##### Table of Contents



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

FORM 10-Q

|                |  |                                                                                        
|--------------- |  | ---------------------------------------------------------------------------------------
|X IN BALLOT BOX |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2002

or

|                |  |                                                                                         
|--------------- |  | ----------------------------------------------------------------------------------------
|X IN BALLOT BOX |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from  to

Commission File Number: 30733

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 41-1978822                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|10700 Bren Road West, Minnetonka, MN                           |  | 55343                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          

952-933-4666

(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

X IN BALLOT BOX    Yes    
X IN BALLOT BOX    No

As of July 22, 2002, there were 32,272,301 shares of the registrants $.01
par value Common Stock outstanding.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                                                                          |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item. 1. Financial Statements                                                                
|                              |                                                                                               | Consolidated Balance Sheets as of December 29, 2001, and June 29, 2002 (Unaudited)                      
|                              |                                                                                               | Statements of Operations for the three and six months ended June 30, 2001, and June 29, 2002 (Unaudited)
|                              |                                                                                               | Statements of Cash Flows for the six months ended June 30, 2001, and June 29, 2002 (Unaudited)          
|                              |                                                                                               | Notes to Consolidated Financial Statements (Unaudited)                                                  
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|Part II. Other Information   
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                   



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##### Table of Contents



INDEX

|           |  |         |  |                                                                                                          |  |        
|---------- |  | ------- |  | -------------------------------------------------------------------------------------------------------- |  | -------
|           |  |         |  |                                                                                                          |  | Page(s)
|           |  |         |  |                                                                                                          |  |        
|Part I.    |  |         |  | FINANCIAL INFORMATION                                                                                    |  |        
|           |  |         |  |                                                                                                          |  |        
|           |  | Item 1. |  | Financial Statements                                                                                     |  | 3      
|           |  |         |  |                                                                                                          |  |        
|           |  |         |  | Consolidated Balance Sheets as of December 29,
2001, and June 29, 2002 (Unaudited)                       |  | 3      
|           |  |         |  |                                                                                                          |  |        
|           |  |         |  | Statements of Operations for the three and six
months ended June 30, 2001, and June 29, 2002
(Unaudited) |  | 4      
|           |  |         |  |                                                                                                          |  |        
|           |  |         |  | Statements of Cash Flows for the six months ended
June 30, 2001, and June 29, 2002 (Unaudited)           |  | 5      
|           |  |         |  |                                                                                                          |  |        
|           |  |         |  | Notes to Consolidated Financial Statements (Unaudited)                                                   |  | 6 - 7  
|           |  |         |  |                                                                                                          |  |        
|           |  | Item 2. |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                    |  | 8 - 16 
|           |  |         |  |                                                                                                          |  |        
|           |  |         |  |                                                                                                          |  |        
|           |  | Item 3. |  | Quantitative and
Qualitative Disclosures AboutMarket Risk                                                |  | 17     
|           |  |         |  |                                                                                                          |  |        
|Part II.   |  |         |  | OTHER INFORMATION                                                                                        |  |        
|           |  |         |  |                                                                                                          |  |        
|           |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                                      |  | 18     
|           |  |         |  |                                                                                                          |  |        
|           |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                         |  | 18     
|           |  |         |  |                                                                                                          |  |        
|SIGNATURES |  |         |  | 19                                                                                                      

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item. 1. Financial Statements




AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         |  |          |             |         | 
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- |  | -------- | ----------- | ------- | 
|                                               |                                                                                                                                                                                                                                                 |                                            |        | December 29, |         |  | June 29, |            
|                                               |                                                                                                                                                                                                                                                 |                                            |        | 2001         |         |  | 2002     |            
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         |  |          |            
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         |  |          | (unaudited) |        
|Assets                                         |                                                                                                                                                                                                                                                 |                                            |        |              |         |  |          |            
|Current assets:                                |                                                                                                                                                                                                                                                 |                                            |        |              |         |  |          |            
|                                               | Cash and cash equivalents                                                                                                                                                                                                                       |                                            | $      | 28,755       |         |  | $        | 31,482      |        
|                                               | Short term investments                                                                                                                                                                                                                          |                                            |        | 9,013        |         |  |          | 20,028      |        
|                                               | Accounts receivable, net                                                                                                                                                                                                                        |                                            |        | 25,306       |         |  |          | 26,513      |        
|                                               | Inventories                                                                                                                                                                                                                                     |                                            |        | 13,991       |         |  |          | 13,116      |        
|                                               | Deferred taxes                                                                                                                                                                                                                                  |                                            |        | 7,471        |         |  |          | 5,742       |        
|                                               | Other current assets                                                                                                                                                                                                                            |                                            |        | 1,552        |         |  |          | 755         |        
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         | 
|                                               |                                                                                                                                                                                                                                                 | Total current assets                       |        |              | 86,088  |  |          |             | 97,636  | 
|Property, plant and equipment, net             |                                                                                                                                                                                                                                                 |                                            | 23,604 |              |         |  | 22,496   |            
|Goodwill, net                                  |                                                                                                                                                                                                                                                 |                                            | 82,365 |              |         |  | 82,365   |            
|Intangibles, net                               |                                                                                                                                                                                                                                                 |                                            | 17,118 |              |         |  | 15,109   |            
|Deferred income taxes                          |                                                                                                                                                                                                                                                 |                                            | 3,180  |              |         |  | 2,451    |            
|Long-term investments in marketable securities |                                                                                                                                                                                                                                                 |                                            | 18,783 |              |         |  | 10,728   |            
|Investments in technology and other assets     |                                                                                                                                                                                                                                                 |                                            | 4,013  |              |         |  | 4,732    |            
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         | 
|                                               |                                                                                                                                                                                                                                                 | Total assets                               |        | $            | 235,151 |  |          | $           | 235,517 | 
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         | 
|Liabilities and Stockholders Equity           |                                                                                                                                                                                                                                                 |                                            |        |              |         |  |          |            
|Current liabilities:                           |                                                                                                                                                                                                                                                 |                                            |        |              |         |  |          |            
|                                               | Accounts payable                                                                                                                                                                                                                                |                                            | $      | 2,678        |         |  | $        | 2,592       |        
|                                               | Accrued compensation expenses                                                                                                                                                                                                                   |                                            |        | 15,656       |         |  |          | 9,662       |        
|                                               | Accrued warranty expense                                                                                                                                                                                                                        |                                            |        | 7,587        |         |  |          | 7,394       |        
|                                               | Other accrued expenses                                                                                                                                                                                                                          |                                            |        | 4,350        |         |  |          | 1,311       |        
|                                               | Current portion of notes payable                                                                                                                                                                                                                |                                            |        | 4,909        |         |  |          | 5,454       |        
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         | 
|                                               |                                                                                                                                                                                                                                                 | Total current liabilities                  |        |              | 35,180  |  |          |             | 26,413  | 
|Long-term notes payable                        |                                                                                                                                                                                                                                                 |                                            | 24,000 |              |         |  | 19,909   |            
|Other long-term liabilities                    |                                                                                                                                                                                                                                                 |                                            | 1,884  |              |         |  | 1,176    |            
|Stockholders equity:                          |                                                                                                                                                                                                                                                 |                                            |        |              |         |  |          |            
|                                               | Common stock, par value $.01 per share; authorized
95,000,000 shares; issued and outstanding
16,166,887 voting shares and 11,597,941 non-voting
shares for December 29, 2001; 31,855,931 voting and
341,700 non-voting shares for June 29, 2002 |                                            |        | 320          |         |  |          | 322         |        
|                                               | Additional paid-in capital                                                                                                                                                                                                                      |                                            |        | 194,630      |         |  |          | 196,144     |        
|                                               | Deferred compensation                                                                                                                                                                                                                           |                                            |        | (448         | )       |  |          | (329        | )      
|                                               | Accumulated other comprehensive loss                                                                                                                                                                                                            |                                            |        | (2,810       | )       |  |          | (1,660      | )      
|                                               | Accumulated deficit                                                                                                                                                                                                                             |                                            |        | (17,605      | )       |  |          | (6,458      | )      
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         | 
|                                               |                                                                                                                                                                                                                                                 | Total stockholders equity                 |        |              | 174,087 |  |          |             | 188,019 | 
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         | 
|                                               |                                                                                                                                                                                                                                                 | Total liabilities and stockholders equity |        | $            | 235,151 |  |          | $           | 235,517 | 
|                                               |                                                                                                                                                                                                                                                 |                                            |        |              |         | 

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

3



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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)(Unaudited)

|                                |                             |   |                    |        |   |                  |        |        |               |   |        |               |   |   |        |        |  
|------------------------------- | --------------------------- | - | ------------------ | ------ | - | ---------------- | ------ | ------ | ------------- | - | ------ | ------------- | - | - | ------ | ------ | -
|                                |                             |   | Three months ended |        |   | Six months ended |       
|                                |                             |   |                    |        |   |                  |       
|                                |                             |   | June 30, 2001      |        |   | June 29, 2002    |        |        | June 30, 2001 |   |        | June 29, 2002 |  
|                                |                             |   |                    |        |   |                  |        |        |               |   |        |               |  
|Net sales                       |                             | $ | 28,438             |        |   | $                | 36,330 |        |               | $ | 55,986 |               |   | $ | 71,045 |       
|Cost of goods sold              |                             |   | 5,787              |        |   |                  | 7,120  |        |               |   | 11,184 |               |   |   | 14,252 |       
|                                |                             |   |                    |        |   |                  |        |        |               |   |        |              
|                                | Gross profit                |   |                    | 22,651 |   |                  |        | 29,210 |               |   |        | 44,802        |   |   |        | 56,793 |  
|Operating expenses:             |                             |   |                    |        |   |                  |        |        |               |   |        |               |   |   |        |       
|                                | Marketing and selling       |   |                    | 11,211 |   |                  |        | 13,108 |               |   |        | 22,620        |   |   |        | 25,918 |  
|                                | General and administrative  |   |                    | 3,077  |   |                  |        | 2,912  |               |   |        | 5,803         |   |   |        | 6,186  |  
|                                | Research and development    |   |                    | 2,891  |   |                  |        | 3,197  |               |   |        | 6,081         |   |   |        | 6,031  |  
|                                | Amortization of intangibles |   |                    | 2,361  |   |                  |        | 939    |               |   |        | 4,561         |   |   |        | 1,878  |  
|                                |                             |   |                    |        |   |                  |        |        |               |   |        |              
|Total operating expenses        |                             |   | 19,540             |        |   |                  | 20,156 |        |               |   | 39,065 |               |   |   | 40,013 |       
|Operating income                |                             |   | 3,111              |        |   |                  | 9,054  |        |               |   | 5,737  |               |   |   | 16,780 |       
|Other income (expense):         |                             |   |                    |        |   |                  |        |        |               |   |        |               |   |   |        |       
|                                | Royalty and other income    |   |                    | 775    |   |                  |        | 747    |               |   |        | 1,850         |   |   |        | 2,246  |  
|                                | Interest income             |   |                    | 20     |   |                  |        | 325    |               |   |        | 102           |   |   |        | 758    |  
|                                | Interest expense            |   |                    | (1,036 | ) |                  |        | (718   | )             |   |        | (2,145        | ) |   |        | (1,481 | )
|                                |                             |   |                    |        |   |                  |        |        |               |   |        |              
|Income before income taxes      |                             |   | 2,870              |        |   |                  | 9,408  |        |               |   | 5,544  |               |   |   | 18,303 |       
|Income tax expense              |                             |   | 1,336              |        |   |                  | 3,678  |        |               |   | 2,606  |               |   |   | 7,156  |       
|                                |                             |   |                    |        |   |                  |        |        |               |   |        |              
|Net income                      |                             | $ | 1,534              |        |   | $                | 5,730  |        |               | $ | 2,938  |               |   | $ | 11,147 |       
|                                |                             |   |                    |        |   |                  |        |        |               |   |        |              
|Earnings per share:             |                             |   |                    |        |   |                  |        |        |               |   |        |               |   |   |        |       
|Basic                           |                             | $ | 0.05               |        |   | $                | 0.18   |        |               | $ | 0.11   |               |   | $ | 0.35   |       
|Diluted                         |                             | $ | 0.05               |        |   | $                | 0.17   |        |               | $ | 0.10   |               |   | $ | 0.33   |       
|Weighted average common shares: |                             |   |                    |        |   |                  |        |        |               |   |        |               |   |   |        |       
|Basic                           |                             |   | 27,938             |        |   |                  | 32,171 |        |               |   | 27,876 |               |   |   | 32,072 |       
|Diluted                         |                             |   | 30,064             |        |   |                  | 34,245 |        |               |   | 29,984 |               |   |   | 34,244 |       

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

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)

|                                                     |                                                                                   |                                           |        |                          |         |   |               |        |        |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ------------------------ | ------- | - | ------------- | ------ | ------ | -
|                                                     |                                                                                   |                                           |        | For the six months ended |        
|                                                     |                                                                                   |                                           |        |                          |        
|                                                     |                                                                                   |                                           |        | June 30, 2001            |         |   | June 29, 2002 |       
|                                                     |                                                                                   |                                           |        |                          |         |   |               |       
|Cash flows from operating activities:                |                                                                                   |                                           |        |                          |         |   |               |       
|                                                     | Net income                                                                        |                                           | $      | 2,938                    |         |   | $             | 11,147 |       
|                                                     | Adjustments to reconcile net income to net cash
provided by operating activities: |                                           |        |                          |         |   |               |        |       
|                                                     | Depreciation                                                                      |                                           |        | 1,909                    |         |   |               | 2,028  |       
|                                                     | Amortization of intangibles                                                       |                                           |        | 4,561                    |         |   |               | 1,874  |       
|                                                     | Deferred financing costs                                                          |                                           |        | 135                      |         |   |               | 135    |       
|                                                     | Stock-based compensation costs                                                    |                                           |        |                         |         |   |               | 6      |       
|                                                     | Noncash deferred compensation                                                     |                                           |        | 235                      |         |   |               | 96     |       
|                                                     | Income tax benefit related to stock option plan                                   |                                           |        | 149                      |         |   |               | 542    |       
|                                                     | Change in net deferred taxes                                                      |                                           |        | 1,994                    |         |   |               | 2,231  |       
|                                                     | Changes in operating assets and liabilities:                                      |                                           |        |                          |         |   |               |        |       
|                                                     |                                                                                   | Accounts receivable                       |        |                          | (916    | ) |               |        | (723   | )
|                                                     |                                                                                   | Inventories                               |        |                          | (1,478  | ) |               |        | 938    |  
|                                                     |                                                                                   | Accounts payable and accrued expenses     |        |                          | 2,430   |   |               |        | (9,490 | )
|                                                     |                                                                                   | Other assets                              |        |                          | 325     |   |               |        | 78     |  
|                                                     |                                                                                   |                                           |        |                          |         |  
|                                                     |                                                                                   | Net cash provided by operating activities |        |                          | 12,282  |   |               |        | 8,862  |  
|                                                     |                                                                                   |                                           |        |                          |         |  
|Cash flows from investing activities:                |                                                                                   |                                           |        |                          |         |   |               |       
|                                                     | Purchase of property, plant and equipment                                         |                                           |        | (855                     | )       |   |               | (920   | )     
|                                                     | Purchase of businesses, net of cash acquired                                      |                                           |        | (10,938                  | )       |   |               |       |       
|                                                     | Purchase of investments in technology                                             |                                           |        | (4,500                   | )       |   |               |       |       
|                                                     | Purchase of marketable securities                                                 |                                           |        |                         |         |   |               | (9,446 | )     
|                                                     | Sales of marketable securities                                                    |                                           |        |                         |         |   |               | 6,375  |       
|                                                     |                                                                                   |                                           |        |                          |         |  
|                                                     |                                                                                   | Net cash used in investing activities     |        |                          | (16,293 | ) |               |        | (3,991 | )
|                                                     |                                                                                   |                                           |        |                          |         |  
|Cash flows from financing activities:                |                                                                                   |                                           |        |                          |         |   |               |       
|                                                     | Issuance of common stock                                                          |                                           |        | 633                      |         |   |               | 991    |       
|                                                     | Payments on long-term debt                                                        |                                           |        | (3,017                   | )       |   |               | (3,546 | )     
|                                                     |                                                                                   |                                           |        |                          |         |  
|                                                     |                                                                                   | Net cash used in financing activities     |        |                          | (2,384  | ) |               |        | (2,555 | )
|                                                     |                                                                                   |                                           |        |                          |         |  
|Effect of exchange rates                             |                                                                                   |                                           | (395   | )                        |         |   | 411           |       
|                                                     |                                                                                   |                                           |        |                          |         |  
|Net increase (decrease) in cash and cash equivalents |                                                                                   |                                           | (6,790 | )                        |         |   | 2,727         |       
|Cash and cash equivalents at beginning of period     |                                                                                   |                                           | 12,165 |                          |         |   | 28,755        |       
|                                                     |                                                                                   |                                           |        |                          |         |  
|Cash and cash equivalents at end of period           |                                                                                   | $                                         | 5,375  |                          |         | $ | 31,482        |       
|                                                     |                                                                                   |                                           |        |                          |         |  
|Supplemental disclosure:                             |                                                                                   |                                           |        |                          |         |   |               |       
|                                                     | Cash paid for interest                                                            |                                           | $      | 1,933                    |         |   | $             | 1,136  |       
|                                                     | Cash paid for taxes                                                               |                                           | $      | 47                       |         |   | $             | 6,688  |       

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

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The consolidated financial statements included in this Form 10-Q have been
prepared by American Medical Systems Holdings, Inc. (the Company), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules
and regulations. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These unaudited consolidated interim financial
statements should be read in conjunction with the Companys consolidated
financial statements and related notes included in its Annual Report on Form
10-K for 2001.

These statements reflect, in managements opinion, all adjustments (which
include only normal, recurring adjustments) necessary for a fair presentation
of the financial position and the results of operations and cash flows for the
periods presented. The results of operations for any interim period may not be
indicative of results for the full year.

2. Inventories

Inventories consist of the following (in thousands):

|                       |  |                   |        |   |               |             |        |  
|---------------------- |  | ----------------- | ------ | - | ------------- | ----------- | ------ | -
|                       |  | December 29, 2001 |        |   | June 29, 2002 |            
|                       |  |                   |        |   |               |            
|                       |  |                   |        |   |               | (Unaudited) |       
|Raw materials          |  | $                 | 3,366  |   |               | $           | 3,386  |  
|Work-in-process        |  |                   | 2,210  |   |               |             | 2,184  |  
|Finished goods         |  |                   | 11,114 |   |               |             | 10,302 |  
|Obsolescence allowance |  |                   | (2,699 | ) |               |             | (2,756 | )
|                       |  |                   |        |   |               |            
|Total, net             |  | $                 | 13,991 |   |               | $           | 13,116 |  
|                       |  |                   |        |   |               |            

3. Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations,which requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. The Company has not been involved in a business
combination since then.

In June 2001, the Financial Standards Board also issued issued Statements of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Under SFAS No. 142, goodwill and other intangible assets with indefinite lives
are not amortized, but tested for impairment annually, or whenever there is an
impairment indicator. In addition, upon adoption of SFAS No. 142, all goodwill
is assigned to reporting units for purposes of impairment testing and is no
longer subject to amortization. Intangible assets that are not deemed to have
an indefinite life continue to be amortized over their estimated useful lives.
The Company adopted SFAS No. 142 as of December 30, 2001, and assessed whether
goodwill had been impaired at the date of adoption, determined that it is a
single reporting unit, and, that the Companys fair value exceeded the carrying
amount of its goodwill. There was no indication that goodwill was impaired.

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The following table presents a reconciliation of net income and earnings per
share adjusted for the exclusion of goodwill amortization, net of income taxes:

|                                         |  |                         |       |  |            |   |       | 
|---------------------------------------- |  | ----------------------- | ----- |  | ---------- | - | ----- | 
|                                         |  | Total through June 2001 |      
|                                         |  |                         |      
|(in thousands, except per share data)    |  | Three months            |       |  | Six months |  
|                                         |  |                         |       |  |            |  
|Net income, as reported                  |  | $                       | 1,534 |  |            | $ | 2,938 | 
|Add: Goodwill amortization, net of taxes |  |                         | 1,072 |  |            |   | 1,979 | 
|                                         |  |                         |       |  |            |  
|Adjusted net income                      |  | $                       | 2,606 |  |            | $ | 4,917 | 
|                                         |  |                         |       |  |            |  
|Reported diluted earnings per share      |  | $                       | 0.05  |  |            | $ | 0.10  | 
|Add: Goodwill amortization, net of taxes |  |                         | 0.04  |  |            |   | 0.07  | 
|                                         |  |                         |       |  |            |  
|Adjusted diluted earnings per share      |  | $                       | 0.09  |  |            | $ | 0.17  | 
|                                         |  |                         |       |  |            |  

4. Comprehensive Income

Comprehensive income for the Company is net income adjusted for changes in
value of derivative financial instruments, unrealized gains and losses on
marketable securities, and foreign currency translation. Comprehensive income
for the six months through June 30, 2001, and June 29, 2002, was:

|                                                                                                                   |  |                         |       |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ----- | - | ---- | - | ------ | -
|                                                                                                                   |  | Six months through June |      
|                                                                                                                   |  |                         |      
|                                                                                                                   |  | 2001                    |       |   | 2002 |  
|                                                                                                                   |  |                         |       |   |      |  
|Net income                                                                                                         |  | $                       | 2,938 |   |      | $ | 11,147 |  
|Cumulative effect of change in accounting principle for
derivative and hedging activities (SFAS 133), net of
taxes |  |                         | (712  | ) |      |   |       |  
|Net loss on derivative financial instruments, net of taxes                                                         |  |                         | (347  | ) |      |   | (42    | )
|Amounts reclassified to interest expense during the
period from derivative and hedging activities, net of
taxes    |  |                         | 127   |   |      |   | 481    |  
|Unrealized losses on marketable securities                                                                         |  |                         |      |   |      |   | (69    | )
|Foreign currency translation adjustments                                                                           |  |                         | (631  | ) |      |   | 780    |  
|                                                                                                                   |  |                         |       |   |      |  
|Comprehensive income                                                                                               |  | $                       | 1,375 |   |      | $ | 12,297 |  
|                                                                                                                   |  |                         |       |   |      |  

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|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial Condition and
Results of Operations

The following Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Words such as may,
expect, believe, anticipate, or estimate, identify such forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially from those expressed in
such forward-looking statements. Some of the factors that could cause such
material differences are identified in Certain Important Factors beginning on
page 14. We undertake no obligation to correct or update any forward-looking
statements, whether as a result of new information, future events, or
otherwise. You are advised, however, to consult any future disclosures we make
on related subjects in future filings with the SEC.

Critical Accounting Policies and Estimates

Managements discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgements that affect the reported amounts of assets,
liabilities, revenues, and expenses and related disclosure of contingent assets
and liabilities. At each balance sheet date, we evaluate our estimates,
including but not limited to, those related to accounts receivable,
inventories, long-lived assets, warranty and sales return obligations, legal
contingencies, and income taxes. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. The critical accounting policies that are most
important in fully understanding and evaluating our financial condition and
results of operations are discussed below.

Allowance for Doubtful Accounts and Other Accounts Receivable-Related Valuation
Accounts. We maintain an allowance for doubtful accounts, returns, and
warranty claims. We rely on subjective judgments and estimates to establish
these valuation accounts. If we make different judgements, we could have
material variances in the amount and timing of our reported results for any
period. In addition, actual results could be different from our current
estimates, possibly resulting in increased future charges to earnings.

We maintain an allowance for doubtful accounts for all individual accounts
receivable that we believe are unlikely to be collected. For all other
accounts receivable, we record an allowance for doubtful accounts based on a
combination of factors including the age of receivable balances, historical bad
debt experience, general customer creditworthiness, and current economic
trends. At June 29, 2002, our allowance for doubtful accounts was $838,000.

We maintain an allowance for returns based on historical and current trends in
product returns. At June 29, 2002, our allowance for sales returns was
$463,000.

We accrue a liability for estimated warranty claims. The amount of the accrual
is based on historical claims by product group and other factors. Claims could
be materially different from actual results for a variety of reasons, including
a change in our warranty policy, competition or other external forces,
manufacturing changes that could impact product quality, or as yet unrecognized
defects in products sold. As of June 29, 2002, our accrual for estimated
future warranty costs was $7.4 million. If future product quality standards or
policies are less favorable than current analyses, additional warranty accruals
may be required and would be reflected in cost of sales in the period the
revision is made.

Inventory Valuation.We use estimates and judgments to value our inventory.
In general, we record our inventories at the lower of standard manufacturing
cost or expected market value. Each quarter, we

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evaluate our inventories for obsolescence and excess quantities. This
evaluation includes analyses of inventory levels, historical loss trends,
expected product lives, sales levels by product and projections of future sales
demand. We write off inventories that we consider obsolete. In addition, we
maintain an allowance for inventory quantities in excess of forecasted demand.
Our inventory allowances were $2.7 million at June 29, 2002. If future demand
or market conditions are less favorable than current estimates, additional
inventory adjustments would be required and would adversely affect income in
the period the adjustment is made.

Legal Liability Accrual.Each quarter, we make an estimate of the uninsured
portion of legal representation and settlement costs of possible future product
liability. This evaluation consists of reviewing historical claims costs as
well as assessing future trends in medical device liability cases. Social and
political factors, as well as doctor and medical facility responsibility, make
litigation costs hard to predict. Accruals for future litigation costs were
$1.3 million on June 29, 2002. If, in the future, we determine this accrual is
inadequate, the adjustment would reduce income in the period the adjustment is
recorded.

Income Taxes.In the preparation of our consolidated financial statements, we
estimate income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax exposures and assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet.

We have significant amounts of deferred tax assets that we review for
recoverability and then value accordingly. We evaluate the realizability of
our deferred tax assets on a quarterly basis and assess the need for valuation
allowances. These deferred tax assets are evaluated by considering historical
levels of income, estimates of future taxable income, and the impact of tax
planning strategies. We record a valuation allowance to reduce deferred tax
assets when we determine that we could not realize all or part of our deferred
tax assets.

We maintain a valuation allowance of $682,000 to offset tax loss carryfowards
created in a foreign jurisdiction, which, if subsequently recognized, would be
allocated to goodwill. We did not maintain any other allowances against our
net deferred tax assets at June 29, 2002. If we later determine that we would
not realize all or part of the deferred tax assets, we would adjust the
deferred tax asset valuation allowance and charge the adjustment to income in
the period we made the determination.

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Results of Operations

Three Months Through June 30, 2001, Compared to the Three Months Through June
29, 2002

Net Sales.The following chart compares net sales between our second quarter
of 2001 and 2002.

|                     |       |      |                         |        |      |   |        |        | 
|-------------------- | ----- | ---- | ----------------------- | ------ | ---- | - | ------ | ------ | 
|                     |       |      | Three months ended June |       
|                     |       |      |                         |       
|Product Category     |       | 2001 |                         |        | 2002 |  
|                     |       |      |                         |        |      |  
|Erectile Restoration |       | $    | 14,054                  |        |      | $ | 17,797 |       
|Continence:          |       |      |                         |        |      |   |        |       
|                     | Men   |      |                         | 7,648  |      |   |        | 8,960  | 
|                     | Women |      |                         | 4,990  |      |   |        | 7,904  | 
|                     |       |      |                         |        |      |  
|                     | Total |      |                         | 12,638 |      |   |        | 16,864 | 
|Prostate Treatments  |       |      | 1,746                   |        |      |   | 1,669  |       
|                     |       |      |                         |        |      |  
|Total                |       | $    | 28,438                  |        |      | $ | 36,330 |       
|                     |       |      |                         |        |      |  
|Domestic Sales       |       | $    | 23,269                  |        |      | $ | 29,663 |       
|International Sales  |       |      | 5,174                   |        |      |   | 6,667  |       
|                     |       |      |                         |        |      |  
|Total                |       | $    | 28,443                  |        |      | $ | 36,330 |       
|                     |       |      |                         |        |      |  

The erectile restoration product line includes four types of inflatable and
non-inflatable prostheses and smaller amounts of diagnostic equipment. During
the second quarter of 2002, sales of the erectile restoration products
increased $3.7 million, or 26.6%, when compared to the second quarter of 2001.
This increase was primarily due to increased sales of our new InhibiZone
antimicrobial coated penile implant, which was released in the U.S. second
quarter of 2001. We expect international availability of this product by the
end of 2002. The incontinence product line includes all sales of Acticon
Neosphincter to control fecal incontinence and tissue, even though we believe
some small share of these products are used in men, and tissue may also be used
in non-incontinence procedures. Sales of the continence product line increased
$4.2 million, or 33.4%, during the second quarter primarily due to the
increased sales of SPARC, a suprapubic mid-urethral sling system which was
approved for sale in Europe in April 2001 and in the U.S. in August 2001.
Prostate treatments include all sales of our Urolume product even though this
product is also used to treat urethral strictures.

Cost of Goods Sold.Cost of goods sold as a percentage of net sales decreased
from 20.3% in the second quarter of 2001 to 19.6% in 2002. This decrease
resulted from spreading of relatively fixed manufacturing costs over higher
production levels, and lower warranty costs in 2002 than in 2001. Recent
quality improvements as well as changes made to our procedures for granting
warranty credit are leading to longer-term reductions in our warranty expenses
and exposure. Future costs of goods sold will depend on production levels,
product mix, and sales volumes.

Marketing and selling.Marketing and selling costs decreased from 39.4% of net
sales in 2001 to 36.1% in 2002, although costs increased $1.9 million. This
increase resulted from higher employee and commission expenses to support the
28% higher sales, with a small offset of new product rollouts costs in 2002
than in 2001. In the future, we expect marketing and selling costs to increase
as sales increase, but decrease as a percentage of sales. In addition, costs
will vary quarter to quarter as certain costs, such as sales meetings and
product rollout costs, are incurred independent of that quarters sales.

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General and administrative.General and administrative costs decreased
$165,000, or 5.4%, from $3.1 million in the second quarter of 2001 to $2.9
million in 2002. These decreases were primarily due to gains on currency of
approximately $400,000 and the closing of our Israeli manufacturing facility in
early 2002, which reduced expenses approximately $300,000 in the second quarter
of 2002 versus 2001. The exchange gains were the result of the strengthening
of foreign currencies, mainly the Euro, against the US dollar and related to
translating foreign denominated inter-company receivables to current rates. We
expect quarterly spending in general and administrative for the remainder of
2002 to be consistent with the first quarter of 2002 rather than the
just-completed-quarter as the currency gains may be non-recurring.

Research and development.Research and development includes costs to develop
and improve current and possible future products and the costs for regulatory
and clinical activities for our products. Research and development costs
increased from $2.9 million in 2001 to $3.2 million in 2002. We expect total
spending in research and development to increase in 2002 from 2001 levels and,
longer term, to remain within the range of 8 to 10 percent of net sales. In
addition, our costs in this area could vary as a result of spending on
purchased technologies as opportunities are discovered.

Amortization of intangibles.Amortization of intangibles decreased $1.4
million, from $2.4 million in the second quarter of 2001 to $939,000 in 2002.
This decrease is attributable to the Companys adoption on December 30, 2001,
of SFAS No. 142, Goodwill and Other Intangible Assets.Under the provisions of
SFAS No. 142, goodwill and other intangible assets with indefinite lives are
not amortized, but tested for impairment annually, or whenever there is an
impairment indicator. In addition, upon adoption of SFAS No. 142, all goodwill
must be assigned to reporting units for purposes of impairment testing and is
no longer subject to amortization. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
estimated useful lives.

Below is a table detailing the quarterly pro forma impact on earnings with the
adoption of SFAS 142, as if the adoption of the new standard were effective in
fiscal year 2001.

|                                                                              |  |         |       |   |         |   |       |         |  |   |         |   |  |   |       |  
|----------------------------------------------------------------------------- |  | ------- | ----- | - | ------- | - | ----- | ------- |  | - | ------- | - |  | - | ----- | -
|                                                                              |  | 2001    |      
|                                                                              |  |         |      
|                                                                              |  | First   |       |   | Second  |   |       | Third   |  |   | Fourth  |  
|(in thousands, except per share data)                                         |  | Quarter |       |   | Quarter |   |       | Quarter |  |   | Quarter |  
|                                                                              |  |         |       |   |         |   |       |         |  |   |         |  
|Net income, as reported                                                       |  | $       | 1,404 |   |         | $ | 1,534 |         |  | $ | 2,007   |   |  | $ | 1,585 |  
|Pro forma change in net income with adoption
of new accounting pronouncements |  |         | 1,242 |   |         |   | 1,407 |         |  |   | 1,406   |   |  |   | 1,503 |  
|Tax impact                                                                    |  |         | (335  | ) |         |   | (335  | )       |  |   | (335    | ) |  |   | (335  | )
|                                                                              |  |         |       |   |         |   |       |         |  |   |         |  
|Pro forma net income                                                          |  | $       | 2,311 |   |         | $ | 2,606 |         |  | $ | 3,078   |   |  | $ | 2,753 |  
|                                                                              |  |         |       |   |         |   |       |         |  |   |         |  
|Diluted earnings per share, as reported                                       |  | $       | 0.05  |   |         | $ | 0.05  |         |  | $ | 0.06    |   |  | $ | 0.05  |  
|Pro forma diluted earnings per share                                          |  | $       | 0.08  |   |         | $ | 0.09  |         |  | $ | 0.09    |   |  | $ | 0.08  |  

Royalty and other income.All of our royalty income is from the license of
certain stent-delivery technology to Boston Scientific Corporation for use
outside urology. Royalty income was $747,000 in the second quarter of 2001 and
$775,000 in 2002.

Interest income and interest expense.Interest expense decreased from $1.0
million in 2001 to $718,000 because average borrowings under notes payable were
approximately $16.0 million lower in 2002 than in 2001. Interest income
increased from $20,000 in 2001 to $325,000 in 2002 due primarily to investment
of receipts from our July 2001 secondary common stock offering.

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Income tax expense.Income tax expense increased $2.3 million in 2002 compared
to 2001, as income before income taxes in 2002 was $9.4 million compared to
income before income taxes of $2.9 million in 2001.

As part of our adoption of SFAS 142, we no longer record goodwill amortization
that previously had been a permanent non-deductible tax expense. In the second
quarter of 2001, the total of this type of amortization was approximately
$500,000. If we had these new rules in place in 2001, our effective tax rate
would have been approximately 41%.

Net income.Net income was $4.2 million higher in 2002 than in 2001. This
increase in net income resulted from the increase in revenues while maintaining
control over our operating costs and the change in accounting for amortization
of goodwill, all of which are described above.

Six Months Through June 30, 2001, Compared to the Six Months Through June 29,
2002

Net Sales.The following chart compares net sales between our first six-month
period of 2001 and 2002.

|                     |       |      |                       |        |      |   |        |        | 
|-------------------- | ----- | ---- | --------------------- | ------ | ---- | - | ------ | ------ | 
|                     |       |      | Six months ended June |       
|                     |       |      |                       |       
|Product Category     |       | 2001 |                       |        | 2002 |  
|                     |       |      |                       |        |      |  
|Erectile Restoration |       | $    | 27,596                |        |      | $ | 35,111 |       
|Continence:          |       |      |                       |        |      |   |        |       
|                     | Men   |      |                       | 15,297 |      |   |        | 17,697 | 
|                     | Women |      |                       | 9,768  |      |   |        | 14,947 | 
|                     |       |      |                       |        |      |  
|                     | Total |      |                       | 25,065 |      |   |        | 32,644 | 
|Prostate Disease     |       |      | 3,325                 |        |      |   | 3,314  |       
|                     |       |      |                       |        |      |  
|Total                |       | $    | 55,986                |        |      | $ | 71,069 |       
|                     |       |      |                       |        |      |  
|Domestic Sales       |       | $    | 45,686                |        |      | $ | 58,824 |       
|International Sales  |       |      | 10,300                |        |      |   | 12,221 |       
|                     |       |      |                       |        |      |  
|Total                |       | $    | 55,986                |        |      | $ | 71,045 |       
|                     |       |      |                       |        |      |  

During the first six months of 2002, sales of erectile restoration products
increased $7.5 million, or 27.2%, when compared to the same period in 2001.
This increase was primarily due to increased sales of our new InhibiZone
antimicrobial coated penile implant, which was released in the second quarter
of 2001. Sales of continence products increased $7.6 million, or 30.2%,
primarily due to the increased sales of SPARC, a suprapubic mid-urethral sling
system which we introduced in the third quarter of 2001.

Costs of Goods Sold.Costs of goods sold as a percentage of net sales inceased
from 20.0% in 2001 to 20.1% in 2002.

Marketing and selling.Marketing and selling costs decreased from 40.4% of net
sales in 2001 to 36.5% in 2002, although costs increased $3.3 million. This
increase resulted from higher employee and commission expenses to support of
the higher sales, both within the United States and internationally.

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General and administrative.General and administrative costs increased
$383,000, or 6.6%, from $5.8 million in 2001 to $6.2 million in 2002. This
increase was primarily due to professional fees and services, recruiting and
relocation costs, corporate insurance, and bad debt charges partially offset by
the closing of our Israeli manufacturing facility in early 2002, and gains on
currency which were approximately $450,000 in the first half of 2002. These
exchange gains were the result of the strengthening of foreign currencies,
mainly the Euro, against the US dollar, and related to translating foreign
denominated inter-company receivables to current rates.

Amortization of intangibles.Amortization of intangibles decreased $2.7
million, from $4.6 million in 2001 to $1.9 million in 2002. This decrease is
attributable to the Companys adoption on December 30, 2001, of SFAS No. 142,
Goodwill and Other Intangible Assets.Under the provisions of SFAS No. 142,
goodwill and other intangible assets with indefinite lives are not amortized,
but tested for impairment annually, or whenever there is an impairment
indicator. In addition, upon adoption of SFAS No. 142, all goodwill must be
assigned to reporting units for purposes of impairment testing and is no longer
subject to amortization. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their estimated
useful lives.

Royalty and other income.All of our royalty income is from the license of
certain stent-delivery technology to Boston Scientific Corporation for use
outside urology. Royalty income was $1.5 million in 2001 and 2002.

Other income increased from $375,000 in 2001 to $716,000 in 2002. In early
2001, we received a non-recurring payment of $375,000 representing
reimbursement to resolve a quality issue with a materials supplier dating back
to the fourth quarter of 1999. On January 1, 2002, we terminated the AMS
Retirement Annuity Plan. In conjunction with this termination, the Company
made an approximate $5.8 million settlement contribution to the pension trust
and recorded a gain on pension termination of $716,000.

Interest income and interest expense.Interest expense decreased $664,000 in
2002 compared to 2001 from $2.1 million to $1.5 million because average
borrowings under notes payable were approximately $16.0 million lower in 2002
than in 2001. Interest income increased from $102,000 in 2001 to $758,000 in
2002 due to investment of receipts from our July 2001 secondary common stock
offering.

Income tax expense.Income tax expense increased $4.6 million in 2002 compared
to 2001, as income before income taxes in 2002 was $18.3 million compared to
$5.5 million in 2001.

As part of our adoption of SFAS 142, we no longer record goodwill amortization
that previously had been a permanent non-deductible tax expense. In the first
six months of 2001, the total of this type of amortization was approximately
$1.0 million. If we had these new rules in place in 2001, our effective tax
rate would have been approximately 41%.

Net income.Net income was $8.2 million higher in 2002 than in 2001. This
increase in net income resulted from the increase in revenues while maintaining
control over our operating costs and the change in accounting for amortization
of goodwill, all of which are described above.

Liquidity and Capital Resources

Cash and cash equivalents plus investments in short-term and long-term
marketable securities were $62.2 million as of June 29, 2002, as compared to
$56.6 million as of December 29, 2001. This increase is due to cash provided
from operations less cash flows from financing activities and cash flows from
investing activities.

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Cash provided from operations.Cash flow provided by operating activities
totaled $8.9 million in the first six months of 2002. Net income plus non-cash
operating expenses totaled $15.3 million the first six months of and was offset
by the $5.8 million pension plan termination payment made in the first quarter
of 2002 and other changes in operating assets and liabilities.

Cash flows used in investing activities.During 2002, we purchased equipment
for $920,000 and had purchases of marketable securities, net of sales, totaling
$3.1 million.

Financing activities.We have a senior credit facility that consists of term
debt and a $15 million revolving line of credit. Our senior credit facility
expires in March 2006. This facility is secured by substantially all of our
assets, and contains restrictions concerning the payment of dividends,
incurrence of additional debt and capital expenditures. In addition, we are
subject to, and in compliance with, certain financial covenants including
ratios related to fixed charges coverage and leverage. As of June 29, 2002, the
outstanding principal balance under our senior credit facility was $25.4
million. As of June 29, 2002, we did not have an outstanding balance under our
revolving line of credit and had $15 million of availability under the
revolving line of credit. The following table sets forth our future payment
obligations under our senior credit facility:

|                           |  |                        |        |  |      |          |       |       |        |   |        |         |  |   |   | 
|-------------------------- |  | ---------------------- | ------ |  | ---- | -------- | ----- | ----- | ------ | - | ------ | ------- |  | - | - | 
|                           |  | Payments Due By Period |       
|                           |  |                        |       
|                           |  |                        |        |  |      | Less     |       |       | One to |   |        | Four to | 
|                           |  |                        |        |  |      | Than One |       |       | Three  |   |        | Five    | 
|(in thousands)             |  | Total                  |        |  | Year |          |       | Years |        |   | Years  |        
|                           |  |                        |        |  |      |          |       |       |        |   |        |        
|Future Payment Obligations |  | $                      | 25,363 |  |      | $        | 5,454 |       |        | $ | 19,909 |         |  | $ |  | 

In the six-months through June 29, 2002, we received $1.0 million from issuing
common stock related to our Employee Stock Purchase Plan and exercise of
options under our Equity Incentive Plan. On December 31, 2001, March 29, 2002,
and June 28, 2002, we made quarterly principal payments totaling $3.5 million
on our senior credit facility.

Cash Commitments

Our acquisition of the distribution rights to DermMatrix, a porcine dermis
graft material used in sling and pelvic prolapse procedures, allows us to make
an additional $1.0 million payment in December 2002 to extend the supply
agreement through December 2008.

We have implemented a new profit sharing plan whereby contributions to the plan
will vary based upon our performance and will be allocated to participants
equally. While the contribution will be variable, we expect that initially the
profit sharing contribution will approximate our historical AMS Retirement
Annuity Plan expense at current income levels. We estimate that our profit
sharing contribution in 2002 will be approximately $1.5 million.

We believe that funds generated from operations, together with our balances in
cash and marketable securities and funds available under our senior credit
facility, will be sufficient to finance our current operations and planned
capital expenditure requirements for at least the next 12 months.

Certain Important Factors

There are several important factors that could cause our business to suffer.
These factors, and their impact on the success of our business and our ability
to achieve our goals, include the following:

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Successful Introduction of New Products and Product Improvements.As part of
our growth strategy, we intend to introduce a number of new products and
product improvements. If we do not timely introduce these new products and
product improvements, or they are not well-accepted by the market, our future
growth will suffer.

Continued Use of Non-Invasive Treatment Alternatives.We sell medical devices
for invasive or minimally invasive surgical procedures. If physicians and
patients do not accept our products, our sales will decline. Patient
acceptance of our products depends on a number of factors, including the
failure of non-invasive therapies, the degree of invasiveness involved in the
procedures using our products, the rate and severity of complications from the
procedures using our products, and other adverse side effects from the
procedures using our products. Patients are more likely first to consider
non-invasive alternatives to treat their urological disorders. The
introduction of new oral medications or other less-invasive therapies may cause
our sales to decline in the future.

Continued Physician Use and Endorsement of our Products.For us to sell our
products, physicians must recommend and endorse them. We may not obtain the
necessary recommendations or endorsements from physicians. Many of the
products we have acquired or are developing are based on new treatment methods.
Acceptance of our products is dependent on educating the medical community as
to the distinctive characteristics, perceived benefits, clinical efficacy and
cost-effectiveness of our products compared to competitive products, and on
training physicians in the proper application of our products.

Increased Supply of Sling Material.In the past we have provided human
cadaveric dermis as a service in conjunction with the sale of some of our sling
procedure kits for urinary incontinence. Currently, the available supply of
human tissue is not sufficient to meet demand. In December 2001, our sole
supplier of human cadaveric dermis declared bankruptcy and is no longer
supplying us. We are actively working with another supplier of this material,
but the available supply is still inadequate to meet our needs. We continue to
have a source of porcine dermis that can be used with our sling procedure kits,
but we cannot assure you that such supply will be sufficient to meet our
demands. If our sources of sling materials cannot fill our needs, sales of our
sling procedure kits could decline.

Actions Related to Reimbursement for our Products.We may be unable to sell
our products on a profitable basis (in the United States and Internationally)
if third-party payors deny coverage or reduce their current levels of
reimbursement. Our revenues depend largely on government health care programs
and private health insurers reimbursing patients medical expenses.
Physicians, hospitals, and other health care providers may not purchase our
products if they do not receive satisfactory reimbursement from these
third-party payors.

Potential Product Recalls.If any of our products were found to be defective,
we could recall such defective product. We believe there is a possibility that
we may recall products in the future and that future recalls could result in
significant costs to us and in significant negative publicity which could harm
our ability to market our products in the future.

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Additional Information on AMS

We are currently subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. As a result, we are required to file
periodic reports and other information with the SEC, such as annual, quarterly
and current reports and proxy and information statements. You are advised to
read this Form 10-Q in conjunction with the other reports, proxy statements and
other documents we file from time to time with the SEC. If you would like more
information regarding AMS, you may read and copy the reports, proxy and
information statements and other documents we file with the SEC, at prescribed
rates, at the SECs public reference room at 450 Fifth Street, NW, Washington,
DC 20549. You may obtain information regarding the operation of the SECs
public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings
are also available to the public free of charge at the SECs website. The
address of this website is http://www.sec.gov.

We also make all of our SEC filings, such as our annual, quarterly and current
reports and proxy statements, available to the public free of charge on our
website. The address of our website is www.AmericanMedicalSystems.com. Our
website is not intended to be, and is not, a part of this Quarterly Report on
Form 10-Q. We place our SEC filings on our website on the same day as we file
such material with the SEC. In addition, we will provide electronic or paper
copies of our SEC filings (excluding exhibits) to any AMS stockholder free of
charge upon receipt of a written request for any such filing. All requests for
our SEC filings should be sent to the attention of Investor Relations at
American Medical Systems, Inc., 10700 Bren Road West, Minnetonka, MN 55343

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Hedging.We hedged a portion of our original $65.0 million
variable rate term note, as required by our senior credit facility, by entering
into two interest rate swap agreements in which we agree to exchange, at
specified intervals, the calculated difference between the fixed interest rate
of the swaps and the variable interest rate on a portion of our debt. These
interest rate swap agreements expire June 30, 2003. We expect that pre-tax
costs totaling approximately $1.2 million, which are recorded in other
comprehensive income (loss) at June 29, 2002, and represent the difference
between the fixed rate of the swap agreements and variable interest of the term
note, will be recognized within the next twelve months as part of interest
expense. At June 29, 2002, the fair value of the interest rate swaps, based
upon quoted market prices for contracts with similar maturities, was
approximately $1.2 million.

Currency Fluctuation.Our operations outside of the United States are
maintained in their local currency. All assets and liabilities of our
international subsidiaries are translated to U.S. dollars at quarter-end
exchange rates. Translation adjustments arising from the use of differing
exchange rates are included in accumulated other comprehensive income in
stockholders equity. Realized and unrealized gains and losses on foreign
currency transactions are included in operations. Gains of approximately
$450,000 were recognized in the first six months of 2002 compared to losses of
approximately $160,000 in 2001.

Inflation.We do not believe that inflation has had a material effect on our
results of operations in recent years and periods. There can be no assurance,
however, that our business will not be adversely affected by inflation in the
future.

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PART II. OTHER INFORMATION




Item 4. Submission of Matters to a Vote of Security Holders.



| | (a) |  | Our annual meeting of stockholders was held on May 8, 2002.                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Not required. We solicited proxies pursuant to
Regulation 14A under the Securities Exchange Act of 1934,
there was no solicitation in opposition to managements
nominees for directors as listed in the proxy statement and
our stockholders elected all of these nominees at the annual
meeting.                                                                                                                                                                  
|
| | (c) |  | At the annual meeting, our stockholders were
presented with and asked to vote upon a proposal to elect
three directors, one to serve for a two-year term and two to
serve for three-year terms, or until their successors are
elected and duly qualified. One nominee for director, an
incumbent director, was elected at the annual meeting to serve
for a two-year term expiring in 2004. The name of this
nominee for director and voting results are as follows:

|                |  |       |            |  |         |  |   |          |  |  |           |  |  |  |   | 
|--------------- |  | ----- | ---------- |  | ------- |  | - | -------- |  |  | --------- |  |  |  | - | 
|                |  | Votes |            |  | Votes   |  |   | Votes    |  |  | Broker    | 
|Name            |  | For   |            |  | Against |  |   | Withheld |  |  | Non-Votes | 
|Albert Jay Graf |  |       | 28,969,768 |  |         |  | 0 |          |  |  | 195,835   |  |  |  | 0 | 



| |  |  | Two nominees for director, both incumbent directors, were
elected at the annual meeting to serve for a three-year term
expiring in 2005. The name of these nominees for director
and voting results are as follows:
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |                   |     |            |            |         |       |   |          |       |  |           |         |  |  |   |   | 
|--------------------- | ----------------- | --- | ---------- | ---------- | ------- | ----- | - | -------- | ----- |  | --------- | ------- |  |  | - | - | 
|                      |                   |     | Votes      |            |         | Votes |   |          | Votes |  |           | Broker  | 
|Name                  |                   | For |            |            | Against |       |   | Withheld |       |  | Non-Votes |        
|                      | Richard B. Emmitt |     |            | 28,971,393 |         |       |   | 0        |       |  |           | 194,210 |  |  |   | 0 | 
|Christopher H. Porter |                   |     | 28,480,900 |            |         |       | 0 |          |       |  | 684,703   |         |  |  | 0 |  




Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits                                                                              
|--- |  | --------------------------------------------------------------------------------------
|   
|    |  | There are no exhibits to this Quarterly Report on Form 10-Q.                          
|   
|(b) |  | Reports on Form 8-K                                                                   
|   
|    |  | No report on Form 8-K was filed by the Company during the quarter
ended June 29, 2002.

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SIGNATURES

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

|              |  |    |  |                                                                                                     | 
|------------- |  | -- |  | --------------------------------------------------------------------------------------------------- | 
|              |  |    |  | AMERICAN MEDICAL SYSTEMS
HOLDINGS, INC.                                                             | 
|              |  |    |  |                                                                                                     | 
|July 29, 2002 |  | By |  | /s/ Douglas W. Kohrs                                                                                | 
|              |  |    |  |                                                                                                     | 
|Date          |  |    |  | Douglas W.
Kohrs
Chief Executive Officer                                                            | 
|              |  |    |  |                                                                                                     | 
|July 29, 2002 |  | By |  | /s/ M. James Call                                                                                   | 
|              |  |    |  |                                                                                                     | 
|Date          |  |    |  | M. James Call
Executive Vice President and Chief
Financial Officer and
Principal Accounting Officer | 

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