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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

or

For the transition period from ______ to ______

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

952-930-6000

          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

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes  [  ] No

          As of August 1, 2003, there were 32,940,739 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)

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)

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

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

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

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

1. Basis of Presentation

The consolidated financial statements included in this Form 10-Q have been prepared by American Medical Systems Holdings Inc., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The consolidated financial statements include the accounts of the company and its subsidiaries, and all significant inter-company accounts and transactions are eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These unaudited consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in its Annual Report on Form 10-K for 2002. All amounts are in thousands, except per share data.

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

2. Stock-Based Compensation

The Company has one stock-based employee compensation plan. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The exercise price of the Company’s employee stock options generally equals the market price of the underlying stock on the date of grant for all options granted, and thus, under APB 25, no compensation expense is recognized. However, during 2000, the Company recognized deferred compensation of $1.4 million, reflecting the excess of the fair value of the underlying stock on the date of grant over the exercise price. The deferred compensation is being amortized over vesting periods of two to four years.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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3. Earnings per Share

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

4. Inventories

Inventories consist of the following:

5. Warranties

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

Many of the Company’s products are sold with warranty coverage for periods ranging from one year up to the patient’s lifetime. Replacement product is covered under the terms of the warranty agreement. The amount of the accrued warranty allowance is the estimate of the expected future cost of honoring warranty obligations. Factors influencing this estimate include historical claim rates, changes in product performance, the frequency of use by the patient, and the patient’s performance expectations, surgical infection rates and product reliability are functions of raw material properties, manufacturing processes, and surgical technique. Beginning and ending balances, and other changes in warranty allowances during the six months through June 2003 were as follows:

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6. Acquisitions

CryoGen

On December 30, 2003, the Company completed a merger with CryoGen, Inc. under which CryoGen became a wholly-owned subsidiary of the Company. In conjunction with the merger, the Company paid the former shareholders of CryoGen $36.2 million and paid $3.8 million in acquisition-related costs of the sellers. In addition to the initial consideration for the CryoGen acquisition, CryoGen’s former shareholders may receive an earnout payment equal to three times sales of CryoGen’s products during any four consecutive company fiscal quarters ending three years after closing, less $40 million. If net product revenues attributable to sales of CryoGen’s products during any such four-quarter period do not exceed $13.3 million, no earnout payment will be made. The maximum amount of the earnout payment is $110 million. The primary purpose of the merger was to gain access to CryoGen’s products and technology. The consolidated financial statements of the Company for the three and six-month periods ended June 28, 2003, include the financial results of CryoGen from December 30, 2002, the date the purchase transaction was effective, and which represents the date when the Company effectively took control of CryoGen.

The Company has received a preliminary formal valuation study of this acquisition. Based on this preliminary study, the Company has recorded goodwill of approximately $28.5 million, including approximately $0.9 million in acquisition costs consisting of legal, accounting, and other expenses. The allocation of the purchase price for the acquisition and other purchase accounting adjustments is as follows:

Dura II

On April 7, 2003, the Company acquired the Dura II line of erectile restoration products from Endocare, Inc. The Company paid Endocare $2.2 million for all intellectual property, production equipment, and current Dura II inventory.

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

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7. Comprehensive Income

Comprehensive income for the Company is net income adjusted for changes in value of derivative financial instruments, unrealized gains and losses on marketable securities, and foreign currency translation. Comprehensive income for the six months through June, 2002 and 2003, were:

8. Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 requires companies that control another entity through interests other than voting interests to consolidate the controlled entity. FIN 46 was effective immediately for variable interest entities created, or in which the company obtains an interest, after January 31, 2003. For all variable interest entities created on or before January 31, 2003, the provisions are effective July 31, 2003. The Company is evaluating the impact of this interpretation.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Critical Accounting Policies and Estimates

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Management’s discussion and analysis of financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect (1) the reported amounts of assets, liabilities, revenues, and expenses; and (2) the related disclosure of contingent assets and liabilities. At each balance sheet date, we evaluate our estimates, including but not limited to, those related to accounts receivable and sales return obligations, inventories, long-lived assets, warranty, legal contingencies, and income taxes. The critical accounting policies that are most important in fully understanding and evaluating the financial condition and results of operations are discussed in our most recent Annual Report on Form 10-K on file with the SEC.

RESULTS OF OPERATIONS

Overview

We manufacture and market a broad range of proprietary products for erectile restoration; other men’s health, including products for incontinence, stricture, and prostate disease; and women’s health, including products for incontinence, menorrhagia, and other pelvic floor disorders. Our product development and acquisition strategy has focused on expanding our product offering and on adding less-invasive medical devices for surgeons and their patients. We estimate that nearly 18 million men and women are potential candidates for treatment with our products, although only a very small share of them ever seek treatment.

Results of Operations

The following is a discussion of the results of our operations and financial condition for the second fiscal quarter and first six months of 2003 compared to the second fiscal quarter and first six months of 2002. On August 11, we announced our decision to move the work currently done at our San Diego facility to our Minnetonka facility. Continued growth of this business will depend on our ability to retain key employees, move manufacturing, product development and service, and other critical functions, and our ability to obtain appropriate FDA and other regulatory approvals to carry on manufacturing and related activities in Minnetonka. We expect this move will increase our operating costs during the transition period, and will reduce operating costs thereafter.

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

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

Approximately $1.1 million of the increase during the three months ended June 2003 and $2.0 million of the increase in the six months ended June 2003 was due to changes in currency exchange rates, mainly the Euro. If these currency exchange rates in 2003 were the same as in 2002, and we had not otherwise raised prices, total sales in the second quarter of 2003 would have been $41.1 million, an increase of $4.8 million, or 13.2 percent, and total sales for the six months through June 2003 would have been $79.6 million, an increase of $8.5 million, or 12.0 percent.

Erectile restoration sales in the three and six-month periods ended June 2003 were up slightly due to price and mix changes. The increases in sales of male urinary control products were due to a combination of unit increases, especially in the InVance sling system, and favorable currency exchange rates on sales of products in Europe. The decline in sales of other men’s health products were due to lower demand for our urethral stents for BPH. The increases in sales of women’s health products were primarily due to greater unit sales, primarily SPARC and Monarc, and to a lesser extent, sales of Her Option products. Sales of Her Option products (used to cure excessive uterine bleeding) were approximately $1.0 million and $1.8 million, net of allowance for returns, in the three and six-month periods ended June 2003.

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