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

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934






For the quarterly period ended
    September 27, 2003


or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934



For the transition period from
    
    to




Commission File Number:
    00030733


AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware
    
    41-1978822(State or other jurisdiction of
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 o No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

x Yes o No

As of November 10, 2003, there were 33,070,117 shares of the registrants
Common Stock, $.01 par value outstanding.





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TABLE OF CONTENTS



|                                              |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                
|                                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                              | Consolidated Balance Sheets as of December 28, 2002 and September 27, 2003                   
|                                              | Consolidated Statements of Operations  Unaudited                                            
|                                              | Notes to Consolidated Financial Statements                                                   
|                                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION                   
|                                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                   
|EX-31.1 Certification of CEO - Section 302   
|EX-31.2 Certification of CFO - Section 302   
|EX-32.1 Certification Pursuant to Section 906



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INDEX

Page(s)Part I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Consolidated Balance
Sheets as of December 28, 2002, and September 27,
2003
    3Consolidated
Statements of Operations for the three and ninemonths
ended September 28, 2002, and September 27, 2003
    4Consolidated
Statements of Cash Flows for the ninemonths ended September 28,
2002, and September 27, 2003
    5Notes
to Consolidated Financial Statements
    6 - 10Item 2.
    
    Managements Discussion and Analysis ofFinancial Condition and Results of Operations
    11 - 18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    18Item 4.
    
    Controls and Procedures
    19Part II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    20SIGNATURES
    
    
    
    20Exhibit 31.1
    
    Section 302 Certification  CEO
    21-22Exhibit 31.2
    
    Section 302
Certification  CFO
    23-24Exhibit 32.1
    
    Section 906 Certification
    25


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PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




American Medical Systems Holdings Inc.
Consolidated Balance Sheets
(In thousands)

December 28, 2002
    
    
    September 27, 2003(Unaudited)AssetsCurrent assetsCash and equivalents
    
    $
    79,429
    
    
    $
    53,949Accounts receivable, net
    
    
    27,208
    
    
    
    29,823Inventories
    
    
    13,475
    
    
    
    18,688Deferred taxes
    
    
    3,542
    
    
    
    3,476Other current assets
    
    
    2,155
    
    
    
    3,336Total current assets
    
    
    125,809
    
    
    
    109,272Property, plant and equipment, net
    
    
    21,328
    
    
    
    24,505Goodwill, net
    
    
    80,607
    
    
    
    101,208Intangibles, net
    
    
    15,691
    
    
    
    22,075Deferred income taxes
    
    
    3,068
    
    
    
    11,151Investment in technology and other assets
    
    
    5,142
    
    
    
    5,150Total assets
    
    $
    251,645
    
    
    $
    273,361Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    3,000
    
    
    $
    3,966Accrued compensation expenses
    
    
    10,246
    
    
    
    11,251Accrued warranty expense
    
    
    4,526
    
    
    
    4,568Other accrued expenses
    
    
    4,751
    
    
    
    5,306Current portion of notes payable
    
    
    6,000
    
    
    
    6,750Total current liabilities
    
    
    28,523
    
    
    
    31,841Long-term notes payable
    
    
    18,000
    
    
    
    12,886Other long-term liabilities
    
    
    860
    
    
    
    Stockholders equityCommon stock, par value $.01 per share; authorized
95,000,000 shares; issued and
outstanding 32,156,873 voting and 341,700
non-voting shares at December 28, 2002; and 33,042,756
voting shares at September 27, 2003
    
    
    325
    
    
    
    330Additional paid-in capital
    
    
    197,991
    
    
    
    201,273Deferred compensation
    
    
    (198
    )
    
    
    (65
    )Accumulated other comprehensive income (loss):Cumulative translation adjustment
    
    
    (678
    )
    
    
    1,083Derivative financial instruments
    
    
    (459
    )
    
    
    Retained earnings
    
    
    7,281
    
    
    
    26,013Total stockholders equity
    
    
    204,262
    
    
    
    228,634Total liabilities and stockholders equity
    
    $
    251,645
    
    
    $
    273,361


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

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

Three months through
    
    
    Nine months throughSeptember
    
    
    September2002
    
    
    2003
    
    
    2002
    
    
    2003Sales
    
    $
    32,771
    
    
    $
    39,559
    
    
    $
    103,816
    
    
    $
    121,130Operating expensesCost of goods sold
    
    
    6,233
    
    
    
    7,110
    
    
    
    20,485
    
    
    
    21,434Marketing and selling
    
    
    11,277
    
    
    
    15,245
    
    
    
    37,195
    
    
    
    47,026Research and development
    
    
    2,696
    
    
    
    3,739
    
    
    
    8,727
    
    
    
    11,013General and administrative
    
    
    3,178
    
    
    
    4,110
    
    
    
    9,816
    
    
    
    12,025Amortization of intangibles
    
    
    939
    
    
    
    1,150
    
    
    
    2,817
    
    
    
    3,254Total operating expenses
    
    
    24,323
    
    
    
    31,354
    
    
    
    79,040
    
    
    
    94,752Operating income
    
    
    8,448
    
    
    
    8,205
    
    
    
    24,776
    
    
    
    26,378Other income (expense)Royalty income
    
    
    692
    
    
    
    711
    
    
    
    2,279
    
    
    
    2,175Interest income
    
    
    283
    
    
    
    107
    
    
    
    1,041
    
    
    
    349Interest expense
    
    
    (412
    )
    
    
    (235
    )
    
    
    (1,893
    )
    
    
    (1,659
    )Other income
    
    
    (147
    )
    
    
    113
    
    
    
    964
    
    
    
    434Total other income
    
    
    416
    
    
    
    696
    
    
    
    2,391
    
    
    
    1,299Income before income taxes
    
    
    8,864
    
    
    
    8,901
    
    
    
    27,167
    
    
    
    27,677Income tax expense
    
    
    3,456
    
    
    
    1,961
    
    
    
    10,612
    
    
    
    8,946Net income
    
    $
    5,408
    
    
    $
    6,940
    
    
    $
    16,555
    
    
    $
    18,731Net income per shareBasic
    
    $
    0.17
    
    
    $
    0.21
    
    
    $
    0.51
    
    
    $
    0.57Diluted
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.55Weighted average common shares used in calculationBasic
    
    
    32,321
    
    
    
    32,974
    
    
    
    32,155
    
    
    
    32,773Diluted
    
    
    34,205
    
    
    
    34,455
    
    
    
    34,230
    
    
    
    34,193


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

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

Nine months throughSeptember2002
    
    
    2003Cash flows from operating activitiesNet income
    
    $
    16,555
    
    
    $
    18,731Adjustments to reconcile net income to
net cash provided by operating activitiesDepreciation
    
    
    2,873
    
    
    
    4,447Amortization of intangibles
    
    
    2,817
    
    
    
    3,254Deferred financing costs
    
    
    205
    
    
    
    203Non-cash deferred compensation
    
    
    136
    
    
    
    108Non-cash stock-based compensation
    
    
    9
    
    
    
    21Income tax benefit related to stock option plan
    
    
    1,124
    
    
    
    1,227Change in net deferred taxes
    
    
    1,264
    
    
    
    822Changes in operating assets and liabilities:Accounts receivable
    
    
    435
    
    
    
    (1,234
    )Inventories
    
    
    550
    
    
    
    (3,701
    )Accounts payable and accrued expenses
    
    
    (6,861
    )
    
    
    (423
    )Other assets
    
    
    (1,622
    )
    
    
    (1,065
    )Net cash provided by operating activities
    
    
    17,485
    
    
    
    22,390Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (1,195
    )
    
    
    (3,202
    )Purchases of businesses
    
    
    
    
    
    
    (43,152
    )Purchase of short and long-term investments
    
    
    (9,446
    )
    
    
    Sale of short and long-term investments
    
    
    37,242
    
    
    
    Net cash provided by (used in) investing activities
    
    
    26,601
    
    
    
    (46,354
    )Cash flows from financing activitiesIssuance of common stock
    
    
    1,936
    
    
    
    2,064Payments on long-term debt
    
    
    (3,546
    )
    
    
    (4,956
    )Net cash used in financing activities
    
    
    (1,610
    )
    
    
    (2,892
    )Effect of exchange rates
    
    
    570
    
    
    
    1,376Net increase (decrease) in cash and cash equivalents
    
    
    43,046
    
    
    
    (25,480
    )Cash and cash equivalents at beginning of period
    
    
    28,755
    
    
    
    79,429Cash and cash equivalents at end of period
    
    $
    71,801
    
    
    $
    53,949Supplemental disclosureCash paid for interest
    
    $
    852
    
    
    $
    1,474Cash paid for taxes
    
    $
    7,726
    
    
    $
    6,955


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

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American Medical Systems Holdings Inc.
Notes to Consolidated Financial Statements
(Unaudited)



|1. |  | Basis of Presentation
|-- |  | ---------------------

The consolidated financial statements included in this Form 10-Q have been
prepared by American Medical Systems Holdings Inc. without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). The
consolidated financial statements include the accounts of the Company and its
subsidiaries, and all significant inter-company accounts and transactions are
eliminated in consolidation. Certain information and footnote disclosure
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 all adjustments (which include only normal, recurring
adjustments) management believes are necessary for a fair presentation of the
financial position and the results of operations and cash flows for the periods
presented. Our business has seasonal fluctuations in both revenue and
expenses, and the results of operations for any interim period are not
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.

Nine months throughSeptember2002
    
    
    2003Net income, as reported
    
    $
    16,555
    
    
    $
    18,731Add: Stock-based employee compensation
expense included in reported income, net of tax effects
    
    
    84
    
    
    
    68Subtract: Total stock-based employee
compensation expense determined under fair-value based method for all awards, net of tax effects
    
    
    (2,486
    )
    
    
    (3,359
    )Pro forma net income
    
    $
    14,153
    
    
    $
    15,440Earnings per shareAs reportedBasic
    
    $
    0.51
    
    
    $
    0.57Diluted
    
    $
    0.48
    
    
    $
    0.55Pro formaBasic
    
    $
    0.44
    
    
    $
    0.47Diluted
    
    $
    0.41
    
    
    $
    0.45


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|3. |  | Earnings per Share
|-- |  | ------------------

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

Three months through
    
    
    Nine months throughSeptember
    
    
    September2002
    
    
    2003
    
    
    2002
    
    
    2003Net Income
    
    $
    5,408
    
    
    $
    6,940
    
    
    $
    16,555
    
    
    $
    18,731Weighted-average shares
outstanding for basic income per share
    
    
    32,321
    
    
    
    32,974
    
    
    
    32,155
    
    
    
    32,773Dilutive effect of stock options
    
    
    1,884
    
    
    
    1,481
    
    
    
    2,075
    
    
    
    1,420Adjusted weighted-average
shares outstanding and assumed
conversion for diluted income per share
    
    
    34,205
    
    
    
    34,455
    
    
    
    34,230
    
    
    
    34,193Basic net income per share
    
    $
    0.17
    
    
    $
    0.21
    
    
    $
    0.51
    
    
    $
    0.57Diluted net income per share
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.55




|4. |  | Inventories
|-- |  | -----------

Inventories consist of the following:

December 28, 2002
    
    
    September 27, 2003Raw materials
    
    $
    4,147
    
    
    $
    5,210Work-in process
    
    
    1,938
    
    
    
    2,787Finished goods
    
    
    10,138
    
    
    
    13,469Obsolescence allowance
    
    
    (2,748
    )
    
    
    (2,778
    )Total, net
    
    $
    13,475
    
    
    $
    18,688




|5. |  | Warranties
|-- |  | ----------

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

Many of the Companys products are sold with warranty coverage for periods
ranging from one year up to the patients lifetime. The accrued warranty
allowance is our estimate of the expected future cost of honoring current
warranty obligations. Factors influencing this estimate include historical
claim rates, surgical infection rates, changes in product performance, the
frequency of use by the patient, and the patients performance expectations.
Beginning and ending balances; and changes in warranty allowances during the
nine months through September 2003 were as follows:

Balance at beginning of period
    
    $
    4,526Balance assumed from CryoGen acquisition
    
    
    113Provisions for warranty
    
    
    157Claims processed
    
    
    (228
    )Balance at end of period
    
    $
    4,568


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|6. |  | Acquisitions
|-- |  | ------------

CryoGen

On December 30, 2002, the Company completed a merger with CryoGen Inc. under
which CryoGen became a wholly-owned subsidiary of the Company. In conjunction
with the merger, the Company paid the former shareholders of CryoGen $36.2
million and paid $4.7 million of acquisition-related costs. In addition to the
initial consideration for the CryoGen acquisition, CryoGens former
shareholders may receive an earnout payment equal to three times the sales of
CryoGens products during any four consecutive quarters ending three years
after closing, less $40 million. If net product revenues attributable to sales
of CryoGens products during any such four-quarter period do not exceed $13.3
million, no earnout payment will be made. The maximum amount of the earnout
payment is $110 million. This payment, if any, will be accounted for as
goodwill. The primary purpose of the CryoGen acquisition was to gain access to
CryoGens products and technology and further the Companys strategy of
developing more and better treatments to improve womens health. The Company
believes that many women with the incontinence and other pelvic disorders it
treats (through urologists and gynecologists) also suffer from menorrhagia and
uterine fibroids, and the Companys investments in these markets would allow it
to extend the benefits of the CryoGen products and technology to these women
more efficiently and effectively than CryoGen could. The Company also believes
that by broadening its offerings beyond incontinence treatments, it could offer
more value to its physician-customers. The Company believes as many as
150,000 American women every year suffer from hysterectomies that might be
avoided by using less invasive treatments such as Her Option. The primary
advantage of Her Optionover other less-invasive treatments is cost: the
Company believes a gynecologist could use the Her Optionto cure menorrhagia
without monitored anesthesia, with significant savings to the healthcare
system. The consolidated financial statements of the Company for the three and
nine-month periods through September 2003, include the financial results of
CryoGen from December 30, 2002, the date the purchase transaction was
effective.

The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed as a result of this acquisition:

AssetsCurrent assets
    
    $
    1,514Goodwill
    
    
    18,803Intangible assets
    
    
    9,809Deferred tax asset
    
    
    9,775Other long-term assets
    
    
    4,394Total assets acquired
    
    
    44,295LiabilitiesCurrent liabilities
    
    
    2,727Notes payable
    
    
    592Total liabilities assumed
    
    
    3,319Net assets acquired
    
    $
    40,976


Following are pro forma amounts assuming the acquisition was made at the
beginning of 2002:

Three months through
    
    
    Nine months throughSeptember
    
    
    September2002
    
    
    2003
    
    
    2002
    
    
    2003Pro forma
    
    
    Reported
    
    
    Pro forma
    
    
    ReportedRevenue
    
    $
    33,600
    
    
    $
    39,559
    
    
    $
    105,864
    
    
    $
    121,130Net Income
    
    $
    4,031
    
    
    $
    6,940
    
    
    $
    11,541
    
    
    $
    18,731Earnings per shareBasic
    
    $
    0.12
    
    
    $
    0.21
    
    
    $
    0.36
    
    
    $
    0.57Diluted
    
    $
    0.12
    
    
    $
    0.20
    
    
    $
    0.34
    
    
    $
    0.55


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Dura II

On April 7, 2003, the Company acquired the Dura II line of erectile restoration
products from Endocare Inc. The Company paid Endocare $2.2 million for all
intellectual property, production equipment, and current Dura II inventory.
The primary purpose of this acquisition was to fill the void in the Companys
product line between its inflatable prostheses and its non-inflatable products
with a non-inflatable, adjustable product.

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

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


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 and nine months through September, 2002 and 2003, were:

Three months through
    
    
    Nine months throughSeptember
    
    
    
    
    
    
    September2002
    
    
    2003
    
    
    2002
    
    
    2003Net income
    
    $
    5,408
    
    
    $
    6,940
    
    
    $
    16,555
    
    
    $
    18,731Net loss on derivative
financial instruments, net of taxes
    
    
    (286
    )
    
    
    
    
    
    
    (328
    )
    
    
    (5
    )Amounts reclassified to interest
expense during the period from
derivative and hedging activities,
net of taxes
    
    
    246
    
    
    
    
    
    
    
    727
    
    
    
    464Unrealized losses on marketable
securities, net of taxes
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    Cumulative translation adjustment, net of taxes
    
    
    166
    
    
    
    689
    
    
    
    946
    
    
    
    1,761Comprehensive income
    
    $
    5,603
    
    
    $
    7,629
    
    
    $
    17,900
    
    
    $
    20,951




|8. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company is required to
apply FIN 46 to all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, management is required to apply FIN 46 for periods ending
after December 15, 2003. The Company is evaluating the impact of this
interpretation.

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9. Goodwill and Intangible Assets

Intangible Assets
The following table presents the Companys intangible assets and amortizations as of September 27, 2003:

Gross carrying
    
    
    Accumulated
    
    
    Net bookamount
    
    
    amortization
    
    
    valueAmortized intangible assetsPatents, trademarks
    
    $
    10,164
    
    
    $
    (5,187
    )
    
    $
    4,977Licenses
    
    
    2,787
    
    
    
    (950
    )
    
    
    1,837Deferred financing
    
    
    1,611
    
    
    
    (1,094
    )
    
    
    517Developed technology
    
    
    21,473
    
    
    
    (8,487
    )
    
    
    12,986Non-compete agreements
    
    
    1,111
    
    
    
    (1,111
    )
    
    
    Total amortized intangible assets
    
    $
    37,146
    
    
    $
    (16,829
    )
    
    $
    20,317Unamortized
intangible assets  trademarks
    
    $
    2,208
    
    
    $
    (450
    )
    
    $
    1,758Total Intangible Assets
    
    $
    39,354
    
    
    $
    (17,279
    )
    
    $
    22,075


Aggregate amortization expense

2002
    
    
    2003For the nine months through September
    
    $
    2,817
    
    
    $
    3,254


Estimated amortization expense

The estimated amortization expense for each of the years 2004 through 2007 is $4.8 million.

Goodwill
The changes in the carrying amount of goodwill for the nine-months ended September 27, 2003, are as follows:

Balance as of December 29, 2002
    
    $
    80,607Goodwill acquired during the year
    
    
    20,601Balance as of September 27, 2003
    
    $
    101,208


10. Income Taxes
During the third quarter of 2003, the Company recognized a one-time tax benefit
of $1.1 million resulting from the implementation of certain tax planning
strategies, increasing net income by $1.1 million, or $0.03 per share. The
Company also changed its estimated effective annual income tax rate from 37.2
percent to 36.3 percent. This reduced the provision for income taxes by
$250,000 in the three and nine months through September 2003 from what they
would have been without this change in estimate.

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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 esti-mate, 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 Risk 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
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
risks, inventories, long-lived assets, warranty, legal contingencies, and
income taxes. The critical accounting policies that are most important in fully
understanding and evaluating the financial condition and results of operations
are discussed in our most recent Annual Report on Form 10-K on file with the
SEC. During the third quarter of 2003 we determined that our use of certain
tax credits would result in a lower effective annual income tax rate, and we
adjusted our estimated effective annual income tax rate from 37.2 percent to
36.3 percent. This reduced our provision for income taxes by $250,000 in the
three and nine months through September 2003 from what they would have been
without this change in estimate.

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
menorrhagia, incontinence, 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 discusses the results of operations and financial condition for
the third fiscal quarter and first nine months of 2003 compared to the third
fiscal quarter and first nine months of 2002.

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

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##### Table of Contents



The following tables show changes in the net sales by product lines and
geography in 2002 and 2003:

Consolidated SalesThree months throughSeptember
    
    
    Increase (Decrease)
    
    
    Shares of total sales2002
    
    
    2003
    
    
    Amount
    
    
    Percent
    
    
    2002
    
    
    2003By product lineErectile restoration
    
    $
    16,207
    
    
    $
    17,059
    
    
    $
    852
    
    
    
    5.3
    %
    
    
    49
    %
    
    
    43
    %Mens healthMale urinary control
    
    
    8,295
    
    
    
    8,774
    
    
    
    479
    
    
    
    5.8
    %
    
    
    25
    %
    
    
    22
    %Other
    
    
    1,269
    
    
    
    1,188
    
    
    
    (81
    )
    
    
    -6.4
    %
    
    
    4
    %
    
    
    3
    %Womens health
    
    
    7,000
    
    
    
    12,538
    
    
    
    5,538
    
    
    
    79.1
    %
    
    
    21
    %
    
    
    32
    %Total
    
    $
    32,771
    
    
    $
    39,559
    
    
    $
    6,788
    
    
    
    20.7
    %
    
    
    100
    %
    
    
    100
    %By geographyUnited States
    
    $
    27,376
    
    
    $
    33,023
    
    
    $
    5,647
    
    
    
    20.6
    %
    
    
    84
    %
    
    
    83
    %Outside United States
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    %Before currency impact
    
    
    5,395
    
    
    
    5,921
    
    
    
    526
    
    
    
    9.7
    %
    
    
    16
    %
    
    
    15
    %With currency impact
    
    
    0
    
    
    
    615
    
    
    
    615
    
    
    
    
    
    
    
    0
    %
    
    
    2
    %Total
    
    
    5,395
    
    
    
    6,536
    
    
    
    1,141
    
    
    
    21.1
    %
    
    
    16
    %
    
    
    17
    %Total
    
    $
    32,771
    
    
    $
    39,559
    
    
    $
    6,788
    
    
    
    20.7
    %
    
    
    100
    %
    
    
    100
    %


Consolidated SalesNine months throughSeptember
    
    
    Increase (Decrease)
    
    
    Shares of total sales2002
    
    
    2003
    
    
    Amount
    
    
    Percent
    
    
    2002
    
    
    2003By product lineErectile restoration
    
    $
    51,293
    
    
    $
    52,877
    
    
    $
    1,584
    
    
    
    3.1
    %
    
    
    49
    %
    
    
    44
    %Mens healthMale urinary control
    
    
    26,439
    
    
    
    29,784
    
    
    
    3,345
    
    
    
    12.7
    %
    
    
    26
    %
    
    
    25
    %Other
    
    
    4,583
    
    
    
    3,696
    
    
    
    (887
    )
    
    
    -19.4
    %
    
    
    4
    %
    
    
    3
    %Womens health
    
    
    21,501
    
    
    
    34,773
    
    
    
    13,272
    
    
    
    61.7
    %
    
    
    21
    %
    
    
    29
    %Total
    
    $
    103,816
    
    
    $
    121,130
    
    
    $
    17,314
    
    
    
    16.7
    %
    
    
    100
    %
    
    
    100
    %By geographyUnited States
    
    $
    86,203
    
    
    $
    99,289
    
    
    $
    13,086
    
    
    
    15.2
    %
    
    
    83
    %
    
    
    82
    %Outside United StatesBefore currency impact
    
    
    17,613
    
    
    
    19,189
    
    
    
    1,576
    
    
    
    8.9
    %
    
    
    17
    %
    
    
    16
    %With currency impact
    
    
    0
    
    
    
    2,652
    
    
    
    2,652
    
    
    
    
    
    
    
    0
    %
    
    
    2
    %Total
    
    
    17,613
    
    
    
    21,841
    
    
    
    4,228
    
    
    
    24.0
    %
    
    
    17
    %
    
    
    18
    %Total
    
    $
    103,816
    
    
    $
    121,130
    
    
    $
    17,314
    
    
    
    16.7
    %
    
    
    100
    %
    
    
    100
    %


Approximately $.6 million of the sales increase during the three months through
September 2003 and $2.7 million of the increase in the nine months through
September 2003 were 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 third quarter of 2003 would
have been $38.9 million, an increase of $6.2 million, or 18.8 percent, and
total sales for the nine months through September 2003 would have been $118.4
million, an increase of $14.7 million, or 14.1 percent.

Erectile restoration sales in the three and nine-month periods through
September 2003 increased 5 percent and 3 percent, mostly from a continuing
shift to our InhbiZonetreated implants. These drug-eluting prostheses are now
67 percent of our inflatable prostheses volume, an increase from 55 percent in
the third quarter of 2002. Sales of products to treat male incontinence,
generally following nerve or muscle damage from prostate surgery, continued to
grow in the three and nine-month periods, with approximately half of the growth
from increased procedures. Sales of other mens products for prostate disease,
accounting for 3 percent of consolidated sales, decreased slightly. Increases
in sales of womens health products were primarily due to greater unit sales of
Sparcand Monarcsystems for stress urinary incontinence. These products now
comprise approximately 60 and 20 percent of our volume for

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this disease; we expect continued growth as more data on the value of these
procedures are published and as we expand our physician training program. Net
sales of Her Optionproducts were approximately $1.0 million and $2.7 million
in the three and nine-month periods through September. Sales of Her Option
products were less than we had expected at the time of our acquisition of
CryoGen in December 2002 due to unexpected difficulty in obtaining
reimbursement for this procedure from third party payers. We have begun the
process of obtaining a Category I CPT code, which we believe will facilitate
physician reimbursement and increase physician support for the Her Option
procedure; we expect the American Medical Association to issue the necessary
Category I CPT code in 2005.

The following tables show changes in the revenue, expense, and other income
accounts in 2002 and 2003.

Three months throughSeptember
    
    
    Change2002
    
    
    2003
    
    
    Amount
    
    
    PercentNet sales
    
    $
    32,771
    
    
    $
    39,559
    
    
    $
    6,788
    
    
    
    21
    %Operating expensesCost of goods sold
    
    
    6,233
    
    
    
    7,110
    
    
    
    877
    
    
    
    14
    %Marketing and selling
    
    
    11,277
    
    
    
    15,245
    
    
    
    3,968
    
    
    
    35
    %Research and development
    
    
    2,696
    
    
    
    3,739
    
    
    
    1,043
    
    
    
    39
    %General and administrative
    
    
    3,178
    
    
    
    4,110
    
    
    
    932
    
    
    
    29
    %Amortization of intangibles
    
    
    939
    
    
    
    1,150
    
    
    
    211
    
    
    
    22
    %Total operating expenses
    
    
    24,323
    
    
    
    31,354
    
    
    
    7,031
    
    
    
    29
    %Operating income
    
    
    8,448
    
    
    
    8,205
    
    
    
    (243
    )
    
    
    -3
    %Other income (expense)Royalty income
    
    
    692
    
    
    
    711
    
    
    
    19
    
    
    
    3
    %Interest income
    
    
    283
    
    
    
    107
    
    
    
    (176
    )
    
    
    -62
    %Interest expense
    
    
    (412
    )
    
    
    (235
    )
    
    
    177
    
    
    
    43
    %Other income
    
    
    (147
    )
    
    
    113
    
    
    
    260
    
    
    
    177
    %Total other income
    
    
    416
    
    
    
    696
    
    
    
    280
    
    
    
    67
    %Income before income taxes
    
    
    8,864
    
    
    
    8,901
    
    
    
    37
    
    
    
    0
    %Income tax expense
    
    
    3,456
    
    
    
    1,961
    
    
    
    (1,495
    )
    
    
    -43
    %Net income
    
    $
    5,408
    
    
    $
    6,940
    
    
    $
    1,532
    
    
    
    28
    %


Nine months throughSeptember
    
    
    Change2002
    
    
    2003
    
    
    Amount
    
    
    PercentNet sales
    
    $
    103,816
    
    
    $
    121,130
    
    
    $
    17,314
    
    
    
    17
    %Operating expensesCost of goods sold
    
    
    20,485
    
    
    
    21,434
    
    
    
    949
    
    
    
    5
    %Marketing and selling
    
    
    37,195
    
    
    
    47,026
    
    
    
    9,831
    
    
    
    26
    %Research and development
    
    
    8,727
    
    
    
    11,013
    
    
    
    2,286
    
    
    
    26
    %General and administrative
    
    
    9,816
    
    
    
    12,025
    
    
    
    2,209
    
    
    
    23
    %Amortization of intangibles
    
    
    2,817
    
    
    
    3,254
    
    
    
    437
    
    
    
    16
    %Total operating expenses
    
    
    79,040
    
    
    
    94,752
    
    
    
    15,712
    
    
    
    20
    %Operating income
    
    
    24,776
    
    
    
    26,378
    
    
    
    1,602
    
    
    
    6
    %Other income (expense)Royalty income
    
    
    2,279
    
    
    
    2,175
    
    
    
    (104
    )
    
    
    -5
    %Interest income
    
    
    1,041
    
    
    
    349
    
    
    
    (692
    )
    
    
    -66
    %Interest expense
    
    
    (1,893
    )
    
    
    (1,659
    )
    
    
    234
    
    
    
    12
    %Other income
    
    
    964
    
    
    
    434
    
    
    
    (530
    )
    
    
    -55
    %Total other income (expense)
    
    
    2,391
    
    
    
    1,299
    
    
    
    (1,092
    )
    
    
    -46
    %Income before income taxes
    
    
    27,167
    
    
    
    27,677
    
    
    
    510
    
    
    
    2
    %Income tax expense
    
    
    10,612
    
    
    
    8,946
    
    
    
    (1,666
    )
    
    
    -16
    %Net income
    
    $
    16,555
    
    
    $
    18,731
    
    
    $
    2,176
    
    
    
    13
    %


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Cost of goods sold.Cost of goods sold decreased as a percentage of sales
relative to comparable periods in 2002 due mainly to production volume, mix
changes, and the impact of favorable foreign currency exchange rates. Cost of
goods sold as a share of sales has generally benefited from relatively fixed
overhead costs, which account for more than a quarter of our costs of goods
sold, being spread over higher manufacturing volumes, including higher volumes
for increased inventory. Future cost of goods sold will continue to depend on
production levels and product mix.

Marketing and selling.Marketing and selling activities increased relative to
comparable periods in 2002 as we expanded our work with gynecologists for Her
Optionand our other womens health products, and with patients with erectile
dysfunction. Increased spending for womens health products for the three and
nine-month period were $3.1 million and $8.6 million respectively. We expect
to continue these higher activity and spending levels going forward, although
we expect them to decline as a share of sales as our sales increase. In
addition, during the first nine months of 2003, we incurred approximately $1.2
million of costs to consolidate much of our European marketing and selling
operations into a new shared service center in Amsterdam. We expect selling
and marketing expense to continue to increase at about 20 percent of the sales
increase going forward.

Research and development.Research and development expense includes costs to
develop and improve current and possible future products plus the costs for
regulatory and clinical activities for these products. Cost increases during
the three months and nine months through September 2003 of $0.3 million and
$0.9 million respectively were to support Her Optionproducts. We expect total
spending in research and development to also be greater in the fourth quarter
of in 2003 than in 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.

General and administrative.Major cost increases during the three and
nine-month periods through September 2003 compared to the same periods in 2002
were due to approximately $0.3 million and $1.1 million of additional costs
related to the CryoGen operation and $0.2 million and $0.5 million of costs to
support the extension of systems to our European offices. The Sarbanes-Oxley
Act that became law in July 2002 has increased the focus on our financial
reporting principles public disclosure, and compliance practices. We have
incurred additional costs for additional personnel and resources to comply with
the Sarbanes-Oxley Act and related regulations. We expect our costs to comply
with the legal and financial requirements of the Sarbanes-Oxley Act and related
regulations to continue to increase in future periods.

Amortization of intangibles.During the second quarter of 2003, we began
amortizing the definite-lived intangible assets from the CryoGen acquisition,
and during the third quarter of 2003 we began amortizing the definite-lived
intangible assets from the Dura IIacquisition. We expect amortization of
intangibles to be approximately $1.2 million in future quarters.

Royalty income.Most of our royalty income is from the license of our
stent-delivery technology for medical use outside of urology. This perpetual
exclusive worldwide license was entered into in 1998, with expiration
immediately following the term of the various licensed patents. We receive a
royalty equal to 2.625% of net sales of license products on a quarterly basis,
which accounted for $0.7 million and $2.2 million in income for the three and
nine-month periods of 2003. We do not directly influence sales of the products
on which this royalty is based and cannot assure you that they will continue at
current levels, or at all.

Other income.In the first quarter of 2002, we terminated the AMS Retirement
Annuity Plan. At the time of this termination, we contributed approximately
$5.8 million to the pension plan and recorded a gain on pension plan
termination of $0.7 million. We made this contribution to the pension plan to
fully fund under-funded pension plan liabilities that had accrued due to
declining investment balances in the plan and low interest rates, and to fund
early retirement benefits. Substantially all of the remainder of other income
and expense result from translating foreign denominated inter-company
receivables, mainly the Euro, 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 $41.0 million used for the CyroGen acquisition, $2.0 used for the
Dura IIacquisition, and $3.2 million for capital equipment, offset somewhat by
$22.4 million in cash from operations and $2.1 million from the sale of common
stock.

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

Income taxes.We believe our use of certain federal and state tax credits will
result in a lower effective tax rate for 2003 (36.3 percent) than in 2002 when
our effective tax rate was 38.7 percent. This change reduced our income tax
expense by $250,000 in the three and nine months through September 2003.
During the third quarter of 2003 we also recognized a one-time tax benefit of
$1.1 million resulting from the implementation of certain tax planning
strategies.

Liquidity and Capital Resources

Cash and cash equivalents were $53.9 million on September 27, 2003, compared to
$79.4 million on December 28, 2002. This decrease is due primarily to the cash
paid for acquisitions, debt repayment, and capital expenditures, offset
somewhat by cash from operations and the sale of common stock. Each of these
is described below.

Cash flows from operating activities.Net cash from operations was $22.4
million. This differs from net income of $18.7 million because of certain
expenses including depreciation and amortization of $7.9 million and deferred
and accrued taxes of $2.0 million which did not require cash payments during
the nine month period, and cash paid to increase inventories by $3.7 million
which will be expensed as cost of goods sold when the inventory is sold. A
significant share of the inventory increase was for new products: Her Option,
$1.3 million; Dura II, $0.8 million; and Monarc, $0.6 million. Further, we have
not yet received payment for $1.2 million of product sold during the period.
Accounts receivable increased by $2.6 million during the period from an
unrealized currency gain of $0.9 million and $0.5 million in CryoGen accounts
receivable, in addition to the $1.2 million increase from operations.

Cash flows from investing activities.On December 30, 2002, we acquired
CryoGen Inc. for cash payments totaling approximately $36.2 million that we
paid to former CryoGen shareholders, $3.8 million that we paid on behalf of
CryoGen for transaction related expenses, and approximately $0.9 million of our
own capitalized acquisition expenses. On April 7, 2003, we acquired the Dura
IIerectile restoration product line from Endocare Inc. for $2.2 million.
During the first nine months of 2003, we purchased equipment for $3.2 million.
We expect capital expenditures to continue in the range of $3.0 to $4.0 million
annually.

Cash flows from financing activities.We have a senior credit facility,
consisting of term debt and a $15 million revolving line of credit. The senior
credit facility expires in September 2005. This facility is secured by
substantially all of our assets, and contains financial covenants concerning
the payment of dividends, incurrence of additional debt, and capital
expenditures. In addition, we are subject to, and in full compliance with four
financial covenants: a leverage ratio, an interest coverage ratio, a fixed
charge coverage ratio, and a required minimum level of consolidated EBITDA.

The following table sets forth these covenants and our compliance as of
September 27, 2003:

Credit facility
    
    Company ratio as ofrequirements
    
    September 27, 2003CovenantLeverage ratio
    
    <2.50
    
    0.40Interest coverage ratio
    
    >3.00
    
    25.46Fixed charge coverage ratio
    
    >1.25
    
    4.76Minimum consolidated EBITDA
    
    >$36.0 million
    
    $53.1 million


During the first nine months of 2003, we made regular principal payments of
$4.4 million reducing the quarter-end balance to $19.6 million. As of
September 27, 2003, the interest rate on outstanding balances was equal to
LIBOR plus 2.0 percent points, or 3.12 percent. We do not have an outstanding
balance under the revolving line of credit. We pay a commitment fee on the
revolving line of credit equal to .25 percent of the unused portion of the line
of credit. In addition to the above senior credit facility payments made
during 2003, we paid $0.6 million of debt acquired as part of the CryoGen
acquisition on December 30, 2002.

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

Payments due
by periodLess than
    
    
    One to
    
    
    Four toTotal
    
    one year
    
    
    three years
    
    
    five yearsFuture payment obligation
    
    $
    19,636
    
    $
    6,750
    
    
    $
    12,886
    
    
    
    


During the first nine months of 2003, we received $2.1 million from issuing
common stock for our Employee Stock Purchase Plan and for the exercises of
options under our 2000 Equity Incentive Plan.

Cash Commitments

On December 30, 2002, we completed a merger with CryoGen Inc. We made an
initial payment for the benefit of former CryoGen shareholders of $36.2 million
and paid $4.7 million of acquisition-related costs. We deposited $3.0 million
of the initial shareholder consideration in escrow to be held for eighteen months
after closing of the merger to cover certain contingencies. In addition to the
initial consideration for the CryoGen acquisition, CryoGens former
shareholders may receive an earn-out payment equal to three times our sales of
CryoGens products during any four consecutive quarters ending three years
after closing, less $40 million. If our net product revenues attributable to
sales of CryoGens products during any such four-quarter period do not exceed
$13.3 million, no earn-out payment will be made. The maximum amount of the
earn-out payment is $110 million. Sales for the four-quarter period required
to achieve the maximum earn-out would be $50 million. CryoGen product sales
for the three and nine-month periods of 2003 were $1.0 million and $2.7
million. We expect to make any earn-out payment with funds generated from
operations together with borrowing capabilities. The representative
of the former Cryogen shareholders has made a claim for a purchase
price adjustment based on Cryogens net equity at the time of
closing of the transaction. While we do not believe the former
Cryogen shareholders are entitled to a purchase price adjustment, we
are negotiating with the representative of the former Cryogen
shareholders to resolve this dispute. We do not believe that the
resolution will be material to us.
This transaction is more
fully described in our Form 8-K filed with the SEC on January 6, 2003.

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

Risk Factors

There are several factors that could cause our actual results to differ
materially from our anticipated results. Some of these factors, and their
impact on the success of our operations and our ability to achieve our goals,
are discussed below:

Continued Physician Use and Endorsement of our Products

In order for us to sell our products, physicians must recommend and endorse
them. We may not obtain the necessary recommendations or endorsements from
physicians. Many of the products we acquired or are developing are based on
new treatment methods. Acceptance of our products is dependent on educating
the medical community as to the distinctive characteristics, perceived
benefits, clinical efficacy, and cost-effectiveness of our products compared to
competitive products, and on training physicians in the proper application of
our products. For example, during 2003 we have committed significant marketing
and selling resources to making the Monarcsub-fascial hammock for urinary
incontinence, and Her Optiontherapy for excessive uterine bleeding available
to physicians and their patients. We believe both of these products address
major market opportunities, but if we are unsuccessful in marketing either of
them, our sales and earnings may be below expectations.

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.

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Continued Use of Non-Invasive Treatment Alternatives

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

Actions Related to Reimbursement for Procedures using our Products

Some portions of our revenues depend 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. For example,
effective January 1, 2003, the Centers for Medicare and Medicaid Services (CMS)
again reduced the hospital payment rates for certain procedures in which our
products are used. We do not believe these reductions have had a material
adverse effect on our sales or earnings in 2003, but we do not know if
hospitals that treat Medicare and Medicaid patients have prohibited physicians
from performing procedures using our products. While CMS has announced it will
increase some of these procedure reimbursement rates effective January 1, 2004,
we do not know whether these increases will be sufficient incentive for
hospitals to allow or encourage physicians to provide services using our
products. Further, in the United States there have been, and we expect that
there will continue to be, a number of federal and state proposals to control
health care costs. Government and private insurers, both inside and outside of
the United States, may lower their reimbursement rates in the future, which
could adversely affect future hospital and physician support for our products.

Supplier Risks

Many of our products are dependent on raw materials from one or two
suppliers. These suppliers may not be able to meet our demands or may stop
supplying us because of their concerns about product liability claims or other
reasons beyond our control. Losing any of these raw material suppliers could
have a material adverse effect on our sales and income. As a result of recent
supplier consolidations, we now rely on only one source for the silicone
elastomer used in some of our implantable products, and we believe
that the loss of this supplier would have a material adverse effect
on our cost of goods sold and income.

Costs of Physician Malpractice Insurance

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

Potential Product Recalls

In the event that any of our products were defective, we could voluntarily
recall, or the FDA could require us to redesign or implement a recall of, any
defective product. There is a possibility that we may recall products in the
future and that future recalls could result in significant costs to us and in
significant negative publicity which could harm our ability to market our
products in the future.

Product Liability Lawsuits

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

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Acquisition Integration

On December 30, 2002, we acquired CryoGen which we initially maintained as a
San Diego-based subsidiary. On August 11, 2003, we announced our decision to
combine our CryoGen operations from San Diego into our Minnetonka facility.
Maintenance and growth of this business will depend on our ability to retain
key employees, move manufacturing, product development and service, and other
critical functions, and our ability to obtain appropriate FDA and other
regulatory approvals to carry on manufacturing and related activates in
Minnetonka.

Seasonality

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

ADDITIONAL INFORMATION ON AMS

We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended. As a result, we are required to file periodic reports and
other information with the (SEC), such as annual, quarterly, and current
reports, and proxy and information statements. You are advised to read this
report in conjunction with the other reports, proxy statements, and other
documents we file from time to time with the SEC. If you would like more
information regarding AMS, you may read and copy the reports, proxy and
information statements and other documents we file with the SEC, at prescribed
rates, at the SECs public reference room at 450 Fifth Street, NW, Washington,
DC 20549. You may obtain information regarding the operation of the SECs
public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings
are also available to the public free of charge at the SECs website. 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 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, American Medical Systems Inc., 10700 Bren Road West, Minnetonka,
Minnesota 55343.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Hedging.We hedged a portion of our original $65.0 million
variable rate term note, as required by our senior credit facility, by entering
into an interest rate swap agreement in which we agreed to exchange, at
specified intervals, the calculated difference between the fixed interest rate
of the swap and the variable interest rate on a portion of our debt. This
interest rate swap agreement expired June 30, 2003.

Currency fluctuations.Our operations outside of the United States are
maintained in their local currency. All assets and liabilities of our
international subsidiaries are translated to U.S. dollars at quarter-end
exchange rates. Translation adjustments arising from the use of differing
exchange rates are included in accumulated other comprehensive income in
stockholders equity. For the first nine months of 2003, international sales,
accounts receivable, inventory, cash, and accounts payable represented 18
percent, 32 percent, 14 percent, 14 percent, and 23 percent, of total
consolidated accounts for each of these items. Changes in the relative value
of the U.S. dollar and the Euro would affect our sales, Euro-denominated
expenses, and the U.S. dollar value of European assets and liabilities. If
these changes were large and rapid, they could have a material effect on our
results of operations.

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

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ITEM 4. CONTROLS AND PROCEDURES



|a) |  | Evaluation of disclosure controls and procedures.Our chief executive
officer and chief financial officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q, have concluded that, based on such
evaluation, our disclosure controls and procedures were adequate and
designed to ensure that material information relating to us and our
consolidated subsidiaries, which we are required to disclose in the
reports we file or submit under the Securities Exchange Act of 1934, was
made known to them by others within those entities and reported within the
time periods specified in the Securities and Exchange Commissions rules
and forms.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|b) |  | Changes in internal controls over financial reporting.There were no
changes in our internal control over financial reporting identified in
connection with the evaluation of such internal control over financial
reporting that occurred during our last fiscal quarter which have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a)
        ExhibitsItem No.
        Item
        Method of Filing31.1
        Certification of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
        Filed with this Report.31.2
        Certification of Chief Financial
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
        Filed with this Report.32.1
        Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
        Filed with this Report.b)
    
    Reports on Form 8-K


On August 5, 2003, we filed a current report on Form 8-K furnishing under
Item 12 our press release reporting our financial results for the quarter ended
June 28, 2003.




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, INCNovember 10, 2003Date
    
    By
    
    \s\  Douglas W. KohrsDouglas W. Kohrs
Chief Executive OfficerNovember 10, 2003Date
    
    By
    
    \s\  M. James CallM. James Call
Executive Vice President and Chief Financial
Officer and Principal Accounting Officer


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