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

FORM 10-Q

[X]

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

For the quarterly period ended           September 28, 2002          

or

[  ]

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

For the transition period from _______________ to _______________

Commission File Number:           30733          

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [  ] No

     As of October 14, 2002, there were 32,413,814 shares of the registrant’s $.01 par value Common Stock outstanding.

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INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

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

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

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

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

1. Basis of Presentation

The consolidated financial statements included in this Form 10-Q have been prepared by American Medical Systems Holdings, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These unaudited consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in its Annual Report on Form 10-K for 2001.

These statements reflect, in management’s opinion, all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. The results of operations for any interim period may not be indicative of results for the full year.

Certain 2001 amounts have been reclassified to conform to 2002 presentation. More specifically, foreign currency exchange gains and losses have been reclassified from “General and administrative” costs to “Other income (expense)” below “Operating income”. The exchange gains and losses are the result of the weakening and strengthening of foreign currencies, mainly the Euro, against the US dollar and relate to translating foreign denominated inter-company receivables to current rates. The following table presents the quarterly exchange gains (losses) by quarter for 2001 and 2002.

2. Inventories

Inventories consist of the following (in thousands):

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3. Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, which requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company has not been involved in a business combination since then.

In June 2001, the Financial Standards Board also issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are not amortized, but tested for impairment annually, or whenever there is an impairment indicator. In addition, upon adoption of SFAS No. 142, all goodwill is assigned to reporting units for purposes of impairment testing and is no longer subject to amortization. Intangible assets that are not deemed to have an indefinite life continue to be amortized over their estimated useful lives. The Company adopted SFAS No. 142 as of December 30, 2001, and assessed whether goodwill had been impaired at the date of adoption, determined that it is a single reporting unit, and, that the Company’s fair value exceeded the carrying amount of its goodwill. There was no indication that goodwill was impaired.

The following table presents a reconciliation of net income and earnings per share adjusted for the exclusion of goodwill amortization, net of income taxes:

4. Comprehensive Income

     Comprehensive income for the Company is net income adjusted for changes in value of derivative financial instruments and foreign currency translation. Comprehensive income for the nine months through September 29, 2001, and September 28, 2002, was:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “expect,” “believe,” “anticipate,” or “estimate,” identify such forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially from those expressed in such forward-looking statements. Some of the factors that could cause such material differences are identified in “Certain Important Factors”. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future filings with the SEC.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgements that affect (1) the reported amounts of assets, liabilities, revenues, and expenses and (2) the related disclosure of contingent assets and liabilities. At each balance sheet date, we evaluate our estimates, including but not limited to, those related to accounts receivable, inventories, long-lived assets, warranty and sales return obligations, legal contingencies, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The critical accounting policies that are most important in fully understanding and evaluating our financial condition and results of operations are discussed below.

Allowance for Doubtful Accounts and Other Accounts Receivable Related Valuation Accounts.We maintain an allowance for doubtful accounts, returns, and warranty claims. We rely on subjective judgments and estimates to establish these valuation accounts. If we made different judgements, we could have material variances in the amount and timing of our reported results for any period. In addition, actual results could be different from our current estimates, possibly resulting in increased future charges to earnings.

We maintain an allowance for doubtful accounts for all individual accounts receivable that we believe are unlikely to be collected. For all other accounts receivable, we record an allowance for doubtful accounts based on the age of receivable balances. At September 29, 2002, our allowance for doubtful accounts was $1.1 million compared to $.8 million at December 29, 2001. As a percentage of total accounts receivable, the allowance was 4.2% at September 2002 compared to 3.1% at December 2001.

We maintain an allowance for returns based on historical and current trends in product returns. At September 28, 2002, and December 29, 2001, our allowance for sales returns was $463,000.

We maintain an allowance for estimated warranty claims. The amount of the accrual is based on historical claims by product group and other factors. Claims could be materially different from actual results for a variety of reasons, including a change in our warranty policy, competition or other external forces, manufacturing changes that could impact product quality, or as yet unrecognized defects in products sold. At September 28, 2002, our allowance for estimated future warranty costs was $7.4 million and $7.6 million at December 29, 2001. If future product quality standards or policies are less favorable than current analyses, additional warranty accruals may be required and would reduce reported earnings in the period the revision is made.

Inventory Valuation. In general, we record our inventories at the lower of manufacturing cost or expected market value. Each quarter, we evaluate our inventories for obsolescence and excess quantities.

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This evaluation includes analyses of inventory levels, historical loss trends, expected product lives, sales levels by product and projections of future sales demand. We write off inventories that we consider obsolete. In addition, we maintain an allowance for inventory quantities in excess of forecasted demand. Our inventory allowances were $2.6 million at September 28, 2002 and $2.7 million at December 29, 2001. If future demand or market conditions are less favorable than current estimates, additional inventory adjustments would be required and would adversely affect income in the period the adjustment is made. As a percentage of total inventories, the allowance was 16.3% at September 2002 compared to 15.9% at December 2001.

Legal Liability Accrual. Each quarter, we estimate the uninsured portion of legal representation and settlement costs of possible future product liability. This evaluation consists of reviewing historical claims costs as well as assessing future trends in medical device liability cases. Social and political factors, as well as doctor and medical facility responsibility, make litigation costs hard to predict. Accruals for future litigation costs were $1.4 million on September 28, 2002 compared to $1.5 million at December 29, 2001. If, in the future, we determine this accrual is inadequate, the adjustment would reduce reported income in the period the adjustment is recorded.

Income Taxes. In the preparation of our consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposures and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet.

We have significant amounts of deferred tax assets that we review for recoverability and then value accordingly. We evaluate the realizability of our deferred tax assets on a quarterly basis and assess the need for valuation allowances. These deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income, and the impact of tax planning strategies. We record a valuation allowance to reduce deferred tax assets when we believe we will not realize all or part of our deferred tax assets.

We maintain a valuation allowance of $682,000 to offset tax loss carryforwards created in a foreign jurisdiction, which, if subsequently recognized, would be allocated to goodwill. We did not maintain any other allowances against our net deferred tax assets at September 28, 2002. If we later determine that we would not realize all or part of the deferred tax assets, we would adjust the deferred tax asset valuation allowance and charge the adjustment to income in the period we made the determination.

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Results of Operations

Three and Nine Months Through September 2001 and 2002

Net Sales. The erectile restoration product line includes four types of inflatable and non-inflatable prostheses and smaller amounts of diagnostic equipment. Male urinary control products include all sales of the inflatable urinary sphincter even though a very small share of this product is used in women. Women’s health product line sales include sales of Acticon Neosphincter to control fecal incontinence even though a small percentage of the product is used in males. Prostate treatments include all sales of our Urolume product even though this product is also used to treat urethral strictures.

The following table compares net sales of our product lines between the three and nine month periods of 2001 and 2002.

During the three month period through September 2002, the 8.3% increase in erectile restoration sales was due to a shift to our new InhibiZone antibiotic coated penile implant (released in the U.S. during the second quarter of 2001), and increased selling prices, which more than offset a 3% decline in units. We plan to release InhibiZone to international markets in early 2003. The 18.5% increase in male urinary control sales was due to a combination of unit increases, especially in the InVance male sling system, and price and unit increases on the AMS 800 Artificial Urinary Sphincter. The 43.3% increase in sales of women’s health products was primarily due to increased sales of Sparc, a suprapubic mid-urethral sling system which we released internationally in the second quarter of 2001 and in the U.S. in the third quarter of 2001. The decrease in sales of prostate products was due to lower unit sales of the Urolume product.

During the nine month period through September 2002, the 20.5% increase in erectile restoration sales was primarily due to a shift to our new InhibiZone antibiotic coated penile prothesis and increased unit sales. The 20.1% increase in male urinary control sales was due to a combination of unit increases, especially in the InVance male sling system, and price increases on the AMS 800 Artificial Urinary Sphincter. The 44.0% increase in women’s health sales is attributable to greater unit sales of Sparc. In the nine months through September 2002, the decrease in sales of prostate treatment products was due to lower unit sales of the Urolume product.

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The following table compares our dollar and percentage changes in our Statement of Operations between the three and nine month periods through September 2001 and 2002.

The following table shows our Statement of Operations as a percentage of net sales for the three and nine month periods through September 2001 and 2002.