##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

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

|                                             |  | 
|-------------------------------------------- |  | 
|For the quarterly period ended June 28, 2003 |  | 

or

|     |  |                                                                    
|---- |  | -------------------------------------------------------------------
|[  ] |  | 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: 00030733 |  | 

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.




(Exact name of registrant as specified in its charter)


|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Delaware                        |  | 41-1978822                          
|                                |  |                                     
|(State or other jurisdiction of |  | (I.R.S. Employer Identification No.)
|incorporation or organization)  |  |                                     

|                                            |  |           
|------------------------------------------- |  | ----------
|10700 Bren Road West, Minnetonka, Minnesota |  | 55343     
|                                            |  |           
|(Address of principal executive offices)    |  | (Zip Code)

952-930-6000




(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]
Yes  [  ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X]
Yes  [  ] No

As of August 1, 2003, there were 32,940,739 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               
|                                                  |                                                                                               | Statements of Operations                  
|                                                  |                                                                                               | Consolidated Statements of Cash Flow      
|                                                  |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                                  | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                  | ITEM 4. CONTROLS AND PROCEDURES                                                              
|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                                       
|EXHIBIT INDEX                                    
|EX-10.1 2000 Equity Incentive Plan, as amended   
|EX-10.2 Agreement of Purchase and Sale           
|EX-31.1 Certification of CEO Pursuant to Rule 302
|EX-31.2 Certification of CFO Pursuant to Rule 302
|EX-32.1 Certification Pursuant to 18 USC Sec. 906



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##### Table of Contents



INDEX

|           |  |                                                                                       |  |                                                                                              |         |         |       | 
|---------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- | ------- | ------- | ----- | 
|           |  |                                                                                       |  |                                                                                              |         | Page(s)
|           |  |                                                                                       |  |                                                                                              |         |        
|Part I.    |  | FINANCIAL INFORMATION                                                                 |  |                                                                                              |         |        
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  |                                                                                              |         |        
|           |  |                                                                                       |  | Consolidated Balance Sheets as of
December 28, 2002, and June 28, 2003                       |         |         | 3     | 
|           |  |                                                                                       |  | Statements of Operations for the three and six
months ended June 29, 2002, and June 28, 2003 |         |         | 4     | 
|           |  |                                                                                       |  | Statements of Cash Flows for the six
months ended June 29, 2002, and June 28, 2003           |         |         | 5     | 
|           |  |                                                                                       |  | Notes to Consolidated Financial Statements                                                   |         |         | 6 - 9 | 
|Item 2.    |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations |  |                                                                                              | 10 - 16 |        
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                              | 17      |        
|Item 4.    |  | Controls and Procedures                                                               |  |                                                                                              | 17      |        
|Part II.   |  | OTHER INFORMATION                                                                     |  |                                                                                              |         |        
|Item 4.    |  | Shareholder Votes                                                                     |  |                                                                                              | 18      |        
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                              | 19      |        
|SIGNATURES |  |                                                                                       |  |                                                                                              | 20      |        

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)

|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |        |         |     | 
|------------------------------------ | ------------------------------------------ | -------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------- | ----------------- | ---- | ------------- | ------ | ------- | --- | 
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         | December 28, 2002 |      | June 28, 2003
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |              
|Assets                               |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |              
|                                     | Current assets                             |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |       
|                                     |                                            | Cash and equivalents             |                                                                                                                                                                                                                                           | $                                 | 79,429  |                   |      | $             | 44,399 |        
|                                     |                                            | Accounts receivable, net         |                                                                                                                                                                                                                                           |                                   | 27,208  |                   |      |               | 29,938 |        
|                                     |                                            | Inventories                      |                                                                                                                                                                                                                                           |                                   | 13,475  |                   |      |               | 17,160 |        
|                                     |                                            | Deferred taxes                   |                                                                                                                                                                                                                                           |                                   | 3,542   |                   |      |               | 4,607  |        
|                                     |                                            | Other current taxes              |                                                                                                                                                                                                                                           |                                   | 2,155   |                   |      |               | 1,037  |        
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |        |        
|                                     |                                            | Total current assets             |                                                                                                                                                                                                                                           |                                   | 125,809 |                   |      |               | 97,141 |        
|                                     | Property, plant and equipment, net         |                                  |                                                                                                                                                                                                                                           | 21,328                            |         |                   |      | 24,484        |       
|                                     | Goodwill, net                              |                                  |                                                                                                                                                                                                                                           | 80,607                            |         |                   |      | 115,139       |       
|                                     | Intangibles, net                           |                                  |                                                                                                                                                                                                                                           | 15,691                            |         |                   |      | 23,292        |       
|                                     | Deferred income taxes                      |                                  |                                                                                                                                                                                                                                           | 3,068                             |         |                   |      |              |       
|                                     | Investment in technology and other assets  |                                  |                                                                                                                                                                                                                                           | 5,142                             |         |                   |      | 5,064         |       
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |        |        
|                                     | Total assets                               |                                  | $                                                                                                                                                                                                                                         | 251,645                           |         |                   | $    | 265,120       |       
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |        |        
|Liabilities and Stockholders Equity |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |              
|                                     | Current liabilities                        |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |       
|                                     |                                            | Accounts payable                 |                                                                                                                                                                                                                                           | $                                 | 3,000   |                   |      | $             | 3,123  |        
|                                     |                                            | Accrued compensation expenses    |                                                                                                                                                                                                                                           |                                   | 10,246  |                   |      |               | 10,373 |        
|                                     |                                            | Accrued warranty expense         |                                                                                                                                                                                                                                           |                                   | 4,526   |                   |      |               | 4,591  |        
|                                     |                                            | Other accrued expenses           |                                                                                                                                                                                                                                           |                                   | 4,751   |                   |      |               | 4,356  |        
|                                     |                                            | Current portion of notes payable |                                                                                                                                                                                                                                           |                                   | 6,000   |                   |      |               | 6,546  |        
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |        |        
|                                     | Total current liabilities                  |                                  |                                                                                                                                                                                                                                           | 28,523                            |         |                   |      | 28,989        |       
|                                     | Long-term notes payable                    |                                  |                                                                                                                                                                                                                                           | 18,000                            |         |                   |      | 14,727        |       
|                                     | Deferred income taxes                      |                                  |                                                                                                                                                                                                                                           |                                  |         |                   |      | 1,571         |       
|                                     | Other long-term liabilities                |                                  |                                                                                                                                                                                                                                           | 860                               |         |                   |      |              |       
|                                     | Stockholders equity                       |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |       
|                                     |                                            |                                  | Common stock, par value $0.1 per share; authorized
95,000,000 shares; issued and outstanding 32,156,873 voting
and 341,700 non-voting shares for December 28, 2002; and
32,554,151 voting and 341,700 non-voting shares for June 28, 2003 |                                   |         | 325               |      |               |        | 329     |    
|                                     |                                            |                                  | Additional paid-in capital                                                                                                                                                                                                                |                                   |         | 197,991           |      |               |        | 200,142 |    
|                                     |                                            |                                  | Deferred compensation                                                                                                                                                                                                                     |                                   |         | (198              | )    |               |        | (104    | )  
|                                     |                                            |                                  | Accumulated other comprehensive income (loss):                                                                                                                                                                                            |                                   |         |                   |      |               |        |         |    
|                                     |                                            |                                  |                                                                                                                                                                                                                                           | Cumulative translation adjustment |         |                   | (678 | )             |        |         | 394 | 
|                                     |                                            |                                  |                                                                                                                                                                                                                                           | Derivative financial instruments  |         |                   | (459 | )             |        |         |    | 
|                                     |                                            |                                  | Retained earnings                                                                                                                                                                                                                         |                                   |         | 7,281             |      |               |        | 19,072  |    
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |        |        
|                                     | Total stockholders equity                 |                                  |                                                                                                                                                                                                                                           | 204,262                           |         |                   |      | 219,833       |       
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |        |        
|                                     | Total liabilities and stockholders equity |                                  | $                                                                                                                                                                                                                                         | 251,645                           |         |                   | $    | 265,120       |       
|                                     |                                            |                                  |                                                                                                                                                                                                                                           |                                   |         |                   |      |               |        |        

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

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American Medical Systems Holdings Inc.
Statements of Operations
(In thousands, except per share data)

|                                                   |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |        |  
|-------------------------------------------------- | --------------------------- | - | ------------------------- | ------ | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                   |                             |   | Three months through June |        | Six months through June
|                                                   |                             |   |                           |        |                        
|                                                   |                             |   | 2002                      |        | 2003                    |   | 2002   |        | 2003
|                                                   |                             |   |                           |        |                         |   |        |        |     
|Sales                                              |                             | $ | 36,330                    |        |                         | $ | 42,224 |        |      | $ | 71,045 |        |   | $ | 81,571 |       
|Operating expenses                                 |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |       
|                                                   | Cost of goods sold          |   |                           | 7,120  |                         |   |        | 7,381  |      |   |        | 14,252 |   |   |        | 14,324 |  
|                                                   | Marketing and selling       |   |                           | 13,108 |                         |   |        | 16,984 |      |   |        | 25,918 |   |   |        | 31,781 |  
|                                                   | Research and development    |   |                           | 3,197  |                         |   |        | 3,483  |      |   |        | 6,031  |   |   |        | 7,274  |  
|                                                   | General and administrative  |   |                           | 3,357  |                         |   |        | 3,845  |      |   |        | 6,636  |   |   |        | 7,915  |  
|                                                   | Amortization of intangibles |   |                           | 939    |                         |   |        | 1,039  |      |   |        | 1,878  |   |   |        | 2,104  |  
|                                                   |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |       
|                                                   | Total operating expenses    |   |                           | 27,721 |                         |   |        | 32,732 |      |   |        | 54,715 |   |   |        | 63,398 |  
|Operating income                                   |                             |   | 8,609                     |        |                         |   | 9,492  |        |      |   | 16,330 |        |   |   | 18,173 |       
|Other income (expense)                             |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |       
|                                                   | Royalty income              |   |                           | 747    |                         |   |        | 687    |      |   |        | 1,530  |   |   |        | 1,464  |  
|                                                   | Other income                |   |                           | 445    |                         |   |        | 286    |      |   |        | 1,166  |   |   |        | 321    |  
|                                                   | Interest income             |   |                           | 325    |                         |   |        | 112    |      |   |        | 758    |   |   |        | 242    |  
|                                                   | Interest expense            |   |                           | (718   | )                       |   |        | (698   | )    |   |        | (1,481 | ) |   |        | (1,424 | )
|                                                   |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |       
|Income before income taxes                         |                             |   | 9,408                     |        |                         |   | 9,879  |        |      |   | 18,303 |        |   |   | 18,776 |       
|Income tax expense                                 |                             |   | 3,678                     |        |                         |   | 3,542  |        |      |   | 7,156  |        |   |   | 6,985  |       
|                                                   |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |       
|Net income                                         |                             | $ | 5,730                     |        |                         | $ | 6,337  |        |      | $ | 11,147 |        |   | $ | 11,791 |       
|                                                   |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |       
|Net income per share                               |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |       
|                                                   | Basic                       |   | $                         | 0.18   |                         |   | $      | 0.19   |      |   | $      | 0.35   |   |   | $      | 0.36   |  
|                                                   | Diluted                     |   | $                         | 0.17   |                         |   | $      | 0.19   |      |   | $      | 0.33   |   |   | $      | 0.35   |  
|Weighted average common shares used in calculation |                             |   |                           |        |                         |   |        |        |      |   |        |        |   |   |        |       
|                                                   | Basic                       |   |                           | 32,171 |                         |   |        | 32,800 |      |   |        | 32,072 |   |   |        | 32,673 |  
|                                                   | Diluted                     |   |                           | 34,245 |                         |   |        | 34,077 |      |   |        | 34,244 |   |   |        | 34,057 |  

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

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American Medical Systems Holdings Inc.
Consolidated Statements of Cash Flow
(In thousands)

|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |         |       |         |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------- | ------ | ----------------------- | ------ | -------- | ------- | ----- | ------- | -
|                                                     |                                                                                   |                                                 |                                             |        | Six months through June
|                                                     |                                                                                   |                                                 |                                             |        |                        
|                                                     |                                                                                   |                                                 |                                             |        | 2002                    |        | 2003    
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |         
|Cash flows from operating activities                 |                                                                                   |                                                 |                                             |        |                         |        |          |        
|                                                     | Net income                                                                        |                                                 | $                                           | 11,147 |                         |        | $        | 11,791  |      
|                                                     | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                 |                                             |        |                         |        |          |         |      
|                                                     |                                                                                   | Depreciation                                    |                                             |        | 2,028                   |        |          |         | 2,865 |        
|                                                     |                                                                                   | Amortization of intangibles                     |                                             |        | 1,874                   |        |          |         | 2,104 |        
|                                                     |                                                                                   | Deferred financing costs                        |                                             |        | 135                     |        |          |         | 135   |        
|                                                     |                                                                                   | Non-cash deferred compensation                  |                                             |        | 6                       |        |          |         | 16    |        
|                                                     |                                                                                   | Non-cash stock-based compensation               |                                             |        | 96                      |        |          |         | 72    |        
|                                                     |                                                                                   | Income tax benefit related to stock option plan |                                             |        | 542                     |        |          |         | 892   |        
|                                                     |                                                                                   | Change in net deferred taxes                    |                                             |        | 2,231                   |        |          |         | (992  | )      
|                                                     | Changes in operating assets and liabilities:                                      |                                                 |                                             |        |                         |        |          |         |      
|                                                     |                                                                                   |                                                 | Accounts receivable                         |        |                         | (723   | )        |         |       | (1,270  | )
|                                                     |                                                                                   |                                                 | Inventories                                 |        |                         | 938    |          |         |       | (2,166  | )
|                                                     |                                                                                   |                                                 | Accounts payable and accrued expenses       |        |                         | (9,490 | )        |         |       | (3,039  | )
|                                                     |                                                                                   |                                                 | Other assets                                |        |                         | 78     |          |         |       | 1,320   |  
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|                                                     | Net cash provided by operating activities                                         |                                                 |                                             | 8,862  |                         |        |          | 11,728  |      
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|Cash flows from investing activities                 |                                                                                   |                                                 |                                             |        |                         |        |          |        
|                                                     |                                                                                   |                                                 | Purchase of property, plant and equipment   |        |                         | ($920  | )        |         |       | ($1,599 | )
|                                                     |                                                                                   |                                                 | Purchases of businesses                     |        |                         |       |          |         |       | (43,069 | )
|                                                     |                                                                                   |                                                 | Purchase of short and long-term investments |        |                         | (9,446 | )        |         |       |        |  
|                                                     |                                                                                   |                                                 | Sale of short and long-term investments     |        |                         | 6,375  |          |         |       |        |  
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|                                                     | Net cash used in investing activates                                              |                                                 |                                             | (3,991 | )                       |        |          | (44,668 | )    
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|Cash flows from financing activities:                |                                                                                   |                                                 |                                             |        |                         |        |          |        
|                                                     |                                                                                   |                                                 | Issuance of common stock                    |        | $                       | 991    |          |         | $     | 1,269   |  
|                                                     |                                                                                   |                                                 | Payments on long-term debt                  |        |                         | (3,546 | )        |         |       | (3,319  | )
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|                                                     | Net cash used in financing activities                                             |                                                 |                                             | (2,555 | )                       |        |          | (2,050  | )    
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|Effect of exchange rates                             |                                                                                   |                                                 | 411                                         |        |                         |        | (40      | )      
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|Net increase (decrease) in cash and cash equivalents |                                                                                   | $                                               | 2,727                                       |        |                         |        | ($35,030 | )      
|Cash and cash equivalents at beginning of period     |                                                                                   |                                                 | 28,755                                      |        |                         |        | 79,429   |        
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|Cash and cash equivalents at end of period           |                                                                                   | $                                               | 31,482                                      |        |                         | $      | 44,399   |        
|                                                     |                                                                                   |                                                 |                                             |        |                         |        |          |        
|Supplemental disclosure                              |                                                                                   |                                                 |                                             |        |                         |        |          |        
|                                                     |                                                                                   |                                                 | Cash paid for interest                      |        | $                       | 1,136  |          |         | $     | 1,301   |  
|                                                     |                                                                                   |                                                 | Cash paid for taxes                         |        | $                       | 6,688  |          |         | $     | 6,641   |  

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., without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). The consolidated financial statements include the accounts
of the company and its subsidiaries, and all significant inter-company accounts
and transactions are eliminated in consolidation. 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 2002. All amounts are in
thousands, except per share data.

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. Stock-Based Compensation

The Company has one stock-based employee compensation plan. The Company
accounts for this plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The exercise price of the Companys employee stock options
generally equals the market price of the underlying stock on the date of grant
for all options granted, and thus, under APB 25, no compensation expense is
recognized. However, during 2000, the Company recognized deferred compensation
of $1.4 million, reflecting the excess of the fair value of the underlying
stock on the date of grant over the exercise price. The deferred compensation
is being amortized over vesting periods of two to four years.

The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.

|                                                                                                                                             |             |         |        |                         |      |   |        |   |      | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------- | ------ | ----------------------- | ---- | - | ------ | - | ---- | 
|                                                                                                                                             |             |         |        | Six months through June
|                                                                                                                                             |             |         |        |                        
|                                                                                                                                             |             | 2002    |        | 2003                   
|                                                                                                                                             |             |         |        |                        
|Net income, as reported                                                                                                                      |             | $       | 11,147 |                         |      | $ | 11,791 |  
|Add: Stock-based employee compensation expense included
in reported income, net of tax effects                                               |             |         | 88     |                         |      |   | 72     |  
|Subtract: Total stock-based employee compensation expense
determined under fair value based method for
all awards net of related tax effects |             |         | (1,694 | )                       |      |   | (2,080 | )
|                                                                                                                                             |             |         |        |                         |      |   |        |  
|Pro forma net income                                                                                                                         |             | $       | 9,541  |                         |      | $ | 9,783  |  
|                                                                                                                                             |             |         |        |                         |      |   |        |  
|Earnings per share:                                                                                                                          |             |         |        |                         |      |   |        |  
|                                                                                                                                             | As reported |         |        |                         |      |   |        |   |     
|                                                                                                                                             |             | Basic   |        | $                       | 0.35 |   |        | $ | 0.36 | 
|                                                                                                                                             |             | Diluted |        | $                       | 0.33 |   |        | $ | 0.35 | 
|                                                                                                                                             | Pro forma   |         |        |                         |      |   |        |   |     
|                                                                                                                                             |             | Basic   |        | $                       | 0.30 |   |        | $ | 0.29 | 
|                                                                                                                                             |             | Diluted |        | $                       | 0.28 |   |        | $ | 0.29 | 

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3. Earnings per Share

The following table presents information necessary to calculate basic and
diluted earnings per common share and common share equivalents for the three
and six months through June, 2002 and 2003.

|                                                                                                   |  |                           |        |                         |  |      |        |      |  |   |        |  |  |   |        | 
|-------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ----------------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                                                   |  | Three months through June |        | Six months through June
|                                                                                                   |  |                           |        |                        
|                                                                                                   |  | 2002                      |        | 2003                    |  | 2002 |        | 2003
|                                                                                                   |  |                           |        |                         |  |      |        |     
|Earnings                                                                                           |  | $                         | 5,730  |                         |  | $    | 6,337  |      |  | $ | 11,147 |  |  | $ | 11,791 | 
|Weighted-average shares outstanding
for basic earnings per share                                   |  |                           | 32,171 |                         |  |      | 32,800 |      |  |   | 32,072 |  |  |   | 32,673 | 
|Dilutive effect of stock options                                                                   |  |                           | 2,074  |                         |  |      | 1,277  |      |  |   | 2,172  |  |  |   | 1,384  | 
|                                                                                                   |  |                           |        |                         |  |      |        |      |  |   |        |  |  |   |        | 
|Adjusted weighted-average shares outstanding
and assumed conversion for diluted
earnings per share |  |                           | 34,245 |                         |  |      | 34,077 |      |  |   | 34,244 |  |  |   | 34,057 | 
|                                                                                                   |  |                           |        |                         |  |      |        |      |  |   |        |  |  |   |        | 
|Basic earnings per share                                                                           |  | $                         | 0.18   |                         |  | $    | 0.19   |      |  | $ | 0.35   |  |  | $ | 0.36   | 
|Diluted earnings per share                                                                         |  | $                         | 0.17   |                         |  | $    | 0.19   |      |  | $ | 0.33   |  |  | $ | 0.35   | 

4. Inventories

Inventories consist of the following:

|                       |  |                   |        |               |  |   |        |  
|---------------------- |  | ----------------- | ------ | ------------- |  | - | ------ | -
|                       |  | December 28, 2002 |        | June 28, 2003
|                       |  |                   |        |              
|Raw materials          |  | $                 | 4,147  |               |  | $ | 4,863  |  
|Work-in process        |  |                   | 1,938  |               |  |   | 3,184  |  
|Finished goods         |  |                   | 10,138 |               |  |   | 11,580 |  
|Obsolescence allowance |  |                   | (2,748 | )             |  |   | (2,467 | )
|                       |  |                   |        |               |  |   |        |  
|Total, net             |  | $                 | 13,475 |               |  | $ | 17,160 |  
|                       |  |                   |        |               |  |   |        |  

5. Warranties

The Company adopted Financial Accounting Standards Board Interpretation No. 45
Guarantors accounting and disclosure requirements for guarantees, including
indirect indebtedness to others(FIN 45), during the first quarter of 2003.
FIN 45 requires disclosures concerning the Companys obligations under certain
guarantees.

Many of the Companys products are sold with warranty coverage for periods
ranging from one year up to the patients lifetime. Replacement product is
covered under the terms of the warranty agreement. The amount of the accrued
warranty allowance is the estimate of the expected future cost of honoring
warranty obligations. Factors influencing this estimate include historical
claim rates, changes in product performance, the frequency of use by the
patient, and the patients performance expectations, surgical infection rates
and product reliability are functions of raw material properties, manufacturing
processes, and surgical technique. Beginning and ending balances, and
other changes in warranty allowances during the six months through
June 2003 were as follows:

|                                         |  |   |       |  
|---------------------------------------- |  | - | ----- | -
|                                         |  |  
|                                         |  |  
|Balance
at beginning of period           |  | $ | 4,526 |  
|Balance assumed from CryoGen acquisition |  |   | 65    |  
|Provisions for warranty                  |  |   | 150   |  
|Claims processed                         |  |   | (150  | )
|                                         |  |   |       |  
|Balance
at end of period                 |  | $ | 4,591 |  
|                                         |  |   |       |  

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6. Acquisitions

CryoGen

On December 30, 2003, the Company completed a merger with CryoGen, Inc. under
which CryoGen became a wholly-owned subsidiary of the Company. In conjunction
with the merger, the Company paid the former shareholders of CryoGen $36.2
million and paid $3.8 million in acquisition-related costs of the sellers. In
addition to the initial consideration for the CryoGen acquisition, CryoGens
former shareholders may receive an earnout payment equal to three times sales
of CryoGens products during any four consecutive company fiscal quarters
ending three years after closing, less $40 million. If net product revenues
attributable to sales of CryoGens products during any such four-quarter period
do not exceed $13.3 million, no earnout payment will be made. The maximum
amount of the earnout payment is $110 million. The primary purpose of the
merger was to gain access to CryoGens products and technology. The
consolidated financial statements of the Company for the three and six-month
periods ended June 28, 2003, include the financial results of CryoGen from
December 30, 2002, the date the purchase transaction was effective, and which
represents the date when the Company effectively took control of CryoGen.

The Company has received a preliminary formal valuation study of this
acquisition. Based on this preliminary study, the Company has recorded
goodwill of approximately $28.5 million, including approximately $0.9 million
in acquisition costs consisting of legal, accounting, and other expenses. The allocation of the purchase price for the acquisition and other
purchase accounting adjustments is as follows:

|                                                    |                      |   |        |        |  
|--------------------------------------------------- | -------------------- | - | ------ | ------ | -
|Total
acquisition cost                              |                      |   |        |       
|                                                    |                      |  
|Purchase price                                      |                      | $ | 36,242 |       
|Company acquisition costs                           |                      |   | 896    |       
|Deficit of liabilities in excess of assets acquired |                      |   | 2,536  |       
|                                                    |                      |   |        |       
|Total                                               |                      |   | 39,674 |       
|Less amounts allocated to:                          |                      |   |        |       
|                                                    | Developed technology |   |        | (9,400 | )
|                                                    | Fixed assets         |   |        | (1,752 | )
|                                                    | Inventory            |   |        | (14    | )
|                                                    |                      |   |        |       
|Goodwill                                            |                      | $ | 28,508 |       
|                                                    |                      |   |        |       

Dura II

On April 7, 2003, the Company acquired the Dura II line of erectile restoration
products from Endocare, Inc. The Company paid Endocare $2.2 million for all
intellectual property, production equipment, and current Dura II inventory.

The Company intends to do an internal valuation study of this product
acquisition. The Company has recorded goodwill of approximately $1.8 million,
including acquisition costs consisting of legal services. The allocation of
the purchase price for the acquisition is as follows:

|                           |              |   |       |      |  
|-------------------------- | ------------ | - | ----- | ---- | -
|                           |              |   |       |     
|Acquisition cost           |              |   |       |     
|                           |              |  
|Purchase price             |              | $ | 2,150 |     
|Company acquisition costs  |              |   | 26    |     
|                           |              |   |       |     
|Total                      |              |   | 2,176 |     
|Less amounts allocated to: |              |   |       |     
|                           | Fixed assets |   |       | (28  | )
|                           | Inventory    |   |       | (351 | )
|                           |              |   |       |     
|Goodwill                   |              | $ | 1,797 |     
|                           |              |   |       |     

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7. 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, 2002 and 2003, were:

|                                                                                                                |                           |      |                         |      |   |   |        |    |  
|--------------------------------------------------------------------------------------------------------------- | ------------------------- | ---- | ----------------------- | ---- | - | - | ------ | -- | -
|                                                                                                                |                           |      | Six months through June
|                                                                                                                |                           |      |                        
|(in thousands)                                                                                                  |                           | 2002 |                         | 2003
|                                                                                                                |                           |      |                         |     
|Net income                                                                                                      |                           | $    | 11,147                  |      |   | $ | 11,791 |   
|Net loss on derivative financial                                                                                |                           |      |                         |      |   |   |        |   
|                                                                                                                | instruments, net of taxes |      |                         | (42  | ) |   |        | (5 | )
|Amounts reclassified to interest expense during the period from
derivative and hedging activities, net of taxes |                           |      | 481                     |      |   |   | 464    |   
|Unrealized losses on marketable securities, net of taxes                                                        |                           |      | (69                     | )    |   |   |       |   
|Cumulative translation adjustment                                                                               |                           |      | 780                     |      |   |   | 1,072  |   
|                                                                                                                |                           |      |                         |      |   |   |        |   
|Comprehensive income                                                                                            |                           | $    | 12,297                  |      |   | $ | 13,322 |   
|                                                                                                                |                           |      |                         |      |   |   |        |   

8. Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).
FIN 46 requires companies that control another entity through interests other
than voting interests to consolidate the controlled entity. FIN 46 was
effective immediately for variable interest entities created, or in which the
company obtains an interest, after January 31, 2003. For all variable interest
entities created on or before January 31, 2003, the provisions are effective
July 31, 2003. The Company is evaluating the impact of this interpretation.

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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. 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

We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Managements
discussion and analysis of financial condition and results of operations are
based upon the 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
judgments that affect (1) the reported amounts of assets, liabilities,
revenues, and expenses; and (2) the 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 and sales return
obligations, inventories, long-lived assets, warranty, legal contingencies, and
income taxes. The critical accounting policies that are most important in fully
understanding and evaluating the financial condition and results of operations
are discussed in our most recent Annual Report on Form 10-K on file with the
SEC.

RESULTS OF OPERATIONS

Overview

We manufacture and market a broad range of proprietary products for erectile
restoration; other mens health, including products for incontinence,
stricture, and prostate disease; and womens health, including products for
incontinence, menorrhagia, and other pelvic floor disorders. Our product
development and acquisition strategy has focused on expanding our product
offering and on adding less-invasive medical devices for surgeons and their
patients. We estimate that nearly 18 million men and women are potential
candidates for treatment with our products, although only a very small share of
them ever seek treatment.

Results of Operations

The following is a discussion of the results of our operations and financial
condition for the second fiscal quarter and first six months of 2003 compared
to the second fiscal quarter and first six months of 2002. On August
11, we announced our decision to move the work currently done at our
San Diego facility to our Minnetonka facility. Continued growth of
this business will depend on our ability to retain key employees,
move manufacturing, product development and service, and other
critical functions, and our ability to obtain appropriate FDA and
other regulatory approvals to carry on manufacturing and related
activities in Minnetonka. We expect this move will increase our
operating costs during the transition period, and will reduce
operating costs thereafter.

Net Sales.Our erectile restoration products include several types of
inflatable and non-inflatable prostheses to replace non-functioning penile
erectile tissue. In April 2003, we expanded our range of erectile restoration
products by purchasing the Dura II line of prostheses from Endocare. For male
urinary control we sell our Artificial Urinary Sphincter and the InVance sling
system. For urethral stricture and BPH symptoms we sell urethral stents,
surgical resection loops, and a chemical ablation system (in clinical trials in
the U.S.). Our womens health products include several products for urinary
control (Urinary Sphincter, InFast, Sparc, and Monarc), the Her
Option products recently added with the CryoGen acquisition, and a variety of
other products for pelvic vault repairs.

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The following table compares net sales of our product lines between 2002 and
2003.

|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |       |  
|------------------------------- | -------------------- | - | ------------------------- | ------ | -------- | - | ---------- | ------ | - | - | ----------------------- | ----- | -------- |  | ---------- | ----- | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ----- | ------ | - |  | ---- | ----- | -
|                                |                      |   | Three months through June |        |          |   |            |        |   |   | Six months through June |       |          |  |            |       |  
|                                |                      |   |                           |        | Increase |   |            |        |   |   |                         |       | Increase |  |            |       |  
|                                |                      |   | 2002                      |        | 2003     |   | (Decrease) |        | % |   | 2002                    |       | 2003     |  | (Decrease) |       | %
|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |  
|Erectile restoration            |                      | $ | 17,793                    |        |          | $ | 17,964     |        |   | $ | 171                     |       |          |  | 1.0        | %     |   | $ | 35,089 |        |   | $ | 35,818 |        |   | $ | 729   |        |   |  | 2.1  | %    
|Mens health                    |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|                                | Male urinary control |   |                           | 9,117  |          |   |            | 10,727 |   |   |                         | 1,610 |          |  |            | 17.7  | % |   |        | 18,134 |   |   |        | 21,010 |   |   |       | 2,876  |   |  |      | 15.9  | %
|                                | Other                |   |                           | 1,670  |          |   |            | 1,309  |   |   |                         | (361  | )        |  |            | -21.6 | % |   |        | 3,313  |   |   |        | 2,508  |   |   |       | (805   | ) |  |      | -24.3 | %
|Womens health                  |                      |   | 7,750                     |        |          |   | 12,224     |        |   |   | 4,474                   |       |          |  | 57.7       | %     |   |   | 14,509 |        |   |   | 22,235 |        |   |   | 7,726 |        |   |  | 53.2 | %    
|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|                                | Total                |   | $                         | 36,330 |          |   | $          | 42,224 |   |   | $                       | 5,894 |          |  |            | 16.2  | % |   | $      | 71,045 |   |   | $      | 81,571 |   |   | $     | 10,526 |   |  |      | 14.8  | %
|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|Sales within the United States  |                      | $ | 29,668                    |        |          | $ | 33,919     |        |   | $ | 4,251                   |       |          |  | 14.3       | %     |   | $ | 58,827 |        |   | $ | 66,266 |        |   | $ | 7,439 |        |   |  | 12.6 | %    
|Sales outside the United States |                      |   | 6,662                     |        |          |   | 8,305      |        |   |   | 1,643                   |       |          |  | 24.7       | %     |   |   | 12,218 |        |   |   | 15,305 |        |   |   | 3,087 |        |   |  | 25.3 | %    
|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|                                | Total                |   | $                         | 36,330 |          |   | $          | 42,224 |   |   | $                       | 5,894 |          |  |            | 16.2  | % |   | $      | 71,045 |   |   | $      | 81,571 |   |   | $     | 10,526 |   |  |      | 14.8  | %
|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|Share of total sales:           |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|Erectile restoration            |                      |   | 49                        | %      |          |   | 43         | %      |   |   |                         |       |          |  |            |       |   |   | 49     | %      |   |   | 44     | %      |   |   |       |        |   |  |      |      
|Mens health                    |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|                                | Male urinary control |   |                           | 25     | %        |   |            | 25     | % |   |                         |       |          |  |            |       |   |   |        | 26     | % |   |        | 26     | % |   |       |        |   |  |      |       |  
|                                | Other                |   |                           | 5      | %        |   |            | 3      | % |   |                         |       |          |  |            |       |   |   |        | 5      | % |   |        | 3      | % |   |       |        |   |  |      |       |  
|Womens health                  |                      |   | 21                        | %      |          |   | 29         | %      |   |   |                         |       |          |  |            |       |   |   | 20     | %      |   |   | 27     | %      |   |   |       |        |   |  |      |      
|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|                                | Total                |   |                           | 100    | %        |   |            | 100    | % |   |                         |       |          |  |            |       |   |   |        | 100    | % |   |        | 100    | % |   |       |        |   |  |      |       |  
|Sales within the United States  |                      |   | 82                        | %      |          |   | 80         | %      |   |   |                         |       |          |  |            |       |   |   | 83     | %      |   |   | 81     | %      |   |   |       |        |   |  |      |      
|Sales outside the United States |                      |   | 18                        | %      |          |   | 20         | %      |   |   |                         |       |          |  |            |       |   |   | 17     | %      |   |   | 19     | %      |   |   |       |        |   |  |      |      
|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      
|                                | Total                |   |                           | 100    | %        |   |            | 100    | % |   |                         |       |          |  |            |       |   |   |        | 100    | % |   |        | 100    | % |   |       |        |   |  |      |       |  
|                                |                      |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |       |   |   |        |        |   |   |        |        |   |   |       |        |   |  |      |      

Approximately $1.1 million of the increase during the three months ended June
2003 and $2.0 million of the increase in the six months ended June 2003 was due
to changes in currency exchange rates, mainly the Euro. If these currency
exchange rates in 2003 were the same as in 2002, and we had not otherwise
raised prices, total sales in the second quarter of 2003 would have been $41.1
million, an increase of $4.8 million, or 13.2 percent, and total sales for the
six months through June 2003 would have been $79.6 million, an increase of $8.5
million, or 12.0 percent.

Erectile restoration sales in the three and six-month periods ended June 2003
were up slightly due to price and mix changes. The increases in sales of male
urinary control products were due to a combination of unit increases,
especially in the InVance sling system, and favorable currency exchange rates
on sales of products in Europe. The decline in sales of other mens health
products were due to lower demand for our urethral stents for BPH. The
increases in sales of womens health products were primarily due to greater
unit sales, primarily SPARC and Monarc, and to a lesser extent, sales of Her
Option products. Sales of Her Option products (used to cure excessive uterine
bleeding) were approximately $1.0 million and $1.8 million, net of allowance
for returns, in the three and six-month periods ended June 2003.

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The following table compares the dollar and percentage change in the Statement
of Operations between 2002 and 2003.

|                           |                             |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |      |   |   |        |        |  |   |        |        |  |   |        |       |  |  |       |      |  
|-------------------------- | --------------------------- | - | ------------------------- | ------ | -------- | - | ---------- | ------ | - | - | ----------------------- | ----- | -------- |  | ---------- | ---- | - | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ----- |  |  | ----- | ---- | -
|                           |                             |   | Three months through June |        |          |   |            |        |   |   | Six months through June |       |          |  |            |      |  
|                           |                             |   |                           |        | Increase |   |            |        |   |   |                         |       | Increase |  |            |      |  
|                           |                             |   | 2002                      |        | 2003     |   | (Decrease) |        | % |   | 2002                    |       | 2003     |  | (Decrease) |      | %
|                           |                             |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |      |  
|Net sales                  |                             | $ | 36,330                    |        |          | $ | 42,224     |        |   | $ | 5,894                   |       |          |  | 16.2       | %    |   | $ | 71,045 |        |  | $ | 81,571 |        |  | $ | 10,526 |       |  |  | 14.8  | %   
|Operating expenses:        |                             |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |      |   |   |        |        |  |   |        |        |  |   |        |       |  |  |       |     
|                           | Cost of sales               |   |                           | 7,120  |          |   |            | 7,381  |   |   |                         | 261   |          |  |            | 3.7  | % |   |        | 14,252 |  |   |        | 14,324 |  |   |        | 72    |  |  |       | 0.5  | %
|                           | Marketing and sales         |   |                           | 13,108 |          |   |            | 16,984 |   |   |                         | 3,876 |          |  |            | 29.6 | % |   |        | 25,918 |  |   |        | 31,781 |  |   |        | 5,863 |  |  |       | 22.6 | %
|                           | Research and development    |   |                           | 3,197  |          |   |            | 3,483  |   |   |                         | 286   |          |  |            | 8.9  | % |   |        | 6,031  |  |   |        | 7,274  |  |   |        | 1,243 |  |  |       | 20.6 | %
|                           | General and administrative  |   |                           | 3,357  |          |   |            | 3,845  |   |   |                         | 488   |          |  |            | 14.5 | % |   |        | 6,636  |  |   |        | 7,915  |  |   |        | 1,279 |  |  |       | 19.3 | %
|                           | Amortization of intangibles |   |                           | 939    |          |   |            | 1,039  |   |   |                         | 100   |          |  |            | 10.6 | % |   |        | 1,878  |  |   |        | 2,104  |  |   |        | 226   |  |  |       | 12.0 | %
|                           |                             |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |      |   |   |        |        |  |   |        |        |  |   |        |       |  |  |       |     
|Total operating expenses   |                             |   | 27,721                    |        |          |   | 32,732     |        |   |   | 5,011                   |       |          |  | 18.1       | %    |   |   | 54,715 |        |  |   | 63,398 |        |  |   | 8,683  |       |  |  | 15.9  | %   
|                           |                             |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |      |   |   |        |        |  |   |        |        |  |   |        |       |  |  |       |     
|Operating income           |                             |   | 8,609                     |        |          |   | 9,492      |        |   |   | 883                     |       |          |  | 10.3       | %    |   |   | 16,330 |        |  |   | 18,173 |        |  |   | 1,843  |       |  |  | 11.3  | %   
|Royalty income             |                             |   | 747                       |        |          |   | 687        |        |   |   | (60                     | )     |          |  | -8.0       | %    |   |   | 1,530  |        |  |   | 1,464  |        |  |   | (66    | )     |  |  | -4.3  | %   
|Other income               |                             |   | 445                       |        |          |   | 286        |        |   |   | (159                    | )     |          |  | -35.7      | %    |   |   | 1,166  |        |  |   | 321    |        |  |   | (845   | )     |  |  | -72.5 | %   
|Interest income            |                             |   | 325                       |        |          |   | 112        |        |   |   | (213                    | )     |          |  | -65.5      | %    |   |   | 758    |        |  |   | 242    |        |  |   | (516   | )     |  |  | -68.1 | %   
|Interest expense           |                             |   | (718                      | )      |          |   | (698       | )      |   |   | 20                      |       |          |  | 2.8        | %    |   |   | (1,481 | )      |  |   | (1,424 | )      |  |   | 57     |       |  |  | 3.8   | %   
|                           |                             |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |      |   |   |        |        |  |   |        |        |  |   |        |       |  |  |       |     
|Income before income taxes |                             |   | 9,408                     |        |          |   | 9,879      |        |   |   | 471                     |       |          |  | 5.0        | %    |   |   | 18,303 |        |  |   | 18,776 |        |  |   | 473    |       |  |  | 2.6   | %   
|Income tax expense         |                             |   | 3,678                     |        |          |   | 3,542      |        |   |   | 136                     |       |          |  | 3.7        | %    |   |   | 7,156  |        |  |   | 6,985  |        |  |   | 171    |       |  |  | 2.4   | %   
|                           |                             |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |      |   |   |        |        |  |   |        |        |  |   |        |       |  |  |       |     
|Net income                 |                             | $ | 5,730                     |        |          | $ | 6,337      |        |   | $ | 607                     |       |          |  | 10.6       | %    |   | $ | 11,147 |        |  | $ | 11,791 |        |  | $ | 644    |       |  |  | 5.8   | %   
|                           |                             |   |                           |        |          |   |            |        |   |   |                         |       |          |  |            |      |   |   |        |        |  |   |        |        |  |   |        |       |  |  |       |     

Cost of goods sold. Cost of goods sold declined as a percentage of sales as a
result of volume, mix changes, and favorable foreign currency exchange rates.
Cost of goods sold as a share of sales has benefited from relatively fixed
overhead costs being spread over higher manufacturing volumes. Future cost of
goods sold will depend on production levels and product mix.

Marketing and selling.Approximately half of the cost increase during the
three and six months ended June 2003 compared to the same periods in 2002 were
due to our support of Her Option products. In addition, during the second
quarter of 2003, we incurred approximately $0.7 million of costs to consolidate
much of our European operations into a new shared service center in Amsterdam.
We expect selling and marketing expense to continue to increase at about 20
percent of the sales increase going forward. In addition, we expect to incur
approximately $0.3 million of additional costs related to the European
headquarters move which should be completed by September 2003.

Research and development.Research and development expense includes costs to
develop and improve current and possible future products plus the costs for
regulatory and clinical activities for these products. Cost increases during
the three months through June 2003 compared to the same period in 2002 were to
support Her Option products. Increased spending for the six-month period was
for Her Option and other products. We expect total spending in research and
development to increase in 2003 compared to 2002, and longer term, to be in the
range of 8 to 10 percent of net sales. In addition, costs in this area could
vary as a result of spending on purchased technologies as new opportunities are
discovered.

General and administrative.Cost increases during the three and six-month
periods ended June 2003 compared to the same periods in 2002 were due to
approximately $0.3 million and $0.8 million of additional costs related to the
CryoGen acquisition and $0.2 million and $0.5 million to support the extension of systems to our European
offices.
These cost increases were partially offset by approximately $0.3 million and
$0.5 million lower spending on outside professional services. We expect
spending in general and administrative to continue higher in 2003 compared to
2002 due but to generally decline as a share of sales.

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Amortization of intangibles.During the second quarter of 2003, we started
amortizing the definite-lived intangible assets from the CryoGen acquisition.
This additional amortization was partially offset by a change in estimate of
useful life for the worldwide distribution rights to DermMatrix, a porcine
graft material used in sling and pelvic prolapse procedures. We expect
amortization of intangibles to be approximately $1.2 million in future
quarters.

Royalty income.Most of our royalty income is from the license of our
stent-delivery technology for medical use outside urology.

Other income.On January 1, 2002, we terminated the AMS Retirement Annuity
Plan. In conjunction with this termination, we contributed approximately $5.8
million to the pension trust and recorded a gain on pension plan termination of
$0.7 million. Substantially all of the remainder of other income and expense
relates to exchange gains and losses resulting from the weakening and
strengthening of foreign currencies, mainly the Euro, against the U.S. dollar
and relate to translating foreign denominated inter-company receivables to
current rates.

Interest income.Interest income was lower in 2003 than in 2002 due to lower
levels of investments and returns. Investment levels were reduced by
approximately $40.0 million used for the CyroGen acquisition.

Interest expense.We hedged a portion of our original $65.0 million variable
rate term note, as required by our senior credit facility, by entering into an
interest rate swap agreement in which we agreed to exchange, at specified
intervals, the calculated difference between the fixed interest rate of the
swap and the variable interest rate on a portion of our debt. This interest
rate swap agreement expired June 30, 2003. Pre-tax losses totaling $0.4
million and $0.8 million in the three and six-month periods ended June 2003
were recorded as interest expense. We did not renew the swap agreement and do
not expect those swap-related expenses going forward.

Income taxes.We believe our use of certain federal tax credits will result in
a lower effective tax rate for 2003 then in 2002. During the second quarter of
2003 we adjusted our provision for income taxes to reflect our current estimate
of our tax liability.

Net income.Increases in net income in 2003 resulted from the increase in
sales while maintaining control over operating costs, all of which are
described above.

Liquidity and Capital Resources

Cash and cash equivalents were $44.4 million as of June 28, 2003, compared to
$79.4 million as of December 28, 2002. This decrease is due primarily to the
cash paid for the CryoGen acquisition, offset somewhat by cash from operations.
Each of these is described below.

Cash flows from operating activities.Cash flow provided by operating
activities totaled $11.7 million in the first six months of fiscal 2003. Net
income plus the non-cash expenses of depreciation and amortization totaled
$16.8 million. Changes in operating assets and liabilities were a use of cash
totaling approximately $5.2 million.

Cash flows from investing activities.On December 30, 2002, we acquired
CryoGen, Inc. for cash payments totaling approximately $36.2 million paid to
CryoGen shareholders and $3.8 million paid to CryoGen creditors. In addition,
we incurred approximately $0.9 million of capitalized acquisition expenses. On
April 7, 2003, we acquired the Dura II erectile restoration product line from
Endocare, Inc. for $2.2 million. During the first six months of 2003, we
purchased equipment for $1.6 million. We expect capital expenditures to
continue in the range of $2.0 to $3.0 million annually.

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Cash flows from financing activities.We have a senior credit facility, which
consists of term debt and a $15 million revolving line of credit. The 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.
During the first six months of 2003, we made regular principal payments of $2.7
million bringing the quarter-end balance to $21.3 million. In addition to the
above senior credit facility payments made during 2003, we paid $0.6 million of
debt acquired as part CryoGen on December 30, 2002.

The following table sets forth the future payment obligations under our senior
credit facility:

|                          |  |                        |        |           |  |             |       |            |  |   |        |  |  |  |   | 
|------------------------- |  | ---------------------- | ------ | --------- |  | ----------- | ----- | ---------- |  | - | ------ |  |  |  | - | 
|                          |  | Payments due by period |        |           |  |             |       |            |  |  
|                          |  |                        |        |           |  |             |       |            |  |  
|                          |  |                        |        | Less than |  | One to      |       | Four to   
|                          |  | Total                  |        | one year  |  | three years |       | five years
|                          |  |                        |        |           |  |             |       |           
|Future payment obligation |  | $                      | 21,273 |           |  | $           | 6,546 |            |  | $ | 14,727 |  |  |  |  | 

During the first six months of 2003, we received $1.3 million from issuing
common stock under our Employee Stock Purchase Plan and exercises of options
under our Equity Incentive Plan.

Cash Commitments

In addition to the initial consideration for the CryoGen acquisition, CryoGens
former shareholders may receive an earn-out payment equal to three times our
sales of CryoGens products during any four consecutive quarters ending three
years after closing, less $40 million. If our net product revenues
attributable to sales of Cryogens products during any such four-quarter period
do not exceed $13.3 million, no earn-out payment will be made. The maximum
amount of the earn-out payment is $110 million. This transaction is more fully
described in our form 8-K filed with the SEC on January 6, 2003.

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

Certain Important Factors

There are several important factors that could cause our actual results to
differ materially from our anticipated results. These factors, and their
impact on the success of our operations and our ability to achieve our goals,
include the following:

Continued Physician Use and Endorsement of our Products

In order 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 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. For example, during 2003 we have committed significant marketing
and selling resources to making the Monarcsub-fascial hammock for urinary
incontinence, and Her Optiontherapy for excessive uterine bleeding available
to physicians and their patients. We believe both of these products address
major market opportunities, but if we are unsuccessful in marketing either of
them, our sales and earnings may be below expectations.

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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 growth
will suffer.

Continued Use of Non-Invasive Treatment Alternatives

We predominantly sell devices and kits for invasive or minimally invasive
surgical procedures. If patients do not accept our products, our sales may
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 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.

Actions Related to Reimbursement for our Products

Our revenues depend largely on U.S. and O.U.S. 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 for the cost of procedures using our products. Effective
January 1, 2003, the Centers for Medicare and Medicaid Services again reduced
the hospital payment rates for certain procedures in which our products are
used. We do not believe these reductions will have a material adverse effect
on our sales or earnings in 2003, but we cannot assure you that hospitals which
treat Medicare and Medicaid patients will not prohibit physicians from
performing procedures which use our products. If any hospital were to prohibit
these procedures, sales of our products would decline unless physicians who had
been performing these procedures in that hospital were able to obtain surgical
privileges in other hospitals which did allow these procedures. Further,
changes in the relative reimbursement rates for different products may cause
hospitals to encourage physicians to use lower cost products from our product
lines, thereby having a material adverse effect on our sales and earnings.

Supplier Risks

Many of our products are dependent on raw materials from one or two suppliers
who may not be able to meet our demands or who may decide to stop supplying us
because of their concerns about product liability claims or other reasons.
Losing any of these raw material suppliers could have a material adverse effect
on our sales and income.

Costs of Physician Malpractice Insurance

Most of our products are used by physicians who are required to maintain
certain levels of medical malpractice insurance to maintain their hospital
privileges. As the cost of this insurance increases, certain physicians who
have used our products to treat their patients may stop performing surgeries.
Unless these patients who would have been treated by these physicians are
referred to other physicians, sales of our products will decline.

Potential Product Recalls

In the event that any of our products were defective, we could voluntarily
recall, or the FDA could require us to redesign or implement a recall of, any
defective product. 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.

Product Liability Lawsuits

The manufacture and sale of medical devices exposes us to significant risk of
product liability claims. In the past, we have had a number of product
liability claims relating to our products. In the future, we may be subject to
additional product liability claims, some of which may have a negative impact
on our business. Additionally, we could experience a material design or
manufacturing failure
in our products, a quality system failure, other safety issues, or heightened
regulatory scrutiny that would warrant a recall of some of our products. Our
existing product liability insurance coverage may be inadequate to protect us
from any liabilities we might incur. If a product liability claim or series of
claims is brought against us for uninsured liabilities or in excess of our
insurance

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coverage, our business could suffer. In addition, a recall of some of
our products, whether or not the result of a product liability claim, could
result in significant costs to us.

Acquisition Integration

On December 30, 2002, we acquired CryoGen Inc., which we have maintained as a
San Diego-based subsidiary. On August
11 we announced our decision to move the work to our Minnetonka facility.
Continued growth of
this business will depend on our ability to retain key employees,
move manufacturing, product development and service, and other
critical functions, and our ability to obtain appropriate FDA and
other regulatory approvals to carry on manufacturing and related
activities in Minnetonka.

Seasonality

Our business is seasonal, with the third quarter of each year typically having
the lowest sales and earnings, and fourth quarter of each year typically having
the highest sales and earnings. There can be no assurance that future seasonal
fluctuations will not vary from this pattern or that these or other variations
will not adversely affect our business and results of operations.

ADDITIONAL INFORMATION ON AMS

We are 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 report 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 from charge on our
website 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, Minnesota 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 an interest rate swap agreement in which we agreed to exchange, at
specified intervals, the calculated difference between the fixed interest rate
of the swap and the variable interest rate on a portion of our debt. This
interest rate swap agreement expired June 30, 2003.

Currency fluctuations.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.

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.




ITEM 4. CONTROLS AND PROCEDURES



|a) |  | Evaluation of disclosure controls and procedures.Our chief executive
officer and chief financial officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q, have concluded that, based on such
evaluation, our disclosure controls and procedures were adequate and
designed to ensure that material information relating to us and our
consolidated subsidiaries, which we are required to disclose in the
reports we file or submit under the Securities Exchange Act of 1934, was
made known to them by others within those entities and reported within the
time periods specified in the Securities and Exchange Commissions rules
and forms.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b) |  | Changes in internal controls over financial reporting.There were no
changes in our internal control over financial reporting identified in
connection with the evaluation of such internal control over financial
reporting that occurred during our last fiscal quarter which have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                  

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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 7, 2003.                                                                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Douglas W. Kohrs, Thomas E. Timbie, and Elizabeth H. Weatherman were
re-elected as directors of the company. Albert Jay Graf, David W.
Stassen, and Christopher H. Porter continued their terms as directors
after the meeting.                                                                                                                                                                         
|   
|(c) |  | At the annual meeting, our stockholders were presented with and asked to
vote upon two proposals: (1) to elect three directors, all incumbent
directors, to serve for three-year terms, or until their successors are
elected and duly qualified; (2) to amend our 2000 Equity Incentive Plan to
increase the number of shares reserved for issuance under this plan from
5,355,000 to 7,355,000 shares.

The names of these nominees for director and voting results are:

|                        |  |       |            |         |  |          |   |           |  |  |           |  |  |  |   | 
|----------------------- |  | ----- | ---------- | ------- |  | -------- | - | --------- |  |  | --------- |  |  |  | - | 
|                        |  | Votes |            | Votes   |  | Votes    |   | Broker   
|Name                    |  | For   |            | Against |  | Withheld |   | Non-Votes
|                        |  |       |            |         |  |          |   |          
|Douglas W. Kohrs        |  |       | 24,410,444 |         |  |          | 0 |           |  |  | 6,005,647 |  |  |  | 0 | 
|                        |  |       |            |         |  |          |   |          
|Thomas E. Timbie        |  |       | 28,313,032 |         |  |          | 0 |           |  |  | 2,103,059 |  |  |  | 0 | 
|                        |  |       |            |         |  |          |   |          
|Elizabeth H. Weatherman |  |       | 28,969,984 |         |  |          | 0 |           |  |  | 1,446,107 |  |  |  | 0 | 



| |  | 24,680,805 shares were voted for
the proposal to increase the shares reserved for issuance under the
2000 Equity Incentive Plan; 3,180,775 shares were voted against the
proposal; 4,675 shares abstained from voting on the proposal; and
2,549,835 shares were represented by broker non-votes.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|a) |  | Exhibits
|-- |  | --------

|         |  |                                                                                                                                                |  |                        
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------
|Item No. |  | Item                                                                                                                                           |  | Method of Filing       
|         |  |                                                                                                                                                |  |                        
|10.1     |  | 2000 Equity Incentive Plan, as amended                                                                                                         |  | Filed with this Report.
|         |  |                                                                                                                                                |  |                        
|10.2     |  | Agreement of Purchase and Sale, dated
April 17, 2003, among American
Medical Systems, Inc., Endocare, Inc.
and Timm Medical Technologies, Inc. |  | Filed with this Report.
|         |  |                                                                                                                                                |  |                        
|31.1     |  | Certification of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002                                             |  | Filed with this Report.
|         |  |                                                                                                                                                |  |                        
|31.2     |  | Certification of Chief Financial
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002                                             |  | Filed with this Report.
|         |  |                                                                                                                                                |  |                        
|32.1     |  | Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002                         |  | Filed with this Report.



|b) |  | Reports on Form 8-K
|-- |  | -------------------

The Company filed a currant report of Form-8 on August 5, 2003 furnishing
a press release reporting its financial results for the quarter ended June 28,
2003.

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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                                                             
|                |  |    |  |                                                                                                    
|August 11, 2003 |  | By |  | \s\ Douglas W. Kohrs                                                                               
|                |  |    | 
|Date            |  |    |  | Douglas W. Kohrs
Chief Executive Officer                                                           
|                |  |    |  |                                                                                                    
|August 11, 2003 |  | By |  | \s\ M. James Call                                                                                  
|                |  |    | 
|Date            |  |    |  | M. James Call
Executive Vice President and Chief Financial
Officer and Principal Accounting Officer

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EXHIBIT INDEX

|            |  |                                                                                                                                                |  |                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------
|Exhibit No. |  | Description                                                                                                                                    |  | Method of Filing       
|            |  |                                                                                                                                                |  |                        
|10.1        |  | 2000 Equity Incentive Plan, as amended                                                                                                         |  | Filed with this Report.
|            |  |                                                                                                                                                |  |                        
|10.2        |  | Agreement of Purchase and Sale, dated
April 17, 2003, among American
Medical Systems, Inc., Endocare, Inc.
and Timm Medical Technologies, Inc. |  | Filed with this Report.
|            |  |                                                                                                                                                |  |                        
|31.1        |  | Certification of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002                                             |  | Filed with this Report.
|            |  |                                                                                                                                                |  |                        
|31.2        |  | Certification of Chief Financial
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002                                             |  | Filed with this Report.
|            |  |                                                                                                                                                |  |                        
|32.1        |  | Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002                         |  | Filed with this Report.

21