##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q



|
|
|

|                               |  |               
|------------------------------ |  | --------------
|For the quarterly period ended |  | March 29, 2003
|                               |  |               

or



|
|
|

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
incorporation or organization) |  | (I.R.S. Employer Identification No.)

|                                            |  |           
|------------------------------------------- |  | ----------
|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

As of May 1, 2003, there were 32,731,615 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                                                                
|                                                   |                                                                                               | STATEMENTS OF OPERATIONS                  
|                                                   |                                                                                               | STATEMENTS OF CASH FLOWS                  
|                                                   |                                                                                               | 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                           
|PART II. OTHER INFORMATION                        
|                                                   | ITEM 4. CONTROLS AND PROCEDURES                                                              
|                                                   | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                        
|EX-10.1 2000 Equity Incentive Plan, as amended    
|EX-10.2 Agreement of Purchase and Sale            
|EX-99.1 Certification pursuant to 18 USC Sec. 1350



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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 March 29, 2003                |  | 3      
|           |  | Statements of Operations for the three
months ended March 30, 2002, and March 29, 2003 |  | 4      
|           |  | Statements of Cash Flows for the three
months ended March 30, 2002, and March 29, 2003 |  | 5      
|           |  | Notes to Consolidated Financial Statements                                             |  | 6  8  
|Item 2.    |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations  |  | 9  15 
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                             |  | 16     
|Part II    |  | OTHER INFORMATION                                                                      |  |        
|Item 4.    |  | Controls and Procedures                                                                |  | 17     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                       |  | 17     
|SIGNATURES |  | 18                                                                                    

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM. 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(In thousands)

|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |         |        |  
|------------------------------------------ | ------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------- | ------------ | ------ | --------- | ------- | ------- | ------ | -
|                                           |                                            |                                                                                                                                                                                                                                            |         | December 28, |        | March 29,
|                                           |                                            |                                                                                                                                                                                                                                            |         | 2002         |        | 2003     
|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |          
|Assets                                     |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        
|                                           | Current assets                             |                                                                                                                                                                                                                                            |         |              |        |           |         |         |       
|                                           |                                            | Cash and cash equivalents                                                                                                                                                                                                                  |         | $            | 79,429 |           |         | $       | 42,767 |  
|                                           |                                            | Accounts receivable, net                                                                                                                                                                                                                   |         |              | 27,208 |           |         |         | 27,905 |  
|                                           |                                            | Inventories                                                                                                                                                                                                                                |         |              | 13,475 |           |         |         | 15,451 |  
|                                           |                                            | Deferred taxes                                                                                                                                                                                                                             |         |              | 3,542  |           |         |         | 3,973  |  
|                                           |                                            | Other current assets                                                                                                                                                                                                                       |         |              | 2,155  |           |         |         | 1,802  |  
|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        
|                                           | Total current assets                       |                                                                                                                                                                                                                                            |         | 125,809      |        |           |         | 91,898  |       
|                                           | Property, plant ,and equipment, net        |                                                                                                                                                                                                                                            |         | 21,328       |        |           |         | 23,294  |       
|                                           | Goodwill, net                              |                                                                                                                                                                                                                                            |         | 80,607       |        |           |         | 119,374 |       
|                                           | Intangibles, net                           |                                                                                                                                                                                                                                            |         | 15,691       |        |           |         | 15,682  |       
|                                           | Deferred income taxes                      |                                                                                                                                                                                                                                            |         | 3,068        |        |           |         | 2,562   |       
|                                           | Investments in technology and other assets |                                                                                                                                                                                                                                            |         | 5,142        |        |           |         | 5,186   |       
|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        
|Total assets                               |                                            | $                                                                                                                                                                                                                                          | 251,645 |              |        | $         | 257,996 |        
|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        
|Liabilities and Stockholders Equity       |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        
|                                           | Current liabilities                        |                                                                                                                                                                                                                                            |         |              |        |           |         |         |       
|                                           |                                            | Accounts payable                                                                                                                                                                                                                           |         | $            | 3,000  |           |         | $       | 3,483  |  
|                                           |                                            | Accrued compensation expenses                                                                                                                                                                                                              |         |              | 10,246 |           |         |         | 10,148 |  
|                                           |                                            | Accrued warranty expense                                                                                                                                                                                                                   |         |              | 4,526  |           |         |         | 4,611  |  
|                                           |                                            | Other accrued expenses                                                                                                                                                                                                                     |         |              | 4,751  |           |         |         | 5,436  |  
|                                           |                                            | Current portion of notes payable                                                                                                                                                                                                           |         |              | 6,000  |           |         |         | 6,000  |  
|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        
|                                           | Total current liabilities                  |                                                                                                                                                                                                                                            |         | 28,523       |        |           |         | 29,678  |       
|                                           | Long-term notes payable                    |                                                                                                                                                                                                                                            |         | 18,000       |        |           |         | 16,636  |       
|                                           | Other long-term liabilities                |                                                                                                                                                                                                                                            |         | 860          |        |           |         | 444     |       
|                                           | Stockholders equity                       |                                                                                                                                                                                                                                            |         |              |        |           |         |         |       
|                                           |                                            | Common stock, par value $.01 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 32,334,626 voting
and 341,700 non-voting shares for March 29, 2003 |         |              | 325    |           |         |         | 327    |  
|                                           | Additional paid-in capital                 |                                                                                                                                                                                                                                            |         | 197,991      |        |           |         | 198,718 |       
|                                           | Deferred compensation                      |                                                                                                                                                                                                                                            |         | (198         | )      |           |         | (141    | )     
|                                           | Accumulated other comprehensive loss:      |                                                                                                                                                                                                                                            |         |              |        |           |         |         |       
|                                           |                                            | Cumulative translation adjustment                                                                                                                                                                                                          |         |              | (678   | )         |         |         | (200   | )
|                                           |                                            | Derivative financial instruments                                                                                                                                                                                                           |         |              | (459   | )         |         |         | (201   | )
|                                           | Retained earnings                          |                                                                                                                                                                                                                                            |         | 7,281        |        |           |         | 12,735  |       
|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        
|                                           | Total stockholders equity                 |                                                                                                                                                                                                                                            |         | 204,262      |        |           |         | 211,238 |       
|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        
|Total liabilities and stockholders equity |                                            | $                                                                                                                                                                                                                                          | 251,645 |              |        | $         | 257,996 |        
|                                           |                                            |                                                                                                                                                                                                                                            |         |              |        |           |         |        

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

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STATEMENTS OF OPERATIONS
(In thousands)

|                               |                             |   |                            |        |      |   |        |        |  
|------------------------------ | --------------------------- | - | -------------------------- | ------ | ---- | - | ------ | ------ | -
|                               |                             |   | Three months through March
|                               |                             |   |                           
|                               |                             |   | 2002                       |        | 2003
|                               |                             |   |                            |        |     
|Net sales                      |                             | $ | 34,715                     |        |      | $ | 39,347 |       
|Operating expenses             |                             |   |                            |        |      |   |        |       
|                               | Cost of goods sold          |   |                            | 7,132  |      |   |        | 6,943  |  
|                               | Marketing and selling       |   |                            | 12,810 |      |   |        | 14,797 |  
|                               | General and administrative  |   |                            | 3,279  |      |   |        | 4,070  |  
|                               | Research and development    |   |                            | 2,834  |      |   |        | 3,791  |  
|                               | Amortization of intangibles |   |                            | 939    |      |   |        | 1,065  |  
|                               |                             |   |                            |        |      |   |        |       
|                               | Total operating expenses    |   |                            | 26,994 |      |   |        | 30,666 |  
|                               |                             |   |                            |        |      |   |        |       
|Operating income               |                             |   | 7,721                      |        |      |   | 8,681  |       
|Other income (expense)         |                             |   |                            |        |      |   |        |       
|                               | Royalty income              |   |                            | 783    |      |   |        | 777    |  
|                               | Other income                |   |                            | 721    |      |   |        | 35     |  
|                               | Interest income             |   |                            | 433    |      |   |        | 130    |  
|                               | Interest expense            |   |                            | (763   | )    |   |        | (726   | )
|                               |                             |   |                            |        |      |   |        |       
|                               | Total other income          |   |                            |        |      |   |        |        |  
|Income before income taxes     |                             |   | 8,895                      |        |      |   | 8,897  |       
|Income tax expense             |                             |   | 3,478                      |        |      |   | 3,443  |       
|                               |                             |   |                            |        |      |   |        |       
|Net income                     |                             | $ | 5,417                      |        |      | $ | 5,454  |       
|                               |                             |   |                            |        |      |   |        |       
|Net income per share           |                             |   |                            |        |      |   |        |       
|                               | Basic                       |   | $                          | 0.17   |      |   | $      | 0.17   |  
|                               | Diluted                     |   | $                          | 0.16   |      |   | $      | 0.16   |  
|Weighted average common shares |                             |   |                            |        |      |   |        |       
|                               | Basic                       |   |                            | 32,005 |      |   |        | 32,547 |  
|                               | Diluted                     |   |                            | 34,221 |      |   |        | 34,042 |  

The accompanying notes are an intergral part of the consolidated financal statements.

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STATEMENTS OF CASH FLOWS
(In thousands)

|                                                 |                                                                                  |                                                 |        |                            |        |      |         |   |         |  
|------------------------------------------------ | -------------------------------------------------------------------------------- | ----------------------------------------------- | ------ | -------------------------- | ------ | ---- | ------- | - | ------- | -
|                                                 |                                                                                  |                                                 |        | Three months through March
|                                                 |                                                                                  |                                                 |        |                           
|                                                 |                                                                                  |                                                 |        | 2002                       |        | 2003
|                                                 |                                                                                  |                                                 |        |                            |        |     
|Cash flows from operating activities             |                                                                                  |                                                 |        |                            |        |      |         |  
|Net income                                       |                                                                                  | $                                               | 5,417  |                            |        | $    | 5,454   |  
|                                                 | Adjustments to reconcile net income to
net cash provided by operating activities |                                                 |        |                            |        |      |         |   |        
|                                                 |                                                                                  | Depreciation                                    |        |                            | 950    |      |         |   | 1,383   |  
|                                                 |                                                                                  | Amortization of intangibles                     |        |                            | 939    |      |         |   | 1,065   |  
|                                                 |                                                                                  | Deferred financing costs                        |        |                            | 71     |      |         |   | 71      |  
|                                                 |                                                                                  | Noncash deferred compensation                   |        |                            | 49     |      |         |   | 36      |  
|                                                 |                                                                                  | Noncash stock-based compensation                |        |                            | 10     |      |         |   | 10      |  
|                                                 |                                                                                  | Income tax benefit related to stock option plan |        |                            | 279    |      |         |   | 170     |  
|                                                 |                                                                                  | Change in net deferred taxes                    |        |                            | 108    |      |         |   | (83     | )
|Changes in operating assets and liabilities:     |                                                                                  |                                                 |        |                            |        |      |         |  
|                                                 |                                                                                  | Accounts receivable                             |        |                            | (1,271 | )    |         |   | (461    | )
|                                                 |                                                                                  | Inventories                                     |        |                            | 986    |      |         |   | (1,929  | )
|                                                 |                                                                                  | Accounts payable and accrued expenses           |        |                            | (4,624 | )    |         |   | (1,630  | )
|                                                 |                                                                                  | Other assets                                    |        |                            | 764    |      |         |   | 433     |  
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|Net cash provided by operating activities        |                                                                                  |                                                 | 3,678  |                            |        |      | 4,519   |  
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|Cash flows from investing activities:            |                                                                                  |                                                 |        |                            |        |      |         |  
|                                                 |                                                                                  | Purchase of property, plant and equipment       |        |                            | (440   | )    |         |   | (707    | )
|                                                 |                                                                                  | Purchase of business                            |        |                            |       |      |         |   | (40,698 | )
|                                                 |                                                                                  | Purchase of short and long-term investments     |        |                            | (8,889 | )    |         |   |        |  
|                                                 |                                                                                  | Sale of short and long-term investments         |        |                            | 2,766  |      |         |   |        |  
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|Net cash used in investing activities            |                                                                                  |                                                 | (6,563 | )                          |        |      | (41,405 | )
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|Cash flows from financing activities             |                                                                                  |                                                 |        |                            |        |      |         |  
|                                                 |                                                                                  | Issuance of common stock                        |        |                            | 430    |      |         |   | 570     |  
|                                                 |                                                                                  | Payments on long-term debt                      |        |                            | (2,182 | )    |         |   | (1,956  | )
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|                                                 |                                                                                  | Net cash used in financing activities           |        |                            | (1,752 | )    |         |   | (1,386  | )
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|Effect of exchange rates                         |                                                                                  |                                                 | (56    | )                          |        |      | 1,610   |  
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|Net decrease in cash and cash equivalents        |                                                                                  |                                                 | (4,693 | )                          |        |      | (36,662 | )
|Cash and cash equivalents at beginning of period |                                                                                  |                                                 | 28,755 |                            |        |      | 79,429  |  
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|Cash and cash equivalents at end of period       |                                                                                  | $                                               | 24,062 |                            |        | $    | 42,767  |  
|                                                 |                                                                                  |                                                 |        |                            |        |      |         |  
|Supplemental disclosure                          |                                                                                  |                                                 |        |                            |        |      |         |  
|                                                 |                                                                                  | Cash paid for interest                          |        | $                          | 696    |      |         | $ | 630     |  
|                                                 |                                                                                  | Cash paid for taxes                             |        | $                          | 20     |      |         | $ | 2,427   |  

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

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

1.     Basis of Presentation

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

|                                                                                                                                      |                       |      |                            |      |  |   |       |      | 
|------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | -------------------------- | ---- |  | - | ----- | ---- | 
|                                                                                                                                      |                       |      | Three months through March
|                                                                                                                                      |                       |      |                           
|(thousands, except per share data)                                                                                                    |                       | 2002 |                            | 2003
|                                                                                                                                      |                       |      |                            |     
|Net income, as reported                                                                                                               |                       | $    | 5,417                      |      |  | $ | 5,454 |     
|Add: Stock-based employee compensation
expense included in reported income, net of tax effects                                        |                       |      | 44                         |      |  |   | 36    |     
|Subtract: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax effects |                       |      | (847                       | )    |  |   | (976  | )   
|                                                                                                                                      |                       |      |                            |      |  |   |       |     
|Pro forma net income                                                                                                                  |                       | $    | 4,614                      |      |  | $ | 4,514 |     
|                                                                                                                                      |                       |      |                            |      |  |   |       |     
|Earnings per share                                                                                                                    |                       |      |                            |      |  |   |       |     
|                                                                                                                                      | Basic  as reported   |      | $                          | 0.17 |  |   | $     | 0.17 | 
|                                                                                                                                      | Basic  pro forma     |      | $                          | 0.14 |  |   | $     | 0.14 | 
|                                                                                                                                      | Diluted  as reported |      | $                          | 0.16 |  |   | $     | 0.16 | 
|                                                                                                                                      | Diluted  pro forma   |      | $                          | 0.13 |  |   | $     | 0.13 | 

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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
months through March, 2002 and 2003.

|                                                                                                   |  |      |        |      |  |   |        | 
|-------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|(thousands, except per share data)                                                                 |  | 2002 |        | 2003
|                                                                                                   |  |      |        |     
|Earnings                                                                                           |  | $    | 5,417  |      |  | $ | 5,454  | 
|Weighted-average shares outstanding
for basic earnings per share                                   |  |      | 32,005 |      |  |   | 32,547 | 
|Dilutive effect of stock options                                                                   |  |      | 2,216  |      |  |   | 1,495  | 
|                                                                                                   |  |      |        |      |  |   |        | 
|Adjusted weighted-average shares outstanding and
assumed conversion for diluted earnings per share |  |      | 34,221 |      |  |   | 34,042 | 
|                                                                                                   |  |      |        |      |  |   |        | 
|Basic earnings per share                                                                           |  | $    | 0.17   |      |  | $ | 0.17   | 
|Diluted earnings per share                                                                         |  | $    | 0.16   |      |  | $ | 0.16   | 

4.     Inventories

Inventories consist of the following:

|                       |  |                   |        |                |  |   |        |  
|---------------------- |  | ----------------- | ------ | -------------- |  | - | ------ | -
|(thousands)            |  | December 28, 2002 |        | March 29, 2003
|                       |  |                   |        |               
|Raw materials          |  | $                 | 4,147  |                |  | $ | 5,008  |  
|Work-in process        |  |                   | 1,938  |                |  |   | 744    |  
|Finished goods         |  |                   | 10,138 |                |  |   | 12,308 |  
|Obsolescence allowance |  |                   | (2,748 | )              |  |   | (2,609 | )
|                       |  |                   |        |                |  |   |        |  
|Total, net             |  | $                 | 13,475 |                |  | $ | 15,451 |  
|                       |  |                   |        |                |  |   |        |  

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 patients 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 our
warranty obligation. 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. Product reliability is a
function of raw material properties, manufacturing processes, and surgical
technique. Changes in warranty allowances during the three months ended March
2003 were as follows:

|                                         |  |   |       |  
|---------------------------------------- |  | - | ----- | -
|(thousands)                              |  |   |       |  
|Balance, beginning of period             |  | $ | 4,526 |  
|Balance assumed from CryoGen acquisition |  |   | 65    |  
|Provisions for warranty                  |  |   | 75    |  
|Claims processed                         |  |   | (55   | )
|                                         |  |   |       |  
|Balance, end of period                   |  | $ | 4,611 |  
|                                         |  |   |       |  

6.     Acquisition

During this quarter 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 in addition, 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 our

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sales of CryoGens products during any four consecutive company fiscal 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 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-month period
ended March 29, 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.

Pending completion of a formal valuation study, the Company has recorded
goodwill of approximately $39.4 million, including approximately $0.7 million
in acquisition costs consisting of legal, accounting, and other various
expenses. The allocation of the purchase price for the acquisition and other
purchase accounting adjustments is as follows:

|                                                    |  |   |        | 
|--------------------------------------------------- |  | - | ------ | 
|(thousands)                                         |  |   |        | 
|Total purchase price, net                           |  | $ | 36,242 | 
|Company acquisition costs                           |  |   | 707    | 
|Deficit of liabilities in excess of assets acquired |  |   | 2,536  | 
|                                                    |  |   |        | 
|Goodwill                                            |  | $ | 39,485 | 
|                                                    |  |   |        | 

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 three months through March, 2002, and 2003, was:

|                                                                                                              |  |      |       |      |  |   |       |  
|------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|(thousands)                                                                                                   |  | 2002 |       | 2003
|                                                                                                              |  |      |       |     
|Net income                                                                                                    |  | $    | 5,417 |      |  | $ | 5,454 |  
|Net income (loss) on derivative financial instruments, net of taxes                                           |  |      | 43    |      |  |   | (5    | )
|Amounts reclassified to interest expense during the
period from derivative and hedging activities, net of tax |  |      | 240   |      |  |   | 263   |  
|Unrealized losses on marketable securities, net of taxes                                                      |  |      | (69   | )    |  |   |      |  
|Cumulative translation adjustment, net of taxes                                                               |  |      | (56   | )    |  |   | 478   |  
|                                                                                                              |  |      |       |      |  |   |       |  
|Comprehensive income                                                                                          |  | $    | 5,575 |      |  | $ | 6,190 |  
|                                                                                                              |  |      |       |      |  |   |       |  

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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 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 first fiscal quarter of 2003 compared to the first fiscal
quarter of 2002.

Net Sales.Our erectile restoration products include several types of
inflatable and non-inflatable functioning penile erectile tissue. In April
2003, we expanded our range 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 urinary 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 (Artifical 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.

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

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|      |              |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   |  |     |    |  
|----- | ------------ | --------------------- | ------------------- | - | ------ | ------ | ---- | - | ------- | ------ | ------- | - | -------------------- | ----- | - |  | ---- | ----- | - |  | --- | -- | - |  | --- | -- | -
|      |              |                       |                     |   |        |        |      |   |         |        |         |   | Change               |       |   |  |      |       |   |  |    
|      |              |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |    
|      |              |                       |                     |   | 2002   |        | 2003 |   | Dollars |        | Percent |   | Share of total sales
|      |              |                       |                     |   |        |        |      |   |         |        |         |   |                     
|Sales |              |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   | 
|      | Product line |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   |  |    
|      |              | Erectile restoration  |                     | $ | 17,295 |        |      | $ | 17,854  |        |         | $ | 559                  |       |   |  | 3.2  | %     |   |  | 50  | %  |   |  | 45  | % 
|      |              | Other mens health    |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   |  |     |   
|      |              |                       | Male continence     |   |        | 9,028  |      |   |         | 10,283 |         |   |                      | 1,255 |   |  |      | 13.9  | % |  |     | 26 | % |  |     | 26 | %
|      |              |                       | Prostate treatments |   |        | 1,645  |      |   |         | 1,199  |         |   |                      | (446  | ) |  |      | -27.1 | % |  |     | 5  | % |  |     | 3  | %
|      |              |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   | 
|      |              |                       | Total               |   |        | 10,673 |      |   |         | 11,482 |         |   |                      | 809   |   |  |      | 7.5   | % |  |     | 31 | % |  |     | 29 | %
|      |              | Womens health        |                     |   | 6,747  |        |      |   | 10,011  |        |         |   | 3,264                |       |   |  | 48.4 | %     |   |  | 19  | %  |   |  | 25  | % 
|      |              |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   | 
|      |              | Total                 |                     | $ | 34,715 |        |      | $ | 39,347  |        |         | $ | 4,632                |       |   |  | 13.3 | %     |   |  | 100 | %  |   |  | 100 | % 
|      |              |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   | 
|      | Geography    |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   |  |    
|      |              | United States         |                     | $ | 29,159 |        |      | $ | 32,347  |        |         | $ | 3,188                |       |   |  | 10.9 | %     |   |  | 84  | %  |   |  | 82  | % 
|      |              | Outside United States |                     |   | 5,556  |        |      |   | 7,000   |        |         |   | 1,444                |       |   |  | 26.0 | %     |   |  | 16  | %  |   |  | 18  | % 
|      |              |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   | 
|      |              | Total                 |                     | $ | 34,715 |        |      | $ | 39,347  |        |         | $ | 4632                 |       |   |  | 13.3 | %     |   |  | 100 | %  |   |  | 100 | % 
|      |              |                       |                     |   |        |        |      |   |         |        |         |   |                      |       |   |  |      |       |   |  |     |    |   | 

Approximately $0.9 million of the increase from 2002 to 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 first quarter of 2003 would have been $38.4 million, an increase
of $3.7 million, or 10.7 percent.

Erectile restoration sales were up slightly due to price and mix changes. The
13.9 percent increase in male urinary control sales was 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 27.1 percent decrease in
sales of other mens health products was due to lower demand for our urethral
stents for BPH. The 48.4 percent increase in sales of womens health products was
primarily due to greater unit sales of SPARC. During the quarter, we
introduced our new subfascial hammock system (Monarc) to control stress urinary
incontinence in two European countries. We expect to expand availability
throughout the year, launching it in the United States mid-year. In 2003,
womens health products included the Her Option system which was acquired with
CryoGen at the beginning of the year. Her Option is used to cure excessive
uterine bleeding. Sales of these products were $0.7 million, net of allowance
for returns in this quarter, and are expected to be more than $7.0 million
during the full year 2003.

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

|                           |                             |   |               |        |                       |   |               |        |         |   |       |       |              |  |       |      |   |  |                |      |   |  |       |      |  
|-------------------------- | --------------------------- | - | ------------- | ------ | --------------------- | - | ------------- | ------ | ------- | - | ----- | ----- | ------------ |  | ----- | ---- | - |  | -------------- | ---- | - |  | ----- | ---- | -
|                           |                             |   |               |        |                       |   |               |        |         |   |       |       |              |  |       |      |   |  | Share of sales
|                           |                             |   | Three months  |        |                       |   |               |        |         |   |       |       | three months
|                           |                             |   | through March |        | Increase 2002 to 2003 |   | through March
|                           |                             |   |               |        |                       |   |              
|                           |                             |   | 2002          |        | 2003                  |   | Dollars       |        | Percent |   | 2002  |       | 2003        
|                           |                             |   |               |        |                       |   |               |        |         |   |       |       |             
|Net sales                  |                             | $ | 34,715        |        |                       | $ | 39,347        |        |         | $ | 4,632 |       |              |  | 13.3  | %    |   |  | 100.0          | %    |   |  | 100.0 | %   
|Operating expenses:        |                             |   |               |        |                       |   |               |        |         |   |       |       |              |  |       |      |   |  |                |      |   |  |       |     
|                           | Cost of sales               |   |               | 7,132  |                       |   |               | 6,943  |         |   |       | (189  | )            |  |       | -2.7 | % |  |                | 20.5 | % |  |       | 17.6 | %
|                           | Marketing and sales         |   |               | 12,810 |                       |   |               | 14,797 |         |   |       | 1,987 |              |  |       | 15.5 | % |  |                | 36.9 | % |  |       | 37.6 | %
|                           | General and administrative  |   |               | 3,279  |                       |   |               | 4,070  |         |   |       | 791   |              |  |       | 24.1 | % |  |                | 9.4  | % |  |       | 10.3 | %
|                           | Research and development    |   |               | 2,834  |                       |   |               | 3,791  |         |   |       | 957   |              |  |       | 33.8 | % |  |                | 8.2  | % |  |       | 9.6  | %
|                           | Amortization of
intangibles |   |               | 939    |                       |   |               | 1,065  |         |   |       | 126   |              |  |       | 13.4 | % |  |                | 2.7  | % |  |       | 2.7  | %
|                           |                             |   |               |        |                       |   |               |        |         |   |       |       |              |  |       |      |   |  |                |      |   |  |       |     
|Total operating expenses   |                             |   | 26,994        |        |                       |   | 30,666        |        |         |   | 3,672 |       |              |  | 13.6  | %    |   |  | 77.8           | %    |   |  | 77.9  | %   
|                           |                             |   |               |        |                       |   |               |        |         |   |       |       |              |  |       |      |   |  |                |      |   |  |       |     
|Operating income           |                             |   | 7,721         |        |                       |   | 8,681         |        |         |   | 960   |       |              |  | 12.4  | %    |   |  | 22.2           | %    |   |  | 22.1  | %   
|Royalty income             |                             |   | 782           |        |                       |   | 777           |        |         |   | (5    | )     |              |  | -0.6  | %    |   |  | 2.3            | %    |   |  | 2.0   | %   
|Other income               |                             |   | 722           |        |                       |   | 35            |        |         |   | (687  | )     |              |  | -95.2 | %    |   |  | 2.1            | %    |   |  | 0.1   | %   
|Interest income            |                             |   | 433           |        |                       |   | 130           |        |         |   | (303  | )     |              |  | -70.0 | %    |   |  | 1.2            | %    |   |  | 0.3   | %   
|Interest expense           |                             |   | (763          | )      |                       |   | (726          | )      |         |   | 37    |       |              |  | -4.8  | %    |   |  | -2.2           | %    |   |  | -1.8  | %   
|                           |                             |   |               |        |                       |   |               |        |         |   |       |       |              |  |       |      |   |  |                |      |   |  |       |     
|Income before income taxes |                             |   | 8,895         |        |                       |   | 8,897         |        |         |   | 2     |       |              |  | 0.0   | %    |   |  | 25.6           | %    |   |  | 22.6  | %   
|Income tax expense         |                             |   | 3,478         |        |                       |   | 3,443         |        |         |   | (35   | )     |              |  | -1.0  | %    |   |  | 10.0           | %    |   |  | 8.8   | %   
|                           |                             |   |               |        |                       |   |               |        |         |   |       |       |              |  |       |      |   |  |                |      |   |  |       |     
|Net income                 |                             | $ | 5,417         |        |                       | $ | 5,454         |        |         | $ | 37    |       |              |  | 0.7   | %    |   |  | 15.6           | %    |   |  | 13.9  | %   
|                           |                             |   |               |        |                       |   |               |        |         |   |       |       |              |  |       |      |   |  |                |      |   |  |       |     

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Cost of goods sold. Cost of goods sold declined slightly as a result of
supplier and mix changes. Cost of goods sold as a share of sales has benefited
from relatively fixed overhead costs being spread over higher manufacturing
volumes. In addition, during the first quarter of 2003, sales to outside
international distributors, which generally are sold at lower prices, were a
smaller percentage of total sales than in the first quarter of 2002. Future
costs of goods sold will depend on production levels and product mix.

Marketing and selling.Most of the increase in marketing and selling costs,
compared to the first quarter of 2002, were to support marketing and selling of
Her Option product, which we have been selling since the acquisition of
CryoGen. Other selling and marketing expenses increased by 20 percent of the
sales increase from non-CryoGen products. We expect selling and marketing
expense to continue to increase at about 20 percent of the sales increase going
forward.

General and administrative.Cost increases in 2003 compared to 2002 were due
to approximately $0.5 million of additional costs related to the CryoGen
acquisition on December 30, 2002, and $0.4 million of costs related to
information technology to support the extension of systems to our European
offices. We expect spending in general and administrative to increase in 2003
compared to 2002 due to the acquisition of CryoGen.

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. Approximately a third
of the increase over 2002 was for Her Option products, and the remainder was to
develop and test 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.

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.

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. Net income in 2003 was net of after-tax losses from the newly
acquired CyroGen operations, without which net income would have increased 34
percent to $6.7 million, or $.20 per share.

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Liquidity and Capital Resources

Cash and cash equivalents were $42.8 million as of March 29, 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 are described below.

Cash flows from operating activities.Cash flow provided by operating
activities totaled $4.5 million in the first quarter of fiscal 2003. Net
income plus the non-cash expenses of depreciation and amortization totaled $7.9
million. Changes in operating assets and liabilities were a use of cash
totaling approximately $3.6 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 $0.7 million of capitalized acquisition expenses.
During the first quarter of 2003, we purchased equipment for $0.7 million and
we expect capital expenditures to continue in the range of $2.0 to $3.0 million
annually.

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 quarter of 2003, we made a regular principal payment of $1.4
million bringing the quarter-end balance to $22.6 million. In addition to the
above senior credit facility payment made during the first quarter of 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
|(amounts in thousands)    |  | Total                  |        | one year |  | three years |       | five years
|                          |  |                        |        |          |  |             |       |           
|Future payment obligation |  | $                      | 22,636 |          |  | $           | 6,000 |            |  | $       | 16,636 |  |  | $ |  | 

During the first quarter of 2003, we received $0.6 million from issuing common
stock related to 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 earnout payment equal to three times our
sales of CryoGens products during any four consecutive company fiscal 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 earnout payment will be
made. The maximum amount of the earnout payment is $110 million. This
transaction is more fully described in our form 8-K filed with the SEC on
January 6, 2003.

On April 7, 2003 shortly after the close of our first quarter, we acquired the
Dura II line of erectile restoration products from Endocare, Inc. for $2.0
million. The transaction includes all related intellectual property,
production equipment, and current Dura II inventory. See Exhibit 10.2 as filed
with this document.

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 12 months.

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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. In particular, at the end of 2002, we introduced the Monarc
sub-fascial hammock for urinary incontinence, and with the acquisition of
CryoGen Inc., the Her Optiontherapy for excessive uterine bleeding. We
believe both of these products address major market opportunities, and we have
committed significant marketing and selling resources to making this therapy
available to physicians and their patients. If we are unsuccessful in
marketing either of them, our sales and earnings may be below expectations.

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 from the procedures using our products and other adverse side
effects from the procedures using our products. Patients are more likely first
to consider non-invasive alternatives to treat their urological disorders. The
introduction of new oral medications or other less-invasive therapies may cause
our sales to decline.

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.

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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 prove to be 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.

Increased Supply of Sling Material

In the past we have provided human cadaveric dermis as a service in conjunction
with the sale of our sling procedure kits for urinary incontinence. Currently,
the supply of human tissue is not sufficient to meet demand. We are supplying
porcine dermis that can be used with our sling procedure kits and are
developing new sources of supply for human dermis, but we cannot assure you
that these supplies will be sufficient to meet our customers demands and sales
of certain sling procedure kits may continue to decline.

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 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 are maintaining as a
San Diego-based subsidiary with full responsibility for product development and
manufacturing of all components and final assembly and testing of all of the
components for the Her Optionsystem for endometrial ablation, including
product enhancements and new products based on CryoGen technologies. Failure
to retain and develop the CryoGen workforce, or establish and maintain
appropriate communications, performance expectations, regulatory compliance
procedures, accounting controls, and reporting procedures could adversely
affect our future sales and earnings.

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.

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ADDITIONAL INFORMATION ON AMS

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

We also make all of our SEC filings, such as our annual, quarterly and current
reports and proxy statements, available to the public free 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 expires June 30, 2003. We expect that pre-tax
costs totaling approximately $0.4 million, which are recorded in accumulated
other comprehensive income at March 29, 2003, and represent the difference
between the fixed rate of the swap agreement and variable interest of the term
note, will be recognized within the next twelve months as part of interest
expense. At March 29, 2003, the fair value of the interest rate swap, based
upon quoted market prices for contracts with similar maturities, was
approximately $0.4 million.

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.

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PART II. OTHER INFORMATION




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
the Companys disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a
date (the Evaluation Date) within 90 days before the filing date of this
quarterly report on Form 10-Q, have concluded that, as of the Evaluation
Date, our disclosure controls and procedures were adequate and designed to
ensure that material information relating to us and our consolidated
subsidiaries would be made known to them by others within those entities.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b) |  | Changes in internal controls.There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to
the Evaluation Date.                                                                                                                                                                                                                                                                                                                                                                                                                                   




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.
|99.1     |  | 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



| |  |  | On January 6, 2003, we filed a Current Report on Form 8-K
reporting that we had completed our acquisition of CryoGen, Inc.                                                        
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On March 17, 2003, we filed a Current Report on Form 8-K with the
pro forma financial statements relating to our acquisition of
CryoGen, Inc.                                     
|
| |  |  | On April 28, 2003, we filed a Current Report on Form 8-K
furnishing our press release dated April 23, 2003, announcing
results of operations for the quarter ended March 29, 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                                                                   
|             |  |    |  |                                                                                                          
|May 13, 2003 |  | By |  | /s/ Douglas W. Kohrs                                                                                     
|             |  |    |  |                                                                                                          
|Date         |  |    |  | Douglas W. Kohrs
   Chief Executive Officer                                                              
|             |  |    |  |                                                                                                          
|May 13, 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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CERTIFICATIONS

Certification by Chief Executive Officer

I, Douglas W. Kohrs, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of American Medical
Systems Holdings, Inc.;

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

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

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



| | a) |  | Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        

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



| | a) |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                   |  |         |  |                                      
|------------------ |  | ------- |  | -------------------------------------
|Date: May 13, 2003 |  |         |  |                                      
|                   |  |         |  |                                      
|                   |  | By: /s/ |  | Douglas W. Kohrs                     
|                   |  | Name:   |  | Douglas W. Kohrs                     
|                   |  | Title:  |  | President and Chief Executive Officer

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##### Table of Contents



Certification by Chief Financial Officer

I, M. James Call, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of American Medical
Systems Holdings, Inc.;

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

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

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



| | a) |  | Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        

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



| | a) |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                   |  |                       |  |                                                                
|------------------ |  | --------------------- |  | ---------------------------------------------------------------
|Date: May 13, 2003 |  |                       |  |                                                                
|                   |  | By: /s/ M. James Call
|                   |  | Name:                 |  | M. James Call                                                  
|                   |  | Title:                |  | Executive Vice President,
Chief Financial Officer and Secretary

20