AMERICAN MEDICAL SYSTEMS HOLDINGS INC, 424B1, 2000-08-14

AMERICAN MEDICAL SYSTEMS HOLDINGS INC
424B1, 2000-08-14
ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES

Previous: INVESCO ASSET MANAGEMENT LTD, 13F-NT, 2000-08-14

Next: FIRSTMARK COMMUNICATIONS EUROPE SA, S-1, 2000-08-14

<PAGE> 1
Filed Pursuant To Rule 424(b)(1)
Registration No. 333-37488

6,250,000 Shares

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

Common Stock [AMS LOGO]
$11.00 per share
</TABLE>

--------------------------------------------------------------------------------

- American Medical Systems Holdings, Inc. is offering 6,250,000 shares.

- This is our initial public offering and no public market existed for our
shares prior to this offering.

- Trading symbol: Nasdaq National Market -- AMMD.

----------------------

THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 11.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price....................................... $11.00 $68,750,000
Underwriting discount....................................... $ 0.77 $ 4,812,500
Proceeds to American Medical Systems........................ $10.23 $63,937,500
</TABLE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

Warburg, Pincus Equity Partners, L.P. has granted the underwriters a 30-day
option to purchase up to 937,500 additional shares of common stock to cover
over-allotments, if any.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

U.S. BANCORP PIPER JAFFRAY
BANC OF AMERICA SECURITIES LLC
CHASE H&Q

THE DATE OF THIS PROSPECTUS IS AUGUST 10, 2000.
<PAGE> 2

INSIDE FRONT COVER

BROAD ARRAY OF UROLOGICAL SURGICAL PRODUCTS

<TABLE>
<S> <C> <C>
AMS SPHINCTER 800(TM) URINARY PROSTHESIS
[Picture of AMS Artificial Sphincters are used to treat male and [Diagram of
Sphincter 800 Urinary female urinary and fecal incontinence. related anatomy]
Prosthesis]

IN-FAST(TM) SLING SYSTEM
[Picture of In-Fast] Sling procedures are used to treat female [Diagram of
incontinence. related anatomy]

STRAIGHT-IN(TM) MALE SLING SYSTEM
[Picture of Straight-In] Sling procedures can also be used to treat male [Diagram of
incontinence. We recently introduced the related anatomy]
Straight-In product, which is used in a sling
procedure for the treatment of male
incontinence.

</TABLE>
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 5
Risk Factors................................................ 11
Forward-Looking Statements.................................. 18
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 22
Selected Financial Data..................................... 23
Unaudited Pro Forma Consolidated Statement of Operations.... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 40
Management.................................................. 59
Certain Transactions........................................ 71
Principal and Selling Stockholders.......................... 74
Description of Capital Stock................................ 76
Shares Eligible for Future Sale............................. 79
Underwriting................................................ 81
Legal Matters............................................... 84
Experts..................................................... 84
Change in Independent Accountants........................... 84
Where You Can Find More Information......................... 85
Index to Financial Statements............................... F-1
</TABLE>

---------------------------------------------

You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, the securities in any state where the offer or sale is
not permitted. The information in this prospectus is complete and accurate as of
the date on the front cover, but the information may have changed since that
date.

3
<PAGE> 4

(THIS PAGE INTENTIONALLY LEFT BLANK)

4
<PAGE> 5

SUMMARY

The items in the following summary are described in more detail later in this
prospectus. This summary provides an overview of selected information and does
not contain all the information you should consider. Therefore, you should also
read the more detailed information set out in this prospectus, including the
financial statements.

BUSINESS OF AMERICAN MEDICAL SYSTEMS

We are the leading independent company focused solely on supplying medical
devices to physicians specializing in the treatment of urological disorders. We
currently manufacture and market a broad and well-established line of
proprietary products directly to urologists, with our principal focus on the
three major urological disorders: incontinence, erectile dysfunction and
prostate disease. We believe our long-standing reputation for quality and
innovative products and excellent relationships with leading urological surgeons
position us not only to benefit from the growth in the urology market, but to
drive it.

We are the worldwide leader in most of the markets in which we participate. The
following exemplify our market leadership:

- #1 market position in artificial urinary sphincters for the treatment of
incontinence.

- #2 market position in sling systems, one of the fastest growing surgical
procedures for the treatment of incontinence, based on a survey we
conducted of more than 100 urologists.

- #1 market position in penile prostheses for the treatment of erectile
dysfunction, with more than 60% market share.

- #1 market position in permanent urethral stents for the treatment of
strictures and enlarged prostate glands, also referred to as benign
prostatic hyperplasia, or BPH.

During 1998 and 1999, we incurred significant losses. Most of these losses were
due to charges related to our acquisition from Pfizer Inc. in September 1998. We
incurred a net loss of $6.5 million during the period from September 11, 1998 to
December 31, 1998 and a net loss of $9.8 million in 1999. In connection with
this acquisition, we recorded inventories at fair market value on the date of
the acquisition, which required an inventory write-up of $21.8 million. This
write-up was charged to cost of sales as these inventories were sold. We charged
to cost of sales $10.2 million during the period from September 11, 1998 to
December 31, 1998 and $11.6 million in the first quarter of 1999. We also wrote
off $7.4 million of in-process research and development during 1999 related to
our acquisitions of the UroVive bulking system for the treatment of urinary
stress incontinence in August 1999 and Influence, Inc. in December 1999. We also
incurred transition and reorganization costs of $2.5 million during the period
from September 11, 1998 to December 31, 1998 and $3.0 million in 1999 related to
our acquisition from Pfizer.

Currently, approximately 60 million people in the United States suffer from the
urological disorders addressed by our products. We estimate that approximately
11 million of these people have a disorder severe enough to be likely candidates
for treatment with our products. However, a very small percentage of people
suffering from these disorders have undergone procedures to resolve their
conditions. We believe that several key factors will accelerate demand for
surgical approaches to treat these disorders. These factors include an aging
population, expanding treatment alternatives driven by new technologies and
techniques, increased consumer awareness and higher quality of life
expectations.

Our product development and acquisition strategy is designed to be responsive to
the wide range of surgical treatments demanded by our urologist customers and
their patients. During the past 18 months,

5
<PAGE> 6

we significantly enhanced our product offering and added leading-edge,
less-invasive medical devices in our core product areas. In August 1999, we
acquired the UroVive bulking system. In October 1999, we acquired exclusive
worldwide distribution rights to the InjecTx ethanol injection system for the
treatment of BPH. The InjecTx system was recently renamed the ProstaJect system.
In December 1999, we acquired Influence, Inc., one of the leading providers of
surgical devices to treat female incontinence. We now offer multiple surgical
solutions for the treatment of the following major urological disorders:

- Incontinence. Our products include artificial sphincters, sling systems
and bulking systems. Our incontinence products represented $26.9 million,
or 33%, of our 1999 net sales. Sales of incontinence products would have
been $37.5 million in 1999 if Influence sales had been included for the
entire year.

- Erectile Dysfunction. Our erectile dysfunction products include a full
line of inflatable and malleable penile prostheses and a diagnostic system
used to determine the causes of erectile dysfunction. Urologists have
implanted over 200,000 of our devices with high patient satisfaction
rates. Our erectile dysfunction products represented $47.2 million, or
58%, of our 1999 net sales.

- Prostate Disease. We participate in the prostate disease market with our
endourethral stents, resection loops and a minimally invasive system for
treatment of BPH. Our prostate disease products represented $7.2 million,
or 9%, of our 1999 net sales.

Since our founding in 1972, we have focused solely on surgical product solutions
for urologists. These surgical products are generally high margin, sophisticated
products requiring training and frequent contact with physicians. Over time, our
sales force has developed very strong relationships throughout the urologist
community and we believe this is a primary competitive advantage. Today, we
employ one of the largest sales forces solely focused on the urology market,
with over 100 domestic and international direct sales representatives and 45
international distributors. Through this sales force, we continue to strengthen
our relationships with urologists by assisting them with expanding their
practices and increasing patient awareness of our products. Our relationship
with urologists is an important part of our growth strategy, providing us with a
source of new product ideas and a conduit through which to introduce new
products.

In 1999, our international business represented 23% of our total net sales. We
plan to grow our international business and expect it to be an increasing
portion of our sales. In order to achieve this goal, we have recently added a
new senior management team and restructured our international business. We are
also refocusing our European operations to respond to the needs of the local
markets and to develop marketing and reimbursement strategies on a
country-by-country basis.

CORPORATE INFORMATION

We founded our business in 1972. Pfizer Inc. acquired our business in 1985. In
September 1998, a group of investors led by Warburg, Pincus Equity Partners,
L.P., financed the purchase of our assets from Pfizer. We formed American
Medical Systems Holdings, Inc., our current holding company, in April 2000.

This prospectus contains references to our trademarks Acticon(TM), American
Medical Systems(TM), AMS 700(TM), AMS Ambicor(R), AMS Sphincter 800(TM),
Coaguloop(R), Flast(TM), In-Fast(TM), Influence(R), ProstaJect(TM),
Straight-In(TM), Triangle(R), UroLume(R), UroVive(TM), and Ultrex(R). All other
trademarks or trade names referred to in this prospectus are the property of
their respective owners, in particular Pfizer Inc. owns Viagra(R) and VIVUS,
Inc. owns MUSE(TM).

6
<PAGE> 7

In this prospectus, references to "AMS," "the company," "we" and "our," unless
the context otherwise requires, refer to American Medical Systems Holdings, Inc.
and its subsidiaries, including its wholly owned operating subsidiary, American
Medical Systems, Inc. References to "Warburg Pincus," unless we specifically
state otherwise, refer to Warburg, Pincus Equity Partners, L.P.

RECAPITALIZATION AND STOCK SPLIT

Prior to the closing of the offering, we will effect a three-for-one stock
split. Simultaneous with the completion of the offering, all of our outstanding
preferred stock, together with accumulated dividends, will be converted into
common stock, and we will amend our certificate of incorporation to eliminate
our currently designated preferred stock.

OFFICE AND WEBSITE LOCATION

Our principal executive offices are located at 10700 Bren Road West, Minnetonka,
Minnesota 55343, and our telephone number is (952) 933-4666. Our website is
located at www.visitAMS.com. Our website is not intended to be part of this
prospectus.

7
<PAGE> 8

THE OFFERING

<TABLE>
<S> <C>
Common stock offered............................... 6,250,000 shares

Common stock outstanding after the offering........ 27,707,299 shares

Offering price..................................... $11.00 per share

Use of proceeds.................................... We intend to use the proceeds from the offering
to repay approximately $39 million of
outstanding indebtedness under the guaranteed
portions of our senior credit facility, to pay
contingent purchase price payments relating to
our acquisition of Influence, and the balance
for general corporate purposes, including to
fund future product development and acquisitions
of technologies, products and companies. See
"Use of Proceeds" for more detailed information
about our use of proceeds from the offering.

Nasdaq National Market symbol...................... AMMD
</TABLE>

The number of shares of common stock to be outstanding after the offering
excludes:

- 3,024,561 shares of our common stock that we may issue upon the exercise
of outstanding options at a weighted average exercise price of $2.25 per
share;

- 687,189 shares of our common stock available for future issuances under
our 2000 Equity Incentive Plan; and

- 227,675 shares of our common stock that we estimate issuing under an
Exchange Agreement we entered into in December 1999 in connection with
our acquisition of Influence (assuming all contingent purchase price
payments are earned and excluding all accrued dividends); and

- 300,000 shares of our common stock available for future issuances under
our Employee Stock Purchase Plan.

Except as otherwise noted, all information in this prospectus:

- assumes no exercise of the underwriters' over-allotment option;

- reflects the completion of a 3-for-1 stock split that will occur prior
to the closing of the offering;

- reflects the conversion upon the closing of the offering of all of our
outstanding preferred stock, plus accrued dividends on these shares,
into 3,565,848 shares of our voting common stock and 17,703,201 shares
of our non-voting common stock; and

- assumes the filing of our amended and restated certificate of
incorporation which will occur simultaneously with the closing of the
offering.

8
<PAGE> 9

SUMMARY FINANCIAL DATA

In the pro forma column of the consolidated statement of operations data below,
we have adjusted the statement of operations data for the year ended December
31, 1999, to give the estimated effects of our acquisition of Influence on
December 16, 1999, as if the transaction closed on January 1, 1999.

In calculating the pro forma net loss per share in the consolidated statement of
operations data below, we have given effect to the conversion of all of our
outstanding preferred stock, plus accumulated dividends, into common stock as if
the conversion occurred at the beginning of the respective period. We will use
approximately $39 million of the proceeds of the offering to repay outstanding
debt. Assuming the issuance and sale of a number of shares which would generate
proceeds sufficient to repay approximately $39 million of our debt as of the
beginning of 1999, pro forma net income (loss) per share would have been $(.39)
per share for the year ended December 31, 1999 and $.01 for the six months ended
June 30, 2000.

<TABLE>
<CAPTION>
COMBINED PREDECESSOR CONSOLIDATED AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
---------------------------- -----------------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 11, PRO FORMA SIX MONTHS ENDED
YEAR ENDED 1998 TO 1998 TO YEAR ENDED YEAR ENDED JUNE 30,
DECEMBER 31, SEPTEMBER 10, DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1998 1999 1999 1999 2000
------------ ------------- ------------- ------------ ------------ -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $91,958 $54,615 $ 23,115 $ 81,353 $ 92,506 $ 40,234 $ 50,079
Cost of sales(1)....... 19,694 14,050 15,551 31,419 34,299 21,109 11,515
------- ------- -------- -------- -------- -------- --------
Gross profit........... 72,264 40,565 7,564 49,934 58,207 19,125 38,564

Operating expenses:
Marketing and
sales.............. 21,607 18,486 8,261 30,400 37,036 14,390 19,883
Research and
development........ 16,251 10,177 2,884 9,552 11,708 4,536 5,993
General and
administrative..... 17,073 19,846 1,951 7,889 10,114 4,124 5,629
Transition and
reorganization..... -- -- 2,517 3,000 3,000 3,000 1,000
Amortization of
intangibles........ 998 19 965 4,260 7,510 1,970 4,001
In-process research
and development.... -- -- -- 7,354 7,354 -- --
------- ------- -------- -------- -------- -------- --------
Total operating
expenses............. 55,929 48,528 16,578 62,455 76,722 28,020 36,506
------- ------- -------- -------- -------- -------- --------
Operating income
(loss)............... 16,335 (7,963) (9,014) (12,521) (18,515) (8,895) 2,058
Royalty and other
income (expense)..... (112) (155) 180 4,205 4,205 2,208 1,427
Interest income
(expense)............ -- -- (1,672) (6,873) (7,087) (3,358) (4,081)
------- ------- -------- -------- -------- -------- --------
Income (loss) before
taxes................ 16,223 (8,118) (10,506) (15,189) (21,397) (10,045) (596)

-------------------------------------------------------------------------------------------------------------------------
Footnote appears on the following page.
</TABLE>

9
<PAGE> 10

<TABLE>
<CAPTION>
COMBINED PREDECESSOR CONSOLIDATED AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
---------------------------- -----------------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 11, PRO FORMA SIX MONTHS ENDED
YEAR ENDED 1998 TO 1998 TO YEAR ENDED YEAR ENDED JUNE 30,
DECEMBER 31, SEPTEMBER 10, DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1998 1999 1999 1999 2000
------------ ------------- ------------- ------------ ------------ -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income tax benefit
(expense)............ (6,136) 3,241 4,024 5,340 5,340 4,018 40
------- ------- -------- -------- -------- -------- --------
Net income (loss)...... $10,087 $(4,877) $ (6,482) $ (9,849) $(16,057) $ (6,027) $ (556)
======= ======= ======== ======== ======== ======== ========
Pro forma net income
(loss) per
share--basic and
diluted.............. $ (.69) $ (.03)
======== ========
Shares used in pro
forma per share
calculation.......... 14,289 20,785
======== ========
</TABLE>

---------------------------------------------

(1) In connection with our acquisition from Pfizer Inc., we recorded inventories
at fair market value at the date of the acquisition. This accounting
treatment required a $21.8 million write-up of inventories above
manufacturing costs. The write-up was charged to cost of sales over the
following six months as the acquired inventory was sold. Cost of sales were
charged $10.2 million in the period from September 11 to December 31, 1998
and $11.6 million in the first quarter of 1999 related to this fair market
value cost adjustment.

In the pro forma column of the consolidated balance sheet data below, we have
adjusted the balance sheet data as of June 30, 2000, to give effect to the
conversion of all of our outstanding preferred stock, as if such conversion had
occurred on June 30, 2000, plus accumulated dividends, into 3,537,957 shares of
our voting common stock and 17,557,335 shares of our non-voting common stock
upon the closing of the offering. We have also reflected approximately $39
million repayment of debt from the proceeds of the offering.

In the pro forma as adjusted column of the consolidated balance sheet data
below, we have adjusted the balance sheet data as of June 30, 2000, to give
effect to the adjustments set forth above and our receipt of the estimated net
proceeds of $63.0 million from the sale of 6,250,000 shares of common stock we
are offering for sale under this prospectus at the initial public offering price
of $11.00 per share and the application of these proceeds as set forth under the
caption "Use of Proceeds."

<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 4,840 $ 4,840 $ 28,690
Working capital (deficit)............................... (1,675) (1,675) 22,175
Total assets............................................ 190,070 190,070 213,920
Long-term liabilities................................... 96,521 96,521 57,421
Redeemable preferred stock.............................. 70,120 -- --
Stockholders' equity (deficit).......................... (24,738) 45,382 108,332
</TABLE>

10
<PAGE> 11

RISK FACTORS

You should carefully consider the following risk factors before you decide to
buy our common stock. You should also consider the other information in this
prospectus. If any of these risks actually occur, our business, financial
condition, operating results or cash flows, could be materially adversely
affected. This could cause the trading price of our common stock to decline, and
you may lose part or all of your investment.

RISKS RELATED TO OUR BUSINESS

IF PATIENTS CHOOSE NON-INVASIVE ALTERNATIVES, OUR SALES MAY DECLINE.

We predominantly sell medical devices for invasive or minimally invasive
surgical procedures. If patients do not accept our products, our sales may
decline. Patient acceptance of our products depends on a number of factors,
including the failure of non-invasive therapies, the degree of invasiveness
involved in the procedures using our products, the rate and severity of
complications from the procedures using our products and other adverse side
effects from the procedures using our products.

Patients are always more likely first to consider non-invasive alternatives to
treat their urological disorders. Patients with incontinence conditions are
likely first to try pads, adult diapers or exercises to self-manage their
condition. Patients with erectile dysfunction are likely first to try oral
medications. For example, the primary oral medication used to treat erectile
dysfunction today is Viagra. Another non-invasive treatment is MUSE. MUSE is an
applicator which inserts medication into the urethra. Following the introduction
of MUSE in 1997 and the anticipation of Viagra in 1998, sales of our penile
implant products declined significantly. The introduction of new oral
medications or other less-invasive therapies may cause our sales to decline in
the future.

IF PHYSICIANS DO NOT RECOMMEND AND ENDORSE OUR PRODUCTS, OUR SALES MAY DECLINE
OR WE MAY BE UNABLE TO INCREASE OUR REVENUES AND PROFITABILITY.

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

IF WE FAIL TO COMPETE SUCCESSFULLY IN THE FUTURE AGAINST OUR EXISTING OR
POTENTIAL COMPETITORS, OUR REVENUES AND OPERATING RESULTS MAY BE NEGATIVELY
AFFECTED AND WE MAY NOT ACHIEVE FUTURE GROWTH.

Many of our competitors in the urology market have greater resources, more
widely accepted products, less-invasive therapies, greater technical
capabilities and stronger name recognition than we do. Our competitors will
continue to improve their products and develop new competing products, including
less-invasive or non-invasive products such as Viagra. We may be unable to
compete effectively with our competitors if we cannot keep up with existing or
new alternative products, techniques, therapies and technology in the urology
market. These new technologies and products may beat our products to the market,
be more effective than our products or render our products obsolete by
substantially reducing the prevalence of incontinence, erectile dysfunction or
prostate diseases. See "Business--Competition" for more information about our
competitors.

11
<PAGE> 12

IF WE ARE UNABLE TO MANAGE SUCCESSFULLY OUR ISRAELI OPERATIONS, OUR RESEARCH AND
DEVELOPMENT EFFORTS MAY SUFFER.

We acquired Influence in December 1999. Influence's research and manufacturing
operations are located in the State of Israel. We are relying on our Influence
research and development staff to develop new products, particularly for
incontinence. If we fail to manage our Israeli operations effectively from the
United States we may not develop new or improved incontinence products. We rely
on the two founders of Influence to manage our Israeli operations. The Influence
founders have other business interests, and under their employment agreements
they are only required to devote 40% of their time to our business. These
employment agreements expire in December 2000, unless the parties agree to
extend them.

In addition, many of our Israeli employees are currently obligated to perform
annual reserve duty in the Israel Defense Forces and can be called to active
military duty at any time. A significant leave of absence of these employees,
without the ability to hire additional employees or replace key employees, could
have a negative impact on our product development efforts.

IF WE FAIL TO MANAGE SUCCESSFULLY OUR TWO U.S. SALES FORCES, WE MAY HARM OUR
BUSINESS BY CREATING CONFUSION IN THE UROLOGY MARKET.

Since our acquisition of Influence, we have maintained two separate sales forces
in the United States, one that sells our traditional products and one that sells
Influence's sling procedure kits for the treatment of incontinence. The
Influence sales force sells products that are less invasive than some of the
products the AMS sales force sells. In some cases, our two sales forces sell
products that may compete for the same patients, which may create tension
between our sales forces. Our use of two sales forces may also confuse our
customers because customers may not know which of our sales representatives sell
a particular product.

IF WE CANNOT OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR
OUR PRODUCTS, PHYSICIANS AND PATIENTS MAY BE RELUCTANT TO USE OUR PRODUCTS AND
SALES MAY DECLINE.

We may be unable to sell our products on a profitable basis if third-party
payors deny coverage or reduce their current levels of reimbursement. The U.S.
Health Care Financing Administration, or HCFA, recently published a list of
products for which it will provide reimbursement when used in the outpatient
hospital setting. This list does not include our artificial urinary sphincters.
If HCFA does not add this product to the list of products eligible for
reimbursement in the outpatient hospital setting, our sales of artificial
urinary sphincters may decline significantly. Our revenues depend largely on
government health care programs and private health insurers reimbursing
patients' medical expenses. Physicians, hospitals and other health care
providers may not purchase our products if they do not receive satisfactory
reimbursement from these third-party payors for the cost of the procedures using
our products. Payors continue to review their coverage policies carefully for
existing and new therapies and can, without notice, deny coverage for treatments
that include the use of our products.

If we are unable to obtain adequate levels of reimbursement from third-party
payors outside of the United States, international sales of our products may
decline. Outside of the United States, reimbursement systems vary significantly
by country. Many foreign markets have governmentally managed health care systems
that govern reimbursement for new devices and procedures. Some European
countries, in particular France, have tightened reimbursement rates, which has
contributed to a decrease in our international sales, particularly of our
artificial urinary sphincter. See "Business--Third-Party Reimbursement" for more
information regarding reimbursement in the United States and internationally.

IF OUR EFFORTS TO ACQUIRE OTHER COMPANIES OR PRODUCT LINES FAIL, OUR BUSINESS
MAY NOT GROW.

As part of our growth strategy, we intend to pursue acquisitions of other
companies or products and distribution arrangements. Our ability to grow through
acquisitions or distribution arrangements depends
12
<PAGE> 13

upon our ability to identify, negotiate and complete suitable acquisitions or
distribution arrangements. Even if we complete acquisitions, we may also
experience:

- difficulties in assimilating any acquired companies and products into
our existing business;

- delays in realizing the benefits of the acquired company or products;

- diversion of our management's time and attention from other business
concerns;

- lack of or limited direct prior experience in new markets we may enter;
or

- difficulties in retaining key employees of the acquired business
necessary to manage these acquisitions.

In addition, an acquisition could materially impair our operating results by
causing us to incur debt or requiring us to amortize acquisition expenses and
acquired assets.

IF WE SUPPLY PRODUCTS TO THE MARKET THAT WE MUST RECALL, OUR BUSINESS COULD
SUFFER FROM NEGATIVE PUBLICITY AND OUR SALES COULD DECLINE.

In the event that any of our products prove to be defective, we could
voluntarily recall, or the FDA could require us to redesign or implement a
recall of, any defective product. Since our acquisition from Pfizer, the cost of
sales for recalled products was approximately $1 million, of which $837,000 was
related to one of our products. Based on this experience, and the fact that our
competitors have also recalled products, we believe there is a possibility that
we may recall products in the future and that future recalls could result in
significant costs to us and significant negative publicity which could harm our
ability to market our products in the future. Though it is not possible to
quantify the economic impact of a recall, it could have a negative impact on our
business.

WE MAY INCUR SUBSTANTIAL COSTS AND OUR BUSINESS MAY SUFFER DUE TO CURRENT AND
FUTURE LITIGATION.

IF WE LOSE ANY EXISTING OR FUTURE INTELLECTUAL PROPERTY LAWSUITS, A COURT COULD
REQUIRE US TO PAY SIGNIFICANT DAMAGES OR PREVENT US FROM SELLING OUR
PRODUCTS. The medical device industry is litigious with respect to patents and
other intellectual property rights. Companies in the medical device industry
have used intellectual property litigation to gain a competitive advantage. We
are currently involved in two intellectual property lawsuits with Boston
Scientific Corporation relating to our sling procedure kits for the treatment of
incontinence. See "Business--Legal Proceedings" for more specific information
regarding these lawsuits. If Boston Scientific were to succeed in one or the
other of these lawsuits, the court may:

- require us to pay significant damages to Boston Scientific;

- prevent us from selling our sling procedure kits for the treatment of
incontinence; or

- hold our patents invalid or unenforceable.

The occurrence of any of these would have a negative impact on our business.

In the future, we may become a party to other lawsuits involving patents or
other intellectual property. A legal proceeding, regardless of the outcome,
could drain our financial resources and divert the time and efforts of our
management. If we lose one of these proceedings, a court, or a similar foreign
governing body, could require us to pay significant damages to third parties,
require us to seek licenses from third parties and pay ongoing royalties,
require us to redesign our products or prevent us from manufacturing, using or
selling our products. In addition to being costly, protracted litigation to
defend or prosecute our
13
<PAGE> 14

intellectual property rights could result in our customers or potential
customers deferring or limiting their purchase or use of the affected products
until resolution of the litigation.

IF PRODUCT LIABILITY LAWSUITS ARE BROUGHT AGAINST US, OUR BUSINESS MAY BE
HARMED. The manufacture and sale of medical devices entails significant risk of
product liability claims. In the past, we have had a significant number of
product liability claims relating to our penile prostheses. In the future, we
may be subject to additional product liability claims, some of which may have a
negative impact on our business. Our existing products liability insurance
coverage may be inadequate to protect us from any liabilities we might incur. If
a product liability claim or series of claims is brought against us with respect
to uninsured liabilities or in excess of our insurance coverage, our business
could suffer.

IF WE LOSE ONE OF OUR KEY SUPPLIERS, WE MAY BE UNABLE TO MEET OUR CUSTOMER
ORDERS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN OUR BUDGET.

If we are unable to obtain materials we need from our key suppliers, we may be
unable to manufacture our products for a period of time or within our budget. We
rely on one supplier for the silicone used in most of our implantable penile
prosthesis and sphincters. We are aware of only two suppliers of silicone to the
medical device industry for permanent implant usage. We rely mostly on one
supplier for some of the components used in Influence's sling procedure kits. We
are currently aware of only a few suppliers of these components that we may use
if needed. In addition, some of our new products under development use materials
that are available only from limited sources.

Suppliers of raw materials and components may decide for reasons beyond our
control to cease supplying raw materials and components to us. For example, the
controversies in the United States surrounding the use of silicone in breast
implants have caused suppliers to carefully evaluate supplying silicone to
manufacturers of medical devices. We have no written agreements with our key
suppliers requiring them to supply us with these raw materials or components. In
addition, the FDA requires us to identify any supplier we use. The FDA may
require additional testing of any raw materials or components from new suppliers
prior to our use of these materials or components.

OUR USE OF SILICONE TO MANUFACTURE OUR PENILE IMPLANTS COULD CAUSE PUBLIC
CONTROVERSY WHICH MAY PREVENT CUSTOMERS FROM CHOOSING OUR PRODUCTS.

Our use of silicone in our products may result in controversies or even
litigation, which could decrease sales of our largest product line. Although we
do not use the type of silicone gel used in breast implants, the public may
still view our penile implant products as harmful as a result of the
controversies surrounding the use of silicone in breast implants. Studies or
research unknown to date may also cast doubt on the safety of our products and
the appropriateness of their intended use.

IF WE ARE UNABLE TO CONTINUE TO MEET THE OPERATIONAL, LEGAL AND FINANCIAL
CHALLENGES WE MAY ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, THE GROWTH OF OUR
INTERNATIONAL BUSINESS MAY BE LIMITED.

Our international sales and operations subject us and our representatives,
agents and distributors to laws and regulations of foreign jurisdictions. The
following factors, among others, may negatively impact our international sales
and operations. Our international sales are predominately generated in Europe.
In Europe, healthcare regulation and reimbursement for medical devices vary
significantly from country to country on a regular basis. This changing
environment could adversely affect our ability to sell our products in some
European countries.

We frequently launch new products in Europe. Our ability to launch new products
rapidly and effectively in Europe can affect market acceptance of new products
in the United States and other markets. In addition, we have experienced a
higher turnover rate among our European sales force than we have experienced in
the United States. Our ability to attract and retain an effective sales force in
Europe will

14
<PAGE> 15

affect our European sales. Also, we will need to attract and retain distributors
in countries outside of Europe to grow our international sales.

FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD RESULT IN DECLINES IN OUR
REPORTED SALES AND EARNINGS.

Since our international sales are denominated in local currencies and not in
U.S. dollars, our reported sales and earnings are subject to fluctuations in
foreign exchange rates. International sales accounted for 23% of our net sales
in 1999. We expect that international sales will continue to be a significant
portion of our business. At present, we do not engage in hedging transactions to
protect against uncertainty in future exchange rates between particular foreign
currencies and the U.S. dollars.

IF OUR PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS DO NOT ADEQUATELY PROTECT
OUR PRODUCTS, WE MAY LOSE MARKET SHARE TO OUR COMPETITORS AND BE UNABLE TO
OPERATE OUR BUSINESS PROFITABLY.

We rely on patents, trade secrets, copyrights, know-how, trademarks, license
agreements and contractual provisions to establish our intellectual property
rights and protect our products. These legal means, however, afford only limited
protection and may not adequately protect our rights. In addition, we cannot
assure you that any of our pending patent applications will issue. The U.S.
Patent and Trademark Office, or the PTO, may deny or significantly narrow claims
made under patent applications and the issued patents, if any, may not provide
us with significant commercial protection. We could incur substantial costs in
proceedings before the PTO. These proceedings could result in adverse decisions
as to the priority of our inventions. In addition, the laws of some of the
countries in which our products are or may be sold may not protect our products
and intellectual property to the same extent as U.S. laws, or at all. We may be
unable to protect our rights in trade secrets and unpatented proprietary
technology in these countries.

We seek to protect our trade secrets and unpatented proprietary technology, in
part, with confidentiality agreements with our employees and consultants. We
cannot assure you, however, that:

- these agreements will not be breached;

- we will have adequate remedies for any breach; or

- trade secrets will not otherwise become known to or independently
developed by our competitors.

IF WE FAIL TO OBTAIN REGULATORY APPROVAL TO COMMERCIALLY MANUFACTURE OR SELL ANY
OF OUR PRODUCTS, OR IF APPROVAL IS DELAYED, WE WILL BE UNABLE TO GENERATE
REVENUE FROM THE SALE OF THOSE PRODUCTS.

WE MUST OBTAIN REGULATORY APPROVALS TO MARKET OUR PRODUCTS IN THE UNITED STATES
AND FOREIGN JURISDICTIONS. If we fail to receive regulatory approval for future
products, we will be unable to market and sell these future products. In the
United States, we must obtain approval from the FDA before we can begin
commercializing most of our products. The FDA approval process is typically
lengthy and expensive, and approval is never certain. For a description of the
FDA regulatory process, see "Business--Government Regulation." Products
distributed outside of the United States are also subject to foreign government
regulations which vary from country to country. The time required to obtain
approval from a foreign country may be longer or shorter than that required for
FDA clearance. Our failure to comply with regulatory approvals could result in
government authorities:

- imposing fines and penalties on us;

- preventing us from manufacturing our products;

- bringing civil or criminal charges against us;

15
<PAGE> 16

- delaying the introduction of our new products into the market;

- recalling or seizing our products;

- disrupting the manufacture or distribution of our products; or

- withdrawing or denying approvals for our products.

WE WILL BE UNABLE TO SELL OUR PRODUCTS IF WE FAIL TO COMPLY WITH MANUFACTURING
REGULATIONS. In order to commercially manufacture our products we must comply
with the FDA's manufacturing regulations which govern design controls, quality
systems and documentation policies and procedures. The FDA and foreign
authorities periodically inspect our manufacturing facilities. Our failure to
comply with these manufacturing regulations may prevent us or delay us from
marketing or distributing our products and this would have a negative impact on
our business. For a description of the manufacturing regulations we must comply
with, see "Business--Government Regulation."

OUR BUSINESS MAY SUFFER IF OUR NEW PRODUCTS ARE NOT CLEARED TO MARKET IN THE
UNITED STATES OR ANY OTHER MARKET. We sell some of our products only in
international markets because they have not been cleared for marketing in the
United States. We may be unable to sell the products we are selling in Europe in
the United States. We may be unable to sell our future products in Europe, the
United States or any other market for a number of reasons. These reasons
include, among others, the possibilities that the potential products will be:

- ineffective or cause harmful side effects during preclinical testing or
clinical trials;

- difficult to manufacture on a large scale; or

- uneconomical.

IF THE CURRENT REGULATIONS GOVERNING THE USE OF HUMAN TISSUE CHANGE, SALES OF
OUR SLING PROCEDURE KITS MAY DECLINE.

We provide human cadaveric tissue as a service in conjunction with the sale of
our sling procedure kits for urinary incontinence. If we fail to comply with
laws or regulations relating to human tissue services, we may be unable to
provide human tissue with our sling procedure kits and sales of sling procedure
kits could decline. The procurement and transplantation of human tissue are
currently subject to federal regulation under a criminal statute, which
prohibits the purchase and sale of the human tissue we provide for valuable
consideration. The term valuable consideration does not include reasonable
payments associated with services such as the removal, transportation,
implantation, processing, preservation, quality control and storage of human
tissue. The FDA currently regulates human tissue-based products on a limited
basis, but has proposed a more comprehensive regulatory framework. If this more
comprehensive regulatory framework is adopted, we could be limited in our
ability to provide human cadaveric tissue. This could result in a decrease in
sales of our sling procedure kits.

IF OUR ROYALTY INCOME DECLINES, OUR NET INCOME WILL DECLINE.

In 1999, we recognized approximately $3.4 million of royalty income from the
sale of medical products by a third party that is covered by patents we own.
Because the royalty income does not have any cost, all of our royalty income
contributes to pre-tax net income and has a greater impact on net income than
other revenue items. Any decrease in royalty income will reduce our pre-tax net
income by an equal amount.

16
<PAGE> 17

RISKS RELATED TO THE OFFERING

IF A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK IS SOLD INTO THE MARKET
FOLLOWING THE OFFERING, THE MARKET PRICE OF OUR COMMON STOCK COULD SIGNIFICANTLY
DECLINE, EVEN IF OUR BUSINESS IS DOING WELL.

Once a trading market develops for our common stock, many of our stockholders
will have an opportunity to sell their stock for the first time. Also, many of
our employees and directors may exercise their stock options in order to sell
the stock underlying their options in the market. Sales of a substantial number
of shares of our common stock in the public market after the offering could
depress the market price of our common stock and impair our ability to raise
capital through the sale of additional equity securities. Officers, directors,
stockholders and holders of outstanding options owning an aggregate of
approximately 23,773,242 shares have agreed that they will not, without the
prior written consent of the underwriters, directly or indirectly sell any of
these restricted shares for 180 days after the date of this prospectus. For a
more detailed description, see "Shares Eligible for Future Sale."

OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, OUR BYLAWS AND DELAWARE
LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE, DELAY OR PREVENT A TAKEOVER OF
AMS.

Provisions of our amended and restated certificate of incorporation, bylaws and
Delaware law may discourage, delay or prevent a merger with, or acquisition of,
AMS that you may consider favorable. See "Management--Board of Directors
Composition and Compensation" and "Description of Capital Stock--Undesignated
Preferred Stock;--Anti-Takeover Provisions of Delaware Law" for more information
on the specific provisions of our amended and restated certificate of
incorporation, our bylaws and Delaware law that could discourage, delay or
prevent a change of control of AMS.

OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR COMMON STOCK COULD
SUFFER A DECLINE IN VALUE.

There is currently no public market for our common stock. An active trading
market for our common stock may not develop, or, if one develops, trading may
not continue. You may be unable to resell the common stock you buy at or above
the initial public offering price. We will establish the initial public offering
price through our negotiations with the representatives of the underwriters. You
should not view the price they establish as any indication of prices that will
prevail in the trading market. With the current uncertainty about health care
policy, reimbursement and coverage in the United States, there has been
significant volatility in the market price and trading volume of securities of
medical device and other health care companies unrelated to the performance of
these companies. These broad market fluctuations may negatively affect the
market price of our common stock. Some specific factors that may have a
significant affect on our common stock market prices include:

- actual or anticipated fluctuations in our operating results;

- our announcements or our competitors' announcements of technological
innovations or new products;

- clinical trial results;

- changes in our growth rates or competitors' growth rates;

- developments regarding our patents or proprietary rights, or those of our
competitors;

- FDA and international actions with respect to the government regulation
of medical devices and third-party reimbursement matters;

- public concern as to the safety of our products;

- changes in health care policy in the United States and internationally;

- conditions in the financial markets in general;
17
<PAGE> 18

- conditions of other medical device companies or the medical device
industry generally; and

- changes in stock market analyst recommendations regarding our common
stock, other comparable companies or the technology industry generally.

OUR EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDER MAY BE ABLE TO
INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL.

After the offering, our executive officers and directors (including Warburg
Pincus and stockholders with which directors are affiliated) will control
approximately 77.1% of our outstanding voting common stock. Warburg Pincus,
individually, will own approximately 45% of our voting common stock. This
concentration of ownership may have the effect of delaying, preventing or
deterring a change in control of our company, could deprive our stockholders of
an opportunity to receive a premium for their common stock as part of a sale or
merger of AMS and may negatively affect the market price of our common stock.
All of our principal stockholders are parties to a stockholders agreement, which
provides that current stockholders who own at least 10% of our capital stock
have the right to designate a specified number of persons to our board of
directors so long as the stockholder maintains specified levels of ownership of
our outstanding common stock. Upon the completion of the offering, Warburg
Pincus will have the right under the stockholders agreement to designate two
persons to be appointed or nominated to our board of directors. As a result of
this share ownership and minority representation on our board of directors, our
current stockholders, in particular Warburg Pincus, will be able to influence
all affairs and actions of our company, including matters requiring stockholder
approval such as the election of directors and approval of significant corporate
transactions. The interests of our executive officers, directors and principal
stockholders may differ from the interests of the other stockholders.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, principally in the sections
entitled "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" and "Business." Generally, you can identify these
statements because they use phrases like "anticipates," "believes," "expects,"
"future," "intends," "plans," and similar terms. These statements are only
predictions. Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy, and actual results may differ materially from those we anticipated due
to a number of uncertainties, many of which are unforeseen. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including,
among others, the risks we face as described on the previous pages and elsewhere
in this prospectus.

We believe it is important to communicate our expectations to our investors.
There may be events in the future, however, that we are unable to predict
accurately or over which we have no control. The risk factors listed on the
previous pages, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in the previous risk factors and elsewhere in
this prospectus could negatively impact our business, operating results,
financial condition and stock price.

18
<PAGE> 19

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the 6,250,000 shares of
our common stock we are offering under this prospectus at the initial public
offering price of $11.00 per share will be approximately $63.0 million, after
deducting the underwriting discount and estimated offering expenses. We will not
receive any proceeds from the sale of common stock by Warburg Pincus if the
underwriters exercise their over-allotment option.

We anticipate using the net proceeds of the offering to:

- Repay approximately $39 million of outstanding indebtedness, which is
guaranteed by Warburg Pincus and three of its affiliated entities, under
our $115 million senior credit facility with a syndication of banks led
by Bank of America, N.A. See "Certain Transactions" and "Underwriting"
for more information on our senior credit facility. Borrowings under the
guaranteed portions of our senior credit facility bear interest at
either an Adjusted Base Rate or an Adjusted Eurodollar Rate depending
upon whether we have requested a Base Rate Loan or a Eurodollar Loan
from our lenders. To date, we have only requested Eurodollar Loans from
our lenders which bear interest at the London InterBank Offering Rate,
or LIBOR, plus 0.875%. As of June 30, 2000 this interest rate was 6.78%.
Amounts outstanding under the guaranteed portions of our senior credit
facility are due in March 2006.

- Make contingent purchase price payments of up to $16.5 million under our
merger agreement with Influence.

We plan to use the balance of the proceeds for general corporate purposes,
including to fund expansion of our current product offering through research and
development and acquisitions of technologies, products and companies. We have no
present understandings, commitments or agreements with respect to any
acquisitions. Pending the uses described above, we intend to invest the net
proceeds of the offering in short-term, investment-grade, interest-bearing
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" for additional
information regarding our sources and uses of capital.

DIVIDEND POLICY

We have never declared or paid cash dividends. We currently intend to retain all
future earnings for the operation and expansion of our business. We do not
anticipate declaring or paying cash dividends on our common stock in the
foreseeable future. Any payment of cash dividends on our common stock will be at
the discretion of our board and will depend upon our results of operations,
earnings, capital requirements, contractual restrictions and other factors
deemed relevant by our board. In addition, our current senior credit facility
prohibits us from paying you any cash dividends without our lenders' consent.

19
<PAGE> 20

CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and
capitalization as of June 30, 2000.

In the pro forma column, we have made adjustments to give effect to the
conversion of all of our outstanding preferred stock into our voting common
stock and non-voting common stock upon the closing of the offering, as if the
conversion occurred on June 30, 2000.

In the pro forma as adjusted column, we have made adjustments to give effect to
the adjustments set forth above, our receipt of the estimated net proceeds of
$63.0 million from the sale of 6,250,000 shares of common stock we are offering
for sale under this prospectus at the initial public offering price of $11.00
per share and the application of these proceeds as set forth under the caption
"Use of Proceeds." We have also reflected approximately $39 million repayment of
debt from the proceeds of the offering.

You should read this table in conjunction with our consolidated financial
statements and their notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Use of Proceeds" and
"Description of Capital Stock" for additional information.

<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 4,840 $ 4,840 $ 28,690
======== ======== ========
Long-term debt, including current portion................. $104,000 $104,000 $ 65,000
Series A convertible non-voting preferred stock, $.01 par
value, 32,116 shares authorized; 27,749 shares issued
and outstanding actual; no shares issued and outstanding
pro forma or pro forma as adjusted...................... 32,067 -- --
Series B convertible voting preferred stock, $.01 par
value, 4,050,000 shares authorized; 680,000 shares
issued and outstanding actual; no shares issued and
outstanding pro forma or pro forma as adjusted.......... 3,746 -- --
Series C convertible non-voting preferred stock, $.01 par
value, 6,000,000 shares authorized; 3,370,000 shares
issued and outstanding actual; no shares issued and
outstanding pro forma or pro forma as adjusted.......... 18,784 -- --
Series D convertible voting preferred stock, $.01 par
value, 4,800,000 shares authorized; 336,144 shares
issued and outstanding actual; no shares issued and
outstanding pro forma or pro forma as adjusted.......... 3,497 -- --
Series E convertible non-voting preferred stock, $.01 par
value, 3,400,000 shares authorized; 1,163,856 shares
issued and outstanding actual; no shares issued and
outstanding pro forma or pro forma as adjusted.......... 12,026 -- --

Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding actual;
no shares issued and outstanding pro forma or pro
forma as adjusted.................................... -- -- --
</TABLE>

20
<PAGE> 21

<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Voting common stock, $.01 par value, 75,000,000 shares
authorized; no shares issued and outstanding actual;
3,587,457 shares issued and outstanding pro forma;
9,837,457 shares issued and outstanding pro forma as
adjusted............................................. -- 36 98
Non-voting common stock, $.01 par value, 20,000,000
shares authorized; no shares issued and outstanding
actual; 17,557,335 shares issued and outstanding pro
forma; 17,557,335 shares issued and outstanding and
pro forma as adjusted................................ -- 175 175
Additional paid-in capital................................ 1,464 71,373 134,261
Deferred compensation..................................... (1,191) (1,191) (1,191)
Accumulated other comprehensive loss...................... (956) (956) (956)
Accumulated deficit....................................... (24,055) (24,055) (24,055)
-------- -------- --------
Total stockholders' equity (deficit)................. (24,738) 45,382 108,332
-------- -------- --------
Total capitalization............................... $149,382 $149,382 $173,332
======== ======== ========
</TABLE>

The outstanding share information in the table above is based on the number of
shares outstanding as of June 30, 2000. The table above excludes:

- 3,024,561 shares of our common stock that we may issue upon the exercise
of outstanding options at a weighted average exercise price of $2.25 per
share;

- 687,189 shares of our common stock available for future issuances under
our 2000 Equity Incentive Plan;

- 300,000 shares of our common stock available for future issuances under
our Employee Stock Purchase Plan; and

- 138,750 shares of our common stock issued after June 30, 2000 upon
exercise of stock options.

21
<PAGE> 22

DILUTION

Our historical net tangible book deficit as of June 30, 2000 was approximately
$(128,996,000). Our pro forma net tangible book deficit as of June 30, 2000 was
$(58,876,000), or approximately $(2.78) per share. Pro forma net tangible book
deficit per share represents our total tangible assets less our total
liabilities, divided by the number of shares of our common stock outstanding,
giving effect to the conversion of all of our outstanding shares of preferred
stock, including accumulated dividends on these shares, into 21,095,292 shares
of our common stock, as if the conversion occurred on June 30, 2000. After
giving effect to this conversion, and the sale of the 6,250,000 shares of common
stock offered by this prospectus and after deducting the underwriting discount
and estimated offering expenses, our net tangible book value as of June 30, 2000
would have been approximately $3,524,000, or $.13 per share. This represents an
immediate increase in net tangible book value of $2.91 per share to our existing
stockholders and an immediate dilution of $10.87 per share to new investors.
Dilution is an accounting concept that refers to the difference between what an
investor pays for shares of a company and the book value of the shares
immediately after the transaction. Whenever the book value is less than the
investor paid, the investor suffers dilution. The dilution to investors in the
offering is illustrated in the following table:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $11.00
Pro forma net tangible book deficit per share before the
offering............................................... (2.78)
Increase per share attributable to new investors.......... 2.91
------
Pro forma as adjusted net tangible book value per share
after the offering........................................ .13
------
Dilution per share to new investors......................... $10.87
======
</TABLE>

The following table enumerates the number of shares of common stock issued, the
total consideration paid and the average price per share paid by our existing
stockholders. The following table also enumerates, as of June 30, 2000, the
number of shares of common stock purchased and the total consideration paid,
calculated before deduction of the underwriting discount and estimated offering
expenses, and the average price per share paid by the new investors in this
offering assuming the sale of 6,250,000 shares of our common stock at the
initial offering price of $11.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 21,144,792 77.2% $ 63,082,500 47.9% $ 2.98
New investors...................... 6,250,000 22.8 68,750,000 52.1 11.00
---------- ----- ------------ ----- ------
Total....................... 27,394,792 100.0% $131,832,500 100.0% $ 4.81
========== ===== ============ ===== ======
</TABLE>

The information presented in the previous table with respect to existing
stockholders assumes the conversion of all of our outstanding preferred stock,
including accumulated dividends on these shares, into 21,095,292 shares of our
common stock. The table assumes that existing stockholders do not purchase any
shares of common stock in the offering. The previous table assumes no exercise
of stock options. As of June 30, 2000, there are options outstanding to purchase
3,133,311 shares of our common stock at a weighted average exercise price of
$2.12 per share. If all outstanding options were exercised, the total number of
shares outstanding would be 30,528,103; the percent of shares purchased by new
investors would be 20.5%; the total amount of consideration paid by all
stockholders would be $138,475,119; the percent of consideration paid by new
investors would be 49.6%; the average price per share paid by optionholders
would be $2.12; and the average price per share paid by all stockholders would
be $4.54. See "Management" and "Description of Capital Stock" for information
regarding outstanding options.

22
<PAGE> 23

SELECTED FINANCIAL DATA

The following tables set forth certain selected combined and consolidated
financial data of American Medical Systems Holdings, Inc. and its predecessor
for the periods indicated. We derived our selected combined and consolidated
financial data as of December 31, 1998 and 1999 and for the period from January
1, 1998 to September 10, 1998 and September 11, 1998 to December 31, 1998 and
the year ended December 31, 1999 from our consolidated financial statements
included elsewhere in this prospectus and that were audited by Ernst & Young
LLP. We derived our selected combined financial data as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
from our financial statements that were audited by KPMG LLP. The audited
combined financial statements for the year ended December 31, 1997 are included
elsewhere in this prospectus. The audited combined financial statements for the
year ended December 31, 1996 are not included in this prospectus. We derived our
selected financial data as of December 31, 1995 from our unaudited combined
financial statements not included elsewhere in this prospectus. The selected
consolidated financial data for the six months ended June 30, 1999 and 2000 has
been derived from our unaudited consolidated financial statements which, in the
opinion of management, include all adjustments, consisting solely of normal
recurring adjustments, necessary for a fair presentation of the consolidated
financial information shown on these statements. The results for the six months
ended June 30, 2000 are not necessarily indicative of the results to be expected
for the full year or any future period.
<TABLE>
<CAPTION>
COMBINED PREDECESSOR
-----------------------------------------------
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1998
---------------------------- TO SEPTEMBER 10,
1995 1996 1997 1998
------- -------- ------- ----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $89,734 $ 97,933 $91,958 $54,615
Cost of sales(1)........... 18,470 17,325 19,694 14,050
------- -------- ------- -------
Gross profit............... 71,264 80,608 72,264 40,565
Operating expenses:
Marketing and sales...... 27,316 26,851 21,607 18,486
Research and
development............ 12,949 13,747 16,251 10,177
General and
administrative......... 10,052 9,926 17,073 19,846
Transition and
reorganization......... -- -- -- --
Amortization of
intangibles............ 1,229 1,190 998 19
In-process research and
development............ -- -- -- --
------- -------- ------- -------
Total operating expenses... 51,546 51,714 55,929 48,528
------- -------- ------- -------
Operating income (loss).... 19,718 28,894 16,335 (7,963)
Royalty and other income
(expense)................ (69) (571) (112) (155)
Interest income
(expense)................ -- -- -- --
------- -------- ------- -------
Income (loss) before
taxes.................... 19,649 28,323 16,223 (8,118)
Income tax benefit
(expense)................ (8,149) (10,581) (6,136) 3,241
------- -------- ------- -------
Net income (loss).......... $11,500 $ 17,742 $10,087 $(4,877)
======= ======== ======= =======
Pro forma net income (loss)
per share--basic and
diluted(2)...............
Shares used in pro forma
per share calculation....

<CAPTION>
CONSOLIDATED AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
------------------------------------------------------
PERIOD FROM SIX MONTHS ENDED
SEPTEMBER 11, 1998 YEAR ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, ------------------
1998 1999 1999 2000
------------------ ------------ -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $ 23,115 $ 81,353 $ 40,234 $50,079
Cost of sales(1)........... 15,551 31,419 21,109 11,515
-------- -------- -------- -------
Gross profit............... 7,564 49,934 19,125 38,564
Operating expenses:
Marketing and sales...... 8,261 30,400 14,390 19,883
Research and
development............ 2,884 9,552 4,536 5,993
General and
administrative......... 1,951 7,889 4,124 5,629
Transition and
reorganization......... 2,517 3,000 3,000 1,000
Amortization of
intangibles............ 965 4,260 1,970 4,001
In-process research and
development............ -- 7,354 -- --
-------- -------- -------- -------
Total operating expenses... 16,578 62,455 28,020 36,506
-------- -------- -------- -------
Operating income (loss).... (9,014) (12,521) (8,895) 2,058
Royalty and other income
(expense)................ 180 4,205 2,208 1,427
Interest income
(expense)................ (1,672) (6,873) (3,358) (4,081)
-------- -------- -------- -------
Income (loss) before
taxes.................... (10,506) (15,189) (10,045) (596)
Income tax benefit
(expense)................ 4,024 5,340 4,018 40
-------- -------- -------- -------
Net income (loss).......... $ (6,482) $ (9,849) $ 6,027 $ (556)
======== ======== ======== =======
Pro forma net income (loss)
per share--basic and
diluted(2)............... $ (.69) $ (.03)
======== =======
Shares used in pro forma
per share calculation.... 14,289 20,785
======== =======
</TABLE>

---------------------------------------------
Footnote appears on the following page.

23
<PAGE> 24

<TABLE>
<CAPTION>
CONSOLIDATED AMERICAN MEDICAL
COMBINED PREDECESSOR SYSTEMS HOLDINGS, INC.
------------------------------ -------------------------------
AS OF DECEMBER 31, AS OF
---------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(3)................................ $ -- $ -- $ -- $ 2,808 $ 6,940 $ 4,840
Working capital (deficit)................................... 81,913 101,456 108,197 26,193 (235) (1,675)
Total assets................................................ 116,456 164,448 174,716 155,600 187,290 190,070
Long-term liabilities....................................... 7,685 48,990 52,104 95,000 95,821 96,521
Redeemable preferred stock.................................. -- -- -- 40,981 67,465 70,120
Stockholders' equity (deficit).............................. $ 97,065 $115,458 $122,612 $ (7,908) $(21,836) $(24,738)
</TABLE>
<TABLE>
<CAPTION>

COMBINED PREDECESSOR
----------------------------------------------

PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1998
--------------------------- TO SEPTEMBER 10,
1995 1996 1997 1998
------- ------- ------- ----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>

OTHER FINANCIAL DATA:
EBITDA(4)..................... $22,251 $31,029 $18,856 $(6,063)
Cash flows provided by (used
in) operating activities.... 3,132 1,219 2,642 1,256
Cash flows provided by (used
in) investing activities.... (3,132) (1,219) (2,642) (1,294)
Cash flows provided by (used
in) financing activities.... -- -- -- --

<CAPTION>
CONSOLIDATED AMERICAN MEDICAL
SYSTEMS HOLDINGS, INC.
-----------------------------------------------------
SIX MONTHS
PERIOD FROM ENDED
SEPTEMBER 11, 1998 YEAR ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, -----------------
1998 1999 1999 2000
------------------ ------------ ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(4)..................... $2,980 $ 17,487 $ 8,197 $ 9,579
Cash flows provided by (used
in) operating activities.... 850 13,898 8,329 3,194
Cash flows provided by (used
in) investing activities.... (721) (39,092 (4,967) (7,458)
Cash flows provided by (used
in) financing activities.... -- 29,253 2,500 2,782
</TABLE>

---------------------------------------------

(2) In calculating the pro forma net loss per share, we have given effect to the
conversion of all our outstanding preferred stock, plus accumulated
dividends, into common stock as if the conversion occurred at the beginning
of the respective period. We will use approximately $39 million of the
proceeds of the offering to repay outstanding debt. Assuming the issuance
and sale of a number of shares which would generate proceeds sufficient to
repay approximately $39 million of our debt as of the beginning of 1999, pro
forma net income (loss) per share would have been $(.39) per share for the
year ended December 31, 1999 and $.01 for the six months ended June 30,
2000.

(3) Cash balances at December 31, 1995, 1996 and 1997 were zero because Pfizer
regularly transferred cash from our predecessor's bank account to its bank
account as part of its cash management policy.

(4) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation, amortization (including amortization of deferred
compensation), non-cash charges related to acquired inventory, and the
in-process research and development write-off. EBITDA is provided because it
is a measure of financial performance commonly used as an indicator of a
company's historical ability to service debt. We have presented EBITDA to
enhance your understanding of our operating results. You should not construe
it as an alternative to operating income as an indicator of operating
performance. It should also not be construed as an alternative to cash flows
from operating activities as a measure of liquidity determined in accordance
with GAAP. We may calculate EBITDA differently from other companies. For
further information, see our financial statements and related notes
elsewhere in this prospectus.

24
<PAGE> 25

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

Our unaudited pro forma consolidated statement of operations illustrates the
estimated effects of the acquisition of Influence on December 16, 1999. Our
unaudited pro forma consolidated statement of operations for the year ended
December 31, 1999 gives effect to the acquisition of Influence by applying the
purchase method of accounting and certain adjustments that are directly
attributable to the acquisition as if the transaction was consummated as of
January 1, 1999.

Our unaudited pro forma consolidated statement of operations is based upon
historical financial statements of AMS and Influence included elsewhere in this
prospectus, and should be read in connection with those statements and related
notes. Certain reclassifications have been made to the historical expenses of
Influence to conform to the AMS financial presentation. There is no pro forma
adjustment to reflect any expense savings which we expect to achieve after the
acquisition as the estimated benefits are based on projections and assumptions,
not actual experiences.

Our pro forma consolidated statement of operations does not purport to represent
what our results of operations would have been if the Influence acquisition had
in fact been consummated as of January 1, 1999 or to project the results of
operations for any future date or period. The pro forma adjustments are based
upon available information and upon certain assumptions that our management
believes are reasonable. In the opinion of our management, all adjustments
necessary to present fairly the unaudited pro forma consolidated statement of
operations have been made.

In calculating the pro forma net loss per share in the pro forma consolidated
statement of operations below, we have given effect to the conversion of all of
our outstanding preferred stock into common stock as if the conversion occurred
at the beginning of the year.

<TABLE>
<CAPTION>
AMERICAN
MEDICAL SYSTEMS
HOLDINGS, INC. INFLUENCE, INC.
--------------- ---------------
PERIOD FROM
JANUARY 1,
YEAR ENDED 1999 TO
DECEMBER 31, DECEMBER 15, PRO FORMA PRO FORMA
1999 1999 ADJUSTMENTS COMBINED
--------------- --------------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales................................... $ 81,353 $11,153 $ -- $ 92,506
Cost of sales............................... 31,419 2,880 -- 34,299
-------- ------- ------- --------
Gross profit................................ 49,934 8,273 -- 58,207
Operating expenses:
Marketing and sales....................... 30,400 6,636 -- 37,036
Research and development.................. 9,552 2,156 -- 11,708
General and administrative................ 7,889 2,225 -- 10,114
Transition and reorganization............. 3,000 -- -- 3,000
Amortization of intangibles............... 4,260 -- 3,250(1) 7,510
In-process research and development....... 7,354 -- -- 7,354
-------- ------- ------- --------
Total operating expenses.................... 62,455 11,017 3,250 76,722
-------- ------- ------- --------
Operating income (loss)..................... (12,521) (2,744) (3,250) (18,515)
-------------------------------------------
Footnote appears on the following page.
</TABLE>

25
<PAGE> 26

<TABLE>
<CAPTION>
AMERICAN
MEDICAL SYSTEMS
HOLDINGS, INC. INFLUENCE, INC.
--------------- ---------------
PERIOD FROM
JANUARY 1,
YEAR ENDED 1999 TO
DECEMBER 31, DECEMBER 15, PRO FORMA PRO FORMA
1999 1999 ADJUSTMENTS COMBINED
--------------- --------------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Royalty and other income (expense).......... $ 4,205 $ -- $ -- $ 4,205
Interest income (expense)................... (6,873) (514) 300(2) (7,087)
-------- ------- ------- --------
Income (loss) before taxes.................. (15,189) (3,258) (2,950) (21,397)
Income tax benefit (expense)................ 5,340 -- -- 5,340
-------- ------- ------- --------
Net income (loss)........................... $ (9,849) $(3,258) $(2,950) $(16,057)
======== ======= ======= ========
Pro forma net loss per share--basic and
diluted(3)................................ $ (1.12)
Shares used in pro forma per share
calculation............................... 14,289
========
</TABLE>

---------------------------------------------

(1)Additional first-year amortization expense with respect to intangible assets
purchased in the acquisition of Influence using the straight-line method over
one to ten years.

(2)Elimination of interest expense of Influence of $514,000, offset by $214,000
of additional annual interest expense incurred on incremental borrowings
related to the Influence acquisition made under our senior credit facility.

(3)In calculating the pro forma net loss per share, we have given effect to the
conversion of all our outstanding preferred stock, plus accumulated
dividends, into common stock as if the conversion occurred at the beginning
of the respective period. We will use approximately $39 million of the
proceeds of the offering to repay outstanding debt. Assuming the issuance and
sale of a number of shares which would generate proceeds sufficient to repay
approximately $39 million of our debt as of the beginning of 1999, pro forma
net loss per share would have been $(.69) per share for the year ended
December 31, 1999.

26
<PAGE> 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of
operations should be read together with the "Selected Financial Data" and our
financial statements and the related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those under the heading
"Risk Factors."

OVERVIEW

OPERATIONS OVERVIEW

We manufacture and market a broad and well-established line of medical devices
for patients suffering from incontinence, erectile dysfunction and prostate
disease. We are focused on expanding our product offering and adding
less-invasive medical devices for urological disorders through product
development and acquisitions.

In 1999, we expanded our commitment to the incontinence and prostate disease
markets with the acquisition of several technologies. These acquisitions have
enabled us to diversify our product portfolio and offer a sling product for
incontinence, one of the fastest growing surgical procedures for the treatment
of incontinence.

In August 1999, we acquired the UroVive bulking system for the treatment of
urinary incontinence. We paid $4.2 million at the closing of the acquisition and
are required to pay up to an additional $1.5 million if certain contingencies
are met. We are also committed to make royalty payments through 2003. In
connection with the transaction, we recorded $2.4 million of intangible assets
and expensed $1.3 million of in-process research and development costs.

In October 1999, we acquired exclusive worldwide distribution rights to an
injection system that offers a minimally invasive treatment option for BPH. In
exchange, we made a $2.0 million equity investment in the company that developed
this product and are required to invest up to an additional $2.5 million of
equity if certain clinical study milestones are achieved.

In December 1999, we acquired Influence, a provider of surgical devices used in
incontinence procedures. We paid $24.3 million at the closing of the
acquisition. We are required to make contingent purchase price payments of up to
$10.0 million if various milestones related to transitional and integration
activities are completed by various dates ending on January 31, 2001. To date,
we have made $3.5 million of these contingent payments. In addition, we are
required to make contingent purchase price payments of up to approximately $10
million depending on the outcome of our litigation with Boston Scientific
Corporation. In connection with the transaction, we expensed $6.1 million of
in-process research and development costs and recorded $20.3 million of goodwill
and other intangible assets. We also capitalized $3.2 million related to
transaction and transition costs.

We manufacture most of our products and related components from our 180,000
square foot corporate headquarters located in Minnetonka, Minnesota. We
currently manufacture our sling products at our Israeli facility, but are in the
process of transferring most of this production to our Minnesota facility.

We have established a strong sales, marketing and distribution infrastructure
that includes over 100 direct field representatives worldwide. Our U.S. sales
force is comprised of two teams of sales representatives. One team is focused on
selling traditional AMS products, including our erectile dysfunction products,
artificial urinary sphincters and UroLume stents. The other team, made up
primarily of the former Influence sales force, is focused on selling sling
products to the incontinence market. During 1999, approximately 77% of our net
sales were in the United States. We also have direct sales representatives

27
<PAGE> 28

located in five Western European countries, Canada and Australia. Supplementing
this sales force are approximately 45 distributors that sell our products
throughout Asia, Latin America, the Middle East and Africa.

Our marketing organization has effectively developed and implemented strategies
designed to create close working relationships with customers. These programs
are designed in part to educate physicians and patients. These programs provide
us with exceptional access to physicians throughout the world and help us
establish long-term relationships with them.

Our U.S.-based research and development staff focuses on developing new products
to treat incontinence, erectile dysfunction and prostate disease. In addition,
our research and development staff continually works on enhancing our current
product offerings. We also conduct research and development activities in
Israel. This team is led by the two founders of Influence and is focusing on a
next generation sling technology and other incontinence products. We regularly
conduct clinical trials to support our product introductions and to meet
regulatory requirements. During 1998, we abandoned an external research and
development project that cost $7.1 million in 1997 and $3.1 million in 1998. As
a result, our spending for research and development, regulatory and medical
affairs, quality systems and compliance decreased from $16.3 million in 1997 to
$9.6 million in 1999.

SEPARATION FROM PFIZER

We founded our business in 1972. Pfizer Inc. acquired our business in 1985. In
September 1998, a group of investors led by Warburg Pincus acquired our assets
from a Pfizer subsidiary. We formed, American Medical Systems Holdings, Inc.,
our current holding company, in April 2000.

The acquisition of our assets was financed by a $40.0 million preferred stock
investment and $95.0 million of senior debt. Goodwill and other intangible
assets of approximately $74.6 million resulted from the acquisition.

Prior to the acquisition, we relied on Pfizer for various corporate functions,
including management information systems and benefit plans. Accordingly,
following the acquisition, we assessed our senior management personnel needs,
completed a strategic review of our research and development efforts, and
established new benefit plans and accounting and information systems. These
transition and reorganization expenses totaled $2.5 million in the period from
September 11 to December 31, 1998 and $3.0 million in the first quarter of 1999.
We borrowed $2.5 million in early 1999 to pay for these costs. During 1999, we
also hired additional senior corporate officers and established independent
management information systems.

In connection with the acquisition, we recorded inventories at fair market value
at the date of the acquisition. This accounting treatment required a $21.8
million write-up of inventories. The write-up was charged to cost of sales over
the six-month period during which these inventories were sold, including $10.2
million in the period from September 11 to December 31, 1998 and $11.6 million
in the first quarter of 1999.

In the first quarter of 1999, we collected $6.8 million of receivables from
Pfizer. This amount included $5.2 million for the working capital we used on
behalf of Pfizer between the date of the acquisition agreement and the closing
of the acquisition, $607,000 of pension costs related to terminated employees,
and $924,000 for services rendered under a service agreement with a subsidiary
of Pfizer.

FINANCIAL OVERVIEW

Our net sales decreased $14.2 million, or 15.4%, from $91.9 million in 1997 to
$77.7 million in 1998, including a $16.0 million decrease in sales of our
erectile dysfunction products. The decrease in sales was primarily due to the
1997 introduction of MUSE, a non-invasive drug delivery system for the treatment
of erectile dysfunction, and the early second quarter 1998 introduction of
Viagra. However, net sales increased $3.6 million, or 4.7%, from $77.7 million
in 1998 to $81.3 million in 1999.

28
<PAGE> 29

We have incurred substantial losses since the September 1998 acquisition from
Pfizer. During the period from September 11 to December 31, 1998, we incurred a
loss of $10.5 million before income taxes and, during the year ended December
31, 1999, we incurred a loss of $15.2 million before income taxes. These losses
resulted primarily from costs related to the acquisition, including charges to
cost of sales related to acquired inventories of $10.2 million during the period
from September 11 to December 31, 1998 and $11.6 million in the first quarter of
1999. We also wrote-off $7.4 million of in-process research and development
during 1999 related to our acquisition of Influence and the UroVive bulking
system. Transition and reorganization costs of $2.5 million in the period from
September 11 to December 31, 1998 and $3.0 million in 1999 also contributed to
these losses.

Under the Pfizer acquisition agreement, Pfizer agreed to indemnify us for the
costs of product liability claims relating to products sold prior to the
acquisition. General and administrative costs decreased $13.9 million, or 63.8%,
from $21.8 million in 1998 to $7.9 million in 1999 primarily due to legal
expenses relating to product liability exposure allocated to us by Pfizer prior
to the acquisition. Excluding these legal expenses, general and administrative
costs as a percentage of net sales decreased from 11.7% in 1998 to 9.7% in 1999,
in part because of efficiencies gained from operating as an independent company.
We expect our selling, general and administrative expenses as a percentage of
sales to increase because the expenses associated with hiring senior corporate
officers and establishing independent management information systems from Pfizer
did not occur until various times throughout 1999.

The debt incurred in connection with the acquisition led to interest expense of
$1.7 million in the period from September 11 to December 31, 1998 and $6.9
million in the year ended December 31, 1999. We plan to use proceeds from the
offering to reduce our debt to approximately $63.0 million under the terms of
our existing senior credit facility.

At December 31, 1999, we had net operating loss carryforwards for federal income
tax purposes of $14 million available to offset future taxable income, which
begin to expire in 2018. Realization of the future tax benefits related to net
deferred tax assets is dependent on several factors, including our ability to
generate taxable income within the net operating loss carryforward period. We
have included a valuation allowance of $5 million for net operating losses that
were created in a foreign jurisdiction. This amount represents the approximate
amount by which the net operating losses are projected to exceed future income
in that foreign jurisdiction.

Our net operating losses from September 11, 1998 through December 31, 1999
resulted primarily from acquisition accounting and transition and reorganization
charges of a non-recurring nature. Without these non-recurring charges, we would
have been profitable during these periods. We have developed and are
implementing a tax-planning strategy to utilize most of the net operating losses
created in foreign jurisdictions. Accordingly, except for some of the net
operating losses that were created in a foreign jurisdiction, we believe that
our future taxable income will be sufficient to utilize these net operating loss
carryforwards.

29
<PAGE> 30

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain selected
financial data expressed as a percentage of net sales:

<TABLE>
<CAPTION>
CONSOLIDATED AMERICAN MEDICAL SYSTEMS
COMBINED PREDECESSOR HOLDINGS, INC.
---------------------------- -------------------------------------------
PERIOD PERIOD
FROM FROM SIX MONTHS
YEAR JANUARY 1 SEPTEMBER 11 ENDED
ENDED TO TO YEAR ENDED JUNE 30,
DECEMBER 31, SEPTEMBER 10, DECEMBER 31, DECEMBER 31, -------------
1997 1998 1998 1999 1999 2000
------------ ------------- ------------ ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................... 21.4 25.7 67.3 38.6 52.5 23.0
----- ----- ----- ----- ----- -----
Gross profit.................... 78.6 74.3 32.7 61.4 47.5 77.0
Operating expenses:
Marketing and sales............. 23.5 33.9 35.7 37.4 35.8 39.7
Research and development........ 17.7 18.7 12.5 11.8 11.3 12.0
General and administrative...... 18.6 36.3 8.4 9.7 10.2 11.2
Transition and reorganization... -- -- 10.9 3.7 7.4 2.0
Amortization of intangibles..... 1.1 -- 4.2 5.2 4.9 8.0
In-process research and
development.................. -- -- -- 9.0 -- --
----- ----- ----- ----- ----- -----
Total operating expenses.......... 60.9 88.9 71.7 76.8 69.6 72.9
----- ----- ----- ----- ----- -----
Operating income (loss)........... 17.7 (14.6) (39.0) (15.4) (22.1) 4.1
Royalty and other income
(expense)....................... (0.1) (0.3) 0.8 5.2 5.4 2.8
Interest income (expense)......... -- -- (7.3) (8.5) (8.3) (8.1)
----- ----- ----- ----- ----- -----
Income (loss) before taxes........ 17.6 (14.9) (45.5) (18.7) (25.0) (1.2)
Income tax benefit (expense)...... (6.6) 6.0 17.5 6.6 10.0 .1
----- ----- ----- ----- ----- -----
Net income (loss)................. 11.0% (8.9%) (28.0%) (12.1%) (15.0%) (1.1%)
===== ===== ===== ===== ===== =====
</TABLE>

In connection with our acquisitions of Influence and UroSurge, we conducted a
valuation of the intangible assets we acquired. Based on this valuation, we
assigned to purchased in-process research and development, or IPR&D, $6.1
million of the Influence purchase price and $1.3 million of the UroSurge
purchase price. A brief description of our acquired in-process research and
development projects is set forth below:

INFLUENCE: STRAIGHT-IN. The Straight-In is a male sling fixation system. For
the IPR&D valuation, we estimated that the product was 80% complete, and we
currently estimate that this product is 90% complete. We have completed one of
two planned design modifications which required no further FDA approval. We
released this product in the second quarter of 2000. The second design
modification is underway, which we estimate will be completed before fourth
quarter 2000. At the valuation date, we estimated costs of completion to be $0.1
million, and we currently estimate it to be $0.2 million.

INFLUENCE: NEXT GENERATION SLING SYSTEMS. We have two next generation sling
systems under development: No-Tac and Staple-Tac. The No-Tac does not require a
metal implant in the pubic bone. For the IPR&D valuation, we estimated that this
product was 60% complete, and we currently estimate that this product is 65%
complete. As of the valuation date, we estimated costs to complete to be $0.3
million. We currently estimate the cost to complete to be $0.4 million. As of
the valuation date, we estimated this product would be released late in 2000. We
currently expect this product to be released in early 2001.

30
<PAGE> 31

The Staple-Tac is a pull-in inserter that is sutureless. For the IPR&D
valuation, we estimated that this product was 75% complete, and we currently
estimate that this product is 85% complete. We have since obtained regulatory
approval and are currently evaluating the device before its possible release. At
the valuation date, we estimated the cost of completion to be $0.1 million which
should approximate actual costs.

INFLUENCE: FLAST. The Flast is a device used to harvest human tissue for a
sling procedure, and it is in the late prototype stage. For the IPR&D valuation,
we estimated that this product was 75% complete. Our percent completion estimate
has not changed since that time. We currently estimate that this product will be
released 2001, depending on our assessment of economic viability of this
product. We estimate the cost to complete to be $0.1 million.

INFLUENCE: NEXTUS. NexTus is a soft tissue-anchoring device. For the IPR&D
valuation, we estimated that this product was 80% complete. Our percent
completion estimate has not changed since that time, although we believe that
clinical costs will increase. We initially estimated that the cost to complete
would be $0.1 million, and we currently estimate that this cost will be $0.3
million. We initially estimated that we would release this product in 2001,
pending regulatory approval. We are assessing the market potential for this
product and have not determined whether or when we will release this product.
The final cost to complete this product will largely depend on the extent of
required clinical studies.

INFLUENCE: CLIP-IN. The Clip-In is a clip around the suture in place of a knot.
For the IPR&D valuation, we estimated that this product was 75% complete. Our
percent completion estimate has not changed since that time. We currently
estimate that this product will be released 2001, depending on our assessment of
economic viability of this product. We estimate the cost to complete to be $0.1
million.

UROSURGE: NEXT GENERATION UROVIVE SYSTEM. The next generation UroVive system is
a durable reversible microballoon system to treat stress urinary incontinence.
It includes a microballoon, a delivery system, and a syringe filled with
biocompatible hydrogel. At the IPR&D valuation date, we estimated that the
microballoon was 60% complete and the delivery system was 40% complete. At the
time of the valuation, clinical trials were underway, and we estimated the cost
of completion to be $0.5 million. The project has since been revised and
development is expected to be completed by the end of 2000. We plan to begin
additional clinical work in early 2001. We expect clinical expenditures to
increase, but we are uncertain as to final cost and timeline. We currently
estimate that this product is 40% complete.

31
<PAGE> 32

Our cost of sales for the period from September 11 to December 31, 1998 and the
year ended December 31, 1999 are not comparable to those of prior periods
because under generally accepted accounting principles, we were required to
revalue our inventories in connection with the acquisition from Pfizer. In
addition, in the fourth quarter of 1999, we recorded an $837,000 charge related
to a recall of approximately 2,000 units of the delivery system used to place
our UroLume stent. We discovered that some of the delivery systems used to place
our UroLume stent contained a small crack in the handle. In some situations,
this crack adversely affected the ability of the physician to properly place the
stent. As a result, we voluntarily initiated a recall to remove all products
from the market that had not been used. The following table sets forth an
analysis of cost of sales expressed as a percentage of sales adjusted to exclude
these items:

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED JUNE 30, 2000

NET SALES. Net sales increased $9.8 million, or 24.5%, from $40.2 million in
the first six months of 1999 to $50.1 million in the first six months of 2000.
Of this increase, 72.4% was attributable to incontinence product sales.
Incontinence sales related to the Influence acquisition in December, 1999
amounted to $6.7 million, or 68.4% of our six month sales increase in 2000 over
1999. Erectile dysfunction sales increased 16.6% due to a 13% volume increase
and a shift of product mix to higher-priced products.

Increased sales of our incontinence and erectile dysfunction products were
offset by a decline in sales in our prostate products. Sales of our UroLume
stents decreased $811,000 in the first six months of 2000 compared to the first
six months of 1999 due to a recall. We corrected this problem in the first
quarter of 2000, and sales of this product returned to pre-recall levels in
March 2000.

Net sales in the United States increased $10.1 million from $30.1 million in the
first six months of 1999 to $40.2 million in the first six months of 2000. Of
this increase, $6.4 million was attributable to new products acquired from
Influence and the balance of the increase was primarily due to growth in
erectile dysfunction products. Foreign net sales decreased $0.3 million from
$10.2 million in the first six months of 1999 to $9.9 million in the first six
months of 2000. This decrease was attributable to the recall of the UroLume
delivery system.

COST OF SALES. Cost of sales as a percentage of net sales decreased from 52.5%
in the first six months of 1999 to 23.0% in the first six months of 2000. Our
cost of sales for the first six months of 1999 was negatively impacted because
our inventories were recorded at fair market value at the date of our
acquisition from Pfizer. Some of this inventory was sold during the first three
months of 1999 resulting in an $11.6 million charge to cost of sales. Excluding
this charge, cost of sales as a percentage of net sales was 23.6% in the first
six months of 1999.

MARKETING AND SALES. Marketing and sales costs increased $5.5 million, or
38.2%, from $14.4 million in the first six months of 1999 to $19.9 million in
the first six months of 2000. Approximately $2.7 million of

32
<PAGE> 33

this increase was attributable to marketing costs and the sales force that
focuses on the Influence products which we acquired in December 1999. An
additional $2.4 million was due to increases in our domestic sales and marketing
efforts. As a percentage of net sales, marketing and sales costs increased from
35.8% to 39.7% due to Influence-related sales and marketing costs being higher
as a percentage of net sales than our ratios prior to the Influence acquisition.

RESEARCH AND DEVELOPMENT. Research and development costs increased $1.5
million, or 32.1%, from $4.5 million in the first six months of 1999 to $6.0
million in the first six months of 2000. This increased spending supports our
strategic emphasis on internal new product development. We also added a number
of research and development personnel through our acquisition of Influence.

GENERAL AND ADMINISTRATIVE. General and administrative costs increased $1.5
million, or 36.5%, from $4.1 million in the first six months of 1999 to $5.6
million in the first six months of 2000. Part of this increase related to
accounting, information technology and general management functions necessary to
support the operations acquired from Influence. Since the first six months of
1999, we have also installed new information systems in both the United States
and Europe.

TRANSITION AND REORGANIZATION. In the first six months of 1999, we completed an
assessment of senior management personnel needs and also completed a strategic
review of our research and development function. We incurred $3.0 million of
transition and reorganization expenses as a result of this review. These costs
primarily related to employee termination benefits and executive search fees. In
the first six months of 2000, we completed another assessment of management
personnel needs. We incurred $1.0 million of transition and reorganization
expenses as a result of this review. These costs primarily related to employee
termination benefits.

AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $2.0
million, or 103.1%, from $2.0 million in the first six months of 1999 to $4.0
million in the first six months of 2000. The acquisition of Influence in
December 1999, and the purchase of the UroVive assets in August 1999, added $2.0
million of intangible amortization expense during the first six months of 2000.
Excluding amortization associated with the acquisition of Influence,
amortization of intangibles remained stable.

ROYALTY AND OTHER INCOME. Royalty and other income decreased $781.000, or
35.4%, from $2.2 million in the first six months of 1999 to $1.4 million in the
first six months of 2000. In 1999, we benefited from a one-time $500,000
contractual research and development project reimbursement.

INTEREST EXPENSE. Interest expense increased $723,000, or 21.5%, from $3.4
million in the first six months of 1999 to $4.1 million in the first six months
of 2000. This increase resulted primarily from borrowing levels that were
approximately $6.5 million higher in the first six months of 2000 than in the
comparable period in 1999 due to costs incurred to acquire new technologies,
including Influence.

INCOME TAX BENEFIT (EXPENSE). We recorded a $4.0 million income tax benefit in
the first six months of 1999. The recording of these tax benefits assumes that
we will achieve significant levels of profitability in the future. We believe we
will realize these benefits, based upon our past levels of profitability and
future operating expectations, although we cannot assure these results. Our
effective tax rate was 40.0% in the first six months of 1999 compared to 6.7% in
the first six months of 2000. The difference between our effective tax rate and
the statutory rate is primarily due to state income taxes and non-deductible
amortization of intangible assets.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997, 1998, INCLUDING THE PERIODS
FROM JANUARY 1 TO SEPTEMBER 10, 1998 AND FROM SEPTEMBER 11 TO DECEMBER 31, 1998,
AND 1999

NET SALES. Net sales increased $3.6 million, or 4.7%, from $77.7 million in
1998 to $81.3 million in 1999 primarily due to the growth in our erectile
dysfunction product line. Our erectile dysfunction sales increased 11.6% from
1998 to 1999. In addition, sales from products acquired from Influence in mid-
December 1999 accounted for $588,000 of the increase. Partially offsetting these
increases was a $1.1 million decrease in sales of our artificial urinary
sphincter for the treatment of incontinence. Our
33
<PAGE> 34

international sales of this product decreased $1.7 million, primarily due to a
decrease in the reimbursement rates in certain European countries, particularly
France.

Net sales decreased $14.2 million, or 15.4%, from $91.9 million in 1997 to $77.7
million in 1998 due to a $16.0 million, or 27.5%, decrease in erectile
dysfunction sales in 1998. The decrease in erectile dysfunction sales was
primarily due to the 1997 introduction of MUSE, a non-invasive drug delivery
system for the treatment of erectile dysfunction, and the early second quarter
1998 introduction of Viagra. Partially offsetting the erectile dysfunction sales
decrease were sales increases related to our artificial urinary sphincter, our
Acticon bowel sphincter and our Coaguloop Resection Electrode, which we
introduced to the domestic market in 1997.

COST OF SALES. Cost of sales as a percentage of net sales changed from 25.7% in
the period from January 1 to September 10, 1998 to 67.3% during the period from
September 11 to December 31, 1998 and to 38.6% in 1999. In connection with the
acquisition from Pfizer in September 1998, inventories were recorded at fair
market value requiring a $21.8 million write-up above manufactured costs. This
write-up was charged to cost of sales over a six-month period ending March 31,
1999, during which these inventories were sold. Cost of sales was charged $10.2
million in the period from September 11 to December 31, 1998 and $11.6 million
relating to this write-up in the first quarter of 1999. In addition, we recorded
an $837,000 charge in the fourth quarter of 1999 related to a recall of the
delivery system used to place our UroLume stent. Excluding these effects, cost
of sales as a percentage of net sales were 23.0% in the period from September 11
to December 31, 1998 and 23.3% in 1999.

Cost of sales as a percentage of sales increased from 21.4% in the year ended
December 31, 1997 to 25.7% in the period from January 1 to September 10, 1998.
This was primarily due to higher actual costs per unit produced resulting from
lower production volume of our erectile dysfunction devices and a shift in
product mix to lower margin products. We recorded greater obsolescence reserves
during the period from January 1 to September 10, 1998 than we had in previous
periods due to technological obsolescence identified during the period.

Excluding the effects of the higher costs of inventory charged to cost of sales
and the recall of the delivery system used to place our UroLume stent, cost of
sales as a percentage of sales decreased from 25.7% during the period from
January 1 to September 10, 1998 to 23.0% in the period from September 11 to
December 31, 1998. These reductions in cost of sales as a percentage of sales
primarily resulted from reduced manufacturing labor, obsolescence charges and
overhead spending. Slightly higher production volumes of erectile dysfunction
devices also helped this improvement.

MARKETING AND SALES. Marketing and sales costs increased $3.7 million, or
13.7%, from $26.7 million in 1998 to $30.4 million 1999. During 1999, we
restructured our European sales and marketing operations. These actions were
required for us to create autonomous sales and marketing operations following
our acquisition from Pfizer.

Marketing and sales costs increased $5.1 million, or 23.8%, from $21.6 million
in 1997 to $26.7 million in 1998. The increase in marketing spending was driven
by an attempt to counter the introduction of MUSE and Viagra and promotional
costs related to our new Acticon and Coaguloop Resection Electrode products.

RESEARCH AND DEVELOPMENT. Research and development costs decreased $3.2
million, or 19.6%, from $16.3 million in 1997 to $13.1 million in 1998. These
costs also decreased $3.5 million, or 26.9%, from $13.1 million in 1998 to $9.6
million in 1999. During 1998, we abandoned an external project that cost $7.1
million in 1997 and $3.1 million in 1998. The impact of abandoning this project
was to reduce our research and development spending $4.0 million in 1998 as
compared to 1997 and $3.1 million in 1999 as compared to 1998.

Excluding the effects of the abandoned project, our 1998 research and
development costs increased as compared to 1997 because we revised our strategic
research and development plan and increased our investment in our new research
and development efforts following the September 1998 acquisition from Pfizer.
34
<PAGE> 35

GENERAL AND ADMINISTRATIVE. General and administrative costs decreased $13.9
million, or 63.8%, from $21.8 million in 1998 to $7.9 million in 1999 primarily
due to legal expenses relating to product liability exposure allocated to us by
Pfizer prior to the acquisition. During 1998, we charged operations for $13.2
million of legal expenses as compared to $2.0 million in 1999. The 1998 charges
were primarily incurred during the period from January 1 to September 10, 1998.
Under the Pfizer acquisition agreement, Pfizer agreed to indemnify us for the
costs of product liability claims relating to products sold prior to the
acquisition. Excluding these legal expenses, general and administrative costs as
a percentage of net sales decreased from 11.7% in 1998 to 9.7% in 1999, in part
because of efficiencies gained from operating as an independent company. We
expect our selling, general and administrative expenses as a percentage of sales
to increase because of expenses associated with hiring senior corporate officers
and establishing independent management information systems. These actions were
required for us to create our autonomous operations following our acquisition
from Pfizer, which occurred at various times throughout 1999.

General and administrative costs increased $4.7 million, or 27.7%, from $17.1
million in 1997 to $21.8 million in 1998 primarily due to an increase in legal
expenses charged to us by Pfizer.

TRANSITION AND REORGANIZATION. In late 1998 following our acquisition from
Pfizer, we recorded $2.5 million of transition and reorganization expenses. We
also assessed our senior management personnel needs in early 1999 and conducted
a strategic review of our research and development efforts. Transition and
reorganization costs of $3.0 million expensed in 1999 were primarily related to
employee termination benefits and executive recruiting fees.

AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $3.3
million, or 332.9%, from $984,000 in 1998 to $4.3 million in 1999 principally
related to approximately $74.6 million of goodwill and other intangible assets
recorded from the Pfizer acquisition in September 1998. In the period from
September 11 to December 31, 1998, $965,000 of intangible amortization was
expensed. An affiliate charged us amortization related to the use of technology
during 1997. This charge did not continue in subsequent periods.

IN-PROCESS RESEARCH AND DEVELOPMENT. We expensed $6.1 million of in-process
research and development costs in connection with the Influence acquisition in
December 1999 and $1.3 million of in-process research and development costs
related to the August 1999 UroVive acquisition.

ROYALTY AND OTHER INCOME (EXPENSE). We license our stent delivery technology to
a former subsidiary of Pfizer for medical use outside of the urology field. We
entered into this license agreement in September 1998 in connection with our
acquisition from Pfizer. In 1999, we recognized royalty income of approximately
$3.4 million, all of which was from this license agreement.

INTEREST EXPENSE. Interest expense increased $5.2 million, or 311.1%, from $1.7
million in 1998 to $6.9 million in 1999. We borrowed $95.0 million to finance
our acquisition from Pfizer in September 1998 and $2.5 million in early 1999 to
pay for transition and reorganization expenses.

INCOME TAX BENEFIT (EXPENSE). We recorded tax benefits of $5.3 million in 1999
and $4.0 million in the period from September 11 to December 31, 1998. The 1999
tax benefit resulted primarily from the revaluation of acquired inventories, the
recording of write-offs of acquired research and development, the expensing of
transition and reorganization costs and interest expense. The tax benefit during
the period from September 11 to December 31, 1998 was caused by the impact of
the revaluation of acquired inventories, transition and reorganization costs and
interest expense. The recording of these tax benefits assumes that we will
achieve significant levels of profitability in the future. We believe our past
levels of profitability and future operating expectations will allow us to
realize these benefits, although we cannot assure these results.

The effective tax rates used to record these benefits were 35.2% in 1999 and
38.3% during the period from September 11 to December 31, 1998. These rates
compare to effective rates of 39.9% and 37.8% used to record tax expense in the
period January 1 to September 10, 1998 and the year ended December 31, 1997,
35
<PAGE> 36

respectively. The effective rates differ from the statutory rates due to state
taxes, goodwill amortization and the impact of foreign taxes.

QUARTERLY RESULTS OF OPERATIONS

The following table presents a summary of our unaudited quarterly operating
results for each of the four quarters in 1999 and for the quarters ended March
31, 2000, and June 30, 2000. We derived this information from unaudited interim
financial statements that, in the opinion of management, have been prepared on a
basis consistent with the financial statements contained elsewhere in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of such information when read in
conjunction with our audited financial statements and related notes. These
operating results include Influence's financial results from the December 16,
1999 date of acquisition. The operating results for any quarter are not
necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
1999 2000
----------------------------------------- ------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................................... $ 20,169 $20,065 $19,536 $21,583 $24,986 $25,093
Cost of sales(1).............................. 16,300 4,809 4,497 5,813 5,730 5,785
-------- ------- ------- ------- ------- -------
Gross profit................................ 3,869 15,256 15,039 15,770 19,256 19,308
Operating expenses:
Marketing and sales......................... 7,045 7,347 7,621 8,387 9,864 10,019
Research and development.................... 2,127 2,409 2,378 2,638 3,028 2,965
General and administrative.................. 1,677 2,047 2,019 2,146 2,694 2,935
Transition and reorganization............... 3,000 -- -- -- -- 1,000
Amortization of intangibles................. 1,010 960 996 1,294 1,991 2,010
In-process research and development......... -- -- -- 7,354 -- --
-------- ------- ------- ------- ------- -------
Total operating expenses...................... 14,859 12,763 13,014 21,819 17,577 18,929
-------- ------- ------- ------- ------- -------
Operating income (loss)....................... (10,990) 2,493 2,025 (6,049) 1,679 379
Royalty and other income (expense)............ 785 1,423 835 1,162 726 701
Interest income (expense)..................... (1,741) (1,617) (1,690) (1,825) (1,844) (2,237)
-------- ------- ------- ------- ------- -------
Income (loss) before taxes.................... (11,946) 2,299 1,170 (6,712) 561 (1,157)
Income tax benefit (expense).................. 4,778 (910) (471) 1,943 (352) 392
-------- ------- ------- ------- ------- -------
Net income (loss)............................. $ (7,168) $ 1,389 $ 699 $(4,769) $ 209 $ (765)
======== ======= ======= ======= ======= =======
Net sales growth as compared to same quarter
in prior year............................... (13.0%) 10.3% 9.8% 12.6% 23.9% 25.1%
</TABLE>

---------------------------------------------

(1)Cost of sales for the first quarter of 1999 includes $11.6 million of
amortization relating to revaluation of inventories acquired on September 10,
1998 from Pfizer.

SEASONALITY

Our sales and operating results have varied and are expected to continue to vary
significantly from quarter to quarter as a result of seasonal patterns. We
believe our business is seasonal, with the third quarter of each year typically
having the lowest sales and the fourth quarter of each year typically having the
highest sales. There can be no assurance that future seasonal fluctuations will
not adversely affect our business and results of operations.

36
<PAGE> 37

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $4.8 million as of June 30, 2000 as compared to
$6.9 million as of December 31, 1999 and $2.8 million as of December 31, 1998.

CASH PROVIDED FROM AND USED IN OPERATIONS. In the first six months of 1999, our
operations provided $8.3 million of cash as compared to $3.2 million of cash
provided from operations in the first six months of 2000. Our operating
activities for the six months ended June 30, 1999 were significantly impacted by
the $11.6 million non-cash charge related to the acquisition write-up of
inventories and the collection of $6.8 million of receivables from former
affiliates. We also incurred $2.6 million of additional depreciation and
amortization in the first six months of 2000 as compared to the same period in
1999. These increases resulted from the acquisition of Influence and other
technologies late in 1999.

We generated $13.9 million of cash from operations in 1999. Our net loss of $9.8
million was caused largely by noncash items, including the $11.6 million charge
for the acquisition write-up of inventories, the $7.4 million write-off of
in-process research and development resulting from the Influence and UroVive
acquisitions, $6.8 million of depreciation and amortization and $2.1 million of
pension expense that did not require funding. We collected $6.8 million from
former affiliates, but accounts receivable grew because of higher revenues. We
used cash to reduce our accrued liabilities particularly those related to
transition and reorganization costs.

We generated $850,000 in cash from operations in the period from September 11 to
December 31, 1998 following the Pfizer acquisition. In the period from January 1
to September 10, 1998, we generated $1.3 million of cash from operations.

Our 1997 operations generated $2.6 million in cash. Transactions with affiliates
impacted the cash flows during this year. These affiliates used $11.7 million of
cash from the operations during this year.

CASH USED IN INVESTING ACTIVITIES. During 1999, we used $31.6 million to
purchase Influence and to acquire other technologies and assets. We also paid
$1.0 million to acquire a patent related to our incontinence products. In the
first six months of 2000, we paid contingent purchase price payments of $3.5
million related to the acquisition of Influence, paid the second $1.0 million
installment related to the patent purchase, and paid $1.4 million in up-front
financing fees on our senior credit facility.

In the first six months of 2000, we completed implementation of new software
systems. We invested $1.2 million in property and equipment during the period,
primarily related to this project. We spent $6.5 million on the purchase of
property, plant and equipment in 1999, again mostly related to the development
of these systems and the purchase of related computer hardware.

We invested $2.0 million in equipment purchased during 1998 and purchased
property and equipment of $2.6 million in 1997. These acquisitions were for
manufacturing equipment and computer related hardware and software.

CASH PROVIDED BY FINANCING ACTIVITIES. We used $2.7 million of net borrowings
under our credit facility to finance the Influence contingent payments and
patent acquisition in the first six months of 2000. We borrowed $2.5 million
under our senior credit facility to finance 1999 purchases of computer hardware
and software and to fund the payment of accrued transition and reorganization
expenses.

The 1999 acquisition of Influence and other technologies were financed through
$23.0 million of additional preferred stock financing from our existing
stockholders and $3.8 million of borrowings under our senior credit facility.

INCOME TAXES AND NET OPERATING LOSS CARRYFORWARDS. At December 31, 1999, we had
net operating loss carryforwards of $14.0 million available for federal income
tax purposes to offset future taxable income, which begin to expire in 2018.
Realization of the future tax benefits related to this net deferred tax asset is
dependent on many factors, including our ability to generate taxable income
within the net operating loss carryforward period. To the extent the net
operating losses were created in a foreign jurisdiction, we have

37
<PAGE> 38

included a valuation allowance of $5.0 million. This amount represents the
approximate amount by which we project the net operating losses to exceed future
income in that foreign jurisdiction.

SENIOR CREDIT FACILITY. We have a $115.0 million senior credit facility, which
expires in March 2006. In April 2000, we refinanced our prior credit facility
that was due to expire in September 2000. The new facility consists of a $65.0
million term note, a $35.0 million guaranteed note, and a $15.0 million
guaranteed revolving line of credit. The guarantee is provided by Warburg
Pincus. The term note bears interest, payable quarterly, at the Base Rate (the
higher of the Federal Funds rate plus .5% or the Prime Rate) plus from 1% to 2%
for Base Rate loans or LIBOR plus 3% for Eurodollar loans. The guaranteed note
and the revolving line of credit bear interest at the Base Rate for Base Rate
loans or LIBOR plus .875% for Eurodollar loans. At June 30, 2000, the Base Rate
was 9% and LIBOR was 6.78%. Through June 30, 2000, we have only requested
Eurodollar loans. The term note requires quarterly principal payments of $2.0
million through March 2002, $2.5 million from June 2002 through March 2003, $3.0
million from June 2003 through March 2004, and $3.4 million from June 2004
through March 2006. At March 31, 2000, $10.9 million was unused. The senior
credit facility is secured by substantially all of our assets, including 100% of
the outstanding capital stock of American Medical Systems, Inc. and Influence,
Inc., and contains restrictions concerning the payment of dividends, incurrence
of additional debt and capital expenditures. In addition, we are subject to, and
in compliance with, certain financial covenants including ratios related to
fixed charges coverage and leverage.

We plan to use a portion of the net proceeds of this offering to repay all of
the outstanding debt under the guaranteed portion of our current credit
facility, plus accumulated interest. We expect that approximately $39.0 million
will be needed for this purpose.

CASH COMMITMENTS. Our acquisition of Influence also obligates us to make
contingent purchase price payments of up to $10.0 million if various milestones
related to transitional and integration activities are completed by various
dates ending on January 31, 2001. To date, we have made $3.5 million of these
contingent payments. In addition, we are required to make contingent purchase
price payments of up to approximately $10 million depending on the outcome of
our litigation with Boston Scientific Corporation. We expect that up to $17.0
million of the net proceeds of the offering could be used to meet these future
contingent payments.

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

INTEREST RATE HEDGING AND CURRENCY FLUCTUATIONS

We do not engage in trading market risk sensitive instruments or purchasing
hedging instruments that are likely to expose us to market risk, whether
interest rate, foreign currency exchange, and commodity price or equity price
risk. We have not purchased options or entered into forward or futures
contracts. Assuming we repay approximately $39 million under our senior credit
facility with proceeds from the offering, if the interest rate under our senior
credit facility were to increase by 10%, our annual interest expense would
increase by approximately $500,000.

Our senior credit facility requires us to maintain protection against
fluctuations in interest rates beginning in mid-July 2000 and continuing for a
three-year period. In July 2000, we entered into a swap agreement that fixed
LIBOR at 7.065% on $30.0 million of our $65.0 million term note through June 20,
2003. The term note bears interest at LIBOR plus 3%.

Our operations outside of the United States are maintained in their local
currency, except for our Israeli subsidiary, where the U.S. dollar serves as the
functional currency. All assets and liabilities of our international
subsidiaries are translated to U.S. dollars at year-end exchange rates in effect
during the year. Translation adjustments arising from the use of differing
exchange rates are included in accumulated other

38
<PAGE> 39

comprehensive income in stockholders' equity. Gains and losses on foreign
currency transactions are included in operations and were not material in any
period.

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.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivative which focused on
freestanding contracts, including, for example, options and forwards, and
futures and swaps, expanding it to include embedded derivatives and many
commodity contracts. Under the statement, every derivative is recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. We do not
anticipate that the adoption of SFAS No. 133 will have a material impact on our
financial position or results of operations. We do not currently hold derivative
instruments or engage in hedging activities, except as required under our senior
credit facility. See "Interest Rate Hedging and Currency Fluctuations."

39
<PAGE> 40

BUSINESS

OVERVIEW

We are the leading independent company focused solely on supplying medical
devices to physicians specializing in the treatment of urological disorders.
None of the other leading suppliers in this market derives more than 40% of
their sales from urological products. We believe our long-standing reputation
for quality and innovative products and excellent relationships with leading
urological surgeons positions us not only to benefit from the growth in the
urology market, but to drive it.

We believe that our broad and diverse product offering is an important
competitive advantage because it allows us to address the various preferences of
doctors and patients, as well as the quality of life issues presented by
urological disorders. We offer medical devices to treat the three major
urological disorders: incontinence, erectile dysfunction and prostate disease.

- Incontinence. We offer a broad line of products designed to treat men
and women suffering from urinary and fecal incontinence. Our products
include artificial sphincters, sling systems and bulking systems. Our
incontinence products represented $26.9 million, or 33%, of our 1999 net
sales. Sales of incontinence products would have been $37.5 million in
1999 if Influence sales had been included for the entire year.

- Erectile Dysfunction. We are the leader in the surgical erectile
dysfunction market, with more than 60% market share in penile prostheses
based on 1999 sales. Our erectile dysfunction products include a full
line of inflatable and malleable penile prostheses and a diagnostic
system used to determine the causes of erectile dysfunction. Urologists
have implanted over 200,000 of our devices with high patient
satisfaction rates. Our erectile dysfunction products represented $47.2
million, or 58%, of our 1999 net sales.

- Prostate Disease. We participate in the prostate disease market with our
prostatic stents, resection loops and a minimally invasive ethanol
injection system which is under development for treatment of enlarged
prostates, also referred to as BPH. Our prostate disease products
represented $7.2 million, or 9%, of our 1999 net sales.

Our product development and acquisition strategy has focused on expanding our
product offering and on adding less-invasive medical devices for the treatment
of incontinence, erectile dysfunction and prostate disease. In 1999, we expanded
our commitment to the treatment of incontinence and prostate disease through the
acquisitions of several leading-edge technologies. In August 1999, we acquired
the UroVive bulking system, a minimally invasive treatment for female urinary
stress incontinence. In October 1999, we acquired exclusive worldwide
distribution rights to the ProstaJect ethanol injection system, a minimally
invasive treatment for BPH. In December 1999, we acquired Influence, a provider
of less-invasive sling products for treating female incontinence.

We believe the size and strength of our sales organization are among our primary
competitive advantages. We employ one of the largest sales forces solely focused
on the urology market, with more than 100 domestic and international direct
sales representatives who are well-trained and highly motivated and 45
international distributors and agents who sell our products worldwide.

THE UROLOGY MARKET

The three most prevalent urological disorders are incontinence, erectile
dysfunction and prostate disease. Approximately 60 million people in the United
States suffer from one or more of these disorders. We estimate that
approximately 11 million of these people have a disorder severe enough to be
likely candidates for treatment with our products. Historically, only a small
percentage of the patients suffering from these disorders has sought treatment.
In recent years, however, the number of people seeking treatment has grown as a
result of the publicity associated with new treatment alternatives, especially
new drug therapies.

40
<PAGE> 41

When a patient seeks treatment, urologists generally assess the severity of the
urological disorder as mild, moderate or severe. Regardless of the degree of
severity, however, patients will often consider a non-invasive treatment first.
If the non-invasive treatment is unsuccessful, urologists may recommend a
surgical treatment. Surgical treatment has demonstrated a higher degree of
effectiveness compared to non-invasive alternatives for patients suffering from
moderate or severe urological disorders.

The cost to the U.S. health care system for treatment of urological disorders is
approximately $24 billion annually. Of this amount, we estimate that more than
$1 billion is spent on diagnostic and therapeutic medical devices. This market
is comprised of five major disorders including incontinence, erectile
dysfunction, BPH, prostate cancer and endourology. We currently offer products
that provide solutions for three of these major disorders: erectile dysfunction,
incontinence and BPH. We estimate that the U.S. market for medical devices to
treat these three disorders is over $500 million annually.

We believe over the next several years a number of key demographic and
technological factors will accelerate growth in the market for medical devices
to treat urological disorders, particularly in our three product categories.
These factors include the following:

- Aging population. The incidence of urological disorders increases with
age. The over-40 age group in the United States is growing almost twice
as fast as the overall population. Accordingly, the number of
individuals developing urological disorders will increase significantly
as the population ages and as life expectancies continue to rise. We
estimate that approximately one half of all individuals over age 50
suffer from incontinence, erectile dysfunction or prostate disease. Of
those suffering from these disorders, we estimate that approximately 19%
have disorders severe enough to be likely candidates for our products.

- Less-invasive techniques and technologies. Patients often weigh the
clinical benefits against the invasiveness of the procedures when
choosing a treatment alternative. Technological advances have been
driving the development of less-invasive procedures that improve
outcomes and speed recovery. As a result, we believe patients will
increasingly choose surgical alternatives over alternatives that simply
manage their disorder.

- More patients seeking treatment. In recent years, the publicity
associated with new technological advances and new drug therapies has
increased the number of patients visiting their urologists to seek
treatment for urological disorders. For example, since Pfizer introduced
Viagra in April 1998, there have been approximately 8.6 million new
prescriptions written for Viagra. In contrast, prior to the introduction
of Viagra, approximately one million men sought treatment for erectile
dysfunction each year. Since non-surgical treatments are ineffective for
large numbers of patients, we believe the number of patients who will
try surgical treatments will increase as the overall number of patients
seeking treatment increases.

- Emphasis on quality of life. Baby boomers place an increased emphasis on
quality of life issues and maintaining active lifestyles. Their desire
to improve quality of life is usually an important factor in selecting a
treatment for their disorder. Baby boomers are more likely to consider
treatments designed to cure a urological disorder rather than simply
manage it. Because surgical treatment is one of the most effective ways
to treat urological disorders, we believe baby boomers will increasingly
choose surgical treatments.

OUR BUSINESS STRATEGY

We are the only major medical device company focusing solely on the urology
market. Our goal is to build the preeminent, worldwide urological medical device
company. The key elements of our strategy to achieve this goal are:

- Focus on urologists. We have developed extremely strong, long-standing
relationships with leading urologists treating incontinence, erectile
dysfunction and prostate disease. These relationships provide us with a
source of new product ideas, physician advisors for new products and a
conduit

41
<PAGE> 42

through which to introduce new products. Maintaining and expanding these
relationships is an important part of our growth strategy, particularly
for the development and introduction of new products.

- Continue to focus on surgical product solutions. We focus on surgical
products because they are high-margin, proprietary products designed to
cure urological disorders. In addition, the sophisticated nature of
surgical products requires extensive and frequent contact between us and
physicians. As a result, we form close relationships that we believe
create barriers to entry for our competitors.

- Offer a broad range of products. We believe that our broad and diverse
product offering is an important competitive advantage because it allows
us to address the various preferences of doctors and patients, as well
as the quality of life issues presented by urological disorders.
Consolidation among hospital buying groups has reduced the number of
suppliers from which they purchase products, providing an advantage to
suppliers offering a broad range of products. An important part of our
growth strategy is to broaden our product line further to meet customer
needs by developing new products internally or acquiring new products
through acquisitions.

- Expand less-invasive alternatives. Generally, the surgical procedures in
which our products are used are at the patient's discretion. Patients
often weigh the clinical benefits against the invasiveness of the
procedure. We intend to expand our less-invasive treatment alternatives
while maintaining a high level of clinical effectiveness.

- Partner with urologists to build their practices and develop markets. We
have developed marketing programs to assist urologists in marketing
their practices. We intend to continue to provide innovative programs
focused on helping urologists attract appropriate patients and develop
referral networks. We also believe our marketing efforts to build
patient awareness of treatment alternatives and encourage patients to
see urologists will help urologists build their practices and
simultaneously increase sales of our products.

- Grow our international business. In order to grow our international
business, which represented 23% of our total 1999 net sales, we have
recently added a new senior management team and restructured our
international business. We are refocusing our European operations to
respond to the needs of the local markets and to develop marketing and
reimbursement strategies on a country-by-country basis. New product
introductions will be key to growing our international operations.

OUR INCONTINENCE BUSINESS

OVERVIEW

Incontinence is the inability to control the release of urine or fecal matter
from the body. The urinary system is composed of two kidneys, two ureters, a
bladder and a urethra. The kidneys remove waste products from the blood and
continuously produce urine. The muscular, tube-like ureters move urine from the
kidneys to the bladder, where it is stored until it flows out of the body
through the tube-like urethra. A circular muscle, called the urinary sphincter,
controls the activity of the urethra. The neck of the bladder and the urinary
sphincter work together to act as a valve. As the bladder fills, the urinary
sphincter contracts to prevent urination. During urination, the urethra and
urinary sphincter muscle relax and open, the bladder contracts and the bladder
neck opens, all in a coordinated fashion, causing the passage of urine.

In normal continence, when the bladder neck opens involuntarily in response to
intra-abdominal pressure, the lower portion of the urinary sphincter tightens in
turn, so as to maintain continence. In order to maintain continence, the urethra
must be supported and compressed in its normal anatomic position. The female's
natural support system for the urethra is a hammock-like supportive layer.
Similarly, the urethra is also under muscular control so as to keep this tube
closed during the urine storage phase.

42
<PAGE> 43

A malfunction in any part of the urinary system can cause urinary incontinence.
Incontinence may result from one or more conditions, including: weakened pelvic
muscles; pelvic organic prolapses; tumors or other cancers and cancer
treatments; prostate surgery; pelvic trauma; spinal cord damage; birth defects;
and degenerative changes associated with aging and medications. The most common
type of incontinence results from a lack of bladder neck or mid-urethral support
caused primarily by weak surrounding tissue. The weakening of tissue surrounding
the bladder, urethra and bladder neck arises most commonly in women as a
consequence of pelvic trauma caused by pregnancy and childbirth.

There are four main types of urinary incontinence:

- Stress incontinence is the involuntary loss of urine caused by an
increase in abdominal pressure during stress events such as coughing,
sneezing, lifting or exercising. There are two main categories of stress
incontinence: hypermobility which refers to extra movement of the
urethra; and intrinsic sphincter dysfunction, or ISD, which refers to a
poorly functioning sphincter muscle.

- Urge incontinence is the involuntary loss of urine due to an
overwhelming need to urinate and the inability to suppress it long
enough to reach a toilet.

- Mixed incontinence is a combination of stress and urge incontinence.

- Overflow incontinence is the involuntary loss of urine when the amount
of urine produced exceeds the bladder's capacity. This occurs mostly in
patients with a neurogenic bladder where there is no feeling in the
bladder.

Our products are designed primarily for patients with stress and mixed
incontinence. Stress and mixed incontinence account for approximately two-thirds
of incontinence patients, or approximately 13 million people worldwide.

CURRENT TREATMENTS FOR INCONTINENCE

The majority of patients who suffer from incontinence have mild incontinence.
These patients will typically attempt to manage their incontinence condition
through the use of disposable adult diapers and pads, pelvic floor muscle
strengthening or, for men, a catheter and a urinary drainage bag. These
approaches only provide the patient a means to manage their incontinence. They
do not permanently cure incontinence.

Patients with moderate to severe incontinence typically find management of their
incontinence unacceptable and may be offered one of the following four
procedures to cure their incontinence:

-- A bulking procedure, where a bulking product is implanted in the wall
of the urethra at the bladder neck to bulk the sphincter and close
the urethra;

-- A sling procedure, where a sling material acts as a back stop to the
urethra to prevent leakage when there is a stress event;

-- A bladder neck suspension procedure, which lifts up vaginal or
periurethral tissue and repositions the bladder to prevent urine
leakage during a stress event; and

-- An artificial urinary sphincter procedure, where a saline-filled cuff
is inserted around the urethra to gently squeeze the urethra closed
to keep urine in the bladder.

We provide products that are used in all four of these procedures.

INCONTINENCE MARKET OPPORTUNITY

Incontinence represents one of the largest underserved urology markets. We
believe this market provides significant growth opportunities. Urinary
incontinence affects more than 13 million people in the United States, including
our estimate that approximately 2.3 million people suffer from severe
conditions, costing the U.S. health care system more than $15 billion annually.
Of this amount, we estimate that approximately $250 million is spent on medical
devices. In 1999, there were approximately 200,000 procedures performed in the
United States to treat incontinence. We believe that new less-invasive surgical
procedures will encourage more patients to seek surgical treatments.

43
<PAGE> 44

There are approximately ten million women with incontinence in the United
States. However, only 175,000 of these women elect to undergo a sling or
suspension procedure to treat their incontinence problem annually. Based on
surveys that have been conducted, we believe the sling procedure is one of the
fastest growing surgical procedures for the treatment of incontinence, with more
than 30% growth in 1999. We estimate that sling procedures currently represent
more than 40% of the total number of incontinence surgical procedures. The sling
procedure is quickly becoming the leading technique for the treatment of female
stress incontinence because it provides an effective solution for a wide variety
of patients. In addition, urologists can perform this procedure using a
less-invasive approach, which reduces morbidity and costs associated with this
procedure.

We estimate that there are approximately 30,000 patients, mostly women, treated
with a bulking product in the United States each year. Until recently, there was
one dominant bulking product commercially available in the United States. The
effectiveness of that product is limited because it is resorbed by the body over
time. We believe that this market could grow with the introduction of a
non-resorbable product.

There are approximately 1.9 million men with incontinence in the United States.
Approximately 150,000 of these men suffer from stress incontinence.
Complications from procedures for BPH and prostate cancer are the primary causes
of male stress incontinence. We estimate that 10,000 men become incontinent each
year due to complications from these procedures. Treatments for male
incontinence include artificial urinary sphincters, bulking agents and slings.

OUR INCONTINENCE PRODUCTS

We believe the incontinence market is a major growth opportunity. We have made a
significant commitment to this market in the past year with our acquisitions of
Influence and the UroVive bulking system. We have the number one market position
in artificial urinary sphincters and, based on surveys we have conducted, are
one of the top two providers of sling systems. Our incontinence products
represented $26.9 million, or 33%, of our 1999 net sales. Sales of incontinence
products would have been $37.5 million in 1999 if Influence sales had been
included for the entire year.

We offer a full line of incontinence products designed to meet a wide range of
patient needs in the treatment of urinary and fecal incontinence for men and
women. The following tables summarize our core incontinence products, products
under development and services. For more information on the FDA regulatory
approval process, see "Business--Government Regulation."

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
CURRENT PRODUCTS DESCRIPTION OF PRODUCT U.S. REGULATORY APPROVAL STATUS
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
In-Fast Female Sling System Female sling fixation system 510(k) cleared
------------------------------------------------------------------------------------------------------------
Straight-In Male Sling System Male sling fixation system 510(k) cleared
------------------------------------------------------------------------------------------------------------
Synthetic Sling Material Synthetic material used in a sling 510(k) cleared
procedure
------------------------------------------------------------------------------------------------------------
AMS Sphincter 800 Urinary Small, fluid-filled implant for 510(k) cleared; PMA in process
Prosthesis urinary incontinence; only
commercially available artificial
urinary sphincter
------------------------------------------------------------------------------------------------------------
Acticon Neosphincter Small, fluid-filled implant for Humanitarian Device Exemption
fecal incontinence received; PMA will be submitted
------------------------------------------------------------------------------------------------------------
UroVive Bulking System A durable, reversible microballoon PMA classification; Revised IDE
bulking system will be submitted
------------------------------------------------------------------------------------------------------------
</TABLE>

44
<PAGE> 45

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
PRODUCTS UNDER DEVELOPMENT DESCRIPTION OF PRODUCT U.S. REGULATORY APPROVAL STATUS
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Next Generation Sling Systems Female sling fixation systems 510(k) cleared
------------------------------------------------------------------------------------------------------------
Synthetic Sling A strong synthetic material used 510(k) will be submitted
in a sling procedure
------------------------------------------------------------------------------------------------------------
Flast A device used to harvest human None required
tissue for a sling procedure
------------------------------------------------------------------------------------------------------------
Next Generation UroVive A durable, reversible microballoon PMA classification; Revised IDE
system will be submitted
------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
SERVICES DESCRIPTION OF SERVICE U.S. REGULATORY APPROVAL STATUS
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cadaveric Fascia Lata Human fascia lata tissue used in a None required
sling procedure
------------------------------------------------------------------------------------------------------------
Cadaveric Dermal Tissue Human dermal tissue used in a None required
sling procedure
------------------------------------------------------------------------------------------------------------
</TABLE>

We believe our In-Fast Sling System is one of the leading products for use in
sling procedures in the United States. In the In-Fast sling procedure, two
titanium bone screws are implanted into the pubic bone, one on each side of the
urethra. Either human tissue or a synthetic sling material is then placed in the
space between the urethra and the vagina. The sling material is attached to each
screw and forms a hammock or "sling" beneath the urethra. The sling material
below the urethra acts as a back stop during a stress event to close the urethra
and prevent leakage. Until recently, a sling procedure required an invasive
surgical procedure requiring hospitalization with associated discomfort, lengthy
recovery and high expense. However, today, less-invasive systems, such as our
In-Fast Sling System, are designed to facilitate a completely transvaginal
approach, which enables the urologist to perform the sling procedure in
approximately 30 minutes in the operating room. These less-invasive procedures,
which can be performed on an outpatient basis with minimal post-operative pain
and recovery time, are driving the growth of sling procedures. Surgeons using
our sling system have reported that 95% of their patients are dry or improved
five months after their procedure.

Our Straight-In Male Sling System is a novel, less-invasive approach to male
incontinence that we recently introduced to the market. In this procedure, the
physician implants six titanium bone screws in the pubic bone, three on each
side of the urethra. Sling material is attached to the screws, and pulled tight,
to form passive compression and support for the urethra. This procedure offers
immediate relief of incontinence, is minimally invasive and can be performed in
about one hour. It is generally performed on an outpatient basis and requires
minimal recovery time.

Our AMS Sphincter 800 Urinary Prosthesis is the only commercially available
artificial urinary sphincter. A study recently found that five years after
implant over 90% of the patients have a functioning device. The efficacy rate
with the device varies between 80% and 94% over a two to seven year period. An
artificial urinary sphincter is an implantable device that mimics the function
of the sphincter muscle making natural urinary control and urination possible.
It is a miniature, hydraulic saline-filled device consisting of an inflatable
cuff placed around the urethra, a pressure-regulating balloon placed abdominally
and a control pump placed in the scrotum. The cuff is implanted around the
urethra at the bladder neck in the female or around the bulbous urethra in the
male, closing off the urethra. To urinate, the patient squeezes the pump to move
fluid out of the cuff into the balloon, opening the urethra. The fluid then
automatically returns from the balloon to the cuff, restoring continence.

45
<PAGE> 46

Our Acticon Neosphincter Prosthesis is very similar to our AMS Sphincter 800
Urinary Prosthesis, but the cuff is placed around the anal canal to treat fecal
incontinence.

Our UroVive Bulking System is designed to treat urinary stress incontinence,
particularly in those women with a weak or poorly functioning sphincter muscle.
The UroVive Bulking System is a minimally invasive procedure that enables the
urologist to place hydrogel-filled microballoons around the bladder neck to help
close the urethra, restoring continence. This procedure is mostly used in
females although it can also be used in men. Until recently, there was one
dominant bulking agent commercially available in the United States. The
effectiveness of that product is limited in part because it is resorbed by the
body over time. Once a bulking product resorbs, it loses its effectiveness and
retreatment is often necessary. The microballoons used in the UroVive Bulking
System are not resorbed by the body. This feature provides a durable procedure
that can be reversed if necessary by puncturing the balloon. We are currently
marketing this product in Europe and are conducting FDA clinical studies in the
United States. We are also developing a next generation of this product which
will improve its ease of use and reduce its cost.

As part of the acquisition of Influence, we acquired a number of products that
are currently in development. Several of these products are improvements and
next generation products for female sling procedures. These next generation
products are lower cost and should be easier to use than the current systems. In
addition, we are developing a product that does not require a metal implant in
the pubic bone, which we believe will be particularly appealing to those
urologists and gynecologists who have historically avoided using a metal bone
anchor. Accordingly, we believe we can increase our market opportunity with a
product that appeals to a broader spectrum of physicians.

We are developing two new products as alternatives to cadaveric tissue for sling
procedures. We are developing a specially treated synthetic material, which is
designed to reduce the infection rate associated with other synthetic materials,
have greater strength than fascia lata and be less expensive. We also are
developing Flast, a device physicians can use to harvest fascia lata from the
patient's own thigh for sling material without making a large incision.

We offer several types of sling materials for use in male and female sling
procedures under the Triangle trademark. In the United States, we provide
cadaveric fascia lata sling material, fascia from the thigh of a donor, as a
service. There is a limited supply of this type of material. We recently added
the service of providing a cadaveric dermal tissue, or donor skin, product in
the United States. Cadaveric dermal tissue has superior strength characteristics
over cadaveric fascia lata. In addition, we offer two types of synthetic sling
material, primarily outside of the United States.

OUR ERECTILE DYSFUNCTION BUSINESS

OVERVIEW

Erectile dysfunction, or impotence, is the inability to achieve or maintain an
erection firm enough, or for a sufficient amount of time, for sexual
intercourse. The psychological and quality of life impact of erectile
dysfunction on a man's, and a couple's, life is significant.

A variety of physical and psychological conditions can cause erectile
dysfunction, including diabetes, vascular disorders, disorders that affect the
nervous system, complications from surgery, medication, alcoholism, spinal cord
injuries, depression, stress and performance anxiety. Erectile dysfunction is
most often caused by physical problems, rather than psychological problems.

Most physicians use a scoring system for erectile dysfunction that measures the
severity of a patient's disorder and categorizes it as mild, moderate or severe.
Of patients with erectile dysfunction, approximately 33% are categorized as
mild, 49% as moderate and 18% as severe. More than 90% of patients who receive a
penile implant have severe erectile dysfunction.

CURRENT TREATMENTS FOR ERECTILE DYSFUNCTION

The primary treatment options for erectile dysfunction are oral medications,
injectable medications, vacuum devices and penile implants. Today, the primary
oral medication used for treating erectile
46
<PAGE> 47

dysfunction is Viagra. Patients can also inject medication directly into the
penis using a small needle attached to a syringe or insert medication into the
urethra with an applicator instead of a needle. Before the advent of Viagra, a
primary treatment for erectile dysfunction was a vacuum constriction device,
which uses a vacuum to draw blood into the penis and a constriction ring to
prevent blood from flowing back out of the penis.

Although the success of some of these treatments, especially Viagra, has had a
positive impact on the diagnosis and treatment of patients suffering from
erectile dysfunction, many patients with severe erectile dysfunction are not
successfully treated with these therapies. For an effective treatment, many
patients with severe conditions often have no alternative other than a penile
implant. A penile implant is a device surgically implanted inside the penis to
mechanically simulate an erection. A penile implant provides natural looking and
feeling erections and has a very high patient and partner satisfaction rate.
Patients with a penile implant can generally ejaculate normally and experience
normal sensations during intercourse.

ERECTILE DYSFUNCTION MARKET OPPORTUNITY

Worldwide sales for erectile dysfunction products are estimated at $1.2 billion
annually. Approximately 20% of the adult male population suffers from erectile
dysfunction, which translates into more than 30 million men in the United
States, primarily those over the age of 40. Of these, we estimate that
approximately 5.6 million men suffer from severe erectile dysfunction, including
approximately 2.8 million who suffer from chronic, severe erectile dysfunction.
Viagra is an effective treatment option for less than half of patients with
chronic, severe erectile dysfunction. As a result, we estimate that there are
approximately 1.1 million men who are candidates for penile implants in the
United States alone. We estimate that only approximately 20,000 men received a
penile implant worldwide in 1999, generating worldwide sales of approximately
$70 million. We believe that increased marketing and a focus on physician and
patient education will continue to drive the growth of penile implants.

The introduction and advertising of Viagra have significantly increased the
population of patients seeking treatment for erectile dysfunction. Since Pfizer
introduced Viagra in 1998, there have been approximately 8.6 million new
prescriptions written for Viagra. Prior to the introduction of Viagra,
approximately one million men sought treatment for erectile dysfunction each
year.

OUR ERECTILE DYSFUNCTION PRODUCTS

Historically, we have derived most of our revenues from our penile implants. Our
erectile dysfunction products represented $47.2 million, or 58%, of our 1999 net
sales. We are the worldwide leader in the penile implant market, with more than
a 60% market share. Since we introduced the first inflatable penile prosthesis
in 1973, urologists have implanted over 200,000 of our penile prostheses with
patient satisfaction rates as high as 87% at five years.

In order to meet various physician and patient preferences, we offer a full line
of penile implants. The following tables lists our core erectile dysfunction
products on the market and those currently under development. For more
information on the FDA regulatory approval process, see "Business--Government
Regulation."

47
<PAGE> 48

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
CURRENT PRODUCTS DESCRIPTION OF PRODUCT U.S. REGULATORY APPROVAL STATUS
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AMS 700 CX 3-piece hydraulic implant PDP approved
expands in girth only
----------------------------------------------------------------------------------------------------------------
AMS 700 Ultrex 3-piece hydraulic implant PDP approved
expands in length and girth
----------------------------------------------------------------------------------------------------------------
Ambicor 2-piece hydraulic implant PDP approved
----------------------------------------------------------------------------------------------------------------
AMS 650 Malleable implant 510(k) cleared
----------------------------------------------------------------------------------------------------------------
NEVA Nocturnal monitoring device for 510(k) cleared
diagnostic purposes
----------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
PRODUCTS UNDER DEVELOPMENT DESCRIPTION OF PRODUCT U.S. REGULATORY APPROVAL STATUS
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Next Generation Penile Implants Implants designed for PDP supplements will be
durability, ease of use and submitted
resistance to infection
----------------------------------------------------------------------------------------------------------------
</TABLE>

Our AMS 700 product is a three-piece hydraulic inflatable implant that consists
of a pair of hollow silicone cylinders implanted into the penis, a control pump
placed in the scrotum and a reservoir balloon filled with saline placed in the
abdomen. The control pump provides the ability to direct the saline to flow out
of the balloon and into the cylinders, expanding the cylinders and causing an
erect penis. Hydraulic implants are the most popular type of implants because of
their natural look and feel in both the flaccid and erect positions. Our AMS 700
line includes our CX model, which expands in girth, and our Ultrex model, which
expands in both length and girth. Our Ultrex model most closely approximates the
process and feel of both a natural erection and a natural flaccid state and is
the only product of its kind on the market. We believe our AMS 700 line of
penile implants is the most widely used implant worldwide.

Our Ambicor product is a two-piece hydraulic implant. This product uses the
distal end of the implant as the reservoir site which allows us to eliminate the
abdominal balloon used in the AMS 700. The Ambicor product can be implanted in a
less-invasive and shorter procedure than the procedure required for the
three-piece device. For the patient it has the additional benefit of requiring
fewer pumps for activation.

Our AMS 650 is a malleable penile implant. This product is made of a
silicone-covered wire bundle that allows a man to manually straighten his penis
to allow for intercourse or bend it out of the way when it is not in use. This
product is a lower cost alternative to our hydraulic implants. Most of our sales
of the AMS 650 are outside of the United States.

We also distribute the NEVA System, an innovative diagnostic system designed to
measure nocturnal erectile events and record pertinent data for physician
review. Based on the information provided by the NEVA System, a physician can
better understand the origin of the erectile dysfunction problem and recommend
appropriate treatment options.

OUR PROSTATE BUSINESS

OVERVIEW

There are three primary types of prostate disease: enlarged prostate, more
commonly known as BPH, strictures and prostate cancer. We currently offer
products to treat strictures and BPH. We also view the treatment of prostate
cancer as an attractive market opportunity. The prostate gland is located just
below the bladder, next to the rectum. The urethra runs through the middle of
the prostate and penis.

48
<PAGE> 49

In BPH patients, the prostate enlarges which squeezes the urethra, thereby
restricting the normal passage of urine. More than half of men in their 60's
have BPH, and among men in their 70's and 80's, the figure may be as high as
90%. BPH patients also typically suffer from a variety of troubling symptoms
primarily relating to changes in urinary voiding which may have a significant
impact on their quality of life. These symptoms include: increased frequency of
urination; sudden urge to urinate; stopping and starting of flow during
urination; weak flow of urine; difficulty in starting urination and sensation of
incompleteness in emptying of bladder.

Strictures are scarring of the urethra, usually caused by sexually transmitted
diseases or from physical or surgical trauma, including passing of scopes or
other instrumentation within the urethra.

CURRENT TREATMENTS FOR PROSTATE DISEASE

Conventional treatments for prostate disease typically involve a number of
invasive surgical techniques and/or drug therapies. The following summarizes
treatment options for the three types of prostate diseases:

- BPH. The primary treatments for patients with mild to moderate BPH are
watchful waiting and drug therapy. Watchful waiting means that the
patient chooses no treatment at all, and seeks treatment only when the
condition worsens. For patients with moderate to severe BPH, the most
common surgical treatment is transurethral resection of the prostate, or
TURP. This procedure involves inserting a tiny looped wire into the
urethra through the penis and up to the prostate to remove the prostatic
tissue. New, less-invasive techniques have been introduced to the market
recently, such as lasers, radio frequency energy needles and microwave
therapy. These therapies are designed to kill prostatic tissue using
various forms of energy without damaging the urethra. While
less-invasive than TURPs, these therapies are somewhat less effective at
restoring high urine flow rates to patients. Stents are another
alternative for patients who suffer from BPH. They offer the advantages
of a less-invasive procedure, immediate relief of obstruction as well as
flow rates comparable to TURP.

- Strictures. Treatments of strictures include dilation procedures,
urethrotomy procedures and stents. Urethral dilation involves the use of
metal dilators to gradually stretch out the strictured area of the
urethra. Urethrotomy involves making an incision in the urethra to open
up the scarred area. Urethral stents are placed to hold open the urethra
so that the scar does not reform, a common complication of other
procedures. A urethroplasty procedure is typically used when other
methods fail. In this procedure, the stricture is accessed through a
surgical incision, the strictured area is removed and the urethra is
re-attached.

- Prostate cancer. A radical prostatectomy is the most widely accepted
treatment to remove a cancerous prostate gland. In this procedure, the
entire prostate is removed in an invasive procedure. Radiation therapy,
particularly brachytherapy, has become an important new technology for
treatment of prostate cancer. Brachytherapy is a less-invasive procedure
in which small radiation seeds are implanted in the prostate through the
perineum to kill the cancerous prostatic tissue. Cryotherapy has also
recently been reintroduced to the market. This procedure uses cryo
probes placed perineally to freeze the prostate and kill the cancerous
tissue.

PROSTATE DISEASE MARKET OPPORTUNITY

Prostate disease affects approximately 16 million patients in the United States.
We estimate that the U.S. market for products to treat prostate disease is more
than $300 million annually, and approximately $100 million of this amount is
from products used to treat BPH. BPH is the most common type of prostate
disease, affecting more than 13 million men in the United States. We estimate
that approximately 2.9 million of these men suffer from severe BPH;
approximately 2 million are treated with drugs and approximately 250,000 are
treated surgically. In addition, the American Cancer Society estimates that
there will be 180,400 new cases of prostate cancer diagnosed in 2000.

49
<PAGE> 50

OUR PROSTATE PRODUCTS

We have the number one market position in permanent urethral stents for the
treatment of BPH and strictures. Our prostate disease products represented $7.2
million, or 9.0%, of our 1999 net sales. The following tables list our core
prostate products and products under development. For more information on the
FDA regulatory approval process, see "Business--Government Regulation."

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
CURRENT PRODUCTS DESCRIPTION OF PRODUCT REGULATORY APPROVAL STATUS
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UroLume Endoprosthesis An expandable braided wire PMA approved
stent
---------------------------------------------------------------------------------------------------
Coaguloop Resection Electrode A resection loop using radio 510(k) cleared
frequency energy to resect
the prostate
---------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
PRODUCTS UNDER DEVELOPMENT DESCRIPTION OF PRODUCT REGULATORY APPROVAL STATUS
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ProstaJect System A needle injecting probe is IND/NDA will be submitted;
used to inject ethanol into IND for Phase I and II trials
the prostate to kill the in preparation
tissue
---------------------------------------------------------------------------------------------------
Next Generation UroLume An expandable braided wire PMA supplement will be
stent which is more submitted
comfortable and easier to
remove
---------------------------------------------------------------------------------------------------
Bioresorbable Stent Urethral stent designed to IDE/PMA will be submitted
maintain its structure for
2-4 weeks after implant
---------------------------------------------------------------------------------------------------
</TABLE>

Our UroLume Endoprosthesis is an expandable braided wire stent intended as a
treatment to relieve urinary obstruction caused by BPH, detrusor external
sphincter dyssenergia, or DESD, and strictures. Our UroLume procedure is
minimally invasive, using a direct vision delivery system for precise
positioning and easy placement. Urologists perform this procedure under local or
general anesthesia. Our UroLume stent has an 88% success rate seven years after
implant. We are currently developing a next generation UroLume product which is
designed to be easier to remove and less irritative.

Our Coaguloop Resection Electrode is a premium resection loop used during TURP
and bladder cancer procedures. It is used as a treatment to relieve urinary
obstruction caused by BPH. The main advantage of our loop is that it has
superior coagulation characteristics compared to other loops.

We acquired the exclusive rights to distribute the ProstaJect injection device
on a worldwide, long-term basis in October 1999. The ProstaJect System is an
injection system designed to treat BPH in a less-invasive manner by injecting
ethanol into the prostate to kill prostatic tissue. The device is made up of a
curved injection needle that facilitates precise placement of the ethanol into
the prostate. This system does not require the physician to invest in any
capital equipment, unlike competitive products currently on the market.
Urologists can perform this transurethral injection procedure in an ambulatory
surgery center without the use of general anesthesia. We are currently seeking
FDA approval to market this product in the United States for BPH. We plan to
launch this product in early-2001 outside of the United States.

We are in the process of developing a bioresorbable stent. This product is
designed for use in post-surgical procedures, particularly after less-invasive
BPH procedures. A high percentage of these patients are sent home with catheters
after the procedure because of temporary obstruction caused by swelling of the

50
<PAGE> 51

urethra. Our product is designed to hold open the urethra for a period of two to
four weeks. This would allow patients immediate post-operative voiding without
the use of a catheter.

SALES AND MARKETING

UNITED STATES

We have a strong sales, marketing and distribution infrastructure that includes
well-trained, direct field representatives worldwide. Our U.S. sales force is
comprised of two teams of sales representatives. One team is focused on selling
traditional AMS products, including our penile implants, artificial urinary
sphincters and UroLume stents. The other team, made up primarily of the former
Influence sales force, is focused on selling sling products to the incontinence
market. We believe this allows both sales teams to focus on their core
competencies and to maximize sales. We also have surgical specialists in the
field who support our selling efforts by attending procedures involving our
products.

We believe the size and strength of our sales organization are among our
important competitive advantages. Our sales force is very well trained in the
technical aspects of the procedures urologists perform with our products. In
addition, our AMS sales team has strong, long-term relationships with the
urologists who use our products. Our Influence sales team is a competitive
selling organization. Our sales representatives have an average tenure with us
or Influence of six years.

Our marketing department consists of more than 30 professionals who develop and
implement marketing programs designed to increase awareness of our products with
patients and urologists. Our marketing programs have provided us with
exceptional access to physicians throughout the world. These programs include:

- Medical Marketing Programs are intended to educate physicians and their
staff about successfully promoting their practices, efficiently educate
patients about the diagnosis and treatment of various urological
conditions and effectively train office staff to work with patients.

- Surgical Training Programs are offered to physicians interested in
improving their surgical techniques.

- Education Materials, such as brochures and videos, are developed to
educate patients and urologists about treatment options for
incontinence, erectile dysfunction, prostate disease and about our
products in particular.

- Reimbursement Assistance is provided by our Health Care Affairs
department and outside consultants to assist patients and surgeons in
obtaining appropriate reimbursement for our products.

- Medical Advisory Boards are comprised of key U.S. and international
opinion leaders who provide us feedback about our current and future
products, diagnostic and treatment trends and other areas of interest.

- Website marketing is focused on educating both patients and urologists
about our product alternatives, reimbursement for our procedures and our
marketing programs.

INTERNATIONAL

In order to grow our international business, which represented 23% of our total
net sales in 1999, we have recently added a new senior management team and
restructured our international business. We currently employ a direct sales
force located in five Western European countries, Canada and Australia. All of
our international sales people sell our entire product line. We also have a
network of approximately 45 foreign independent distributors and agents who
supplement our direct sales force. These distributors and agents sell our
products primarily in Eastern Europe, Southeast Asia, South America, the Middle
East and Africa. The local market condition, regulatory situation and
competitive situation determine the type of products sold in our distributor
markets. New product introductions will be key to growing our international
operations.
51
<PAGE> 52

MANUFACTURING AND SUPPLY

We have approximately 75,000 square feet at our headquarters located in
Minnetonka, Minnesota used for manufacturing, research and development,
warehousing and distribution. We have numerous manufacturing capabilities at the
Minnesota facility, including high-skilled operations specialists and expertise
in plastic injection molding, silicone transfer molding, silicone molding, dip
coating and silicone extrusion using state-of-the-art technology. We manufacture
almost all of our products and related components in our Minnesota facility,
except our sling products, which are currently manufactured at our Israeli
facility. We are in the process of transferring production of our In-Fast sling
products from our Israeli facility to our Minnesota facility. We plan to
continue to use our Israeli facility to manufacture prototypes and other
lower-volume incontinence products.

Although most of the components we purchase to use in our manufacturing facility
are available from multiple sources, some materials are only supplied by a
limited number of vendors. The main component of our implantable prostheses is
raw silicone. We currently rely on one supplier to provide the silicone used in
most of our implantable products. We are aware of only two suppliers of silicone
to the medical device industry for permanent implant usage. We rely mostly on
one supplier for some of the components used in Influence's sling procedure kits
for the treatment of incontinence, although there are a few other authorized
suppliers of these components. We purchase other raw materials from multiple
suppliers in the United States.

We maintain a comprehensive quality assurance and quality control program, which
includes documentation of all material specifications, operating procedures,
equipment maintenance and quality control test methods. Our documentation
systems comply with FDA and ISO 9001 requirements.

Currently, we are operating one manufacturing shift and are at approximately 25%
of our production capacity in our Minnesota facility. We have the ability to
increase production levels of our current product lines without expanding our
facility. We believe that our property in Minnesota is adequate to serve our
business operations for the foreseeable future.

RESEARCH AND DEVELOPMENT

Our U.S.-based research and development staff of more than 30 people focuses on
developing new products to treat incontinence, erectile dysfunction and prostate
disease. In addition, our research and development staff continually works on
enhancing our current product offerings, also known as continuation engineering.
The incontinence, erectile dysfunction and prostate disease teams focus on
developing new, unique and cost-effective products to treat these disorders. The
continuation engineering team focuses on developing improvements to our existing
products. Our research and development staff also consults with our network of
leading urologists to develop new products and new features to our existing
products.

In addition, our Israeli subsidiary continues to employ the two founders of
Influence who lead a research and development staff of approximately 15 people
in Israel. This team focuses on next generation sling technology and other
incontinence products. The Israeli research and development team works closely
with our U.S. research and development staff. To support the Israeli research
and development team, we have maintained Influence's prototype manufacturing
group, consisting of 10 highly skilled machinists and craftsmen. The prototype
manufacturing group is responsible for transferring the technology developed by
the Israeli research and development team to a manufacturing platform.

We spent $16.3 million in 1997, $13.1 million in 1998 and $9.6 million in 1999
on research and development. These costs include clinical and regulatory
expenses. Our research and development costs declined in 1998 and 1999 because
we abandoned a research project on which we spent $7.1 million in 1997 and $3.1
million in 1998. We abandoned this project in early 1999, and did not spend a
significant amount on this project in 1999.

52
<PAGE> 53

COMPETITION

Competition in the medical device industry is intense and is characterized by
extensive research efforts and rapid technological progress. We believe that the
primary competitive factors include price, quality, technical capability,
breadth of product line and distribution capabilities. Many of our competitors
in the urology market have greater resources, more widely accepted products,
less-invasive therapies, greater technical capabilities and stronger name
recognition than we do. Our ability to compete is affected by our ability to:

- develop new products and innovative technologies;

- obtain regulatory clearance and compliance for our products;

- protect the proprietary technology of our products and manufacturing
process;

- market our products;

- attract and retain skilled employees; and

- maintain and establish distribution relationships.

Our principal competition in the erectile dysfunction market is Mentor
Corporation's penile implants and oral medications such as Pfizer's Viagra. We
also compete with companies that provide injectables for erectile dysfunction
such as Pharmacia and Schwarz Pharma. Our principal competitors in the
incontinence market are C.R. Bard, Inc., Boston Scientific Corporation, Johnson
& Johnson, UroPlasty, Inc. and Advanced UroSciences, Inc. Our principal
competitors in the prostate disease market are Johnson & Johnson, Boston
Scientific Corporation, EDAP Technomed, Urologix, Inc. and VidaMed, Inc.

Our competitors also include academic institutions and other public and private
research organizations that continue to conduct research, seek patent protection
and establish arrangements for commercializing products in this market which
will compete with our products.

INTELLECTUAL PROPERTY

We seek to aggressively protect technology, inventions and improvements that we
consider important through the use of patents and trade secrets in the United
States and significant foreign markets. We cannot assure you that our patents
will provide competitive advantages for our products, or that our competitors
will not challenge or circumvent these rights. In addition, we cannot assure you
that the PTO will issue any of our pending patent applications. The PTO may also
deny or significantly narrow claims made under our patent applications. Any
issued patents may not provide us with significant commercial protection. We
could incur substantial costs in proceedings before the PTO, including
interference proceedings. These proceedings could result in adverse decisions as
to the priority of our inventions. The laws of some of the countries in which
our products are or may be sold may not protect our products and intellectual
property to the same extent as the laws in the United States, or at all.

While we do not believe that any of our products infringe any valid claims of
patents or other proprietary rights held by third parties, we cannot assure you
that we do not infringe any patents or other proprietary rights held by third
parties. If a third party makes an infringement claim, our costs to defend the
claim could be substantial and adversely affect us, even if we were ultimately
successful in defending the claim. If our products were found to infringe any
proprietary right of a third party, we could be required to pay significant
damages or license fees to the third party or cease production. Litigation may
also be necessary to enforce patent rights we hold or to protect trade secrets
or techniques we own. Any claims or litigation could result in substantial costs
and diversion of effort by our management. We are currently involved in two
intellectual property lawsuits with Boston Scientific Corporation. See
"Business--Legal Proceedings" for more specific information regarding these
lawsuits.

We also rely on trade secrets and other unpatented proprietary technology. We
cannot assure you that we can meaningfully protect our rights in these
unpatented proprietary technology or that others will not
53
<PAGE> 54

independently develop substantially equivalent proprietary products or processes
or otherwise gain access to our proprietary technology. We seek to protect our
trade secrets and proprietary know-how, in part, with confidentiality agreements
with employees and consultants. We cannot assure you, however, that the
agreements will not be breached, that we will have adequate remedies for any
breach or that our competitors will not discover or independently develop our
trade secrets.

GOVERNMENT REGULATION

UNITED STATES

Numerous governmental authorities, principally the FDA and corresponding state
and foreign regulatory agencies, strictly regulate our products and research and
development activities. The Federal Food, Drug, and Cosmetic Act, or FDA Act,
the regulations promulgated under this act, and other federal and state statutes
and regulations, govern, among other things, the pre-clinical and clinical
testing, design, manufacture, safety, efficacy, labeling, storage, record
keeping, advertising and promotion of medical devices.

Generally, before we can market a new medical device, we must obtain marketing
clearance through a 510(k) premarket notification, approval of a premarket
approval application, or PMA, or approval of product development protocol, or
PDP. The FDA will typically grant a 510(k) clearance if it can establish that
the device is substantially equivalent to a predicate device. It generally takes
several months from the date of a 510(k) submission to obtain clearance, but it
may take longer, particularly if a clinical trial is required.

A PMA or PDP application must be submitted if a proposed device does not qualify
for a 510(k) premarket clearance procedure. The scientific data required to
support an approval to market a product using a PMA or PDP is generally the
same. PMA and PDP applications must be supported by valid scientific evidence to
demonstrate the safety and effectiveness of the device, typically including the
results of clinical trials, bench tests, and laboratory and animal studies. The
PMA and PDP must also contain a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising, and any training materials. The PMA and PDP
process can be expensive, uncertain and lengthy, require detailed and
comprehensive data and generally take significantly longer than the 510(k)
process. Toward the end of the PMA review process, the FDA generally will
conduct an inspection of the manufacturer's facilities to ensure compliance with
applicable quality standard regulation requirements which include elaborate
testing, control documentation and other quality assurance procedures. Separate
preapproval inspections are required for each PMA application.

If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, and the device presents a significant risk, the
sponsor of the trial, usually the manufacturer or the distributor of the device,
must file an investigational device exemption, or an IDE, application prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and/or laboratory testing. If the IDE
application is approved by the FDA and one or more appropriate institutional
review boards, or IRBs, human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a nonsignificant risk to the patient, a sponsor may
begin the clinical trial after obtaining approval for the study by two or more
appropriate IRBs without separate approval from the FDA. Submission of an IDE
does not give assurance that the FDA will approve the IDE and, if it is
approved, there can be no assurance the FDA will determine that the data derived
from the studies support the safety and efficacy of the device or warrant the
continuation of clinical trials. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness, study indication
or the rights, safety or welfare of human subjects.

54
<PAGE> 55

Our core implantable products are or will be approved through the PMA or PDP
application process. Most of our other products are approved through the 510(k)
premarketing notification process. We have conducted clinical trials to support
many of our regulatory approvals.

We currently plan to seek approval from the FDA to market the InjecTx device and
ethanol as a drug/device combination product in the United States. In order to
obtain this approval, we will need to conduct preclinical laboratory and animal
tests; submit to the FDA an investigational new drug application, commonly known
as an IND application; conduct clinical and other studies to assess safety and
dosage parameters of use; conduct adequate and well-controlled randomized
clinical trials to establish the safety and effectiveness of the drug product;
submit to the FDA a new drug application, commonly known as an NDA; and obtain
FDA approval of the NDA prior to any commercial sale or shipment of the product
in the United States. Throughout the process, we will be required to submit
extensive clinical data to the FDA, which the FDA will review and analyze. This
process is expensive, uncertain and generally takes several years to complete.

In addition to granting approvals for our products, the FDA and international
regulatory authorities periodically inspect our company. We must comply with the
host of regulatory requirements that apply to medical devices marketed in the
United States and internationally. These requirements include labeling
regulations, manufacturing regulations, quality system regulation requirements,
and the medical device reporting regulations which require a manufacturer to
report to the FDA adverse events involving its products, and the FDA's general
prohibitions against promoting products for unapproved or off-label uses. The
FDA periodically inspects device and drug manufacturing facilities in the United
States in order to assure compliance with applicable quality system regulations.
The FDA last inspected our Minnetonka, Minnesota manufacturing facility in 1999
and our Israeli facility in 2000.

If the FDA believes we are not in compliance with law, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against us and our officers
and employees. If we fail to comply with these regulatory requirements, our
business, financial condition and results of operations would be harmed. In
addition, regulations regarding the manufacture and sale of our products are
subject to change. We cannot predict the effect, if any, that these changes
might have on our business, financial condition and results of operations.

Our manufacturing facility complies in all material respects with FDA
requirements. We have also implemented comprehensive procedures to ensure
compliance with the FDA quality system regulations with a focus on comprehensive
product design controls.

In addition to the FDA's regulation of the sale and marketing of medical
devices, we are also subject to the National Organ Transplant Act, or NOTA,
because we provide human tissue in connection with our sling systems for urinary
incontinence. NOTA prohibits the purchase and sale of human organs, including
bone and related tissue, for valuable consideration. NOTA permits the payment of
reasonable expenses associated with the removal, transportation, processing,
preservation, quality control, implantation and storage of human bone tissue.
NOTA enables the federal government to impose civil and criminal penalties on
those found to have violated this federal statute.

The FDA currently regulates human tissue-based products under the Public Health
Services Act. FDA regulations do not require a premarket clearance for human
tissue that is minimally manipulated, although human tissue is subject to tissue
donor screening and testing, processing and record keeping, and other controls.
The FDA, however, has proposed a more comprehensive regulatory framework that
will, if adopted, build upon and supersede the existing regulations for human
tissue-based products. Implementation of this proposed regulatory approach would
lead to new regulations for the human tissue we provide with our sling kits.

Most major foreign countries also regulate the use of human tissue, though with
different regulations and standards in each country.

55
<PAGE> 56

INTERNATIONAL

In order to market our products in European and other foreign countries, we must
obtain required regulatory approvals and comply with extensive regulations
governing product safety, quality and manufacturing processes. These regulations
vary significantly from country to country and with respect to the nature of the
particular medical device. The time required to obtain these foreign approvals
to market our products may be longer or shorter than that required in the United
States, and requirements for licensing may differ from FDA requirements.

In order to market our products in the member countries of the European Union,
we are required to comply with the medical devices directive and obtain CE mark
certification. CE mark certification is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. Under the medical devices directives, all medical devices
including active implants and in-vitro diagnostic products must qualify for CE
marking.

All our products sold internationally are subject to appropriate foreign
regulatory approvals, like CE Marking for the European Union. Our products are
manufactured in ISO 9001 compliant facilities.

THIRD-PARTY REIMBURSEMENT

In the United States, as well as in foreign countries, government-funded or
private insurance programs, commonly known as third-party payors, pay the cost
of a significant portion of a patient's medical expenses. A uniform policy of
reimbursement does not exist among all these payors. Therefore, reimbursement
can be quite different from payor to payor. We believe that reimbursement is an
important factor in the success of any medical device. Consequently, we seek to
obtain reimbursement for all of our products.

Reimbursement in the United States depends on our ability to obtain FDA
clearances and approvals to market these products. Reimbursement also depends on
our ability to demonstrate the short-term and long-term clinical and
cost-effectiveness of our products from the results we obtain from clinical
experience and formal clinical trials. We present these results at major
scientific and medical meetings and publish them in respected, peer-reviewed
medical journals.

The U.S. Health Care Financing Administration, or HCFA, sets reimbursement
policy for the Medicare program in the United States. HCFA has a national
coverage policy, which provides for the diagnosis and treatment of erectile
dysfunction in Medicare beneficiaries. It is estimated that 50-60% of penile
prosthesis procedures are performed on patients covered by Medicare.

Commercial payor coverage for erectile dysfunction varies widely across the
United States. Prior authorization is required for penile prosthesis surgeries,
and we have developed programs to address coverage denials for physicians and
their patients. For example, the introduction of Viagra resulted in some plans
establishing broad coverage exclusions for erectile dysfunction, most notably
some Blue Cross/Blue Shield plans.

Medicare has a national coverage policy that provides coverage for our AMS 800
Artificial Urinary Sphincter. Likewise, the Influence In-Fast and Straight-In
sling fixation systems are utilized in surgical procedures that are
well-accepted and paid for by third-party payors. Minimally invasive treatments
for prostate disease are generally covered under many third-party reimbursement
programs. Treatment for stricture of the urethra is covered by all Medicare
carriers in the United States and BPH is covered by Medicare in 33 states with
six additional states pending.

All third-party reimbursement programs, whether government funded or insured
commercially, whether inside the United States or outside, are developing
increasingly sophisticated methods of controlling health care costs through
prospective reimbursement and capitation programs, group purchasing, redesign of
benefits, second opinions required prior to major surgery, careful review of
bills, encouragement of healthier lifestyles and exploration of more
cost-effective methods of delivering health care. These types of

56
<PAGE> 57

programs can potentially limit the amount which health care providers may be
willing to pay for medical devices.

HCFA issued a Final Rule on its Prospective Payment System For Outpatient
Services on April 7, 2000. We estimate that more than half of the procedures
using our products are used in an outpatient hospital setting. This rule
provides for a new system to reimburse Medicare outpatient surgical services
provided in a hospital made up of two parts: payment to the hospital for the
procedure costs and a separate payment, known as a pass-through payment,
intended to cover the cost of medical devices used during the procedure that are
more than 25% of the total procedure cost. Some medical devices that do not fit
the pass-through criteria may be reimbursed by a separate payor known as New
Technology Ambulatory Payment Classification. HCFA's new reimbursement rules
became effective on August 1, 2000. On July 26, 2000, HCFA published a list of
pharmaceuticals and medical devices that will be eligible for pass-through
payments. HCFA currently intends only to provide payment for the products on
this list. HCFA has stated that it will update this list on a quarterly basis.
The current list contains approval for pass-through payments for our 700 line of
penile implants, the UroLume stent and our sling procedure kits. Our 650 and
Ambicor penile implants are approved for new technology payments. These lists do
not yet include the artificial urinary sphincter.

EMPLOYEES

As of April 15, 2000, we employed directly and through our subsidiaries 508
people in the following areas: 145 in manufacturing, 190 in sales and marketing,
72 in administration, 45 in regulatory, clinical and quality assurance, 49 in
research and development and 7 in human resources. We do not have any active
organized labor unions. We believe we have an excellent relationship with our
employees.

FACILITIES

Our corporate headquarters, main warehouse and manufacturing operations are
located in a 180,000 square foot building we own in Minnetonka, Minnesota. The
manufacturing operations at this location include sufficient capacity to expand
production of our current product line as well as absorb the transfer of
Influence's high volume manufacturing and assembling operations.

We lease office space for our international operations in France, Spain,
Germany, Belgium, England, Australia and Canada. We also lease space in a
building in Israel which contains research and development and prototype
manufacturing capabilities.

LEGAL PROCEEDINGS

BOSTON SCIENTIFIC CORPORATION V. INFLUENCE, INC.

On February 3, 1999, Boston Scientific Corporation filed an action in the
Federal District Court in San Francisco, California against Influence, which we
acquired in December 1999. Boston Scientific alleges that Influence has and
continues to induce the infringement of four United States patents by its
promotion and sale of products for the surgical treatment of female stress
urinary incontinence. Influence has counter-claimed against Boston Scientific
alleging that Boston Scientific infringes two United States patents owned by
Influence.

Boston Scientific is seeking its alleged lost profits, royalties and an
injunction. Influence likewise seeks its lost profits, royalties and an
injunction. Each party contends the asserted patents of the other party are
invalid and unenforceable. The court has issued a preliminary ruling that
Influence does not have rights to one of the patents it has asserted in this
action. This patent relates to a product that Influence has replaced with a new
product that is covered by a different patent. Nonetheless, Influence plans to
seek reconsideration of, and if necessary appeal, this ruling. Due to the early
stage of discovery and the inherent uncertainty of litigation, the outcome of
the action is uncertain. If Boston Scientific were to succeed in obtaining the
relief it claims, the Court could award damages to Boston Scientific, could
impose an injunction against further sales of Influence's products for the
surgical treatment of stress urinary

57
<PAGE> 58

incontinence, and could rule that Influence's patents are invalid or
unenforceable. We are unable to quantify the potential range of any damage
award. A damage award could be significant.

AMERICAN MEDICAL SYSTEMS, INC. V. BOSTON SCIENTIFIC CORPORATION

On March 27, 2000, we filed a complaint in Federal District Court in
Minneapolis, Minnesota, alleging that Boston Scientific infringes one of our
patents through Boston Scientific's sales and promotion of products and methods
for the treatment of female stress urinary incontinence. In the complaint, we
seek damages and an injunction against Boston Scientific. Boston Scientific has
denied our allegations and asserted that the patent at issue is invalid and
unenforceable.

OTHER

We have been and are also currently subject to various other legal proceedings
and other matters which arise in the ordinary course of business, including
product liability claims. In connection with the purchase of our assets from
Pfizer in 1998 by Warburg Pincus, Pfizer retained liability for claims relating
to products that were sold before the completion of the acquisition. We are
liable for claims relating to products sold after the completion of the
acquisition.

58
<PAGE> 59

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

Set forth below is certain information concerning our executive officers,
directors and key employees, including their age, as of May 1, 2000:

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Douglas W. Kohrs.......................... 42 President, Chief Executive Officer and
Director
Richard J. Faleschini..................... 53 Vice President, Sales and Marketing
Gregory J. Melsen......................... 48 Vice President, Finance and Chief
Financial Officer
Martin J. Emerson......................... 36 Vice President and General Manager,
International
J. Daniel Ruys............................ 49 Vice President, International
Johann Neisz.............................. 42 Vice President, Research and Development
Lawrence W. Getlin........................ 54 Vice President, Regulatory, Medical
Affairs and Quality Systems
Brian A. Millberg......................... 43 Vice President, Manufacturing and
Operations
Janet L. Dick............................. 44 Vice President, Human Resources
Eva S. Snitkin............................ 28 Director, Business Development
Richard B. Emmitt(1)...................... 55 Director
Christopher H. Porter, Ph.D............... 56 Director
David W. Stassen(1)....................... 48 Director
James T. Treace(1)(2)..................... 54 Director
Elizabeth H. Weatherman(2)................ 40 Director
</TABLE>

---------------------------------------------

(1)Member of the audit committee.
(2)Member of the compensation committee.

Douglas W. Kohrs has served as our President, Chief Executive Officer and
Director since April 1999. Mr. Kohrs has 18 years of experience in the medical
device industry, most recently as general manager of Sulzer Spine-Tech, Inc.
from May 1998 to April 1999. Mr. Kohrs was part of the founding team at Spine-
Tech when it was formed in 1991 to develop and commercialize the BAK spinal
fusion cage, a novel implantable device to improve the surgical treatment of
degenerative disc disease. Mr. Kohrs also served as Vice President of Research
and Development and Vice President of Marketing during his tenure at Spine-
Tech. Prior to working for Spine-Tech, Mr. Kohrs spent seven years with Johnson
& Johnson and two years at Zimmer, a division of Bristol-Myers Squibb. Mr. Kohrs
currently serves as a director of Kyphon, Inc. and Pioneer Surgical
Technologies, privately held companies

Richard J. Faleschini has served as our Vice President, Sales and Marketing
since November 1999. Mr. Faleschini has over 20 years experience in medical
device sales, marketing and general management. From July 1995 to August 1999,
he served in various executive positions at Medtronic, Inc. with
responsibilities for several sectors of its cardiovascular businesses, including
coronary stents, most recently as Vice President, U.S. Cardiovascular Health
Care Systems Marketing. His previous experience also includes sales and
marketing management responsibilities at Cordis Corporation from 1990 to 1995,
at Biomagnetic Technologies from 1985 to 1990 and at ATL and ADR Ultrasound from
1977 to 1985.

Gregory J. Melsen has served as our Vice President, Finance, Treasurer and Chief
Financial Officer since March 1999. From January 1996 to March 1999, Mr. Melsen
was Vice President, Finance, Treasurer and Chief Financial Officer of Avecor
Cardiovascular, Inc., a publicly-traded medical device company that Medtronic,
Inc. acquired in March 1999. His 25-year tenure in accounting and finance
includes two years as Vice President and Chief Financial Officer of PACE
Incorporated, an environmental testing company, and 19 years with Deloitte &
Touche, including nine years as an audit partner.

59
<PAGE> 60

Martin J. Emerson joined the company as Vice President, General Manager of
International in June 2000. Mr. Emerson has 15 years experience in the medical
device field in finance and general management capacities. From September 1998
to February 2000, he served as General Manager and Finance Director for Boston
Scientific Corporation in Singapore. Also in Singapore, he was Vice President
and Regional Financial Officer with MasterCard International from April 1997 to
September 1998. Mr. Emerson's early experience was with Baxter International
from June 1985 to March 1988 and from May 1989 to April 1997 in positions of
increasing responsibilities in finance and administration, leading to the
positions of Regional Director, Finance and Administration, Singapore and
ultimately, Vice President Finance -- Hospital Business, Brussels, from
September 1995 to April 1997.

J. Daniel Ruys has served as our Vice President, International since July 1999.
Mr. Ruys has 20 years of experience in sales, marketing and general management
with medical device companies and has spent most of his career based in Europe.
From April 1997 to June 1999, he served as the European Director of MICROVENA
International B.V. From March 1995 to March 1997, he served as the Vice
President, Europe of CardioGenesis B.V. From January 1994 to February 1995, he
served as General Manager of Hepatix, Inc. From 1977 through 1993, he served in
various capacities at Baxter Healthcare/American Hospital Supply.

Johann Neisz has served as our Vice President, Research and Development since
May 1999. Mr. Neisz has 16 years of medical device product development
experience. From July 1988 to May 1999, Mr. Neisz was employed by Medtronic,
Inc. in senior level Research and Development capacities in The Netherlands,
Sweden, and in the United States with its Neuro, Synectics-Dantec, Corporate
Ventures and Tachyarrhythmia Instruments businesses.

Lawrence W. Getlin, J.D. has served as our Vice President, Regulatory, Medical
Affairs and Quality Systems and Compliance since 1990. Prior to joining us, Mr.
Getlin served for 14 years with the Pharmaseal Division of Baxter
Healthcare/American Hospital Supply, the last eight years as the Director of
Regulatory Affairs. He is a member of the California State Bar as well as the
U.S. Court of Appeals 9th District, and District Court, Central District of
California, and is Regulatory Affairs Certified.

Brian A. Millberg has served as our Vice President, Manufacturing and Operations
since September 1998. Mr. Millberg joined us in 1984, spending his first 11
years with us in positions of increasing responsibility within research and
development. In 1996, he was promoted to Director of Operations, with full
responsibility for our manufacturing operations.

Janet L. Dick has served as our Vice President, Human Resources since 1996.
Overall, Ms. Dick has spent almost 15 years in positions of increasing
responsibility within our human resources department and Schneider's human
resources department, both of which were divisions of Pfizer at the time. Prior
to joining us, Ms. Dick was Assistant Vice President/Personnel Officer for Utica
National Bank & Trust for four years.

Eva S. Snitkin has served as our Director, Business Development since October
1998. From January 1996 to August 1998, Ms. Snitkin served with Banc of America
Securities, formerly NationsBanc Montgomery Securities, as a research analyst,
where she covered the medical device industry with a focus on the urology
market. For the two years prior to that, Ms. Snitkin covered the medical device
industry as an associate research analyst with Hambrecht & Quist.

Richard B. Emmitt has served as one of our directors since September 1998. Mr.
Emmitt is currently a Managing Director of The Vertical Group, Inc., an
investment management and venture capital firm which he founded in 1989 to focus
exclusively on the medical device industry. From 1977 to 1989, Mr. Emmitt served
in various capacities at F. Eberstadt & Co., and its successor, Eberstadt
Fleming. He currently also serves on the board of directors of A-Med Systems,
Inc. and Wright Medical Technology, Inc., and he previously served on the board
of directors of Xomed Surgical Products, Inc. and SciMed Life Systems, Inc.

60
<PAGE> 61

Christopher H. Porter, Ph.D. has served as one of our directors since December
1998. He currently serves as Principal of Medical Genesis, a consulting company
he founded in 1992. His 25 year career in the medical device industry includes
research and development and management experience with 3M, Johnson & Johnson
and Pfizer Inc., as well as several early stage companies. Mr. Porter also
served as our Vice President, Research and Development from 1981 to 1987. He has
introduced over 30 medical products during his career and holds 24 U.S. patents.

David W. Stassen has served as one of our directors since July 1999. Since
January 1999 he has been the Managing Director of Upper Lake Growth Capital, LLC
and Crane Island Ventures, LLC, venture capital companies based in Minneapolis,
Minnesota. Mr. Stassen was the President of Sulzer Spine-Tech, Inc., formerly
Spine-Tech, Inc., which developed and commercialized the BAK spinal fusion cage,
a novel implantable device to improve the surgical treatment of degenerative
disc disease, from June 1992 through June 1998. From 1990 to 1992, Mr. Stassen
was the Executive Vice President of St. Paul Venture Capital, Inc., a venture
capital company. From 1980 to 1989, Mr. Stassen was Vice President of North Star
Ventures, Inc., a privately-held Minnesota-based venture capital fund. Mr.
Stassen also currently serves as a director of Directag.com, Heartstent, Image
Guided Neurologies and Broncus Technologies, privately-held companies.

James T. Treace has served as one of our directors since December 1998. He
currently is the President of Medtronic/Xomed, the leader in the market for
surgical products used by ear, nose and throat surgeons, a position he has held
since 1996. From 1993 until its acquisition by Xomed Surgical Products, Inc. in
April 1996, Mr. Treace served as Chief Executive Officer, President and Chairman
of the Board of TreBay Medical Corp., an ear, nose and throat and orthopaedic
product company Mr. Treace co-founded in 1993. From 1990 to 1993, Mr. Treace
served as President of Linvatec Corporation, a minimally invasive orthopaedic
medical device company formerly known as Concept, Inc. Mr. Treace is currently a
director of Wright Medical Technology, Inc. and serves on the operating
committee of Medtronic, Inc.

Elizabeth H. Weatherman has served as one of our directors since July 1998. She
is a Managing Director of E.M. Warburg, Pincus & Co., LLC where she has been a
member of the health care group since 1988. She is responsible for Warburg
Pincus' medical device investment activities. Ms. Weatherman currently also
serves on the board of directors of Wright Medical Technology, Inc., and she
previously served on the board of directors of Xomed Surgical Products, Inc. and
E.P. Technologies, Inc.

BOARD OF DIRECTORS COMPOSITION AND COMPENSATION

Our board currently has six members. In accordance with our Amended and Restated
Certificate of Incorporation which will become effective upon the closing of the
offering, our board of directors will be divided into three classes with
staggered three-year terms. The term of the first class will expire at the
annual stockholders' meeting in 2001. The term of the second class will expire
at the annual stockholders' meeting in 2002. The term of the third class will
expire at the annual stockholders' meeting in 2003. We have designated Mr.
Stassen and Mr. Treace as the class one directors, Mr. Emmitt and Mr. Porter as
the class two directors, and Ms. Weatherman and Mr. Kohrs as the class three
directors. At each annual meeting of the stockholders after the closing of the
offering, the number of directors equal to the number of the class whose term
expires at the meeting will be elected for a term of three years. Each director
will serve until the expiration of his or her term for which he or she was
elected and qualified, or until his or her successor is duly elected and
qualified. This classification of our board may delay or prevent changes in the
control of our company or in our management.

According to a stockholders agreement, Warburg Pincus will have the right to
designate two persons to our board of directors upon the completion of the
offering. Currently, Warburg Pincus has designated Elizabeth H. Weatherman as
its representative under this agreement. See "Certain Transactions" for more
information about the stockholders agreement, in particular what rights our
current stockholders will have under this agreement once the offering is
completed. Elizabeth H. Weatherman is currently a partner of Warburg, Pincus &
Co., which is the sole general partner of Warburg, Pincus Equity Partners, L.P.,
our principal stockholder.

61
<PAGE> 62

We currently pay our non-employee directors $1,500 for each regularly scheduled
meeting of our board of directors, regardless of whether attendance is in person
or by telephone. We do not pay our non-employee directors this fee, however, if
our board holds a telephone meeting solely to approve actions a committee of our
board recommend. We also reimburse non-employee directors for reasonable
out-of-pocket expenses incurred in connection with attending regularly scheduled
meetings of our board of directors. Non-employee directors are directors who are
not our employees or a representative of one of our stockholders.

In addition, our non-employee directors have received grants of stock options
under our stock option plan for their service on our board. We have granted each
of our non-employee directors a non-qualified stock option to purchase 75,000
shares of our common stock at an exercise price of $1.67 per share. The options
vest over a four-year period from the date of grant as long as the non-employee
director continues to serve on our board. The options expire ten years from the
date of grant. No other options have been granted to any other person in respect
of their service as one of our directors. See "2000 Equity Incentive Plan" for
more information about our stock option plan.

BOARD COMMITTEES

The board of directors has established an audit committee and a compensation
committee.

The audit committee provides assistance to the board in satisfying its fiduciary
responsibilities relating to accounting, auditing, operating and reporting
practices and reviews the annual financial statements, the selection and work of
our independent auditors, the scope of the annual audits, the fees to be paid to
the auditors and the adequacy of internal controls for compliance with corporate
policies and directives. This committee consists of David W. Stassen, Richard B.
Emmitt and James T. Treace.

The compensation committee reviews general programs of compensation and benefits
for all employees and makes recommendations to our board of directors concerning
executive officer and director compensation. This committee consists of James T.
Treace and Elizabeth H. Weatherman.

EXECUTIVE COMPENSATION

The following table describes the compensation earned in fiscal year 1999 by our
current and former President and Chief Executive Officer, and our other top four
executive officers whose salaries and bonuses exceeded $100,000 in fiscal year
1999. The executives named in this table are referred to in this prospectus as
our named executive officers.

62
<PAGE> 63

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Douglas W. Kohrs(1).............................. $155,192 $20,000(2) 450,000 --
Current President and Chief Executive Officer
Gregory J. Melsen(3)............................. $124,496 $15,192(2) 150,000 $ 15,939(4)
Vice President, Finance and Chief Financial
Officer
Lawrence W. Getlin............................... $170,000 $ 9,690(2) 150,000 $ 11,618(5)
Vice President, Regulatory, Medical Affairs and
Quality Assurance
Brian A. Millberg................................ $117,500 $ 6,120(2) 150,000 $ 4,500(6)
Vice President, Manufacturing and Operations
Janet L. Dick.................................... $134,000 $16,344(2) 150,000 $ 6,555(7)
Vice President, Human Resources
Sam B. Humphries(8).............................. $ 75,000 $37,500 -- $173,442(9)
Former President and Chief Executive Officer
Helen Vallerand(10).............................. $ 62,500 -- 150,000 $282,296(11)
Former Vice President, Marketing
William R. Stein(12)............................. $ 79,038 -- 150,000 $224,627(13)
Former Vice President, North American Sales
</TABLE>

---------------------------------------------

(1)Mr. Kohrs' first day of employment with us was April 23, 1999.

(2)Bonuses were for services performed in 1999, but paid in 2000. These amounts
do not include bonuses paid in 1999.

(3)Mr. Melsen's first day of employment with us was March 11, 1999.

(4)Consists of $2,804 we paid under our 401(k) plan, and $1,808 we paid under
our supplemental employee retirement plan, as matching contributions, and
$11,327 we paid to Mr. Melsen for consulting services he performed prior to
his employment with us.

(5)Consists of $5,071 we paid under our 401(k) plan, and $3,400 we paid under
our supplemental employee retirement plan, as matching contributions, and
$3,147 in perquisites.

(6)Consists of $4,500 we paid under our 401(k) plan, as matching contributions.

(7)Consists of $6,332 we paid under our 401(k) plan, and $223 we paid under our
supplemental employee retirement plan, as matching contributions.

(8)Mr. Humphries' last day of employment with us was April 23, 1999.

(9)Consists of $150,000 in severance payments, $16,442 for accrued vacation, a
$2,000 car allowance and $5,000 we paid under our 401(k) plan as a matching
contribution. See "Certain Transactions--Agreements with Former Chief
Executive Officer" for more information regarding Mr. Humphries' severance
arrangement.

(10)Ms. Vallerand's last day of employment with us was May 14, 1999.

(11)Consists of $247,041 in severance payments, $23,582 for accrued vacation,
$7,330 for a pro rated bonus through Ms. Vallerand's termination date and
$4,343 we paid under our 401(k) plan as a matching contribution. See
"Certain Transactions--Other Severance Agreements" for more information
regarding Ms. Vallerand's severance arrangement.

(12)Mr. Stein's last day of employment with us was July 9, 1999.

(13)Consists of $197,400 in severance payments, $17,532 for accrued vacation,
$5,297 for a pro rated bonus through Mr. Stein's termination date and $4,398
we paid under our 401(k) plan as a matching contribution. See "Certain
Transactions--Other Severance Agreements" for more information regarding Mr.
Stein's severance arrangement.

63
<PAGE> 64

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information concerning stock options
granted during fiscal year 1999 to each of our named executive officers.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE TERM(2)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED FISCAL YEAR 1999 SHARE DATE 5% 10%
---- ---------- ---------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Douglas W. Kohrs........... 450,000(3) 16.2% $1.67 04/23/09 $471,671 $1,195,307
Gregory J. Melsen.......... 150,000(4) 5.4% $1.67 04/23/09 $157,224 $ 398,436
Lawrence W. Getlin......... 150,000(4) 5.4% $1.67 01/05/09 $157,224 $ 398,436
Brian A. Millberg.......... 150,000(4) 5.4% $1.67 01/05/09 $157,224 $ 398,436
Janet L. Dick.............. 150,000(4) 5.4% $1.67 01/05/09 $157,224 $ 398,436
Helen Vallerand............ 150,000(5) 5.4% $1.67 -- -- --
William R. Stein........... 150,000(5) 5.4% $1.67 -- -- --
</TABLE>

---------------------------------------------

(1)All of the options granted to the named executive officers were granted under
our 2000 Equity Incentive Plan. See "Management--2000 Equity Incentive Plan"
for a summary of the material terms of the options granted under this plan.

(2)In accordance with the rules of the SEC, the amounts shown on this table
represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date and do
not reflect our estimates or projections of our future common stock prices.
The gains shown are net of the option price, but do not include deductions
for taxes or other expenses associated with the exercise. Actual gains, if
any, on stock option exercises will depend upon the future performance of our
common stock, the executive's continued employment with us or our
subsidiaries and the date on which the options are exercised. The amounts
represented in this table might not necessarily be achieved.

(3)A total of 112,500 shares underlying these options vested on April 23, 2000.
The remaining 337,500 shares vest in increments of 28,125 shares on the last
day of each calendar quarter following March 31, 2000 as long as Mr. Kohrs is
providing services on each of these dates.

(4)A total of 37,500 shares underlying these options vested on December 31,
1999. The remaining 112,500 shares vest in increments of 9,375 shares on the
last day of each calendar quarter following December 31, 1999 as long as the
named executive officer is providing services on each of these dates.

(5)These options did not vest prior to the termination dates for these
employees, and were terminated effective as of their last day of employment
with AMS.

FISCAL YEAR-END OPTION VALUES

None of our named executive officers exercised any stock options in fiscal year
1999. The following table sets forth information concerning stock options held
by our named executive officers at December 31, 1999.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999 (1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglas W. Kohrs............................... -- 450,000 $ -- $4,198,500
Gregory J. Melsen.............................. 37,500 112,500 $349,875 $1,049,625
Lawrence W. Getlin............................. 37,500 112,500 $349,875 $1,049,625
Brian A. Millberg.............................. 37,500 112,500 $349,875 $1,049,625
Janet L. Dick.................................. 37,500 112,500 $349,875 $1,049,625
</TABLE>

---------------------------------------------

(1)There was no public trading market for our common stock on December 31, 1999.
Accordingly, these values have been calculated in accordance with the rules
of the SEC, on the basis of the initial public offering price per share of
$11.00 minus the exercise price of $1.67 per share.

64
<PAGE> 65

PENSION PLAN TABLE

Our named executive officers will continue to participate in our pension plan
following the offering. The following table sets forth the approximate annual
pension that a named executive officer may receive under the pension plan
assuming selection of a straight life annuity, retirement at age 65 and the
current level of covered compensation, based on the indicated assumptions as to
covered compensation and years of service. There are other annuity options
available under the pension plan which would reduce the following amounts. The
amount of the normal retirement benefit under the pension plan is the greater
of:

- the product of 1.4% times years of credited participation in the pension
plan, up to 35 years, times final average compensation, the highest 5
years of covered compensation; or

- the difference between (A) the product of 1.75% times years of credited
participation in the pension plan, up to 35 years, times final average
compensation, the highest 5 years of covered compensation, and (B) the
product of 1.5% times the named executive officer's primary social
security benefit times years of credited participation in the pension
plan, up to 35 years.

Compensation covered by the pension plan includes salary and cash bonuses.
Credited years of participation for our named executive officers are as follows:
Mr. Kohrs--1 year; Mr. Melsen--1 year; Mr. Getlin--10 years; Mr. Millberg--15
years; and Ms. Dick--14 years. The amounts shown do not reflect limitations
imposed by the Internal Revenue Code on retirement benefits which may be paid
under plans qualified under the Code. We have agreed to provide under our
Nonfunded Supplemental Retirement Plan the portion of the retirement benefits
earned under the pension plan which would otherwise be subject to Code
limitations. Under the Code the maximum annual benefit currently allowed under
the pension plan is $135,000 and the maximum annual compensation that may be
taken into account is currently $170,000.

PENSION TABLE

<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000........... $ 29,016 $ 38,688 $ 48,361 $ 58,033 $ 67,705
150,000........... 35,579 47,438 59,298 71,158 83,017
175,000........... 42,141 56,188 70,236 84,283 98,330
200,000........... 48,704 64,938 81,173 97,408 113,642
225,000........... 55,266 73,688 92,111 110,533 128,955
250,000........... 61,829 82,438 103,048 123,658 144,267
275,000........... 68,391 91,188 113,986 136,783 159,580
300,000........... 74,954 99,938 124,923 149,908 174,892
350,000........... 88,079 117,438 146,798 176,158 205,517
400,000........... 101,204 134,938 168,673 202,408 236,142
450,000........... 114,329 152,438 190,548 228,658 266,767
500,000........... 127,454 169,938 212,423 254,908 297,392
</TABLE>

EMPLOYMENT AGREEMENTS

We entered into an employment agreement with Douglas W. Kohrs on April 23, 1999.
Mr. Kohrs is currently serving as our President and Chief Executive Officer. The
current term of this agreement expires on April 23, 2001. This agreement extends
automatically for consecutive one-year periods until either we or Mr. Kohrs
provides notice of termination to the other not less than 60 days prior to an
anniversary date of this agreement. We currently pay Mr. Kohrs an annual base
salary of $250,000. Mr. Kohrs is eligible to receive an annual bonus based upon
certain performance criteria established by our board of directors. Under this
agreement, we granted Mr. Kohrs an option to purchase 450,000 shares of our
common stock at an exercise price of $1.67 per share, of which 112,500 shares
vested on April 23, 2000 and 28,125 shares of which vest on the last day of each
calendar quarter following March 31, 2000 while he is employed by us. We have
also agreed to reimburse Mr. Kohrs' reasonable and necessary business

65
<PAGE> 66

expenses. This agreement also entitles Mr. Kohrs to participate in our other
standard benefit programs and contains customary confidentiality and
non-competition provisions. See "Certain Transactions--Sales of Capital Stock"
for information regarding sales of our preferred stock to Mr. Kohrs.

We entered into an employment agreement with Gregory J. Melsen on March 24,
1999. Under the terms of this agreement, Mr. Melsen is currently serving as our
Vice President, Finance and Chief Financial Officer for an initial term expiring
on March 24, 2001. Upon the expiration of the initial term, this agreement will
extend automatically for consecutive one-year periods until either we or Mr.
Melsen provides notice of termination to the other not less than 60 days prior
to an anniversary date of this agreement. We currently pay Mr. Melsen an annual
base salary of $161,200. Mr. Melsen is also eligible to receive an annual bonus
based upon performance criteria established by our board of directors. Under
this agreement, we granted Mr. Melsen an option to purchase 150,000 shares of
our common stock at an exercise price of $1.67 per share, of which 37,500 shares
vested on December 31, 1999, and 9,375 shares of which vest on the last day of
each calendar quarter following December 31, 1999 while he is employed by us. We
have also agreed to reimburse Mr. Melsen's reasonable and necessary business
expenses. This agreement also entitles Mr. Melsen to participate in our other
standard benefit programs and contains customary confidentiality and
non-competition provisions.

Both of the agreements with Mr. Kohrs and Mr. Melsen include the following
termination benefits:

- If the employee dies or becomes disabled while employed by us, he will
be entitled to receive all amounts and benefits accrued but unpaid under
the agreement through his death or disability and his salary at the rate
in effect at the time of his death or disability for a period of twelve
months following his death or disability.

- If we terminate the employee for cause, he will receive no additional
compensation or termination benefits.

- If we terminate the employee without cause, we are required to continue
to pay his salary and provide health and welfare benefits for a period
of twelve months following his termination. If the employee, however,
accepts or engages in other employment prior to the last day of the
twelve-month period, we will be entitled to deduct from amounts and
benefits due the employee, other than in respect of any amount owed him
for bonus, the amounts and benefits he received from the other
employment.

- If we terminate the employee without cause, or if the employee
terminates his employment for a good reason, such as diminution in
responsibility or relocation, during the twelve-month period immediately
following a change of control:

-- we will pay the employee all amounts and benefits accrued but unpaid
through the date of his termination;

-- all unvested shares subject to the option granted him under the
agreement will immediately vest and be exercisable;

-- we will pay the employee a lump sum payment equal to his annual
salary at the rate in effect on the date of his termination, plus his
target bonus for the year in which the change of control occurs; and

-- we will provide, at our cost, any health and welfare benefits he
received at the time of termination for a twelve-month period
following termination.

We entered into an at-will employment agreement with Johann Neisz on May 1,
1999. Under the terms of this agreement, Mr. Neisz is serving as our Vice
President, Research and Development. Under this agreement, if we terminate Mr.
Neisz for any reason other than cause, death or disability, we must:

- pay Mr. Neisz his annual salary in effect at the time of his termination
for a period of six months following his termination;
66
<PAGE> 67

- pay Mr. Neisz his pro-rated bonus for the year in which his termination
occurs; and

- provide health and welfare benefits to Mr. Neisz for a period of six
months following his termination. However, if Mr. Neisz accepts other
employment prior to the last day in the six-month period following his
termination date, we will be entitled to deduct from amounts and
benefits we owe Mr. Neisz, other than in respect of any amounts owed him
for bonus, the amounts and benefits he received from the other
employment.

We entered into an at-will employment agreement with Jan Daniel Ruys on July 22,
1999. Under the terms of the agreement, Mr. Ruys is serving as our Vice
President, International. Under this agreement, we must provide Mr. Ruys the
following termination benefits:

- If Mr. Ruys becomes ill or disabled and he can no longer work for us, we
must continue to pay Mr. Ruys his salary, pension plan contributions and
health and welfare benefits, all in accordance with our standard
practices, for a period up to 12 months.

- If we terminate Mr. Ruys without cause, or if he terminates his
employment for good reason, we are required to pay Mr. Ruys a severance
payment equal to one year's salary.

- If we terminate Mr. Ruys without cause, or if he terminates his
employment for good reason, and his termination occurs after a change of
control of AMS, we are required to pay Mr. Ruys a severance payment
equal to two year's salary in lieu of the payment set forth in the
previous paragraph.

2000 EQUITY INCENTIVE PLAN

Our board of directors approved our 2000 Equity Incentive Plan on April 17,
2000. Our stockholders also approved the plan on April 17, 2000. The plan
replaced the American Medical Systems, Inc. 1998 Equity Incentive Plan, which
was terminated in connection with the formation of American Medical Systems
Holdings, Inc. All options outstanding under the 1998 Equity Incentive Plan were
exchanged for options under the 2000 Equity Incentive Plan. The exchanged
options have the same terms and are subject to the same conditions, except that
upon exercise, the holders of the options will receive common stock of American
Medical Systems Holdings, Inc., rather than common stock of American Medical
Systems, Inc. As of the date of this prospectus, we have a total of 3,900,000
shares of our common stock reserved for issuance under the plan. As of the date
of this prospectus, we have outstanding options to purchase an aggregate of
3,024,561 shares of our common stock at a weighted average exercise price of
$2.25 per share.

The plan provides for the grant to eligible persons of:

- options to purchase our common stock that qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended;

- options to purchase our common stock that do not qualify as incentive
stock options under the Code;

- restricted stock awards, which are subject to certain forfeiture and
transferability restrictions that lapse after specified employment
periods; and

- awards of unrestricted shares of common stock in the form of stock
bonuses, stock appreciation rights, phantom stock and performance share
units.

Except for stock options, we have not granted any other awards under the plan.
Our employees, directors and consultants are eligible to participate in the
plan. Under present law, incentive stock options may only be granted to
employees. Our board, or a committee of the board, may administer the plan, and
has the authority to:

- select plan participants;

- determine the nature and extent of the awards made to each plan
participant;

67
<PAGE> 68

- determine when awards will be made to plan participants;

- determine the duration of the period and vesting schedule for each
award;

- determine any payment conditions of the awards;

- prescribe the form of agreements evidencing awards made under the plan;
and

- make all other decisions relating to the administration of the plan.

Under the plan, the administrator also determines the exercise price at the time
of grant. The exercise price may not be less than 100% of the fair market value
of a share of our common stock on the day the administrator grants the option.
The options are generally granted for a ten year term, but may terminate earlier
if the participant's employment with us terminates before the end of the
ten-year period. If a plan participant who holds an incentive stock option also
owns, or is deemed to own, more than 10% of the combined voting power of all of
our classes of stock, the option period shall not exceed five years and the
exercise price of the option may not be less than 110% of the fair market value
on the grant date.

Under our standard agreement covering stock option grants, if we undergo a
change in control and within nine months after the change of control, we
terminate the employee's employment for any reason other than death, disability
or cause, or the employee terminates his or her employment with us for a good
reason, then without any action by the administrator of the plan, all
outstanding options may become immediately exercisable in full and may remain
exercisable for a period of up to twelve months from the date of termination
depending upon the reason for the employee's termination.

For purposes of the plan, a change in control of AMS will be deemed to have
occurred, among other events, upon:

- a reorganization, merger, consolidation or disposition of all or
substantially all of our assets, but only if:

-- we or our affiliates do not control the new entity resulting from the
transaction;

-- an unrelated party does not own, directly or indirectly, 50% or more
of the outstanding common stock of the new entity, including shares
that could be issued upon the exercise of outstanding stock options,
or 50% or more of the combined voting power of the new entity; and

-- at least a majority of the members of the board of the new entity
were members of our board at the time of the transaction;

- the sale at least 80% of our assets to an unrelated party;

- the approval by our stockholders of a complete liquidation or
dissolution of our company;

- any unrelated party purchases 50% or more of our then outstanding shares
of common stock, taking into account shares that may be issued upon the
exercise of outstanding stock options, or 50% or more of the combined
voting power of our then outstanding securities ordinarily having the
right to vote at the election of directors; or

- the current members of our board, or future members of our board who are
approved by at least two-thirds of our current board, cease to
constitute at least a majority of the board.

Under our standard agreement covering stock options, we have the right to
repurchase any stock issued upon exercise of an option at the same price the
option holder paid if we terminate the employee for cause. Also, if a
participant in the plan owns our common stock and receives an offer to purchase
this stock from another person, we have the right to purchase the stock from the
participant before the participant can sell it to the third party.

EMPLOYEE STOCK PURCHASE PLAN

On May 24, 2000, our board of directors approved our Employee Stock Purchase
Plan. Our board has reserved 300,000 shares of our voting common stock for
issuance under the plan. Our stockholders approved the plan on June 30, 2000. We
intend to implement the plan after the offering is completed.

68
<PAGE> 69

Under this plan, eligible employees have the right to purchase shares of our
common stock through payroll deductions made during consecutive offering
periods. The plan will have four three-month offering periods each year, except
for the initial offering period which will begin on September 1, 2000 and end on
December 31, 2000. The plan is intended to qualify under the provisions of
Section 421 and 423 of the Code. Subject to certain restrictions imposed by the
Code, persons eligible to participate in the plan are those who are employed by
us or one of our designated subsidiaries for at least 20 hours per week and for
more than five months in a calendar year. Eligible employees participate
voluntarily and may withdraw from any offering period at any time before they
purchase stock. Participation terminates automatically upon termination of
employment.

We will sell shares under the plan to participants at a discount from fair
market value. The purchase price per share of common stock in an offering period
will not be less than 85% of the lesser of its fair market value at the
beginning of an offering period or at the end of an offering period. To
accumulate the purchase price for the shares, each participant executes an
agreement which authorizes payroll deductions up to a maximum of 10% of the
participant's eligible compensation. The plan restricts the maximum number of
shares we may issue to a participant during a single offering period, and
provides that no participant will be permitted to subscribe for shares if,
immediately after the sale, that participant would own more than 5% of the
combined voting power or value of all classes of our stock.

The plan provides for adjustments in the number of shares subject to purchase
under the plan, and in the purchase price per share, if there is a change in our
capitalization that results in an increase or decrease in the number of
outstanding shares of our common stock. The plan also gives our board the
authority to shorten an offering period, and thereby accelerate a participant's
right to purchase shares, in the event of a proposed sale of all or
substantially all of our assets or a proposed merger with another company.

AMS 2000 MANAGEMENT INCENTIVE COMPENSATION PLAN

Our 2000 Management Incentive Compensation Plan became effective on January 1,
2000 to reward our vice presidents, directors and other key management with
additional performance-based compensation. This plan allows eligible
participants to earn bonuses up to stated percentages of their base salary. The
bonuses are paid in the first quarter of the following calendar year and based
on our specific achievement of sales and operating income goals and the
achievement of specific individual goals set by the participant. If any
participant voluntarily terminates his or her employment with us, or we
terminate his or her employment based upon performance during any plan year,
then their incentive award for that year is forfeited. For the year 2000, the
percentages for the participants are as follows:

- up to a maximum of 70% for our President and Chief Executive Officer if
we achieve 125% of our business plan;

- up to a maximum of 60% for our Vice Presidents if we achieve 150% or
more of our business plan; and

- up to a maximum of 55% for our director level employees if we achieve
150% or more of our business plan.

During 1999, we had a total of 20 employees participating in this plan, and paid
a total of $138,289 to these employees under this plan.

EMPLOYEE BENEFIT PLANS

AMS RETIREMENT ANNUITY PLAN. In September 1998, we adopted a defined benefit
retirement plan known as the AMS Retirement Annuity Plan which covers all of our
U.S. employees, except those hired after December 31, 1999. This pension plan is
intended to meet the requirements for qualification under Section 401(a) of the
Code, and provides a pension benefit to a participating employee based on the
employee's years of service and average compensation prior to retirement. Our
funding policy is to contribute annually to a trust maintained for the pension
plan in amounts as are necessary to maintain the pension plan on a sound
actuarial basis and to meet minimum funding standards required by applicable
law. This pension plan is administered by the employee benefits committee which
directs the investment of

69
<PAGE> 70

the assets of the pension plan in various investment options. The participants
in this pension plan acquire a vested interest in a retirement annuity under the
pension plan over a five-year period subject to requirements relating to the
number of hours worked in any given year. In December 1999, our board of
directors amended the pension plan to deny additional participation for any
employees who initially began employment with us after December 31, 1999.

AMS NONFUNDED SUPPLEMENTAL RETIREMENT PLAN. The Internal Revenue Code limits the
annual benefit that we may pay from tax-qualified pension plans such as our
Retirement Annuity Plan. As a result, we established the AMS Nonfunded
Supplemental Retirement Plan to provide retirees with supplemental benefits so
that they will receive, in the aggregate, the benefits they would have been
entitled to receive under our pension plan had those limits not been in effect.

AMS SAVINGS AND INVESTMENT PLAN--401(K) PLAN. In September 1998, we adopted a
defined contribution 401(k) plan known as the AMS Savings and Investment Plan
covering our employees located in the United States. Our 401(k) plan is intended
to meet the requirements for qualification and the requirements for a qualified
cash or deferred arrangement under Section 401(a) of the Code, so that salary
deferral contributions by employees, matching contributions by us and the
investment earnings are not taxable to our employees until withdrawn from the
401(k) plan. Pursuant to our 401(k) plan, eligible employees may elect to reduce
their current annual compensation between 2% and 15%, in whole percents, up to
the statutorily prescribed annual limit of $10,500 in year 2000 and to have the
amount of the reduction contributed to the 401(k) plan. Under our 401(k) plan,
we provide an additional matching contribution to each participant in the amount
of 100% of the participant's salary deferral contribution up to 2% of the
participant's compensation, and 50% of the participant's salary deferral
contribution between 2% and 6% of the participant's compensation. For employees
hired after January 1, 2000, these matching contributions vest on a four-year
graded vesting schedule. As of December 31, 1999, we had 364 eligible employees
participating in this 401(k) plan, and we made matching contributions of
approximately $866,000 for 1999.

AMS NONFUNDED DEFERRED COMPENSATION AND SUPPLEMENTAL SAVINGS PLAN. The Code
limits the amount that may be contributed to 401(k) plans. We established the
AMS Nonfunded Deferred Compensation and Supplemental Savings Plan to provide
employees the opportunity to make elective contributions to the plan and receive
the full amount of the matching contribution which are otherwise unavailable
under our 401(k) plan because of the limits imposed under the Code.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

James T. Treace and Elizabeth H. Weatherman, each of whom is a member of our
board of directors, are members of the board's compensation committee. No
executive officer of ours serves as a member of the board of directors or
compensation committee of any entity that has an executive officer serving as a
member of our board of directors or compensation committee.

Ms. Weatherman is a managing director E.M. Warburg, Pincus & Co., LLC, referred
to as EMWP. Warburg Pincus is managed by EMWP. Warburg Pincus led a group of
private investors in the acquisition of our assets from Pfizer in September
1998. In connection with the acquisition, Warburg Pincus purchased 19,000 shares
of our series A preferred stock, 200,000 shares of our series B preferred stock
and 3,600,000 shares of our series C preferred stock for a total of $38,000,000.
In December 1999, in connection with the financing of our acquisition of
Influence, Warburg Pincus purchased an additional 6,410 shares of our series A
preferred stock, as well as 118,072 shares of our series D preferred stock and
all 1,163,856 shares of our outstanding series E preferred stock for a total of
$19,229,280. Warburg Pincus has also guaranteed a portion of our senior credit
facility. See "Certain Transactions."

70
<PAGE> 71

CERTAIN TRANSACTIONS

ACQUISITION FROM PFIZER

In July 1998, Warburg Pincus led a group of private investors to form WPAMS
Acquisition Corp. to acquire the business of AMS and its subsidiaries from
Pfizer Inc. On July 21, 1998, Pfizer, WPAMS and other corporations Pfizer
controls entered into an Asset Purchase Agreement, which was later amended on
September 10, 1998, setting forth the terms and conditions upon which Pfizer and
its affiliates agreed to sell to WPAMS substantially all of the assets, and
WPAMS agreed to assume all liabilities related to those assets, of American
Medical Systems and its subsidiaries. On September 10, 1998, WPAMS completed its
acquisition of AMS from Pfizer, and on September 25, 1998, WPAMS changed its
name to American Medical Systems, Inc.

SALES OF CAPITAL STOCK

In connection with the acquisition of American Medical Systems from Pfizer, we
sold to five institutional investors, including Warburg Pincus, an aggregate of:

- 20,000 shares of series A preferred stock for $1,000 per share, or a
total of $20,000,000;

- 400,000 shares of series B preferred stock for $5.00 per share, or a
total of $2,000,000; and

- 3,600,000 shares of series C preferred stock for $5.00 per share, or a
total of $18,000,000.

Of the shares issued,

- Warburg Pincus purchased 19,000 shares of our series A preferred stock,
200,000 shares of our series B preferred stock and 3,600,000 shares of
our series C preferred stock for a total of $38,000,000; and

- Vertical Fund Associates, L.P., an affiliate of Richard B. Emmitt, one
of our directors, purchased 500 shares of our series A preferred stock
and 100,000 shares of our series B preferred stock for a total of
$1,000,000.

In June 1999, we sold to Douglas W. Kohrs, our current President and Chief
Executive Officer, 250 shares of our series A preferred stock for $1,000 per
share, or a total of $250,000, and 50,000 of our series B preferred stock for
$5.00 per share, or a total of $250,000.

In July 1999, we sold to Upper Lake Growth Capital LLC and Crane Island Ventures
LLC, of which one of our directors, David W. Stassen, is Managing Director, an
aggregate of 500 shares of our series A preferred stock for $1,000 per share, or
a total of $500,000, and 100,000 shares of our series D preferred stock for
$10.00 per share, or a total of $1,000,000.

In connection with the acquisition of Influence in December 1999, we sold to
seven of our stockholders the following additional shares:

- 6,999 shares of series A preferred stock for $1,000 per share, or a
total of $6,999,000;

- 236,144 shares of series D preferred stock for $10.00 per share, or a
total of $2,361,440; and

- 1,163,856 shares of series E preferred stock for $10.00 per share, or a
total of $11,638,560.

Of the shares issued,

- Warburg Pincus purchased 6,410 shares of series A preferred stock,
118,072 shares of series D preferred stock and all of the series E
preferred stock for a total of $19,229,280;

- Vertical Fund Associates purchased 169 shares of series A preferred
stock and 33,735 shares of series D preferred stock for a total of
$506,350;

- Upper Lake Growth Capital and Crane Island Ventures purchased an
aggregate of 168 shares of series A preferred stock and 33,735 shares of
series D preferred stock for a total of $505,350; and

71
<PAGE> 72

- Douglas W. Kohrs purchased 84 shares of series A preferred stock and
16,867 shares of series D preferred stock for a total of $252,670.

Upon completion of the offering, all of our series A preferred stock, plus
accumulated dividends, will convert, at a conversion price equal to the initial
public offering price of $11.00, into 242,895 shares of our voting common stock
and 2,712,945 shares of our non-voting common stock. Upon completion of the
offering, each outstanding share of our other series of preferred stock, plus
accumulated dividends, will convert into three shares of common stock for a
total of 3,322,953 shares of our voting common stock and 14,990,256 shares of
our non-voting common stock. Warburg Pincus will own all of the shares of non-
voting common stock. We anticipate that following the closing of the offering,
Warburg Pincus will convert a number of shares of non-voting common stock into
shares of voting common stock such that Warburg Pincus will own approximately
45% of our outstanding shares of voting common stock.

We have granted all holders of our series A preferred stock registration rights
with respect to all shares of common stock, including shares issuable upon
conversion of preferred stock, owned by our series A stockholders. See
"Description of Capital Stock -- Registration Rights."

FORMATION OF HOLDING COMPANY

On March 17, 2000, we formed American Medical Systems Holdings, Inc. to
establish a holding company for American Medical Systems, Inc. On April 17,
2000, American Medical Systems Holdings, Inc. entered into an exchange agreement
with the then existing stockholders of American Medical Systems, Inc. and
American Medical Systems, Inc. Under this agreement, all the then existing
stockholders of American Medical Systems, Inc., including Warburg Pincus,
institutional stockholders controlled by Richard B. Emmitt and David W. Stassen,
two of our directors, and Douglas W. Kohrs, our President and Chief Executive
Officer, agreed to exchange their shares of American Medical Systems, Inc. for
shares of American Medical Systems Holdings, Inc. As a result of this
transaction, the former stockholders of American Medical Systems, Inc. became
the stockholders of American Medical Systems Holdings, Inc., and American
Medical Systems, Inc. became a wholly owned subsidiary of American Medical
Systems Holdings, Inc.

STOCKHOLDERS AGREEMENT

On April 17, 2000, we entered into a stockholders agreement with Warburg Pincus
and all of our then existing stockholders. Following the completion of the
offering, as long as any of our current stockholders own at least 20% of our
outstanding shares of capital stock, we are obligated to nominate and use our
best efforts to have two individuals designated by that stockholder elected to
our board of directors. We are also obligated, following the completion of the
offering, to nominate and use our best efforts to have one individual designated
by any stockholder who owns at least 10% of our outstanding shares of capital
stock elected to our board of directors. Accordingly, upon the completion of the
offering, Warburg Pincus will have the right under this stockholders agreement
to designate two persons to our board of directors.

CREDIT FACILITY

We have a $115.0 million senior credit facility, which expires in March 2006. In
April 2000, we refinanced our prior credit facility that was due to expire in
September 2000. The new facility consists of a $65.0 million term note, a $35.0
million guaranteed note and a $15.0 million guaranteed revolving line of credit.
The guarantee is provided by Warburg Pincus. The term note bears interest,
payable quarterly, at the Base Rate (the higher of the Federal Funds rate plus
.5% or the Prime Rate) plus from 1% to 2% for Base Rate loans or LIBOR plus 3%
for Eurodollar loans. The guaranteed note and the revolving line of credit bear
interest at the Base Rate for Base Rate loans or LIBOR plus .875% for Eurodollar
loans. At June 30, 2000, the Base Rate was 9% and LIBOR was 6.78%. Through June
30, 2000, we have only requested Eurodollar loans. The term note requires
quarterly principal payments of $2.0 million through March 2002, $2.5 million
from June 2002 through March 2003, $3.0 million from June 2003 through March
2004 and $3.4 million from June 2004 through March 2006. At June 30, 2000, $11.0
million was unused. The senior credit facility is secured by substantially all
of our assets, including 100% of the outstanding capital stock

72
<PAGE> 73

of American Medical Systems, Inc. and Influence, and contains restrictions
concerning the payment of dividends, incurrence of additional debt and capital
expenditures. In addition, we are subject to, and in compliance with, certain
financial covenants including ratios related to fixed charges coverage and
leverage.

We plan to use approximately $39 million of the net proceeds of the offering to
repay all of the outstanding debt under the guaranteed portion of our current
senior credit facility.

CONSULTING AGREEMENTS

On September 1, 1999, we entered into a consulting agreement with Medical
Genesis. Christopher H. Porter, Ph.D., one of our directors, controls Medical
Genesis. Under this agreement, Medical Genesis performs consulting services for
us as we request up to 2.5 days per month. We pay Medical Genesis $3,500 per
month for performing these consulting services and $1,400 a day for each day
above 2.5 days. We also pay all reasonable expenses Medical Genesis incurs while
performing services for us. This agreement expires on September 1, 2000. In
1999, we paid Medical Genesis $99,333 for performing services under this
agreement.

From November 1998 to March 1999, Gregory J. Melsen provided consulting services
to us under an oral agreement. Mr. Melsen became our full-time employee in March
of 1999. We paid Mr. Melsen a total of $11,327 for these consulting services.

AGREEMENTS WITH FORMER CHIEF EXECUTIVE OFFICER

On September 25, 1998, Warburg Pincus sold Sam B. Humphries, our then President
and Chief Executive Officer, 200 shares of its series A preferred stock at
$1,000 per share and 40,000 shares of its series B preferred stock at a price
equal to $5.00 per share for a total purchase price of $400,000. Mr. Humphries
executed a full recourse promissory note payable to Warburg Pincus for the full
purchase price of the shares he purchased. The shares he purchased were pledged
as security for the note. This note bears interest at the rate of 5.54% per year
and is due on September 25, 2002. If Mr. Humphries sells any of the shares,
however, he must use the net proceeds from the sale to repay the note. Mr.
Humphries has agreed to sell his 40,000 shares of series B preferred stock to
Vertical Fund Associates, L.P., Upper Lake Growth Capital LLC, Crane Island
Ventures LLC, three of our stockholders, and James T. Treace, one of our
directors, for a per share price equal to 90% of the initial public offering
price. Upon completion of these sales, Mr. Humphries is required to use the
proceeds to repay the Warburg Pincus note. In connection with Mr. Humphries'
severance agreement described below, Mr. Humphries surrendered the 200 shares of
series A preferred stock and $200,000 of the principal and interest on the note
was cancelled. Upon Mr. Humphries initial employment with us, we loaned him
$208,250 under a non-recourse promissory note. This note is secured by a pledge
of 105,062 shares of common stock of Optical Sensors Incorporated. This note
bears interest at the rate of 5.54% per year and is due on September 25, 2001.

In June 1999, we entered into a separation agreement with Mr. Humphries. Under
the terms of this agreement, Mr. Humphries' employment with us was terminated on
April 23, 1999. We agreed to continue to pay Mr. Humphries his salary, at the
rate of $225,000 per year, through February 28, 2000 and provide health care and
welfare benefits through April 22, 2000. We also paid Mr. Humphries a lump sum
of $37,500 plus $16,442 for accrued but unused vacation and floating holidays up
to the date of his termination. All stock options we issued to Mr. Humphries
under our 1998 Equity Incentive Plan, whether vested or unvested, were
cancelled.

OTHER SEVERANCE ARRANGEMENTS

Following our acquisition from Pfizer, David Booth, Roger Mitchell, Helen
Vallerand and William Stein, all of whom were executive officers, left our
company. Under our employee separation plan, which we are required to maintain
through September 10, 2000 under our agreement with Pfizer, we paid Mr. Booth
$609,608, Mr. Mitchell $207,011, Ms. Vallerand $277,952 and Mr. Stein $220,228.

All future transactions, including any loans from us to our officers, directors,
principal stockholders or affiliates, will be on terms no less favorable to us
than could be obtained from unaffiliated third parties.

73
<PAGE> 74

PRINCIPAL AND SELLING STOCKHOLDERS

The table below sets forth information regarding beneficial ownership of our
common stock as of June 1, 2000, and as adjusted to reflect the sale of shares
of common stock in the offering, for:

- each stockholder who we know owns beneficially more than 5% of the
outstanding shares of common stock;

- each of our directors;

- each of our named executive officers; and

- all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules and regulations
of the SEC. For the purpose of calculating the percentage beneficially owned,
the number of shares of common stock deemed outstanding "Before Offering"
includes:

- 49,500 shares of common stock outstanding as of June 1, 2000;

- the conversion upon the closing of the offering of all of our
outstanding preferred stock, plus accrued dividends on these shares,
into 3,565,848 shares of voting common stock and 17,703,201 shares of
non-voting common stock; and

- shares of common stock subject to options held by the person or group
that are currently exercisable or exercisable within 60 days from June
1, 2000.

The number of shares of common stock outstanding "After Offering" includes an
additional 6,250,000 shares offered hereby. Except as indicated in the footnotes
to this table and subject to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to all
shares of common stock listed as beneficially owned by them. The address for
each of our named executive officers is 10700 Bren Road West, Minnetonka,
Minnesota 55343.

<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
STOCK BENEFICIALLY OWNED
SHARES SUBJECT TOTAL SHARES ---------------------------------
NAME OF BENEFICIAL OWNER TO OPTIONS BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------------ -------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C>
Warburg, Pincus Equity Partners,
L.P.(1)(2)............................... -- 19,372,902 90.3% 69.9%
Douglas W. Kohrs(3)........................ 140,625 386,430 1.8% 1.4%
Gregory J. Melsen.......................... 56,250 56,250 * *
Lawrence W. Getlin......................... 56,250 56,250 * *
Brian A. Millberg.......................... 56,250 56,250 * *
Janet L. Dick.............................. 56,250 56,250 * *
Richard B. Emmitt(4)....................... -- 557,377 2.6% 2.0%
Christopher H. Porter, Ph.D................ 28,125 28,125 * *
David W. Stassen(5)........................ -- 535,682 2.5% 1.9%
James T. Treace(6)......................... 28,125 72,180 * *
Elizabeth H. Weatherman(7)................. -- 19,372,902 90.3% 69.9%
All directors and executive officers as a
group (14 persons)(8).................... 459,375 21,245,196 99.0% 77.1%
</TABLE>

---------------------------------------------
*Less than 1%.

(1)Warburg, Pincus Equity Partners, L.P., referred to as Warburg Pincus,
includes three affiliated partnerships. Warburg, Pincus & Co. referred to as
WP, is the sole general partner of Warburg Pincus. Warburg Pincus is managed
by E.M. Warburg, Pincus & Co., LLC, referred to as EMWP. Lionel I. Pincus is
the managing partner of WP and the managing member of EMWP and may be deemed
to control both entities. The address of the Warburg Pincus entities is 466
Lexington Avenue, New York, New York 10017. The number of shares beneficially
owned includes 5,067,338 shares of preferred stock that will convert into
1,669,701 shares of voting common stock and 17,703,201 shares of non-voting
common stock on the closing of the offering. Our amended and restated
certificate of incorporation prevents Warburg Pincus from converting its
non-voting common stock into voting common stock if it would own more than
50% of the voting common stock. We anticipate that following the closing of
the

74
<PAGE> 75

offering, Warburg Pincus will convert a number of shares of non-voting common
stock into shares of voting common stock such that Warburg Pincus will own
approximately 45% of our outstanding shares of voting common stock.

(2)Assumes no exercise of the underwriters' over-allotment option. Warburg
Pincus has granted the underwriters a 30-day option to purchase up to 937,500
shares of common stock to cover over-allotments, if any. In the event the
over-allotment option is exercised, Warburg Pincus will beneficially own
18,435,402 shares, or 66.5%, of the common stock after the offering.

(3)The number of shares beneficially owned includes 67,201 shares of preferred
stock that will convert into 245,805 shares of common stock on the closing of
the offering.

(4)Mr. Emmitt is one of our directors and the Managing Director of The Vertical
Group, Inc. The Vertical Group, Inc. is the general partner of Vertical Fund
Associates, L.P., one of our stockholders. All shares indicated as owned by
Mr. Emmitt are included because of his affiliation with The Vertical Group,
Inc. Mr. Emmitt does not own any shares individually. The number of shares
beneficially owned includes 134,404 shares of preferred stock that will
convert into 513,321 shares of common stock on the closing of the offering,
and 44,056 shares Vertical Fund Associates, L.P. has agreed to acquire from
Sam Humphries, our former chief executive officer, upon the closing of the
offering.

(5)Mr. Stassen is one of our directors and the Managing Director of Upper Lake
Growth Capital LLC and Crane Island Ventures LLC, two of our stockholders.
All shares indicated as owned by Mr. Stassen are included because of his
affiliation with the Upper Lake Growth Capital and Crane Island Ventures. Mr.
Stassen does not own any shares individually. The number of shares
beneficially owned includes 134,403 shares of preferred stock that will
convert into 491,613 shares of common stock on the closing of the offering,
and 44,069 shares Upper Lake Growth Capital and Crane Island Ventures have
agreed to acquire from Sam Humphries upon the closing of the offering.

(6)The number of shares beneficially owned includes 44,055 shares Mr. Treace has
agreed to acquire from Sam Humphries upon the closing of the offering.

(7)Ms. Weatherman is one of our directors, a partner of WP and a Managing
Director of EMWP. All shares indicated as owned by Ms. Weatherman are
included because of her affiliation with the Warburg Pincus entities. Ms.
Weatherman does not own any shares individually and disclaims beneficial
ownership of all shares owned by the Warburg Pincus entities.

(8)The number of shares beneficially owned includes 132,180 shares that will be
acquired from Sam Humphries upon the closing of the offering. This number
also includes 20,465,961 shares beneficially owned by Mr. Emmitt, Mr. Stassen
and Ms. Weatherman, see footnotes 4, 5 and 7 above.

75
<PAGE> 76

DESCRIPTION OF CAPITAL STOCK

The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our amended and restated certificate of incorporation referenced below and
applicable law. A copy of our amended and restated certificate of incorporation
which will be amended and restated in connection with the offering has been
filed as an exhibit to the registration statement of which this prospectus is a
part. The following description refers to the certificate of incorporation as
amended and restated upon the completion of the offering and gives effect to the
conversion of all of our outstanding shares of preferred stock into voting
common stock and non-voting common stock upon the completion of the offering.

Our amended and restated certificate of incorporation provides that the
authorized capital stock of our company consists of 75 million shares of voting
common stock, $.01 par value, 20 million shares of non-voting common stock, $.01
par value and 5 million shares of preferred stock, $.01 par value, that are
undesignated as to series. Upon completion of the offering:

- Our outstanding shares of series A preferred stock, plus accumulated
dividends on these shares, will convert into 242,895 shares of voting
common stock and 2,712,945 shares of non-voting common stock at a
conversion price equal to the initial public offering price of $11.00
per share.

- Our outstanding shares of series B preferred stock, plus accumulated
dividends on these shares, will convert into 2,265,939 shares of voting
common stock at a conversion price equal to $1.67 per share.

- Our outstanding shares of series C preferred stock, plus accumulated
dividends on these shares, will convert into 11,355,297 shares of
non-voting common stock at a conversion price equal to $1.67 per share.

- Our outstanding shares of series D preferred stock, plus accumulated
dividends on these shares, will convert into 1,057,014 shares of voting
common stock at a conversion price equal to $3.33 per share.

- Our outstanding shares of series E preferred stock, plus accumulated
dividends on these shares, will convert into 3,634,959 shares of
non-voting common stock at a conversion price equal to $3.33 per share.

Warburg Pincus will own all of the shares of non-voting common stock. We
anticipate that following the closing of the offering, Warburg Pincus will
convert a number of shares of non-voting common stock into shares of voting
common stock such that Warburg Pincus will own approximately 45% of our
outstanding shares of voting common stock.

VOTING COMMON STOCK

The holders of voting common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders and are not
entitled to cumulate votes. The holders of voting common stock are entitled to
receive ratably dividends as may be declared by our board of directors out of
legally available funds. Upon our liquidation, dissolution or winding up, the
holders of voting common stock are entitled to share ratably in all assets that
are legally available for distribution after payment of all debts and other
liabilities, subject to the prior rights of any holders of preferred stock then
outstanding. The holders of voting common stock have no other preemptive,
subscription, redemption, sinking fund or conversion rights. All outstanding
shares of voting common stock are fully paid and nonassessable. The shares of
voting common stock to be issued upon completion of the offering will also be
fully paid and nonassessable. The rights, preferences and privileges of holders
of voting common stock are subject to, and may be negatively impacted by, the
rights of the holders of shares of any series of preferred stock which we may
designate and issue in the future.

76
<PAGE> 77

NON-VOTING COMMON STOCK

Our non-voting common stock is identical to our voting common stock except in
two respects. First, our non-voting common stock is not entitled to any voting
rights, except as required by law and under situations where we repeal or
negatively impact the holders rights with respect to liquidation or dividend
preferences or voting rights as they relate to common stock. Second, holders of
our non-voting common stock may, at their option, convert their shares into
fully paid and non-assessable shares of voting common stock on a share-for-share
basis except that if the holder is Warburg Pincus, it may only convert if, upon
conversion, it would own no more than 50% of our outstanding voting common stock
or upon the occurrence of a sale of our company meeting specific conditions or a
public sale of our securities.

UNDESIGNATED PREFERRED STOCK

There will not be any shares of preferred stock outstanding upon the closing of
the offering. Under our amended and restated certificate of incorporation which
will become effective simultaneously with the offering, our board of directors
has the authority, without action by our stockholders, to designate and issue
any authorized but unissued shares of preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of our common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of our common stock or non-voting common stock until our
board determines the specific rights of the holders of preferred stock. However,
the effects might include, among other things, restricting dividends on the
common stock, diluting the voting power of the common stock, impairing the
liquidation rights of the common stock and delaying or preventing a change in
control of our common stock without further action by our stockholders. We have
no present plans to issue any shares of preferred stock.

OPTIONS

As of the date of this prospectus, we had outstanding options to purchase an
aggregate of 3,024,561 shares of common stock at a weighted average exercise
price of $2.25 per share under our 2000 Equity Incentive Plan. All outstanding
options provide for anti-dilution adjustments in the event of certain mergers,
consolidations, reorganizations, recapitalizations, stock dividends, stock
splits or other changes in our corporate structure.

REGISTRATION RIGHTS

Under a registration rights agreement we entered into in June 2000, we granted
registration rights with respect to 21,224,994 shares of common stock issuable
upon conversion of our preferred stock held by Warburg Pincus, Mr. Kohrs and the
other holders of series A preferred stock. These registration rights also extend
to any shares of our capital stock hereafter acquired by these investors.

Under the registration rights agreement, investors holding more than 50% of the
then outstanding registrable securities may demand that we file a registration
statement under the Securities Act covering some or all of the investors'
registrable securities. We are not required to effect more than two demand
registrations nor are we required to effect a registration if the requested
registration would have an aggregate offering price to the public of less than
$15 million. In an underwritten offering, the managing underwriter of any such
offering has the right, subject to certain conditions, to limit the number of
registrable securities.

In addition, the investors have "piggyback" registration rights. If we propose
to register any of our equity securities under the Securities Act other than
pursuant to the investors' demand registration right noted above or certain
excluded registrations, the investors may require us to include all or a portion
of their registrable securities in the registration and in any related
underwriting. In an underwritten offering, the managing underwriter, if any, of
any such offering has the right, subject to certain conditions, to limit the
number of registrable securities.

Further, if we are eligible to effect a registration on Form S-3, the investors
may demand that we file a registration statement on Form S-3 covering all or a
portion of the investors' registrable securities, provided
77
<PAGE> 78

that the registration has an aggregate offering price of $5 million and that we
are not required to effect more than three such registrations at the investors'
request.

In general, we will bear all fees, costs and expenses of such registrations,
other than underwriting discounts and commissions.

ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW

We are subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years following the date the person became an interested stockholder,
unless the business combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a business
combination includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
interested stockholder is a person who, together with affiliates and associates,
owns or, in the case of affiliates or associates of the corporation, within
three years prior to the determination of interested stockholder status, did own
15% or more of a corporation's voting stock. The existence of this provision
could have anti-takeover effects with respect to transactions not approved in
advance by the board of directors, such as discouraging takeover attempts that
might result in a premium over the market price of the common stock.

Stockholders will not be entitled to cumulative voting in the election of
directors. The authorization of undesignated preferred stock will make it
possible for our board of directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
effect a change of control of our company. The foregoing provisions of our
amended and restated certificate of incorporation and the Delaware General
Corporation Law may have the effect of deterring or discouraging hostile
takeovers or delaying changes in control of our company.

LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION

Our amended and restated certificate of incorporation will limit our directors'
liability to the fullest extent permitted under Delaware's corporate law.
Specifically, our directors are not liable to us or our stockholders for
monetary damages for any breach of fiduciary duty by a director, except for
liability for:

- any breach of the director's duty of loyalty to us or our stockholders;

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- dividends or other distributions of our corporate assets that are in
contravention of restrictions in Delaware law, our amended and restated
certificate of incorporation, bylaws or any agreement to which we are a
party; and

- any transaction from which a director derives an improper personal
benefit.

This provision will generally not limit liability under state or federal
securities laws.

Delaware law, and our amended and restated certificate of incorporation, provide
that we shall, in certain situations, indemnify any person made or threatened to
be made a party to a proceeding by reason of that person's former or present
official capacity with our company against judgments, penalties, fines,
settlements and reasonable expenses including reasonable attorney's fees. Any
person is also entitled, subject to certain limitations, to payment or
reimbursement of reasonable expenses in advance of the final disposition of the
proceeding.

TRANSFER AGENT AND REGISTRAR

Wells Fargo Bank Minnesota, N.A. is our transfer agent and registrar.

78
<PAGE> 79

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the offering there has not been a public market for our common stock.
We cannot predict the effect, if any, that market sales of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. As described below, only a limited number of shares will be
available for sale shortly after the offering due to contractual and legal
restrictions on resale. Nevertheless, sales of substantial amounts of our common
stock in the public market after the restrictions lapse could cause the market
price of our common stock to decline.

When the offering is completed, we will have a total of 27,707,299 shares of
common stock outstanding. The 6,250,000 shares offered by this prospectus will
be freely tradable unless our affiliates, as defined in Rule 144 under the
Securities Act of 1933, as amended, purchase them. The remaining 21,457,299
shares are "restricted," which means they were originally sold in offerings that
were not subject to a registration statement filed with the SEC. These
restricted shares may be resold only through registration under the Securities
Act or under an available exemption from registration, such as Rule 144 or Rule
701.

LOCK-UP AGREEMENTS

Our officers, directors, stockholder and holders of rights to purchase our
common stock have agreed to a 180-day "lock-up" with respect to 23,773,242
shares of our common stock. This generally means that they cannot sell these
shares during the 180 days following the date of this prospectus. After the
180-day lock-up period, these shares may only be sold in accordance with an
available exemption from registration, such as Rule 144.

RULE 144

In general, under Rule 144, a person or persons whose shares are aggregated, who
has beneficially owned restricted securities for at least one year, including
the holding period of any holder who is not an affiliate, is entitled to sell
within any three-month period a number of our shares of common stock that does
not exceed the greater of:

- 1% of the then outstanding shares of our common stock, which will equal
approximately 277,073 shares upon completion of the offering; or

- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of sale is filed with the SEC.

Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. Under Rule
144 and subject to volume limitations, many of the restricted shares will be
eligible for sale beginning 180 days after the date of the final prospectus, and
the remaining restricted shares will become salable at various times thereafter.

RULE 144(k)

A person who is not deemed an affiliate of ours at any time during the 90 days
preceding a sale and who has beneficially owned shares for at least two years,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell shares following the offering under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
or notice requirements of Rule 144.

RULE 701 AND OPTIONS

Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with some restrictions, including the holding period requirement, of
Rule 144. Any employee, officer or director or consultant who purchased his or
her shares pursuant to a written compensatory plan or contract may be entitled
to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait 90 days after the
date of this prospectus before selling these

79
<PAGE> 80

shares. However, an aggregate of 2,267,250 shares of common stock issued or
issuable upon exercise of options held by officers, directors and other
employees are subject to lock-up provisions and will only become eligible for
sale upon the expiration of 180 days after the date of this prospectus.

REGISTRATION

Following the offering, we intend to file a registration statement under the
Securities Act covering shares of common stock subject to outstanding options or
issued or issuable under our 2000 Equity Incentive Plan. This registration
statement will automatically become effective upon filing. Accordingly, shares
registered under this registration statement will, subject to Rule 144 volume
limitations applicable to our affiliates, be available for sale in the open
market immediately after the expiration of the 180-day lock-up agreements.

80
<PAGE> 81

UNDERWRITING

The underwriters named below have agreed to buy, subject to the terms and
conditions of the purchase agreement, the number of shares listed opposite their
names below. The underwriters are committed to purchase and pay for all of the
shares if any are purchased, other than those shares covered by the over-
allotment option described below.

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
U.S. Bancorp Piper Jaffray Inc. .................. 2,137,500
Banc of America Securities LLC.................... 1,068,750
Chase Securities Inc. ............................ 1,068,750
Bear, Stearns & Co. Inc. ......................... 175,000
CIBC World Markets Corp. ......................... 175,000
Dain Rauscher Incorporated........................ 175,000
Lehman Brothers Inc. ............................. 175,000
Morgan Stanley & Co. Incorporated................. 175,000
PaineWebber Incorporated.......................... 175,000
Prudential Securities Incorporated................ 175,000
Salomon Smith Barney Inc. ........................ 175,000
SG Cowen Securities Corporation................... 175,000
UBS Warburg LLC................................... 175,000
Adams, Harkness & Hill, Inc....................... 75,000
Fahnestock & Co. Inc. ............................ 75,000
Pennsylvania Merchant Group....................... 75,000
---------
Total........................................... 6,250,000
=========
</TABLE>

The underwriters have advised us that they propose to offer the shares to the
public initially at $11.00 per share, and to certain dealers at the same price
less a concession of not more than $.46 per share. The underwriters may allow
and the dealers may reallow a concession of not more than $.10 per share on
sales to certain other brokers and dealers. After the offering, these figures
may be changed by the underwriters.

At our request, the underwriters have reserved for sale, at the initial public
offering price, up to 312,500 shares of common stock for our directors,
officers, employees and business associates. The number of shares of common
stock available for sale to the general public will be reduced to the extent
those persons purchase any of the reserved shares. Any reserved shares not
purchased will be reoffered immediately by the underwriters to the public at the
initial public offering price.

Warburg Pincus has granted to the underwriters an option to purchase up to an
additional 937,500 shares of common stock at the same price to the public, and
with the same underwriting discount, as set forth in the table above. The
underwriters may exercise this option any time during the 30-day period after
the date of this prospectus, but only to cover over-allotments, if any. To the
extent the underwriters exercise the option, each underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of the additional shares as it was obligated to purchase under the
purchase agreement.

The following table shows the underwriting fees to be paid to the underwriters
in connection with the offering. These amounts are shown assuming both no
exercise and full exercise of the over-allotment option.

<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share.......................... $ .77 $ .77
Total.............................. $4,812,500 $5,534,375
</TABLE>

81
<PAGE> 82

We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect to those
liabilities.

The underwriters have informed us that neither they, nor any other underwriter
participating in the distribution of the offering, will make sales of the common
stock offered by this prospectus to accounts over which they exercise
discretionary authority without the prior specific written approval of the
customer.

The offering of our shares of common stock is made for delivery when, as and if
accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject an order for the purchase of shares in whole or
part.

Our directors, executive officers, principal stockholders and certain holders of
options to purchase shares of common stock have agreed to certain restrictions
on their ability to sell additional shares of our common stock for a period of
180 days after the date of this prospectus. We have also agreed not to directly
or indirectly offer for sale, sell, contract to sell, grant any option for the
sale of, or otherwise issue or dispose of, any shares of common stock, options
or warrants to acquire shares of common stock, or any related security or
instrument, without the prior written consent of U.S. Bancorp Piper Jaffray for
a period of 180 days after the date of this prospectus. The agreements provide
exceptions for:

- sales to underwriters pursuant to the purchase agreement;

- sales of shares of our common stock under our employee stock purchase
plan;

- our issuance of shares of common stock in connection with the exercise
of options granted and the granting of options to purchase up to an
additional 500,000 shares under our 2000 Equity Incentive Plan; and

- other common exceptions.

Some of the underwriters or their affiliates have provided from time to time,
and expect to provide in the future, investment banking, financial advisory and
other related services to us and our affiliates, for which they have received
and may continue to receive customary fees and commissions. U.S. Bancorp Piper
Jaffray, the lead managing underwriter, provided financial advisory services to
Warburg Pincus with respect to the original acquisition of our assets from
Pfizer in 1998, and provided financial advisory services to us with respect to
our acquisition of Influence in 1999. Certain affiliated funds and entities of
U.S. Bancorp Piper Jaffray purchased 500 shares of series A preferred stock for
$500,000 and 100,000 shares of series B preferred stock for $500,000 in
September 1998. In addition, they purchased 168 shares of series A preferred
stock for $168,000 and 33,735 shares of series D preferred stock for $337,350 in
December 1999. These shares will be converted into 513,228 shares of common
stock upon the consummation of the offering.

Banc of America Securities LLC acts as sole lead arranger and sole book manager,
and its affiliate, Bank of America, N.A., acts as agent under our $115,000,000
senior credit facility and receive fees under our senior credit facility
customary for performing these services. A portion of the proceeds from the
offering will be used to repay approximately $39 million plus accrued interest
under the senior credit facility, part of which will be paid to Bank of America,
N.A. and U.S. Bank N.A., an affiliate of U.S. Bancorp Piper Jaffray as lenders
under the credit agreement.

Because affiliates of Banc of America Securities LLC and U.S. Bancorp Piper
Jaffray will receive, in the aggregate, in excess of 10% of the proceeds in the
offering, the offering is being conducted in accordance with Rule 2710(c)(8) and
2720 of the NASD Conduct Rules. These rules require that the initial public
offering price may be no higher than that recommended by a "qualified
independent underwriter," as defined by the NASD. Chase Securities Inc. is
serving in that capacity and has conducted due diligence and participated in the
preparation of this prospectus and the registration statement of which this

82
<PAGE> 83

prospectus forms a part. The initial public offering price will not be higher
than the price recommended by Chase Securities Inc.

Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered by this prospectus was negotiated by us and the underwriters. The
primary factors considered in determining the initial public offering price
include:

- the history of and the prospects for the industry in which we compete;

- our past and present operations;

- our historical results of operations;

- our prospects for future earnings;

- the recent market prices of securities of generally comparable
companies; and

- the general condition of the securities markets at the time of the
offering.

There can be no assurance that the initial public offering price of the common
stock will corresponded to the price at which the common stock will trade in the
public market subsequent to the offering or that an active public market for the
common stock will develop and continue after the offering.

To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during and
after the offering. Specifically, the underwriters may over-allot or otherwise
create a short position in the common stock for their own account by selling
more shares of common stock than have been sold to them by us. Short sales
involve the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in an
amount not greater than the underwriters' option to purchase additional shares
from the issuer in the offering. The underwriters may close out any covered
short position by either exercising their option to purchase additional shares
or purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are sales in excess of this option.
The underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could adversely affect
investors who purchase in the offering.

In addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock on the open market and
may impose penalty bids. If penalty bids are imposed, selling concessions
allowed to syndicate members or other broker-dealers participating in the
offering are reclaimed if shares of common stock previously distributed in the
offering are repurchased, whether in connection with stabilization transactions
or otherwise. These transactions, including the underwriters' purchases to cover
syndicate short sales, may have the effect of raising or maintaining the market
price of the common stock or preventing or retarding a decline in the market
price of the common stock. As a result, the price of the common stock may be
higher than the price that might otherwise exist in the open market. The
imposition of a penalty bid may also affect the price of the common stock to the
extent that it discourages resales of the common stock. The magnitude or effect
of any stabilization or other transactions is uncertain. These transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

83
<PAGE> 84

LEGAL MATTERS

Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota will pass on the
validity of the common stock offered by this prospectus for us. Willkie Farr &
Gallagher will pass on legal matters relating to the offering for the
underwriters. Oppenheimer Wolff & Donnelly LLP has in the past, and may continue
to, perform legal services for U.S. Bancorp Piper Jaffray, Inc. Willkie Farr &
Gallagher has in the past performed, and may continue to perform, legal services
for us and Warburg Pincus, our principal stockholder.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements as of December 31, 1998 and 1999, and for the periods from January 1,
1998 to September 10, 1998 and September 11, 1998 to December 31, 1998, and the
year ended December 31, 1999 as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.

The consolidated financial statements of Influence, Inc. appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, to the extent indicated in their report thereon also
appearing elsewhere herein and in the Registration Statement. Such consolidated
financial statements have been included herein in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.

The financial statements of American Medical Systems, a business unit of Pfizer
Inc., "the Company," for the year ended December 31, 1997, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.

The consolidated financial statements of Influence, Inc. as of December 31, 1997
and for the two years then ended included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

CHANGE IN INDEPENDENT ACCOUNTANTS

Prior to our acquisition from Pfizer in September 1998, Pfizer retained KPMG LLP
as principal accountants to audit the financial statements of the Pfizer
subsidiary which conducted our business. In connection with this acquisition,
Warburg Pincus retained Ernst & Young LLP to conduct due diligence and assist in
the acquisition. Following closing of the acquisition, we engaged Ernst & Young
as our independent accountants. The decision to engage Ernst & Young as our
independent accountants following the acquisition was not specifically approved
by our board. Because the acquisition of our assets occurred prior to the end of
1998, KPMG did not audit our financial statements for the year ended December
31, 1998. Ernst & Young audited our financial statements for the years ended
December 31, 1998 and 1999. The audit report of KPMG on our predecessors'
combined financial statements as of and for the year ended December 31, 1997 did
not contain an adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. We did not
have any disagreement with KPMG on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures, which
disagreement, if not resolved to the satisfaction of KPMG, would have caused it
to make reference in connection with their opinion to the subject matter of the
disagreement. Prior to our acquisition from Pfizer, we had not consulted with
Ernst & Young on items that involved our accounting principles or the form of
audit opinion to be issued on our financial statements.

84
<PAGE> 85

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 with the SEC for the stock we
are offering by this prospectus. You should refer to the registration statement
and its exhibits for additional information that is not contained in this
prospectus. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete the offering, we will also be
required to file annual, quarterly and special reports, proxy statements and
other information with the SEC.

You can read our SEC filings, including this registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any documents we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington D.C. 20549, 7 World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of the Nasdaq
National Market. For further information on obtaining copies of our public
filings at the Nasdaq National Market, you should call (212) 656-5060.

85
<PAGE> 86

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
Report of Independent Auditors........................... F-2
Independent Auditors' Report............................. F-3
Consolidated Balance Sheets.............................. F-4
Combined and Consolidated Statements of Operations....... F-6
Combined and Consolidated Statements of Changes in
Stockholders' Equity (Deficit)......................... F-7
Combined and Consolidated Statements of Cash Flows....... F-8
Notes to Combined and Consolidated Financial
Statements............................................. F-9
INFLUENCE, INC.
Report of Independent Auditors........................... F-26
Report of Independent Accountants........................ F-27
Consolidated Balance Sheets.............................. F-28
Consolidated Statements of Operations.................... F-29
Consolidated Statement of Stockholders' Deficit.......... F-30
Consolidated Statements of Cash Flows.................... F-31
Notes to Consolidated Financial Statements............... F-32
</TABLE>

F-1
<PAGE> 87

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors of
American Medical Systems Holdings, Inc.

We have audited the accompanying consolidated balance sheets of American Medical
Systems Holdings, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for the year ended December 31, 1999 and for the period from
September 11, 1998 to December 31, 1998 and the combined statements of
operations, changes in shareholders' equity (deficit) and cash flows of the
Predecessor for the period from January 1, 1998 to September 10, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Medical
Systems Holdings, Inc. as of December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for the year ended December 31,
1999 and the period from September 11, 1998 to December 31, 1998, and of the
Predecessor for the period from January 1, 1998 to September 10, 1998, in
conformity with accounting principles generally accepted in the United States.

As discussed more fully in Note 14, the Company has revised its purchase price
allocation in connection with the purchase of net assets from Pfizer, and has
restated its 1999 consolidated financial statements, accordingly.

Ernst & Young LLP

Minneapolis, Minnesota
May 12, 2000, except for
Note 14 as to which the date
is August 1, 2000

F-2
<PAGE> 88

INDEPENDENT AUDITORS' REPORT

The Board of Directors
American Medical Systems Holdings, Inc.:

We have audited the accompanying combined statements of operations and cash
flows of American Medical Systems, a Business of Pfizer Inc. ("the Company") for
the year ended December 31, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of American Medical Systems, a Business of Pfizer Inc., for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.

KPMG LLP

Minneapolis, Minnesota
June 29, 1998

F-3
<PAGE> 89

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

<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31, AS OF AS OF
-------------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
-------- -------- -------- ---------
RESTATED (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,808 $ 6,940 $ 4,840 $ 4,840
Accounts receivable, net.......................... 16,552 19,809 21,902 21,902
Receivable from former affiliate.................. 6,757 -- -- --
Inventories....................................... 21,731 11,045 12,560 12,560
Deferred income taxes............................. 4,519 6,336 6,352 6,352
Other current assets.............................. 1,353 1,475 838 838
-------- -------- -------- --------
Total current assets......................... 53,720 45,605 46,492 46,492
Property, plant and equipment, net.................. 21,972 26,774 26,022 26,022
Intangibles, net.................................... 73,623 101,951 104,258 104,258
Deferred income taxes............................... 6,008 12,533 13,163 13,163
Other assets........................................ 277 427 664 135
-------- -------- -------- --------
Total assets................................. $155,600 $187,290 $190,070 $190,070
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 3,946 $ 2,753 $ 4,643 $ 4,643
Accrued compensation expenses..................... 9,282 11,684 12,090 12,090
Accrued warranty expense.......................... 6,348 7,385 7,221 7,221
Deferred income tax liability..................... 413 8,282 8,295 8,295
Other accrued expenses............................ 7,538 9,736 7,918 7,918
Current portion of notes payable.................. -- 6,000 8,000 8,000
-------- -------- -------- --------
Total current liabilities.................... 27,527 45,840 48,167 48,167
Long-term notes payable............................. 95,000 95,300 96,000 96,000
Minority interest................................... -- 521 521 521
Redeemable preferred stock:
Series A convertible preferred stock, par value
$.01 per share; authorized 32,116 shares;
issued and outstanding 20,000 shares for 1998
and 27,749 shares for 1999 and 2000............ 20,613 30,523 32,067 --
Series B convertible preferred stock, par value
$.01 per share; authorized 4,050,000 shares;
issued and outstanding 400,000 shares for 1998
and 680,000 shares for 1999 and 2000........... 2,037 3,637 3,746 --
Series C convertible preferred stock, par value
$.01 per share; authorized 6,000,000 shares;
issued and outstanding 3,600,000 shares for
1998 and 3,370,000 shares for 1999 and 2000.... 18,331 18,235 18,784 --
</TABLE>

F-4
<PAGE> 90

<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31, AS OF AS OF
-------------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
-------- -------- -------- ---------
RESTATED (UNAUDITED)
<S> <C> <C> <C> <C>
Series D convertible preferred stock, par value
$.01 per share; authorized 4,800,000 shares;
issued and outstanding no shares for 1998 and
336,144 for 1999 and 2000...................... -- 3,395 3,497 --
Series E convertible preferred stock, par value
$.01 per share; authorized 3,400,000 shares;
issued and outstanding no shares for 1998 and
1,163,856 for 1999 and 2000.................... -- 11,675 12,026 --
Stockholders' deficit:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued........................
Common stock, par value $.01 per share; authorized
95,000,000 shares; none issued 1998 and 1999,
49,500 shares issued for June 30, 2000,
21,144,792 shares pro forma.................... -- 211
Additional paid-in capital........................ -- -- 1,464 71,373
Deferred compensation............................. -- -- (1,191) (1,191)
Accumulated other comprehensive loss.............. (445) (993) (956) (956)
Accumulated deficit............................... (7,463) (20,843) (24,055) (24,055)
-------- -------- -------- --------
Total stockholders' equity (deficit)......... (7,908) (21,836) (24,738) 45,382
-------- -------- -------- --------
Total liabilities and stockholders' equity
(deficit)................................. $155,600 $187,290 $190,070 $190,070
======== ======== ======== ========
</TABLE>

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

F-5
<PAGE> 91

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
COMBINED PREDECESSOR
-----------------------------------------
PERIOD FROM
YEAR ENDED JANUARY 1, 1998
DECEMBER 31, 1997 TO SEPTEMBER 10, 1998
----------------- ---------------------

<S> <C> <C>
Net sales.................. $91,958 $54,615
Cost of sales.............. 19,694 14,050
------- -------
Gross profit............. 72,264 40,565
Operating expenses:
Marketing and sales...... 21,607 18,486
Research and
development............ 16,251 10,177
General and
administrative......... 17,073 19,846
Transition and
reorganization
expenses............... -- --
Amortization of
intangibles............ 998 19
In-process research and
development............ -- --
------- -------
Total operating expenses... 55,929 48,528
------- -------
Operating income (loss).... 16,335 (7,963)
Royalty and other income
(expense)................ (112) (155)
Interest income
(expense)................ -- --
------- -------
Income (loss) before income
taxes.................... 16,223 (8,118)
Income tax benefit
(expense)................ (6,136) 3,241
------- -------
Net income (loss).......... $10,087 $(4,877)
======= =======
Pro forma net income (loss)
per share--basic and
diluted..................
Shares used in pro forma
per share calculation....

<CAPTION>
CONSOLIDATED AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
--------------------------------------------------------------------------
PERIOD FROM SIX MONTHS ENDED
SEPTEMBER 11, 1998 YEAR ENDED -------------------------------
TO DECEMBER 31, 1998 DECEMBER 31, 1999 JUNE 30, 1999 JUNE 30, 2000
-------------------- ----------------- -------------- --------------
RESTATED (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.................. $ 23,115 $ 81,353 $ 40,234 $50,079
Cost of sales.............. 15,551 31,419 21,109 11,515
-------- -------- -------- -------
Gross profit............. 7,564 49,934 19,125 38,564
Operating expenses:
Marketing and sales...... 8,261 30,400 14,390 19,883
Research and
development............ 2,884 9,552 4,536 5,993
General and
administrative......... 1,951 7,889 4,124 5,629
Transition and
reorganization
expenses............... 2,517 3,000 3,000 1,000
Amortization of
intangibles............ 965 4,260 1,970 4,001
In-process research and
development............ -- 7,354 -- --
-------- -------- -------- -------
Total operating expenses... 16,578 62,455 28,020 36,506
-------- -------- -------- -------
Operating income (loss).... (9,014) (12,521) (8,895) 2,058
Royalty and other income
(expense)................ 180 4,205 2,208 1,427
Interest income
(expense)................ (1,672) (6,873) (3,358) (4,081)
-------- -------- -------- -------
Income (loss) before income
taxes.................... (10,506) (15,189) (10,045) (596)
Income tax benefit
(expense)................ 4,024 5,340 4,018 40
-------- -------- -------- -------
Net income (loss).......... $ (6,482) $ (9,849) $ (6,027) $ (556)
======== ======== ======== =======
Pro forma net income (loss)
per share--basic and
diluted.................. $ (.69) $ (.03)
======== =======
Shares used in pro forma
per share calculation.... 14,289 20,785
======== =======
</TABLE>

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

F-6
<PAGE> 92

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)

<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
ACCUMULATED PAID-IN DEFERRED COMPREHENSIVE
EARNINGS (DEFICIT) CAPITAL COMPENSATION LOSS TOTAL
------------------ ---------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Combined Predecessor:
Balances at December 31,
1996......................... $ 115,458 $ -- $ -- $ -- $ 115,458
Net income................... 10,087 -- -- -- 10,087
Net activity with Pfizer..... (2,933) -- -- -- (2,933)
--------- ------ ------- ----- ---------
Balances at December 31,
1997......................... 122,612 -- -- -- 122,612
Net income................... (4,877) -- -- -- (4,877)
Net activity with Pfizer..... (2,296) -- -- -- (2,296)
Transfer of value due to
acquisition.................. (115,439) -- -- -- (115,439)
--------- ------ ------- ----- ---------
Consolidated Successor:
Balances at September 10,
1998......................... -- -- -- -- --
Comprehensive loss
Net loss..................... (6,482) -- -- -- (6,482)
Cumulative translation
adjustment................ -- -- -- (445) (445)
--------- ------ ------- ----- ---------
Total comprehensive loss....... (6,482) -- -- (445) (6,927)
Accretion of cumulative
preferred stock dividends.... (981) -- -- -- (981)
--------- ------ ------- ----- ---------
Balances at December 31,
1998......................... (7,463) -- -- (445) (7,908)
Comprehensive loss
Net loss..................... (9,849) -- -- -- (9,849)
Cumulative translation
adjustment................ -- -- -- (548) (548)
--------- ------ ------- ----- ---------
Total comprehensive loss....... (9,849) -- -- (548) (10,397)
Accretion of cumulative
preferred stock dividends.... (3,531) -- -- -- (3,531)
--------- ------ ------- ----- ---------
Balances at December 31, 1999
-- Restated.................. (20,843) -- -- (993) (21,836)
Comprehensive income
Net loss..................... (556) -- -- -- (556)
Cumulative translation
adjustment................ -- -- -- 37 37
--------- ------ ------- ----- ---------
Total comprehensive income..... (556) -- -- 37 (519)
Issuance of common stock....... 82 -- -- 82
Issuance of compensatory stock
options...................... -- 1,382 (1,382) -- --
Amortization of deferred
compensation................. -- -- 191 -- 191
Accretion of cumulative
preferred stock dividends.... (2,656) -- -- -- (2,656)
--------- ------ ------- ----- ---------
Balances at June 30, 2000
(unaudited).................. $ (24,055) $1,464 $(1,191) $(956) $ (24,738)
========= ====== ======= ===== =========
</TABLE>

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

F-7
<PAGE> 93

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

<TABLE>
<CAPTION>
CONSOLIDATED AMERICAN SYSTEMS MEDICAL
COMBINED PREDECESSOR HOLDINGS, INC.
---------------------------- ------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 11, SIX MONTHS
YEAR ENDED 1998 TO 1998 TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, SEPTEMBER 10, DECEMBER 31, DECEMBER 31, -----------------
1997 1998 1998 1999 1999 2000
------------ ------------- ------------- ------------ ------- -------
RESTATED (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 10,087 $(4,877) $(6,482) $ (9,849) $(6,027) $ (556)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation.............................. 1,635 2,036 613 2,578 1,314 1,902
Amortization of intangibles............... 998 19 965 4,260 1,970 4,001
In-process research and development....... -- -- -- 7,354 -- --
Noncash pension charge.................... -- (470) 590 2,058 1,026 786
Noncash deferred compensation............. -- -- -- -- -- 191
Change in net deferred taxes.............. (1,440) (451) (843) (2,814) (2,136) (633)
Changes in operating assets and
liabilities:
Accounts receivable..................... 3,066 3,720 (2,891) (1,800) (2,218) (1,382)
Receivable from former affiliate........ (11,704) 2,296 (1,166) 6,757 6,757 --
Inventories............................. 1,802 (3,120) 11,190 11,921 10,493 (1,586)
Accounts payable........................ (3,125) (1,112) 2,958 (1,498) (670) 1,904
Accrued expenses........................ -- 2,990 (3,237) (5,060) (1,530) (2,362)
Other noncurrent liabilities............ 777 -- -- -- -- --
Other assets............................ 546 225 (847) (9) (650) 929
-------- ------- ------- -------- ------- -------
Net cash provided by (used in)
operating activities................ 2,642 1,256 850 13,898 8,329 3,194
-------- ------- ------- -------- ------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment... (2,642) (1,294) (721) (6,470) (3,105) (1,150)
Acquisition of businesses, net of cash
acquired.................................. -- -- -- (31,622) -- (3,506)
Purchase of other intangibles............... -- -- -- (1,000) (1,862) (2,802)
-------- ------- ------- -------- ------- -------
Net cash used in investing activities..... (2,642) (1,294) (721) (39,092) (4,967) (7,458)
-------- ------- ------- -------- ------- -------
Cash flows from financing activities:
Sale of preferred stock..................... -- -- -- 22,953 -- --
Issuance of common stock.................... -- -- -- -- -- 82
Borrowings on long-term debt................ -- -- -- 6,300 2,500 4,700
Payments on long-term debt.................. -- -- -- -- -- (2,000)
-------- ------- ------- -------- ------- -------
Net cash provided by financing
activities.............................. -- -- -- 29,253 2,500 2,782
-------- ------- ------- -------- ------- -------
Effect of exchange rates...................... -- -- (202) 73 (157) (618)
-------- ------- ------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................. -- (38) (73) 4,132 5,705 (2,100)
Cash and cash equivalents, beginning of
period...................................... -- -- 2,881 2,808 2,808 6,940
-------- ------- ------- -------- ------- -------
Cash and cash equivalents, end of period...... $ 0 $ (38) $ 2,808 $ 6,940 $ 8,513 $ 4,840
======== ======= ======= ======== ======= =======
Supplemental disclosure:
Cash paid for interest...................... $ -- $ -- $ 1,571 $ 6,049 $ 2,935 $ 3,833
Non-cash investing activities:
Property, plant and equipment from Pfizer... 1,890 -- -- -- -- --
Property, plant and equipment to Pfizer..... 1,593 -- -- -- -- --
</TABLE>

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

F-8
<PAGE> 94

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS DESCRIPTION

American Medical Systems, Inc., predecessor to American Medical Systems
Holdings, Inc. (collectively, the "Company" or "AMS"), was a business unit
within Pfizer Inc. until September 10, 1998 when it, and certain net assets
exclusively used in its business, was acquired by a group of private investors
for $130 million. The Company purchased assets of $68.2 million and assumed
liabilities of $12.6 million. In connection with this transaction, the Company
recorded $7.6 million related to intangible patent assets, $4.2 million related
to intangible workforce assets, $1.8 million of capitalized transaction costs,
and $61.0 million of goodwill which is being amortized over an estimated useful
life of twenty-five years. The Company manufactures and markets a broad and
well-established line of proprietary surgical products directly to urologists.
The Company principally focuses on the three major urological disorders:
incontinence, erectile dysfunction and prostate disease.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of American Medical
Systems Holdings, Inc. and its subsidiaries after elimination of all significant
intercompany transactions and accounts. In March 2000, American Medical Systems,
Inc. formed American Medical Systems Holdings, Inc. In April 2000, the
stockholders of American Medical Systems, Inc. exchanged all of their
outstanding shares of capital stock of American Medical Systems, Inc. for an
identical number of shares of the same class and series of capital stock of
American Medical Systems Holdings, Inc., and American Medical Systems, Inc.
became a wholly-owned subsidiary of American Medical Systems Holdings, Inc. No
change in ownership occurred as a result of this reorganization, and the
reorganization was accounted for as a reorganization of entities under common
control. Accordingly, this reorganization had no effect on the Company's
financial statements. The financial statements are presented as if this
reorganization took place effective September 10, 1998.

Basis of Presentation -- Year Ended 1997 and Period from January 1, 1998 to
September 10, 1998

The combined financial statements for 1997 and for the period from January 1,
1998 to September 10, 1998 present the financial position, results of operations
and cash flows for AMS as if it were a separate legal entity. All significant
transactions and balances among AMS locations have been eliminated. Operations
outside of the U.S. were included on a fiscal year basis ending November 30. The
combined financial statements included the accounts specifically attributed to
AMS, including allocations of certain assets, liabilities and expenses relating
to shared services and administrative functions incurred at the corporate and
business segment operating levels of Pfizer. No cash balances were reflected in
the accompanying combined statement of cash flows at December 31, 1997 since all
cash was included in Pfizer's centralized cash management system. The Company
did not have debts to Pfizer and therefore there was never any interest to be
charged. The amount of the net cash transfers is included in the Statements of
Cash Flows. Accordingly, AMS' lack of cash at December 31, 1997 may not be
representative of an independent company.

F-9
<PAGE> 95

Corporate and Divisional Allocated Costs -- Years ended 1997 and Period from
January 1, 1998 to September 10, 1998

Pfizer allocated certain actual corporate service and employee benefit expenses
to AMS based on number of personnel, occupied office space and third party
sales. Pfizer did not allocate various other corporate overhead expenses to its
operating divisions. However, an allocation of such expenses has been included
in the accompanying combined statements of income and is summarized as follows:

<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1, 1998 TO
DECEMBER 31, 1997 SEPTEMBER 10, 1998
----------------- ------------------
<S> <C> <C>
Pfizer corporate and the Medical Technology Group
division of Pfizer (MTG) division overhead costs... $2,832,000 $2,296,000
========== ==========
</TABLE>

Pfizer corporate overhead costs represent a portion of corporate functions such
as personnel, legal, accounting, treasury and information systems which were
allocated based primarily on sales of AMS compared to total Pfizer revenues.

MTG division overhead costs represent personnel, quality control, regulatory
compliance, finance and business development which were allocated based
primarily on sales to third party customers of AMS compared to total MTG sales.

AMS purchased certain products from an affiliated entity which were carried at
the affiliate's manufactured cost. In addition, the combined statement of income
for 1997 includes $973,000 of goodwill amortization charged by the affiliate for
use of the technology associated with the UroLume product line.

Certain costs including marketing, research and development, quality assurance,
finance, information technology and personnel were shared between AMS and
another member of the MTG division. Such shared service costs were charged to
AMS based on estimated usage and were approximately $9.2 million for the year
ended December 31, 1997 and $4.4 million for the period from January 1 to
September 10, 1998. The nature and amount of these shared services may not be
indicative of American Medical Systems, Inc. stand alone costs.

Included within operating expenses on the accompanying combined statement of
income are credits earned for the co-promotion of Cardura, an affiliate's
product. Net of sales costs, such amounts were $3.4 million for the year ended
December 31, 1997 and $982,000 for the period from January 1 to September 10,
1998.

Management believes that all allocations were made on a reasonable basis;
however, these costs may not necessarily be representative of the costs that
would have been or will be incurred by AMS as an independent company.

BASIS OF PRESENTATION--UNAUDITED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited financial statements as of June 30, 1999 and 2000
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. Interim financial information included in the
accompanying footnotes is unaudited.

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

For financial reporting purposes, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. The Company's cash and cash equivalent balances are
concentrated primarily with one investment manager and the majority is invested
in daily money market funds.

F-10
<PAGE> 96

CONCENTRATION OF RISKS

The Company's accounts receivable are primarily due from hospitals and
independent foreign distributors located mainly in the United States and Western
Europe. Although the Company does not require collateral from its customers,
concentrations of credit risk in the United States are somewhat mitigated by a
large number of geographically dispersed customers. The Company does not
presently anticipate credit risk associated with foreign trade receivables,
although collection could be impacted by the underlying economies of the
respective countries.

One Company subsidiary, Influence Medical Technologies Ltd., has its product
development and production facility located in Israel, and the Company is
directly affected by the political, economic and military conditions to which
the country is subject. Accordingly, any major hostilities involving Israel or
the interruption or curtailment of trade between Israel and its present trading
partners could have an adverse effect on the Company's business, financial
conditions, and results of operations.

INVENTORIES

The majority of inventories are stated at the lower of cost, determined on the
first-in, first-out method, or market. At the date the Company was acquired from
Pfizer Inc., inventories were recorded at fair value requiring a $21.8 million
write-up. This write-up was charged to the statement of operations over a six-
month period ended March 31, 1999, representing an estimate of the period over
which inventories were sold. Cost of sales was charged $10.2 million in the
period from September 11 to December 31, 1998 and $11.6 million relating to this
write-up in the first quarter 1999.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including internal and external costs of computer
software, are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are generally recorded using the straight-line
method over the following estimated useful asset lives:

<TABLE>
<S> <C>
Building............................................ 20 years
Machinery and equipment............................. 8-12 years
Furniture, fixtures and other....................... 3-12 years
Software............................................ 3-5 years
</TABLE>

Maintenance, repairs and minor improvements are charged to expense as incurred
while major betterments and renewals are capitalized. When assets are sold or
retired, the cost and related accumulated depreciation and amortization are
removed from the accounts and the resulting gain or loss is included in
operations.

INTANGIBLE ASSETS

Intangible assets consist of goodwill and purchased intangibles related to
workforce, patents, non-compete agreements, tradename, and developed research
and development technologies. Intangible assets are being amortized on a
straight-line basis over periods ranging principally from 10 to 25 years. The
Company continually evaluates the periods of amortization to determine whether
events and circumstances, such as effects of competition, obsolescence and other
economic factors, warrant revision of the useful lives. The Company assesses the
recoverability of goodwill from future operations using cash flows of the
related acquired business as a measure. Under this approach, the carrying value
of goodwill would be reduced if it becomes probable that the estimated expected
undiscounted future cash flows of the related business are less than the
carrying amount of goodwill over its remaining amortization period. If an
impairment exists, the Company measures the impairment utilizing discounted cash
flows.

LONG-LIVED ASSETS

The Company follows Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." SFAS No. 121 requires that long-lived assets, including
goodwill, be reviewed for impairment whenever events or circumstances indicate
the carrying amount of an asset may not be recoverable. The Company evaluates

F-11
<PAGE> 97

potential impairment by comparing the carrying amount of the assets with the
estimated undiscounted cash flows associated with them. If an impairment exists,
the Company measures the impairment utilizing discounted cash flows.

REVENUE RECOGNITION

The Company recognizes sales upon product shipment, net of allowance for
estimated returns.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

ADVERTISING COSTS

Advertising costs are charged to operations in the year incurred. Advertising
costs charged to operations during the year ended December 31, 1997, the periods
from January 1 to September 10, 1998 and September 11 to December 31, 1998, and
the year ended December 31, 1999 were $1,900,000, $1,300,000, $400,000, and
$3,200,000, respectively.

PRODUCT WARRANTY COSTS

The Company provides a warranty on its products and accrues estimated future
warranty costs based on its history of actual warranty costs incurred.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes certain costs incurred in connection with developing or
obtaining software for internal use in accordance with AICPA Statement of
Position 98-1, "Accounting For Computer Software Developed For Or Obtained For
Internal Use."

INCOME TAXES

Pre-September 10, 1998

As an operating unit of Pfizer, AMS did not file separate tax returns but rather
was included as part of the various returns filed by Pfizer or its subsidiaries.
For reporting purposes, AMS' tax provision was computed as if it were a separate
company and income taxes were settled with Pfizer on a current basis. Deferred
tax assets and liabilities were recognized for the expected future tax
consequences of differences between the financial reporting and tax bases of
assets and liabilities using enacted tax rates and laws. In accordance with
Pfizer's policy, no provision was made for taxes on overseas earnings which were
deemed to be permanently reinvested.

Post-September 10, 1998

The Company accounts for income taxes using the liability method. The liability
method provides that deferred tax assets and liabilities are recorded based on
the differences between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes ("temporary differences")
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Temporary differences relate primarily to the allowance for
doubtful accounts, obsolete inventory allowances, depreciation, and accruals for
vacation, product liability and warranty costs.

FOREIGN CURRENCY TRANSLATION

The financial statement amounts attributed to operations outside of the United
States are maintained in their local currency, except for Influence Medical
Technologies Ltd., where the United States dollar serves as the functional
currency. All assets and liabilities of the Company's international subsidiaries
are translated to United States dollars at year-end exchange rates, while
elements of the statement of operations are translated at average exchange rates
in effect during the year. Translation adjustments arising from the use of
differing exchange rates are included in accumulated other comprehensive income

F-12
<PAGE> 98

in stockholders' equity. Gains and losses on foreign currency transactions are
included in operations and were not material during the periods presented.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant areas
which require the use of management's estimates relate to the determination of
the allowances for doubtful accounts receivable and obsolete inventories, the
period of goodwill amortization, the extent of required warranty reserve, the
extent of the contingency for product liability claims, the need for a valuation
allowance on deferred tax assets, and additionally, for the year ended December
31, 1997 and, for the period from January 1, 1998 to September 10, 1998
allocations of certain assets, liabilities and expenses relating to shared
services and administrative functions incurred at the corporate and business
segment operating levels of Pfizer. The Company is subject to risks and
uncertainties, such as changes in the health care environment, competition and
legislation that may cause actual results to differ from estimated results.

RECLASSIFICATION

Certain 1997 and 1998 amounts have been reclassified to conform to the 1999
presentation.

COMMON STOCK SPLITS

Effective prior to the closing of the offering, the Company's common stock will
be split three for one. All share and per share information in the financial
statements has been restated to give effect to this stock split.

EARNINGS PER SHARE

Earnings per share data is not presented because no common shares were
outstanding.

PRO FORMA NET INCOME (LOSS) PER SHARE

Pro forma net income (loss) per share for the year ended December 31, 1999 and
the six months ended June 30, 2000 is computed giving effect to the conversion
of all outstanding preferred stock, plus accumulated dividends, into common
stock as if such conversion occurred at the beginning of each period, or at the
date of original issuance, if later. Basic and diluted pro forma net loss per
share are the same for the year ended December 31, 1999 and for the six months
ended June 30, 2000 because the effect of all stock options are anti-dilutive.
Pro forma net income (loss) per share is unaudited.

PRO FORMA JUNE 30, 2000 BALANCE SHEET (UNAUDITED)

The terms of the Convertible Preferred Stock provide that the stock will
automatically convert into Common Stock at the time of an initial public
offering. The pro forma June 30, 2000 balance sheet reflects the Company's
financial position as of that date adjusted to give effect to the conversion of
the Company's Convertible Preferred Stock into 21,095,292 shares of Common
Stock.

2. ACQUISITIONS

INFLUENCE

On December 16, 1999 the Company acquired Influence Inc., a supplier of bone
anchors and sling products used in the treatment of female incontinence. The
Company paid the former shareholders of Influence, Inc. $24.3 million at the
closing of the acquisition and capitalized $3.2 million related to transaction
and transition costs. The Company is also required to make contingent purchase
price payments of up to $10.0 million if various milestones related to
transitional and integration activities are completed by various dates ending on
January 31, 2001. The Company has made $3.5 million of these contingent
payments. In addition, the Company is required to make contingent purchase price
payments of up to approximately $10 million depending on the outcome of its
litigation with Boston Scientific

F-13
<PAGE> 99

Corporation when that litigation is resolved. Any contingent purchase price
payments will be recorded as goodwill. In connection with this transaction, the
Company expensed $6.1 million of acquired in-process research and development,
and recorded $6.6 million of goodwill and other intangibles including $9.9
million of developed research technology, $2.2 million of tradename, $1.1
million related to non-compete agreements, and $500,000 related to the
workforce.

The Company's consolidated statements of operations include Influence, Inc.'s
financial results from the December 16, 1999 date of acquisition. The following
provides Company results on a pro forma basis including Influence Inc. as if the
acquisition occurred at the beginning of each period presented (in thousands):

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 11 TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................................... $23,115 $25,654 $81,353 $ 92,506
Net loss........................................... $(6,482) $(8,991) $(9,849) $(16,057)
</TABLE>

UROSURGE

On August 3, 1999 the Company acquired all assets related to its UroVive bulking
agent system for the treatment of female stress urinary incontinence. The
Company paid UroSurge, Inc. $4.2 million at closing of the acquisition. The
Company is also obligated to pay UroSurge, Inc. payments of up to an additional
$1.5 million if certain milestones are successfully completed. In addition, the
Company has agreed to pay royalties on net sales generated by the acquired
products through December 2003. Any contingent purchase price payments will be
recorded as goodwill. In connection with this transaction, the Company expensed
$1.3 million of acquired in-process research and development and recorded
intangible assets of $2.2 million related to developed research technology and
$200,000 of licensed patents.

INJECTX

On October 4, 1999 the Company signed an exclusive, long-term agreement with
InjecTx to distribute its urethral injection system worldwide. The Company made
a $2.0 million equity investment in InjecTx. The Company is also required to
invest up to an additional $2.5 million of equity if certain clinical study
milestones are achieved. The Company currently owns 11% of the capital stock of
InjecTx. This investment has been accounted for on a cost basis.

IN-PROCESS RESEARCH AND DEVELOPMENT

In connection with the acquisitions of Influence and UroSurge, the Company
conducted a valuation of the intangible assets acquired. The value assigned to
purchased in-process research and development ("IPR&D") was $6.1 million and
$1.3 million of the purchase price for Influence and Urosurge, respectively.
IPR&D represented purchased in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
Accordingly, these amounts were expensed during 1999 following consummation of
the acquisitions. The value assigned to IPR&D was determined by identifying
research projects in areas for which technological feasibility had not been
achieved. The value was determined by estimating the costs to develop the IPR&D
into commercially viable products, estimating the resulting cash flows from such
projects, and discounting the net cash flows back to their present value.

The Company estimated costs required to obtain regulatory approvals and have
assumed the approvals will be received. Costs related to manufacturing,
distribution, and marketing of the products are included in our projections. The
resulting cash flows from such projects are based on management's estimates of
revenues, cost of sales, research and development costs, sales and marketing,
general and administrative, and the anticipated income tax effect. The Company
does not expect gross margins or expense levels to significantly change
following introduction of these products. The discount rates utilized in
discounting the net cash flows from purchased in-process research and
development were 23% for Influence products and

F-14
<PAGE> 100

35% for Urosurge products. These discount rates reflect uncertainties
surrounding the successful development of the purchased in-process research and
development.

The forecast data employed in the analyses was based upon internal product level
forecast information. The forecast data and assumptions are inherently uncertain
and unpredictable. However, based upon the information available at this time
management believes the forecast data and assumptions to be reasonable. These
assumptions may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Unless otherwise noted,
forecasts and assumptions have not changed materially from the date the
appraisals were completed.

3. TRANSITION AND REORGANIZATION EXPENSE

Pre-September 10, 1998

In connection with Pfizer's worldwide restructuring program initiated in 1993, a
restructuring reserve was established for the consolidation of facilities. In
1997, $573,000 of the restructuring reserve was utilized.

Post-September 10, 1998

The Company recorded $2.5 million of transition and reorganization expenses for
the period September 11, 1998 to December 31, 1998. These expenses related to
senior management changes and the need to establish new benefit plans and new
accounting and information systems following the acquisition of the Company's
assets by a group of private investors.

In the first quarter of 1999, the Company completed an assessment of senior
management personnel needs and also completed a strategic review of its research
and development efforts. As a result of this review, the Company incurred $3.0
million of transition and reorganization expenses for the year ended December
31, 1999 primarily related to employee termination benefits and executive search
recruiting fees. Thirty employees were terminated as a result of these
reorganizations, eight in 1998 and twenty-two in 1999.

In the first six months of 2000, the Company completed another assessment of
senior management personnel needs. As a result of this review, the Company
incurred $1.0 million of transition and reorganization expenses for the
six-month period ended June 30, 2000, primarily related to employee termination
benefits. The Company expects all these benefits to be paid by December 31,
2000.

Below is a summary of transition and reorganization expenditures (in thousands):

<TABLE>
<CAPTION>
PROFESSIONAL EXECUTIVE
SEVERANCE FEES SEARCH FEES OTHER TOTAL
--------- ------------ ----------- ----- -------
<S> <C> <C> <C> <C> <C>
Period from September 11 - December 31, 1998
Accrued.................................... $ 750 $ 1,440 $ 94 $ 233 $ 2,517
Paid....................................... (83) (1,001) (94) (104) (1,282)
------- ------- ----- ----- -------
Balance at December 31, 1998................. 667 439 -- 129 1,235
Accrued.................................... 2,490 145 314 51 3,000
Paid....................................... (2,279) (584) (314) (129) (3,306)
------- ------- ----- ----- -------
Balance at December 31, 1999................. 878 -- -- 51 929
Accrued.................................... 1,000 -- -- -- 1,000
Paid....................................... (738) -- -- (51) (789)
------- ------- ----- ----- -------
Balance at June 30, 2000 (unaudited)......... $ 1,140 $ -- $ -- $ -- $ 1,140
======= ======= ===== ===== =======
</TABLE>

F-15
<PAGE> 101

4. BALANCE SHEET INFORMATION

The following provides additional information concerning selected balance sheet
accounts (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Trade accounts receivable................................. $17,125 $ 19,325 $ 20,472
Other receivables......................................... 127 888 1,809
Allowance for doubtful accounts........................... (700) (404) (379)
------- -------- --------
$16,552 $ 19,809 $ 21,902
======= ======== ========
Inventories:
Raw materials............................................. $ 1,996 $ 2,940 $ 4,199
Work-in-progress.......................................... 1,307 1,843 844
Finished goods............................................ 20,914 8,455 9,891
Obsolescence reserve...................................... (2,486) (2,193) (2,374)
------- -------- --------
$21,731 $ 11,045 $ 12,560
======= ======== ========
Property, plant and equipment, net:
Land and building......................................... $13,076 $ 13,183 $ 13,239
Machinery and equipment................................... 5,873 9,590 9,705
Furniture, fixtures and other............................. 2,789 2,718 2,854
Software.................................................. 847 4,917 5,820
------- -------- --------
$22,585 $ 30,408 $ 31,618
Accumulated depreciation and amortization................... (613) (3,634) (5,596)
------- -------- --------
$21,972 $ 26,774 $ 26,022
======= ======== ========
Intangible assets, net:
Goodwill.................................................. $62,712 $ 76,092 $ 79,100
Developed technologies.................................... -- 12,073 12,073
Patents................................................... 7,600 7,600 7,600
Trademarks................................................ -- 2,233 2,233
Investment in technology.................................. -- 2,000 2,000
Workforce and other....................................... 4,276 7,166 10,466
------- -------- --------
$74,588 $107,164 $113,472
Accumulated amortization.................................... (965) (5,213) (9,214)
------- -------- --------
$73,623 $101,951 $104,258
======= ======== ========
</TABLE>

5. SENIOR CREDIT FACILITY

The Company has a $115.0 million senior credit facility, which expires in March
2006. In April 2000 the Company refinanced its prior credit facility that was
due to expire in September 2000. As such the senior credit facility has been
classified according to the terms of the refinanced agreement. The new facility
consists of a $65.0 million term note, a $35.0 million guaranteed note, and a
$15.0 million guaranteed revolving line of credit. The guarantee is provided by
a major stockholder. The term note bears interest, payable quarterly, at the
Base Rate (the higher of the Federal Funds rate plus .5% or the Prime Rate) plus
from 1% to 2% for Base Rate loans or LIBOR plus 3% for Eurodollar loans. The
guaranteed note and the revolving line of credit bear interest at the Base Rate
for Base Rate loans or LIBOR plus .875% for Eurodollar loans. At June 30, 2000,
the Base Rate was 9% and LIBOR was 6.78%. Through June 30, 2000 the Company has
only requested Eurodollar loans. The term note requires quarterly principal
payments of $2.0 million through March 2002, $2.5 million from June 2002 through
March 2003, $3.0 million from June 2003 through March 2004, and $3.4 million
from June 2004 through March 2006.

F-16
<PAGE> 102

At June 30, 2000, $11.0 million was unused. During 1999 interest was payable
quarterly based on either a Eurodollar rate plus .875% or a federal funds rate
plus .5%. A .375% fee was charged on unused amounts. The interest rate at
December 31, 1999 was 7%. Prepaid interest of approximately $900,000 was charged
to expense over a 15-month period ending December 31, 1999.

The carrying value of the $104.0 million outstanding at June 30, 2000
approximates fair value estimated using the Company's incremental borrowing rate
for similar liabilities. The senior credit facility is secured by substantially
all of the Company's assets. The Company is subject to, and is in compliance
with, certain covenants including ratios related to fixed charge coverage and
leverage. The Company is prohibited from paying dividends under its senior
credit facility without the lenders' consent.

6. STOCKHOLDERS' EQUITY

PREFERRED STOCK

Series A Redeemable Preferred:

The holders of Series A Preferred Stock are entitled to receive cumulative
dividends of 10% per annum payable in cash. Dividends of $613,000 for the period
September 11 to December 31, 1998; $2,207,000 for the year ended December 31,
1999 and $1,544,000 for the six months ended June 30, 2000 have been accrued but
not paid. As long as any shares of Series A are outstanding, no cash dividends
may be paid to other preferred or common shareholders, but dividends in the form
of additional shares of stock may be made. Holders of Series A Preferred Stock
have no voting rights, but have preference over other preferred and common
shareholders in liquidation or dissolution.

The Series A Preferred Stock is subject to mandatory redemption at $1,000 per
share plus accrued but unpaid dividends at the time of certain public offerings,
a sale of the Company or on December 31, 2006. The Company may redeem the Series
A Preferred Stock at any time. In addition, the shares of Series A Preferred
Stock will automatically convert into a number of shares of voting common stock
and non-voting common stock equal to the redemption price of $1,000 per share
plus accrued dividends, divided by the initial public offering price upon
completion of the offering. At the initial public offering price of $11.00 per
share, the Company's series A preferred stock will convert into 239,880 shares
of voting common stock and 2,679,273 shares of non-voting common stock.

Series B, Series C, Series D and Series E Convertible Preferred

Except with respect to voting rights, conversion rates and the class of capital
stock into which they convert, Series B, C, D and E Convertible Preferred Stock
have the same powers, preferences, rights and qualifications. The holders of
these Series of Convertible Preferred Stock are entitled to receive cumulative
dividends of 6% per annum payable in additional shares of the respective series.
Dividends of $368,000 for the period September 11, 1998 to December 31, 1998;
$1,324,000 for the year ended December 31, 1999; and $1,111,000 for the six
months ended June 30, 2000 have been accrued but not paid. No dividends may be
paid to these Series of stockholders if any shares of Series A are outstanding.

Each share of Series B and D Preferred Stock will be automatically converted
into shares of voting common stock and each share of Series C and Series E
Preferred Stock will be automatically converted into shares of non-voting common
stock at the time of a public offering (assuming a total Company valuation of at
least $100 million and gross proceeds to the Company of at least $50 million) or
if the majority of the shares of the Convertible Preferred Stock vote to convert
such shares. At the option of the stockholder, each share of Series B and Series
D Preferred Stock may be converted into voting common stock at $1.67 and $3.33
per share, respectively, plus accrued but unpaid dividends. Each share of Series
C and Series E Preferred Stock may be converted into non-voting common stock, at
$1.67 and $3.33 per share, respectively, plus accrued but unpaid dividends. Each
share of Series C Preferred Stock is also convertible into Series B Preferred
Stock and each share of Series E Preferred Stock is also convertible into Series
D preferred stock at the election of the stockholder subject to a limitation
that no stockholder may own more than 50% of Series B and Series D Preferred
Stock.

F-17
<PAGE> 103

The Series B and C Convertible Preferred Stock is subject to mandatory
redemption at $5.00 per share plus accrued but unpaid dividends and Series D and
E Convertible Preferred Stock is subject to mandatory redemption at $10.00 per
share plus accrued but unpaid dividends at the time of sale of the Company or on
December 31, 2006. The Company may redeem these Series of Preferred Stock at any
time with consent of the holders of the majority of shares of outstanding
Convertible Preferred Stock.

STOCK INCENTIVE PLAN

The Company's Equity Incentive Plan ("Plan") provides for granting to eligible
employees and certain other individuals nonqualified and incentive stock
options. The Company had reserved 3,000,000 shares of common stock for issuance
under the Plan at December 31, 1999. Subsequent to December 31, 1999, the pool
of shares reserved for such issuance was increased to 3,450,000. Options granted
under the Plan generally become exercisable 25% on the first anniversary date of
the grant and 6.25% per quarter thereafter. The options typically expire, if not
exercised, ten years after the date of grant. Options are granted at the fair
market value on the date of the grant. Activity in the plan was as follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE EXERCISE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Balance at September 10, 1998........................ -- --
Granted............................................ 450,000 $1.67
---------
Balance at December 31, 1998......................... 450,000 1.67
Granted............................................ 2,781,000 1.67
Canceled or terminated............................. (779,250) 1.67
---------
Balance at December 31, 1999......................... 2,451,750 1.67
Granted............................................ 765,750 3.96
Exercised.......................................... (49,500) 1.67
Canceled or terminated............................. (34,689) 1.67
---------
Balance at June 30, 2000............................. 3,133,311 $2.12
=========
</TABLE>

Options to purchase 717,189 common shares are available for grant under the Plan
at June 30, 2000. At June 30, 2000, the weighted average remaining contractual
life of outstanding options was 9 years and 510,657 shares were exercisable.

The Company has elected to follow Accounting Principles Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. The exercise price of the Company's employee stock options
equaled the market price of the underlying stock on the date of grant for all
options granted through December 31, 1999, and thus, under APB 25, no
compensation expense is recognized. During the six months ended June 30, 2000,
the Company recognized deferred compensation of $1,382,000, reflecting the
excess of the fair value of the underlying stock on the date of grant over the
exercise price. The deferred compensation will be amortized over vesting periods
of two to four years.

Pro forma information regarding net income (loss) and income (loss) per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement 123. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions; risk-free interest rates of 4.6% to 6% in 1999 and
4% in 1998; volatility factor of the expected market price of the Company's
common stock of .001; no expected dividends; and a weighted-average expected
life of the option of 8 years. The pro forma operations impact of options issued
during the period September 11 to December 31, 1998, the year ended December 31,
1999, and the six months ended June 30, 2000 was $5,000, $98,000 and $105,000,
respectively.

F-18
<PAGE> 104

In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options because
the Company's employee stock options have characteristics significantly
different from those of traded options and have vesting restrictions and because
changes in the subjective input assumptions can materially affect the fair value
estimates. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require input
of highly subjective assumptions.

7. COMMITMENTS AND CONTINGENT LIABILITIES

The Company is self-insured on product liability claims below $1 million for
each occurrence and $3 million in the aggregate, and maintains product liability
insurance above these limitations. Product liability events and claims prior to
the September 10, 1998 acquisition of the Company from Pfizer are the
responsibility of Pfizer.

The Company is involved in two patent infringement lawsuits with Boston
Scientific Corporation ("BSC"). Prior to the Company's acquisition of Influence,
Inc., BSC filed a patent infringement lawsuit in United States District Court
for the Northern District of California alleging that Influence, Inc. infringed
four patents owned by BSC by encouraging the use of its bone anchor insertion
devices in stress urinary incontinence procedures. On March 15, 1999, Influence
Inc. answered the complaint denying the allegations and filed counterclaims. The
court has issued a preliminary ruling that Influence does not have rights to one
of the patents it has asserted in this action. This patent relates to a product
that Influence has replaced with a new product that is covered by a different
patent. Nonetheless, Influence plans to seek reconsideration of, and if
necessary appeal, this ruling. On March 27, 2000, the Company filed a complaint
in United States District Court for the District of Minnesota alleging that BSC
infringes one patent owned by the Company through BSC's sales and promotion of
products and methods for the treatment of female stress urinary incontinence and
that BSC has misappropriated trade secrets.

The Company is also involved in a number of claims and lawsuits considered
normal in its business, including product liability matters. While it is not
possible to predict the outcome of legal actions brought against the Company,
the Company believes that the liability resulting from the pending claims and
suits would not have a material adverse effect on the results of its operations,
cash flows, or financial position at December 31, 1999 or for the year then
ended.

In May 1997, Influence Medical Technologies Ltd. signed a facility lease
agreement for a period of five years. The Company has a renewal option, to
extend the lease by an additional period of five years. Future minimum rental
payments as of December 31, 1999, are as follows: $297,000 for 2000, $297,000
for 2001, and $185,000 for 2002. The Company has facility lease agreements at
other international subsidiary locations with future minimal rental payments as
of December 31, 1999, as follows: $176,000 for 2000, $91,000 for 2001, and
$21,000 for 2002.

Rent expense for the year ended December 31, 1997, the periods January 1 to
September 10, 1998 and September 11 to December 31, 1998, and the year ended
December 31, 1999 was $374,000; $467,000; $204,000; and $847,000, respectively.

8. INDUSTRY SEGMENT INFORMATION AND FOREIGN OPERATIONS

Since its inception, the Company has operated in the single industry segment of
developing, manufacturing and marketing medical devices.

The Company distributes its products through its direct sales force and
independent sales representatives in the United States, Canada, and most of
Europe. Additionally, the Company distributes its products through foreign
independent distributors, primarily in Europe and Asia, who then market the
products directly to medical institutions. No customer or distributor accounted
for 10% or more of the Company's net sales during the year ended December 31,
1997, the periods January 1 through September 10, 1998 and the period September
11 through December 31, 1998 or the year ended December 31, 1999.

F-19
<PAGE> 105

Total export sales from the United States to unaffiliated entities (primarily to
Europe and payable in United States dollars) were $4,913,000 for the year ended
December 31, 1997; $2,401,000 for the period January 1 to September 10, 1998;
$1,117,000 for the period from September 11 to December 31, 1998 and $4,829,000
for the year ended December 31, 1999. Foreign subsidiary sales are predominantly
from customers in Western Europe. Substantially all of the Company's foreign
subsidiary assets are located in Western Europe.

At December 31, 1998 and 1999, consolidated accounts receivable included
$7,955,000 and $6,253,000, respectively, due from customers located outside of
the United States.

<TABLE>
<CAPTION>
AMERICAN
MEDICAL INFLUENCE, INC. FOREIGN
SYSTEMS, INC. SUBSIDIARY SUBSIDIARIES CONSOLIDATED
(In thousands) ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Sales to unaffiliated customers............... $ 73,073 -- $18,885 $ 91,958
Operating income (loss)....................... 12,430 -- 3,905 16,335
Identifiable assets........................... 166,695 -- 8,021 174,716
PERIOD FROM JANUARY 1-SEPTEMBER 10, 1998
Sales to unaffiliated customers............... $ 41,917 -- $12,698 $ 54,615
Operating income (loss)....................... (5,623) -- (2,340) (7,963)
Identifiable assets........................... 39,167 -- 7,184 46,351
PERIOD FROM SEPTEMBER 11-DECEMBER 31, 1998
Sales to unaffiliated customers............... $ 18,727 -- $ 4,388 $ 23,115
Operating income (loss)....................... (9,133) -- 119 (9,014)
Identifiable assets........................... 129,274 -- 26,326 155,600
YEAR ENDED DECEMBER 31, 1999
Sales to unaffiliated customers............... $ 67,161 $ 588 $13,604 $ 81,353
Operating income (loss)....................... (14,246) (32) 1,757 (12,521)
Identifiable assets........................... 158,015 3,763 25,512 187,290
</TABLE>

9. PENSION AND POSTRETIREMENT BENEFITS

The Company has pension plans covering most employees worldwide. For United
States employees, the Company sponsors the AMS Retirement Annuity Plan. Plan
benefits depend on years of service and employee final average earnings.
Participants vest in their benefits after as few as five years of service.

The Company also sponsors a post-retirement plan in the United States, which
provides medical and life insurance benefits to retirees and their eligible
dependents. Employees are eligible if they meet age and service requirements and
qualify for retirement benefits. The Company does not fund other post-retirement
benefit plans, but contributes to the plans as benefits are paid.

F-20
<PAGE> 106

The following tables present reconciliations of the benefit obligation of the
plans, the plan assets of the pension plan and the funded status of the plans
(in thousands):

<TABLE>
<CAPTION>
PENSION OTHER BENEFITS
------------------ ------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year............... $15,655 $16,394 $ 2,869 $ 3,032
Service cost.......................................... 425 1,469 105 366
Interest cost......................................... 317 1,099 58 205
Actuarial (gains) or losses........................... (3) (4,204) -- (705)
Benefit payments...................................... -- (297) -- --
Transfer out.......................................... -- (265) -- --
------- ------- ------- -------
Benefit obligation at end of year..................... $16,394 $14,196 $ 3,032 $ 2,898
Change in plan assets:
Fair value of plan assets at beginning of year........ $12,433 $12,713 -- --
Actual return on plan assets.......................... 280 710 -- --
Benefit payments...................................... -- (296) -- --
Transfer out.......................................... -- (430) -- --
------- ------- ------- -------
Fair value of plan assets at end of year................ $12,713 $12,697 -- --
Funded status........................................... $(3,681) $(1,499) $(3,032) $(2,898)
Unrecognized net actuarial (gain) loss.................. 32 (3,637) -- (705)
------- ------- ------- -------
Net amount of (accrued) benefit cost.................... $(3,649) $(5,136) $(3,032) $(3,603)
======= ======= ======= =======
</TABLE>

The components in the balance sheet as of December 31, 1998 and 1999 consist of:

<TABLE>
<CAPTION>
PENSION OTHER BENEFITS
----------------- -----------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Accrued benefit liability................................ $3,649 $5,136 $3,032 $3,603
</TABLE>

The weighted-average assumptions used and the annual cost related to these plans
consist of:

<TABLE>
<CAPTION>
PENSION OTHER BENEFITS
--------------- ---------------
1998 1999 1998 1999
---- ------- ---- ----
<S> <C> <C> <C> <C>
Discount rate:............................................. 6.75% 8.0% 6.75% 8.0%
Rate of future compensation increase....................... 4.5% 4.5% 4.5% 4.5%
Expected long-term return on plan assets................... 8.5% 8.5% -- --
Service cost............................................... $425 $ 1,469 $105 $366
Interest cost.............................................. 317 1,098 58 205
Expected return on plan assets............................. (315) (1,080) -- --
---- ------- ---- ----
Net periodic benefit costs................................. $427 $ 1,487 $163 $571
==== ======= ==== ====
</TABLE>

An average increase of 7.5% and 7.0% in the cost of covered health care benefits
was assumed for 1998 and 1999, respectively, is projected to decrease gradually
to 5.0% for 2004 and remain at that level thereafter.

The Company was allocated a portion of Pfizer's pension cost which resulted in a
credit of $83,000 in 1997.

10. SAVINGS AND INVESTMENT PLAN

The AMS Savings and Investment Plan (the "plan") allows employees in the United
States to contribute a portion of their salaries to the plan. The Company
matches a portion of the contributions. The plan is

F-21
<PAGE> 107

intended to satisfy the requirements of Section 401(a)(27) of the Internal
Revenue Code. Generally, all employees of the Company are eligible to
participate in the plan. The Company made contributions of $611,000, $728,000,
$243,000, and $866,000 to the plan for the year ended December 31, 1997, the
periods January 1 to September 10, 1998 and September 11 to December 31, 1998,
and the year ended December 31, 1999, respectively.

11. INCOME TAXES

Components of the Company's income (losses) before income taxes are as follows
(in thousands):

<TABLE>
<CAPTION>
PERIOD PERIOD SIX MONTHS
YEAR ENDED JANUARY 1 TO SEPTEMBER 11 TO YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 10, DECEMBER 31, DECEMBER 31, JUNE 30, 2000
1997 1998 1998 1999 (UNAUDITED)
------------ ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Domestic........................ $12,441 $(10,007) $ (9,381) $(14,995) $(690)
Foreign......................... 3,782 1,889 (1,125) (194) 94
------- -------- -------- -------- -----
Total......................... $16,223 $ (8,118) $(10,506) $(15,189) $(596)
======= ======== ======== ======== =====
</TABLE>

Components of the Company's income tax benefit (expense) are as follows (in
thousands):

<TABLE>
<CAPTION>
PERIOD PERIOD SIX MONTHS
YEAR ENDED JANUARY 1 TO SEPTEMBER 11 TO YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 10, DECEMBER 31, DECEMBER 31, JUNE 30, 2000
1997 1998 1998 1999 (UNAUDITED)
------------ ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Current
Federal....................... $(4,612) $2,834 $2,236 $1,292 $(625)
State......................... (786) 730 518 838 6
Foreign....................... (2,178) (774) 427 54 (36)
Deferred........................ 1,440 451 843 3,156 695
------- ------ ------ ------ -----
Total......................... $(6,136) $3,241 $4,024 $5,340 $ 40
======= ====== ====== ====== =====
</TABLE>

A reconciliation of income tax benefit (expense) computed at the United States
statutory rate to the effective income tax rate is as follows (in thousands):

<TABLE>
<CAPTION>
PERIOD PERIOD SIX MONTHS
YEAR ENDED JANUARY 1 TO SEPTEMBER 11 TO YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 10, DECEMBER 31, DECEMBER 31, JUNE 30, 2000
1997 1998 1998 1999 (UNAUDITED)
------------ ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Statutory Rate.................. $(5,681) $2,841 $3,572 $5,164 $ 202
Meals & Entertainment........... (114) (75) (28) (108) (27)
Goodwill........................ -- -- (56) (178) (139)
Foreign......................... 227 (113) 45 8 (4)
Other........................... -- -- 124 (125) --
State Taxes..................... (568) 588 367 579 8
------- ------ ------ ------ -----
Total...................... $(6,136) $3,241 $4,024 $5,340 $ 40
======= ====== ====== ====== =====
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

F-22
<PAGE> 108

Significant components of the Company's deferred income tax assets and
liabilities as of December 31, 1998 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 3,190 $ 5,377 $ 5,635
Foreign NOL/credits....................................... -- 9,614 9,630
Acquired NOL.............................................. -- 421 421
Pension liability......................................... 2,539 3,324 3,735
Accrued warranty expenses................................. 2,412 2,806 2,744
UroSurge assets........................................... 471 475
Compensation accruals..................................... 998 954 713
Start up costs............................................ 361 277 239
Workforce and patents..................................... -- -- 333
Other, primarily certain reserves......................... 1,027 625 590
Valuation allowance....................................... -- (5,000) (5,000)
------- ------- -------
Total deferred tax assets................................... 10,527 18,869 19,515
Deferred tax liabilities:
Acquired technology....................................... -- 7,691 7,397
Tax over book amortization................................ 163 351 826
Other..................................................... 250 240 72
------- ------- -------
Total deferred tax liabilities.............................. 413 8,282 8,295
------- ------- -------
Net deferred tax asset...................................... $10,114 $10,587 $11,220
======= ======= =======
</TABLE>

At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of $14 million available to offset future taxable
income, which begin to expire in 2018. Realization of the future tax benefits
related to the net deferred tax assets is dependent on many factors, including
the Company's ability to generate taxable income within the net operating loss
carryforward period. To the extent the net operating losses were created in a
foreign jurisdiction, the Company has included a valuation allowance of $5
million. This amount represents the approximate amount by which the net
operating losses are projected to exceed future income in that foreign
jurisdiction. Management believes that, at a minimum, it is more likely than not
that future taxable income will be sufficient to realize the remaining recorded
asset.

12. SUBSEQUENT EVENT

The Company's Board of Directors and stockholders have approved an amended and
restated certificate of incorporation, which will become effective upon
completion of the offering. The amended and restated certificate of
incorporation increases the authorized capital to 75,000,000 shares of voting
common stock and 20,000,000 shares of non-voting common stock, establishes
5,000,000 shares of undesignated preferred stock and eliminates all of the
existing classes of designated preferred stock.

F-23
<PAGE> 109

13. VALUATION AND QUALIFYING ACCOUNTS

The following table sets forth activity in the Company's valuation accounts.

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts deducted from accounts
receivable:
For the period ended:
December 31, 1999.................................... $ 700 $ 186 $ 482 $ 404
------ ------ ------ ------
December 31, 1998.................................... $ 800 79 179 $ 700
------ ------ ------ ------
September 10, 1998................................... $1,655 117 $ 972 $ 800
------ ------ ------ ------
December 31, 1997.................................... $ 794 $ 951 $ 90 $1,655
------ ------ ------ ------
Valuation allowance deducted from inventories:
For the period ended:
December 31, 1999.................................... $2,486 $ 346 $ 639 $2,193
------ ------ ------ ------
December 31, 1998.................................... $2,864 -- $ 378 $2,486
------ ------ ------ ------
September 10, 1998................................... $ 831 $3,593 $1,560 $2,864
------ ------ ------ ------
December 31, 1997.................................... $1,414 -- $ 583 $ 831
------ ------ ------ ------
Accrued product liability reserve:
For the period ended:
December 31, 1999.................................... $ 225 $ 818 -- $1,043
------ ------ ------ ------
December 31, 1998.................................... -- $ 225 -- $ 225
------ ------ ------ ------
September 10, 1998................................... -- $7,950 $7,950 --
------ ------ ------ ------
December 31, 1997.................................... -- $6,056 $6,056 --
------ ------ ------ ------
Accrued warranty expense:
For the period ended:
December 31, 1999.................................... $6,348 $1,037 -- $7,385
------ ------ ------ ------
December 31, 1998.................................... $6,749 $ 294 $ 695 $6,348
------ ------ ------ ------
September 10, 1998................................... $5,925 $ 824 -- $6,749
------ ------ ------ ------
December 31, 1997.................................... $5,265 $ 660 -- $5,925
------ ------ ------ ------
</TABLE>

14. RESTATEMENT OF FINANCIAL STATEMENTS

The Company has restated its 1999 financial statements to reflect the
reallocation of the purchase price of the assets acquired from Pfizer.
Originally the Company allocated $68.2 million of the purchase price to
goodwill. The accompanying restated financial statements reallocate $7.6 million
of the goodwill to intangible patents assets and $4.2 million to intangible
workforce assets. Because patents and workforce have shorter useful lives than
goodwill, amortization expense for the year ended December 31, 1999 is $900,000
greater in the accompanying financial statements, resulting in an increase in
net loss and pro forma net loss per share of $558,000 and $.04 respectively.

F-24
<PAGE> 110

CONSOLIDATED FINANCIAL STATEMENTS
INFLUENCE, INC.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND NINE MONTHS ENDED SEPTEMBER 30, 1999

F-25
<PAGE> 111

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and
Shareholders of Influence, Inc.

We have audited the accompanying consolidated balance sheet of Influence, Inc.
and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Influence, Inc.
and subsidiaries at December 31, 1998, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
October 26, 1999, except for Note 10, as to
which the date is November 12, 1999

F-26
<PAGE> 112

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Influence, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
Influence, Inc. and its subsidiaries at December 31, 1997, and the results of
their operations and their cash flows for the two years in the period ended
December 31, 1997, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements for any period subsequent to
December 31, 1997.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California
June 23, 1998

F-27
<PAGE> 113

INFLUENCE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

<TABLE>
<CAPTION>
AS OF DECEMBER 31 AS OF SEPTEMBER 30,
-------------------- -------------------
1997 1998 1999
-------- -------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 2,737 $ 2,558 $ 1,274
Short-term investments................................ 2,459 94 99
Accounts receivable, net.............................. 391 1,425 1,984
Inventories........................................... 918 1,182 1,172
Other current assets.................................. 964 511 523
-------- -------- --------
Total current assets............................. 7,469 5,770 5,052
Property and equipment, net............................. 1,252 1,157 978
-------- -------- --------
Total assets..................................... $ 8,721 $ 6,927 $ 6,030
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................... $ 619 $ 575 $ 678
Income taxes payable.................................. -- 319 372
Accrued liabilities and other......................... 1,229 2,079 1,778
-------- -------- --------
Total current liabilities........................ 1,848 2,973 2,828
Note payable............................................ -- 7,000 2,024
-------- -------- --------
Total liabilities................................ 1,848 9,973 4,852
Stockholders' equity (deficit):
Series A convertible preferred Stock, par value $.01
per share:
Authorized shares--750,000
Issued and outstanding shares--713,000............. 7 7 7
Common stock, par value $.001 per share:
Authorized shares--30,000,000
Issued and outstanding shares -- 6,612,569 for 1997
and 1998 and 7,287,651 for 1999.................. 7 7 8
Additional paid-in capital............................ 25,616 27,125 33,927
Deferred compensation................................. (137) (288) (10)
Accumulated deficit................................... (18,620) (29,897) (32,754)
-------- -------- --------
Total stockholders' equity (deficit)............. 6,873 (3,046) 1,178
-------- -------- --------
Total liabilities and stockholders' equity
(deficit)..................................... $ 8,721 $ 6,927 $ 6,030
======== ======== ========
</TABLE>

See accompanying notes.

F-28
<PAGE> 114

INFLUENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ -- $ 1,114 $ 5,624 $ 3,432 $ 8,360
Cost of revenues................... -- 2,765 2,967 2,385 2,217
---------- ---------- ---------- ---------- ----------
Gross margin....................... -- (1,651) 2,657 1,047 6,143
Operating expenses:
Research and development......... 3,219 3,155 2,914 2,619 1,726
Sales and marketing.............. 667 3,837 7,380 5,732 5,211
General and administrative....... 1,769 2,073 3,398 2,114 1,668
---------- ---------- ---------- ---------- ----------
Total operating expenses........... 5,655 9,065 13,692 10,465 8,605
Operating loss..................... (5,655) (10,716) (11,035) (9,418) (2,462)
Other (expense) income............. (118) (134) 78 46 (23)
---------- ---------- ---------- ---------- ----------
Net loss before income taxes....... (5,773) (10,850) (10,957) $ (9,372) $ (2,485)
Income tax expense................. -- -- 320 240 372
---------- ---------- ---------- ---------- ----------
Net loss........................... $ (5,773) $ (10,850) $ (11,277) $ (9,612) $ (2,857)
========== ========== ========== ========== ==========
Basic and diluted net loss per
share............................ $ (.92) $ (1.66) $ (1.71) $ (1.45) $ (.42)
========== ========== ========== ========== ==========
Shares used in computing basic and
diluted net loss per share....... 6,278,354 6,517,547 6,612,569 6,612,569 6,837,596
========== ========== ========== ========== ==========
</TABLE>

See accompanying notes.

F-29
<PAGE> 115

INFLUENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(In thousands, except share data)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------- ------ --------- ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995....................... 713,000 $7 6,138,182 $7 $ 3,131 $ -- $ (1,997) $ 1,148
Issuance of compensatory
stock options............ -- -- -- -- 610 (610) -- --
Exercise of stock
options.................. -- -- 39,000 -- 125 -- -- 125
Issuance of stock options
in connection with
services................. -- -- -- -- 837 -- -- 837
Amortization of deferred
compensation............. -- -- -- -- -- 327 -- 327
Net loss................... -- -- -- -- -- -- (5,773) (5,773)
------- -- --------- -- ------- ------ -------- --------
Balance at December 31,
1996....................... 713,000 7 6,177,182 7 4,703 (283) (7,770) (3,336)
Conversion of debenture to
common stock at $62.55
per share................ -- -- 419,787 -- 20,838 -- -- 20,838
Issuance of stock options
in connection with
services................. -- -- -- -- 101 (101) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 171 -- 171
Exercise of stock
options.................. -- -- 15,600 -- 50 -- -- 50
Cancellation of
compensatory stock
options.................. -- -- -- -- (76) 76 -- --
Net loss................... -- -- -- -- -- (10,850) (10,850)
------- -- --------- -- ------- ------ -------- --------
Balance at December 31,
1997....................... 713,000 7 6,612,569 7 25,616 (137) (18,620) 6,873
Issuance of compensatory
stock options............ -- -- -- -- 1,246 (1,246) -- --
Issuance of stock options
in connection with
services................. -- -- -- -- 311 (311) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 1,358 -- 1,358
Cancellation of
compensatory stock
options.................. -- -- -- -- (48) 48 -- --
Net loss................... -- -- -- -- -- -- (11,277) (11,277)
------- -- --------- -- ------- ------ -------- --------
Balance at December 31,
1998....................... 713,000 $7 6,612,569 $7 $27,125 $ (288) $(29,897) $ (3,046)
Conversion of debentures to
common stock............... -- -- 675,082 1 6,999 -- -- 7,000
Stock options issued for
severance.................. -- -- -- -- 89 (89) -- --
Amortization of deferred
compensation............... -- -- -- -- -- 81 -- 81
Cancellation of compensatory
stock options.............. -- -- -- -- (286) 286 -- --
Net loss..................... -- -- -- -- -- -- (2,857) (2,857)
------- -- --------- -- ------- ------ -------- --------
Balance at September 30, 1999
(unaudited)................ 713,000 $7 7,287,651 $8 $33,927 $ (10) $(32,754) $ 1,178
======= == ========= == ======= ====== ======== ========
</TABLE>

See accompanying notes.

F-30
<PAGE> 116

INFLUENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
------------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $(5,773) $(10,850) $(11,277) $(9,612) $(2,857)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 58 166 315 188 129
Interest on convertible debenture.................... 100 738 -- -- --
Amortization of deferred compensation................ 327 171 1,358 1,158 82
Stock compensation................................... 837 -- -- -- --
Loss on disposal of property and equipment........... -- -- 3 -- --
Changes in assets and liabilities:
Accounts receivable................................ -- (391) (1,034) (667) (559)
Inventories........................................ (244) (674) (264) (121) 10
Other current assets............................... (108) (740) 453 (138) (12)
Accounts payable................................... 301 (61) (44) 17 103
Income taxes payable............................... -- -- 320 240 80
Accrued expenses................................... 413 716 850 1,782 (329)
------- -------- -------- ------- -------
Net cash used in operating activities.................. (4,089) (10,925) (9,320) (7,153) (3,353)
INVESTING ACTIVITIES
Purchase of short-term investments..................... (103) (2,357) -- -- (5)
Proceeds from short-term investments................... -- -- 2,365 2,361 --
Proceeds from the sale of property and equipment....... -- -- 357 -- 50
Purchases of property and equipment.................... (561) (778) (581) (115) --
------- -------- -------- ------- -------
Net cash (used in) provided by investing activities.... (664) (3,135) 2,141 2,246 45
FINANCING ACTIVITIES
Proceeds from exercise of stock options................ 125 50 -- -- --
Proceeds from notes payable--stockholder............... 3,000 -- -- -- --
Proceeds from note payable............................. -- -- 7,000 7,000 2,024
Repayment of principal on notes payable to
stockholder.......................................... (3,000) -- -- -- --
Proceeds from convertible debenture.................... 20,000 -- -- -- --
------- -------- -------- ------- -------
Net cash provided by financing activities.............. 20,125 50 7,000 7,000 2,024
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash equivalents... 15,372 (14,010) (179) 2,093 (1,284)
Cash and cash equivalents at beginning of year......... 1,375 16,747 2,737 2,737 2,558
------- -------- -------- ------- -------
Cash and cash equivalents at end of year............... $16,747 $ 2,737 $ 2,558 $ 4,830 $ 1,274
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Conversion of convertible debenture and accrued
interest into Common Stock........................... $-- $20,838 $-- $-- $--
Deferred compensation from stock options issued for
services............................................. -- -- 311 311 89
Deferred compensation from issuance of compensatory
stock options........................................ -- -- 1,246 1,180 --
Supplemental cash flow disclosure:
Interest paid........................................ $79 $-- $40 $30 $12
</TABLE>

See accompanying notes.

F-31
<PAGE> 117

INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999

1. ORGANIZATION AND NATURE OF BUSINESS

Influence, Inc. was incorporated in Delaware on November 9, 1994. Its
wholly-owned subsidiary, Influence Medical Technologies, Ltd. ("IMT"), an
Israeli corporation, was incorporated on November 22, 1994 and commenced
operations on January 1, 1995. On November 7, 1996, IMT incorporated a
wholly-owned subsidiary, Influence Medical Technologies, GmbH, in Germany.
Influence, Inc. and its wholly-owned subsidiaries (the "Company") is a medical
device manufacturer engaged in the design, development and commercialization of
minimally invasive products in the areas of urology/gynecology, otolaryngology
and cancer radiotherapy.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Influence, Inc.
and its wholly-owned subsidiaries. The carrying amount of net assets of the
Company's wholly-owned subsidiaries were approximately $3.5 million at December
31, 1997 and $3.6 million at December 31, 1998. All significant intercompany
accounts and transactions have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Significant areas requiring management estimates relate to the
allowances for doubtful accounts and for obsolete inventory, valuation
allowances for deferred tax assets and useful lives for depreciation and
amortization. Actual results could differ from those estimates.

FOREIGN CURRENCY

The Company's subsidiaries consider their functional currency to be the United
States dollar. All of the Company's financing activity is in United States
dollars. Further, substantially all of the Company's revenues and purchases of
materials and components are also denominated in United States dollars.
Accordingly, the primary economic environment in which the Company operates is
the United States dollar.

Monetary assets and liabilities denominated in currencies other than United
States dollars are remeasured using the exchange rates in effect at each balance
sheet date, while nonmonetary items are remeasured at historical rates.

The Company has not engaged in hedging activities to minimize the risk of
fluctuations in exchange rates. Remeasurement adjustments and foreign currency
transactions gains or losses are recognized in the consolidated statement of
operations. Such amounts were not significant for the years ended December 31,
1996, 1997 and 1998.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments which have an original
maturity of three months or less to be cash equivalents. The carrying amount
reported in the consolidated balance sheet for cash and cash equivalents
approximates its fair value.

BASIS OF PRESENTATION--UNAUDITED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited financial statements as of September 30, 1998 and
1999 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
F-32
<PAGE> 118
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.

SHORT-TERM INVESTMENTS

The Company's short-term investments consist of bank deposits and commercial
paper. All of the Company's investment securities are classified as
available-for-sale and are stated at fair market value which approximates cost.

CONCENTRATION OF RISKS

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, short-term
investments and accounts receivable. Cash equivalents and short-term investments
are placed in high credit quality instruments and their composition and
maturities are regularly monitored by management. The Company deposits most of
its cash with a single financial institution.

The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable.

The Company's product development and production facility is located in Israel,
and the Company is directly affected by the political, economic and military
conditions to which the country is subject. Accordingly, any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company is required to purchase a certain component used with one of its
products from a sole supplier. Although there is currently only one manufacturer
of this component, management believes that other suppliers could provide a
similar component at comparable terms. However, the loss of this supplier could
delay the shipment of one of the Company's products and have a material adverse
effect on the Company's results of operations.

INVENTORIES

Inventories are stated at the lower of cost, determined using the moving average
method, or market.

PROPERTY AND EQUIPMENT

Machinery and equipment, office furniture and equipment and leasehold
improvements are stated at cost, less accumulated depreciation. Property and
equipment are depreciated on a straight-line basis over their estimated useful
lives or over the life of the lease, whichever is shorter. Useful lives range
from three to seventeen years for office furniture and equipment and seven to
fourteen years for machinery and equipment.

REVENUE RECOGNITION

Revenues are recognized as products are shipped. Allowances for estimated
returns are provided upon shipment.

F-33
<PAGE> 119
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

INCOME TAXES

The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109"). SFAS 109 requires that the Company recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the consolidated financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined on the
basis of the difference between the income tax basis of assets and liabilities
and their respective financial reporting amounts at enacted tax rates in effect
for the periods in which the differences are expected to reverse.

STOCK-BASED COMPENSATION

The Company has elected to follow the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. SFAS 123 allows companies to choose whether to account for
stock-based compensation under the current method as prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25") or use the fair value method
described in SFAS 123. The Company plans to continue to follow the accounting
measurement provisions of APB 25.

BASIC AND DILUTED NET LOSS PER SHARE

The Company adopted SFAS No. 128, Earnings Per Share, during the year ended
December 31, 1997 and retroactively restated all prior periods. Basic net loss
per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed using the
weighted average number of common and potential common shares outstanding during
the period. Potential common shares consist of the incremental common shares
issuable upon the exercise of stock options (using the treasury stock method)
and upon the conversion of the convertible debenture and Series A Convertible
Preferred Stock (using the if-converted method). Potential common shares have
been excluded from the computation of diluted net loss per share as their effect
is anti-dilutive.

COMPREHENSIVE NET INCOME (LOSS)

Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for the
reporting of comprehensive income (loss) and its components in a full set of
general-purpose financial statements. Comprehensive income (loss) is comprised
of net income (loss) and other comprehensive earnings such as foreign currency
cumulative translation adjustments and unrealized gains or losses on
available-for-sale short-term investments. The Company's unrealized gains and
losses on available-for-sale short-term investments have been insignificant for
all periods presented.

F-34
<PAGE> 120
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. BALANCE SHEET COMPONENTS

The following provides additional information concerning selected balance sheet
accounts as of (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
--------------
1997 1998
---- ------
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable................................. $428 $1,608
Allowance for doubtful accounts........................... (37) (183)
---- ------
$391 $1,425
==== ======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1998
------ ------
<S> <C> <C>
Inventories:
Raw materials............................................. $ 582 $ 727
Work-in-process........................................... 66 81
Finished goods............................................ 270 505
Less reserve for obsolescence............................. -- (131)
------ ------
$ 918 $1,182
====== ======
Property and equipment:
Machinery and equipment................................... $ 925 $ 922
Office furniture and equipment............................ 468 594
Leasehold improvements.................................... 92 137
Less accumulated depreciation............................. (233) (496)
------ ------
$1,252 $1,157
====== ======
</TABLE>

Other current assets consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
------------
1997 1998
---- ----
<S> <C> <C>
Prepaid expenses............................................ $445 $300
VAT refundable.............................................. 120 126
Prepaid taxes............................................... 72 38
Due from employees.......................................... 150 1
Deposits.................................................... 73 45
Other....................................................... 104 1
---- ----
$964 $511
==== ====
</TABLE>

Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1998
------ ------
<S> <C> <C>
Accrued compensation and related payroll taxes.............. $ 409 $ 719
Professional fees........................................... 446 845
Clinical fees............................................... 99 175
Other....................................................... 275 340
------ ------
$1,229 $2,079
====== ======
</TABLE>

F-35
<PAGE> 121
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. GEOGRAPHIC AREA INFORMATION

The Company operates in one industry segment: the development and
commercialization of disease management systems. Operating losses are determined
by deducting from net revenues the related costs and operating expenses
attributable to each geographic region. Research and development costs are
reflected in the geographic region in which the activity was performed. The
following table presents a summary of operations by geographic region.

<TABLE>
<CAPTION>
UNITED STATES ISRAEL GERMANY ELIMINATIONS CONSOLIDATED
(IN THOUSANDS) ------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1996
Operating losses....................... $ (654) $ (4,888) $(113) $ -- $ (5,655)
Total assets........................... 21,644 1,347 120 (5,154) 17,957
1997
Net sales.............................. -- 1,114 -- -- 1,114
Operating losses....................... (26) (10,634) (21) (35) (10,716)
Total assets........................... 24,765 4,352 308 (20,704) 8,721
1998
Net sales.............................. -- 5,624 -- -- 5,624
Operating losses....................... (1,039) (9,359) -- (637) (11,035)
Total assets........................... 32,600 8,093 300 (34,066) 6,927
</TABLE>

For the year ended December 31, 1998, approximately 45% of the Company's net
sales were derived from exports to Europe.

5. FINANCING ARRANGEMENTS

In June 1999, the Company issued a note payable to a shareholder and director
for $1.0 million. The note bears interest at the applicable federal rate (4.33%
at December 31, 1998).

On August 17, 1998, the Company signed a distribution agreement with Indigo
Medical, Incorporated ("Indigo"), a subsidiary of Johnson & Johnson ("J&J"),
pursuant to which Indigo will become the Company's exclusive distributor outside
the United States of the Company's current and future products in the fields of
urology and gynecology and its radiotherapy product under development. In
connection with this distribution agreement, the Company and Johnson & Johnson
Development Corporation ("JJDC"), a subsidiary of J&J, entered into an
investment agreement. The investment agreement provides, in addition to the $1.0
million note entered into in June 1998, that JJDC invest an additional $6.0
million in the Company. In exchange for the $6.0 million cash investment and the
outstanding $1.0 million note, the Company entered into a new $7.0 million
convertible note (the "J&J Note"). The J&J Note is automatically convertible
into shares of the Company's Common Stock at the earlier of completing an
initial public offering of Common Stock or May 1999. The J&J Note accrues
interest at 10% per annum only from the date of any default and will convert at
the initial public offering price upon completion of such offering. In the event
the initial public offering is not completed by May 1999, the J&J Note and any
accrued interest thereon will automatically convert into shares of Common Stock
at a per share price equal to $82.0 million divided by the number of then
outstanding shares of Common Stock and equivalents, as defined.

On June 22, 1998, the Company entered into a $6.0 million revolving line of
credit agreement (the "Agreement") with a bank. Amounts drawn under the
Agreement are guaranteed by a shareholder, who is also a member of the Board of
Directors. Advances under the Agreement bear interest at 1% above the

F-36
<PAGE> 122
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. FINANCING ARRANGEMENTS (CONTINUED)
London Interbank Offer Rate. There were no advances outstanding as of December
31, 1998. The Agreement expired on June 19, 1999.

In November 1996, the Company entered into an agreement with Medtronic, Inc.
("Medtronic") which granted Medtronic the option to purchase the Company on or
before June 10, 1997 at a purchase price of $180.0 million (the "Agreement"). In
December 1996, in connection with the Agreement, the Company issued a one-year
convertible debenture to Medtronic in exchange for cash of $20.0 million. The
convertible debenture accrued interest at the prime rate. Upon termination of
the purchase option, the convertible debenture and accrued interest thereon
automatically converted into shares of the Company's Common Stock at a per share
price equal to $400.0 million divided by the number of then outstanding Common
Stock and equivalents as defined in the Agreement. The convertible debenture,
plus accrued interest of $838,000, was converted into 419,787 shares of Common
Stock at a conversion price, in excess of fair value, of $62.55 per share on
June 10, 1997.

6. INCOME TAXES

Income tax expense consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Currently payable:
Federal........................................... $300
State............................................. 20
----
Total..................................... $320
====
</TABLE>

There were no income taxes paid in 1998.

Deferred income taxes arise from the recognition of certain items of expense in
different years for tax and financial statement purposes. The principal sources
of these differences are the different methods used for tax and financial
statement purposes in reporting depreciation expense, start-up costs and certain
accrued liabilities. For financial reporting purposes, a valuation allowance
$1,954,000 as of December 31, 1997 and $189,000 as of December 31, 1998 has been
recognized to offset the net deferred tax assets. Significant components of the
Company's net deferred tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1998
------- -----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 1,484 $ --
Expenses not currently deductible......................... 470 190
------- -----
1,954 190
Deferred tax liabilities:
Depreciation.............................................. -- (1)
------- -----
1,954 189
Valuation allowance......................................... (1,954) (189)
------- -----
Net deferred tax assets..................................... $ -- $ --
======= =====
</TABLE>

F-37
<PAGE> 123
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES (CONTINUED)
The components of net loss were as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Domestic.................................................... $ (576) $ 495 $ (636)
Foreign..................................................... (5,197) (11,345) (10,641)
------- -------- --------
Net loss.................................................... $(5,773) $(10,850) $(11,277)
======= ======== ========
</TABLE>

The Company's Israeli manufacturing facility has received "Approved Enterprise"
status under Israeli tax law. As such, undistributed income derived from the
Company's manufacturing facility in Israel will be tax-exempt for a maximum of
two years after IMT has taxable income, and will be subject to a reduced income
tax rate for a maximum of eight additional years (depending upon the level of
foreign investment). In the event that IMT were to pay a dividend to the Company
in the United States during any tax-exempt period, however, the amount of the
dividend would be subject to the Israeli corporate income tax from which it was
exempt, plus a 15% withholding tax. Further, license fees remitted to the
Company in the United States will also be subject to a 15% withholding tax.

As of December 31, 1997 and 1998, the Company has net operating loss
carryforwards and other future tax deductions for Israeli tax purposes of
approximately $13.0 and $3.0 million and $20.0 million and $3.0 million,
respectively, for which, due to the uncertainty of their realizability, no
deferred tax assets have been recognized.

7. STOCKHOLDERS' DEFICIT

SERIES A CONVERTIBLE PREFERRED STOCK

The Company has authorized 850,000 shares of Preferred Stock, 750,000 of which
have been designated as Series A Convertible Preferred Stock. The holders of the
Series A Convertible Preferred Stock have no voting rights but their shares are
convertible at any time at the option of the holder on a 1-for-1 basis into
Common Stock. Each share of Series A Convertible Preferred Stock is
automatically converted into 1 share of Common Stock prior to the closing of an
initial public offering. Upon the dissolution or liquidation of the Company, the
holders of the Series A Convertible Preferred Stock are entitled to receive
$5.00 per share before any payments are made to the holders of any other shares
of stock. Any remaining amount available after this payment will be distributed
to holders of all outstanding shares equally.

Dividends, when and as declared by the Board, shall be payable to the holders of
the Common Stock and Series A Convertible Preferred Stock in amounts consistent
with the conversion ratio in effect on the dividend date.

STOCK OPTIONS

Under the Influence, Inc. 1995 Stock Option Plan (the "1995 Plan"), options are
granted at prices determined by the Board of Directors, vest over various
periods generally not exceeding five years, and terminate ten years from the
date of grant. In June 1998, the Board canceled all remaining shares available
for future grant under the 1995 Plan.

In June 1998, the Board authorized 995,400 shares of Common Stock for issuance
pursuant to the Company's 1998 Long-Term Incentive Plan (the "1998 Plan"). Under
the 1998 Plan, options are granted at prices determined by the Board of
Directors, vest over various periods generally not exceeding four years and
terminate ten years from the date of grant.

F-38
<PAGE> 124
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. STOCKHOLDERS' DEFICIT (CONTINUED)
The following table summarizes the options to purchase shares of the Company's
Common Stock under the Company's stock option plans:

<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
--------- ----------- --------------
<S> <C> <C> <C>
Outstanding as of December 31, 1995........................ 621,651 252,349 $ 3.21
Granted.................................................. (534,300) 534,300 3.82
Exercised................................................ -- (39,000) 3.21
Canceled................................................. 21,060 (21,060) 3.21
-------- ---------
Outstanding as of December 31, 1996........................ 108,411 726,589 8.67
Additional shares reserved............................... 624,000 --
Granted.................................................. (378,488) 378,488 10.79
Exercised................................................ -- (15,600) 3.21
Canceled................................................. 93,600 (93,600) 10.05
-------- ---------
Balance December 31, 1997.................................. 447,523 995,877 5.52
Additional shares reserved............................... 995,400 -- --
Granted.................................................. (906,266) 906,266 5.07
Canceled................................................. 414,055 (414,055) 9.02
Terminated............................................... (487,938) -- --
-------- ---------
Balance December 31, 1998.................................. 462,774 1,488,088 $ 3.58
======== =========
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$0.01.................................................. 132,000 9.5 $ .01
$1.00 - $3.10.......................................... 660,942 7.5 3.21
$4.50 - $9.00.......................................... 695,146 9.4 6.68
---------
1,488,088
=========
</TABLE>

The weighted average grant date fair value of options granted during the year
ended December 31, 1998 was $2.48 per share. All grants during 1998 were at
prices lower than market prices and have been recorded as deferred compensation
and amortized according to their vesting schedules.

At December 31, 1996, 1997 and 1998, 407,068, 538,382 and 924,762 options with
weighted average exercise prices of $4.01, $4.20 and $3.86, respectively, were
exercisable.

F-39
<PAGE> 125
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. STOCKHOLDERS' DEFICIT (CONTINUED)
The following table summarizes information about stock options granted under the
1995 and 1998 Plans for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE FAIR EXERCISE FAIR EXERCISE FAIR
PRICE VALUE PRICE VALUE PRICE VALUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options granted at market price....... $3.21 $0.46 $10.79 $2.52 $ -- $ --
Options granted below market price.... 3.73 3.42 -- -- 5.37 2.48
</TABLE>

The Company accounts for stock options granted to employees in accordance with
the provisions of Accounting Principles Board Opinion No. 25. Had compensation
expense for options granted to employees been determined based upon the
estimated grant date fair value pursuant to SFAS 123, the Company's net loss and
net loss per share would have been as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Pro forma net loss.......................................... $(6,077) $(11,151) $(11,277)
======= ======== ========
Pro forma net loss per share................................ $ (.97) $ (1.71) $ (1.73)
======= ======== ========
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
minimum value method with the following assumptions: dividend yield of 0%;
risk-free annual interest rates of 5.21% to 6.42%, 6.20% and 5.45% for the years
ended December 31, 1996, 1997 and 1998, respectively, and an expected option
term of three years for all years presented.

During 1996, 1997 and 1998, the Company granted 109,200, 59,000, and 242,980
options, respectively, to consultants in exchange for services. The 1996 options
vested immediately and resulted in $837,000 of compensation expense. The 1997
and 1998 options resulted in deferred compensation of $101,000 and $311,000,
respectively, which will be amortized over various vesting periods up to five
years.

During the year ended December 31, 1996 and 1998, the Company granted options to
employees to purchase 366,445 and 663,286 shares of Common Stock at a weighted
average exercise price of $3.21 and $5.15 per share, respectively. These options
have various vesting periods from immediately to up to five years. The Company
recorded $610,000 and $1,246,000 of deferred compensation for 1996 and 1998,
respectively.

Amortization and cancellation of deferred compensation were $327,000 and $-0-,
respectively, for the year ended December 31, 1996, $171,000 and $76,000,
respectively, for the year ended December 31, 1997, and $1,358,000 and $48,000,
respectively, for the year ended December 31, 1998.

8. RELATED PARTY TRANSACTIONS

Two founders of the Company are also General Managers of InStent Israel, Ltd.,
("InStent"), a subsidiary of Medtronic. Medtronic is a principal shareholder of
the Company. There have been no material related party transactions between
InStent and the Company.

During 1994 and 1995, the Company acquired certain technologies for use in its
research and development programs from NMB Medical Applications, Ltd. ("NMB"),
an affiliate of the Company by way of

F-40
<PAGE> 126
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. RELATED PARTY TRANSACTIONS (CONTINUED)
common ownership. As consideration for the technology, the Company paid $327,000
and expensed this amount as the technology had no alternative future use.

Under the terms of a management agreement, which commenced in March 1995, the
Company is obligated to pay a minimum management fee of $7,000 per month to NMB
in lieu of compensation to two of the Company's founders. The Company incurred
management fees in connection with this agreement totaling $224,000 for the year
ended December 31, 1996. As of July 1, 1996, required payments under the formal
management agreement has ceased and the two founders entered into employment
agreements pursuant to which each was to receive an annual salary of $150,000
and certain other fringe benefits. Subsequently, at the founders requests,
payments have continued to NMB to fulfill the Company's obligation under such
employment agreements. The Company incurred fees totaling $371,000 and $183,000
under the employment agreements for the years ended December 31, 1997 and 1998,
respectively. Included in accrued expenses at December 31, 1996, 1997 and 1998
were management fees payable totaling approximately $144,000, $46,000 and $-0-,
respectively.

In April 1996, the Company entered into an agreement with Jessco Medical Supply
("Jessco"), under which the Company pays $2,500 per month for consulting
services. One of the Company's Board members is the owner of Jessco. The Company
paid $23,000, $30,000 and $-0- to Jessco for consulting services for the years
ended December 31, 1996, 1997 and 1998, respectively.

Between June 10, 1996 and November 7, 1996, the Company borrowed $3.0 million
from a stockholder in exchange for promissory notes which bore interest at the
Applicable Federal Rate as defined by the Internal Revenue Code. On December 18,
1996, the Company repaid the notes, plus accrued interest of $59,000.

In March, 1998 the Company reached an agreement in principle with Galil Medical
Ltd., an affiliate of ESC Medical Systems, Ltd ("ESC"), under which the
companies have agreed to form a joint venture to develop technology and product
in the cryo-surgery field. Material terms, including commitments under the
agreement are subject to final negotiation. One of the Company's Board members
is the Chief Executive Officer and Chairman of the Board of ESC.

9. COMMITMENTS AND CONTINGENCIES

The Company occupies most of its facilities under long-term operating leases.
Certain leases contain escalation provisions and renewal options. Future minimum
rental payments under noncancelable operating leases at December 31, 1998 are as
follows:

<TABLE>
<S> <C>
Period ended December 31:
1999............................................. $ 241,000
2000............................................. 458,000
2001............................................. 455,000
2002............................................. 343,000
2003............................................. 152,000
2004 and beyond.................................. 64,000
----------
$1,713,000
==========
</TABLE>

Rent expense totaled approximately $66,000, $145,000 and $322,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.

Israeli labor laws and agreements require IMT to make severance payments to
employees in certain circumstances. Severance accruals are recorded in the
consolidated balance sheets and funded by the

F-41
<PAGE> 127
INFLUENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
purchase of managers' insurance policies with insurance companies and by
deposits made with a recognized severance fund. The severance liability was
$193,000 at December 31, 1997 and $85,000 at December 31, 1998.

The Company is involved in a patent infringement suit filed in the Northern
District of California. The Company denies the allegations brought against it,
plans to vigorously defend its case and has filed related counterclaims.

The Company has entered into an employment agreement with one of its officers
which expires in May 1999. The agreement provides for a minimum annual salary
level of $150,000, as well as for incentive bonuses which are payable upon
attainment of certain performance criteria established from time to time by the
Board of Directors.

The Company is subject to various legal proceedings and other matters which
arise in the ordinary course of business. In the opinion of management, the
amount of any ultimate liability with respect to these matters will not
materially affect the results of operations or financial position of the
Company.

In March 1998, the Company entered into a Technology Development and License
Agreement with The Titan Corporation ("Titan") and TomoTherapeutics, Inc.
("TTI"), a subsidiary of Titan (the "TTI Agreement"). Under the terms of the TTI
Agreement, the Company was granted a license to certain patented technology,
agreed to purchase certain tangible assets from TTI and to work initially with
TTI, and subsequently on its own, to develop and market products based on the
licensed technology. Upon completion of certain performance milestones by the
Company, the Company will issue up to 35,714 shares of its Common Stock to TTI.
In the event the Company realizes any revenues resulting from future products
developed pursuant to the TTI Agreement, the Company is obligated to pay the
greater of $200,000 or a royalty of 8% on such revenues until the Company has
paid cumulative royalties of $2.0 million. Thereafter, the Company is obligated
to pay TTI a royalty of 5% on revenues resulting from future products developed
pursuant to the TTI Agreement. Payments under this agreement were $33,000 in
1998.

10. SUBSEQUENT EVENTS

On November 12, 1999, the Company entered into an Agreement and Plan of Merger
(the "Agreement") under which the Company's Common Stock and Preferred Stock
issued and outstanding immediately prior to closing will be purchased for the
agreed-upon merger consideration as defined in the Agreement.

On November 12, 1999, the Company and JJDC agreed to terminate the distribution
agreement between the Company and Indigo and convert the JJDC note into 674,082
shares of the Company's Common Stock.

F-42
<PAGE> 128

INSIDE BACK COVER

<TABLE>
<S> <C> <C>
AMS 700(TM) PENILE PROSTHESIS [Diagram of related anatomy]
[Picture of AMS 700
Penile Prosthesis] Penile implants are used to
treat erectile dysfunction.
We offer a full line of
implants to serve a variety
of patient and physician
needs.

UROLUME(R) ENDOPROSTHESIS [Diagram of related anatomy]
[Picture of Urolume]
Stents are used to treat
strictures and BPH in men.

INJECTX(TM) SYSTEM [Diagram of related anatomy]
[Picture of InjecTx probe]
Injection of ethanol into the
prostate is a
development-stage product for
treatment of BPH.
</TABLE>
<PAGE> 129

6,250,000 SHARES
AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
COMMON STOCK

[AMERICAN MEDICAL SYSTEMS HOLDINGS LOGO]

---------------------------
PROSPECTUS
---------------------------

Until September 4, 2000, all dealers that effect transactions in these
securities, whether or not participating in the offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

U.S. BANCORP PIPER JAFFRAY
BANC OF AMERICA SECURITIES LLC
CHASE H&Q

AUGUST 10, 2000