SECURITIES AND EXCHANGE COMMISSION

Form 10-K

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

10700 Bren Road West
Minnetonka, Minnesota 55343
(Address of Principal Executive Offices, Including Zip Code)

Registrant’s Telephone Number, Including Area Code:

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

     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. Yes x No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes x No o

As of June 27, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common stock of the registrant (based upon the closing price of the voting Common Stock as of that date as reported by The Nasdaq Stock Market and excluding shares beneficially owned by directors, executive officers, and affiliates of AMS) was approximately $370,589,582.

As of March 10, 2004, 33,244,419 shares of Common Stock of the registrant were outstanding.

Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to in this Annual Report) from the registrant’s Proxy Statement for its 2004 Annual Meeting of Stockholders to be held May 6, 2004 (the “2004 Proxy Statement”).

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

FORM 10-K

For the Fiscal Year Ended January 3, 2004

TABLE OF CONTENTS

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FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements not of historical fact may be considered forward-looking statements. Written words such as “may,” “expect,” “believe,” “anticipate,” or “estimate,” or other variations of these or similar words, identify such forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially from those expressed in such forward-looking statements. Important factors known to us that could cause such material differences are identified in this Annual Report on Form 10-K beginning on page 8 and in the “Management Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 15 of this Annual Report on Form 10-K. 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.

PART I

Item 1. Business

Overview

Since its inception in 1972, American Medical Systems has operated as a single business developing, manufacturing, and marketing medical devices to physicians. We manufacture and market a broad and well-established line of proprietary products for erectile restoration; other men’s health needs, including products for incontinence, stricture, and prostate disease; and women’s health needs, including products for incontinence, menorrhagia, prolapse, and other pelvic floor disorders. We estimate these diseases affect approximately 242 million people in the United States and Europe, profoundly diminishing their quality of life and significantly impacting their relationships. 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 believe that nearly 70 million men and women are potential candidates for treatment with our products, although only a few of these ever seek treatment.

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

Markets and Products

In recent years, the number of people seeking treatment for erectile dysfunction, incontinence, prostate disease, menorrhagia, prolapse, or other pelvic disorders has grown with the publicity for new treatments, especially new drug therapies, but the portion seeking treatment remains relatively small. When patients do seek treatment, they generally begin with medical treatment rather than surgical treatment, regardless of the severity of the disease. Only if medical therapy is unsuccessful and the patient persists with seeking a cure is surgery considered.

Sales of our products benefit from some of the same factors which drive sales in many other medical device companies: an aging population with a desire to maintain a non-aging quality of life, the expanding availability of safe and effective treatments, and increasing patient and physician awareness of these treatments.

The diseases we treat are seldom life threatening but can profoundly affect the quality of one’s life. The burden of these diseases increases with age. The incidence of erectile dysfunction and incontinence in men increases with age and with the incidence of prostate surgery, which also grows with age. Female incontinence is linked to pregnancy and childbirth among younger women, but occurs independently as women age. As a result, we believe that as the baby boomer generation moves into their mid- to late-50’s, which is happening during this decade, the growth in the

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need for our products will accelerate. We also believe that this group and those that follow will be less willing to accept the “natural” deterioration of body functions, and their desire to maintain a non-aging quality of life will amplify their increased demand for procedures using our products. Providing an expanding portfolio of treatment options is an important business driver for us. In the last several years we have successfully introduced a series of new products to meet our target physician and patient needs. In 2003, products introduced in the last three years accounted for 47 percent of our consolidated revenue. Our product development and acquisition strategy has focused on expanding our product offering with products and procedures which improve outcomes, reduce operating time and operating trauma, and thereby increase the value of our products to physicians, patients, and payers.

Increasing patient awareness of these new treatments is critical to our continued success. We believe that advertising by pharmaceutical companies and increased private internet access to healthcare information has greatly increased patients’ awareness of treatment options for their medical conditions. For example, erectile dysfunction has become a more widely recognized disease largely due to Pfizer’s extensive advertising campaign for Viagra. We anticipate the combined advertising expenditures for currently available erectile dysfunction drugs will exceed $200 million in 2004. Advertising for incontinence management may reach $100 million in 2004, with campaigns selling absorbent pads and drugs. As these patients seek treatment, we expect many of them will learn about and choose a treatment using one of our products. We facilitate that decision by working closely with physicians who are skilled in procedures using our products, and by sponsoring meetings where their patients can learn more about the benefits of these procedures. While the principal focus of our marketing efforts continues to be with physicians, we have increased our direct-to-consumer programs, primarily through physician practices, and may increase them more in the future.

Building physician awareness continues to be an important element of our marketing strategy. In June 2003, we began extensive training and proctoring for gynecologists and urologists in the United States for our Monarc product — an innovative treatment for women with stress incontinence. From June through December 2003, we trained more than 1,000 U.S. surgeons on the Monarc system. In 2003, physicians successfully performed over 12,000 Monarc procedures around the world, with more than half of those occurring in the fourth quarter, and we expect that this new product will be a growing revenue contributor in 2004. With thirty years experience, we believe we have a very strong franchise with urologists; we are working to build a similarly strong franchise with gynecologists. This gynecologist franchise is critical to our growth because most women who suffer from incontinence and the other diseases our products can treat are more likely to first seek help from a gynecologist or other primary care physician than from a urologist.

The expansion of our product offering, combined with increasing physician and patient awareness, has greatly increased our business opportunities. For example, where only 2 percent of men have symptoms of urinary incontinence by age 45, and 6 percent by age 65, nearly 30 percent of women report some degree of incontinence by age 45 and nearly 50 percent by age 65. This means that while there may be four million men with some degree of incontinence in areas where we have a direct sales force, there are approximately 53 million women with some degree of incontinence. Seventy percent of procedures utilizing our products in 2003 were for women’s health, compared to less than three percent in 1999.

Erectile Restoration

Net sales of these products were $59.2 million, $69.6 million, and $72.4 million in 2001, 2002, and 2003, and were 50.2 percent, 49.1 percent, and 43.0 percent of sales in those years. Erectile dysfunction is the inability to achieve or maintain an erection sufficient for sexual intercourse. It is most often caused by vascular disease, complications from diabetes, or prostate surgery which can damage both nerves and arteries necessary for erectile function. This disease can also be caused by spinal cord injury, and may have a psychogenic component. Erectile dysfunction may affect 94 million men and their partners around the world. The primary treatment for erectile dysfunction is Viagra or a similar-acting drug. If these drugs do not work, the patient may try a vacuum device or a topical or injected drug before considering a penile implant such as those we offer. If the patient elects to have implant surgery, the surgeon replaces the erectile tissues of the penis with a prosthesis which provides sufficient rigidity for sexual intercourse.

We lead the penile implant market with a series of semi-rigid malleable prostheses and a complete range of more naturally functioning inflatable prostheses, including the AMS 700 CX and Ultrex. In 2001, we began offering two

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significant improvements to our AMS 700 inflatable prostheses: (1) a parylene coating on certain internal surfaces of the prosthesis, to reduce friction and increase durability, and (2) our InhibiZone antibiotic surface treatment to help reduce the risk of surgical infections. Physician preference for this new product, which carries a higher price than any of our untreated products, was a major contributor to the growth in erectile restoration sales in 2002 and 2003. In April 2003, we expanded our range of erectile restoration products by purchasing the Dura II line of prostheses from Endocare.

Men’s Bladder Control

Net sales of these products were $30.5 million, $35.3 million, and $39.8 million in 2001, 2002, and 2003, and were 25.9 percent, 24.9 percent, and 23.6 percent of sales in those years. Approximately four million men in the U.S. and Europe suffer from urinary incontinence, the uncontrolled release of urine from the body. In men, this most often results from nerve and sphincter damage during prostate surgery. Male incontinence may be managed with a catheter and leg-bag to collect the urine, or with pads and diapers to absorb the leaks. These measures are not ideal, as they come with recurring replacement product costs and the potential for infection and embarrassing leaks and odor.

Since 1972, when we introduced the Artificial Urinary Sphincter, we have been the world leader with surgical solutions for male incontinence. This fully implanted system includes an inflatable urethral cuff to restrict flow through the urethra, and a control pump which allows the patient to discretely open the cuff when he wishes to urinate. Since 2000, we have also been selling the InVance sling system, which is a less invasive procedure for men with mild to moderate incontinence. This system uses technology which came with our 1999 acquisition of Influence Inc. to support the bulbous urethra and improve urinary control.

Prostate Treatments

Net sales of these products were $7.1 million, $6.1 million, and $4.9 million in 2001, 2002, and 2003, and were 6.0 percent, 4.3 percent and 2.9 percent of sales in those years. Our products can be used to relieve restrictions on the normal flow of urine from the bladder caused by an enlarged prostate, generally the result of benign prostatic hyperplasia (BPH) or urethral strictures. Symptoms of these restrictions include increased urination frequency, sudden urges to urinate, and weak urine flow. Nearly 70 percent of men over age 65 have some indications of BPH, and approximately 31 million of them have symptoms that require treatment. For those who find existing drug treatments unacceptable, the conventional treatment is a transurethral resection of the prostate (TURP). We offer the UroLume endoprosthesis stent as a less invasive procedure for men who may not be good surgical candidates. Newer, less-invasive tissue ablation techniques such as lasers, RF energy needles, and microwave therapy are becoming increasingly available as alternatives to procedures using our products. As a result, we do not expect to reverse the declining revenue trend of recent years unless we acquire a new technology. In 1999, we acquired exclusive worldwide distribution rights for the ProstaJect system to inject ethanol or other medicaments to treat prostate disease. This therapy is currently in U.S. clinical trials and is approved for sale in Europe.

Women’s Health

Net sales of these products were $21.1 million, $30.7 million, and $51.2 million in 2001, 2002, and 2003, and were 17.9 percent, 21.7 percent, and 30.4 percent of sales in those years. Approximately 53 million women in the United States and Europe suffer from urinary or fecal incontinence. These diseases can lead to debilitating medical and social problems, from embarrassment to anxiety and depression. There are three types of urinary incontinence: stress, urge, and mixed. Pads and diapers are often used to contain and absorb leaks, and may be acceptable for controlling mild incontinence; new drugs may be shown to be effective, especially for urge incontinence. Our products treat stress incontinence, which generally results from a weakening of the tissue surrounding the bladder, urethra, and bladder neck from childbirth and aging. Pregnancy and childbirth trauma may also cause fecal incontinence, pelvic organ prolapse, and other pelvic floor disorders. Incontinence may be relieved through exercise to strengthen pelvic floor muscles, or the injection of collagen or some other bulking agent into the wall of the urethra, bladder neck, or sphincter to narrow the passage. Surgical solutions are generally recommended only if these therapies are not effective. Prolapse and other pelvic floor defects may be repaired with a variety of open, laparoscopic, and transvaginal surgeries.

We offer a broad range of systems to restore continence including the Artificial Urinary Sphincter (outside the U.S.), and the In-Fast, SPARC, Monarc, and BioArc SP sling systems. This broad range allows the surgeon to select the procedure most appropriate to the patient’s symptoms and anatomy. With an In-Fast procedure, which we have

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been selling since acquiring Influence in 1999, the surgeon uses a transvaginal approach to support the urethra and bladder neck with a sling attached to the back of the pubis. During 2002, we introduced the In-Fast Ultra, with a new profile designed to allow better placement of the bone anchors which hold the support material in place. We introduced the SPARC procedure in 2001 as the first complete system to place a self-fixating, mid-urethral sling with a suprapubic approach. During 2002, we launched SPARC II, with several improvements in form and function. Since its introduction, SPARC has been the major sales driver in our products for women’s health. The Monarc procedure was introduced at the end of 2002, and uses unique helical needles to place a self-fixating, sub-fascial hammock through the transobturator foramina. This procedure may be done without disrupting the endopelvic fascia and is especially valuable for women who have scarring from previous abdominal surgery and are not good candidates for a SPARC procedure. In the fourth quarter of 2003, we launched our fourth female incontinence offering, the BioArc SP sling system, in the United States. The BioArc SP sling is the only system available that offers physicians the choice of a biological graft material attached to a self-fixating synthetic sling. The new BioArc SP system employs the same suprapubic approach of the SPARC system, which has been used in more than 70,000 procedures since we introduced it in 2001, and we expect it will fill a niche for physicians who would prefer not to use traditional sling material around the urethra.

The Acticon neosphincter, an extension of our urinary control technology, is used to cure severe fecal incontinence. We also offer InteGraft pelvic reconstructive materials and a growing number of surgical tools to repair bladder and other pelvic organ prolapse.

Approximately 28 million women in the United States and Europe suffer from excessive uterine bleeding, or menorrhagia. Menorrhagia is socially debilitating and causes anemia. Drug therapies are effective for some women, but many end up with a hysterectomy. We estimate that as many as 150,000 (25 percent of all hysterectomies) in the United States each year are the result of menorrhagia. Other procedures which have some efficacy include dilation and curettage to remove the endometrial tissue from the uterus, and several new techniques to destroy the endometrium with heat or cold. On December 30, 2002, two days after the close of our 2002 fiscal year, we acquired CryoGen Inc. and its Her Option cryoablation therapy. This system uses a microprocessor-controlled probe to eliminate excessive menstrual bleeding by freezing the lining of the uterus and reducing its ability to regenerate. The procedure can be performed in the gynecologist’s office, allowing the patient to keep her uterus and normal hormonal levels, and avoids the hospital stay and recovery time associated with a hysterectomy. We believe that Her Option offers significant advantages over other therapies to the patient, her physician, and the healthcare system. These other therapies are, however, supported by more marketing resources and have a greater installed base of experienced users than CryoGen has. Further, this is our most significant venture into products used primarily by gynecologists rather than urologists. Our success with this product will depend on, among other things, our ability to quickly understand the needs of gynecologists and build a marketing and sales organization to address those needs, and our ability to obtain adequate reimbursement for physicians performing this procedure in their office. On March 2, 2004, the American Medical Association notified us that it had approved a Category I Current Procedure Terminology code for an endometrial cryoablation procedure using Her Option. This code is used by physicians and payers to describe medical procedures, without which reimbursement decisions are difficult, if not impossible. We expect the code to be published in the fall of 2004 and be effective in January 2005. According to the letter from the AMA, the code will apply to Her Option procedures done in a hospital, ambulatory surgical center, or physician’s office.

Selling and Marketing

We sell our products in the United States, Canada, Australia, and most European countries through direct field representatives. We have 114 employees in our U.S. sales force and 54 employees in our international sales force. We have 46 independent distributors who represent our products in other countries and account for less than five percent of our world-wide sales. No single customer or group of customers accounts for more than five percent of our total sales. Local market conditions, including the regulatory and competitive situation, determine the type of products we sell in each market.

Our marketing people are responsible for understanding patient and physician needs, guiding new product development, and increasing the awareness, understanding, and preference for our products among physicians and patients.

In pricing our products we consider our costs of developing, manufacturing, and distributing the products—including the cost of regulatory compliance and physician training—and the value they bring to the patient and the health care system. For erectile restoration, as an example, we offer a range of products which sell to U.S. hospitals

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at prices ranging from $6,100 for an inflatable system which, when implanted, is practically indistinguishable from the dysfunctional tissue it replaces, to $2,700 for a much simpler prosthesis which creates a somewhat less natural rigidity. Products for women’s bladder control are similar to each other in cost and value, and range from $800 to $1,000, plus, in many instances, the cost of the sling material. Systems for men’s bladder control are much more complicated and costly than those for women, and sell for prices ranging from $2,000 to $6,300.

Manufacturing and Supply

We use approximately 80,000 square feet of our facility in Minnetonka for manufacturing, warehousing, and distribution of our products. We maintain warehouses to support local distribution in countries outside the U.S. where we have direct sales representation.

Although many of the materials we purchase for our products are available from multiple sources, some materials are only supplied by a limited number of vendors.

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 appropriate FDA and ISO requirements.

Research and Development

We are committed to developing new products and improving our current products to provide physicians with better clinical outcomes through less invasive and more efficient products and procedures. Most of our research and development activities are carried out in our Minnetonka facility, although we work with physicians, research hospitals, and universities around the world. None of this work is funded by customers or other outside institutions. Many of the ideas for new and improved products come from a global network of leading physicians, who also work with us in evaluating new concepts and in conducting clinical trials to gain regulatory approvals. The development process for any new product can range from several months to several years, primarily depending on the regulatory pathway required for approval.

In 2003, we increased our spending on new product development activities, including clinical and regulatory work, by 26 percent, from $11.9 million in 2002 (8.4 percent of sales) to $14.9 million in 2003 (8.9 percent of sales). We spent $11.9 million on research and development activities in 2001. Within this area, we increased our investment in research and product design work by 51 percent. For 2004, we are planning on further increases, spending between 8 and 10 percent of sales on new product development.

We plan to introduce several new products during 2004, none of which will require the investment of a material amount of our assets. These new products are all expansions of our existing product and physician franchise, including delivery-system improvements to our InVance male sling product; the BioArc TO, an extension of the BioArc SP we launched for female incontinence in 2003 using the transobturator approach to place a sub-fascial hammock rather than the supra-pubic approach to place a sling; and a more easily activated pump for our inflatable prostheses, and new products for prolapse repair.

Competition

Competition in the medical device industry is intense and characterized by extensive research efforts and rapid technological progress. The primary competitive factors include clinical outcomes, distribution capabilities, and price relative to (1) competitive technologies and (2) reimbursements to physicians and hospitals for their services. Many of our competitors have greater resources to develop and market products, broader distribution resources, and potentially higher economies of scale than we do. Our competitive capability depends on our ability to develop new products and innovative procedures, obtain regulatory clearance and ensure regulatory compliance for our products, assist our customers in obtaining reimbursement, protect the proprietary technology of our products and manufacturing process, and maintain and develop preference for our products among physicians and patients. All of these abilities require recruiting, retaining, and developing skilled and dedicated employees, and maintaining and developing excellent relationships with physicians and suppliers.

Our principal competitor in the erectile restoration market is Mentor Corporation. We have no significant competitor in the market for male bladder control systems. Principal competitors for our prostate products include drug

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manufacturers and other minimally-invasive treatment suppliers such as Johnson & Johnson, Laserscope, Medtronic, Thermatrx, and Urologix. Our principal competitors for women’s health products include, for treating menorrhagia, Boston Scientific, Johnson & Johnson, and Novacept; and, for other products, Boston Scientific, C.R. Bard, Johnson & Johnson, and Mentor.

Intellectual Property

We rely on intellectual property including patents, trade secrets, technical innovations, and various licensing agreements to protect and build our competitive position. We have 113 issued U.S. patents, nearly half of them issued in the last four years, and numerous international patents covering various aspects of our technology. We also have U.S. and international patent applications pending. We review third party products and patents to protect our rights and to avoid infringing the legitimate rights of others.

We file patent applications to protect technology, inventions, and improvements that we consider important, but we cannot be sure our applications will be granted, or that, if granted, the patents will provide competitive advantages for our products, or that our competitors will not challenge or circumvent these patent rights. Costs to defend our patents or to protect our activities from the patent claims of others could be substantial, even if we were ultimately successful in defending the claim. We do not believe that any of our products infringe any valid claims of patents or other proprietary rights held by third parties. We are currently involved in an intellectual property lawsuit with Mentor Corporation which is described under “Item 3 Legal Proceedings”.

Government Regulation

Numerous governmental authorities, principally the FDA and comparable foreign regulatory agencies, regulate the development, testing, manufacturing, labeling, marketing, and distribution of our products. In Europe and certain other countries, we comply with the European Union Directives for Medical Devices and certify our compliance with the CE Mark. In other countries outside the United States, we ensure appropriate registration and authorization. In the U.S., our products fall into FDA Classes I, II, and III depending on the indications for use and the risk they pose to the patient. Class I includes devices with the lowest risk and Class III includes those with the greatest risk.

The class to which our products are assigned determines the type of pre-marketing application required for FDA clearance. If the product is classified as Class I or II, and if it is not exempt, a 510(k) will be required for marketing. It generally takes several months from the date of most 510(k) submissions to obtain clearance, and it may take longer, particularly if a clinical trial is required. For Class III devices, a pre-market approval application (PMA) is generally required. Some of our products may require approval of a New Drug Application, or NDA. The PMA and NDA processes can be expensive, uncertain, require detailed and comprehensive data, and generally take significantly longer than the 510(k) process.

If human clinical trials of a device are required, either for a 510(k) submission or a PMA, the sponsor of the trial, usually the manufacturer or the distributor of the device, must file an investigational device exemption (IDE) application prior to commencing human clinical trials. The FDA may not approve the IDE and, even if it is approved, the FDA may not accept that the data derived from the studies supports the safety and efficacy of the device or warrants the continuation of clinical trials. The same caveat applies to investigational new drug (IND) studies that support an NDA.

Our core implantable products have been approved through the PMA or Product Development Protocol (PDP) application process. Most of our other products, including our new products for women’s incontinence were approved through the 510(k) pre-market notification process. We have conducted clinical trials to support our PMA or PDP regulatory approvals.

The FDA and international regulatory authorities also periodically inspect our operations to assure themselves of our compliance with applicable quality system regulations. We must comply with a host of regulatory requirements that apply to medical devices and human tissue products marketed in the United States and internationally. If we fail to comply with these regulatory requirements, which are subject to change, our business, financial condition, and results of operations could be significantly harmed.

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 and female pelvic support. NOTA prohibits the purchase and

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sale of human organs, including related tissue, for valuable consideration, but it does not prohibit the payment of reasonable expenses associated with the removal, transportation, processing, preservation, quality control, implantation and storage of human tissue. NOTA enables the federal government to impose civil and criminal penalties on those found to have violated this federal statute.

The FDA has proposed a more comprehensive regulatory framework that builds upon and supersedes the existing regulations for human tissue-based products. Implementation of this proposed regulatory approach may lead to medical device submissions for some of the tissue products we provide with our sling kits.

Third-Party Reimbursement

Most of our products are purchased by hospitals which are reimbursed for their services by third-party payers including Medicare, Medicaid, comparable foreign agencies, private health care insurance, and managed care plans. The reimbursement environment facing our customers varies widely, as do our customers’ systems for dealing with such variation. We support the efforts of our customers to obtain appropriate reimbursement by providing them with the information necessary to align the utilization of our products with procedures for which reimbursement is established and through ongoing efforts to aid payers in informal decision making. We believe our support of customer reimbursement efforts is critical to the ongoing acceptance and success of our products.

Many third-party payers (including Medicare, Medicaid, and other large, influential payers) are seeking to reduce their costs by denying coverage for certain procedures, including new procedures for which efficacy has not yet been well established, or reimbursing at rates which do not cover the full cost of procedures. These activities may be particularly detrimental to AMS because our products treat quality-of-life conditions rather than life-threatening conditions, and because we are developing new products for new procedures. These new products and procedures may not find market acceptance because of delays in third-party payer acceptance of the medical value of the new procedures. The reimbursement rates for several procedures that use our products have fluctuated over the last few years, and it is likely that these fluctuations will continue.

We are not able to determine what effect, if any, Medicare reimbursement changes have on our revenues. We believe the average age of patients receiving our products is less than 60 years old and, therefore, a significant portion of our revenues are not directly affected by Medicare reimbursement trends. Further, the amount that hospitals pay medical device suppliers is not always tied directly to Medicare reimbursement rates. Hospitals may consider the total volume generated by a particular surgical specialty or practice and compensate suppliers at rates higher than Medicare reimbursement rates for particular procedures to maintain volumes on other procedures performed by that specialty. Finally, Medicare reimbursement rates are affected by regional variations and, for inpatient procedures, by disease severity factors, making the correlation between national reimbursement rate adjustments and our sales and pricing less than clear. For example, from 2001 to 2002 Medicare reimbursement for hospital-based outpatient surgical procedures using our inflatable penile prostheses for erectile restoration, including the “pass-through” payment for our device, decreased approximately 32 percent, and U.S. sales of products used in these surgeries increased 18 percent. From 2002 to 2003, reimbursement declined another 9 percent, and our sales increased less than 1 percent. For 2004, reimbursement for these procedures, including the payment for our device, will increase 27 percent over 2003. Ultimately, we cannot predict the frequency or severity of future reimbursement reductions, and such future reductions, if they occur, could have a material, adverse effect on our revenue growth rates and profitability.

Employees

We employ 587 people in the following areas: 156 in manufacturing, 254 in sales and marketing, 81 in administration, 49 in regulatory, clinical and quality assurance, and 47 in research and development. We do not have any active organized labor unions. We believe we have an excellent relationship with our employees.

Financial Information about Geographic Areas

Approximately 18.7 percent of our 2003 consolidated revenues are from sales to customers outside of the United States.

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Item 1A. Risk Factors

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

Supplier Risks

Many of our products are dependent on raw materials from one or two suppliers who may not be able to meet our demands or who may decide to stop supplying us because of their concerns about product liability claims or other reasons. Losing any of these raw material suppliers could have a material adverse effect on our sales and income. As a result of recent supplier consolidations, we now rely on only one source for the silicone elastomer used in some of our implantable products; the loss of this supplier would have a material adverse effect on our cost of goods sold and income, as we would be required to qualify an additional supplier. We procure human cadaveric dermis through two processors, and we have one supplier of porcine dermis.

Potential Product Recalls

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

Continued Physician Use and Endorsement of our Products

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

Successful Introduction of New Products and Product Improvements

As part of our growth strategy, we intend to introduce a number of new products and product improvements. If we do not introduce these new products and product improvements on schedule, or they are not well-accepted by the market, our growth will suffer.

Continued Use of Non-Invasive Treatment Alternatives

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

Actions Related to Reimbursement for Procedures Using our Products

Some portions of our revenues depend on U.S. and non-U.S. government health care programs and private health insurers reimbursing patients’ medical expenses. Physicians, hospitals, and other health care providers might not purchase our products if they do not receive satisfactory reimbursement from these third-party payers for the cost of procedures using our products. For example, effective January 1, 2003, the Centers for Medicare and Medicaid Ser-

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

As previously noted, the American Medical Association has announced it will be issuing a Category I CPT code for cryoablation using Her Option. This decision starts a process of updating the AMA’s Resource-Based Relative Value Scale (RBRVS), which will be referenced by health care payers in determining payments for the procedure. We expect the RBRVS update will be published in late 2004 and become effective in January 2005. We can offer no assurances that a new code for Her Option procedures will be in place by January 2005 or that the reimbursement will adequately cover the costs of performing the procedure. If reimbursement for the Her Option procedure were not adequate to cover the full cost of performing the procedure, our sales and earnings would be below expectations.

Intellectual Property Lawsuits

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 an intellectual property lawsuit with Mentor Corporation relating to our Monarc sub-fascial hammock for the treatment of female incontinence. See “Item 3 Legal Proceedings” for more specific information regarding this lawsuit. If Mentor were to succeed in this lawsuit, the court could require us to pay significant damages to Mentor, prevent us from selling our Monarc sub-fascial hammock for the treatment of female incontinence, or both. 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 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.

Product Liability Lawsuits

The manufacture and sale of medical devices exposes us to significant risk of product liability claims. In the past, we have had a number of product liability claims relating to our products. In the future, we may be subject to additional product liability claims, some of which may have a negative impact on our business. If a product liability claim or series of claims is brought against us for uninsured liabilities or for amounts in excess of our insurance coverage, our business could suffer. We are not currently involved in any material product liability litigation.

Costs of Physician Malpractice Insurance

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

Acquisition Integration

On December 30, 2002, we acquired CryoGen, Inc. which we initially maintained as a San Diego-based subsidiary. In August 2003, we announced our decision to combine our San Diego operations into our Minnetonka facility,

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where we expect to obtain FDA approval for manufacturing and product service. Failure to obtain this approval in a timely manner could have a material adverse impact on our business.

International Sales

In 2003, approximately 19 percent of our sales were to customers outside the United States. Some of these sales were to governmental entities and other organizations with extended payment terms. A number of factors including political or economic instability in the countries where we do business could affect payment terms and our ability to collect foreign receivables. We have little influence over these factors and changes could have a material adverse impact on our business.

Manufacturing Facility

We are currently operating with one manufacturing shift and have adequate physical capacity to serve our business operations for the foreseeable future. We do not have a back up facility, and the loss of our Minnetonka facility would have a material adverse effect on our sales, earnings, and financial condition.

Item 2. Properties

Our corporate headquarters, main warehouse, and manufacturing operations are located in a 180,000 square foot building we own in Minnetonka, Minnesota. We believe we have sufficient capacity to meet production requirements for our products for the foreseeable future.

We lease office space for our international operations in Australia, Canada, France, Germany, the Netherlands, Spain and the United Kingdom.

Item 3. Legal Proceedings

We have been and are also currently subject to various legal proceedings and other matters which arise in the ordinary course of business, including product liability claims.

In October 2003, we filed a suit against Mentor Corporation seeking a declaratory judgment that we do not infringe any valid claim of U.S. Patent No. 6,638,211, which is owned by Mentor, that the claims of the ‘211 patent are invalid and unenforceable against us, and enjoining Mentor from making charges that we infringe the ‘211 patent. In February 2004, Mentor filed suit in U.S. District Court for the District of Minnesota against us, alleging that we were inducing infringement and contributing to the infringement of the ‘211 patent by selling our Monarc sub-fascial hammock in the United States. Mentor is seeking a declaratory judgment that we have infringed the ‘211 patent and enjoining us from infringing the ‘211 patent, and damages to compensate Mentor for our alleged infringement, as well as trebling of damages by reason of willful infringement. We believe that Mentor’s complaint is without merit and intend to vigorously prosecute our complaint and defend against Mentor’s complaint. We do not expect this lawsuit to have a material affect on our sales, earnings, or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

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Item 4A. Executive Officers of the Registrant

Our executive officers, with their ages and biographical information are as follows:

Douglas W. Kohrs has served as our Chief Executive Officer and one of our directors since 1999. From 1999 to 2004, he was also our President. In March 2004, he became Chairman of our Board of Directors. Mr. Kohrs has 21 years of experience in the medical device industry. He 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, and was Vice President of Research and Development and Vice President of Marketing. He was general manager of Sulzer Spine-Tech Inc. from 1998 to 1999. Mr. Kohrs currently serves as a director of Disc Dynamics Inc., SpineCore Inc., and Pioneer Surgical Technologies, all of which are privately-held companies, and Kyphon, Inc., which is a publicly-held company engaged in orthopedic medical devices.

M. James Call has served as our Executive Vice President, Strategic Planning and Development since March 2004. Since July 2001 he has also served as our Chief Financial Officer and Secretary, and he will continue to serve as our Chief Financial Officer until March 22, 2004. From 1995 through 2001, Mr. Call was Chief Financial Officer of Interventional Technologies Inc., a private company acquired by Boston Scientific Corporation in 2001.

Janet L. Dick has served as our Vice President, Human Resources since 1996. Overall, Ms. Dick has spent almost 19 years in positions of increasing responsibility within our human resources department and Schneider (USA)’s human resources department, both of which were divisions of Pfizer at the time. Her prior human resources career was in banking, commercial construction, and mortgage banking.

Carmen L. Diersen joined us as an Executive Vice President in March 2004. She will assume the office of Chief Financial Officer on March 22, 2004. From 1992 to 2004, she held positions of increasing domestic and international responsibility in finance, business development, and general management at Medtronic Inc. Most recently, Ms. Diersen was Vice President, Business Development. From March 2002 through 2003, she was Vice President, General Manager, Musculoskeletal Tissue Services; and from February 1999 through March 2002, she was Vice President of Finance and Administration and Vice President of Business Development, Americas and Asia Pacific. From 1982 to 1992, she held positions of increasing responsibility at Honeywell Inc.

Martin J. Emerson has served as our President since March 2004. From January 2003 to March 2004 he served as our Executive Vice President, Global Sales and Marketing, and Chief Operating Officer. From 2000 through 2002, he served as Vice President and General Manager of International. Mr. Emerson has 18 years experience in the medical device field in finance and general management capacities. From 1998 to 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 1997 to 1998. Mr. Emerson’s earlier experience was with Baxter International from 1985 to 1997, most recently as Vice President Finance, Hospital Business, Brussels, from 1995 to 1997.

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Richard J. Faleschini has served as our Vice President and General Manager, since January 2003. From November 1999 through December 2002, he served as our Vice President, Sales and Marketing. Mr. Faleschini has over 24 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.

Lawrence W. Getlin, J.D., has served as our Vice President, Regulatory, Medical Affairs, and Quality Systems and Compliance since 1990. He is a member of the American Bar Association and 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. Mr. Getlin currently serves as AMS’ representative on the board of directors of InjecTx Inc., a privately held company that supplies us with our ProstaJect ethanol injection systems.

Ross A. Longhini has served as our Executive Vice President and Chief Technology Officer since January 2003. Mr. Longhini has 21 years of experience in the field of medical device product development. From 1998 to 2002, he served in various management positions in Sulzer Spine-Tech of Minnesota including Vice President, Research and Development, Clinical & Regulatory. From 1991 to 1998, he worked at I.V. Infusion Therapy of 3M which was sold to Gaseby in 1996 then purchased by Smiths Medical Systems in 1997. From 1983 to 1991, he worked at 3M Dental Products.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

The following table sets forth, for the periods indicated, the high and low closing sales prices per share of our common stock as reported on the Nasdaq National Market. These prices do not include adjustments for retail mark-ups, mark-downs, or commissions.

Holders

On March 1, 2004, there were approximately 123 shareholders of record and 2,400 beneficial stockholders.

Dividends

We have never declared or paid cash dividends. We 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. In addition, our current senior credit facility prohibits us from paying any cash dividends without our lenders’ consent.

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Securities Authorized for Issuance Under Equity Compensation Plans

The information in the “Compensation and Other Benefits—Securities Authorized for Issuance Under Equity Compensation Plans” section of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

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ITEM 6. Selected Financial Data

The following tables present five years of data (in thousands) from our statement of operations and balance sheet.

(1)

In connection with the Company’s acquisition from Pfizer, Inc., inventories were recorded at fair market value on the date of acquisition. This accounting treatment required a $21.8 million write-up of inventories above costs. We charged this write-up to cost of goods sold over the following six months as the acquired inventory was sold. We charged cost of goods sold $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 fourth quarters of 2002 and 2003, we reduced our warranty allowance by $2.9 million and $3.1 million and reduced our cost of goods sold and increased our operating income by the same amounts.

(2)

During the third quarter of 2003, the Company applied for and recognized U.S. tax benefits related to Research and Development and Extraterritorial Income Exclusion tax credits for the years 1999 through 2002, resulting in a $1.1 million reduction in 2003 tax expense.

(3)

No net income per share is presented during fiscal year 1999 because no shares of common stock were outstanding.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introductory Overview

American Medical Systems develops and delivers innovative medical solutions to our target patients and physicians. Since becoming an independent company in 1998, we have worked to build a business that delivers consistent revenue and earnings growth, fueled by a robust pipeline of innovative products for significant, under-penetrated markets of patients and their physicians. We have greatly broadened our product line, building on our traditional base of products for erectile restoration and products for men’s incontinence, stricture, and prostate disease which are used by urologists, to products for women’s incontinence used by urologists and gynecologists, and, in 2003, products for menorrhagia and other pelvic disorders used by gynecologists.

Results of Operations

Sales trends

The following table compares net sales (in thousands) of our product lines between 2001 and 2002, and between 2002 and 2003.

Men’s health products. During 2002, revenue from erectile restoration products increased due to a continued shift to the InhibiZone antibiotic coated penile implant introduced in 2001, which carries a higher selling price than the non-coated AMS 700 product to recover the cost of its drug-eluting benefit. Erectile restoration unit volume declined by 2.5 percent during 2002. The 2003 increase in erectile restoration sales reflects a continued shift to our InhibiZone implants, which represent 55 percent of our total erectile restoration volume, up from 43 percent in 2002. The increase also reflects higher sales of our non-inflatable implants, including the recently acquired Dura II product line. These increases were partially offset by lower unit volume on our Ambicor and non-coated AMS 700 products resulting from our customer’s preference for the InhibiZone product. Overall unit volume increased approximately 1 percent from 2002 to 2003.

The 2002 increase in male bladder control sales was due to a combination of unit and price increases. Approximately one half of the 2003 increase in male bladder control revenues was due to price increases on both the AMS

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800 Artificial Urinary Sphincter and the InVance male sling system, with the remaining increase from higher volumes on both products. Price and volume increases in both products resulted from product and procedure improvement.

Prostate treatment sales continue to decline with unit volume of our UroLume product, particularly in the U.S., as customers continue to prefer newer BPH treatments.

Women’s health products. Revenue growth from women’s health products was 45.8 percent in 2002 and 66.7 percent in 2003 with the market introduction and physician acceptance of our SPARC and Monarc sling systems for female stress urinary incontinence, partially offset by a decrease in InFast unit sales as customers shifted over to our SPARC product. We believe that the less invasive nature of our sling procedures and the unprecedented number of surgical options we now have available for treating incontinence are encouraging more and more physicians to recommend our treatments.

International sales and foreign exchange effects. During 2003, revenues increased $3.9 million as a result of favorable currency exchange rates, mainly the Euro. If currency exchange rates in 2003 were the same as in 2002, total 2003 sales would have been $164.4 million, an increase of $22.7 million, or 16.0 percent. Because a large share of our expenses associated with European sales are Euro-denominated costs, changes in these currency rates do not affect net income and cash flows from operations by the same dollar amount as they affect sales revenues. The following table shows sales by customer location (in thousands).

Operating Expenses

The following table compares the dollar (in thousands) and percentage change in the Statement of Operations between 2001 and 2002 and between 2002 and 2003.

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The following table shows the Statement of Operations as a percentage of net sales for 2001, 2002, and 2003.

Cost of goods sold. During 2002, and continuing into 2003, we experienced a significant decrease in warranty claims. With further investigation, we concluded that these decreases were primarily the result of recent improvements in the quality and durability of our products and our claims processing procedures. As a result, cost of goods sold in 2002 and 2003 reflect favorable reductions in our warranty allowance of $2.9 million and $3.1 million, respectively. Without these favorable adjustments, cost of goods sold during 2002 would have been $27.5 million, or 19.4 percent of sales, and $30.5 million, or 18.1 percent of sales for 2003. See Critical Accounting Policies and Estimates for further details on the warranty reversal.

Excluding the effect of favorable currency exchange rates on revenue of $3.9 million and the warranty reversal, 2003 cost of goods sold would have been 18.6 percent of sales, a 0.8 percentage point reduction from 2002. This decrease is due mainly to higher production volumes and product mix changes. Cost of goods sold as a percent of sales has generally benefited from relatively fixed overhead costs, which account for more than a quarter of our cost of goods sold, being spread over higher manufacturing volumes. This benefit has been partially offset by a higher portion of our revenues coming from women’s health products, which generally carry a slightly lower gross margin. Future cost of goods sold will continue to depend on production levels and product mix.

Marketing and selling. Cost increases in 2002 resulted from higher employee and commission expenses to support higher sales and new product rollout costs. A significant portion of this 2002 increase was to strengthen our international infrastructure, leading to increased international sales in 2002 and 2003. Marketing and selling expenses increased further in 2003 as we expanded our work with (1) gynecologists for Her Option by establishing a separate direct gynecology sales force; (2) other women’s health products; and (3) erectile dysfunction patients. Increased spending for women’s health products totaled $10.4 million in 2003. We expect to continue these higher activity and spending levels going forward, although we expect them to decline as a share of sales as our sales increase.

In addition, we spent approximately $1.2 million during 2003 to consolidate much of our European marketing and selling operations into a new shared service center in Amsterdam. We believe this new shared service center will allow us to grow our European business faster, more efficiently and with greater control. We expect marketing and selling expense to be between 30 and 35 percent of sales going forward.

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General and administrative. Cost increases in 2002 compared to 2001 were primarily due to professional fees and services, recruiting and relocation costs, and corporate insurance, partially offset by $0.6 million in savings due to the closing of our Influence facility in Israel during 2001. Major cost increases during 2003 were due to $2.0 million of additional costs related to the CryoGen operation, including the relocation of the San Diego operation to Minnesota in the fourth quarter of 2003, $0.6 million of additional product liability insurance expenses, and $0.2 million of costs to support the extension of communication and information systems to our European offices. We will incur additional expenses in 2004 to extend the capabilities of these systems to our other international offices.

The Sarbanes-Oxley Act passed in July 2002 has increased the focus on our financial reporting, public disclosure, and compliance practices, and 2003 expenses have increased for additional personnel and resources to comply with this act and related regulations. We expect costs to continue to increase in future periods in order to comply with the legal and financial requirements of the Sarbanes-Oxley Act and related regulations.

Research and development. Research and development includes costs to develop and improve current and possible future products plus the costs for regulatory and clinical activities for these products. Cost increases during 2002 in clinical studies and product development were more than offset by savings of $0.7 million from the closing of our Israeli research and development facility during 2001. Cost increases during 2003 were primarily to support Her Option and other women’s health products. We expect total spending in research and development to increase further in 2004, and in the longer term to continue to be in the range of 8 to 10 percent of net sales. In addition, costs in this area could vary as a result of spending on purchased technologies.

Amortization of intangibles. The decreases in amortization in 2002 compared to 2001 are attributable to the Company’s adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on December 30, 2001. Under the provisions of SFAS No. 142, goodwill and other intangible assets with indefinite lives are no longer amortized. The increase in amortization expense in 2003 compared to 2002 reflects the amortization of definite-lived assets from the CryoGen and Dura II acquisitions. For a more complete description of this change and its impact on financial results see Notes to Consolidated Financial Statement – No. 5.

Other income (expense)

Royalty income. Most of our royalty income is from the license of our stent-delivery technology for medical use outside of urology. This perpetual exclusive worldwide license was entered into during 1998 and is expected to continue to at least 2009. We receive a royalty equal to 2.625 percent of net sales of licensed products on a quarterly basis, which accounted for $2.9 million, $3.0 million, and $2.8 million in other income in 2001, 2002, and 2003.

Interest income. The 2002 increase in interest income was due to the full year investment of proceeds from our July 2001 secondary public offering, while 2001 reflects only one-half year of interest income on these proceeds. Interest income was lower in 2003 than in 2002 due to (1) lower cash balances as a result of the CryoGen and Dura II acquisitions in 2003, and (2) lower interest rates.

Interest expense. Interest expense decreased in 2002 as average borrowings declined by approximately $5.0 million. The decline during 2003 reflects a $7.6 million decline in notes payable, as well as the expiration of our interest rate swap agreement on June 30, 2003. We had hedged a portion of our original $65.0 million variable rate term loan, as required by our senior credit facility, by entering into an interest rate swap agreement in which we agreed to exchange, at specified intervals, the calculated difference between the fixed interest rate of the swap and the variable interest rate on a portion of our debt. Pre-tax expense from this agreement was $0.9 million during 2003. We did not renew the swap agreement and do not expect any swap-related expenses going forward.

Other. On January 1, 2002, we terminated the AMS Retirement Annuity Plan. At the time of this termination, we contributed approximately $5.8 million to the pension plan and recorded a gain on pension plan termination of $0.7 million. We made this contribution to the pension plan to fully fund under-funded pension plan liabilities that had accrued due to declining investment balances in the plan and low interest rates, and to fund early retirement benefits.

Other expense for 2001 includes the write-off of our $3.0 million investment in Collagenesis Corporation (see Notes to Consolidated Financial Statements).

The remainder of other income and expense includes exchange gains and losses resulting from the fluctuations in foreign currencies, mainly the Euro, against the U.S. dollar and relate to translating foreign denominated inter-company receivables to current rates.

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Income tax expense

As part of our adoption of Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, we no longer record goodwill amortization that had been a permanent non-deductible expense. In 2001, the total of this non-deductible amortization was approximately $1.9 million. If the rules that we adopted in 2002 were in place in 2001, the effective tax rate in 2001 would have been approximately 41 percent. Our 2003 effective tax rate was approximately 34.0 percent after taking into account the $1.1 million we recognized with our application for certain U.S. tax benefits related to Research and Development Tax Credits and Extraterritorial Income Exclusion for the years 1999 through 2002. Without the recognition of these credits, our tax rate would have been 36.6 percent, down from 38.7 percent in 2002, reflecting our use of current-period federal and state tax credits. We expect our effective tax rate in 2004 to be in the range of 36 percent to 37 percent.

Liquidity and Capital Resources

Cash and cash equivalents were $59.0 million as of January 3, 2004, compared to $79.4 million as of December 28, 2002. This $20.5 million decrease is primarily caused by debt repayments and the acquisition of CryoGen and Dura II. These decreases were partially offset by cash provided from operations totaling $34.1 million.

Cash flows from operating activities

Operating activities generated $25.3 million, $28.8 million, and $34.1 million of positive cash flow in 2001, 2002, and 2003. During 2003, net income adjusted for the non-cash expenses of depreciation and amortization resulted in a $7.1 million current year increase and totaled $39.7 million compared to $32.6 million in 2002 and $19.8 million in 2001. During 2003, accounts payable and accrued expenses decreased $3.5 million, primarily as a result of an additional $3.1 million reduction in the allowance for warranty claims (see Critical Accounting Policies and Estimates). This compares to the $7.9 million decrease in 2002 related to a $5.8 million pension plan termination payment in addition to a $2.9 million reduction in the allowance for warranty claims, and a $3.9 million increase in 2001 resulting from a non-cash expense of $0.7 million due to the acceleration of stock option vesting for a former employee and a non-cash expense of $3.4 million related to the write-off of an investment in Collagenesis. In addition, during 2003 the Company increased inventories and accounts receivable by $3.1 million and $3.9 million to support business expansion, primarily in women’s health. Deferred income tax assets increased by $3.1 million in 2003, mainly due to an assessment and resulting increase in the Section 382 Net Operating Loss limitation.

Cash flows for investing activities

During 2001, we invested $1.5 million in InjecTx (reported as a technology investment) and spent $1.5 million to acquire worldwide distribution rights for DermMatrix, a porcine dermis graft material used in sling and pelvic prolapse procedures (reported as a purchase of intangibles). We made additional $1.0 million investments for each of these ventures during 2002. In addition, during 2001 we made milestone and contingent purchase price payments relating to the Influence acquisition totaling $11.5 million and a $3.0 million investment in Collagenesis Corporation. Fixed asset additions during 2001 and 2002 were $2.7 million and $1.7 million, respectively. During 2003, we used $44.1 million to acquire CryoGen and Dura II, and $6.5 million for capital expenditures.

Cash flows from financing activities

We have a senior credit facility consisting of term debt and a $15.0 million revolving line of credit, which incurs a commitment fee of .25 percent for unused portions. The senior credit facility expires in September 2005. This facility is secured by substantially all of our assets, and contains certain restrictions requiring prior bank group approval. The restrictions prohibit the payment of dividends and the incurrence of additional debt, limit capital expenditures to $10.0 million for any fiscal year (plus the unused portion of this $10.0 million capital expenditure limit for the preceding fiscal year), limit acquisitions to an aggregate of $25.0 million in any fiscal year, prohibit sale and leaseback agreements, and limit operating leases (except for vehicles for sales personnel) to $1.0 million in any fiscal year.

In addition, we are subject to, and in full compliance with, four financial covenants: a leverage ratio, an interest coverage ratio, a fixed charge coverage ratio, and a required minimum level of consolidated EBITDA. The following table sets forth these covenants and our compliance as of January 3, 2004:

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As of January 3, 2004, the outstanding principal balance under the term debt portion of the senior credit facility was $16.4 million. We did not have an outstanding balance under the revolving line of credit, so we have $15.0 million of availability under that portion of the senior credit facility.

Contractual Obligations

The following table sets forth the past payments and future commitments (in thousands) under the senior credit facility and operating leases.

Our credit facility consists of term debt and a revolving line of credit that expire in September 2005. Payments shown include interest at the indexed rate at January 3, 2004. The automobiles are used by sales personnel. The lease terms for automobiles are typically three years. The office and facility rent includes the CryoGen manufacturing facility in San Diego and sales offices outside the U.S. The lease for the CryoGen facility expires on August 31, 2005. We have sublet the premises for the remaining lease term.

In 2003, we acquired CryoGen Inc. Pursuant to the acquisition agreement, we will pay CryoGen’s former shareholders an earnout payment equal to three times our net revenues from sales of CryoGen’s products over a period of four consecutive quarters ending three years after closing, less $40.0 million. If our net product revenues attributable to sales of CryoGen’s products during any such four-quarter period do not exceed $13.3 million, no earnout payment will be made. The maximum amount of the earnout payment is $110.0 million. The representative of the former CryoGen shareholders has made a claim for a purchase price adjustment based on CryoGen’s net equity at the time of closing of the transaction. We do not believe the former CryoGen shareholders are entitled to a purchase price adjustment, and we do not believe that the resolution will be material to us. This transaction is more fully described in our Form 8-K filed with SEC on January 6, 2003.

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

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 is

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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 below.

Revenue Recognition Policy

The Company recognizes revenue when legal title to the goods passes to its customers. Approximately half of the Company’s revenue is generated from inventory loaned to customers or from consigned inventory maintained at hospitals or with field representatives. In these situations, revenue is recognized at the time the product has been implanted or used. The Company reports sales net of estimated returns, rebates, and other trade discounts.

We have no post-shipment obligations associated with our sales. The shipment of product to distributors, which is less than five percent of our revenues, affects the timing of revenue recognition because the distributors take title FOB our dock. All of our customers have rights of return for the occasional ordering or shipping error. We maintain an allowance for these returns and reduce reported revenue for expected returns from shipments during each reporting period.

Allowance for Doubtful Accounts and Other Accounts Receivable Related Valuation Accounts

We maintain an allowance for doubtful accounts and sales returns that are calculated using subjective judgments and estimates to establish these valuation accounts. Different judgments could have material variances in the amount and timing of our reported results for any period. In addition, actual results could be different from current estimates, possibly resulting in increased future charges to earnings.

An allowance for doubtful accounts is maintained for all individual accounts receivable that we believe are unlikely to be collected. For all other accounts receivable, an allowance for doubtful accounts based on the age of receivable balances is recorded. At December 28, 2002 and January 3, 2004, the allowance for doubtful accounts was $1.0 million. The allowance was 3.4 percent and 3.2 percent of gross accounts receivable at the end of 2002 and 2003, respectively.

We maintain an allowance for returns based on historical and current trends in product returns. At December 28, 2002 this allowance was $0.4 million, and increased to $1.8 million at January 3, 2004, in connection with our product return policies for Her Option sales to gynecologists’ offices.

Inventory Valuation

Inventories are recorded at the lower of manufacturing cost or net realizable value. Each quarter, we evaluate our inventories for obsolescence and excess quantities. 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 we consider obsolete. In addition, we record an allowance for inventory quantities in excess of forecasted demand. Inventory allowances were $2.7 million and $1.9 million at the end of 2002 and 2003. The reduction reflects enhanced inventory management practices. 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.

Warranty Accrual / Allowance

We warrant all of our products to be free from manufacturing defects. In addition, if a product fails, we may provide replacements at no cost or a substantial discount from list price. We maintain a warranty allowance to cover the cost of replacements for our erectile restoration, incontinence, and menorrhagia products. When we sell products, we record an expense for the expected costs of future warranty-related claims, and increase the warranty allowance by an equivalent amount. We reduce the warranty allowance by the cost of the replacement device when an actual claim is awarded. Thus, the balance of the warranty allowance is an estimate of the future cost of honoring our warranty obligation. Factors influencing this estimate include historical claim rates, changes in product performance,

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the frequency of use by the patient, the patient’s performance expectations, and changes in the terms of our product replacement policy. Product reliability is a function of raw material properties, manufacturing processes, and surgical technique.

During 2002, we noted a significant decrease in warranty claims. With further investigation, we concluded that this decrease was the result of recent improvements in the quality and durability of our products and changes in our claims processing. Because we expected these trends to affect warranty claims for the foreseeable future, we determined that the warranty allowance should be reduced by approximately $2.9 million. In 2003, the trend of lower claims experience continued, and further analysis indicated another adjustment of $3.1 million to the accrued warranty allowance was appropriate. These adjustments have been recorded as reductions to cost of goods sold and as increases in reported operating income and net income. At January 3, 2004, our accrued warranty allowance was $1.3 million compared to $4.5 million at December 28, 2002. If we experience further changes in any of the factors that influence this estimate, we will make additional adjustments to this accrued warranty allowance.

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 surgeon and medical facility responsibility, make litigation costs hard to predict. Accruals for future litigation costs were $1.1 million at December 28, 2002, and increased to $1.3 million on January 3, 2004. If, in the future, we determine that this accrual is inadequate, the adjustment would reduce reported income in the period we recorded the adjustment.

Income Taxes

In the preparation of the consolidated financial statements, income taxes in each of the jurisdictions in which we operate are estimated. 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 are reviewed for recoverability and then valued accordingly. We evaluate the realizable value of the deferred tax assets on a quarterly and yearly basis as well as an assessment for the need for valuation allowances 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 all or part of our deferred tax assets will not be realized.

A valuation allowance of $0.7 million is maintained to offset tax loss carry forwards created in a foreign jurisdiction, which, if subsequently recognized, would be allocated to goodwill. No other allowances against net deferred tax assets are maintained at January 3, 2004. If a determination is made that we would not realize all or part of the deferred tax assets, an adjustment to the deferred tax asset valuation allowance and a charge to income in the period of the determination would be made.

Recent Accounting Pronouncements

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

In May 2003, FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for issuer classification and measurement of certain financial instruments with characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003. Instruments that fall within the scope of SFAS 150 must be classified as a liability. For financial instruments issued prior to June 1, 2003, SFAS 150 is effective for the Company in the second

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quarter of fiscal year 2004. Adoption is not expected to have an impact on the Company’s consolidated financial statements.

In January 2004, the FASB issued FASB Staff Position (FSP) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of this Act. Regardless of whether a sponsor elects that deferral, FSP FAS 106-1 requires certain disclosures pending further consideration of the underlying accounting issues. The guidance in FSP FAS 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The Company has elected to defer accounting for these effects, if any, until authoritative guidance on the accounting is issued or until there is a significant event that ordinarily would call for re-measurement of the plan’s assets and obligations.

In December 2003, the FASB issued FAS 132 (Revised) (FAS 132-R), Employer’s Disclosure about Pensions and Other Postretirement Benefits. FAS 132-R retains disclosure requirements of the original FAS 132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefits cost. FAS 132-R is effective for fiscal years ending after December 15, 2003. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The adoption of the disclosure provisions of FAS 132-R did not have a material effect on the Company’s Consolidated Financial Statements.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

Interest Rates

We hedged a portion of our original $65.0 million variable rate term note, as required by our senior credit facility, by entering into an interest rate swap agreement in which we agree to exchange, at specified intervals, the calculated difference between the fixed interest rate of the swap and the variable interest rate on a portion of our debt. This interest rate swap agreement expired June 30, 2003. We do not believe that our interest rate risk is material.

Currency

Our operations outside of the United States are maintained in their local currency. All assets and liabilities of our international subsidiaries are translated to U.S. dollars at quarter-end exchange rates. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income in stockholders’ equity. Gains and losses on foreign currency transactions are included in other income (expense). For 2003, revenues from sales to customers outside the United States were 18.7 percent of total consolidated revenues; and, at year-end, international accounts receivable, inventory, cash, and accounts payable were 33 percent, 9 percent, 14 percent, and 28 percent of total consolidated accounts for each of these items. Changes in the relative value of the U.S. dollar and the Euro would affect our sales, Euro-denominated expenses, and the U.S. dollars value of European assets and liabilities. If these changes were large and rapid, they could have a material effect on our results of operations.

Inflation

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

Item 8. Financial Statements

Our Consolidated Financial Statements and the report of our independent certified public accountants are included in this Annual Report on Form 10-K beginning on page F-1. The index to this report and the financial statements is included in Item 15.

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Item 9.	Changes In and Disagreements With Accountants On Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

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

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

PART III

Item 10. Directors and Executive Officers of the Registrant

Directors of the Registrant

The information in the “Election of Directors-Information About Nominees and Other Directors” and “Election of Directors — Other Information about Nominees and Other Directors” sections of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

Executive Officers of the Registrant

Information about our executive officers is included in this Annual Report on Form 10-K under Item 4A, “Executive Officers of the Registrant.”

Compliance with Section 16(a) of the Exchange Act

The information in the “Section 16(a) Beneficial Ownership Reporting Compliance” section of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

Audit Committee Financial Expert

The information in the “Election of Directors — Board and Board Committees” section of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

Identification of the Audit Committee

The information in the “Election of Directors — Board and Board Committees” section of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

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Code of Ethics

Our Code of Ethics for Senior Financial Management applies to our chief executive officer, chief financial officer, controller, and other employees performing similar functions who have been identified by the chief executive officer, and meets the requirements of the Securities and Exchange Commission. We have posted our Code of Ethics for Senior Financial Management on our website at www.AmericanMedicalSystems.com. We intend to disclose any amendments to and any waivers from a provision of our Code of Ethics for Senior Financial Management on our website within five business days following such amendment or waiver. The information contained or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this or any report that we file with or furnish to the Securities and Exchange Commission.

Item 11. Executive Compensation

The information in the “Election of Directors—Director Compensation,” “Election of Directors—Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report on Executive Compensation,” and “Compensation and Other Benefits” sections of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information in the “Compensation and Other Benefits—Securities Authorized for Issuance Under Equity Compensation Plans” and “Principal Stockholders and Beneficial Ownership of Management” sections of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

Item 13. Certain Relationships and Related Transactions

The information in the “Certain Transactions” section of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

Item 14. Principal Accountant Fees and Services

The information in the “Principal Accountant Fees and Services” section of our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

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PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Financial Statements

Our following Consolidated Financial Statements and the Independent Auditors’ Report thereon are included herein (page numbers refer to pages in this Annual Report on Form 10-K)

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Financial Statement Schedules - Schedule II — Valuation and Qualifying Accounts.

This schedule of valuation and qualifying accounts (in thousands) should be read in conjunction with the consolidated financial statements. No other supplemental schedules are required.

Notes:

	(1)		Uncollectible accounts written off, net of recoveries
	(2)		Obsolete inventory disposals
	(3)		Returned product
	(4)		Product liability claims
	(5)		Product warranty claims
	(6)		Reduction of warranty allowance (net of provision) recorded as a reduction in cost of goods sold

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Exhibits

The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index attached hereto. A copy of any of the exhibits listed in the Exhibit Index will be sent at a reasonable cost to any stockholder as of March 1, 2004, upon receipt from any such person of a written request for any such exhibit. Requests should be sent to the attention of Corporate Secretary, American Medical Systems, 10700 Bren Road West, Minnetonka, Minnesota 55343.

The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K under Item 14(c):

	1.		Employment Agreement, dated April 23, 1999, between Douglas Kohrs and American Medical Systems, Inc.
	2.		Amendment to the Employment Agreement, dated April 17, 2000, between Douglas Kohrs and American Medical Systems, Inc.
	3.		Second Amendment to Employment Agreement, dated January 1, 2002, between Douglas Kohrs and American Medical Systems, Inc.
	4.		Stock Option Agreement, dated April 23, 1999, between Douglas Kohrs and American Medical Systems, Inc.
	5.		Employment Agreement, dated July 30, 2001, between M. James Call and American Medical Systems, Inc.
	6.		Consulting Agreement, dated September 1, 1999, between Medical Genesis and American Medical Systems, Inc.
	7.		Employment Agreement, dated January 1, 2003, between Ross Longhini and American Medical Systems, Inc.
	8.		Employment Agreement, dated March 1, 2004, between Carmen L. Diersen and American Medical Systems, Inc.
	9.		2000 Equity Incentive Plan, as amended.
	10.		Form of Incentive Stock Option Agreement.
	11.		Form of Non-Qualified Stock Option Agreement.
	12.		Employee Stock Purchase Plan.
	13.		2003 Management Incentive Plan.

Reports on Form 8-K:

On October 22, 2003, we filed a Current Report on Form 8-K relating to the announcement of our results of operation for the third quarter of fiscal year 2003.

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FINANCIAL STATEMENTS AND NOTES THERETO

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 28, 2002, and January 3, 2004, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended January 3, 2004. Our audits also included the financial statement schedule listed in Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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 28, 2002, and January 3, 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 3, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein.

As discussed in Note 5 to the consolidated financial statements, the Company changed its method of accounting for goodwill to conform to Statement of Financial Accounting Standards 142 effective December 30, 2001.

F-1

American Medical Systems Holdings Inc.
Consolidated Balance Sheets
(In thousands except share and per share data)

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

F-2

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

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

F-3

American Medical Systems Holdings Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Page 1 of 3, in thousands)

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

F-4

American Medical Systems Holdings Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Page 2 of 3, in thousands)

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

F-5

American Medical Systems Holdings Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Page 3 of 3, in thousands)