American Medical Systems (AMMD) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period endedSeptember 29, 2007

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.

þ Yes      o No          

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ      Accelerated filero      Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes     þ No          

     As of November 5, 2007 there were 72,236,943 shares of the registrant’s $.01 par value Common Stock outstanding.

INDEX

		Page
PART I	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)
	Consolidated Statements of Operations for the three and nine month periods ended September 29, 2007 and September 30, 2006		3
	Consolidated Balance Sheets as of September 29, 2007 and December 30, 2006		4
	Consolidated Statements of Cash Flow for the nine month periods ended September 29, 2007 and September 30, 2006		5
	Notes to Consolidated Financial Statements		6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		29
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		42
ITEM 4.	CONTROLS AND PROCEDURES		42
PART II	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		43
ITEM 6.	EXHIBITS		43
SIGNATURES			44
EXHIBIT INDEX			45
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification Pursuant to 18 U.S.C. Section 1350

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American Medical Systems Holdings, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006
Net sales	$	109,041		$	90,500		$	333,879		$	242,906
Cost of sales		24,441			18,865			77,925			42,302
Gross profit		84,600			71,635			255,954			200,604
Operating expenses
Marketing and selling		42,278			31,465			123,402			88,649
Research and development		9,918			9,295			32,047			22,849
In-process research and development		—			61,500			—			89,575
General and administrative		10,128			8,552			31,704			22,681
Integration costs		—			273			1,103			273
Amortization of intangibles		4,516			5,172			13,969			8,798
Total operating expenses		66,840			116,257			202,225			232,825
Operating income (loss)		17,760			(44,622	)		53,729			(32,221	)
Other (expense) income
Royalty income		3,482			479			4,664			1,340
Interest income		333			1,364			962			2,120
Interest expense		(9,460	)		(8,907	)		(28,681	)		(9,260	)
Financing charges		(1,130	)		(491	)		(2,667	)		(7,446	)
Other income		736			107			2,710			397
Total other (expense) income		(6,039	)		(7,448	)		(23,012	)		(12,849	)
Income (loss) from continuing operations before income taxes		11,721			(52,070	)		30,717			(45,070	)
Provision for income taxes		4,796			5,862			12,083			9,485
Net income (loss) from continuing operations		6,925			(57,932	)		18,634			(54,555	)
Loss from discontinued operations, net of tax benefit (see Note 3)		—			(672	)		(691	)		(672	)
Net income (loss)	$	6,925		$	(58,604	)	$	17,943		$	(55,227	)
Net income (loss) per share
Basic net earnings (loss) from continuing operations	$	0.10		$	(0.83	)	$	0.26		$	(0.78	)
Discontinued operations, net of tax		—			(0.01	)		(0.01	)		(0.01	)
Basic net earnings (loss)	$	0.10		$	(0.84	)	$	0.25		$	(0.79	)
Diluted net earnings (loss) from continuing operations	$	0.09		$	(0.83	)	$	0.25		$	(0.78	)
Discontinued operations, net of tax		—			(0.01	)		(0.01	)		(0.01	)
Diluted net earnings (loss)	$	0.09		$	(0.84	)	$	0.24		$	(0.79	)
Weighted average common shares used in calculation
Basic		72,166			70,122			72,001			69,877
Diluted		73,740			70,122			73,605			69,877

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

3

American Medical Systems Holdings, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share data)

	September 29, 2007		December 30, 2006
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	23,612	$	29,051
Short term investments		639		490
Accounts receivable, net		99,268		91,938
Inventories, net		59,884		37,974
Deferred income taxes		10,832		11,065
Other current assets		10,003		21,572
Assets of discontinued operations		—		46,078
Total current assets		204,238		238,168
Property, plant and equipment, net		55,513		47,035
Goodwill		702,519		677,053
Developed and core technology, net		98,325		110,634
Other intangibles, net		48,869		50,022
Investment in technology and other assets		1,740		1,148
Other long-term assets, net		2,636		3,031
Total assets	$	1,113,840	$	1,127,091
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	18,286	$	15,430
Accrued compensation expenses		17,925		17,019
Accrued warranty expense		3,594		2,715
Income taxes payable		4,092		—
Other accrued expenses		30,356		47,891
Liabilities of discontinued operations		—		19,478
Total current liabilities		74,253		102,533
Long-term debt		667,664		713,456
Deferred income taxes		29,760		22,296
Long-term income taxes payable		9,683		4,584
Long-term employee benefit obligations		3,060		3,060
Total liabilities		784,420		845,929
Stockholders’ equity
Common stock, par value $.01 per share; authorized 220,000,000 shares; issued and outstanding:
72,187,224 shares at September 29, 2007 and 71,059,312 shares at December 30, 2006		722		711
Additional paid-in capital		280,747		253,127
Accumulated other comprehensive income		7,102		4,155
Retained earnings		40,849		23,169
Total stockholders’ equity		329,420		281,162
Total liabilities and stockholders’ equity	$	1,113,840	$	1,127,091

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

4

American Medical Systems Holdings, Inc.

Consolidated Statements of Cash Flow

(In thousands)

(Unaudited)

	Nine Months Ended
	September 29, 2007			September 30, 2006
Cash flows from operating activities
Net income (loss)	$	17,943		$	(55,227	)
Loss from discontinued operations		(691	)		(672	)
Income (loss) from continuing operations		18,634			(54,555	)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities
Depreciation		6,229			4,031
(Gain) loss on asset disposals		(15	)		331
Amortization of intangibles		13,969			8,798
Amortization of deferred financing costs		2,667			491
In-process research and development charges		—			89,575
Financing charges on credit facility		—			6,955
Excess tax benefit from excercise of stock options		(213	)		(1,515	)
Tax benefit on exercised stock option arrangements		744			5,614
Change in net deferred income taxes		7,440			4,701
Stock based compensation		9,142			6,980
Changes in operating assets and liabilities:
Accounts receivable		(2,919	)		(8,489	)
Inventories		(29,830	)		(3,456	)
Accounts payable and accrued expenses		(19,861	)		27,807
Other assets		21,817			(22,594	)
Net cash provided by operating activities		27,804			64,674
Cash flows from investing activities
Purchase of property, plant and equipment		(13,930	)		(13,484	)
Purchase of business, net of cash acquired		(781	)		(750,853	)
Disposal of business		21,675			—
Purchase of investments in technology		—			(28,075	)
Purchase of other intangibles		(379	)		(1,020	)
Purchase of short-term investments		(14,137	)		(139	)
Sale of short-term investments		14,010			15,189
Net cash provided by (used in) investing activities		6,458			(778,382	)
Cash flows from financing activities
Proceeds from issuance of convertible notes, net of issuance costs		—			361,218
Proceeds from senior secured credit facility, net of issuance costs		—			352,754
Issuance of common stock		10,059			8,321
Excess tax benefit from exercise of stock options		213			1,515
Proceeds from short-term borrowings		—			25,000
Repayments of short-term borrowings		—			(25,000	)
Payments on long-term debt		(48,919	)		—
Financing charges paid on credit facility		—			(6,955	)
Net cash (used in) provided by financing activities		(38,647	)		716,853
Cash (used in) provided by continuing operations		(4,385	)		3,145
Cash used in discontinued operations
Operating activities		(691	)		(672	)
Cash used in discontinued operations		(691	)		(672	)
Effect of currency exchange rates on cash		(363	)		719
Net (decrease) increase in cash and cash equivalents		(5,439	)		3,192
Cash and cash equivalents at beginning of period		29,051			30,885
Cash and cash equivalents at end of period	$	23,612		$	34,077
Supplemental disclosure
Cash paid for interest	$	20,891		$	935
Cash (refunded) paid for taxes	$	(11,211	)	$	16,798
Stock issued to settle contingent liabilities under InnovaQuartz purchase agreement	$	7,371		$	—

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

5

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. Basis of Presentation

We have prepared the consolidated financial statements included in this Form 10-Q 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 U.S. generally accepted accounting principles. These unaudited consolidated interim financial statements should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal 2006. All amounts presented in tables 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. Certain 2006 amounts have been reclassified to conform to the current presentation.

We have a 52 or 53 week fiscal year ending on the Saturday nearest December 31. Accordingly, the third fiscal quarters of 2007 and 2006 are represented by the three month periods ended on September 29, 2007 and September 30, 2006, respectively.

In the first quarter of fiscal year 2007, consistent with the plans announced with the Laserscope acquisition, we sold the Laserscope aesthetics business. The results of operations for this business for the period prior to the sale, which occurred January 16, 2007, are presented in the discontinued operations section of the statements of operations for the nine months ended September 29, 2007. The results of operations of the aesthetics business for the three and nine months ended September 30, 2006 are presented in the discontinued operations section of the statements of operations beginning from the date of acquisition of July 20, 2006. The assets and liabilities of the aesthetics business are presented as Assets and Liabilities of discontinued operations in the balance sheet as of December 30, 2006. Unless otherwise noted, disclosures of revenues and expenses in the Notes to Consolidated Financial Statements refer to continuing operations only.

NOTE 2. Acquisitions

Laserscope

On July 20, 2006, we completed a cash tender offer for over 90 percent of the outstanding shares of common stock of Laserscope, a California corporation (Laserscope). On July 25, 2006, we acquired the remaining outstanding shares of Laserscope through a merger of Laserscope with our acquisition subsidiary, resulting in Laserscope becoming our wholly owned subsidiary.

Laserscope designs, manufactures, sells and services an advanced line of minimally invasive medical products worldwide including medical laser systems and related energy delivery devices for the surgical treatment of obstructive benign prostatic hyperplasia (BPH) and urinary stones. The primary purpose of the Laserscope acquisition was to gain access to Laserscope’s line of medical laser systems and related energy delivery devices for outpatient surgical centers, hospital markets, and, potentially, physician offices.

The total acquisition price for Laserscope shares and options was $718.0 million, in addition to transaction costs of approximately $22.6 million and restructuring costs of approximately $15.4 million. The total purchase price, net of acquired cash on hand at closing of $20.1 million and the loss from discontinued operations of the aesthetics business of $6.1 million, was $729.8 million. This purchase price does not include an additional $31.9 million in debt financing costs, which were incurred to finance the Laserscope acquisition.

Our consolidated financial statements for the three and nine months ended September 29, 2007 include the financial results of Laserscope, and our consolidated financial statements for the three and nine months ended September 30, 2006 include the financial results of Laserscope beginning from the acquisition date of July 20, 2006. As described inNote 3, Discontinued Operations and Sale of Aesthetics Business, we sold Laserscope’s aesthetics business in the first quarter of 2007.

6

Financing

Our acquisition of Laserscope was partially funded through the issuance of $373.8 million in principal amount of our 3.25 percent Convertible Senior Subordinated Notes (Convertible Notes) on June 27, 2006. In addition, in conjunction with the Laserscope acquisition, our wholly-owned subsidiary, American Medical Systems, Inc. (AMS), entered into a credit and guarantee agreement (the Credit Facility) for a $430.0 million six-year senior secured credit facility on July 20, 2006. As of September 29, 2007, a total of $315.2 million of term loan borrowings were outstanding under the credit facility. These financings are more fully described inNote 12, Debt.

Purchase Accounting

The aggregate Laserscope purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The estimate of the excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill. The following table summarizes the estimate of fair value of the identifiable tangible and intangible assets and goodwill, net of liabilities assumed, that were acquired as part of the Laserscope acquisition:

(in thousands)	Amount
Developed and core technology	$	88,700
Trademarks		40,800
In-process research and development		62,100
Assets sold, net of tax		14,781
Tangible assets acquired, net of liabilities assumed		11,769
Deferred tax liability on assets acquired, net of deferred tax assets		(17,976	)
Goodwill		529,643
Estimated fair value of identifiable tangible and intangible assets and goodwill, net of cash acquired and liabilites assumed	$	729,817

The determination of the portion of the purchase price allocated to developed and core technology, trademarks, and in-process research and development was based on our forecasted cash inflows and outflows and using an excess earnings method to calculate the fair value of assets purchased. We are responsible for these estimated values, and considered other factors including an independent valuation of our assumptions. The developed and core technology is being amortized over the estimated product lifecycles ranging from 1.0 to 10.5 years, with a weighted average life of 8.3 years, with this expense reflected as part of the amortization of intangibles in the Consolidated Statement of Operations. The acquired in-process research and development of $62.1 million was expensed in fiscal year 2006 with no related income tax benefit. Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisition based on management’s assessment or third party appraisals.

Laserscope acquired InnovaQuartz in May 2006 pursuant to a purchase agreement that contained contingent earnout payments based on milestones, revenues and profitability through 2008 and related covenants. These provisions significantly limited our flexibility in operating the business during the earnout period and imposed penalties for violating those provisions. In order to resolve these earnout and penalty provisions, on December 8, 2006, we agreed to issue shares of common stock with a value of $7.4 million to the former shareholders of InnovaQuartz to terminate the purchase agreement, including all contingent earnout payments under the purchase agreement. We issued 371,500 shares of our common stock on January 12, 2007 in satisfaction of this agreement. The parties also released all claims against each other.

Restructuring Costs

In fiscal year 2006, we recorded restructuring costs of approximately $7.5 million associated primarily with employee terminations and benefits for certain employees of Laserscope. These costs were recognized as liabilities assumed in the purchase business combination and are reflected as an increase to goodwill. These costs represent management’s approved reduction of the Laserscope workforce by 35 employees, mainly in administrative departments and transferred job functions, as well as costs associated with change-in-control provisions of certain Laserscope employment contracts. Our management approved these restructuring plans in the third quarter of 2006. Adjustments were made to these plans during 2007, primarily due to the completion of termination and benefit negotiations with certain employees, resulting in a decrease to this liability of $1.1 million. This adjustment was recorded as a decrease to goodwill. As of September 29, 2007, we have made cash payments related to severance and benefits of $5.9 million.

7

In addition, in the third quarter of 2006, we established a plan to exit certain contracts and activities of Laserscope. As a result of this plan, we recorded a liability of $2.0 million in fiscal year 2006 related to contract terminations and other restructuring costs, which was recognized as a liability assumed in the purchase business combination and reflected as an increase to goodwill. During 2007, we recorded adjustments to increase the liability by $7.0 million, to reflect additional information we obtained regarding the likely outcome of these restructuring activities. As of September 29, 2007, we have made payments and settlements of $3.7 million related to these exit activities. We expect our efforts to resolve these items will continue throughout 2008.

The following table summarizes activity related to the restructuring program that occurred during the first nine months of 2007:

	Restructuring								Restructuring
	Liability as of		Adjustment to			Cash Payments /			Liability as of
(in thousands)	December 30, 2006		Liability			Settlements			September 29, 2007
Severance and benefits	$	7,204	$	(1,069	)	$	(5,605	)	$	530
Contract terminations and other		1,993		6,978			(3,703	)		5,268
Total restructuring	$	9,197	$	5,909		$	(9,308	)	$	5,798

Integration Costs

In the nine months ended September 29, 2007, we recorded $1.1 million of integration costs associated with the Laserscope acquisition, primarily related to legal, consulting and retention bonuses. These integration costs are included in operating expenses.

Our consolidated financial statements for the three and nine months ended September 29, 2007 include the financial results of Laserscope. The following table contains pro forma results for the three and nine months ended September 30, 2006, as if the acquisition had occurred at the beginning of 2006:

	Three Months Ended		Nine Months Ended
(in thousands except per share data)	September 30, 2006		September 30, 2006
Revenues from continuing operations	$	94,750	$	291,786
Revenues from discontinued operations		6,484		23,834
Total revenues	$	101,234		315,620
Net loss	$	3,338	$	4,453
Net loss per share:
Basic	$	0.05	$	0.06
Diluted	$	0.05	$	0.06

The pro forma consolidated results do not purport to be indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor do they claim to be indicative of the results that will be obtained in the future. The above pro forma financial results include the results of operations of Laserscope in its entirety during this period. Since the aesthetics business had not been reported as a discontinued operation until the quarter ended September 30, 2006, the pro forma results above include the aesthetics business.

Solarant Medical, Inc.

On May 8, 2006, we completed the acquisition of Solarant Medical, Inc., (Solarant) a privately funded company focused on the development of minimally invasive therapies for women who suffer from stress urinary incontinence. The purchase price was comprised of an initial payment of $1.0 million, potential milestone payments totaling $6.0 million contingent upon FDA approval of the therapy and the establishment of reimbursement codes for the hospital and office settings, and an earnout based on revenue growth during the first three years in the event of product commercialization. In addition to these acquisition payments, we previously funded $1.0 million of Solarant’s development efforts, which is included as part of the acquisition consideration.

We used cash on hand to make the initial payment.

8

The purchase price is currently allocated as follows:

(in thousands)	Amount
In-process research and development (including $0.8 million in acquisition costs)	$	2,054
Liabilities assumed, net of tangible assets acquired		(88	)
Deferred tax asset acquired		981
Initial purchase price, net of cash acquired through September 29, 2007	$	2,947

The purchase price allocation was made on a relative fair value basis with no amounts allocated to goodwill in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. The acquired in-process research and development of $2.1 million was expensed with no related income tax benefit as we do not have tax basis in this asset. Tangible assets acquired, net of liabilities assumed were stated at fair value at the date of acquisition based on management’s assessment.

Operating results of Solarant were not material; therefore pro forma financial information is not included. Richard Emmitt is a member and Elizabeth Weatherman is a former member of our Board of Directors, and each of them is a former member of the Solarant Board of Directors. In addition, investment funds with which Ms. Weatherman and Mr. Emmitt are affiliated are former shareholders of Solarant and will be entitled a share of any future purchase price payments we make related to Solarant. Neither Ms. Weatherman nor Mr. Emmitt was involved in deliberations regarding the Solarant transaction.

BioControl Medical, Ltd.

On April 26, 2006, we acquired certain issued patents and other assets from BioControl Medical, Ltd. (BioControl), an Israeli company focused on the development of medical devices for the application of implantable electrical stimulation technology. We acquired an exclusive license for the use of the patents and technologies in urology, gynecology and other pelvic health applications. In addition, as part of this acquisition, we purchased Cytrix Israel, Ltd. (Cytrix), an Israeli company with no operations, other than the employment of a specific workforce to support the related licensed technology. The purchase price is comprised of an initial payment of $25.0 million, milestone payments for relevant accomplishments through and including FDA approval of the product of up to $25.0 million, and royalties over the first ten years of the related license agreement. We deposited $2.5 million of the initial payment in escrow to cover certain contingencies over the period of the agreement. The escrow period expired in April 2007 and the full balance was distributed to the seller. We used both cash on hand and short term borrowings on our January 20, 2005, senior credit facility to make the initial payment.

The purchase price allocation was made on a relative fair value basis with no amounts allocated to goodwill in accordance with SFAS No. 142,Goodwill and Other Intangible Assets.

Since the technology purchased had not yet reached technological feasibility and lacked an alternative future use, the initial purchase price of $25.0 million, along with acquisition costs of $0.6 million, were charged to in-process research and development at the time of acquisition.

Future contingent payments will be allocated to in-process research and development as this was the only asset acquired. As the license agreement from BioControl is an asset purchase and the in-process research and development includes tax basis, we were able to record related tax benefits. There were no significant tangible assets acquired or liabilities assumed.

Operating results of BioControl and Cytrix were not material and therefore pro forma financial information is not included.

Ovion Inc.

On July 7, 2005, we acquired Ovion Inc. (Ovion), a development stage company focused on the design of a minimally invasive permanent birth control device for women. The former Ovion shareholders received initial cash consideration of $9.8 million, after certain adjustments made at closing regarding the payment of outstanding liabilities of Ovion at the time of closing. We deposited $1.0 million of this initial consideration in escrow to be held for 12 months after closing of the merger to cover certain contingencies, and the balance is to be distributed to former Ovion shareholders. In the fourth quarter of 2006, $0.4 million of this escrow was distributed. The remaining balance is still held in escrow pending resolution of certain contingencies and reimbursement of certain expenses. We also incurred $0.9 million of acquisition related costs in 2005. We used cash on hand to make these initial payments, net of acquired cash at closing of $0.3 million.

9

In addition to the initial closing payment, we will make contingent payments of up to $20.0 million if certain clinical and regulatory milestones are completed. Earnout payments are equal to one time net sales of Ovion’s products for the 12-month period beginning on the later of (i) our first fiscal quarter commencing six months after approval from the U.S. Food and Drug Administration to market theOvion™ product for female sterilization or (ii) January 1, 2008. The contingent payments and earnout payments are subject to certain rights of offset. We made the first milestone payment of $5.0 million in the fourth quarter of 2006, of which $4.1 million was allocated to in-process research and development and expensed in the fourth quarter of 2006. The remaining $0.9 million of this milestone payment was allocated to the intangible royalty agreement. The founders of Ovion will also receive a royalty equal to two percent of net sales of products that are covered by the Ovion patents related to their initial technology contribution to Ovion.

The primary purpose of the Ovion acquisition was to gain access to their technology for delivering permanent birth control implants in an office-based procedure.

The purchase price, including earned contingent payments, is currently allocated as follows:

(in thousands)	Amount
In-process research and development (including $0.7 million in acquisition costs)	$	13,554
Intangible royalty agreement (including $0.2 million in acquisition costs)		2,970
Liabilities assumed, net of tangible assets acquired		(732	)
Deferred tax liability on assets acquired		(385	)
Initial purchase price, net of cash acquired through September 29, 2007	$	15,407

The purchase price allocation was made on a relative fair value basis with no amounts allocated to goodwill in accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142),Goodwill and Other Intangible Assets, and was based on our forecasted cash inflows and outflows, using an excess earnings method to calculate the fair value of assets purchased. We are responsible for these estimated values, and considered other factors including an independent valuation of our assumptions. The accounting for future contingent payments will also be allocated to in-process research and development and the intangible royalty agreement on a relative fair value basis. Amounts allocated to the intangible royalty agreement will not exceed that amount which would generate an impairment charge. The royalty agreement is being amortized over the life of the agreement, which was 8.25 years at the time of acquisition, with this expense reflected as part of the amortization of intangibles line on the Consolidated Statement of Operations. The acquired in-process research and development of $13.6 million was expensed with no related income tax benefit. Liabilities assumed, net of tangible assets acquired, were stated at fair value at the date of acquisition based on management’s assessment.

As Ovion was a development-stage company with no revenues reported as of the acquisition date, pro forma financial information is not included.

NOTE 3. Discontinued Operations and Sale of Aesthetics Business

In conjunction with our acquisition of Laserscope in July 2006 (seeNote 2, Acquisitions), we committed to a plan to divest Laserscope’s aesthetics business. The aesthetics business provides medical laser-based solutions for cosmetic treatments, and we determined that the aesthetics business does not fit into our strategy to focus on developing, manufacturing and marketing medical devices that restore pelvic health.

On January 16, 2007, we sold Laserscope’s aesthetics business to Iridex Corporation (Iridex) for a sale price consisting of $26.0 million of cash consideration and 213,435 shares of Iridex unregistered common stock (subject to certain post-closing adjustments), and up to an additional $9.0 million as determined by the book value of certain inventory following termination of a manufacturing transition period of approximately six to nine months. The terms of the sale include an obligation on our part to indemnify the buyer against certain potential liabilities, including for breaches of representations and warranties we made in the asset purchase agreement, for a period of twelve months. In August 2007, we agreed with Iridex Corporation on the amount and payment plan for the final post-closing purchase price adjustment and an amount for the fair value of inventory to be purchased at the termination of the manufacturing transition period. The agreement included an increase to the purchase price of $1.1 million and an additional $4.1 million for the purchase of inventory. Pursuant to the payment plan, Iridex will pay these amounts in scheduled payments through the third quarter of 2008, and accordingly, these amounts are included in other current assets, net of applicable reserves. Included in investment in technology and other assets is $1.2 million for the value of unregistered Iridex common stock received in the transaction. The common stock are subject to restrictions on sale through January 2009.

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In accordance with Statement of Financial Accounting Standards No. 144, SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the financial results of the aesthetics business for the period prior to the sale, which occurred January 16, 2007, are presented in the discontinued operations section of the statements of operations for the nine months ended September 29, 2007. The results of operations of the aesthetics business for the three and nine months ended September 30, 2006 are presented in the discontinued operations section of the statements of operations beginning from the date of acquisition of July 20, 2006. Prior to the disposal, the assets and liabilities of this business were recorded at estimated fair value less cost to sell, net of taxes, and are presented as held for sale in our consolidated balance sheet as of December 30, 2006.

The following table represents the results of discontinued operations for the three and nine months ended September 29, 2007 and September 30, 2006:

	Three Months Ended					Nine Months Ended
(in thousands)	September 29, 2007		September 30, 2006			September 29, 2007			September 30, 2006
Net sales	$	—	$	5,672		$	515		$	5,672
Loss from discontinued operations before income taxes		—		(1,082	)		(1,075	)		(1,082	)
Income tax benefit		—		410			384			410
Loss from discontinued operations, net of taxes	$	—	$	(672	)	$	(691	)	$	(672	)

Since the aesthetics business was acquired as part of the Laserscope transaction, the loss from discontinued operations, net of tax, is a reduction to goodwill in the purchase price allocation.

In accordance with Emerging Issues Task Force (EITF) Abstract No. 87-24,Allocation of Interest to Discontinued Operations, interest on our debt that is required to be repaid as a result of the disposal transaction has been allocated to discontinued operations. During the nine months ended September 29, 2007, we were required to repay $16.4 million under our Credit Facility due to the disposal transaction. Our results of discontinued operations include interest expense and financing charges of $0.5 million for the nine months ended September 29, 2007. This amount includes an adjustment of $0.4 million to reflect extinguishment of a proportionate share of the debt discount and debt issuance costs. An additional debt repayment will be made as we receive the final payments from Iridex under the payment plan.

The carrying value of assets and liabilities of discontinued operations held for sale of the aesthetics business as of December 30, 2006 was $13.2 million, consisting of assets of $23.8 million, primarily in accounts receivable, inventory, and capital assets, offset by current liabilities of $10.6 million. The estimated fair value of the aesthetics business as of December 30, 2006 was determined to be $35.5 million based on the actual sales price, less an $8.9 million income tax liability on the sale, for a net realizable value of $26.6 million.

In conjunction with the sale of the aesthetics business, we entered into a supply agreement with Iridex whereby we agreed to manufacture and supply to Iridex certain aesthetics devices during a transition period. The agreement expired on October 16, 2007. Iridex reimburses us for our cost to produce the products. We have received the final purchase orders under the supply agreement and certain of these purchase orders will be delivered after expiration of the agreement. We expect delivery to be completed by the end of January 2008.

In addition, we also entered into an agreement with Iridex to provide administrative services at no charge during a transition period of 60 days. Pursuant to EITF No. 03-13,Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations, we presented the results of operations of the aesthetics business as discontinued operations because we believe that the cash flows under these agreements will not be significant and we will have no significant continuing involvement in the operations of the aesthetics business.

NOTE 4. Stock-Based Compensation

At September 29, 2007, we have one active stock-based employee compensation plan under which new awards may be granted. Awards may include incentive stock options, non-qualified option grants or restricted stock. Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), SFAS 123(R),Share-Based Payment, using the modified prospective transition method. Under that transition method, compensation cost recognized in the periods after adoption includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

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Amounts recognized in our financial statements related to stock-based compensation were as follows:

	Three Months Ended				Nine Months Ended
(in thousands)	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Cost of sales	$	364	$	96	$	1,140	$	251
Marketing and selling		1,070		703		3,154		2,454
Research and development		677		471		2,080		1,505
General and administrative		1,265		633		2,768		2,770
Total stock-based compensation expense	$	3,376	$	1,903	$	9,142	$	6,980

Our 2005 Stock Incentive Plan (2005 Plan), which replaced our 2000 Equity Incentive Plan (2000 Plan), permits the grant of share options and shares to our employees, consultants and directors of up to 6,600,000 shares of common stock, plus the number of shares under our 2000 Plan as of May 5, 2005 subject to outstanding option adjustments. We have 3,555,485 shares available for future grants under our 2005 Plan.

Options granted under the plans generally become exercisable for twenty-five percent of the shares on the first anniversary date of the grant and 6.25 percent at the end of each quarter thereafter. Options are granted with an exercise price equal to the fair market value of the common stock on the date of the grant.

Options granted under our 2000 Plan generally have a stated expiration, if not exercised or earlier terminated, ten years after the date of grant. Options granted under our 2005 Plan generally have a stated expiration, if not exercised or earlier terminated, seven years after the date of grant. No modifications were made to outstanding stock options granted prior to our adoption of SFAS 123(R).

Activity under our 2000 and 2005 plans for the nine months ended September 29, 2007 was as follows:

				Weighted average		Aggregate
	Options			exercise price		Intrinsic
	outstanding			per share		Value
						(in thousands)
Balance at December 30, 2006		7,255,574		$	14.25
Granted		1,124,000			19.75
Exercised		(586,172	)		14.00
Cancelled or expired		(392,068	)		18.59
Balance at September 29, 2007		7,401,334		$	14.88	$	25,831
Options exercisable at September 29, 2007		4,505,537		$	12.08	$	25,482

The total intrinsic value of options exercised during the three and nine months ended September 29, 2007 was $0.4 million and $3.4 million, respectively.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model, incorporating key assumptions on volatility and expected option lives based on our analysis of historical indicators. The risk-free rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a term similar to the expected life of the options. Forfeitures are estimated based on historical indicators. We adopted the straight-line method of expense attribution that results in a straight-line amortization of the compensation expense over the vesting period for all options. The following table provides the weighted average fair value of options granted to employees and the related assumptions used in the Black-Scholes model:

	Three Months Ended						Nine Months Ended
	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006
Fair value of options granted	$	6.29		$	7.14		$	7.08		$	7.50
Risk free interest rate		4.38	%		4.92	%		4.68	%		4.73	%
Expected dividend rate		—			—			—			—
Stock price volatility		30.89	%		35.16	%		32.95	%		35.25	%
Expected life of option	4.3 years			5.1 years			4.7 years			4.7 years

As of September 29, 2007, we had $21.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements granted under our 2005 Plan. We expect that cost to be recognized over a weighted average period of 2.5 years.

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Restricted Stock

Restricted stock awards are granted to employees under the 2005 Stock Incentive Plan upon hire or based on performance criteria established by management. Restricted stock awards are independent of stock option awards and are subject to forfeiture if employment terminates prior to the release of the restrictions. We grant restricted stock which generally vests over a four year period. During the vesting period, ownership of the shares cannot be transferred. Restricted stock is considered issued and outstanding at the grant date and has the same dividend and voting rights as other common stock. We recognize compensation expense for the fair value of the restricted stock grants issued based on the closing stock price on the date of grant. The plan does not designate the specific number of shares available for restricted stock grants, as these are issued from the full pool of shares available under the 2005 Stock Incentive Plan. The option pool is reduced by two shares for each restricted share granted.

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan (ESPP) which allows employees to elect, in advance of each calendar quarter, to contribute up to 10 percent of their compensation, subject to certain limitations, to purchase shares of common stock at the lower of 85 percent of the fair market value on the first or last day of each quarter. Compensation expense recognized on shares issued under our ESPP is based on the value to the employee of the 15 percent discount applied to the stock price. The number of shares reserved under the plan, as amended, is 1,000,000 common shares. Shares issued under the plan through September 29, 2007 total 726,496, with a balance available to be issued of 273,504. Shares purchased under the employee stock purchase plan were 46,973 during the quarter.

NOTE 5. Earnings per Share

The following table presents information necessary to calculate basic and diluted net income from continuing operations per common share and common share equivalents.

	Three Months Ended					Nine Months Ended
(in thousands, except per share data)	September 29, 2007		September 30, 2006			September 29, 2007		September 30, 2006
Net income (loss) from continuing operations	$	6,925	$	(57,932	)	$	18,634	$	(54,555	)
Weighted-average shares outstanding for basic net income per share		72,166		70,122			72,001		69,877
Dilutive effect of stock options and restricted shares		1,574		—			1,604		—
Adjusted weighted-average shares outstanding for diluted net income per share		73,740		70,122			73,605		69,877
Net income (loss) per share
Basic net earnings (loss) from continuing operations	$	0.10	$	(0.83	)	$	0.26	$	(0.78	)
Diluted net earnings (loss) from continuing operations	$	0.09	$	(0.83	)	$	0.25	$	(0.78	)

There were 3,891,772 and 3,785,933 weighted shares outstanding for the quarter and nine month period ended September 29, 2007, respectively, that were excluded from the diluted earnings per share computation because the impact would have been anti-dilutive. For the third quarter and first nine months ended September 30, 2006, there were 7,955,661 and 8,037,301 weighted shares outstanding, respectively, that were excluded from the diluted earnings per share computation because the impact would have been anti-dilutive. In addition, our Convertible Notes were excluded from the diluted net income per share calculation in the three and nine months ended September 29, 2007 and September 30, 2006 because the conversion price was greater than the average market price of our stock during the periods.

NOTE 6. Inventories

Inventories consist of the following as of September 29, 2007 and December 30, 2006:

(in thousands)	September 29, 2007			December 30, 2006
Raw materials	$	18,896		$	13,321
Work in process		8,062			10,878
Finished goods		35,989			16,279
Obsolescence reserve		(3,063	)		(2,504	)
Net inventories	$	59,884		$	37,974

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NOTE 7. Warranties

Many of our products are sold with warranty coverage for periods ranging from one year up to the patient’s lifetime. The 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 or deviations in product performance against our reliability commitments, the frequency of use of a prosthetic implant by the patient, patients’ performance expectations and changes in the terms of our policies.

Changes in the warranty balance during the first nine months of fiscal 2007 and 2006 are listed below:

	Three Months Ended						Nine Months Ended
(in thousands)	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006
Balance, beginning of period	$	2,808		$	1,774		$	2,715		$	1,618
Provisions for warranty		1,904			631			4,418			938
Warranty allowance from acquisition		—			840			—			840
Claims processed		(1,118	)		(337	)		(3,539	)		(488	)
Balance, end of period	$	3,594		$	2,908		$	3,594		$	2,908

NOTE 8. Comprehensive Income (Loss)

Comprehensive income (loss) is net income (loss) adjusted for the impact of foreign currency translation. Comprehensive income (loss) for the three and nine month periods in fiscal 2007 and 2006 was:

	Three Months Ended					Nine Months Ended
(in thousands)	September 29, 2007		September 30, 2006			September 29, 2007		September 30, 2006
Net income (loss)	$	6,925	$	(58,604	)	$	17,943	$	(55,227	)
Foreign currency translation gain (loss), net of taxes		1,705		(392	)		2,947		(1,465	)
Comprehensive income (loss)	$	8,630	$	(58,996	)	$	20,890	$	(56,692	)

NOTE 9. Industry Segment Information and Foreign Operations

Since our inception, we have operated in the single industry segment of developing, manufacturing and marketing medical devices. In the first quarter of fiscal year 2007, consistent with the plans announced with the Laserscope acquisition, we sold the Laserscope aesthetics business (seeNote 3, Discontinued Operations and Sale of Aesthetics Business). We have presented the operations of this business as discontinued operations from the date of acquisition of July 20, 2006 through the date of disposal of January 16, 2007. As such, the following data excludes the results of the aesthetics business for all periods presented.

We distribute products through our direct sales force and independent sales representatives in the United States, Canada, Australia, Brazil and Western Europe. Additionally, we distribute products through foreign independent distributors, primarily in Europe, Asia and South America, who then sell the products to medical institutions. No customer or distributor accounted for five percent or more of net sales during the three and nine month periods ended September 29, 2007 or September 30, 2006. Foreign subsidiary sales are predominantly to customers in Western Europe, Canada, Australia and Brazil and our foreign subsidiary assets are located in the same countries.

The following table presents net sales and long-lived assets (excluding deferred taxes) by geographical territory. No individual foreign country’s net sales or long-lived assets are material.

	Three Months Ended				Nine Months Ended
(in thousands)	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
United States
Net sales	$	78,992	$	70,466	$	243,068	$	187,489
Long-lived assets		891,744		871,313		891,744		871,313
International
Net sales		30,049		20,034		90,811		55,417
Long-lived assets		17,857		15,005		17,857		15,005

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NOTE 10. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine month period ending September 29, 2007 were:

	Nine Months Ended
(in thousands)	September 29, 2007
Goodwill, beginning of the period	$	677,053
Additions and adjustments		24,248
Effect of currency translation		1,218
Goodwill, end of the period	$	702,519

The changes during the current period relate primarily to adjustments in purchase accounting for the Laserscope acquisition.

The following table provides additional information concerning intangible assets:

	September 29, 2007							December 30, 2006
	Gross carrying		Accumulated			Net book		Gross carrying		Accumulated			Net book
(in thousands)	amount		amortization			value		amount		amortization			value
Developed and core technology	$	137,675	$	(39,350	)	$	98,325	$	137,553	$	(26,919	)	$	110,634
Other intangibles
Amortized
Patents		10,313		(8,911	)		1,402		10,127		(8,761	)		1,366
Licenses		9,158		(6,222	)		2,936		8,962		(5,453	)		3,509
Royalty agreement		2,970		(671	)		2,299		2,970		(385	)		2,585
Trademarks		2,208		(776	)		1,432		—		—			—
Total amortized other intangible assets		24,649		(16,580	)		8,069		22,059		(14,599	)		7,460
Unamortized
Trademarks		40,800		—			40,800		42,562		—			42,562
Total other intangibles		65,449		(16,580	)		48,869		64,621		(14,599	)		50,022
Total intangible assets	$	203,124	$	(55,930	)	$	147,194	$	202,174	$	(41,518	)	$	160,656

	Three Months Ended				Nine Months Ended
(in thousands)	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Amortization expense	$	4,516	$	5,172	$	13,969	$	8,798

The estimated amortization expense for currently-owned intangibles, as presented above, for the years 2007 through 2011 is $18.3 million, $17.1 million, $17.0 million, $16.2 million and $15.5 million, respectively.

NOTE 11. Credit Agreements

Credit Agreement

On January 20, 2005, we entered into a credit agreement which we voluntarily terminated as of June 27, 2006 upon the issuance of the Convertible Notes, which are described inNote 12, Debt. The credit agreement provided for $150.0 million senior unsecured five year revolving credit facility (U.S. dollars only), with a $20.0 million sub-limit for the issuance of standby and commercial letters of credit, and a $10.0 million sub-limit for swing line loans. At our option, any loan under this agreement (other than swing line loans) bears interest at a variable rate based on London Inter-Bank Offer Rate (LIBOR) or an alternate variable rate based on either prime rate or the federal funds effective rate, in each case plus a basis point spread determined by reference to our leverage ratio. At our election, the aggregate maximum principal amount available under the credit agreement could have been increased by an amount up to $60.0 million. Funds were available for working capital and other lawful purposes, including permitted acquisitions. During the second quarter 2006 we borrowed $21.0 million on this facility. We repaid the outstanding balance with operating cash and voluntarily terminated the agreement in June 2006.

On July 20, 2006, we entered into a Credit Facility led by CIT Healthcare LLC, which is described inNote 12, Debt.

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Bridge Loan Commitment Fee

In June 2006, in preparation for the acquisition of Laserscope, we obtained a commitment for up to $180 million of senior subordinated unsecured financing. We incurred a commitment fee of $7.0 million for the financing commitment, but did not use the financing. The commitment fee was recorded as a financing charge in the nine month period ended September 30, 2006.

NOTE 12. Debt; Amendment of Credit Facility (Subsequent Event)

Senior Secured Credit Facility

On July 20, 2006, in conjunction with the Laserscope acquisition, our wholly-owned subsidiary, American Medical Systems, Inc. (AMS), entered into a credit and guarantee agreement (the Credit Facility) with CIT Healthcare LLC, as administrative agent and as collateral agent (the Administrative Agent or the Collateral Agent), and certain lenders from time to time party thereto (the Lenders). We and each majority-owned domestic subsidiary of AMS, including Laserscope and its subsidiaries, are parties to the Credit Facility as guarantors of all of the obligations of AMS arising under the Credit Facility. The obligations of AMS and each of the guarantors arising under the Credit Facility are secured by a first priority security interest granted to the Collateral Agent on substantially all of their respective assets, including a mortgage on the AMS facility in Minnetonka, Minnesota.

The Credit Facility provides for a $430.0 million six-year senior secured credit facility which consists of (i) a term loan facility in an aggregate principal amount of $365.0 million and (ii) a revolving credit facility in an aggregate principal amount of up to $65.0 million. The revolving credit facility has a $5.0 million sublimit for the issuance of standby and commercial letters of credit and a $5.0 million sublimit for swing line loans. Funds under the Credit Facility were used to fund a portion of the purchase price for the acquisition of Laserscope, and pay fees and expenses related to the Credit Facility and the acquisition of Laserscope. The revolving credit facility is available to fund ongoing working capital needs of AMS, including future capital expenditures and permitted acquisitions. As of September 29, 2007, there were $315.2 million of term loans outstanding under the Credit Facility.

In addition to initial Credit Facility fees and reimbursement of Administrative Agent expenses, we are obligated to pay (i) a fee based on the total revolving commitments, and (ii) a fee based on the maximum amount available to be drawn under the letters of credit issued under the Credit Facility, each of which is payable quarterly in arrears to the Administrative Agent for the ratable benefit of each Lender. At our option, any loan under the Credit Facility (other than swing line loans) bears interest at a variable rate based on LIBOR or an alternative variable rate based on the greater of the prime rate as quoted in The Wall Street Journal as the prime rate (Prime Rate) or the federal funds effective rate plus 0.5 of 1.0 percent (Federal Funds Rate) plus an applicable margin. The applicable margin for term loans based on LIBOR is 2.25 percent per annum, while the applicable margin for term loans based on the Prime Rate or the Federal Funds Rate is 1.25 percent per annum. As of September 29, 2007 all debt under the Credit Facility had a variable interest rate based on the LIBOR index.

The applicable margin for loans under the revolving credit facility is determined by reference to our total leverage ratio, as defined in the Credit Facility. Interest is payable (a) quarterly in arrears for loans based on the Prime Rate or the Federal Funds Rate and (b) on the earlier of the last day of the respective interest period, or quarterly for loans based on LIBOR. There was no activity under the revolving credit facility during the quarter.

The term loan will amortize 1.0 percent of the current principal balance in each of the first five years from the closing date and the remaining 95 percent will amortize in the final year of the term loan. All amortization payments are due and payable on a quarterly basis. In addition, mandatory prepayments are due under the credit facility equal to (i) 75 percent of Excess Cash Flow (defined generally as net income, plus depreciation and amortization and other non-cash charges including IPR&D, plus decreases or minus increases in working capital, minus capital expenditures (to the extent not financed) and amortization payments with respect to the term loan, and any other indebtedness permitted under the loan documents) with a step-down of 50 percent of Excess Cash Flow when the Total Leverage Ratio is less than 4.00 to 1.00, (ii) 100 percent of the net proceeds of any asset sale (subject to a limited reinvestment option and a $2.5 million exception), (iii) 100 percent of the net proceeds of any debt (including convertible securities) or preferred stock issuance, and (iv) 50 percent of the net proceeds of any other equity issuance. Amounts due under the Credit Facility may also be voluntarily prepaid without premium or penalty. Amortization and other prepayments of $20.8 million and $48.9 million were made during the three and nine months ended September 29, 2007, respectively, including $16.4 million during the first half of 2007 for prepayments related to the disposal of the aesthetics business.

The Credit Facility contains standard affirmative and negative covenants and other limitations (subject to various carve-outs and baskets). The covenants limit: (a) the making of investments, the amount of capital expenditures, the payment of dividends and other payments with respect

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to capital, the disposition of material assets other than in the ordinary course of business, and mergers and acquisitions under certain conditions, (b) transactions with affiliates unless such transactions are completed in the ordinary course of business and upon fair and reasonable terms, (c) the incurrence of liens and indebtedness, and (d) substantial changes in the nature of the companies’ business. The Credit Facility also contains financial covenants which require us to maintain predetermined ratio levels related to leverage, interest coverage, fixed charges, and a limit on capital expenditures. In addition, the Credit Facility contains customary events of default, including payment and covenant defaults and material inaccuracy of representations. The Credit Facility further permits the taking of customary remedial action upon the occurrence and continuation of an event of default, including the acceleration of obligations then outstanding under the Credit Facility.

Fees of $10.5 million are classified as debt discount and are being accreted to interest expense using the effective interest method over a six year period. Additional debt issuance costs of approximately $1.8 million are recorded as other long term assets and are being amortized over six years using the straight-line method. Upon payment of the prepayments described above, a pro rata portion of the related fees and debt issuance costs, or $0.6 million and $1.4 million, were immediately charged to financing charges in the quarter and nine months ending September 29, 2007, respectively. Of these charges, $0.4 million related to the sale of the aesthetics business and were charged to discontinued operations in the nine months ended September 29, 2007.

Amendment of Credit Facility (Subsequent Event)

On October 29, 2007, we entered into a First Amendment of our Credit Facility to modify certain financial covenant ratios as defined in the Credit Facility (the Amendment). Pursuant to the terms of the Amendment, certain of the financial tests and covenants provided in Section 6.8 of the Credit Facility were amended and restated, including the interest coverage ratio, the total leverage ratio, the fixed charge coverage ratio, and the maximum consolidated capital expenditures.

The following table reflects the fiscal quarter ended nearest to the period where a change to the financial covenants applies:

Total Leverage Ratio

Fiscal Quarter Ending	12/31/07		3/31/08		6/30/08		9/30/08		12/31/08		3/31/09		6/30/09
Original Covenant		5.00		4.75		4.50		4.25		4.00		4.00		3.75
Amended Covenant		5.50		5.25		5.00		4.75		4.50		4.25		4.00

Interest Coverage Ratio

Fiscal Quarter Ending	12/31/07		3/31/08		9/30/08
Original Covenant		3.50		3.50		3.75
Amended Covenant		3.25		3.25		3.50

Fixed Charge Coverage Ratio

Fiscal Quarter Ending	9/30/08		12/31/08
Original Covenant		1.50		1.50
Amended Covenant		1.40		1.40

Maximum Consolidated Capital Expenditures

Fiscal Year Ending	12/31/07
Original Limit	$	15.0M	��
Amended Limit	$	16.5M

Convertible Senior Subordinated Notes; Supplemental Guarantor Information

On June 27, 2006, we issued $373.8 million in principal amount of our Convertible Senior Subordinated Notes due 2036 (Convertible Notes). The Convertible Notes bear a fixed interest rate of 3.25 percent per year, payable semiannually in arrears in cash on January 1 and July 1 of each year, beginning January 1, 2007. The Convertible Notes have a stated maturity of July 1, 2036. The Convertible Notes are our direct, unsecured, senior subordinated obligations, rank junior to the senior secured Credit Facility and will rank junior in right of payment to all of our future senior secured debt as provided in the Indenture.

In addition to regular interest on the Convertible Notes, we will also pay contingent interest during any six-month period from July 1 to December 31 and from January 1 to June 30, beginning with the period beginning July 1, 2011, if the average market price of the Convertible Notes for the five consecutive trading days immediately before the last trading day before the relevant six-month period equals or exceeds 120 percent of the principal amount of the Convertible Notes.

17

Our Convertible Notes are convertible under the following circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of Convertible Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment: (1) when, during any fiscal quarter, the last reported sale price of our common stock is greater than 130% of the conversion price for at least 20 trading days in the 30 trading-day period ending on the last trading day of the preceding fiscal quarter; (2) during the five trading days immediately after any five consecutive trading-day period in which the trading price of a Convertible Note for each day of that period was less than 98% of the product of the closing price of our common stock and the applicable conversion rate; (3) if specified distributions to holders of our common stock occur; (4) if we call the Convertible Notes for redemption; (5) if a designated event occurs; or (6) during the 60 days prior to, but excluding, any scheduled repurchase date or maturity date. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the Convertible Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock. If a holder elects to convert its Convertible Notes in connection with a designated event that occurs prior to July 1, 2013, we will pay, to the extent described in the Indenture, a make whole premium by increasing the conversion rate applicable to such Convertible Notes. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility, which we closed on July 20, 2006.

We have the right to redeem for cash all or a portion of the Convertible Notes on or after July 6, 2011 at specified redemption prices as provided in the Indenture plus accrued and unpaid interest, plus contingent interest to, but excluding, the applicable redemption date. Holders of the Convertible Notes may require us to purchase all or a portion of their Convertible Notes for cash on July 1, 2013; July 1, 2016; July 1, 2021; July 1, 2026; and July 1, 2031 or in the event of a designated event, at a purchase price equal to 100 percent of the principal amount of the Convertible Notes to be repurchased plus accrued and unpaid interest, plus contingent interest to, but excluding, the purchase date.

Underwriting commissions of approximately $11.2 million are classified as debt discount and are being accreted to interest expense using the effective interest method over the 30 year term of the Convertible Notes. Debt issuance costs of approximately $1.4 million are recorded as other long term assets and are being amortized using the straight line method over the 30 year term of the Convertible Notes.

The Convertible Notes are fully and unconditionally guaranteed on an unsecured senior subordinated basis by four of our significant domestic subsidiaries: American Medical Systems, Inc., AMS Sales Corporation, AMS Research Corporation and Laserscope (the Guarantor Subsidiaries). The guarantees are subordinated in right of payment to the guaranteed obligations of our significant domestic subsidiaries under our senior Credit Facility.

The following supplemental condensed consolidating financial information presents the statements of operations for each of the three and nine month periods ended September 29, 2007 and September 30, 2006, the balance sheets as of September 29, 2007 and December 30, 2006, and the statements of cash flows for each of the nine month periods ended September 29, 2007 and September 30, 2006, for the Guarantor Subsidiaries as a group, and separately for our non-Guarantor Subsidiaries as a group. In the condensed consolidating financial statements, we and the Guarantor Subsidiaries account for investment in wholly-owned subsidiaries using the equity method.

18

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Statement of Operations
(In thousands)

	Three Months Ended September 29, 2007
	American
	Medical						Non-
	Systems			Guarantor			Guarantor							Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries				Eliminations			Total
Net sales	$	—		$	102,208		$	21,904			$	(15,071	)	$	109,041
Cost of sales		—			24,148			15,159				(14,866	)		24,441
Gross profit		—			78,060			6,745				(205	)		84,600
Operating expenses
Marketing and selling		—			35,206			7,072				—			42,278
Research and development		—			9,757			161				—			9,918
General and administrative		—			10,116			12				—			10,128
Integration costs		—			—			—				—			—
Amortization of intangibles		—			3,646			870				—			4,516
Total operating expenses		—			58,725			8,115				—			66,840
Operating income (loss)		—			19,335			(1,370	)			(205	)		17,760
Other (expense) income
Royalty income		—			3,482			—				—			3,482
Interest income		—			473			14				(154	)		333
Interest expense		(3,037	)		(6,376	)		(196	)	��		149			(9,460	)
Financing charge		(105	)		(1,025	)		—				—			(1,130	)
Other income (expense)		—			525			195				16			736
Total other (expense) income		(3,142	)		(2,921	)		13				11			(6,039	)
(Loss) income before income taxes		(3,142	)		16,414			(1,357	)			(194	)		11,721
Provision for income taxes		(1,286	)		6,716			(555	)			(79	)		4,796
Equity in earnings of subsidiary		8,896			(802	)		—				(8,094	)		—
Net income (loss)	$	7,040		$	8,896		$	(802	)		$	(8,209	)	$	6,925

19

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Statement of Operations
(In thousands)

	Nine Months Ended September 29, 2007
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	306,997		$	67,988		$	(41,106	)	$	333,879
Cost of sales		—			75,939			42,582			(40,596	)		77,925
Gross profit		—			231,058			25,406			(510	)		255,954
Operating expenses
Marketing and selling		—			99,790			23,612			—			123,402
Research and development		—			31,797			250			—			32,047
General and administrative		—			31,631			73			—			31,704
Integration costs		—			1,103			—			—			1,103
Amortization of intangibles		—			11,359			2,610			—			13,969
Total operating expenses		—			175,680			26,545			—			202,225
Operating income (loss)		—			55,378			(1,139	)		(510	)		53,729
Other (expense) income
Royalty income		—			4,664			—			—			4,664
Interest income		—			1,077			39			(154	)		962
Interest expense		(8,952	)		(19,376	)		(502	)		149			(28,681	)
Financing charge		(420	)		(2,247	)		—			—			(2,667	)
Other income (expense)		—			2,751			(52	)		11			2,710
Total other (expense) income		(9,372	)		(13,131	)		(515	)		6			(23,012	)
(Loss) income from continuing operations before income taxes		(9,372	)		42,247			(1,654	)		(504	)		30,717
Provision for income taxes		(3,659	)		16,590			(661	)		(187	)		12,083
Net (loss) income from continuing operations		(5,713	)		25,657			(993	)		(317	)		18,634
Loss from discontinued operations, net of tax		—			(691	)		—			—			(691	)
Equity in earnings (loss) of subsidiary		23,973			(993	)		—			(22,980	)		—
Net income (loss)	$	18,260		$	23,973		$	(993	)	$	(23,297	)	$	17,943

20

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Statement of Operations
(In thousands)

	Three Months Ended September 30, 2006
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	85,005		$	12,404		$	(6,909	)	$	90,500
Cost of sales		—			18,950			7,086			(7,171	)		18,865
Gross profit		—			66,055			5,318			262			71,635
Operating expenses
Marketing and selling		—			25,887			5,578			—			31,465
Research and development		—			9,295			—			—			9,295
In-process research and development		—			61,500			—			—			61,500
General and administrative		—			8,507			45			—			8,552
Integration costs		—			273			—			—			273
Amortization of intangibles		—			4,290			882			—			5,172
Total operating expenses		—			109,752			6,505			—			116,257
Operating (loss) income		—			(43,697	)		(1,187	)		262			(44,622	)
Other (expense) income
Royalty income		—			479			—			—			479
Interest income		—			1,034			330			—			1,364
Interest expense		(3,321	)		(5,122	)		(465	)		1			(8,907	)
Financing charges		(110	)		(381	)		—			—			(491	)
Other income (expense)		—			156			(49	)		—			107
Total other (expense) income		(3,431	)		(3,834	)		(184	)		1			(7,448	)
(Loss) income from continuing operations before income taxes		(3,431	)		(47,531	)		(1,371	)		263			(52,070	)
Provision for income taxes		(1,174	)		4,575			2,353			108			5,862
Net (loss) income from continuing operations		(2,257	)		(52,106	)		(3,724	)		155			(57,932	)
Loss from discontinued operations, net of tax		—			(672	)		—			—			(672	)
Equity in (loss) earnings of subsidiary		(56,502	)		(3,724	)		—			60,226			—
Net (loss) income	$	(58,759	)	$	(56,502	)	$	(3,724	)	$	60,381		$	(58,604	)

21

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Statement of Operations
(In thousands)

	Nine Months Ended September 30, 2006
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	227,589		$	42,880		$	(27,563	)	$	242,906
Cost of sales		—			42,644			26,634			(26,976	)		42,302
Gross profit		—			184,945			16,246			(587	)		200,604
Operating expenses
Marketing and selling		—			72,218			16,431			—			88,649
Research and development		—			22,849			—			—			22,849
In-process research and development		—			87,113			2,462			—			89,575
General and administrative		—			22,597			84			—			22,681
Integration costs		—			273			—			—			273
Amortization of intangibles		—			5,986			2,812			—			8,798
Total operating expenses		—			211,036			21,789			—			232,825
Operating loss		—			(26,091	)		(5,543	)		(587	)		(32,221	)
Other (expense) income
Royalty income		—			1,340			—			—			1,340
Interest income		—			2,077			43			—			2,120
Interest expense		(3,324	)		(5,500	)		(437	)		1			(9,260	)
Financing charges		(7,065	)		(381	)		—			—			(7,446	)
Other income (expense)		—			551			(163	)		9			397
Total other (expense) income		(10,389	)		(1,913	)		(557	)		10			(12,849	)
Loss from continuing operations before income taxes		(10,389	)		(28,004	)		(6,100	)		(577	)		(45,070	)
Provision for income taxes		(3,832	)		13,964			(434	)		(213	)		9,485
Net loss from continuing operations		(6,557	)		(41,968	)		(5,666	)		(364	)		(54,555	)
Loss from discontinued operations, net of tax		—			(672	)		—			—			(672	)
Equity in earnings (loss) of subsidiary		(48,306	)		(5,666	)		—			53,972			—
Net (loss) income	$	(54,863	)	$	(48,306	)	$	(5,666	)	$	53,608		$	(55,227	)

22

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Balance Sheet
(In thousands)

	As of September 29, 2007
	American
	Medical					Non-
	Systems		Guarantor			Guarantor						Consolidated
	Holdings, Inc.		Subsidiaries			Subsidiaries			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	479	$	13,481		$	9,652		$	—		$	23,612
Short term investments		—		303			336			—			639
Accounts receivable, net		622,855		68,728			30,270			(622,585	)		99,268
Inventories, net		—		58,528			5,709			(4,353	)		59,884
Deferred income taxes		—		10,374			458			—			10,832
Other current assets		8,624		(2,882	)		3,990			271			10,003
Total current assets		631,958		148,532			50,415			(626,667	)		204,238
Property, plant and equipment, net		—		53,962			1,551			—			55,513
Goodwill		—		640,608			85,932			(24,021	)		702,519
Developed and core technology, net		—		77,271			21,054			—			98,325
Other intangibles, net		—		46,570			2,299			—			48,869
Investment in subsidiaries		83,398		24,943			—			(108,341	)		—
Investment in technology and other assets		—		1,643			97			—			1,740
Other long-term assets, net		1,357		1,279			—			—			2,636
Total assets	$	716,713	$	994,808		$	161,348		$	(759,029	)	$	1,113,840
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	21,246	$	524,015		$	101,365		$	(628,340	)	$	18,286
Accrued compensation expenses		—		15,387			2,538			—			17,925
Accrued warranty expense		—		3,668			(74	)		—			3,594
Income taxes payable		—		4,433			(341	)		—			4,092
Other accrued expenses		3,037		24,766			2,553			—			30,356
Total current liabilities		24,283		572,269			106,041			(628,340	)		74,253
Non-current liabilities
Long-term debt		363,010		304,654			—			—			667,664
Intercompany loans payable		—		—			22,348			(22,348	)		—
Deferred income taxes		—		21,744			8,016			—			29,760
Long-term income taxes payable		—		9,683			—			—			9,683
Long-term employee benefit obligations		—		3,060			—			—			3,060
Total non-current liabilities		363,010		339,141			30,364			(22,348	)		710,167
Total liabilities		387,293		911,410			136,405			(650,688	)		784,420
Stockholders’ equity
Common stock		722		—			9			(9	)		722
Additional paid-in capital		280,747		3,424			75,683			(79,107	)		280,747
Accumulated other comprehensive income		7,102		769			7,082			(7,851	)		7,102
Retained earnings (deficit)		40,849		79,205			(57,831	)		(21,374	)		40,849
Total stockholders’ equity		329,420		83,398			24,943			(108,341	)		329,420
Total liabilities and stockholders’ equity	$	716,713	$	994,808		$	161,348		$	(759,029	)	$	1,113,840

23

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Balance Sheet
(In thousands)

	As of December 30, 2006
	American
	Medical				Non-
	Systems		Guarantor		Guarantor						Consolidated
	Holdings, Inc.		Subsidiaries		Subsidiaries			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	1,138	$	22,905	$	5,008		$	—		$	29,051
Short term investments		—		274		216			��			490
Accounts receivable, net		606,821		71,346		20,520			(606,749	)		91,938
Inventories, net		—		36,472		5,592			(4,090	)		37,974
Deferred income taxes		—		10,608		457			—			11,065
Other current assets		4,965		14,544		2,220			(157	)		21,572
Assets of discontinued operations		—		46,078		—			—			46,078
Total current assets		612,924		202,227		34,013			(610,996	)		238,168
Property, plant and equipment, net		—		46,454		581			—			47,035
Goodwill		—		593,641		83,933			(521	)		677,053
Developed and core technology, net		—		86,601		24,033			—			110,634
Other intangibles, net		—		71,591		1,931			(23,500	)		50,022
Deferred income taxes		—		—		1,804			(1,804	)		—
Investment in subsidiaries		59,073		14,449		—			(73,522	)		—
Investment in technology and other assets		—		987		161			—			1,148
Other long-term assets, net		1,329		1,702		—			—			3,031
Total assets	$	673,326	$	1,017,652	$	146,456		$	(710,343	)	$	1,127,091
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	23,259	$	508,468	$	96,553		$	(612,850	)	$	15,430
Accrued compensation expenses		—		15,433		1,586			—			17,019
Accrued warranty expense		—		2,715		—			—			2,715
Income taxes payable		—		—		240			(240	)		—
Other accrued expenses		6,175		39,835		1,881			—			47,891
Liabilities of discontinued operations		—		19,478		—			—			19,478
Total current liabilities		29,434		585,929		100,260			(613,090	)		102,533
Non-current liabilities
Long term debt		362,730		350,726		—			—			713,456
Intercompany loans payable		—		—		21,927			(21,927	)		—
Deferred income taxes		—		14,280		9,820			(1,804	)		22,296
Long-term income taxes payable		—		4,584		—			—			4,584
Long-term employee benefit obligations		—		3,060		—			—			3,060
Total non-current liabilities		362,730		372,650		31,747			(23,731	)		743,396
Total liabilities		392,164		958,579		132,007			(636,821	)		845,929
Stockholders’ equity
Common stock		711		—		9			(9	)		711
Additional paid-in capital		253,127		3,431		67,332			(70,763	)		253,127
Accumulated other comprehensive income		4,155		146		4,287			(4,433	)		4,155
Retained earnings (deficit)		23,169		55,496		(57,179	)		1,683			23,169
Total stockholders’ equity		281,162		59,073		14,449			(73,522	)		281,162
Total liabilities and stockholders’ equity	$	673,326	$	1,017,652	$	146,456		$	(710,343	)	$	1,127,091

24

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Statement of Cash Flows
(In thousands)

	Nine Months Ended September 29, 2007
	American
	Medical						Non-
	Systems			Guarantor			Guarantor					Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations		Total
Cash flows from operating activities
Net cash (used in) provided by operating activities	$	(10,931	)	$	39,641		$	(906	)	$	—	$	27,804
Cash flows from investing activities
Purchase of property, plant and equipment		—			(12,689	)		(1,241	)		—		(13,930	)
Purchase of business, net of cash acquired		—			—			(781	)		—		(781	)
Disposal of business		—			21,675			—			—		21,675
Purchase of other intangibles		—			(379	)		—			—		(379	)
Purchase of short-term investments		—			(14,028	)		(109	)		—		(14,137	)
Sale of short-term investments		—			14,000			10			—		14,010
Net cash provided by (used in) investing activities		—			8,579			(2,121	)		—		6,458
Cash flows from financing activities
Intercompany notes		—			300			(300	)		—		—
Investment in subsidiary		—			(8,334	)		8,334			—		—
Issuance of common stock		10,059			—			—			—		10,059
Excess tax benefit from exercise of stock options		213			—			—			—		213
Payments on long-term debt		—			(48,919	)		—			—		(48,919	)
Net cash provided by (used in) financing activities		10,272			(56,953	)		8,034			—		(38,647	)
Cash used in discontinued operations
Operating activities		—			(691	)		—			—		(691	)
Net cash used in discontinued operations		—			(691	)		—			—		(691	)
Effect of exchange rates on cash		—			—			(363	)		—		(363	)
Net (decrease) increase in cash and cash equivalents		(659	)		(9,424	)		4,644			—		(5,439	)
Cash and cash equivalents at beginning of period		1,138			22,905			5,008			—		29,051
Cash and cash equivalents at end of period	$	479		$	13,481		$	9,652		$	—	$	23,612

25

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)
Condensed Consolidating Statement of Cash Flows
(In thousands)

	Nine Months Ended September 30, 2006
	American
	Medical						Non-
	Systems			Guarantor			Guarantor					Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations		Total
Cash flows from operating activities
Net cash provided by operating activities	$	228		$	63,074		$	1,372		$	—	$	64,674
Cash flows from investing activities
Purchase of property, plant and equipment		—			(13,364	)		(120	)		—		(13,484	)
Purchase of business, net of cash acquired		—			(750,853	)		—			—		(750,853	)
Purchase of investments in technology		—			(25,613	)		(2,462	)		—		(28,075	)
Purchase of other intangibles		—			(1,020	)		—			—		(1,020	)
Purchase of short-term investments		—			(139	)		—			—		(139	)
Sale of short-term investments		—			15,175			14			—		15,189
Net cash used in investing activities		—			(775,814	)		(2,568	)		—		(778,382	)
Cash flows from financing activities
Proceeds from issuance of convertible notes, net of issuance costs		361,218			—			—			—		361,218
Proceeds from senior secured credit facility net of issuance costs		—			352,754			—			—		352,754
Intercompany notes		(361,218	)		362,611			(1,393	)				—
Issuance of common stock		8,321			—			—			—		8,321
Excess tax benefit from exercise of stock options		1,515			—			—			—		1,515
Proceeds from short-term borrowings		21,000			4,000			—			—		25,000
Repayments of short-term borrowings		(21,000	)		(4,000	)		—			—		(25,000	)
Financing charges paid on credit facility		(6,955	)		—			—			—		(6,955	)
Net cash provided by (used in) financing activities		2,881			715,365			(1,393	)		—		716,853
Cash used in discontinued operations
Operating activities		—			(672	)		—			—		(672	)
Net cash used in discontinued operations		—			(672	)		—			—		(672	)
Effect of exchange rates on cash		—			—			719			—		719
Net increase (decrease) in cash and cash equivalents		3,109			1,953			(1,870	)		—		3,192
Cash and cash equivalents at beginning of period		1,567			21,751			7,567			—		30,885
Cash and cash equivalents at end of period	$	4,676		$	23,704		$	5,697		$	—	$	34,077

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NOTE 13. Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,Accounting for Income Taxes. FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and increased disclosures.

We adopted the provisions of FIN 48 on fiscal year beginning December 31, 2006. As a result of the implementation of FIN 48, we recognized a $2.1 million increase in the liability for unrecognized tax benefits. This increase in liability resulted in a decrease to our beginning retained earnings balance of $0.3 million. The amount of the gross unrecognized tax benefits (excluding interest) at December 31, 2006 is $7.3 million ($7.0 million net of federal tax benefit on state issues including tax effected interest) of which $3.7 million would impact our effective tax rate, if recognized. The residual of $3.3 million would be credited to goodwill and or deferred tax assets if recognized.

In order to comply with the requirements of FIN 48, we reclassified substantially all of our liability for unrecognized tax benefits from current to non-current liabilities as payment is not anticipated within one year on substantially all of our uncertain tax benefits.

During the third quarter of 2007 we recognized $0.4 million in previously unrecognized tax benefits due to the closing of a 2003 statute of limitations. Offsetting this decrease in unrecognized tax benefits was an increase in unrecognized tax benefits of $2.9 million related to our purchase of Laserscope and the recent filing of Laserscope’s federal and state tax returns for the pre-acquisition period. Due to the application of the purchase accounting rules, the accrual of this unrecognized benefit had no impact on our effective tax rate. Likewise, any potential future reduction in this same balance will not impact our future effective tax rate. We also increased our unrecognized tax benefits during the third quarter of 2007 by $0.8 million related to tax positions claimed on our recently filed federal and state tax returns for 2006.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Operations, which is consistent with the recognition of these items in prior reporting periods. As of December 31, 2006, the date of adoption, we had recorded a liability of approximately $0.2 million for the payment of interest and penalties.

We have no federal income tax audits under way at the current time. Our federal returns are subject to examination for 2004 and subsequent years.

State income tax returns are generally subject to examination for a period of three to four years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.

It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a significant impact on our results of operations or financial position.

NOTE 14. Other Contingencies

On March 15, 2006, we received a demand for arbitration by Robert A. Knarr, as shareholder representative, on behalf of the former shareholders of Cryogen, Inc. On December 30, 2002, we acquired Cryogen, Inc. pursuant to the Agreement and Plan of Merger, dated as of December 13, 2002, as amended, among our wholly-owned subsidiary, American Medical Systems, Inc., Cryogen and Robert A. Knarr, as shareholders’ representative. The arbitration demand alleges that we breached the merger agreement by, among other things, failing to use commercially reasonable efforts to promote, market and sell theHer Option^®System and by acting in bad faith and thereby negatively impacting the former Cryogen shareholders’ right to an earnout payment under the merger agreement. The arbitration demand requests damages of the $110.0 million maximum earnout payment under the merger agreement. We believe Mr. Knarr’s claim is completely without merit, and we responded to the arbitration demand on March 30, 2006. On April 28, 2006, we filed a complaint in U.S. District Court for the District of Minnesota naming Mr. Knarr, certain former officers, directors and employees of Cryogen and JHK Investments LLC, a former Cryogen shareholder, as defendants, alleging that such defendants committed fraud and made negligent misrepresentations in connection with the sale of Cryogen, primarily related to reimbursement of theHer OptionSystem, at the time of the acquisition. The parties have agreed to

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resolve both matters through a single arbitration. The arbitration hearing was completed in July 2007, and we are waiting for a decision from the arbitration panel. The arbitration panel has indicated that it intends to dismiss our fraud claim. We do not believe that the panel’s decision regarding our fraud claim will have any bearing on the panel’s decision regarding the shareholders’ representative breach of contract claim. We expect the panel to rule on the shareholders’ representative breach of contract claim in the fourth quarter of 2007 after post-hearing briefing is completed. We have not recorded any accrual related to damages in this matter because any potential loss is not currently probable or reasonably estimable.

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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. Any statements not of historical fact may be considered forward-looking statements. Written words such as “may,” “expect,” “believe,” “anticipate,” or “estimate,” or other variations of these or similar words, 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 as a result of many factors, including, but not limited to, those included on ourForm 10-K, Part I, Item 1A for the year ended December 30, 2006, as updated by Item 1A of ourForm 10-Q for the quarter ended March 31, 2007. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future filings with the SEC.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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, valuation of share-based payments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The critical accounting policies that are most important in fully understanding and evaluating the financial condition and results of operations are discussed in our Form 10-K for the year ended December 30, 2006.

Overview

We are the world leader in developing and delivering innovative solutions to physicians treating men’s and women’s pelvic health conditions. Since becoming an independent company in 1998, we have built a business that delivers consistent growth, fueled by a robust pipeline of innovative products for significant, under-penetrated markets. Over the past seven years we have diversified our product portfolio, building on our traditional base of products for erectile restoration, men’s incontinence and urethral strictures, to include products and therapies targeted at benign prostatic hyperplasia (BPH) and urinary stones in men as well as urinary and fecal incontinence, pelvic organ prolapse and menorrhagia in women. We estimate these conditions affect over 320 million people in our global markets. Approximately 70 million of these men and women have conditions sufficiently severe so as to profoundly diminish their quality of life and significantly impact their relationships. Our product development and acquisition strategies have focused on expanding our product offering for surgical and office-based solutions and on adding less-invasive solutions for surgeons and their patients. Our primary physician customers include urologists, gynecologists, urogynecologists and colorectal surgeons.

We maintain a website atwww.AmericanMedicalSystems.com.We are not including the information contained on our website as a part of, nor incorporating it by reference into, this Quarterly Report on Form 10-Q. We make available free of charge on our website our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.

Laserscope Acquisition

On July 20, 2006, we completed a cash offer for over 90 percent of the outstanding shares of common stock of Laserscope. On July 25, 2006, we acquired the remaining outstanding shares of Laserscope through a merger of Laserscope with our acquisition subsidiary, resulting in Laserscope becoming our wholly owned subsidiary.

The primary purpose of the Laserscope acquisition was to gain access to Laserscope’s line of medical laser systems and related energy delivery devices for outpatient surgical centers, hospital markets and, potentially, physician offices. Laserscope’s products are used in the minimally invasive surgical treatment of obstructive benign prostatic hyperplasia (BPH) and urinary stones.

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The total acquisition price for Laserscope shares and options was $718.0 million, in addition to transaction costs of approximately $22.6 million and restructuring costs of approximately $15.4 million. The total purchase price, net of acquired cash on hand at closing of $20.1 million and the loss from discontinued operations of the aesthetics business of $6.1 million, was $729.8 million. This purchase price does not include an additional $31.9 million in debt financing costs, which were incurred to finance the Laserscope acquisition. This transaction is more fully described in theNotes to Consolidated Financial Statements – No. 2, Acquisitions.

Results of Operations

The following table compares net sales by product line and geography for the three and nine month periods of fiscal 2007 and 2006.

	Three Months Ended											Nine Months Ended
(in thousands)	September 29, 2007			September 30, 2006			$ Increase		% Increase			September 29, 2007			September 30, 2006			$ Increase		% Increase
Sales
Men’s health	$	73,916		$	60,446		$	13,470		22.3	%	$	225,854		$	151,016		$	74,838		49.6	%
Women’s health		35,125			30,054			5,071		16.9	%		108,025			91,890			16,135		17.6	%
Total	$	109,041		$	90,500		$	18,541		20.5	%	$	333,879		$	242,906		$	90,973		37.5	%
Geography
UnitedStates	$	78,992		$	70,466		$	8,526		12.1	%	$	243,068		$	187,489		$	55,579		29.6	%
International		30,049			20,034			10,015		50.0	%		90,811			55,417			35,394		63.9	%
Total	$	109,041		$	90,500		$	18,541		20.5	%	$	333,879		$	242,906		$	90,973		37.5	%
	Three Months Ended											Nine Months Ended
	September 29, 2007			September 30, 2006								September 29, 2007			September 30, 2006
Percent of total sales
Men’s health		67.8	%		66.8	%							67.6	%		62.2	%
Women’s health		32.2	%		33.2	%							32.4	%		37.8	%
Total		100.0	%		100.0	%							100.0	%		100.0	%
Geography
United States		72.4	%		77.9	%							72.8	%		77.2	%
International		27.6	%		22.1	%							27.2	%		22.8	%
Total		100.0	%		100.0	%							100.0	%		100.0	%

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The following table compares revenue, expense, and other income (expense) for the three and nine months ended September 29, 2007 and September 30, 2006:

	Three Months Ended						$ Increase			% Increase			Nine Months Ended						$ Increase			% Increase
(in thousands)	September 29, 2007			September 30, 2006			(Decrease)			(Decrease)			September 29, 2007			September 30, 2006			(Decrease)			(Decrease)
Net sales	$	109,041		$	90,500		$	18,541			20.5	%	$	333,879		$	242,906		$	90,973			37.5	%
Cost of sales		24,441			18,865			5,576			29.6	%		77,925			42,302			35,623			84.2	%
Gross profit		84,600			71,635			12,965			18.1	%		255,954			200,604			55,350			27.6	%
Operating expenses
Marketing and selling		42,278			31,465			10,813			34.4	%		123,402			88,649			34,753			39.2	%
Research and development		9,918			9,295			623			6.7	%		32,047			22,849			9,198			40.3	%
In-process research and development		—			61,500			(61,500	)		-100.0	%		—			89,575			(89,575	)		-100.0	%
General and administrative		10,128			8,552			1,576			18.4	%		31,704			22,681			9,023			39.8	%
Integration costs		—			273			(273	)		-100.0	%		1,103			273			830			304.0	%
Amortization of intangibles		4,516			5,172			(656	)		-12.7	%		13,969			8,798			5,171			58.8	%
Total operating expenses		66,840			116,257			(49,417	)		-42.5	%		202,225			232,825			(30,600	)		-13.1	%
Operating income (loss)		17,760			(44,622	)		62,382			-139.8	%		53,729			(32,221	)		85,950			-266.8	%
Royalty income		3,482			479			3,003			626.9	%		4,664			1,340			3,324			248.1	%
Interest income		333			1,364			(1,031	)		-75.6	%		962			2,120			(1,158	)		-54.6	%
Interest expense		(9,460	)		(8,907	)		(553	)		6.2	%		(28,681	)		(9,260	)		(19,421	)		209.7	%
Financing charges		(1,130	)		(491	)		(639	)		130.1	%		(2,667	)		(7,446	)		4,779			-64.2	%
Other income		736			107			629			587.9	%		2,710			397			2,313			582.6	%
Income (loss) from continuing operations before income taxes		11,721			(52,070	)		63,791			-122.5	%		30,717			(45,070	)		75,787			-168.2	%
Provision for income taxes		4,796			5,862			(1,066	)		-18.2	%		12,083			9,485			2,598			27.4	%
Income (loss) from continuing operations		6,925			(57,932	)		64,857			-112.0	%		18,634			(54,555	)		73,189			-134.2	%
Loss from discontinued operations, net of tax		—			(672	)		672			-100.0	%		(691	)		(672	)		(19	)		2.8	%
Net income (loss)	$	6,925		$	(58,604	)	$	65,529			-111.8	%	$	17,943		$	(55,227	)	$	73,170			-132.5	%
	Percent of Sales												Percent of Sales
	For the Three Months Ended												For the Nine Months Ended
	September 29, 2007			September 30, 2006									September 29, 2007			September 30, 2006
Net sales		100.0	%		100.0	%								100.0	%		100.0	%
Cost of sales		22.4	%		20.8	%								23.3	%		17.4	%
Gross profit		77.6	%		79.2	%								76.7	%		82.6	%
Operating expenses
Marketing and selling		38.8	%		34.8	%								37.0	%		36.5	%
Research and development		9.1	%		10.3	%								9.6	%		9.4	%
In-process research and development		0.0	%		68.0	%								0.0	%		36.9	%
General and administrative		9.3	%		9.4	%								9.5	%		9.3	%
Integration costs		0.0	%		0.3	%								0.3	%		0.1	%
Amortization of intangibles		4.1	%		5.7	%								4.2	%		3.6	%
Total operating expenses		61.3	%		128.5	%								60.6	%		95.8	%
Operating income (loss)		16.3	%		-49.3	%								16.1	%		-13.3	%
Royalty income		3.2	%		0.5	%								1.4	%		0.6	%
Interest income		0.3	%		1.5	%								0.3	%		0.9	%
Interest expense		-8.7	%		-9.8	%								-8.6	%		-3.8	%
Financing charges		-1.0	%		-0.5	%								-0.8	%		-3.1	%
Other income		0.7	%		0.1	%								0.8	%		0.2	%
Income (loss) from continuing operations before income taxes		10.7	%		-57.5	%								9.2	%		-18.6	%
Provision for income taxes		4.4	%		6.5	%								3.6	%		3.9	%
Income (loss) from continuing operations		6.4	%		-64.0	%								5.6	%		-22.5	%
Loss from discontinued operations, net of tax		0.0	%		-0.7	%								-0.2	%		-0.3	%
Net income (loss)		6.4	%		-64.8	%								5.4	%		-22.7	%

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Comparison of the Three Months Ended September 29, 2007 to the Three Months Ended September 30, 2006

Net sales.Net sales of $109.0 million in the three months ended September 29, 2007 represented an increase of 20.5 percent compared to $90.5 million in the three months ended September 30, 2006. Of this $18.5 million increase, $7.5 million was from the laser therapy business which we acquired in July 2006. Growth in our base business continues to be benefited by the success of recent product launches, specifically theAdVance™ Male Slingfor treating mild male incontinence and theAMS 700 MS™for erectile restoration, both introduced in the third quarter of 2006, and theMiniArc™ Single Incision Slingfor female incontinence introduced in the first quarter of 2007.

Net sales men’s health products.Net sales of men’s health products increased 22.3 percent to $73.9 million in the three months ended September 29, 2007 compared to $60.4 million in the three months ended September 30, 2006. The largest portion of this increase is in prostate treatment sales, which includes the incremental $7.5 million of sales from the laser therapy business which we acquired in July 2006. Laser therapy sales in the U.S. were lower than anticipated in the third quarter, due to the complexities with the varying sales cycles and channels in the domestic laser therapy market. We also experienced a unit decline in sales of ourTherMatrx^®catheters, which are used for the treatment of non-obstructive BPH. The male continence product line, specifically theAMS 800™, theAMS 800withInhibizone^®, and the newAdVance Male Sling, continued with strong growth rates over the same period in 2006. Erectile restoration products experienced growth in dollars and units, largely driven by the continued success of theAMS 700™with the new Momentary Squeeze pump that features a one touch button design for easier deflation, and the newer release of theAMS 700™ LGX.

Net sales women’s health products.Net sales of our women’s health products increased 16.9 percent to $35.1 million in the three months ended September 29, 2007 compared to $30.1 million in the three months ended September 30, 2006. The female continence product line, driven by the newMiniArcsling, as well as continued growth from ourMonarc^®product, contributed strong growth in dollars and units over the same period in 2006.Apogee^®andPerigee^®products also contributed revenue and unit growth over the same period in 2006, although the growth rates have been slowing, due in part to the market’s growing appetite for long-term clinical data. Our clinical prolapse studies, while currently active, have not yet reached their five year milestones. Other factors contributing to the slowing growth rate include the introduction of newer technologies aimed at less severe prolapse indications as well as delays in obtaining international reimbursement.Her Optionproducts delivered both revenue and unit growth during the third quarter of 2007, although growth rates have been impacted as the industry continues to experience lower than expected adoption rates for office-based procedures.

Net sales by geography and foreign exchange effects.Net sales in the United States increased 12.1 percent to $79.0 million in the three months ended September 29, 2007 compared to $70.5 million in the three months ended September 30, 2006. Laser therapy revenues contributed $1.3 million of this increase. International net sales increased 50.0 percent to $30.0 million in the three months ended September 29, 2007 compared to $20.0 million in the three months ended September 30, 2006 and represented 27.6 percent and 22.1 percent of our total net sales during the three months ended September 29, 2007 and September 30, 2006, respectively. Laser therapy revenues contributed $6.2 million of this increase internationally. The overall sales growth was positively impacted by approximately $1.6 million for the three months ended September 29, 2007 due to favorable currency exchange rates, mainly the Euro.

Cost of sales. Cost of sales as a percentage of revenue increased to 22.4 percent during the current period, compared to 20.8 percent in the three month period ending September 30, 2006 primarily driven by a higher proportion of capital equipment sales, the most significant of which are laser therapy consoles. Cost of sales are higher on our laser therapy products than on our base products. Cost of sales in the base business as a percent of revenue has generally benefited from stable overhead costs, which account for more than a quarter of our cost of sales. Future cost of sales will continue to depend upon production levels, labor costs, raw material costs, product mix and our ability to reduce these costs over time especially within our laser therapy business.

Marketing and selling.Marketing and selling expenses as a percentage of revenue increased to 38.8 percent in the third quarter of 2007 compared to 34.8 percent in the same period in the prior year. This increase is due primarily to the worldwide sales force expansion in support of the projected increased revenue along with continued support of laser therapy sales and new product launches. As we have recently experienced revenues lower than anticipated, we will work to increase the leverage of the sales organization through additional efforts to control costs and limit future investments.

Research and development.Research and development includes costs to develop and improve current and possible future products plus the costs for regulatory and clinical activities for these products. The $0.6 million increase in research and development expense from the third quarter of 2006 to the third quarter of 2007 is related to the Ovion clinical study along with design reliability improvements for theGreenLight High-Performance System™ (HPS), and increased personnel and project work in the areas of applied research, product development, and

32

regulatory filings. We expect total spending in research and development, over the longer term, to be approximately ten percent of sales.

In-process research and development.There were no in-process research and development (IPR&D) costs in the three month period of 2007 compared to $61.5 million for the same period of 2006. The IPR&D charges in 2006 related to our acquisition of Laserscope. In accordance with the rules of purchase accounting, we recognized a charge related to the value assigned to IPR&D for Laserscope at the time of acquisition. SeeNotes to Consolidated Financial Statements – No. 2, Acquisitions for additional information.

General and administrative.General and administrative expenses as a percentage of sales for the three month period of 2007 decreased slightly from 9.4 percent to 9.3 percent of revenue from the comparable period in 2006. This decrease is due mainly to leveraging the increased revenues. Our objective remains to leverage general and administrative expense as a percentage of sales.

Integration costs. The $0.3 million of integration costs for the three month period of 2006 include costs incurred to integrate the acquired Laserscope operations into overall AMS operations, primarily for travel, legal and consulting expenses. These costs are now completed and we do not expect further charges in future periods.

Amortization of intangibles.Amortization of intangibles includes amortization expense on our definite-lived intangible assets, consisting of patents, licenses and developed technology. The three month period of 2007 reflects decreased amortization expense over the same period of 2006 primarily due to the full amortization of PV Fiber technology over its one year life since acquisition date. (SeeNotes to Consolidated Financial Statements – No. 2, Acquisitions.)

Royalty income.Our royalty income is from licensing our intellectual property. It includes royalty payments for our stent-delivery and microwave therapy technologies. We do not directly influence sales of the products on which these royalties are based and cannot give any assurance as to future income levels. The $3.5 million in royalty income during the current quarter includes a one-time paid up license of our microwave therapy technology from Celsion. No further payments are owed under the Celsion agreement.

Interest income.Interest income decreased during the three month period of 2007 compared to the same period of 2006 due to the cash on hand during the beginning of the third quarter of 2006 from the net proceeds of our Convertible Notes issued on June 27, 2006, just prior to closing on the acquisition of Laserscope.

Interest expense.Interest expense increased by $0.6 million in the three month period of 2007 from the same period in 2006, as it includes a full quarter of the interest incurred on our Credit Facility, which generally carries a floating interest rate of LIBOR plus 2.25 percent (weighted average rates of 7.6 percent and 7.8 percent at September 29, 2007 and September 30, 2006, respectively). Average borrowings during the third quarter of 2007 on the Credit Facility were $328.3 million, compared to $254.1 million in the third quarter of 2006.

In August 2007, the Financial Accounting Standards Board (FASB) published a proposed FASB Staff Position (FSP) that would change the balance sheet classification of a component of our Convertible Notes between equity and debt and would result in additional non-cash economic interest cost being reflected in the income statement. The proposed change in accounting treatment would be effective for fiscal years beginning after December 15, 2007, and applied retrospectively to prior periods. The impact of this new accounting treatment could be significant and result in a material increase to non-cash interest expense beginning in fiscal year 2008 for financial statements covering past and future periods. Until the final FSP is ultimately adopted and issued by the FASB, we cannot determine the exact impact or timing of the change in accounting treatment.

Financing charges.Financing charges in the three months ended September 29, 2007 and September 30, 2006 are $1.1 million and $0.5 million, respectively, and are comprised of the amortization of the costs associated with the issuance of the Convertible Notes and the Credit Facility, which were obtained in connection with financing our Laserscope acquisition. The increase in 2007 is impacted by the acceleration of amortization resulting from prepayments under the Credit Facility

Other income. The increase in other income for the three months ended September 29, 2007 compared to the period ended September 30, 2006 primarily represents a gain as a result of re-measuring foreign denominated short term receivables to current exchange rates.

Provision for income taxes.Our effective income tax expense rate was 40.9 percent and 11.3 percent on the pretax income for the three months ended September 29, 2007 and the pretax loss for the three months ended September 30, 2006, respectively. The income tax expense rate for 2006 reflected a non-deductible IPR&D charge which did not recur. Without the non-deductible IPR&D charge, the 2006 income tax expense rate would have been 44.9 percent. The difference between the 40.9 percent in the third quarter of 2007 and the 44.9 percent in the third quarter of 2006 is primarily due to the reinstatement of the federal R&D tax credit, an increase in the anticipated domestic

33

manufacturing deduction, a reduction in non-deductible stock compensation expense, and a relative decrease in the 2007 state tax rate after credits which were offset in part by the complete phase-out of the Extraterritorial Income Exclusion in 2007.

During the quarter we increased our unrecognized tax benefits by $0.8 million related to tax positions claimed on our recently filed federal and state tax returns for fiscal year 2006. This increased expense was substantially offset by our recognition of $0.4 million in previously unrecognized tax benefits due to the closing of a 2003 statute of limitations and by deferred tax benefits realized in connection with the $0.8 million increase in unrecognized tax benefits.

Comparison of the Nine Months Ended September 29, 2007 to the Nine Months Ended September 30, 2006

Net sales.Net sales increased 37.5 percent to $333.9 million in the nine months ended September 29, 2007 compared to $242.9 million in the nine months ended September 30, 2006. Of the $91.0 million increase, $62.8 million was driven by sales from the laser therapy business, which we acquired in July 2006. During the first quarter, vendor quality issues, combined with performance shortfalls in our internal manufacturing and demand planning efforts, resulted in an inability to consistently meet demand for several key product lines. These issues were resolved by the end of the second quarter. Growth in our base business was bolstered by the continued success of recent product launches, specifically theAdVance Male Sling, AMS 700 MSandMiniArc.

Net sales men’s health products.Net sales of men’s health products increased 49.6 percent to $225.9 million in the nine months ended September 29, 2007 compared to $151.0 million in the nine MiniArc months ended September 30, 2006. Prostate treatment sales in the first nine months of 2007 included $81.3 million of sales from the laser therapy business, which we acquired in July 2006. This was offset by a decline in unit sales of ourTherMatrxcatheters, which are used for the treatment of non-obstructive BPH. Erectile restoration products grew in both units and revenue and was benefited by the continued success of theAMS 700,with the newMomentary Squeezepump that features a one touch button design for easier deflation, which was launched late in 2006, and the later release of theAMS 700 LGX. The male continence product line, including the newAdVance Male Sling,for the treatment of mild urinary incontinence, experienced favorable growth, despite being impacted by lower than expected sales volumes in the first quarter of 2007, as physicians were deferring surgeries while they assessed how theAdVance Male Slingfits into their treatment regime.

Net sales women’s health products.Net sales of our women’s health products increased 17.6 percent to $108.0 million in the nine months ended September 29, 2007 compared to $91.9 million in the nine months ended September 30, 2006. In the first nine months of 2007,ApogeeandPerigeeproducts saw continued growth, although this market will benefit from five year clinical data to bolster the growth rates going forward, along with expanded reimbursement coverage internationally. We continue to see revenue and unit growth in ourHer Optionsolution for menorrhagia. The female continence product line continued to see unit growth, specifically in theMiniArcandMonarc self-fixating sling.

Net sales by geography and foreign exchange effects.Net sales in the United States increased 29.6 percent to $243.1 million in the nine months ended September 29, 2007 compared to $187.5 million in the nine months ended September 30, 2006. Laser therapy products contributed $36.3 million of this increase. International net sales increased 63.9 percent to $90.8 million in the nine months ended September 29, 2007 compared to $55.4 million in the nine months ended September 30, 2006 and represented 27.2 percent and 22.8 percent of our total net sales during the nine months ended September 29, 2007 and September 30, 2006, respectively. The laser therapy product line contributed $26.5 million of this increase. The overall sales growth was positively impacted by approximately $4.0 million for the nine months ended September 29, 2007 due to favorable currency exchange rates, mainly the Euro.

Cost of sales. Cost of sales as a percentage of sales increased 5.9 percentage points from the nine month period ending September 30, 2006 to the nine month period ending September 29, 2007 primarily driven by sales of laser consoles, which have a higher cost to manufacture compared to our base business, and where we experienced higher than anticipated rework costs during the period. Cost of sales in the base business as a percent of sales has generally benefited from stable overhead costs, which account for more than a quarter of our cost of sales. Future cost of sales will continue to depend upon production levels, labor costs, raw material costs, product mix and our ability to reduce these costs over time especially within our laser therapy business.

Marketing and selling.Marketing and selling expenses increased from 36.5 percent to 37.0 percent of revenue in the first nine months of 2007, compared to the same period in 2006. This was primarily due to the worldwide sales force expansion in support of the projected increased revenue along with continued support of laser therapy sales and new product launches. We expect to continue investing in marketing and selling in support of increasing sales levels, but expect marketing and selling expenses will decrease as a percentage of sales over time.

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Research and development.Research and development includes costs to develop and improve current and possible future products plus the costs for regulatory and clinical activities for these products. These costs increased from 9.4 percent to 9.6 percent of revenue in the first nine months of 2007 compared to the similar period of 2006. This increase is related to the Ovion Clinical Study along with the design reliability improvements for theGreenLight HPSsystem, and increased personnel and project work in the areas of applied research, product development, other clinical studies and regulatory filings. We expect total spending in research and development, over the longer term, to be approximately ten percent of sales.

In-process research and development.There were no in-process research and development (IPR&D) costs in the nine month period of 2007 compared to $89.6 million for the same period in 2006. The IPR&D charges in 2006 related to our acquisitions of Laserscope, Solarant and BioControl and were $61.5 million, $2.5 million and $25.6 million, respectively. In accordance with the rules of purchase accounting, we recognized a charge related to the value assigned to IPR&D for Laserscope, BioControl and Solarant at the time of acquisition. SeeNotes to Consolidated Financial Statements – No. 2, Acquisitionsfor additional information.

General and administrative.General and administrative expenses as a percentage of sales for the nine month period of 2007 increased by 0.2 percentage points from the comparable period in 2006. This increase is due mainly to the Laserscope acquisition, and the necessary expansion of the AMS infrastructure to sustain our revenue growth. Our objective remains to leverage general and administrative expense as a percentage of sales.

Integration costs. Integration costs were $1.1 million for the nine month period of 2007 compared with $0.3 million for the same period in 2006. Integration costs include costs incurred to integrate the acquired Laserscope operations into overall AMS operations, primarily for legal, consulting and retention bonuses. We do not anticipate further integration costs in future periods.

Amortization of intangibles.Amortization of intangibles includes amortization expense on our definite-lived intangible assets, consisting of patents, licenses and developed technology. The nine month period of 2007 reflects increased amortization expense over the same period of 2006 primarily due to the amortization of intangible assets from the Laserscope acquisition. (SeeNotes to Consolidated Financial Statements – No. 2, Acquisitions.)

Royalty income.Our royalty income is primarily from the license of our intellectual property. It includes royalty payments for our stent-delivery and microwave therapy technologies. We do not directly influence sales of the products on which these royalties are based and cannot give any assurance as to future income levels. The $4.7 million in royalty income in the nine-month period of 2007 includes a one-time paid up license of our microwave therapy technology from Celsion. No further payments are due under the Celsion agreement.

Interest income.Interest income decreased during the nine month period of 2007 compared to the same period of 2006. Our interest income in the 2006 period was higher due to the cash on hand from the net proceeds of our Convertible Notes issued on June 27, 2006, just prior to closing on the acquisition of Laserscope.

Interest expense.Interest expense increased by $19.4 million in the nine month period of 2007 from the same period in 2006 due to a full period of interest incurred on our $373.8 million principal value of Convertible Notes, which carry a fixed interest rate of 3.25 percent, and the interest incurred on our Credit Facility, which generally carries a floating interest rate of LIBOR plus 2.25 percent (weighted average rate of 7.6 percent at September 29, 2007). Average borrowings during the first nine months of 2007 on the Credit Facility were $338.1 million, compared to very limited borrowings in the first nine months of 2006, prior to the acquisition of Laserscope in July 2006.

Financing charges.Financing charges in the nine months ended September 29, 2007 are comprised of the amortization of the costs associated with the issuance of the Convertible Notes and the Credit Facility. Financing charges in the nine month period of 2006 are comprised of third quarter expense from amortization of costs associated with the issuance of our debt as well as a $7.0 million bridge loan commitment fee incurred in connection with financing our Laserscope acquisition.

Other income. The increase in other income in the first nine months of 2007 over the same period in 2006 is due primarily to the $1.6 million payment as part of our settlement agreement with the Celsion Corporation (Celsion) on February 8, 2007. This payment settled prior claims under the patent infringement suit we filed against Celsion in September 2006.

Provision for income taxes.Our effective income tax expense rate from continuing operations was 39.3 percent and 21.0 percent on the pretax income for the nine months ended September 29, 2007 and the pretax loss for the nine months ended September 30, 2006, respectively. The income tax expense rate for 2006 reflected a non-deductible IPR&D charge which did not recur. Without the non-deductible IPR&D charge the 2006 income tax expense rate would have been 41.8 percent. The difference between the 39.3 percent in 2007 and the 41.8 percent in 2006 is primarily due to the reinstatement of the federal R&D tax credit, an increase in the anticipated domestic manufacturing deduction, a reduction in non-deductible stock compensation expense, and a relative decrease in the 2007 state tax rate after credits which were offset in part by the complete phase-out of the Extraterritorial Income Exclusion in 2007.

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Liquidity and Capital Resources

Cash, cash equivalents and short term investments were $24.3 million as of September 29, 2007, compared to $29.5 million as of December 30, 2006. This decrease is due primarily to lower cash generated by continuing operations and payments on long-term debt, partially offset by the sale of the aesthetics business.

Cash flows from operating activities.Net cash generated from operations was $27.8 million for the nine month period of 2007, primarily driven by earnings from continuing operations of $18.6 million, adjusted for $22.9 million of depreciation and amortization, $9.7 million of non-cash stock option expense and related tax benefits, and $7.4 million increase in net deferred income taxes. This increase was partially offset by cash used in working capital items of $30.8 million including accounts receivable, inventories, accounts payable, accrued expenses and other assets. Net cash generated from operations was $64.7 million for the nine month period of fiscal 2006, resulting from a net loss from continuing operations of $54.5 million, adjusted for non-cash in-process research and development charges of $89.6 million, debt financing costs of $7.0 million, depreciation and amortization of $13.3 million and stock based compensation of $11.1 million. This increase was partially offset by cash used in working capital items of $6.7 million.

Cash flows from investing activities.Cash generated from investing activities was $6.5 million during the nine month period of 2007, versus $778.4 million used during the same period of 2006. During the nine month period of fiscal 2007, $21.7 million was generated from the sale of the Laserscope aesthetics business (net of $4.3 million for selling costs, loss on discontinued operations and change in asset balances), partially offset by purchases for property, plant and equipment. During the nine month period of fiscal 2006, we made business and technology acquisitions of $778.9 million, primarily consisting of $724.1 million for Laserscope, net of cash acquired, $25.6 million for certain assets of BioControl Medical, Ltd., and $2.7 million for Solarant Medical, Inc. In addition, cash of $26.3 million was paid during the nine month period of 2006 as part of the contingent payments to the former TherMatrx shareholders.

Cash flows from financing activities.Cash used for financing activities was $38.6 million during the nine month period of 2007, versus $716.9 million provided in the same period of 2006. During the nine month period of 2007, $48.9 million was used for repayment of our Credit Facility, offset by $10.1 million of cash received from the issuance of common stock, primarily due to employees exercising stock options. Cash generated in the nine month period of 2006 included $361.2 million from the issuance of our Convertible Notes on June 27, 2006, $352.8 million from our Credit Facility, net of underwriting and debt issuance costs, and $8.3 million from the issuance of common stock, offset by a $7.0 million bridge loan commitment fee incurred in connection with financing our Laserscope acquisition.

We issued our Convertible Notes pursuant to an Indenture dated as of June 27, 2006 as supplemented by the first supplemental indenture dated September 6, 2006 (the Indenture) between us, certain of our significant domestic subsidiaries, as guarantors of the Convertible Notes, and U.S. Bank National Association, as trustee for the benefit of the holders of the Convertible Notes, which specifies the terms of the Convertible Notes. The Convertible Notes bear interest at the rate of 3.25 percent per year, payable semiannually in arrears in cash on January 1 and July 1 of each year, beginning January 1, 2007. The Convertible Notes have a stated maturity of July 1, 2036 and are our direct, unsecured, senior subordinated obligations, rank junior to our Credit Facility and will rank junior in right of payment to all of our future senior secured debt as provided in the Indenture. In addition to regular interest on the Convertible Notes, we will also pay contingent interest during any six-month period from July 1 to December 31 and from January 1 to June 30, beginning with the period beginning July 1, 2011, if the average trading price of the Convertible Notes for the five consecutive trading days immediately before the last trading day before the relevant six-month period equals or exceeds 120 percent of the principal amount of the Convertible Notes. The Convertible Notes are convertible under certain circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of Convertible Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the Convertible Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock.

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The following table illustrates the number of shares issued upon full conversion of the Convertible Notes assuming various market prices for our stock:

		The number of shares issued upon
If the market price of our stock is:		full conversion would be (1):
$	25.00	4.3 million
$	30.00	6.8 million
$	35.00	8.6 million

(1) The formula to calculate the shares issued upon full conversion of our Convertible Notes is as follows:

(	$373.8 million principal	x	Market price of stock at time of conversion	—	$373.8 million principal	)	=	Shares issued upon full conversion
	$19.406 conversion price
	Market price of stock at time of conversion

If a holder elects to convert its Convertible Note in connection with a designated event that occurs prior to July 1, 2013, we will pay, to the extent described in the Indenture, a make whole premium by increasing the conversion rate applicable to such Convertible Notes. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility.

We may also redeem the Convertible Notes on or after July 6, 2011 at specified redemption prices as provided in the Indenture plus accrued and unpaid interest, plus contingent interest to, but excluding, the applicable redemption date, and the holders of the Convertible Notes may require us to purchase all or a portion of their Convertible Notes for cash on July 1, 2013, July 1, 2016, July 1, 2021, July 1, 2026, and July 1, 2031 or in the event of a designated event, at a purchase price equal to 100 percent of the principal amount of the Convertible Notes to be repurchased plus accrued and unpaid interest, plus contingent interest to, but excluding, the purchase date.

Prior to conversion, our Convertible Notes represent potentially dilutive common share equivalents that must be considered in our calculation of diluted earnings per share (EPS). When there is a net loss, common share equivalents are excluded from the computation because they have an anti-dilutive effect. In addition, when the conversion price of our Convertible Notes is greater than the average market price of our stock during any period, the effect would be anti-dilutive and we would exclude the Convertible Notes from the EPS computation. However, when the average market price of our stock during any period is greater than the conversion price of the Convertible Notes, the impact is dilutive and the Convertible Notes will affect the number of common share equivalents used in the diluted EPS calculation. The degree to which these Convertible Notes are dilutive increases as the market price of our stock increases.

The following table illustrates the number of common share equivalents that would potentially be included in weighted average common shares for the calculation of diluted EPS, assuming various market prices of our stock:

	The number of common share equivalents
If the average market	potentially included in the computation of			Percent
price of our stock is:	diluted EPS would be (1):			Dilution (2)
$ 19.00		—	(anti-dilutive)		0.0	%
$ 25.00		4.3	million		5.6	%
$ 30.00		6.8	million		8.6	%
$ 35.00		8.6	million		10.6	%

(1)	Common share equivalents are calculated using the treasury stock method, in accordance with EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion.”
(2)	The percent dilution is based on 72,187,224 outstanding shares as of September 29, 2007.

For the three and nine months ended September 29, 2007 and September 30, 2006, our Convertible Notes were excluded from the diluted net income per share calculation because the conversion price was greater than the average market price of our stock.

On July 20, 2006, our wholly-owned subsidiary, American Medical Systems, Inc. (AMS), entered into a senior secured Credit Facility. AMS and each majority-owned domestic subsidiary of AMS, including Laserscope and its subsidiaries, are parties to the Credit Facility as guarantors of all of the obligations of AMS arising under the Credit Facility. The obligations of AMS and each of the guarantors arising under the Credit Facility are secured by a first priority security interest on substantially all of their respective assets, including a mortgage on the AMS facility in Minnetonka, Minnesota.

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The Credit Facility has a term of six years and consists of (i) a term loan facility in an aggregate principal amount of $365.0 million and (ii) a revolving credit facility in an aggregate principal amount of up to $65.0 million. The revolving credit facility has a $5.0 million sublimit for the issuance of standby and commercial letters of credit and a $5.0 million sublimit for swing line loans. We used borrowings under the Credit Facility to fund a portion of the purchase price for the acquisition of Laserscope, and pay fees and expenses related to the Credit Facility and the acquisition of Laserscope. The revolving credit facility is available to fund our ongoing working capital needs, including future capital expenditures and permitted acquisitions. As of September 29, 2007, we had $315.2 million of term debt outstanding under our Credit Facility.

Our Credit Facility contains standard affirmative and negative covenants and other limitations (subject to various carve-outs and baskets) regarding us, AMS, and in some cases, the subsidiaries of AMS. The covenants limit: (a) investments, capital expenditures, dividend payments, the disposition of material assets other than in the ordinary course of business, and mergers and acquisitions under certain conditions, (b) transactions with affiliates, unless such transactions are completed in the ordinary course of business and upon fair and reasonable terms, (c) liens and indebtedness, and (d) substantial changes in the nature of our business. Our Credit Facility contains customary financial covenants for secured credit facilities, consisting of maximum total and senior debt leverage ratios and minimum interest coverage and fixed charge coverage ratios. These financial covenants adjust from time to time during the term of the Credit Facility. The covenants and restrictions contained in the Credit Facility could limit our ability to fund our business, make capital expenditures, and make acquisitions or other investments in the future.

On October 29, 2007, we entered into a First Amendment of our Credit Facility to modify certain financial covenant ratios as defined in the Credit Facility (the Amendment). Pursuant to the terms of the Amendment, certain of the financial tests and covenants provided in Section 6.8 of the Credit Facility were amended and restated, including the interest coverage ratio, the total leverage ratio, the fixed charge coverage ratio, and the maximum consolidated capital expenditures.

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The financial covenants specified in the Credit Facility, as amended, are summarized as follows:

	For The Fiscal	Original	Amended
Financial	Periods Ending	Required	Required
Covenants	Closest to	Ratio	Ratio
Total Leverage Ratio	9/30/07	5.50:1.00 (maximum)	5.50:1.00 (maximum)
	12/31/07	5.00:1.00	5.50:1.00
	3/31/08	4.75:1.00	5.25:1.00
	6/30/08	4.50:1.00	5.00:1.00
	9/30/08	4.25:1.00	4.75:1.00
	12/31/08	4.00:1.00	4.50:1.00
	Reductions continuing until 6/30/10	3.00:1.00	3.00:1.00
Senior Leverage Ratio	9/30/07	2.75:1.00 (maximum)	2.75:1.00 (maximum)
	12/31/07	2.50:1.00	2.50:1.00
	3/31/08	2.50:1.00	2.50:1.00
	6/30/08	2.50:1.00	2.50:1.00
	9/30/08	2.50:1.00	2.50:1.00
	12/31/08	2.25:1.00	2.25:1.00
	Reductions continuing until 3/31/09	2.00:1.00	2.00:1.00
Interest Coverage Ratio	9/30/07	3.25:1.00 (minimum)	3.25:1.00 (minimum)
	12/31/07	3.50:1.00	3.25:1.00
	3/31/08	3.50:1.00	3.25:1.00
	6/30/08	3.50:1.00	3.50:1.00
	9/30/08	3.75:1.00	3.50:1.00
	12/31/08	3.75:1.00	3.75:1.00
	Increases continuing until 9/30/09	4.00:1.00	4.00:1.00
Fixed Charge Coverage Ratio	9/30/07	1.15:1.00 (minimum)	1.15:1.00 (minimum)
	12/31/07	1.25:1.00	1.25:1.00
	3/31/08	1.25:1.00	1.25:1.00
	6/30/08	1.25:1.00	1.25:1.00
	9/30/08	1.50:1.00	1.40:1.00
	12/31/08	1.50:1.00	1.40:1.00
	Increases continuing until 3/31/09	1.50:1.00	1.50:1.00
Maximum Capital Expenditures	12/31/07	$15.0 million	$16.5 million
	12/31/08	$15.0 million	$15.0 million

As of September 29, 2007, we were in compliance with all financial covenants as defined in our Credit Facility which are summarized as follows:

Financial Covenant	Required Covenant	Actual Result
Total Leverage Ratio (1)	5.50:1.00 (maximum)		5.35
Senior Leverage Ratio (2)	2.75:1.00 (maximum)		2.45
Interest Coverage Ratio (3)	3.25:1.00 (minimum)		3.30
Fixed Charge Coverage Ratio (4)	1.15:1.00 (minimum)		2.31
Maximum Capital Expenditures (5)	$15.0 million	$13.9 million

(1)	Total outstanding debt to Consolidated Adjusted EBITDA for the trailing four quarters.
(2)	Total outstanding senior secured debt to Consolidated Adjusted EBITDA for the trailing four quarters.
(3)	Ratio of Consolidated EBITDA for the trailing four quarters to interest expense for such period.
(4)	Ratio of Consolidated EBITDA for the trailing four quarters to fixed charges (cash interest expense, scheduled principal payments on debt, capital expenditures, income taxes paid, earn-out and milestone payments) for such period.
(5)	Includes expenditures of $6.3 million for the planned expansion of our corporate headquarters building and $3.2 million for the implementation of a new enterprise resource planning system. These projects were completed in the second quarter of 2007.

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The ratios are based on EBITDA, on a rolling four quarters, calculated on a pro forma combined basis with Laserscope and without discontinued operations, with some adjustments (Consolidated Adjusted EBITDA). Consolidated Adjusted EBITDA is a non-GAAP financial measure that is defined in our credit agreement as earnings before interest, income taxes, depreciation, amortization, and other non-cash items reducing net income including IPR&D, stock compensation charges, upfront fees and expenses incurred in connection with the execution and delivery of the Credit Facility, and certain non-recurring integration costs related to the acquisition of Laserscope, less other non-cash items increasing net income. Consolidated Adjusted EBITDA should not be considered an alternative measure of our net income, operating performance, cash flow or liquidity. It is provided as additional information relative to compliance with our debt covenants.

Any failure to comply with any of these financial and other affirmative and negative covenants would constitute an event of default under the Credit Facility, entitling a majority of the bank lenders to, among other things, terminate future credit availability under the Credit Facility, increase the interest rate on outstanding debt, and accelerate the maturity of outstanding obligations under the Credit Facility.

Our borrowing arrangements are more fully described inNotes to Consolidated Financial Statements — No. 12, Debt.

Cash commitments.

On July 7, 2005, we acquired Ovion Inc. (Ovion), and paid the former Ovion shareholders cash consideration of $9.8 million, after adjustments made at closing for payment of outstanding liabilities of Ovion at the time of closing. We deposited $1.0 million of this initial consideration in escrow to be held for 12 months after closing of the merger to cover certain contingencies, and the balance is to be distributed to former Ovion shareholders. In the fourth quarter of 2006, $0.4 million of this escrow was distributed. The remaining balance is still held in escrow, pending resolution of certain contingencies and reimbursement of certain expenses. We also incurred $0.9 million of acquisition related costs in 2005. We used cash on hand to make these initial payments, net of acquired cash on hand at closing of $0.3 million.

In addition to the initial closing payment, we will make contingent payments of up to $20.0 million if certain clinical and regulatory milestones are completed. Earnout payments are equal to one time net sales of Ovion’s products for the 12 month period beginning on the later of (i) our first fiscal quarter commencing six months after approval from the U.S. Food and Drug Administration to market theOvionproduct for female sterilization or (ii) January 1, 2008. The contingent payments and earnout payments are subject to certain rights of offset. We made the first milestone payment of $5.0 million in the fourth quarter of 2006. The founders of Ovion will also receive a royalty equal to two percent of net sales of products that are covered by the Ovion patents related to the founders’ initial technology contribution to Ovion.

On April 26, 2006, we acquired certain issued patents and other assets from BioControl Medical, Ltd., an Israeli company focused on developing medical devices for the application of electrical stimulation technology. We acquired an exclusive license for the use of the patents and technologies in urology, gynecology and other pelvic health applications. In addition, as part of this acquisition, we purchased Cytrix Israel, Ltd. (Cytrix), an Israeli company with no operations, other than the employment of a specific workforce to support the related licensed technology. The purchase price is comprised of an initial payment of $25.0 million, milestone payments for relevant accomplishments through and including FDA approval of the product of up to $25.0 million, and royalties over the first ten years of the related license agreement. We deposited $2.5 million of the initial payment in escrow to cover certain contingencies over the period of the agreement. The escrow period expired in April 2007 and the full balance was distributed to the seller. We used both cash on hand and short term borrowings on our January 20, 2005 senior credit facility to make the initial payment.

On May 8, 2006, we completed the acquisition of Solarant Medical, Inc. (Solarant), a privately funded company focused on the development of minimally invasive therapies for women who suffer from stress urinary incontinence. The purchase price is comprised of an initial payment of $1.0 million, potential milestone payments totaling $6.0 million contingent upon FDA approval of the therapy and the establishment of reimbursement codes for the hospital and office settings, and an earnout based on revenue growth during the first three years in the event of product commercialization. In addition to these acquisition payments, we previously funded $1.0 million of Solarant’s development efforts, which is included as part of the acquisition consideration. Richard Emmitt is a member and Elizabeth Weatherman is a former member of our Board of Directors, and each of them is a former member of the Solarant Board of Directors. In addition, investment funds with which Ms. Weatherman and Mr. Emmitt are affiliated are former shareholders of Solarant and will be entitled a share of any future purchase price payments we make related to Solarant. Neither Ms. Weatherman nor Mr. Emmitt was involved in deliberations regarding the Solarant transaction.

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We believe that funds generated from operations, together with our balances in cash and cash equivalents, as well as short term investments and our revolving Credit Facility, will be sufficient to finance current operations, planned capital expenditures, and any contingent payments that become due related to the acquisitions described.

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 100 F. Street, NE, Room 1580, 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 ishttp://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 websitewww.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 Rates

We have interest rate risk on earnings from the floating LIBOR index that is used to determine the interest rates on our Credit Facility. Most of our floating rate senior secured Credit Facility debt is based on six-month LIBOR. On the applicable interest rate continuation dates we have the option to set the total interest rate based on one, two, three, or six month LIBOR. We are planning to base the continuation dates upon mandatory prepayment requirements, voluntary prepayment expectations, and the interest rate environment.

Based on a sensitivity analysis, as of September 29, 2007, an instantaneous and sustained 200-basis-point increase in interest rates affecting our floating rate debt obligations, and assuming that we take no counteractive measures, would result in a decrease in net income before income taxes of approximately $4.3 million over the next 12 months.

Currency

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 period-end exchange rates. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income in stockholders’ equity. Gains and losses on foreign currency transactions and short term inter-company receivables from foreign subsidiaries are included in other (expense) income.

During the three and nine month periods of fiscal 2007, revenues from sales to customers outside the United States were 27.6 percent and 27.2 percent of total consolidated revenues, respectively. International accounts receivable, inventory, cash, and accounts payable were 41.8 percent, 2.3 percent, 40.9 percent, and 7.8 percent of total consolidated accounts, respectively, for each of these items as of September 29, 2007. The reported results of our foreign operations will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. The result of a uniform 10 percent strengthening in the value of the U.S. dollar in fiscal 2007 relative to each of the currencies in which our revenues and expenses are denominated would have resulted in a decrease in net income of approximately $0.8 million and $2.6 million during the three and nine month periods of fiscal 2007, respectively.

At September 29, 2007, our net investment in foreign subsidiaries translated into dollars using the period end exchange rate was $31.0 million and the potential loss in fair value resulting from a hypothetical 10 percent strengthening in the value of the U.S. dollar currency exchange rate amounts to $3.1 million. Actual amounts may differ.

Inflation

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

ITEM 4. CONTROLS AND PROCEDURES

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 effective 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.

Changes in Internal Control 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 1. LEGAL PROCEEDINGS.

Information about the Cryogen legal proceeding is included in the Quarterly Report on Form 10-Q for the period ended June 30, 2007, under Item 1, “Legal Proceedings.”

ITEM 6. EXHIBITS

Item No.	Item	Method of Filing
10.1	Settlement Agreement dated August 14, 2007, among AMS, Laserscope and Iridex Corporation.	Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed August 20, 2007 (File No. 000-30733).
10.2	First Amendment to Credit and Guaranty Agreement, dated as of October 29, 2007, by and among American Medical Systems, Inc., each of the other credit parties party thereto, including American Medical Systems Holdings, Inc., and CIT Healthcare LLC, as administrative agent.	Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed October 29, 2007 (File No. 000-30733).
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
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 Quarterly Report on Form 10-Q.

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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
November 8, 2007Date	By	/s/ Martin J. EmersonMartin J. Emerson President and Chief Executive Officer
November 8, 2007	By	/s/ Mark A. Heggestad
Date		Mark A. Heggestad Executive Vice President and Chief Financial Officer

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Fiscal Quarter Ended September 29, 2007

Item No.	Item	Method of Filing
10.1	Settlement Agreement dated August 14, 2007, among AMS, Laserscope and Iridex Corporation.	Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed August 20, 2007 (File No. 000-30733).
10.2	First Amendment to Credit and Guaranty Agreement, dated as of October 29, 2007, by and among American Medical Systems, Inc., each of the other credit parties party thereto, including American Medical Systems Holdings, Inc., and CIT Healthcare LLC, as administrative agent.	Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed October 29, 2007 (File No. 000-30733).
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
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 Quarterly Report on Form 10-Q.

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