry "seemed to focus on the fact that there were nonperforming 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. Hy not properly recording a write-

offofbad 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 Lumens' 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. CW7 stated that following the merger with

Coherent, Lumenis's accounts receivable increased by approximately $12.4 million, as a result of

these practices-not due to the "processing difficulties" that Defendants claimed led to in reased

accounts receivables.

52. 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.

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

merger of the accounting systems from Coherent and ESC. CWS 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."

22

54. 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

55. 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 Q2 2001 Q3 2001 Q4 2001 Q1 2002Accounts

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% 13.2%

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

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

23

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

"creating" gains for Lumenis:

There was a $3.8 million gain for reversal - - a provision for

receivables from discontinued distributors-related to the Coherent

acquisition.

57. In the first quarter 2002 conference call, Defeiidan(s admitted that the Company

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

new CFO, stated the following:

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

Although Morano 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 IQ 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"--Aculight Ltd.

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

(Lumenis had reiterated its expectation of "record fourth quarter" results of EPS 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.

("Aculight') ( in addition to the "channel-stuffing" of Aculight discussed above).

59. Lumenis recognized $4.8 million in revenue, based on a transaction with Aculight,

a related party, in violation ofCAAP_ (It was later revealed by Defendants that the $6.4 million

account receivable had to be restructured with extended payment terms)

24

60. Based on Defendants' glowing reports ofthe Company's hair removal business, on

October 22, 2001, CIBC World Markets issued an Equity Research report that estimated Lumenis

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 Aculight -

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

5. Bookinnt of Sham "Sales"

61. 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. CWl 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. CW l 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. Gouger freely granted approval this way in order to book sales, increasing the

recognized revenue levels for the quarter. These tactics figured prominently in the Company's

reported quarterly sales figures since greater than 50% of the sales volume was approved, booked

and recorded during the last two weeks of any given quarter. Lumenis's SEC filings acknowledge

this fact. See, e.g. Fiscal 2001, 10-K, filed with the SEC on April 1, 2002 ("a substantial portion

of the Company's sales are completed in the last few weeks of each calendar quarter").

25

62. CW I 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 QI 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, Alainoudi 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

booked.

6. Short Shipments/"Headless" Sales

63. Concerning improperly recognized sales, CW1 stated that, in each ofthe 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, CW1 stated, "fit 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

Lunienis.

64. CW10 recounted how amazed employees at the Bothell, Washington location were

when systems started to be shipped out without their accompanying "heads." CW10 also

explained that absent a head, the equipment was missing a major portion of its full value. CW 10

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

26

7. Mani u lation of Aecountin For Invento

65. Defendants violated GAAP (SFAC No. ¶1 120-121), by classifying demonstration

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

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

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

held for sale, whereas F.G. is a wasting asset being 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 IO-K and 3Q 2001 Form l0-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 Lumenis by former CFO

66. As described herein, Defendant Adil, former CFO of Lumenis, has confirmed the

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

related lawsuit against the Company filed in the United States District Court fbr the District of

New Jersey and later transferred to the United States District Court for the District of

Massachusetts. See Ex. B at ¶J¶15-16.

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

Shortly thereafter, he discovered rnumernns accounting irregularities , including carrying

27

unwarranted high receivables, underfunding accruals, 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. See Ex. A hereto at X10-11.

68. Subsequently, Adil learned that the Company was engaging in 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. Id. at ¶12.

69. AN then informed Sutton of his findings, requesting that the practices be

corrected. According to Adis, Sutton declined to act on this request . Id, at 113.

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

PVP.

71. 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, mischaracterizations of sales to make up

for earnings shortfalls, and the booking ofapparently non-existent sales. Id. at ¶15.

72. Add reported these irregularities to the Lurnenis Board in November 2001 due to

his belief that these practices violated the securities laws. Id . at 1116-17

73. Within a few weeks, Sutton removed Adil from his CFO position. Add repeated

his concerns to Sutton regarding Lumenis's GAAP 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_ C;enger threatened to fire him and to ruin his reputation in the business

world if be continued to object to Lumenis's financial practices.

28

The Coherent Merger

74. On February 2, 2000, and on February 29, 2000, Lumens issued press releases

announcing FDA approval of its new intense Pulsed Light (IPLTM) 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" ofthe Company's growth

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

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

75. Following the February 2000 announcements, Lumenis began to tout its hair

removal line ofproducts, Thus, for example, on March 13, 2000, Lumenis issued the following

release:

"ESC Medical continues to improve on the superiority of lPLtechnology," said Yacha Sutton, President and CEO of ESCMedical Systems. "In the p ast, our customers have benefitted fromthe, h' h efficacy an excellent safe erfannance of ourtechnology . Now we have demonstrated that these products can bemade compact and affordable, without cornprornisng any of thefactors that gave IPL the largest number of light-based aestheticprocedure devices in the world." [Emphasis added.]

76. At the same time as Lumenis 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 froin ESC's 1999 Form 10-K, filed with the SEC on March 30, 2000 mentions two such

litigations.

Note 12 - COMMITMENTS AND CONTINGENT LIABILITIES

C. (2) On September 20, 1999, Dr. Richard Urso filed whatpurports to he a class action lawsuit against the Company in the

29

State District Court in Harris County, Texas. Dr, Urso alleges anumber of causes of action including, breach of contract, breach ofwarranty, product liability, misrepresentation and violations of theTexas Deceptive Trade Practices Act. The complaint purports tobe filed on behalf ofa national class. The Company has taken stepst.o remove the case to Federal court and intends to vigorously denyall allegations and challenge plaintiffs class certification motionwhen it is filed, No accrual has been recorded in the financialstatements for this matter.

C (3) On May 10, 1999, the Company and a former director andofficer were named as Defendants in an action filed in Tel-AvivCourt by H.K. Hashalom Ltd. in connection with the sale of theCompany's EpiLight systems. H.K. Hashalom is seeking monetarydamages in the amount of $2,500 but has reserved the right toincrease such amount as well as a declaratory judgment that, interalas, the Company indemnify it for certain costs and expensesarising out of the transaction between the parties. On July 15,1999, the Defendants filed a Statement of Defense. The case hasnot yet been set for a first hearing. No accrual has been recorded inthe financial statements fur this matter.

77. By the time Lu'tnenis announced the impending acquisition ofCMG , 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.

78. On July 25, 2000, i umenis 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 frill training, marketing support,

and medical supervision. Defendant Adil was recruited to lead the Aculight project.

30

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

the Acufight Program to sell lair removal equipment to non-physician customers . In the release,

Defendant Sutton discussed the purported growth opportunities this program provided the

Company:

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 tocommercialize our proprietary Intense Pulsed Light (1PL)

technology and market it ,as theAcuL ' T' PhotooosmeticProgram to beauty salons, cpsmeticians, edectrologists and other

professionals who provide hair removal services. We arecontinuing to invest in the future through our ongoing R&D effortand through a variety ofinvestments in start-up ventures includingour dental unit. [Emphasis added.]

80. As revealed in the ESC's 3Q 2000 Form 10-Q, filed an 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 preparation for a sienifcant

increase in sales in the fourth auarter and the manufacture of hairremoval machines for the Aculihht prog^ann . Under the Aculightprogram, machines owned by the Company are placed withoperators who are charged per usage fees. [Emphasis added.]

81, The Company changed its name to Lumens after the early 2001 acquisition of

CMO 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 filed

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

31

consist of a$ 100million 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,"

82. 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: ESCM) announced today this ishas signed a definitive purchase agreement with Coherent, Inc.(NASDAQ: COHR) to acquire the operations of Coherent MedicalGroup (CMG), its medical products division , for case, notes andstock plus an earnout ofup $25 million . The total consideration,excluding the eam- out, is valued at approximately $203 million,

Following closing of the transaction and subject to shareholderapproval, ESC will change its name to Lumenis, derived fromlumen, Latin for light. Post transaction, ESC will be a global leaderin the design, manufacture and marketing of light-based medicalsolutions. Combined sales for the two businesses in year 2000 wereapproximately $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 January1, 2002 and assuming fall synergies had been achieved), ESCestimates that the transaction would be over $0.60 accretive to caseEPS in 2001

83. Although the CMG transaction crealed integral ion problems from the start, as

confirmed by CW I, the February 26' press release reflected how Lumenis's top officials vied with

each other to heap praises for the deal and camou flage 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:

32

"We are pleased to join forces with CMG with its stellar reputationin the medical community. We believe that combining its highquality products and unparalleled customer service with ESC'sstrong record of product innovation will accelerate the profitablegrowth of the new company and delight our customers,," said Prof.Jacob A. Frenkel , Chairman of ESC.

"We are excited about the opportunities that this transaction withcreate for our customers , shareholders and employees ," said YachaSutton , President and CEO of ESC. "CMG's products anddistribution assets are highly complementary to ESC. Incombination with our own, they will create critical mass across ourvarious markets to better enable us to maximize our innovativeR&D pipeline quickly on a global basis," Mr. Sutton concluded.[Emphasis added-]

84. CWI recalled that CMG's average days outstanding on accounts receivable prior

to the merger was approximately 70 days, compared to ESC's approximately 110 days. CWI

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. CWI stated that CMG product lines were state

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

annual revenues were approximately $200 million and ESCs annual revenues were around $165

milliau. The tide shifted radically post-merger so that the precursor ESC product lines accounted

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

for the balance. CW I stated that CMG's Light Sheer product line was a strong one that was well

accepted in the marketplace and 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. CWI observed that, in particular, the merger did not provide the SG&A cost

33

savings promised by the Defendants to investors. For example, cost savings were not realized in

the combined companies' marketing, legal or sales expenses.

FALSE AND MISLEADING STATEMENTS AND MATERIAL OMISSIONS

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

quarter of2000. In the press release, Lumens 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."

86. 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 24"' press

release:

Net revenue for the third quarter 2000 was 537.1 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

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

false and misled ng for the reasons alleged in 1140 -54, 61-62, 66-73.

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

materially false and misleading for the reasons alleged in ¶ 40-54, 61-62, 66-73.

34

89. 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 date, it expects

to report fourth quarter revenues ofapproximately $46 million, consistent with major Wall Street

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

Commenting 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 IPL 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."

90. The revenue figure reported in the January pre-announcement was materially false

and misleading for the reasons alleged in ¶¶ 40-54, 61-62, 66-73.

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

IPL technology products was materially false and misleading for the reasons alleged in 1140-54,

61-62, 66-73. As the expected revenue figures were based on "sales" achieved through improper

accounting techniques, such as channel stuffing, Sutton knew that the Company would not "meet

or exceed analyst expectations."

92. On February 26, 2001, the Company armounced the acquisition of CMG, as

described above. The February 26th press release emphasized the purported synergigs that were

supposed to result from the CMG deal:

Integration teams arc being created to capture the best practices of

both organizations to maximize custofner 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 new

35

opportunities for employees, and generating superior returns forshareholders.

93. Even CMG's CEO, Dr. Bernard Couillaud, was taken in by the hoopla. The same

press release quoted his reassuring comments:

"We are very pleased to enter into this agreement with ESCMedical. I have been impressed with the actions of ESC'smanagement team over the past eighteen months. The creation of astrong and independent medical business benefits Coherent'semployees, customers and stockholders. This combination enablesour medical group to grow and prosper, while providing us with anopportunity to participate in its future growth. As a result of thistransaction, our customers will have a greater choice ofproductsand services and our employees better job opportunities."

94. Financhig for the acquisition was provided by Bank Hapoalirn. The loans and lines

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

EBITDA 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.

Lumenis stock jumped 24% on heavy trading volume to close at $20.44 per share.

95. On March 12, 2001, the Company announced its operating results for the fourth

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

12th press release:

Net revenue for the fourth quarter 2000 was $46.0 millioncompared to $40 . 1 million in the same quarter Last year. Operatingincoine was $7.1 million , or 15% of revenues, net income was $5.7million , and earnings per basic and fully diluted share were $0.22and $0 .20 respectively. In the fourth quarter of 1999, ESCreported a net loss.

Excluding a $1.0 million loss from ESC's start-up dental unit,OpusDent, and $0.7 loss from the new acolight program, ESC'sfully diluted EPS was $0.26 per share.

36

For fiscal year 2000, net revenue was $161.6 million compared to$142.2 million in 1999. Operating income was $22.3 million, or14% 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.

96. 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."

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

materially false and misleading tar the reasons alleged in 1140--54, 61-62, 66-73.

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

misleading for the reasons alleged in IN 40-54, 61-62, 66-73. 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.

99. On March 30, 2001, the Company filed its Forrin 10-K, for the fiscal year ended

December 31, 2000. The 2000 10-K repeated the same reported revenue for the fourth quarter of

2000. The Company's share price increased by approximately $2 per share or 9% following this

announcement. As alleged above in 111140-54, 61-62, 66-73, the reported revenue was materially

false and misleading.

100. The Company also used its Form 14-K to provide assurance on its quality control

measures by touting its ISO 9001 Quality System Certification Award, It would later be revealed

37

in ESC's 2001 Form I O-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,

101. 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." '.1'he market

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

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

false and misleading for the reasons alleged in 1140-54, 61-62, 66-73. Moreover, Sutton's

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

the reasons alleged in 111140-54, 61-62, 66-73. 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."

38

103. 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' press

release:

The results include sales of $43.9 mm, up 22% from the samequarter in 2000. Fully diluted EPS, excluding one time gains andcharges was $0.22, up from $0.03 for the corresponding quarter in2000. Including one-time charges and gains ESC earned $0.14 perfully diluted share.

104. Commenting on the reported results, Defendant Sutton stated: "Q1 demonstrated

the continued growing strength of our business in what is usually a seasonally slow quarter. I'm

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

be strong," The market again responded with approval, raising the Company's stock price

another 6%o to $29.05 per share.

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

materially false and misleading for the reasons alleged in ¶¶ 40-54, 61-62, 66-73. Moreover,

Sutton's statement concerning continued strong demand was knowingly false and misleading for

the reasons alleged in IM 44-54 , 61-62, 66-73.

106. 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, soCoherent' s medical division belongs to us already . Right now, ESCis on its way to change its name to Lumenis , after approval of

39

shareholders- Regarding the fruit of middle streaming expectedfrom the deal of $25 million we already applied a part ofthem.

It can be said that we have touched half of the fruit of middlestreaming. We announced the Boston offices shut down. Parallelywe announced the closing of the plant in Seattle with 65 employeesand the moving all of its technology to Israel and the manufacturingof products will be here.

Next week we have a convention with 100 of our salespeople in theU.S. and Europe. The salespeople are both of ESC andCoherent's medical division. The employees will receive trainingon both companies products, immediately, so we don't lose themomentum of sales.

If we were to begin the merge in the 1" quarter, the sales of the twocompanies would have reached S98 million, so we are on the trackof $400 million sales, because the completion of the deal will be atthe end of April, we lost a month ofjoint sales therefore, the jointsales for the 2'" quarter will be over $80 million."

107. As alleged in 1¶ 83-84, 206-208, Sutton knew that the integration ofCMG into

ESC was not going smoothly.

108. On May 29, 2001, the Company 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 IN 83-84, 206-208, these comments concealed the fact that the

synergies promised from the combination were illusory ones. The May 29a press release stated in

pertinent part:

New Ultra-Portable High-power LightSheerTM LasersI nt.roduced

ESC Medical Systems Ltd. (NASDAQ: ESCM) announced todaythe introduction of two new models of its highly successfulLightSheer diode lasers for hair removal . The LightSheer ST and

40

LightSheer ET feature the same high-power diode laser technologyas the fifll-sized LightSheer lasers, in a table-top portable design.The LighSheer product line was added to ESC as a part of therecent acquisition of Coherent Medical Group.

Yacha Sutton, CEO and President of £SC Medical commented,"We foresee many cross-selling opportunities with these newsystems, especially with our IPL photo rejuvenation products. Theultra compact design and cutting edge technical specifications alsoopen up a new replacement market for existing hair removalsystems. Earlier, we only focused on penetrating new accounts."During the next few months ESC will be rolling out an additionalfour products, all ofwhich hold the promise to become the leader intheir respective applications.

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

2. The GyneLase, for treating menorrhagia, or excessive menstrualbleeding, will begin large-scale shipments, under the multi-milliondollar arrangement with Karl Storz GnnbH this quarter.

3. Opus 5, the new dental diode laser for tooth whitening andminor soft tissue applications, will be launched this quarter inmarkets around the world-

4. ClearLight, the breakthrough acne treatment system, isbeginning shipments outside the United States.

Mr. Sutton concluded. "We are focused on maximizin our stropworld-wide distrib ution channel by leveragin g co ntinded internaldevelopment alongside selective acquisitions of complementaryproduct lines."

Separately, Mr. Sutton commeted, "We are continuing toexperience strong demand for our products. We are in the finalstage of setting up integrated sales and distribution teams. Lastweek over 100 salespeople from the US and Europe participated inproduct cross training sessions. Our Asian sales team completed a

41

similar program earlier. We have already closed several dealsinvolving cross marketing opportunities.

(Emphasis added.)

109. The Company 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 transaction:

ESC Medical Announces Organizational Structure

Esc Medical Systems (NASDAQ: ESCM) announced today that ithas finalized the reorganization of its senior management to reflectthe integration of Coherent Medical Group.

Excluding our smaller dental and industrial units, ESC will beoperating under a matrix organizational structure to allow thenewly combined company to focus upstream marketing, R&D, andmanufacturing activities within product application areas whileintegrating efforts geographically to ensure efficient downstreammarketing and sales activities. This structure is designed toleverage administration expenses geographically across theorganization, while allowing for flexibility in the discreetmanagement of each target market's product lines.

`"Throughout the company, we enjoy a deep base of talent andindustry expertise . Wc'vc now got the key leaders in place to driveour continued growth," said President and Chief Executive OfficerYacha Sutton. "The establishment of this structure and leadershipteam should facilitate a smooth completion of our integration

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 Greacel, Executive Vice President for

Operations ; Hadar Solomon, Executive Vice President , General

Counsel and Corporate Secretary,

42

(Emphasis added.)

110. As alleged in % $3-84, 206-208 , Sutton knew that the CMG integration was not

going smoothly.

1 11. 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 Vro forma 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 31,

2001" Defendants did warn of a "material nonrecurring" R&D related charge in excess of $46

million to be taken in 2[12001. However, in this Forrn 8-KIA, Defendants, dcsperdte to project a

solid found ation'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 he revealed only about a month later in Luinenis's August 20, 2001, Form

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

acquisition. The Form 8 -K/A 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 3 I,

2001.

The following pro forma adjustments have been made to the

pro forma condensed combining financial statements:

43

(4) To record the one-time charge of 546,650 for purchased

in-process research and development identified in the

allocation of the Purchase Price.

112. The Form 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 reporting 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 reported fewer assets and more shareholder dilution.

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

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

CMG:

We are pleased to report that the integration is on track and that Q3

has started out strong. With the integration moving towconmpletion 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 lLadership. 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 added,]

114. As alleged above in IN 83-84, 206-208, Sutton knew that the integration was not

.on track."

44

115. On July 5, 2001, Lumenis announced that it expected] 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: 'V c- 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 ofthe

integration ofCMG into Lumens: "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,)

116. The revenue figure reported in The July 5`' pre-earnings release was materially false

and misleading for the reasons alleged in $140-54, 61-62, 66-68. Moreover, Sutton's statement

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

the reasons alleged in ¶^ 40-54, 61-62, 66-68. 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 ¶^

83-84, 206-208, Sutton knew that the ESC-CMG integration was not proceeding well and that

the Company was not experiencing the represented synergies and costs savings.

117. On August 15, 2001, Lumens announced its financial results for Q2 2001, with

Defendant Sutton again noting the successful integration with CMG:

ESC Medical Announces Second Quarter Results

45

ESC Medical Systems Ltd. (Nasdaq: ESCM), which is changing itsname to Lumenis Ltd., reported financial results for the secondquarter ended June 30, 2001. The results include contributionsfrom ESC's acquisition of Coherent Medical Group since theclosing of the transaction on April 30, 2001.

Financial Results

Revenues for the second quarter of 2001 grew 89U/ to $80.4million over the $42.5 million in last year's comparable period.

Continuing operating income for the quarter was $13.5 millionversus $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. 17respectively (excluding non-recurring gains and losses) in thecorresponding period in year 2000.

Financial results from continuing activities exclude non-cash

charges of about $121.0 million and cash charges of approximately$361 million. These results exclude various charges that have beenpreviously 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 inextra-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 integrating the two Qrganizations. Ibis has

resulted intargeted savings of $30 million. $5 million more than we

had earlier announced. " He went on to elaborate, "With our new

market focused organization s-tntcture 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

46

exclusively focused an the continued growth of the business as we

bring our integration efforts to a successful completion. "

Outlook

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 ofthe year. These

charges will be significantly lower than those experienced in Q2."

He went on to emphasize, "The strategic rationale ofour decision

to execute the Coherent transaction is materializing on all fronts --

significant cross s_elling .opportunities across geographies and

products , an improved co st structure and access towell poised in Q3businesses' best practices. Accordingly. we are

andbeyond."

(Emphasis added.)

118. The revenue and earnings figures reported in the August 15e° earnings release were

materially false and misleading for the reasons alleged in 111 40-54, 61-62, 66-68. Moreover,

Sutton's statement concerning the purported "pace of sales in the third quarter" was knowingly

false and misleading for the reasons alleged in ¶j4O-54, 61-62, 66-68.

119. Furthermore, as discussed above, the reported charges were extraordinarily large,

mostly improper and violated 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 RSC 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 be 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.)

47

IM 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 $130.4 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

approxinuately $141.6 million. Regarding the next quarters, Y.

Suttoil CEO of the company estimated: "We are expecting one time

expenses that are related to the merge until the end ofthe year,

although they wilt 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 unproved 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

share."

Did you 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

48

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

quarters."

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 2001. My estimation is that the extra savings from the

activities will be approximately 13-14 cents per share, in other

words $5 million."

121. In a 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 roln 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

growth opportunities 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,

"I..ook ing ahead, we also do expect continued charges (mostly non-

cash amortizit.ion) t1 ough the end of the year. These charges will

be significantly lower than those experienced in Q2. The strategic

rationale of our decision to execute the Coherent transaction is

49

materializing on all fronts - significant cross selling opportunitiesacross geographies and products, and improved cost structure, andaccess to each businesses' best practices. Accordingly, we are wellpoised in Q3 and beyond."

122. On August 20, 2001, the Company filed its Form l0-Q for the quarter ended June

30, 2001. In the August 20, 2001 Form 10-Q, Lurnenis repeated its revenue figure reported on

August 5, 2001. In spite of admittedly already having learned--and informed S. [3enger--of

numerous financial irregularities that rendered the financial results reported in the Form 10-Q

materially false and misleading, Defendant Adil nevertheless signed the Fonn 10-Q as the

Company's CFO and Duly Authorized Officer.

123. In the August 20, 2001, Form 10-Q, Defendants reiterated the staggering army of

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

acquisition":

The increase in selling marketing and administrative expense in

three and six months ended June 3 0, 2001, is due to the one time

charges, mainly in connection with the CMG acquisition and

euensoLof approximately $4,116 - of business activities

("Discontinued Business Activities" which re resents du lication

activities with little or no future economic benefit as of June 30

2001 , in rred p ost acquisition. In the main, such activities have

been already ceased or definitive actions have been taken to

eliminate them in the short term.

Selling, Marketing and Administrative expenses in the three monthsended June 30, 2001 include one time charges, mainly in connectionwith the CMG • cc uisition as follows:

• Write down of accounts receivables in an amount ofapproximately $12,673, mainly in connection with distributorsconsolidation.

50

• Exceptional personnel cost in an amount ofapproximately$32,697 in respect of termination, retention and bonuses, mostlynon-cash.

• An amount of approximately $27,760 with respect to certainlegal proceedings, claims and litigation, which represents theCompany's management estimation of the Company's potentialexposure relating to such proceedings.

• An amount of approximately $5,537 relating to facility change,including future lease commitments, leases ofunused space andrelated cost.

• An amount of approximately $3,048 of integration relatedexpense.

(Emphasis added.)

124. 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

Lumens shares:

Sources inform "Globes" that Bank Hapoalim has begun exercisingits Lumenis options and to date has exercised an estimated fewmillion dollars of options, out ofthe 2.5 million options held by thebank. 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, Lumcnis will get $50.6million. It appears that Bank Hapnalim will attempt to sell theshares from the options on the market, which is liable to createshort-term pressure on the company share. If the bank exercises allits options and sells all the shares at Lumenis's current marketprice, it will post a $22 million capital gain.

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

51

125. A November 16, 2001 report by Deutsche Bank analyst Kingsniill Bond noted the

same: "the number of shares outstanding increased significantly over the quarter as Bank

Hapoalim exercised 1.4m warrants and Lurnenis retired convertible debt worth $11 m. We believe

that this may have released up to 3 million shares onto the market, which provides some

explanation for the short term weakness of the stock."

126. On September 20, 2001, Lumenis issued apress 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." On this announcement, Lumenis's share price rose approximately 6% to

$19.84 per share on heavy trading volume.

127. Sutton's comments concerning continued "strong" demand for the Company's

products was knowingly false and misleading for the reasons alleged in 1140-54, 61-62, 66-68

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

estimates because ofthe accounting machinations and conduct alleged above in 40 54, 61-62,

66-68.

128. On October 1, 2001, Lumens 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:

52

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

129. The revenue figure reported in, the October is' pre-earnings release was materially

false and misleading for the reasons alleged in ¶ j 40- 54, 61-62, 66-68 . 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 ¶ 40-54, 61-62, 06-08.

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

Smith Barney, Medical Supplies & Technology Analysts commended the progress 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 Cunceru: BUY

At this point, we believe all elements of the Coherent integration

are in very good shame.... l'he new _-established distribution system

is operating efficiently in all respects , in our opinion, as reported,

the overhead cost reduction opportunities associ4e-dwith the

Coherent integration have tuned out to be significantly better than

the original elan, which called for $25 million in s ergics.

Itnenis' management said that during t he pivotal June quarter it

had already identified at least $30 million in ssynergies , and that

nearly half ofthos e savings had been imp lemented within lust two

months of the acquisition. [Emphasis added.]

53

Vanity is the main driver of demand for these products, and itappears that vanity is not very economically sensitive- We knowfrom physicians who perform these procedures that there will oftenbe a mix shift in the types of aesthetic procedures during economicdownturns - away from the most costly procedures such as faceliftstoward the type of less-expensive procedures such as facialresurfacing or hair removal. This sort ofmix shift is favorable tothe laser and IPL companies such as Lumenis. Furthermore,Lurnenis continues to diversify its product mix, both within theaesthetics business (e.g., the new ClearLight acne treatment) and bybranching out into its other businesses in ophthalmics, dentistry,and a variety of general surgical applications. Marra ernent hasrecently hinted that there are far more products in the pipeline thanit has unveiled or factored into Wall Street's models . jEmphasisadded.]

We are pleased to announce that the organization appears to haveachieved its financial goals, even those set earlier this year. I amespecially heartened because revenue flow in the last three weeks ofthe quarter remained at its normal pace. Moreover, the thirdquarter is traditionally a weaker one, relying most heavily on USsales during the slower European months. We remain confident inthe continued global demand for our products and are optimisticthat this trend will continue as we enter the fourth quarter.

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

System, Inc. ("HGM"). 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 ¶j 83-84, 206-208,

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

132. Salomon Smith Barney commended the Company for its acquisition ofHGM

Medical Laser Systems and maintained a rating of 1 S (Buy Speculative) and a one year price

target of S44 per share for the Company in its November 8, 2001 analyst's report:

November 8, 2001 Salomon Smith Barney (Phil Nalbone)

LUME: To Acquire JIGM Medical Laser Systems; DealShould be Accretive in `02

54

This transaction is part ofLumens' strategy to continue to look forgood 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 theophthalmic business and we are pleased to see the companycontinue to diversity its business away from aesthetics. Given the

company's strong performance in the integration of Coherent

Medic al. the inte gration of this new a uisition toproceed smoothly. We maintain our IS (Buy, Speculative) ratingand one-year rice target of $44. [Emphasis added.]

133. As alleged above in IM 83-84, 206-208 the integration ofCMG was not successful.

134. 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 FPS 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 are in

line with previous guidance and include:

• $3.7 million for amortization of intangible assets associated withthe 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 Coherentacquisition

• $2.0 million for various other integration expenses. The

Company expects little or no non-recurring charges starting the first

quarter of 2002,

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

2001, stating in pertinent part as follows:

55

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 weaccomplished these results despite seasonal weakness, thedisruption resulting fl-em the tragic events on September 11, andthe slowing global economy ... During the quarter, we experiencedgrowth across each of the three business units -- aesthetic,ophthalmic and surgical -- with strong contributions from keyapplications including IPL skin treatments, age-related maculardegenerations and urology. . .

Business remains strong. We expect strong revenue growth in thefourth quarter compared to pro forma revenue of last year. Weremain comfortable with the ana lysts' estimates for the fourthquarter, given our diversified businesses and the strong andinnovative product pipeline associated with each of them.[Emphasis added.]

136. The revenue and earnings figures reported in the November 14' press release were

materially false and misleading for the reasons alleged in IN 40-54, 61-62, 66-68. Moreover,

Sutton's statement concerning quarterly growth was knowingly false and misleading for the

reasons alleged in ¶'!J 40-54, 61-62, 66-68. 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.

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

Over the next two days (in which upbeat analyst reports followed the Novemberl4 release), the

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

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

November 14, 2001, Lumenis disclosed continuing purported on time charges arising "mainly in

connection with the CMG Acquisition":

56

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

• $14,043 write down of account receivables mainly in connectionwith distributors consolidation for the nine months endedSeptember 30, 2001.

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

• $29,266 with respect to certain legal proceedings, claims andlitigation , which represents the Company's management estimationof the Companys potential exposure relating to such proceedingsfor the nine months ended September 30, 2001.

n $5,537 relating to facility change, including future leasecommitments , leases ofunused space and related cost for the ninemonths ended September 30, 2001 _

• $2,064 and $5,112 of integration related and other expenses forthe three and nine months ended September 30, 2001, respectively.

139. Defendant Adil again signed the 10-Q on behalf of the Company as the Chief

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

140. Salomon Smith Barney, in a November 15, 2001 analyst report , discussed the

balance sheet issues re lated to Q3 2001 results for the Company. The report re ferred 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 repeated the false re-assurances provided by Detczid.ants:

November 15, 2001 Salomon Smith Barney

Lumenis, LTD (LU ME)

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

57

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

Management devoted a significant amount of time on the earningscall to balance sheet issues. There have been significant concernsand questions recently regarding cash flows, one-time charges andvarious line items on the balance sheet. We feel that managementdid a thorough job of addressing these issues on the call and we willoutline the details below.

A specific item on the balance sheet that has been troubling manyinvestors is the $143.3 million in accounts payable and accruedexpenses. There have been concerns that the company has beenoverly aggressive in taking one-time charges and accruals related tothe Coherent acquisition and lumping it into the accounts payableand accrued expenses line on the balance sheet. To address andconfront this issue, Management carefully broke down the chargesincluded in this line item during the conference call, Thebreakdown is as follows: $1.8 million in accounts payables, $55.7 innormal accruals (which includes a $15.2 million in compensationexpense; $12.6 in service expenses and $10.6 million in warranties),$26 million in litigation expenses, $6 million purchase pricepayments owed, and $21.8 million in accrued integration expenses.We believe that accrued integration expenses of $21.8 million arecertainly reasonable given the scope of the integration whichincluded the closing of 7 .Facilities, the termination of over 200employees, and the retention of over 100 employees.

141. 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 Luznenis' good sales start to the 4° Quarter:

November 16, 2001 Dresdner Kleinwort Wasserstein (RobertC. Dunne) DrKW: LUME Stock rebounds as sales track toexpectations and EPS

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With the Coherent integration proceeding well and moving into thelater stages, management is now better able to turn its attention toentering distribution agreements to enhance sales and continue withefforts to improve the combined operations. Recent examplesinclude the US pact with Paterson Dental lasers to including toothwhitening and last week's announcement to acquire HGM MedicalLasers to bolster profitability by bringing supply ofa keyophthalmology component in house. We are encouraged .by the

good sales start to the fount quarter an with management'scomfort in the consensus EPS forecast . In the fourth quarter we

are looking for a doubling of sales and EPS to $105 million.

[Emphasis added.]

142. On November 18, 2001, Globes reported that Bank Hapoalirn had dumped its

remaining stake in Lumenis:

Bank Hapoalim makes quick killing in Lumenis

Shai Shalev and Nir Goldberg

18.11.2001 17:23

Sources inform "Globes" that Bank Hapoalim made a quick profitof over $7 million from its investment in Lumenis (Nasdaq: LUME)(formerly ESC Medical Systems).

The bank exercised 1.36 million Lumens options in the thirdquarter, injecting $27.6 million into the company. The exercise

price was $20.25 per share. Since the beginning of September, the

share price has fallen sharply, reaching $16.50 at the end of lastweek.

Today it became apparent that Bank Hapoalim had sold all of the

shares it obtained from exercising its options , earning a handsome

profit.

As would be revealed later by Lumens, Bank Iiapoalim was given advance knowledge of the

SEC investigation, news of which had leaked to Lumenis by November 2001, according to CW i.

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143. Dresdner Kleinwort 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 4'

Quarter." It also noted that the AcuLight program was making "steady but unspectacular

progress":

November 26, 2001 United States Hospital Supply and MedicalTechnology Dresdner Kleinwort Wasserstein

Shares of Lurenis responded strongly to solid in-line third Matterresults and a sound start t the fourth q uarter. Sales were in linewith previous company guidance in this seasonally slow period,while EPS, excluding charges, of $0.34 easily exceeded our $0.27projection , due primarily to lower ongoing SG&A, expenses. TheCoherent_(COHR - $29 .313-N R1 acguisitipn {which broadenedproduct lines and increased the domestic presence) is proceeding

well- and nearing completion . [Emphasis added.)

The AcuLight program (hair removal for the masses) is makingsteady but unspectacular progress, mostly in the UK. LUME has150 systems placed, with another 50 slated to be installed by year-end.

144. Salomon Smith Barney, in its November 28, 2001 analyst report, offered a bullish

assessment of Lumeriis' s stock price, and predicted that it would rise to $44 per share and

reiterated its I S rating for the stock:

LUME: We See No Fundamental Basis for Sell off; BusinessStrong; Buying Opportunity

Opinion

Lumens shares were under selling pressure yesterday. We believethat there is no fundamental basis for the sell-off. We believe allbusiness trends at the company remain strong. Lumenis remains ontrack to meet or exceed our December quarter projection for salesof $108.2 million and net income of $16.1 million, or $0.41 per

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share.. For 2002, we believe that Lumenis is on track to earn atleast $2.01 per share. We believe Lumenis shares should carry anearnings rmilti 1e of a roxiunatel 25 times , and based on ourcurrent BPS estimate of $2.01 per share, the stock should betradingat $44 with' the next coup le of uarters. We view thecurrent weakness as a buying opportunity. We reiterate our 1S(Buy, Speculative Risk) rating. (Emphasis added.]

145. 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 Fiuancial Officer. Again , as Defendant Adis 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.

146. On December 17, 2001, C113C World Markets reiterated its "Buy" rating on

Lurnenis, with a $42 price target, In its analyst report, CIBC projected fourth quarter earnings to

double to $42 , and revenue growth of 123%.

147. 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: LUME) 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.]

148. Sutton's expressed comfort with meeting analysts' targets was materially

misleading, Sutton knew that his statement was based not on existing conditions but on

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accounting practices that, as described above, were improper, such as channel stuffing and sham

sales.

149. On or about December 23, 2001, Defendant Sutton addressed an Oppenheimer

investment bank analysts conference in Tel Aviv regarding Lurnenis. Following his address,

Oppenheimer gave Lumenis shares a "buy" rating, stressing Lumenis'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.

150. 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- The market

believed the Company's assurances, and its share price rose 25% over the next trading days to

close at $22.85 per share on heavy volume.

151. Also on December 31, 2001, Globes passed along Defendants' rosier-than-reality

representations regarding the purported success of the integration of CMCr. In 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.

152. Globes reiterated Defendants' false representations regarding the success of the

CMG integration in an article dated January 1, 2002:

Lumenis (NASDAQ: LUMP) 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 amore important announcementthe company said the merger

with the Coherent medical division was proceeding according to

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plan, or even better thanplanned. It will even uaUy beseenthat, inadditi to sell and makin hi her profits the n ismore ffig ient. The results will robabl be a pleasant surprise forother people, but we ex cted that. [Emphasis added.]

153. On January 3, 2002, in the wake ofDefendant 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 time.

154. To the contrary, the market continued to accept Ltnnenis's assurances concerning

its anticipated results . That same day, a CIBC Report noted comfort with its previous revenue

estimates, noting that "[r]eported growth will be much higher due to the contribution from the

recently acquired Coherent Medical Group ." The report also expressed confidence with respect

to the bona fides ofLumenis 's revenues and balance sheet:

Furthermore, the company is expected to achieve these sales levels withoutegregious payment terms. In fact , we believe that the company began tomake a frill court press on collections during the fourth quarter . We alsoexpect the company to inTrove its inventory position dramatically overthe next year to drive positive cash flow.

155. At the same time, according to Adil, Dcfendant S. Genger threatened to fuc; Adil if

he continued to voice objections to the Company's accounting practices, and threatened to ruin

Adit's reputation in the business community.

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156. 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'sstill quite farfrom its peak- Does this reflect investors' distrust inthe company's management?

Sutton: "I don't think there's any basis for suspicion. I think we'requite open with the financial community. We try to be as open aspossible with our accounts and business, to the point where itsometimes hurts us competitively. That openness is intended toremove 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 themerger, and the incentives plan for retaining 100 key employees,the allowance seems reasonable. It's important to note that theshare surged following the conference call."

157. Defendants' desire to keep the stock price inflated was also revealed in the

interview. Sutton disclosed that Lumenis 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'1l issue

at a higher price that will dilute the shareholders less, in order to

improve the balance sheet.

158. On January 12, 2002, the Company announced the opening of European offices in

Amsterdam, and a branch in Switzerland. In the press rclcasc, the Company finally made its first

reference to Adil's removal and reassignment to Asia.

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Asif Adil, who led the Finance Department and was Executive VicePresident of Business Development , will now lead an effort todevelop emerging Asian markets such as India.

Mr. Adis took a leading role in helping to restructure the Companyduring the turnaround, design the Coherent integration program,establish the Aculight franchise, and has recently served as CFO.

159. The press release said nothing about the circumstances of his departure, less than

six months after he assumed the CFO position.

160. On January 21, 2002, TheStreet.com reported that the Company's management

was negotiating for a listing on the Tel Aviv Stock Exchange, to take effect around the time

Lumens would report its financial results.

161. 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 CW 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. CWl 1 a former administrative assistant for Lumenis, was assigned to help Lumenis

employees in a project to collect documents for transmittal to the SEC. CW1 t stated that the

"Lumenis SEC project" began in December, 2001. CW I 1 says that the project was "hush-hush,"

and was told not to talk about what he was doing.

162. On January 29, 2002, Lurnenis pre-announced its financial results for the fourth

quarter of 2001, In the press release, Lumcnis stated that:

its revenues for Ilse fourth quarter ended December 31, 2001 will beabout $141 million or 8% higher than the combined revenues of itslegacy businesses, ESC Medical and Coherent Medical Group, far

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the corresponding quarter in 2000. On a local currency basisrevenues grew by about l0% Results reflect record fourth quartersales . [Emphasis added.]

As previously announced, the Company continues to expect one-time charges (pre-dominantly non-cash) in Q4 and little or no non-recurring charges in Q1 2002.

163. Commenting on the results, Defendant Frenkel stated:

Management is to be congratulated on delivering to shareholderssuch impressive results. I am particularly pleased by our significantprogress in cutting costs, over $35 million to date, compared withour original target of $25 million, while at the same timemaintaining strong top line performance. The Company ispositioned to build on its recent success.

164. Sutton was quoted on various balance sheet issues:

We expect 2002 to be a balance sheet-focused year. We areworking to improve inventory turns, targeting 4.Ox turns by the endof Q12003. Cash generated from this reduction should offset dollargrowth in receivables stemming from increased sales. We alsoexpect to cash out almost all the accruals related to the integrationwhich were already charged through the P&L by the end ofQ12002. Finally, we are expecting about $10 million in capitalexpenditures, significantly higher than usual, as we make majorinvestments in infrastructure.

Adjusted for seasona l weakness of the first quarter, we are off to astrong start.

165. The revenue figure report ed in the January 29th re lease was materially false and

misleading for the reasons alleged in 40-68.

166. Frenkel's statement concerning "strong top line performance" was materially false

and misleading. As alleged in IM 40-68, Frenkel knew or recklessly disregarded that such "strong

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top line performance" was achieved only through improper practices such as channel stuffing,

sham sales, the manipulation ofaccounting for inventory, the ever-malleable allowance for

doubtful accounts , and the Aculight related-party transaction described above in IN 58-60.

167. Sutton' s statements were knowingly materially false and misleading for the reasons

alleged in'{ j 40-68.

168. 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. The sale

was described as follows in Lumenis's 2001 Form 10-K:

During 2001 the Group signed an investment agreement with

Aculight. The Group has significant influence over the operationsofAculight and, accordingly, such investment is accounted forunder the equity method. Following the investment agreement,Aculight acquired from the Group products, formerly leased by it ,

in the amount of $4,764, to be paid over a three-Year period . TheGroup's unrealized gain with respect to such sale, in the amount of

$1,589 was recorded as deferred income. [Emphasis added]

169. 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 fully 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 Lumens, representing

three of the six Aculight directors.

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170. 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. General ly Accepted Accounting Principle Revenue Reco gnition Re uirements:

(1) In order for revenue to be recognized, it must be realizable, i.e. colleetibility mustbe reasonably assured . The following sources of GAAI' stand for this wellestablished proposition:

a) ARB No. 43, Chapter IA $ 1, adopted 1934:

Unrealized profit should not be credited to income account of the corporationeither directly or indirectly, through the medium ofcharging against such-unrealized profits amounts which would ordinarily fall to be charged againstincome account. Profit is deemed to be realized when a sale in the ord narv courseo f busine sg i-,ffected, unless the, circumstanyoB are such Mat the co1&.aUya-qf-t&sale price is not reasonably arsure4, (Emphasis added.).

b) SFAC No. 5 184 (g), issued December 1984:

If coUect ibility of assets received for product, services, or other assets is doubtful,.reye?tues and ga is may recognized on the basis ofcash-wL^eiyes . (Emphasisadded.)

b. Generally Accepted Accounting Principles for Related Party Transactions:

(1) FAS 57, ¶2 requires the following disclosure for materia l related partytransactions:

a) The nature of the relationship of the related parties ;

h) A description of the transactions, including amounts and other pertinentinformation necessary for an understanding of the effects of the related

party transactions, for each period in which an income statement ispresented (related part y transaction of no or nominal amounts must also be

disclosed);

c) The dollar amount ofthe 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;

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d) If not apparent in the financial statements, (a) the_terms of the related partytransactions, (b) the maruier of settlement ofrelated party transactions, and(c) the amount due to or from related parties. (Emphasis added.).

171, 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 $8.2 million from Lumens.

A reciprocal transaction is an inaccurate and misleading representation ofthe economics of the

transaction and, as such, Defendants' reported financial results violated GAAP.

172. 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 terms of the sale were really no

different than the terms of the lease it supposedly replaced. The term of years over which

Lumenis depreciated laser equipment was three years, See 2001 Form 10-K, page F-12

("Finished products located at customers sites in respect ofsupport 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 ofthe 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 substance of the transaction, for the improper

purpose of accelerating the revenue recognition into 4Q 2001. As reported byHaaretz, on March

7, 2003, S. Gcnger, personally flew to England at the end of 2001 to finalize the deal.

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173. Defendants violated ARB No. 43 and SFAC No. 5, by recognizing any uncollectted

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 ofthe CMG acquisition to obscure its write-off

of $17.6 million of ESC hair removal equipment as part of its "Big Bath" expenses, even though

the inventory buildups had occurred months before the CMG acquisition. As there was so little

demand for Aculight products that Lurnenis was writing off related inventories, there was no

rcalistic possibility that Aculight would generate the revenues necessary to make the $4.8 million

payment to Lumenis_

174. The Aculight program was failing. The hair removal equipment was being written

off, hair removal sales were at an all time low, and Aculight was reporting losses. In fact,

Lumens reported a $2.6 million loss in its 2001 10-K from "its invcstmcnt and transactions with

Aculight." See 2001 Form 10-K, at 20. The failing nature of the business is born out by a

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 Q1 2002, the receivable was in default, as evidenced by the

failure of Lumenis to amortize any ofthe $1,2 million deferred revenue at year end December 31,

2001 into income in 1Q 2002. Defendant Sutton stated during the 4Q 2001 conference call on

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March 3, 2002 the following about the Acuiight deferred revenue: "Our results reflect only about

4.8 million ofrevenue the balance of which will be recognized as cash transfers to us." All of

this information would have been known to Lumenis' thencurrent and former Chief Financial

Officers, Defendants S. Genger and Add, both ofwhom simultaneously sat on the Board of

Aculight and held officer positions at Lumenis.

175. Defendants also violated Lumenis's stated revenue recognition policy. At

December 31, 2001, as disclosed in the 2001 10-K, filed on April 1, 2002, at page F-13, Lumenis'

Revenue Recognition policy was as follows: "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 added.) For the foregoing reasons, the collectibility of

the $b.4 million account receivable was not "probable" and, therefore, revenue should not have

been recognized until cash was received.

176. By not discussing the "one-time" nature of the S4,8 million included in aesthetic

hair removal sales, Defendants also violated Reg. 17 C.F.R. §229.343(a)(3)(7, which states:

Results ofOperations. Describe any unusual or infrequent eventsor transactions or any significant economic changes that materiallyaffected the amount ofreported income from continuing operationsand, in each case, indicate the extent to which income was soaffected. In addition, describe any other significant components ofrevenues or expenses that, in the registrant's judgment, should bedescribed in order to understand the registrant's results ofoperations.

177. 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

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distorted the reported revenues for aesthetics sales in 4Q 2401 representing 11% of the reported

total.

178. 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, Defendants violated

GAAP,

179. 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 (Lumenis 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 ¶ 2(c) by failing to fully

disclose the dollar amount of the transaction. Defendants SEC Fonn 10-K wily 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 ofthe transaction by

$1.8 million, a significant omission in a transaction purportedly valued at $8.2M. Finally, the

Defendants violated FAS 5712(b), by tailing to provide information on the receivable balance for

each period that an income statement was provided. This was clearly a material omission in Q 1

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

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disclosure of the receivable balance activity would have alerted investors ofthe problem nature of

this receivable in a more timely fashion-

180, 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.

181. On February 11, 2002, following a week-long slide in its stock price, the Company

falsely reassured investors, in a statement reported in TheMarker,com, that it would meet

forecasts. The Company stated in TeMarker,com that its focus remained on sales and market

expansion, adding:

We are always straight with our investors and the media, and theyknow we always say what we have to say.

182. The article reported that Investec analyst Koby Finkelstein visited the Company for

six hours on February 6, amid rumors o f accounting problems, and came out with a positive

report, stating a "Hold rating at this point is a copout ... we investigated [Lumenis] 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."

183. On February 25, 7007, the Company announced in press releases both a new

financing agrecment 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 the period commencing January 1, 1998. The request primarily relates to the Company's

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relationships with its distributors, and also asks for amplification ofthe Company's explanation of

certain previously disclosed charges and write-downs. The Company intends to furnish all

documents and information requested by the Commission."

184. This announcement, without fully disclosing the fraud complained of herein, raised

concerns over the propriety of Lumenis's accounting and in response Lumenis stock declined

from $12.94 per share to $8.95 per share on very heavy volume..

185. 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 arc under no obligation to do so," Genger said.

"Asking for information is not a designation of wrongdoing.... 1 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 he."

186. 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 atleast cause them insomnia was the replacement occurred near the

date for the publication of the annual financial reports. Lumenisstated after announcing the change, that the CFO wassimultaneously holding another position, which is why he was

replaced only after six months as CFO. it is doubtful whether theannouncement calmed investors.

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187. 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

finiancial 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, 20021 conference call regarding SEC contacts with distributors.

188. On February 28, 2002, Lumenis issued a press release pre-announcing its financial

results for the fourth quarter of 20011 the period ending December 31, 2001. The Company

reported revenues of $ 100.8 million.

189. Also on February 28, 2002, after the markets had already opened, Lmunenis held a

conference call in which Sutton said, "eve learned in January that certain former distributors as

well as the current distributors were contacted by the SEC."

190. Contrary to previous representations by Defendants, Sutton admitted prior

knowledge of the SEC investigation and even claimed , "eve contacted the SEC and volunteered

our assistance in the matter ." Furthermore, despite his previous utterance to Bloomberg

regarding the timing ofwhen he learned of the investigation ("last week '), Sutton went onto say,

"two weeks ago , the SEC contacted us with a three page questionnaire , mostly focusing on

getting documents related to distributors."

191. CWt 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, CW11, a

former administrative assistant for Lumenis, was assigned to help Lumenis employees in a project

to collect documents for transmittal to the SEC. CW 11 states that the "Lumens SEC project"

75

began in December, 2001. CWI l says that the project was "hush-hush," and was told not to talk

about what he was doing.

192. 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.

193. 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 IQ

2002. It also mentioned the likelihood that the Company would be adding to its bad debt reserves

from outstanding receivables of former distributors of the Company.

March 26, 2002 Dresdner Kleinwort Wasserstein (Robert C.Dunne) DrKW: LUME Adjusting 2002 estimate to reflect non-

recurring first quarter

Analysis: We are 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 couldamount to as much as $IUm, reducing first quarter EPS to about

break-even from our previous forecast of $0.28. The expenses are

for moving some ofthe former Coherent manufacturing operation

from Santa Clara to other company facilities. These relocations

should ultimately reduce costs. Second, Lumenis has taken another

look at receivables from former distributors, and will most likely beadding to bad debt reserves in the first quarter.

76

194. As the Company, now under SEC scrutiny, was no longer able to continue the

same practices it had used to create the illusion ofl 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 31, 2002.

The Company 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 traditionallyweak first quarter, we did not meet revenue and earnings estimates.The Company has made management changes and reorganized itsactivities in Europe to address the weaker sales levels.Additionally, lower prices and an unfavorable product mix

adversely affected gross margins.

195. Investors pummeled the stock, knocking it down over 50%, to $3.30 per share

from $6.79 per share. (Scarcely 10 months earlier, A. Gauger was selling more than $30 million

of stock at over $27 per share).

. 196. On April 1, 2002, Defendants caused the Company to file its annual report on

Forin 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.

197. In addition, the 2001 Form 1 O-K falsely and misleadingly identifying the $9M

adjustment as "inventory," Defendant Sutton, during the fourt h quarter 2001, conference call also

falsely claimed that the year end adjustment was for additional "inventor}," as follows:

77

Our inventories at the end of the fourth quarter included finishedgoods used in operations (indiscernible) $92.8 representing anincrease of $11.6 million. The change includes $3.4M from theHGM acquisition, $1.6M writedown in connection with the HGMacquisition. It also includes $10.5 million increase stemmin mainlin connection with the purchase accounting adhaiment from theh icat count of invento at the end of the year...." [Emphasis

added.]

198. 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 comefrom, the $10 million increase in inventory?

MR. SAGI GENDER:

The $10 million izicrease in inventory comes from two differentparts. One part is coming from, basically the HGM inventory thatwas added on.

THE CALLER:

But that was a small amount right?

MR. SAGI GENGER:

Yeah, that's right . And the balance basically comes frm adifference between what was reported to us an the inventory ofCoherent Medical Group by the legacy Coherent finance groupwhen we bought the company and what we actually found when wedid the physical inventory. And effectively that inventory is not aninvento ry that is in the warehous e. rather it is demo inventorysitting out with doctors....... And as we have confirmed thatinventory, it will be added into the balance sheet that doesn't haveany P&i, impact on the company. [Emphasis added.j

THE CALLER:

78

Okay, but in any of that , it's an item that has consumed cash, it'snot. It is not, at some point - it's not realizing cash on the otherhand, l mean it ' s not being sold, so you, you know? [Emphasisadded.]

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 factsstraight and make sure that we are looking at it correctly. First ofall, that increase in inventory never consumed cash for ourshareholders, it consumed cash for the Coherent shareholders .Number two.... [Emphasis added.]

THE CALLER:

I understand , but when you buy a business , you know, you arebuying assets and some expectation of future cash flow but in anyevent go ahead.

MR. SAGI GEIGER:

Anyway (indiscernible) John, I want to thank you very much for thequestion . I think we are trying to limit to one question per personand I think that we should move on with all due respect.

199, Thus, during the conference call discussion, Defendant Genger admitted that the

S9 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 vio lation of GAAP to

classify the equipment as "inventory" held for sale and not as F.G.s, a wasting asset.

200. Supporting the misclassification of inventory is the fact that just two quarters later,

on the Company's conference call for the fourth quarter of 2002, $10.7 million ofinventory that

Lumens wrote off that quarter was described as "spare parts inventory" that were related in part

to "field service inventories."

79

201. 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." In

response to this announcement, Lumenis's share price increased by approximately 14%, to close

at $3.75 per share. Again, this statement was knowingly false because the Company had no

expectation ofprofitability absent the fraudulent practices outlined above in 1140-68.

202. 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 CIBC World Markets Equity Research

L,uruenis Ltd. Lowers Guidance ; Cash Flow Still Negative;

Reiterate Hold

Pro forma for Coherent acquisition , revenues fell 12% because ofEuropean weakness and combined weakness in hair removal andophthalmic . It seems the Coherent deal is problematic. givenintegration issues . [Emphasis added.]

LUME plans to implement a cost reduction program over theremainder of this year in hopes of saving $14 million through theelimination of 100 positions , most of which are expected to come inG&A, not R&D or sales We also believe that non-core businessessuch as industrial , dental, and minority investments could be sold,spun-ofor restructured to improve profitability.

203. 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."

80

204. On May 14, 2002, Bloomberg reported additional false and misleading re-

assurances by Defendant Sutton:

On lower revenue:

We had revenue of $86.1 million, down from our previous guidanceof $90 million. The main factor relates to our European operations.In Europe we missed by $4.6 million in revenue. It's mainly amanagement issue, not a market issue . We've dealt with it, we'vebrought in new people, and we are fixing the problem-

On job cuts:

We've identified $14 million in cost savings through the end of2002. It includes some cuts in personnel. We're talking about arange ofclose to 100 people, We have altogether 1,460 people inthe company, so we're talking roughly 7 percent. The idea isn't toimpact sales and service operations, which relate to customers, or(research and development), which generates the growth for ourfuture.

205. This re-assurance canned 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

forrnal 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, Bloomberg 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. llowever, Morano stated "We would expect this has to do with revenue recognition." In

reaction, the price of Lumenis stock tell to $3.53 per share.

POST CLASS PERIOD EVENTS

The Com an 's Deteriorated Condition Continues

91

206. 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, Lumeriis (NASDAQ : LUME) roseover 54% over a 10 day period , including a 12.6% rise yesterday onsmall turnover. We've finally figured out the real story behindLurnenis' unexpected crisis, which was its acquisition of Coherent(NASDAQ: COHR). First of all, let us make clear that we thinkthe purchase was justified , and in the future , will be seen as a veryimportant step. But - with a capital "B" - when Lumenis boughtthe leading laser eye treatment company it didn ' t assess Coherent'sEuropean division properly. With time, it became clear that the UScompany had a ] of difficulties in Euro a in terms of sales andsales methods. We now know thai Coherent Europe is in terrible

shape , really terrible . But these things only become apparent withtime.

It could be that Lumenis didn't do proper due diligence, and itcould be that it was given erroneous information, but that's allwater under the bridge. Today, a year after the acquisition,Lurnenis'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 toeconomic conditions". There was, they tell me, a real mess overthere in all areas from ortin to management . There's no use inpointing the finger ofblame 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 Ilapoalim will continuebacking the cowliany and thmt calms investors. (Emphasis added.)

207. 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

CMG:

82

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

2.0 Other restructuring costs

1.6 Fixed asset write down

115.2 Total

Source: Lumenis Filings with SEC

83

Table 3: 2001 Write-Offs and Provisions

Amount(US$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 : Lumenis Filings with SEC

When it comes 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-r 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 affirmativc. 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 struneled 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

fundamental issues, such as a further reduction in the number of

84

manufacturing facilities, upgrading middle management in someareas (such as Europe), more thought regarding an appropriatesales and distribution network and improved IT systems are allareas where there is more work to do. One good example forfurther integration that is required comes for the fact the finance

department of the company still operates with five accountingsy5t ms!

The sales structure is a particularly interesting issue. There is

absolutely no ssynergy as r as we can t li on the sell' s'

between the aesthetic division and the new ophthalmic division. So

going forward, should this company establish vertical or horizontalsales 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 stillgrappling with.

(Emphasis added.)

The following charts give a wider view of the Company's write-offs and provisions, including

those relatcd to the CMG acquisition.

LUMENIS, LTD.Selected Financial Data

(in Millions)

Sources: Company Press Releases and SEC Filings

2001 2402

QI Q2 Q3 Q4 Q1 Q21A Q3 Q4

Revenues $43.9 $80.4 $90 . 2 $100.9 $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

Grns Profit $28.3 $26.3 $50.4 $54.6 $45. 1 $50.8 $46.8 $26.7

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 0 $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 $43

85

Writedown investments 53.4 0 $2.1 U a 6 0

Total Operating Expenses $23.7 $168.6 $48.3 $53A $41.9 $51.2 $43,2 $60.6

Net income (Loss) $4 ,2 f ($146.4) $,} {$3.8) {$2,8) {$1.3) {$.9) {$39.1}

LUMENIS, LTD.Write-offs and Non-Recurring Exposo

(In Millions)

Sources: Company Press Releases and SEC Filin¢s

2Q2l 29112

Ql Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total

1n-Process R&DWriteoff

$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 32.8 $2.8

CMG Transaction Ex. $2.3 $2.3

Legal. Expense $1 .5 $27.8 ($7. 0) $22.3 $5.2 $3.7 $8.9

Receivable Writedown $1.3 $12.7 ($3.8) $10.2 $1.3 $1.3

Facility Charges $5.5 ($1.1) 54.4

Exceptional Personnel

Charges

$9.0 $2.5 $4.8 $16.3 ($3.3) ($3.3)

Severance $2.9 $1.2 $4.1

Accelerated Options

& Vesting

$1 .U $23.7 $.7 $.7 $26.1

Integration Expenses $3.1 $2,0 $.7 $5.8

Argentina Bad Debt $1.7 $1.7

Reorgattiaation of

Dental Operations

$1.1 $1.1

Fixed AssetWritedowsls

S1,5 $1.5

Fax Charge $1.1 $1.1

Office Closure Costs $.5 $.5

Total $6,1 $150.4 $9.6 $5.7 $171.8 $2.9 $5.2 $3.2 $15.7 $25,0

86

208. Analysts continued to recognize Lumenis's unusually high accounts receivable as

the source of its difficulties. Thus, in an August 5, 2003 report CIBC analysts John P. Calcagnini

and Chad Suggs noted that Lumenis "has been working down receivables and inventory-but

these measures do not appear to be even close to enough"

Defendants Sutton a d Gen r Are Terminated Iiollowin the Revelation of the Fraud

209. By December 19, 2002, with Defendants no longer able to continue their Class

Period accounting machinations complained of herein and Lumenis's stock price punished

accordingly, the Company announced that detendant Sutton would be discharged from his

position as Lumenis's CFO at the end of that month.

210. Thereafter, Lrimenis installed Avner Raz as the Company's new permanent CEO,

announcing his appointment on April 25, 2003. Within two months of assuming this position, Raz

eliminated defendant S. Genger's position at the Company (Chief Operating Officer), forcing S.

Genger to leave the Company, as announced in the Company's June 20, 2003 press release.

Lumenis 's Auditors Refuse to Issue an Opinion ; Internal Inyrsti gations and NASDAQ

I}e ' ,

211. On November 19, 2003, Lumenis filed its Form 14-Q for the period ended

September 30, 2003. In the 10-Q, the Company disclosed that Deloitte & Touche ("Deloitte"},

its independent auditors, "expressed concern that certain payment and other terms in connection

with specific transactions may not have been disclosed to them" and "requested the Audit

Committee of the Board of Directors to conduct an independent investigation into the relationship

of the Company with one of its distributors and the accounting and disclosures related thereto, in

connection with the continuing Securities and Exchange Commission investigation." It further

87

noted that Deloitte refused to render any opinions or reports concerning Lumenis's financial

statements until completion of the Audit Committee investigation.

212, In that same 10-Q, the Company revealed that on September 30, 2003, Defendants

signed an agreement with Aculight that: required Lumenis to return its shares and options in

Aculight ; required Lumenis to write off $3.5 million net receivable from Aculight (which,

apparently , Defendants had already begun provisioning for a potential loss in 2002, within months

of the purported "sale" and revenue recognition ); and required Aculight to return 77 systems free

of charge and starting October 1, 2003, permitted Lumenis to charge for maintenance and

consumables.

213. On February 4, 2004, Lurnenis announced that it had been do-listed from the

NASDAQ:

Lumenis Announces Delisting from Nasdaq: Shares to Trade on Pink Sheets

YOKNEAM, Israel

February 05, 2004

LumenisTM Ltd. (NASDAQ : LUMEE) announced today that it has receivednotice that the Company 's ordinary shares will be delisted from The NasdaqNational Market (Nasdaq) prior to the market opening on Friday, February 6,2004 . Following delisting , the Company expects that its ordinary shares will bequoted on the Pink Sheets Electronic Quotation Service under the symbol LUNIE.

The notice was contained in a decision by the Nasdaq Listing Qualifications Panel(the Panel) denying the Company's request for an appeal from the determination ofthe StaifofNasdaq stating that its securities are subject to delisting pursuant toNasdaq Rule 4310(c)(14) since the interim financials in the Company's Form 10-Qfor the quarter ended September 30, 2003 had not been reviewed by theCompany's independent auditors in accordance with SEC Rules due to an ongoingindependent investigation being conducted by its Audit Committee.

Amer Ray, President and ChiefExecutive Officer of Lumens, said, "We aredisappointed with the decision of the Panel and intend to appeal the Panel'sdecision to the Nasdaq Listing and Hearing Review Council. In the meantime, wewill continue our efforts to complete the previously announced ongoing

88

independent investigation being conducted by the Audit Committee as quickly aspossible and focus on completing our turnaround plan for the company. Thechange in the trading venue of our ordinary shares does not affect our compliancewith the covenants in our bank financing agreements."

214. On May 3, 2004, Lumenis announced the results of its internal investigation

which it had previously announced on October 14, 2003 ( see 1211 , supra):

Lumens Announces Initial Results of Internal Investigation and Reorganization ofFinancial Reporting Function

YOKNEAM, Israel

May 03, 2004

LumenisTM Ltd. (Pink Sheets: Lumc.pk) announced today the results of the

ongoing internal investigation being conducted on behalf ofthe Audit Committee

of its Board of Directors. The Company also announced that it will bereorganizing certain of its financial reporting functions.

Avner Raz, Lumens' President and Chief Executive Officer, stated, "We arecommitted to completing any re mainin g investigation action items, as well as the

reorganization of certain of our financial reporting functions, as expeditiously as

possible. In addition, as CEO, I want to assure you that as the Audit Committee

and its advisors continue their work to complete the investigation, the Company

will remain focused on serving our customers and growing and revitalizing our

business. Our products continue to be recognized as worldwide market leaders,

the implementation of our previously announced turn-around program continueson schedule and cash resources remain available and sufficient to execute our

plans."

Summary of Results of Internal Investigation

As previously disclosed, the Audit Committee commenced an internal investigation

in October 2003 in response to a request from Deloitte & 'd'ouche Brightman

Almagor ("Deloitte"). The internal investigation, which was conducted for the

Audit Committee by Debevoise & Plimpton L.LP and accounting advisors retained

by that firm, initially focused on accounting and disclosure issues related to the

Company's relationship with one of its domestic distributors. It was subsequently

expanded to include a comprehensive review of the Company's revenue

recognition practices during 2002 and 2003. Certain transactions recorded in 2001

were also reviewed during the internal investigation.

The report prepared for the Audit Committee concludes that the timing of the

Company's revenue recognition was inappropriate with respect to certain

89

identified transactions. The aggregate effect of the Company's accounting for thetransactions identified in the report was to cause revenues in 2001 to be overstatedby approximately $1.7 million or 0.6%, revenues in 2002 to be overstated byapproximately $4.4 million or 1.3%, and revenues in 2003 to be understated byapproximately $5.9 million or 2.1 %. The effect on quarterly periods was asfollows:

Amount of Overstatement/(Understatement)

Of Revenue by 4uarter (In 000's)

1" Quarter 2d Quarter 3d Quarter 4" Quarter

2001 N/A $345 $423 $931

2002 $2,827 $1,234 $2,182 $1,873

2003 $1,561 ($3,079) ($1,022) ($3,362)

The effect of such overstatementlunderstatement of revenues on previously

reported earnings (loss), while not included in the report, is estimated, on apreliminary has is and subject to further adjustment, to increase the net loss as

reported in 2001 by approximately $0.9 million or 0.6%, to increase the net loss as

reported in 2002 by approximately $2.9 million or 6.5%, and to reduce the net loss

as reported in 2003 by approximately $3.8 million or 4.6°/0. The impact on

particular quarterly periods may vary on a percentage basis.

The Audit Committee intends to undertake further investigative steps, including a

more comprehensive review of transactions recorded in the Company's fiscal year

ended December 31, 2001, The Audit Committee anticipates that a restatement ofpreviously reported financial results may be appropriate, but intends to defer

making a final decision pending completion of the additional investigative steps.

Based on the information obtained to date, the adjustments made in any such

restatement would primarily affect the timing ofrevenue recognition, and it is not

anticipated that they would have a material effect on the fmancial position of the

Company as currently reported. In addition, because the report does not identify

any transactions in which revenue was recorded prematurely after the first quarter

of fiscal 2003, the Company does not expect that a restatement would have a

meaningful effect on future reporting periods.

The Company has shared the results of its investigation and its plans to reorganize

certain of its financial reporting functions with Deloitte. That firm has made no

commitment to continue serving as the Company's auditor, and it has advised the

Company that it will not be in a position to evaluate whether it is willing to do so

until after the Company's reorganization has taken place, and the further

investigative steps have been completed.

90

The SEC I s sues a Wells Notice to th e an Unidentified Former Officer

215. On February 2I, 2405, Lumenis provided an update on the SEC's investigation

into its accounting practices:

Lumens Provides Update on SEC Investigation

Yokneam, Israel

February 21, 2005

Yokneam, Israel, February 21, 2005 - Lumenis Ltd. (LUMF.PK), a global

developer, manufacturer and seller of laser and light-based devices for medical,aesthetic, ophthalmic, dental and veterinary applications, today reported that it has

received a notification -- referred to as a "Wells Notice" -- from the staff of theBoston District Office of the Securities and Exchange Commission (the "SEC") inconnection with the staffs ongoing investigation into various accounting matters.

The notification indicated the staffs intention to recommend that the SEC bring a

civil proceeding seeking, among other things, an injunction and civil monetarypenalties against the Company alleging violations of the antifraud and other

provisions of the U.S. federal securities laws in connection with the reporting of

certain transaction reflected in its 2002 and 2003 financial, statements. Thetransactions identified were the subject of the report ofinternal investigationconducted on behalf of the audit committee of the board of directors (the "Audit

Committee Report") disclosed in the Company's press release dated May 3, 2004.

The notification also indicated the staffs intention to recommend allegations that

the Compan /s May 3, 2004 press release disclosing the Audit Committee Report

was misleading for (i) failing to provide detailed information on the quarterly

impact on earnings (loss) of the improper recognition ofrevenue in certain

transactions covered by the Audit Committee Report, which in some quarters had

been significantly higher on a percentage basis than those percentages reported on

an annual basis; and (ii) creating an impression that all transactions covered by the

Audit Committee Report invulvcd premature recognition of revenue, whereas in

certain of the transactions revenue should never have been recognized. In this

regard, the Company notes that the effect ofthe Company's accounting for the

transactions referenced in the preceding sentence as transactions in which revenues

should never have been recognized was included in the table of aggregate effects

which was set tbrth in the May 3, 2004 press release.

The Company understands that the staff of the SEC has separately sent a Wells

Notice to one former officer of the Company.

91

Under the SEC's procedures, a Wells Notice indicates that the SEC staff has madea preliminary decision to recommend that the Commission bring a civilenforcement action against the recipient of the notice. The Wells Notice receivedby the Company indicates that the staff intends to recommend that the Commissionbring an enforcement action against the Company alleging that it violated Section17(a) of the Securities Act of 1933, Sections 10(b), 13(a) and 13(b)(2)(A) and (B)of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-l 1and 13a-13 thereunder. Sections 17(a), 10(b) and Rule 10b-5 contain the basicantifraud provisions of the federal securities laws. Sections 13(a) and I3(b)(2)(A)and (B) and Rules 12b-20, 13a-1, 13a-11 and 13a-13 contain certain of theobligations ofpublic companies to file periodic and other reports with the SECand, in connection therewith, to maintain accurate financial books and records andappropriate internal accounting controls.

The Company has the opportunity to respond to the SEC staff before the staffmakes its formal recommendation on whether any action should be brought by theSEC_ The Company is discussing the Wells Notice with the SEC staff and intendsto continue to cooperate fully with the staff in an effort to bring the matter to anappropriate and timely resolution,

The Company also noted that it has been taking steps for some time to improve itsinternal controls and intends to continue its review of internal controls. In thatregard, the Company is utilizing outside consultants to assist it in this review ofinternal controls on financial reporting.

ADDITIONAL SC]ENTER ALLEGATIONS

216. 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 ofsuch 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 Lumens, their control over, and'or receipt and/or modification of

Lumenis's allegedly materially misleading misstatements and/or their associations with the

92

Company which made them privy to confidential proprietary information concerning

Lumens, participated in the fraudulent scheme alleged herein.

217. There are substantial indicia and evidence ofDefendants ' scienter.

Defendant Adil has admitted to his scienter in papers submitted to this Court and has

irnplicated his co-Defendants , as well. Adil signed two quarterly financial statements filed

with the SE C, which he has admitted under oath to knowing were false. ht addition, he

informed the other Defendants of the falsity ofthe Company ' s financials, and of the

GAAP-violating accounting practices.

218. In addition to Defendants ' knowing or consciously reckless issuance of

false statements complained ofherein, Defendants had several motives to artificially inflate

the price of Lurnenis's stock as sei forth below.

Insider Sales

219. The Management Defendants sold more than $45 million of their Lumens

common shares when Lumenis common stock was at or near Class Period highs.

220. Defendant Sutton sold more than $7.5 million of Lumenis common shares

during the Class Period. In the two year period preceding the Class Period, Defendant

Sutton had not sold any shares of Lumens common stock though he held 100.000

exercisable options during this time period (these options became exercisable on 1211199).

During March of2001, he sold 200,000 of425,000 shares of Lumens common stock, or

more than 47% of his holdings- During lone, 2001, Defendant Sutton sold 110,400, or

nearly 49%, of his then 225,000 Lumenis common shares. His Class Period transactions

are:

93

Date Number of Price Per Total Source WhereShares Share Reported

Proceeds

2125101 101,000 $ 21.47 $2,168,470.00 Forth 4 (4/20101)

2/25/01 74,900 $ 22.02 $1,649,298.00 Form 4 (4/20/01)

2/25/01 24,100 $ 22,00 $530,200.00 Form 4 (4120101)

6/19/01 2,500 $28.00 $70.000.00 Form 4

(10117101)

6/20/01 1,000 $28.00 $28,000.00 Form 4

(10/17/01)

6/21/01 16,500 $27.75 $457,875.00 Form 4

(10/17/01)

6/22/01 1,000 $27.95 $27,950.00 Form 4

(10/17/01)

6122101 6,500 $27.85 $181,025.00 Form 4

(10'17101)

6/25/01 5,000 $27.65 $138,250.00 Form 4

(10/17/01)

6/26/01 5,000 $27.85 $139,250.00 Form 4

(10/17/01)

6126101 5,000 $27.95 $139,750.00 Form 4

(10117101)

6/26/01 10,000 $28.70 $287,000.00 Form 4

(10/17/01)

6126101 2,000 $29.18 $58,360.00 Farm 4

(10/17/01)

94

0)

(IQILI/ol)

t, Uua:T 00.090`5t'$ V0'0£$ 005,1 1018219

(101LI/ni)

V uuo3 00'00(),!; i $ 00'0£$ 04S`£ I D18Z19

(I01LI1Uf)

t, uuo,J 00.000`5Sl$ 00"I£$ 000`S I0ILZ19

OOIL11011)

f+uuod c0'090`ti5I$ 18'0£$ ooo`S I01/219

(1OIL1/01)

I7 uo!l 00'040`LL$ 08'0£$ OO;'Z IOILZI9

(TOIL 110I )

o. 00'408`9L$ ZL'0£$ ooc`Z IOILZI9

(IQILI10I)

V T Od oo'05Z` 19 1 $ SZ'0£$ 0410`5 101/219

([01/1/01)

17 auaj 00'000`ocl$ OO'0£$ ooo c 101LZ19

(r01L.I14I)

j7UUod 4o'009`5tlI$ ZI'6Z$ ooo'c 1019Z/9

(Io1L1.10I)

}, uuod 00'000'M$ 00'62$ OOO' 1019219

(I01LI101)

17 mad 04'001`£LI$ 58"82$ 000,9 1019219

(101LI10I)

t UUod 00"00£`85$ 51'6Z$ 000`2 1O19719

6/29/01 2,500 $29.16 $72,900.00 Form 4

(10117101)

6129101 500 $29.31 $14,655.00 Form 4

(10117101)

6/29/01 500 $29.40 $14,700.00 Form 4

(10117101)

6129101 1,500 $29.34 $44,010.00 Form 4

(10117101)

Tota l $7,527,728.00

ProceedsFrom All Sales

221. During the Class Period, Defendant S. Genger sold more than $2.3 million

of Lumens common shares, including the sale of more 109,950 out of 250,000 shares

(approximately 44%) bought pursuant to options to purchase Lumens common stock. In

the two year period preceding the Class Period, Defendant S. Genger had not sold any

shares of Lumens common stock. His Class Period transactions are:

Date Number of Price Per Total Source WhereShares Share Reported

Proceeds

3/19/01 9,450 $ 20.8509 $197,041.01 Form 4 (4120101)

3/29101 80,000 $ 20.8672 $ 1,669 ,376.00 Forrn 4 (4/20/01)

3/29/01 20,500 $ 22.00 5451,000.00 Form 4 (4120101)

TotalProceeds $2,317,417.01From All Sales

222. In addition, according to an amended Schedule 13-D filed by the Company

oii June 20, 2001, in order to partially satisfy the obligations of a corporation controlled

96

by Defendant S. Genger, he caused 1.2 million I umenis shares to be sold at $27.40 per

shame for net proceeds of almost $33 million. Thus, Defendant S. Genger' s business

operations necessarily relied on and profited from Lumenis's artificially inflated share

price.

223. During the Class Period, Defendant Frenkel sold more than $I I million of

his Lumenis common shares, which includes the sale of all shares bought following the

exercise of options he held. In the twoyear period preceding the Class Period, Defendant

Frenkel had not sold any shares of Lumens common stock. His Class Period transactions

are:

Date Number ofShares

Price PerShare

Total

Proceeds

Source Where

Reported

6126101 25,4()0 $ 29 .65 $741,250.00 Form. 4 (7/27/01)

61'26101 6, 500 $ 29.50 $191 ,750.00 Form 4 (7/27101)

6/26101 2,500 $ 29.75 $74,375 .00 Form 4 (7127/01)

6126101 2,500 $29.80 $74,500.00 Form 4 (7127101)

6/27/01 5,000 $29.50 $147,500.00 Form 4 (7127101)

Total

Proceeds

From All Sales--------- -- --- -

$ 1,229 ,375.00

224. Thus, the Management Defendants ' sales constituted substantial portions

of the Management Defendants holdings in Lumenis common shares. Furthermore, these

sales were all made between February and June 2001, often on or about the same day, at

the height of the knowingfreckless accounting fraud complained ofherein . Accordingly,

these sales are suspicious in timing and amount and thus give rise to a strong inference

that the Management Defendants acted with scienter.

97

Usin Inflated Stock A c uisit n Curren

225. 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 Lumenis stock to fund a significant portion of the purchase

price. The terms ofthe CMG acquisition included payment of 5,432,099 shares of

Lumenis common stock then trading at approximately $21 per share, representing around

$113 million of the $217 million purchase price.

226. 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 inf1ated 5t©ck to Raise Cash from tion Exercise

227. Defendants were also motivated to use the inflated stock price as a source

of funding. Lumenis was in dire need ofcash to fund operations, as it had failed to

generate positive operating cash flaw fnr 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.

228. Capitalizing on the inflated stock prices -caused by their false claims of

synergies and fixture 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 Leunenis insiders, as anticipated,

during 2Q and 3Q 2001 as the stock price was substantially higher than option exercise

98

prices of approximately $10.90 per share. In total, the exercise ofthese accelerated/fully

vested options generated approximately $20 million in cash for Defendants.

229. The Company's financing arrangement with Bank Hapoalim, B.M. ("Bank

Hapoalun," 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 hand-over of the options to the bank has beenapproved, it is almost certain that they will be exercised.Under the terms of the approval, Bank Hapoalim canexercise the options whenever it wishes, but the companycan also oblige the bank to exercise 2 million of the options,as long as the share is being traded above $23. Since thecompany seems to have no reason not I q oblige the bank,the options will apparently be exercised in a matter of days.

230. 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 Company.

Seconda ry Offerin g

23). 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, Lumenis had negative operating cash flow and long-term debt of

approximately $190 million. This made a secondaryoffering a hiighly 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 fo[lows:

Q: Are you planning a shares issue?

99

A: We're definitely examining a possible issue. An issue atthe current share price isn't on the agenda. Well issue at ahigher price that will dilute the shareholders less, in order toimprove the balance sheet structure.

232, 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.

Loan Covenants

233. 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 notes.

234. 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 inconvertible subordinated notes maturing on September 1, 2002,

provided that Lumenis 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 arrangernent consisted of. (a) a $100,000six-year term loan bearing interest at LIBOR plus 1.75%per annum, (b) up to $50,000 revolving line of credit untilApril, 2002 and up to $20,000 revolving line of credit fromApril, 2002 to April, 2003 bearing interest at LIBOR plus1 % per annum and (c) a letter of undertaking pursuant towhich the Bank agreed, subject to the terns and conditionsset forth therein, to provide up to approximately $92,000 ofa tour-year loan convertible into the Company's shares at aprice of $20.25 per share. Proceeds from the newconvertible loan are to be used solely to refinance the

Coinpany's outstanding convertible subordinated notes,

which will mature on September 1, 2002. The new loanwould bear interest ranging between LIBOR plus 2.25%and LIBOR plus 3.5%. This amount of the commitment

i00

was adjusted to $71,000 following the conversion of$21,120 convertible subordinated notes into shares. Inconnection with the $100,000 loan, on April 30, 2001,Lumenis and the Bank also entered into a five year optionagreement granting the Bank or any of its subsidiaries theright to purchase from Lumenis up to 2,500,000 ordinaryshares at a purchase price of $20.25 per share, subject tocertain adjustments. The Bank has exercised options for1,363,700 shares as of December 31, 2001.

The terms of the financing restrict certain cash dividendsand have limitations on asset dispositions or acquisitionswithout prior approval of the Bank. In addition, in order toutilize the letter ofundertaking, the Company has tomaintain a ratio of its debt, as defined, to EBITDA, asdefined, of less than three times. As of December 31, 2001the Company was in compliance with such terms andconditions.

235. Thus, in order for Defendants to obtain the additional financing to retire the

maturing subordinated notes, they were under pressure to achieve sufficient revenue in

order to comply with the. debt coverage ratio based on EBITDA. Adding to the pressure,

Lumenis's cash position had rapidly deteriorated despite the influx of $50 million from

exercised options in 2Q 2001 and 3Q2001. Their Company's cash balance fell from

$100.5 million on September 30, 2001, to $31.4 million on December 31, 2001. With 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 EBITDA 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 Hank to provide the hinds necessary to retire the subordinated

convertible notes, closing the new funding agreement on March 26, 2002.

101

APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD Old-T 3E-MARKET DOCTRINE

236. At all relevant times, the market for Lumenis securities was an efficient

market for t he 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, Lumens filed periodic public reports with the

SEC and the NASDAQ;

(3) Lumenis regularly communicated with public investors via

established market communication mechanisms , including through

regular disser initions ofpress 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.

237. As a result ofthe foregoing, the market for Lumenis's securities promptly

digested current information regarding Lumens from all publicly available sources and

reflected such information in Lumcnis's stock price. Under these circumstances, all

purchasers ofLumenis's securities during the Class Period suffered siruilar injury through

102

their purchase of Lumenis's securities at artificially inflated prices and a presumption of

reliance applies.

NO SAFE HARBOR

238. The statutory safe harbor provided for forward-looking statements under

certain circumstances does not apply to any ofthe 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 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 Lumenis who knew that those

statements were false when made.

COUNT I

Violation Of Section 10 (b) Of The Exchange Act And Rule 10b-5

Promulgated Thereunder AgainstDefendants Lumenis, Sutton, S. Genger, Frenket and Adil ("Management

Defendants"]

239. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

240. 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:

103

(i) deceive the investing 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.

241. 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 ofbusiness 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 ofSection 10(b) of the Exchange Act and Rule lOb-5 promulgated

thereunder. All Management Defendants are sued either as prin}ary participants in the

wrongful and illegal conduct charged herein or as controlling persons as alleged below.

242. The Management Defendants, individually and in concert, directly and

indirectly, byy 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 Lunienis as

specified herein.

243. These Management Defendants employed devices, schemes and artifices to

defraud, while in possession of material, adverse, nonpublic 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

104

omitting to state material facts necessary in order to make the statements made about

Lumenis 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 ofbusiness that operated as a fraud and

deceit upon the purchasers of Lumenis securities during the Class Period.

244. Each of the Management Defendants' primary liability, and controlling

person liability, arises from the following facts: (i) 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, pans, projections and/or reports; (iii)

each of these defendants enjoyed significant personal 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 Coinpairy'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 tailed 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

105

future business prospects from the investing public and supporting the artificially inflated

price ofits 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 ref ainng from taking those steps necessary to discover

whether those statements were false or misleading.

245. As a result of the dissemination ofthe 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 Lumenis'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 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.

246. At the time of said misrepresentations and omissions, Lead Plaintiffs and

other members ofthe Class were ignorant of their falsity, and believed them 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

106

purchased or otherwise acquired their Lumenis 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 10b-5 promulgated thereunder.

247. 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 [T

Violation Of Sectlouu 20 ( a) Of The Exchange Act Against the individu al Defendants

248. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

249. The Individual Defendants acted as controlling persons of Lumenis 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 and'or

awareness of the Company's operations and/or intimate knowledge of the false financial

statements filed by the 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 unlinnited access to

copies ofthe 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

107

issued and had the ability to prevent the issuance of the statements or cause the statements

to be corrected.

250. In particular, each of these Defendants had direct and supervisory

involvement in the day-to-day operations ofthe 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 Earth above,

Lumenis and the Individual Defendants each violated Sectionl0 (b) and Rule IOb-5 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.

251. In or around June, 1999, Defendant Arie Genger completed a hostile proxy

takeover of ESC, the predecessor of Lumenis. Following the takeover, Arie 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.

252. 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, Defendwit 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.

108

253. Defendant A. Genger was the largest individual shareholder ofLumens.

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 Officer. CWI, a former executive ofLumenis,

described A. Genger's degree ofcontrol over the Company and the alleged fraud,

referring to him as the "puppet-master" of the Company. Furthermore, in July, 2001,

following its completion of the CMG acquisition, A_ Genger 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 ofundisclosed pressure Lumenis stock would soon come under.

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 Civil Procedure;

2) Awarding Lead Plaintiffs and the Class damages against each Defendant

and in favor of Lead PEainlii'fs and all other mernbers of the Class in an amount to be

determined at trial plus pre-judgment interest thereon;

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 Court may secm just and proper.

109

JURY L DEMANDED

Lead Plaintiffs hereby demand a trial by jury.

Dated: June 14, 2005

BERNSTEIN LIEBRARD & LIFSHLTZ, LLB'

Jeffrey MM.llber (rH-1738)Abraham 1. Katsman (AK-7305)10 East 40' Street , 22nd FloorNew York, NY 10016Tel: (212) 779-1414

GLANCY BINKOW & GOLDBERG LLPLionel Z . GlancyNeal A. DubLinskyAvi N. Wagner

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

Lead Counsel for Lead Plaintiffs and the Class

110

EXHIBIT A

XMSCII, GAAMr[UERG & fOW,ii (TH0641)Artomeysfw .Plaice,JTWO University PlazaHackensack, New Xezsey 07601(24i) 488-4644

ORIGINAL F .E

HW 1 -3 2W

"J"AM T. vr^u ^,4CLERK

IJNr STATES DISTRICT COURT

D to or NzwJAY

ASI ADI L.

P1ai-uti#lDocket No. Q2-5224QY(T.C)

against ARST AAPENbEw CO[IL4J14'With Demand for Trial by Jury

LLMt"sNLS LTD. and Li3 18 1'C-, foreigncorporations, YACHA SUTTON, SAGI GENGCR,and JACOB A. FRENKEL, individually,

Dof"cx^dau^rs_

Piainiiff'Asif Adz#, by bic attomcy alleges for his First A^=cndod Cosxsptaint

against the defendants:

PAxr

1. Plaintiff is an individual residing at 51 High Meadow Lane, Baskin; Ridge,

New 7krscy. Plaintiff was fumiedy an tiflicer of defendant L o. s l.td. employed as Executive

Vice President resident in New SGrsey. Lumcaiis rcrnoved plaintiff frnxn office in January 2002

and t ated his a np[[yraent as of September 4, 2002.

Z_ Defendant Lumeuzs Ltd is an sraeii corporation €vrmeriy known as BSC

Medical Systems, Ud_, with its principal ofticc at Yokncaui industna.i Park, YoLneam 20697,

iaraei_ and an office at 375 Park Avenue, 1 I;h Floor, New York, New York 10152

NNWr

3. D eudam# Lwmenis hie. is a Nbssadxasdft corporation with its principal

office, at 375 Park Avcauc, k 1ll, Flooi . New York, Neer Yodt 1Oi 52. Luc uis Inc. is a wholly

owned subsidiary of Lumenis Ltd. and, upon infonmat on and hdicf is an after ego of Lumienis

LuL (refcrrc to collectively as "LUrneujs')

-4. Defendant Yacha Sutton is, and at allmil tines was, the President and

CbietBuacutive Offie of Lumei s, residing in let Aviv, IsraeL

5. Dof udant Sag" 6,mgcr became the Chief Opcrad= O1tccr of Lnmeois in

July 2001, prior to which he served as the company's ChiefF naucial Officer. Defendant Crenger

resides in. New York, New York-

G_ Defendant Jacob A Frenkel is, and ad all material des was , the Chaiucuao of

the Hoard ofDirecto s of 1.unaenis, residing in Laudon, England.

7. This Calf ka ]s sdiat puxsua^a# tv ^$ LT.S.C. §§ 144 1 and 1 446 as a rc ft

of defendants' removal of this action from the SupnorCourtof the State of New Jersey,

Somerset County-

Fmsrcoum

8. fa Sprixng 21000, defeadaats- Lumeuis and Sutton solic ited and induced plaintiff

to leave his employmc t with McKinsey & Co. to join L.umeixis, then knovvm as ISC {edic-ad

Systems, xtd in coiasiderig their offer of to-yment^ plaintiff teiied upon Satiou's

roprescntatiaus as to th financial condition and prospects of the company, his promise-s- as to

plaintiff's responsibilities and long term employment, and his (and the camp=y's) cart tmea(

to zood faith and Fair dealing.

9. la reliance upon the promises, representations and con nhmcrts ;macro by

Sunnn and i.urncmJ5, plaintiff arc-. steel their offer of emplo anent and entered into a wriiL u

cv1playra+Ixt agremuent with Lams dated a of hdy S,'2000 to serve as the .Company's

Executive Vice Presides for a period ofthree yem at a base annual salazy of $2.5O 000.

Lumens also promised plaintiff that be would prarticrpate in the company's 1999 Stock Option

Plan, would roceive a sign on bonus, an annual performance bonus, reimbursement of t gorary

living expenses for d 8 months, and nth= henccfi including contributions to a 401K Praia,:

i Q- Soan after begriming vvodr, plaintiff learned that the financial cuudition of

I umcnis was not as it had been rimed to him in that the company was, among other ttiingi,

handling excessive product rckwn_s, canying u awananted high recei' les, iroperly enga-gig

in sales with recourse i^aznciug. undc fundinng ar=ty accruals, and booking wdte-o Es as

rC^IGU3I^_ .

i 1- Pt-aintsf repactcd his findiugs to defendant Geuger as Chief Financial Officer,

but Gengcr ignored plainfif's objections.

12. Plaintiff sibsvueutly 1cut d that lumen" was engaging in these iwpsuper

accounting practices at the direction of dcfcudani Gengcr, who had concealed material

mformation and documentation fmm I. m enis' s outside audiInm with k aowledge of defeedant

SUUOFL

13. Plaintiffsabscquently *farmed defendant Sutton ofthe foregoing with tte

reques' that Lmjmenis should cornice these improper practices- Defendants failed to at±nowlcadgc

or to act on plai ntiff's suggestions_

14. In July 2001, defendant: Sutton asked plaintiff to assume the position of

Lnierin-i Chief Financial Officer while connrwig to perform the duties of Executive Vices

President. Although plaintifag d to do so ou an interim basis, defendant Sutton

misrepresented in a press release that Lumens had . ai poiatcd piaixstiff as pear,2naa

4

Financial Outer: IJcfndaat sultan ncvrztheiess refused to r obiatr the tcrtns ofplaintiff's .

emp1nyn ent contract to reflect the additional re on b " ies be had a ed.

15. Upon assnmng the duties ofChiefFinancial. Ofcer, plaice lamed of

additional financial irregulad1 es, inctudiug lack of foil discJos in ci»tmicamions with

hiders and the iuvesting public, ux&disclosed insider. nsacfiona ua4iiseiased side

agreements between Lumens and its principal tender. m tea ion ofc-apital sales to

make up far an. comings short , and the ba of appar tty tent sales to alleged

foreign entities,

16. Plautxflrepartzd the foregoing financial irregularities to the Board of

Directors ofL penis, including defendant Freukel as Chairman ofthe toard, in November

2001.

17_ At the time, plaiutiiff reasonably believed that d e accounting practices al issue

violated the applicable law, toles and regulations, were fraudulent of giuiina1, and conntravened

the policies of this State and of the United States concerning diselo= s to shareholders and rite-.

investing public.

18. Within a few weeks, defcndazlt Sultan, notified plaiutitthat be had removed

him from the position of ChiefFitancial Officer. Once again, plaintiffrcVca'Ed his pnor

objethons to dcfcwJAnt Sattou, advising him that Lumeais was not follower generally necepled

accounting principles and was improperly issixes in wbic.b its investors had a matte

19.On January 3, 2002, defendant Sutton removed ptaint& fmo. lays posi tion as

E ecutiye Vice Presidrnt, reas5iguing plaintiff to a position as sales rq resentativc in the. Asian

mark=, while at the same t ue jelling plaintiff to be iii 1ocLi m for od r employment -

L J W

20, Lu mcnis's Boardi under the dfri ction ofdefendant i'ieukeI. shordy diefta5eS

removed plaintif' from his position as an of icer of tha rwtpor i ou.

2I. At about this umc tuna, dcfcudani Gcngc r 1hr atc ned to fire plaintiff ifhc

continued to voice objections to Lumee;ds' s financial and accounting practices and to nun

plaintiff's reputauotl in the business community so that he would not be able to find other

e nploynacut.

22- In 2002, plaintiff Icazned. luw a press release issued by defemdanr

Sutton that Lunn nis was the sttject ofon investigation by thc.Secuzides and Exchange

Commiss ion.. Ptaaitiff Promptly advised Sutton that Lumcrds should. My cooperate with the

investigation and should fully disclose all ofthc kupropor practices about ch he had

prviousty reported to the Board ofDirectors.

23. TO re--ponce defendant Sutton told plaintiff that he should actively pursue.

other cxnpIayment_

24. [u. or about March 2002, severat investors rommeuc.ed class action lawsuits

against Lumens, also naming Sutton, Frenkei, Genger and plaintiff indwrdually, for securities

{"mud in coocectiau with the Securities wd Exchange Corwnission investigation, the events

underlying that Myestigatiou, and the decline in the price ofLu ienis's shares during the weeks

pretthug Luuocnis' s press release:. disclosing the SEC investigarian.

25. In or about June 1002, defendant Sutton had plaintffremavrd plairldiff from

his physical ofticc, leaving him without an office in which to work, and strapped plaintiff of all

further duties and responsibilities.

26. By notice dated June 4, 2002, defendant Sutton tcznninated plaintiff's

,-,mplo nnea[ .onlrac : effective September 4, 2002_

27_ Defendants have since refused W pay plaintiffthe bonuses, r+eimbu m ta,

va=tioq pay, and other bcacflts to which he is eatiitled-

28. Defeudattts demoted and subsequenfy tcnninated pI3intiff, and rct'u ed to pay

him the bauuscs, refrnbm- enta, rracatfoa pay, and other benefits which he bad earned, iai bad

faith and in retaliation for plaintiff's report of and abjection to dcf ndants ' accouutixtg

ii egu critics and improper financ"iai practices.

2. The actions ofdefendants' Sutton, Frcnkel, Gcagcr and Lum is were taken

in retalia iau for plaintiff's re e t ofand objection to the canrpady's financial ixregutaxities and

- per accounting pnotices-

30, Defendants ' conduct constitutes willful violations of to Conscientious

Employee Protc atian Act as enacted in New Jersey ('.LS-A- 34: 19-1 et seq_) and New Yom

(Labor Law §740 el seq.).

Wi<7.I REFORR, plafni prays for judgtnent against defer louts, jaiutly and

::.:.. severally, awarding hint:

a. compensatory damages;

b_. a pc=anent injunction restraining defendants from continuing to violate the

applicable laws;

c. reinstatement to his position as lxcxcative Vice President, with all benefits to

which he wa. tiled;,

d, cn =sawn for all lost and dicerhind wages, benctits and other

r=uneraiiou including stack options;

e- costs and attorney's fees, and

f- punitive damages in an itmount suf kieut to punish d-efewlants for their

ardawfud conduct.

.. .x ^.r z .. Iww^,. - ' r

SwomCOUNT

31. Ptainti f'zq5eaft lad rca11gcs tlic allegadous coataiicd in paragrapba t

tbmu8h 32 with the same force and effect as if set forth here at Icngtbr..

32. By reason of the fo ing, defendant Lumaerus has breached the cnaplaymeoxt

s9mem nt with plaid which breut S damaged plaintiffby depriving him of the botmscs,

reiutbu sements, vacation pay, stock options ind other benefits to which Lie was entitled under

the cuiploymcui a8mement with Lumens for the remai g term of his employment

W ' BEFORE, plainEffpmys forjudgment againstdafeudarats, jointly and

se ally, awarding him:-

a- cocupensato f damages for Me bonuses, rcim& semis, vacation pay,

stock options and nhcx bts efits to wbicd be was cntitlcd;

b. inte ist, costs and attorney=s fees; and

c_ punitive damages.sufficient to punish defendsecs for their bad faith and

willful wxaagM conduct-

1 COUNT

33- Yiainti6rep and rcaleges the aiIcWtions cautairxed in paragraphs t

through 34 with the sauce force and eft as if set fGah he at 1ength.-

34_ In iuduciug plain" toto accept its o$cr ofemplaynncnt, defendant. Snit=

caused defendant Lumps to issue stock options to ptainfff to pose 275,E shares of

Lumen s stock at an excrcLsa price of$12 per sham, which options were to be exercised in

accordance with the terms of €he applicable option agremcat, subject to such black-ou t periods

as au ht Iegitisuaic?y apply to ptaiatiff by yirtuc of his positicou as a corporate insider-

the time foal def-ma-a.n[ Sutton caused thc'optians to is.;ue, be knew Arid

nie.]ded that 1'Lii xtiffwould not tie peimittcd to exercise such rrnn^ A Y• ^•_ ^r ^•^^ •:

EFJ

deft Sutton would pesniit him to do so, rrgar4less of the tempts ofthe agocenlcnta or

whether a lcitiiata blacker period was in efficct

36. At each point in time when piainti sought to exercise bii options tha er,

defendant S tton x f i to permit him to do so, regardless ofthe teens of the a is or

'4vhedxv a 3ci6matc Wadk-Out period was in CffhCt

. :: 37. Defendants Sutton 's conduct was wrongfh and without justdicaitiom

38. As a rc u1L of defendants' misconduct,-We decline in they price ofLurnextis's

stack, which dircctty rcIatei to the 1in racial in e gritcs and t oper pi ariiccs it fee ed to

above, and defendant ' s unlawfnl termination of plaintifL s employment , the options issued to

plaintiff arc uaw worthless.

W1iLE 'ORE, p[ainti$'prays 1vr judg¢ceui agaipst de d. ts, jointly and

severalty, awarding him:

a. compensatory daulagea;

b. int s , costs and attorney's fees; and

a. punitive damages sufficient to punish defeudants for their bad faith and

wilifud wrongful conduct-

Fau;•tXITO Comm

39. Plaintiff repeals and realieges the allegations contained in paragraphs I

dnvgh 40 with the sawo futc and effect as of set forth here at 1=9[b

4J. Defeudants flauduientiy induced plaintiff to leave his prior euxploynienr by (a)

inteutionatiy misreprescating the financial condition and prospects v£ the 6umpany, (b) making

false pmcuisrs to plaintiff as to his responsibilities and long-term employment, and (c) Ong in

cnnnaverrcioa of 'tizcir duty ofgood faith axed fair dealing w plaintiff-

41. Plain#freigaed hiis prior employmcat, accepted a lower salary and rr4mced

be^cf t , anti gave up emprloynncnt s ity in ryeupon defendants' tnisregr sent i ions, fa1sc

pn raise and apparent good faith.

42. As a result, plaintiffhas lost substantial camings and is now uriemploya}ikc at

the level that he founcrly wo cd.

W R ;ORJ plaintiffprays forjudgment against defendaatts , Joiutly and

severally, awarding him:

a, compensatory damages.

b. iutcrest, casts and attorxicy ' s fees; and

c. puniti ve damage suficicnt to pm" dofcadaum for their bad faith and

willful wrongful coniduct-

w COUNT

43. Plain if repeats and r=BCgcs the allegations contained in p dgraphs I

du-ough 44 with the same fate and Feet as if set fours here al length-

44 As a result ofdefendants' unlawful conduct, which led to a Securities and

Exchange Commission investigation and to the class acUous nests in which plait ffLS named as

an individual defizO.,xu by virtue of his position as interim CinefFinancial O iccr, plaintiff is

now i<wemployabie at the level that he fbancri.y worked.

WTIEI .FORE, plainti prays for judgment against defendants, jointly and

severally, awarding hmi:

a. compensatory damages;

b. interest , costs and attorney's lens; and

c, punitive damages sufficient to punish dcfeudats for their bad faith and

wi]Ift3I obelig It1 COU.dUCL

SuCOUNT

45. Plaintiff repeats and realleges the alleg .mss contained in paragraphs I

through +46 with the same force and ottect as ifso fi)rth h= At length_

46. De(cidants had a duty to disclose to plaintiff at or about the time that be was

hircd that Lumenis bad engagrd and was'a-igaging in inane irrggularities; self-dcaliug.

?lprop-cr o g practices, and other unlawful conduct.

47_ Defendants brtacbed that duty by failing to disciox to piaintifF, and/or

concealing from plzunnllt that Lutuems was engaged in and engagm in financial irs e^utaritics,

Self-de hng, improper accouncmg practiccs, and outer uu(awthl conduct

43. Had defendants ,formed p a[f of the truc state of-affairs, plaintiff would

not have ace tcd defcndauts offer of a pioyineot, tcsigped his prior employment, accepted a

lower salary and reduced benefits, of giweu up employment sectuity

49- As a resuh of defendants' breath,piaintiffhas lost substantial earnings and is

now unemployable at dw- level he focmedy way

VVEREF4RL, plaintiff prays farjudgment against defendants , jointly and

severaUy* awarding Win-

a- compensatory damages;

b. inter sz, costs and attozncy'S Cam; and

c. punitive damages suffcicat to punish defendaoia for their bad faith and

willful wrongful conduct.

Sm V ENTU COUNT

50. ilanati -x-pears and rcaiic es the allcgatious conrained in pxzag. pb.m I

5 _ Dcfcw acts willfully, wrongUly, and in bad f tetmirsated plaintiffs

cznpioymcat in. or in part to deprive him of the apparturnty to cxanL a the stock Options

that had been ranted to him and to deny bam the compmsatian to which he was cntiilcd.

WHEREFORE, plaintiff prays for jitdgweut agaissdefendants, jointly and

scvo ai1y, awarding him; -

a_ cotnpcnaatory damages;

b, inter, costs and attorneys Rms-, and

c. punitive damages sufficient to punish defendants for their bad faith and

willful Wrongful OQUdjact.

'1rGam COUNT

52_ Ylszntiffrepears and realieges the allegations containcd in the paragrapbx I

through 53 with the same Force and effect as if set otth here at length-

53. Plaintiff is named as a defendant in the pending class action securities fraud

tax suits by vlitue ofhis position as a former officer ofdefendant Lumems As such- plaintiff is

entitled to btvc defendant Lumeo is provide hid:{] with a defense and. indemnity against those

claims.

WHER FORE, plaintiff prays forjudgment against de€endaots , jointly and

scvcIWdy:

a declaring that Lumens must provide him with a defemic and must iadcausify

him against any liability in the !ritics fraud litigation brought agains"t him as a

former o€ cex and emp(oycc of dcfudaut L.unncuis; -

^.. }), awavEng him costs, in(eaest, and attorney's fees; and

c. such other relief as is appropriate.

N ('A COMfr

54_ Piainiiffxepeats and ieaileges theman ewtaiucd in paragx pbs I

thmugh 55 with the same force and effect as if set forth here at Icngth.

55. Defendant Ltimcuis has improperly refused to allow plaintiff to retain

qualified conoscl of his choke to represent him in the srciirities frvrd class action lawsuits

rckrred to herein.

56_ Upon information and bc1iel defendant Lu mcnis has rfused to allow plaintiff

to be defended by qualified couuse ofhis choice in order to &uslratc and to impair plaintiffs

ability to assert his toga.[ rig its against Lumeuis and the other dcfergdants as pkadcd her--ix,

WI J ORE, ptauntffpiays forjudgment:

a, declaring his cattitlement to retain qualified counsel of l s choice to dc[ ad hun

in the litigation , hrought against him as a farmer officer and cmployoc of

defendant Lwnenis

b. awarding him campematcry damages for defendants'' r ,3 conduct with

costs and afomcy's fees; and

c. awarding him punitive damages sufficient to punish defendants for their bad

faith and will!il-wroagH conduct

JURY DFMM{D

Piaintifdemands a trial by juryofall clairc s so triable.

CFxnmcalnO,NN OF tqv Cft"RE1aC? CfON

The undetsigned cmtfles that the matter in coutrova sy is not the subject of any

other action pending. in any court or of a pending arbitxazio' or admi istr-Aive proc:. dbig, that no

other action, arbitrati^ or administrative p[ocC lx1g is conr.c aplated, x3d 1 *1t no other, p rtie

shoilid be j oined in the within action .

Dated: NOnr k 1, 2002

f^zso7c ^z•,^;,,,e,4

WSCY4 GAR MtQ & HOWARDAvon yifir

By-Thom as S. Howard CnI0601)

EXHIBIT B

0

K-rRSCH, GAR rs:rrwt w & Howutw (THQ6O 1)Attorneysfor PIainff FE

=5 i0a 1 107 3 2(4-^ (B(201) 488-4644

UNITED STATES D1STRZCT GNTjVI'LCIAM ;." .

DISTRICT OF NEW JERSEY CLFTIk

...-_.---- ..,.-__---___-•------------ n.,....__._--------- --- x

ASIF ADIL,

Plaintiff,

Docket No. 02-5224(SRC)

' -against- DECLARATtOOT,Or ASYF A[DtL

LUMENIS LTD. and LUMENS INC., foreign ,'', , • ^, .'=corporations , YAC A SUTTON, SAGI GENDER. eand JACOB A. FRENKEL, individually,

Defendants- ^,J ^gYCicx^`-- _--------------- ----------------- _ __ -- - x

[, Asif Adil, hereby declare under penalty of perjury that:

I . I am the plaintiff in the captioned lawsuit. I make this declaration in

opposition to the motion to dismiss filed by the defendants . I have personal knowledge oftbe

facts state l herein-

fumDANTS' COO TACOS WITH

NEW J19RSEY AND HIRING OF PLAIN FIFF IN

THE STATE OF NEW JERSEY

;9^4

_ 2- Prior to my beginning work as an officer ofLuxnertis L-td, and Lurnenis

Inc., I was employed by McKinsey & Co. in Florham Park, New Jersey as a principal or partner.

As part of my employment, I provided consulting services to Lumenis, which was then k own as

ESC Medical Systems, Inc. (referred to for simplicity as "Lumenis") and I was familiar with its

principal o €ficers through that work.

. ! • 40 fl

3. In 1999, McKinsey & Co. provided strategic planning and cost reduction

services to Lumens. I was the lead partner in charge of the Lutnenis account. All of these

services were provided by McKinsey & Co_ from its Florham Park, New Jersey office to

Lumenis across North America, including Lumenis's Allendale, New Jersey, national service and

operations headquarters, and surgical sales headquarters- These services included numerous

meetings with Lumenis senior management in New Jersey.

4. In November 1999, t was personally visited by Yacha Sutton, Lumenis's

CEO, and Sagi Cenger, Lumenis's Chief Financial Officer, at my office in Florham Park, New

Jersey- I knew both men through my work with McKinsey & Co. In the course of the visit, they

broached with one the subject of my joining the Lumenis team. I responded that I would consider

the proposal but needed more information to make a rational decision. Messrs. Sutton and

Genger said that they would provide me with the necessary information and I subsequently

received financial information about the company. At about the same time, I was meeting in

Florham Park with all levels of Lumenis's management concerning the consulting wotk that

McKinsey was providing.

5, In January 2000, Yacha Sutton and Lou Scafuri called me at my New Jerey

office to engage McKinsey & Co_ to develop a growth program including a direct consumer

business. Following that engagement, and during the period January - March 2000, 1 and other

McKinsey personnel met on numerous occasions in Florbarn Park with Lumenis persoruiel who

were sent by Lumenis to work with us in our offices on this project. In connection with this

project, I visited Lumenis's Allendale facility to assess how the company could provide a direct

consumer business.

6. In February 2000, 1 was personally visited by Lou Scafuri, who was then

Lumenis's Chief Operating Officer, at my office with McKinsey & Co_ in Florham. Park, New

Jersey. Mr- Scafuri extended to me an offer ofemployment by Lumenis to serve as the

company's executive vice-president in charge ofNorth America business operations. During that

conversation, he made representations to me about the company's strong financial condition

(with 200/a annual sales growth) and described it as a great opportunity. I told him that I was

interested, asked him to send the company's financial statements to me, and requested that he

provide a written proposal, all ofwhich he agreed to do.

7. Over the next few months, I negotiated"by email and by telephone From my

office and my home in New Jersey with Jacob Frenkel, Chairman , Yacha Sutton , Lou Scafuri,

and Sagi Genger o€Lumenis concerning the specific terms of my employment and the terms of

an employment agreement . During the course of the negotiations , we discussed at length where I

would be based, the nature of my responsibilities , reimbursement of my travel expenses,

relocation expenses after an initial 18 month period , options, and the other detailed terns of the

Employment Agreement, as well as their representations about the company's strong financial

health and sales growth- With respect to where I would be based, we agreed as set forth in

paragraph 6(g) of the Employment Agreement that, for the initia l 18 inou ths , I would live and

work out of my home in Basking Ridge, New Jersey. All of my air and ground travel expenses,

including any trips that I would have to make to Lumenis's Massachusetts headquarters , would

be reimbursed by Lumenis . We agreed that during that 18 mouth period, I would work at Least

two days from my home office in New Jersey with the other three days travelling throughout my

area of responsibility , plus travel to Massachusetts , as and when needed . A copy of the

-3-

Employment Agreement as executed is annexed as Exhibit B to the Declaration of Steven B.

Kaplitt, submitted by defendants on this motion.

PLM NTU?F's EMPLOYMENT BY LYIt i is AS

A NEW JERSEY EMPLOYEE BASED IN THE

STATE OF NEW JERSEY

8_ In accordance with my Employment Agreement, I worked out of my home

on behalf of Lutnenis for at least two days every week, even after July 2001 , when Lurnenis

opened an office in New York that I could use. Even then, Lumenis continued to treat me as a

New Jersey based employee and I continued to work from my home because we had not

completed the initial 18 month interim period specified in my Employment Agreement.

9. Throughout my employment, Lumenis treated me as a New Jersey

employee by which I mean that Lumenis treated me as an employee who worked in and was

based in the State ofNew Jersey, as shown by my W-2 forms for the years 2000, 2001 and 2002.

(Copies annexed as Exhibit I-) Lumenis made all deductions as required by New Jersey State

law, including payments to New Jersey disability and unemployment insu ance funds. Contrary

to the suggestion contained in Mr. Kaplitt's Declaration, I was not treated as if I was employed

either in Massachusetts or, later, in New York, Indeed, Mr. Kaplitt did not have any, knowledge

ofmy employment prior to November 2001, since he only became an employee of Lumenis at

that time.

W, At the time of my hiring , Lumenis had substantiai,husiness operations

located in New Jersey_ Until May 2000, Lutnenis had approximately 200 workers in Allendale,

New Jersey in connection the sales, services, and marketing ofsurgical lasers, as well as staffing

Lumenis's national services and operations headquarters. Thereafter, Lumenis began closing

down these operations and integrating the personnel into other locations, but the New Jersey

-4-

facility continued operating until about December 2001. This New Jersey operation had come

about through Lumenis' s acquisition of Laser Industries, which had been based in New Jersey.

11. At the time I began working informally for Lumerus immediately after the

signing of the Employment Agreement (and in advance ofmy nominal start date) the company

was completing the integration of Laser Industries' personnel and business into Lumenis's

national operations. During the Summer of 2000, 1 visited Lumenis's Allendale, New Jersey

office nn several occasions, and I was involved in terminating New Jersey employees and

terminating the lease of the New Jersey premises.

12. Both before and after the integration of Laser Industries into Lunnenis,

Lutnenis had a further presence in New Jersey through its sales representatives and service

technicians. During the entire period of my employment, Lumenis had at least three sales

representatives in this State who worked under my oversight as Executive Vice President of

North American business operations.

13. 1 also regularly met with members of Lumenis's management at my home

in Basking Ridge, New Jersey during the entire period ofmy employment,. Among the

vficerslsenior managers with whom I met were: Greg Morris, Chief Financial Officer for [forth

America; David Page, Vice President ofSales; and Liz Black and Paul lanelii, who can

Ltunenis's Aculight program. [ regularly met at my home in New Jersey with each of these

individuals, as well as others, for business purposes including the making of telephone calls and

the review of business nratteis, and we visited customers in Fort Lee, Morristown, Short Hills,

Summit, and other localities in Hew Jersey.

-5-

Tics FRAUDULENT MISRIrIRESENTAT!ONS

MADE SY DEFENDANTS TO INDUCE PLAINTIFF

TO ENTER INTO THE EMPLOYMENT AGREEMENT

14. Lumenis misapprehends the allegations contained in the Fourth, Fifth and

Sixth Counts of the Complaint. These allegations arise out o f actual misrepresentations made to

me prior to my accepting Lumenis's offer of employment.

€5. When I was recruited by Lumenis, T was told by various members of

Lumenis's senior management, and I was given financial statements the purported to show, that

the company's sales were growing at a rate of approximately 20% per year. In fact, this was not

true. As I subsequently found out, the company was inflating earnings by booking sales to

distributors with the understanding that the products could be returned, by giving recourse

financing to increase apparent saes when such sales were actually contingent and not bona fide,

and by charging ongoing expenses to a reserve account, rather than against sales, so that the net

sales numbers would not be reduced.

16. If Lumenis had not engaged in these improper financial bookkeeping

strategies, the company would not have shown any sales growth, but might have shown a decline

instead. If l had known that Lumenis was not growing or if l had known that Lumenis was

engaging in improper accounting practices, I would never have accepted employment with that

company. The primary reason that I accepted Luntenis's offer of employment was my belief,

based on representations given to me at the time by Lurnenis's senior management, that the

company was growing and successful, when, in fact, neither was the case.

NEW JERSEY IS BOTH THE MOST CONvENIWNC

ANA THE APPROPRIATE FORUM FOR THIS LITIGATION

17. At the time that we entered into the employment Agreement, Lurnenis'S

principal offices were located in Boston, Massachusetts and Alleadate, Now Jersey. That is no

r-^410

c""^longer the case . Lumenis closed the Allendale operations , and subsequently closed the Boston

office, moving its headquarters to California in 2001, with a satellite office in New York that it

opened in 2001 for the convenience of Sagi Genger. To my knowledge, Lumenis no longer has

any presence in Massachusetts, except that it maintains its status as a Massachusetts corporation.

Indeed, even its agent-for service of process is not located in Massachusetts, as shown by the

printout annexed as Exhibit 2. None of the persons having knowledge ofmy hiring, work, or

termination are located in Massachusetts.

18. After Lumenis opened the satellite office in New York, the company

provided me a visiting office at that location but continued to treat me as a New Jersey employee

working out ofmy New Jersey office, as shown by my W-2 forms (Exhibit 1). Until January

2002, 1 continued to work out of my home office in Basking Ridge, New Jersey, at Lurnenis's

direction and with Lumenis's knowledge. After January 2002, Lumenis ceased providing the

with a visiting office in New York. My place of business from that point until the termination of

my employment in June 2002 was my home office in Basking Ridge-

19. When defendant Sutton removed me from the position of Chief Financial

Officer ofLumenis, he did so by telephoning me at my home in New Jersey in early December.

Similarly, when he notified me on June 4, 2002 that my employment was tern inated on 90 days

notice, he did so by sending the notice to me by email and by the U.S. mails to my home in New

Jersey. A copy of the notice that he sent is annexed as Exhibit 3.

-7-

I declare under penalty ofperjury underthe laws ofthe United States ofAmerica

that the foregoing is true and correct.

Executed on FebruaTy 12,2003

Asif AdilI4A 6 soon neplF deciorcA un aoc

Q5 f

r

-8-

-109FAX 7033IZd2 PTASK& OPERATIONS

[ declare under penalty of pcrjuly under the laws Of the United States of America

that the foregoing is true and correct.

Executed on February [2, 2003

AsiFAdil .

_g.

Q 002

DECLARATION

1, Thomas S. Howard, hereby declare that the annexed facsimile signature of Asif

Add is genuine. Mr. Adil is forwarding his original signature by mail to our office, which will

be filed as soon as it is received. Mr. Adil's original signature could not be obtained in time to

be submitted with this filing. I declare under penalty of perjury that the foregoing is true and

correct.

Dated: February 13, 2003

mas }1S.HO1H06OI 4

CERTIFICATE OF SERVICE

The undersigned certifies that a copy of the attached Second Amended Consolidated Class

Action Complaint was served upon the following counsel ofrecord in the actions filed in this Court,

by FedEx, on the 10th day of June, 2005:

Counsel for Plaintiffs:

Glancy & Binkow LLPLionel Z. GlancyNeal A. DublinskyClaudia J. Bugh1801 Avenue of the Stars, Suite 311Los Angeles, CA 90467Tel: (310) 201-9150

Counsel for Defendants:

Stephen A. Marshall Steward D. Aaron

Sonneuschein Nath & Rosenthal LLP Dorsey & Whitney LLP

1221 Avenue of the Americas 250 Park Avenue

New York, New York 10020 New York, New York 10177

(212) 768-6700 (212) 415-9200

Lopez