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:
952-930-6000

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 þ 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.þ

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

     As of July 2, 2004, 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 $1,108,769,720.

     As of March 14, 2005, 68,496,870 shares of Common Stock (calculated after giving effect for a two-for-one stock split to be distributed on March 21, 2005 to stockholders of record on March 14, 2005) 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 2005 Annual Meeting of Stockholders to be held May 5, 2005 (the “2005 Proxy Statement”).

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

FORM 10-K

For the Fiscal Year Ended January 1, 2005

TABLE OF CONTENTS

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 Holdings, Inc. 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 targeted at the pelvic health disease states of erectile dysfunction, male urinary incontinence, benign prostatic hyperplasia (BPH), male urethral stricture, fecal incontinence, female urinary incontinence, pelvic organ prolapse and menorrhagia. We estimate these diseases affect approximately 242 million people in the United States and Europe. Nearly 70 million of these men and women have conditions sufficiently severe so as to profoundly diminish their quality of life and significantly impact their relationships. Our product development and acquisition strategies have focused on expanding our product offering and on adding less-invasive solutions for surgeons and their patients.

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 the various pelvic health disorders has grown with the publicity for new treatments and drug therapies, but the portion of afflicted patients seeking treatment remains relatively small. When patients do seek treatment, they generally begin with medical options rather than surgical treatment, regardless of the severity of the disease. Also, when patients initially seek treatment, their first physician contact is usually with a general practitioner or gynecologist and not with a surgical specialist. Only once medical therapy has proven unsuccessful 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 high quality of life, the expanding availability of safe and effective treatments, the minimally invasiveness of these therapies, and increasing patient and physician awareness of these treatments.

The diseases we treat can profoundly affect the quality of one’s life and the burden of these diseases increases with age. The incidence of erectile dysfunction, benign prostatic hyperplasia and incontinence in men increases with age and with the incidence of prostate cancer surgery, which also grows with age. Female incontinence and pelvic organ prolapse are linked to pregnancy and childbirth among younger women, but also occur independently as women age. As a result, we believe that as the middle of the baby boomer generation moves into their mid- to late-50’s during this decade, the growth in the prospective patient pool for our products will accelerate. We also believe that this

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demographic group and those that follow will be less willing to accept the natural deterioration of body functions. Their desire to maintain a consistent quality of life will amplify their increased demand for our products and therapies. As a result, our strategy of providing an expanding portfolio of treatment options is an important business driver. In the last several years we have successfully introduced new products and therapies to meet our target physician and patient needs. Our product development and acquisition strategies have focused on expanding our product offering with products and procedures which improve outcomes, reduce operating time and trauma, economically benefit the overall health care system, 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 the pharmaceutical industry’s extensive advertising campaign for Viagra®, Levitra® and Cialis®. Going forward, we expect significant advertising investments for the use of continence drugs in female patients suffering from stress urinary incontinence in addition to the significant awareness already developed for adult incontinence pads. 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 therapies, and by sponsoring meetings where 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-patient 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 2003, we began extensive training and proctoring for gynecologists and urologists in the United States for our Monarc product. In 2004, after FDA clearance of the Apogee and Perigee products, we furthered our commitment to physician training as we introduced surgical systems to the field of pelvic organ prolapse. Through the end of 2004, nearly 5,000 physicians were trained on Monarc and approximately 300 had been trained on our prolapse repair systems. With over thirty years of experience, we believe we have a very strong franchise with urologists and we are working to build a similarly strong franchise with gynecologists. This gynecology franchise is critical to our growth because most women who suffer from incontinence and other pelvic disorders are more likely to first seek help from a gynecologist.

The expansion of our product offering, combined with increasing physician and patient awareness, has greatly increased our business opportunities. With the acquisition of TherMatrx in 2004, we expanded into a marketplace which currently treats approximately 240,000 men annually for benign prostatic hyperplasia. By extending our focus in 1999 beyond our founders’ targeted male market to include women, we moved into the field of female pelvic health, a business representing 73 percent of procedures utilizing our products in 2004.

Erectile Restoration

Net sales of erectile restoration products were $74.1 million, $72.4 million, and $69.6 million in 2004, 2003, and 2002, and were 35.5 percent, 43.0 percent, and 49.1 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 the class of drugs referred to as PDE-5 inhibitors. 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 recent years, we have introduced significant improvements to our AMS 700 inflatable prostheses including a Parylene coating on certain internal surfaces of the prosthesis to increase durability, the InhibiZone antibiotic surface treatment to address the risk of surgical infections and, in 2004, the Tactile Pump to improve ease of use for patients. Physician preference for these new products, which carried higher prices than predecessor products, contributed to the growth in erectile restoration sales in 2004 and 2003.

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Male Continence

Net sales of these products were $48.2 million, $39.8 million, and $35.3 million in 2004, 2003, and 2002, and were 23.1 percent, 23.6 percent, and 24.9 percent of sales in those years. Approximately 760,000 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 caused during prostate cancer 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, 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, a less-invasive procedure for men with mild to moderate incontinence.

Prostate Treatments

Net sales of these products were $14.7 million, $4.9 million, and $6.1 million in 2004, 2003, and 2002, and were 7.0 percent, 2.9 percent, and 4.3 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 BPH include increased urination frequency, sudden urges to urinate, and weak urine flow. Nearly 70 percent of men over age 65 have some symptoms of BPH, and approximately 31 million of them have symptoms requiring treatment. For those experiencing a physical obstruction of the prostatic urethra, the conventional treatment is removal of the prostatic tissue performed in the operating room as either a transurethral resection of the prostate (TURP) or photovaporization of the prostate (PVP). While the former of these is a surgical technique, the latter is a technology offered by Laserscope, a company providing laser technology to various healthcare fields. We offer the UroLume endoprosthesis stent as a less invasive procedure for men within this group who may not be good surgical candidates.

For those men not yet to the point of urethral obstruction, but for whom symptomatic relief is desired, pharmaceuticals or less-invasive tissue ablation techniques including microwave therapy or radiofrequency energy delivered to the prostate and performed in a physician’s office are available as therapeutic options. Over 2 million men in the U.S. are on drug or hormone therapy for BPH. We estimate that approximately 70,000 men received office-based therapy for BPH during 2004, though this number is growing at approximately 35% per year. It is within this market segment that our 2004 acquisition of TherMatrx is positioned. The growth in our revenue in the prostate treatments market was driven exclusively by our entry to the in-office BPH market with the TherMatrx Dose Optimized Therapy (DOT) offering. We acquired TherMatrx early in the third quarter of 2004 and fully integrated it into our operations by early November 2004.

Women’s Health

Net sales of these products were $71.8 million, $51.2 million, and $30.7 million in 2004, 2003, and 2002, and were 34.4 percent, 30.4 percent and 21.7 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 the combination of the two (mixed). Pads and diapers are often used to contain and absorb leaks, and may be acceptable for controlling mild incontinence. Pelvic floor exercises, drug therapy and electrical nerve stimulation are currently used to treat urge incontinence. Our products treat stress incontinence, which generally results from a weakening of the tissue surrounding the bladder and urethra which can be a result of childbirth and aging. Pregnancy, labor, and childbirth may also cause fecal incontinence, pelvic organ prolapse, and other pelvic floor disorders. Incontinence may be treated through exercises to strengthen pelvic floor muscles, or through the injection of collagen or some other bulking agent into the wall of the urethra or bladder neck to narrow the passage. Surgical solutions are generally recommended only if these other therapies are not effective. Prolapse and other pelvic floor defects may be treated with a variety of open, laparoscopic, and transvaginal surgeries.

We offer a broad range of systems to restore female continence including the Artificial Urinary Sphincter (approved for use outside the U.S.), and the In-Fast, SPARC, Monarc, and BioArc sling systems. This broad range allows the surgeon to select the procedure most appropriate to

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the patient’s symptoms and anatomy. With an In-Fast procedure, which we have 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 minimize periurethral dissection and increased ease of bone screw placement which holds 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 several improvements to SPARC. Since its introduction, SPARC has been the major sales driver in our products for women’s health. At the end of 2002, we introduced the Monarc, a product incorporating unique helical needles to place a self-fixating, sub-fascial hammock through the obturator foramina. This procedure may be done without disrupting the endopelvic fascia and is especially valuable for women who have scarring from previous abdominal surgery. 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 incorporating a biologic graft with a self-fixating synthetic. The new BioArc SP system employs the same suprapubic approach of the SPARC system, which has been used in more than 100,000 procedures since we introduced it in 2001, and we expect it will fill a niche for physicians who would prefer not to use a synthetic material to support the urethra. In 2004, we further expanded upon the philosophy of graft material choice through the introduction of BioArc TO, a combination of the Monarc’s transobturator surgical technique with the BioArc’s characteristic choice of biologic material.

The Acticon neosphincter, an extension of our urinary control technology, is used to treat severe fecal incontinence.

Over 230,000 procedures are performed annually in the United States to repair some form of pelvic organ prolapse in women. These procedures have historically been performed through the use of suture and graft materials designed for other surgical applications. In the first half of 2004, we announced FDA clearance of the Apogee and Perigee systems. The Apogee system is designed to repair vaginal vault prolapse, a condition often resulting from the removal of the supporting mechanisms for the apex of the vagina as the result of hysterectomy. The Perigee system targets repair of cystocele, or the herniation of the bladder through the anterior wall of the vagina. We also offer InteGraft pelvic reconstructive materials for use in traditional pelvic organ prolapse procedures.

Approximately 28 million women in the United States and Europe suffer from excessive uterine bleeding, or menorrhagia. Menorrhagia may cause anemia and can be socially debilitating. Drug therapies are effective for some women, but many end up undergoing a hysterectomy. We estimate that as many as 200,000 hysterectomies performed in the United States each year are the result of menorrhagia. Other menorrhagia procedures which have some efficacy include dilation and curettage to remove the endometrial tissue from the uterus, uterine artery embolization, and several therapies to destroy the endometrium with heat. On December 30, 2002, 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, unlike other heat-based therapies, was designed to be administered in the gynecologist’s office. The patient can keep her uterus and maintain normal hormonal levels, avoiding a hospital stay and the 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 have, however, been available and reimbursed for a longer period of time, and, as a result, currently have a larger installed base of experienced users. In the first quarter of 2004, the American Medical Association approved a CPT code for our Her Option cryoablation system to treat excessive uterine bleeding in the physician’s office which was the first step toward the availability of standard reimbursement for Her Option. In January 2005, CMS published the relative value units to be applied to this therapy, resulting in a national average Medicare allowable payment of $2,602 effective as of January 1, 2005. We do not expect a noticeable effect on sales of Her Option until this data has been incorporated into the reimbursement systems of the individual commercial payors across the country.

Selling and Marketing

We sell our products in the United States, Canada, Australia, Brazil, and most European countries through direct field representatives. At the end of 2004, we had 192 employees in our U.S. sales and marketing force and 68 employees in international sales and marketing. We also had 48 independent distributors who represented our products in other countries and accounted for approximately three percent of our worldwide 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.

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Our marketing organization is 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 hospitals at prices ranging from $6,300 for an inflatable system which, when implanted, is practically indistinguishable from the dysfunctional tissue it replaces, to $2,000 for a much simpler prosthesis which creates less natural rigidity. Products for women’s urinary incontinence are distinguished primarily by surgical implantation technique and range from $800 to $1,000. Systems for men’s urinary incontinence are more surgically and technologically demanding than those for women, and sell for prices ranging from $2,600 to $6,600.

Manufacturing and Supply

We use approximately 80,000 square feet of our facility in Minnetonka, Minnesota 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, many of our products utilize raw materials or components that are either single or sole sourced. We currently rely on single source suppliers for the silicone and fabric used in our male prostheses and for the porcine dermis and mesh used in many of our female products. Furthermore, we use single sources for the TherMatrx consoles and disposables. A key component of the InhibiZone antibiotic technology is procured from a single source. We mitigate these risks through appropriate inventory levels, defining alternative sources and comprehensive supplier management.

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, Minnesota facility, although we work with physicians, research hospitals, and universities around the world. 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 2005, we anticipate the release of eight new products including the AMS 700 with Tactile Pump for international markets in the treatment of erectile restoration; the InVance Male Sling with InhibiZone for male urinary incontinence; the Apogee and Perigee products for pelvic organ prolapse with pre-attached biologic graft material; a next generation vaginal vault prolapse product; the BioArc SP and the BioArc TO products for female urinary incontinence with pre-attached biologic graft material; and an upgrade to our Her Option cryoablation probe for menorrhagia.

Our spending on research and development activities, including clinical and regulatory work totaled $15.8 million, $14.9 million and $11.9 million in 2004, 2003, and 2002. These research and development dollars represented 7.6 percent, 8.9 percent, and 8.4 percent of sales for each year respectively. We will continue to target R&D spending at between 8 and 10 percent of sales for the foreseeable future.

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,

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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 surgical treatment of male continence. Principal competitors for our prostate therapy include drug manufacturers and other minimally-invasive treatment suppliers including Urologix, Medtronic, Johnson & Johnson and Boston Scientific Corporation. Our principal competitors for women’s continence products include Johnson & Johnson, Boston Scientific, C.R. Bard and Mentor Corporation. In the field of menorrhagia treatments, our competitors include Cytyc, Boston Scientific, and Johnson & Johnson.

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 146 issued U.S. patents, 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 protection 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.

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 to obtain marketing clearance. 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. The PMA process 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.

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 pelvic organ prolapse 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, drug device combination products 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.

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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 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. With improvements in other biologic solutions, human allograft tissue has become an increasingly smaller portion of our business and is expected to be eliminated from our product offering during 2005.

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 are reimbursing at rates which do not cover the full cost of procedures. These activities may be particularly detrimental to AMS 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 U.S. 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. Ultimately, we cannot predict the frequency or severity of future reimbursement reductions, and such future reductions, if they occur, could have a materially adverse effect on our revenue growth rates and profitability.

Employees

As of January 1, 2005, we employed 627 people in the following areas: 152 in manufacturing; 219 in U.S. sales, marketing and distribution; 68 in administration; 45 in regulatory, clinical and quality assurance; 49 in research and development; and 94 internationally. We do not have any organized labor unions. We believe we have an excellent relationship with our employees.

Financial Information about Geographic Areas

Approximately 20.9 percent, 18.7 percent, and 17.7 percent of our consolidated revenues in 2004, 2003 and 2002 were from sales to customers outside of the United States. See Notes to Consolidated Financial Statements – No. 10 for more information.

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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 utilize raw materials or components that are either single or sole sourced. These sources of supply could encounter manufacturing difficulties or may unilaterally decide to stop supplying us because of product liability concerns or other factors. We currently rely on single source suppliers for the silicone and fabric used in our male prostheses and for the porcine dermis and mesh used in many of our female products. Furthermore, we use single sources for the TherMatrx consoles and disposables. A key component of the InhibiZone antibiotic technology is procured from a single source. We mitigate these risks through appropriate inventory levels, defining alternative sources and comprehensive supplier management. The loss of any of these suppliers could have a materially adverse effect on our financial results in the near term, as we would be required to qualify alternate designs or sources.

Potential Product Recalls

In the event that any of our products were defective, we could voluntarily recall, or the U.S. Food and Drug Administration (the FDA) or an international regulatory body 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. We believe our products address major market opportunities, but if we are unsuccessful in marketing them, our sales and earnings could 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 may be reduced.

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 could cause our sales to decline.

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Actions Related to Reimbursement for Procedures Using our Products

Our physician and hospital customers depend on third party government and non-government entities for reimbursement for services provided to patients. The level of such third party reimbursement may influence whether or not customers purchase our products. Effective January 1, 2004, the Centers for Medicare and Medicaid Services (CMS) increased reimbursement for certain procedures utilizing inflatable penile prostheses and urinary sphincter devices. This increase partially reversed reductions in such reimbursement rates in 2001 and 2002. Our sales history in the U.S. of these devices does not evidence an obvious correlation with changes in CMS reimbursement rates.

The first quarter of 2004, the American Medical Association approved a CPT code for our Her Option cryoablation system to treat excessive uterine bleeding in the physician’s office, which was the first step toward the availability of standard reimbursement for Her Option. In January 2005, CMS published the relative value units to be applied to this therapy, resulting in a national average Medicare allowable payment of $2,602 effective as of January 1, 2005. We do not expect a noticeable effect on sales of Her Option until this data has been incorporated into the reimbursement systems of the individual commercial payers across the country. We can offer no assurances as to the timing or effectiveness the new code and reimbursement level for Her Option procedures will have on the acceptance and practice of this in-office therapy.

Regulatory Approvals and Clinical Results

Regulatory authorities around the world dictate different levels of manufacturing and design information and/or clinical data for various products in order to ensure their safety and efficacy. In the event the data submitted is deemed inadequate or the clinical study results do not support approval, a product may either not be fit for commercialization or may require a redesign.

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. In the future, we may become a party to lawsuits involving patents or other intellectual property. A legal proceeding, regardless of the outcome, would draw upon 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.

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Acquisition Integration

We have acquired businesses in the past, and we may acquire other businesses in the future. Failure to successfully retain critical employees of an acquired company, failure to gain FDA approval for the products of an acquired company, or the inability to establish and maintain appropriate communications, performance expectations, regulatory compliance procedures, accounting controls, and reporting procedures could have a materially adverse affect on our business. We have integrated TherMatrx into our Minnetonka, Minnesota operations and have obtained FDA approval to transfer the manufacture of certain TherMatrx components to our Minnetonka location.

International Sales

During the fiscal 2004, approximately 20.9 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 materially adverse impact on our business. In addition, foreign sales are influenced by fluctuations in currency exchange rates, mainly in the euro. In recent periods, our sales have been positively impacted by increases in the value of the euro relative to the U.S. dollar. Decreases in the value of the euro relative to the U.S. dollar would negatively impact our sales.

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 materially adverse effect on our sales, earnings, and financial condition.

Ongoing Compliance with Section 404 of the Sarbanes-Oxley Act of 2002

During fiscal 2004, we expended significant resources to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Our management has concluded the internal controls over financial reporting are adequate and contain no material weaknesses. Furthermore, our 2004 year-end audit resulted in our external auditors’ ability to attest to our satisfactory assessment of our internal controls over financial reporting with no material weaknesses to report. We realize the requirements of this Act must now be maintained quarterly and are likely to evolve as the result of a reassessment of the Act’s initial implementation. Failure to respond to changes in the requirements of the Act or our inability to comply regularly with the Act’s requirements could have a materially adverse affect on our business as represented by investor confidence and possible fluctuation in our stock price.

Expensing of Stock Options as Required by SFAS 123(R)

In December 2004, the Financial Accounting Standard board issued SFAS No. 123(R), Share-Based Payment, pursuant to which all stock-based compensation awards must be measured and expensed in consolidated financial statements beginning for us with our third fiscal quarter of 2005. Though we have been including footnote disclosure of the impact of the expense that would be recorded under SFAS No. 123 to our earnings and earnings per share in our regularly published SEC filings, the impact of this change to our stock price, and to those throughout the market, is uncertain at this time.

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, Brazil, Canada, France, Germany, the Netherlands, Spain and the United Kingdom.

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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.

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

No matters were submitted to a vote of security holders during the fourth fiscal quarter of 2004.

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 one of our directors since 1999 and he became Chairman of the Board in March 2004. From 1999 to March 2004, he was our President and from 1999 until January 4, 2005 he also served as our Chief Executive Officer. Mr. Kohrs has 22 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., ev3, 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.

Martin J. Emerson has served as our President and Chief Executive Officer and as a director since January 4, 2005. Mr. Emerson also served as our President and Chief Operating Officer from March 2004 until January 4, 2005. 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 over 19 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.

Carmen L. Diersen has served as our Executive Vice President, Chief Financial Officer, and Corporate Secretary since March 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 various positions at Honeywell, Inc. Ms. Diersen currently serves as a director of Memry Corporation, a publicly-held company that provides design, engineering, development and manufacturing services to the medical device industry and other industries.

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Ross A. Longhini has served as our Executive Vice President and Chief Technology Officer since January 2003. Mr. Longhini has 22 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.

Lawrence W. Getlin, J.D. has served as our Vice President, Regulatory, Medical Affairs, and Quality Systems since 1990 and Corporate Compliance Officer since 2003. 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.

Janet L. Dick has served as our Vice President of Human Resources since 1996. Overall, Ms. Dick has spent 20 years in positions of increasing responsibility within our human resources department and Schneider’s human resources department, both of which were divisions of Pfizer at the time. Her prior human resources career was in banking, commercial construction, and mortgage banking.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is currently traded on the NASDAQ National Market under the symbol AMMD. 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. On January 10, 2005, we announced a two-for-one stock split in the form of a 100% stock dividend. On March 4, 2005, our stockholders approved an increase in the number of authorized shares of voting common stock from 75 million to 200 million (in addition to 20 million previously authorized shares of non-voting common stock), which was necessary to complete the stock split. The stock dividend will be distributed on March 21, 2005 to stockholders of record on March 14, 2005. The following stock prices have been adjusted to give retroactive effect to the stock split for all periods presented.

Holders

On March 10, 2005, there were approximately 125 shareholders of record and 17,733 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 places certain restrictions on paying cash dividends.

Securities Authorized for Issuance under Equity Compensation Plans

The information in the “Executive Compensation and Other Benefits — Securities Authorized for Issuance Under Equity Compensation Plans” section of our 2005 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.

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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, to include products and therapies targeted at urethral stricture and benign prostatic hyperplasia in men as well as incontinence, pelvic organ prolapse and menorrhagia in women. Our primary physician customers include urologists, gynecologists, and urogynecologists.

On January 10, 2005, we announced a two-for-one stock split in the form of a 100 percent stock dividend. On March 4, 2005, our stockholders approved an increase in the number of authorized shares of voting common stock from 75 million to 200 million (in addition to 20 million previously authorized shares of non-voting common stock), which was necessary to complete the stock split. The stock dividend will be distributed on March 21, 2005 to stockholders of record on March 14, 2005. Our financial statements, related notes, and other financial data contained in this report have been adjusted to give retroactive effect to the stock split for all periods presented.

Results of Operations

Sales trends

The following table compares net sales of our product lines and geographies between 2004 and 2003, and between 2003 and 2002.

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Men’s health products. Revenue from men’s health products grew 17 percent in 2004, following an increase of 5.5 percent in 2003, primarily driven by the acquisition of TherMatrx, Inc. in the third quarter of 2004 and strength in our male continence products. Erectile restoration products increased 2.3 percent in 2004, and 4.1 percent in 2003. In 2004, a 6.3 percent increase in the average selling price for these products was partially offset by a 3.7 percent reduction in units sold, in part due to 2004 including 52 weeks versus 2003’s 53-week fiscal year. This performance as measured in units sold is reflective of an overall market for erectile restoration implant units in 2004 which was essentially flat. The increase in average selling price was due to InhibiZone antibiotic treated penile implants and the introduction of the Tactile Pump product, which was approved for use by the FDA in July 2004. The 2003 increase in erectile restoration sales was also due to the higher selling price of InhibiZone products. The increase in erectile restoration sales in 2004 and 2003 also reflects higher sales of our non-inflatable implants, including the Dura II product line, which was acquired in 2003.

Increases in unit volume and prices boosted sales of male continence products in 2004 and 2003. Unit sales of the AMS 800 Artificial Urinary Sphincter and the InVance male sling system climbed 12 percent and 38 percent, respectively in 2004, more than doubling the increase registered in 2003. Price and volume increases in both products during 2004 and 2003 resulted from product and procedure improvement.

Prostate treatment sales in 2004 increased $9.8 million over 2003, with the July 2004 acquisition of TherMatrx contributing $10.5 million to 2004 prostate treatment sales. Excluding TherMatrx sales, our prostate product sales declined $0.7 million and $1.1 million during 2004 and 2003, respectively, as we continued to reposition the UroLume product toward obstructive urethral conditions such as urethral stricture.

Women’s health products. Revenue from women’s health products grew 40 percent in 2004, following an increase of 67 percent in 2003, reflecting a continuing shift to the less-invasive self-fixating slings (SPARC, Monarc, and BioArc), partially offset by declining sales of InFast, the conventional bone anchoring device for treating incontinence. Sales of prolapse repair products continued to grow in 2004 on the strength of higher unit volume reflecting new product introductions (Apogee and Perigee) in an expanding market. Uterine health treatments, established in 2003 with the acquisition of Cryogen, contributed less to overall sales in 2004, as the approval of a Current Procedural Terminology (CPT) code in 2004 was not followed by the establishment of a reimbursement level effective until January 2005.

International sales and foreign exchange effects. Our total revenues grew $40.5 million, or 24.1 percent in 2004 from 2003. Of this growth, $3.5 million, or 2.1 percent, was due to favorable currency exchange rates, mainly the euro. In 2003, $3.9 million, or 2.8 percent, of the revenue increase from 2002 was due to favorable currency exchange rates. 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.

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Operating Expenses

The following table compares the dollar and percentage change in the Statement of Operations between 2004 and 2003, and between 2003 and 2002.

The following table shows the Statement of Operations as a percentage of net sales for 2004, 2003, and 2002.

Cost of goods sold. During 2002, and continuing into 2003, we experienced a significant decrease in warranty claims. These decreases were primarily due to improvements in the quality and durability of our products and our claims processing procedures. As a result, cost of goods sold in 2003 and 2002 reflect favorable reductions in warranty allowance of $3.1 million and $2.9 million, respectively.

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Cost of goods sold as a percentage of sales increased 2.1 percentage points from 2003 to 2004. Of this increase, 1.9 percentage points, or $3.1 million, is due to the 2003 reduction in our warranty allowance. Partially offsetting the 2003 warranty allowance impact is the 0.3 percentage point favorable impact of foreign currency. The remaining .5 percentage points increase in 2004 cost of good sold as a percentage of sales is due mainly to the costs of integrating TherMatrx and product mix changes, partially offset by higher production volumes. 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.

In 2003, cost of goods sold as a percentage of sales decreased 1.1 percentage points from 2002. Of this decrease 0.3 percentage points, or $3.9 million, was due to favorable currency impact on revenue in 2003. The remaining .8 percentage point decrease in 2003 was due to higher production volumes and product mix changes. Future cost of goods sold will continue to depend on production levels, labor costs, raw material costs and product mix.

Marketing and selling. Marketing and selling expenses increased in 2004 due to additional U.S. sales personnel and the addition of the TherMatrx sales organization. Both of these additions were in support of the $40.5 million increase in 2004 net sales from 2003. However, marketing and selling expenses as a percentage of net sales decreased 2.6 percent from 2003 as we leveraged prior investments in this area. The increase in 2003 from 2002 reflects the expansion of 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 restoration patients. 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 expect to continue investing in marketing and selling in support of increasing sales levels, but expect marketing and selling expenses will decrease as a percentage of sales.

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. Over 40 percent of the 2004 research and development increase relates to additional personnel and research and development expenditures associated with our acquisition of TherMatrx. Cost increases during 2003 were primarily to support Her Option and other women’s health products. We expect total spending in research and development, over the longer term, to be in the range of 8 to 10 percent of sales.

In-process research and development. The 2004 in-process research and development (IPR&D) expense relates to our acquisition of TherMatrx in July 2004. In accordance with the rules of purchase accounting, we recognized a one-time charge of $35.0 million related to value assigned to IPR&D for a transurethral microwave therapy device that had not yet reached technological feasibility and had no future alternative use. This device will provide a therapeutic dose of microwave energy to the patient’s prostate to treat benign prostate hyperplasia. This device includes updated components, new software, and a significantly updated user interface. In fiscal 2004, we incurred $0.4 million in costs, and expect to incur $0.8 million in fiscal 2005.

This device will be subject to approval by the FDA. With an anticipated launch in 2006, this capital device will replace the current capital equipment component of the TherMatrx system.

We used the excess earnings method to estimate the fair value of the IPR&D, using projections for incremental sales and expenses associated with the new device for the years 2006 through 2014. No incremental sales and expenses for the device are expected after 2014, as yet-to-be defined products are expected to replace this device by that time.

General and administrative. General and administrative cost increases in 2004 compared to 2003 were mainly due to $1.7 million of professional fees and services associated with Sarbanes-Oxley compliance, $0.8 million of international bad debt expense, $0.7 million of legal costs related to intellectual property matters and $0.6 million due to the acquisition of TherMatrx. 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.

Amortization of intangibles. The increase in intangible amortization in 2004 compared to 2003 is primarily due to the amortization of definite-lived assets from the TherMatrx acquisition. 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 Statements – No. 2.

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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 2009. We receive a royalty equal to 2.625 percent of net sales of licensed products on a quarterly basis. We do not directly influence sales of the products on which this royalty is based and cannot give any assurance as to future income levels.

Interest income. The increase in 2004 reflects an increase in rates partially offset by lower cash balances in the interest bearing accounts. Cash balances declined due to prepayment of the credit facility in July 2004 (see Notes to Consolidated Financial Statements – No. 7) and the consideration paid for TherMatrx in July 2004 (see Notes to Consolidated Financial Statements – No. 2). Interest income was lower in 2003 than in 2002 due to lower cash balances as a result of the CryoGen and Dura II acquisitions in 2003, and lower interest rates.

Interest expense. Interest expense decreased in 2004 as a result of the termination of our prior credit facility in July 2004. 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 prior 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 have no requirement for such an agreement under our new credit facility.

Investment impairment. We recognized a $4.5 million loss associated with the write-off of our common and preferred stock investment in InjecTx, a company focused on the development of ethanol ablation systems for prostate treatments. We own 19% of the stock of InjecTx and signed an exclusive, long-term agreement with InjecTx to distribute its injection system worldwide. For a more complete description of this change, see Notes to Consolidated Financial Statements – No. 5.

Other. Other income in 2004 and 2003 is due mainly to gains resulting from the fluctuations in foreign currencies, mainly the euro, against the U.S. dollar and relate primarily to translating foreign denominated inter-company receivables to current rates. Other income in 2002 reflects a gain on pension plan termination. 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. This contribution to the pension plan fully funded under-funded pension plan liabilities that had accrued due to declining investment balances in the plan and low interest rates, and funded early retirement benefits.

Income tax expense

In 2004, the reported tax rate of 118.5 percent was higher than the effective tax rate applied to taxable income due to the $35.0 million in-process research and development charge and the $4.5 million investment impairment charge, both of which are not currently deductible for tax purposes. We expect our effective tax rate for 2005 to be approximately 35.5 percent.

The 2003 reported tax rate was 34.1 percent including the $1.1 million tax benefit recognized with the application for certain U.S. tax benefits related to research and development tax credits and extraterritorial income exclusion for the years 1999 through 2002.

Liquidity and Capital Resources

Cash, cash equivalents, and short-term investments were $51.2 million as of January 1, 2005, compared to $59.0 million as of January 3, 2004. The decrease is primarily due to the acquisition of TherMatrx in July 2004, and the early repayment of amounts owed under the credit facility, which was terminated in July 2004. These decreases were partially offset by cash flow from operations.

Cash flows from operating activities

Cash provided from operations in 2004 totaling $49.0 million represents an increase of $14.9 million over 2003, primarily reflecting the increase in overall gross profit and a reduction in working capital requirements, partially offset by investments in marketing and selling, and general and administrative expenses.

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Cash provided from operations in 2003 was $34.1 million, an increase of $5.3 million over 2002. This was due to an increase in net income, adjusted for non-cash expenses of depreciation and amortization and partially offset by increases in working capital.

Cash flows from investing activities

Cash used in investing activities was $61.1 million and $50.6 million in 2004 and 2003, and cash provided by investing activities was $24.1 million in 2002. During 2004, 2003 and 2002, we purchased property, plant and equipment totaling $3.7 million, $6.5 million and $1.7 million, respectively. During 2004, we had net purchases of investments totaling $15.5 million, and in 2002 we had net sales of investments totaling $27.8 million. During 2004, we had a net cash outlay of $39.4 million related to the acquisition of TherMatrx, and a $2.5 million cash outlay for a cross-licensing agreement covering patents related to the field of female pelvic health. During 2003, we had a net cash outlay of $44.1 million related to the acquisition of CryoGen, Inc. and the purchase of the Dura II line of erectile restoration products from Endocare, Inc. During 2002, we made an additional $1.0 million investment in InjecTx relating to one of our prostate treatment products (reported as a technology investment) and made an additional $1.0 million investment to acquire worldwide distribution rights to a porcine dermis graft material used in sling and pelvic prolapse procedures (reported as a purchase of intangibles).

Cash flows from financing activities

Cash used in financing activities was $10.3 million, $4.9 million and $2.6 million during 2004, 2003 and 2002, respectively. Cash received under our stock option and employee stock purchase plans was $6.1 million, $2.7 million and $2.4 million during 2004, 2003 and 2002, respectively. Payments made under our senior credit facility were $16.4 million, $7.6 million and $4.9 million during 2004, 2003 and 2002, respectively.

On July 8, 2004, we repaid the remaining balance of $12.9 million under our prior senior credit facility and terminated the facility. This facility, which was set to expire in September 2005, was replaced with a new facility on January 20, 2005. The new agreement provides for a $150.0 million senior unsecured five-year revolving facility (U.S. dollars only), with a $20.0 million sub-limit for the issuance of standby and commercial letters of credit, and a $10.0 million sub-limit for swing line loans. At our option, any loan under the credit agreement (other than swing line loans) bears interest at a variable rate based on LIBOR or an alternative variable rate based on either prime rate or the federal funds effective rate, in each case plus a basis point spread determined by reference to our leverage ratio. We have the option of increasing the aggregate maximum principal amount under the facility by $60.0 million. Funds are available under the credit facility for working capital and other lawful purposes, including permitted acquisitions. There are currently no borrowings under the facility.

The new credit agreement contains standard affirmative and negative covenants, including the two financial covenants set forth below:

The covenants also restrict: (a) the making of investments, the payment of dividends and other payments with respect to capital, the disposition of material assets other than in the ordinary course of business and mergers and acquisition if such actions would cause our leverage ratio to be greater than 2.50 to 1.00, (b) transactions with affiliates unless such transactions are completed in the ordinary course of business and upon fair and reasonable terms, (c) the incurrence of liens and (d) substantial changes in the nature of our business. The credit agreement also contains customary events of default, including, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and involuntary proceedings, monetary judgment defaults in excess of specified amounts, cross-defaults to certain other agreements, change of control and ERISA defaults.

Contractual Obligations

The following table sets forth the future commitments (in thousands) under the senior credit facility (see Notes to Consolidated Financial Statements – No. 7) and operating leases.

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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, the TherMatrx facility in Northbrook, Illinois, 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. The lease for the TherMatrx facility expires January 31, 2006.

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. This transaction is more fully described in our Form 8-K filed with the SEC on January 6, 2003. We do not currently anticipate an earnout payment to the former CryoGen shareholders.

On July 15, 2004, we acquired TherMatrx, Inc. At closing, the shareholders of TherMatrx were initially paid cash consideration of $40.5 million. We deposited $4.0 million of this initial consideration in escrow to be held for six months after closing of the merger to cover certain contingencies, and the balance was distributed to former TherMatrx shareholders. We used cash on hand to make the initial payment of $40.5 million. Included in the $40.5 million initial payment was $0.5 million for an estimated increase in net asset value. There was no increase in net asset value, and we were repaid the $0.5 million in February 2005 when the amount in escrow was distributed to former TherMatrx shareholders. In addition to the initial closing payment, we will make contingent payments based on the net product revenues attributable to sales of the TherMatrx Dose Optimized Thermotherapy (DOT) product. These contingent payments will equal four times the aggregate sales of DOT products over a period of six consecutive fiscal quarters (which began on July 5, 2004 and will end on December 31, 2005) minus $40.0 million. The contractual range of contingent payments is from zero to $210.0 million which would result in a total purchase price of $40.0 million up to a maximum of $250.0 million (including the initial payment). These contingent payments will be accounted for as goodwill. At the end of the fourth quarter of 2004, we incurred our first contingent payment to former TherMatrx shareholders in the amount of $0.9 million, payable in the first quarter of 2005.

We believe that funds generated from operations, together with our balances in cash and cash equivalents along with funds available under our senior credit facility, will be sufficient to finance current operations, planned capital expenditures, and commitments to former TherMatrx and CryoGen shareholders through the terms of these agreements.

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 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

We sell our products primarily through a direct sales force. Approximately 44 percent of our revenue is generated from consigned inventory or from inventory with field representatives. For these products, revenue is recognized at the time the product has been used or implanted. For

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all other transactions, we recognize revenue when title to the goods and risk of loss transfer to customers, providing there are no remaining performance obligations required from us or any matters requiring customer acceptance. In cases where we utilize distributors or ship product directly to the end user, we recognize revenue upon shipment provided all revenue recognition criteria have been met. We record estimated sales returns, discounts and rebates as a reduction of net sales in the sale period revenue is recognized.

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. This allowance is based on historical and current trends in product returns. At January 1, 2005, this allowance was $2.3 million, an increase of $0.6 million from January 3, 2004.

Allowance for Doubtful Accounts

We estimate the allowance for doubtful accounts by analyzing those accounts receivable that have reached their due date and by applying rates based upon historical write-off trends and specific account reserves. Accounts are written off sooner in the event of bankruptcy or other circumstances that make further collection unlikely. When it is deemed probable that a customer account is uncollectible, that balance is written off against the existing allowance. Different estimates 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.

At January 1, 2005, the allowance for doubtful accounts was $2.0 million, compared to $1.0 million on January 3, 2004. This increase relates to sales growth and an increased provision on international receivables. The allowance was 4.1 percent and 3.0 percent of gross accounts receivable at the end of 2004 and 2003, respectively.

Inventory Valuation

Inventories are stated at the lower of cost or market determined on the first-in-first-out method. Each quarter, we evaluate our inventories for obsolescence and excess quantities. This evaluation includes analyses of inventory levels, historical loss trends, expected product lives, product at risk of expiration, sales levels by product, and projections of future sales demand. We reserve inventories we consider obsolete. In addition, we record an allowance for inventory quantities in excess of forecasted demand. Inventory allowances were $1.7 million and $1.9 million at the end of 2004 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, BPH, 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, 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 1, 2005, our accrued warranty allowance was $1.5 million compared to $1.3 million at January 3, 2004. Of the $0.2 million increase reported in warranty allowances, most was due to the acquisition of TherMatrx. If we experience further changes in any of the factors that influence this estimate, we will make additional adjustments to this accrued warranty allowance.

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Product Liability Accrual

Each quarter, we estimate the uninsured portion of legal representation and settlement costs of product liability claims and lawsuits. 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 $0.7 million at January 1, 2005, versus $1.3 million at January 3, 2004. During 2004, we reduced our accrual by $0.6 million to reflect a change in estimate related to identified claims and lawsuits in our 2004 year end accrual balance. If, in the future, we determine that this accrual is inadequate, the adjustment would reduce reported income in the period we recorded the adjustment.

Valuation of IPR&D, Goodwill and Other Intangible Assets

When we acquire another company, the purchase price is allocated, as applicable, between in-process research and development (IPR&D), other identifiable intangible assets, tangible assets, and goodwill as required by U.S. GAAP. IPR&D is defined as the value assigned to those projects for which the related products have not received regulatory approval and have no alternative future use. Determining the portion of the purchase price allocated to IPR&D and other intangible assets requires significant estimates. The amount of the purchase price allocated to IPR&D and other intangible assets is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of acquisition in accordance with accepted valuation methods. For IPR&D, these methodologies include consideration of the risk of the project not achieving commercial feasibility.

Goodwill is the excess of the purchase price over the fair value of net assets, including IPR&D, of acquired businesses. We assess goodwill impairment indicators quarterly, or more frequently, if a change in circumstances or the occurrence of events suggest the remaining value may not be recoverable. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows. Our estimates associated with the goodwill impairment tests are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value amounts, including projected future cash flows. Goodwill was $102.4 million as of January 1, 2005 and $99.0 million as of January 3, 2004.

Other intangible assets consist primarily of purchased technology, patents, and trademarks and are amortized using the straight-line method over their estimated useful lives. We review these intangible assets for impairment annually or as changes in circumstance or the occurrence of events suggest the remaining value may not be recoverable. Other intangible assets, net of accumulated amortization, were $44.8 million as of January 1, 2005 and $17.5 million as of January 3, 2004.

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 assess 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.

Valuation allowances for 2004 and 2003 of $0.9 million and $0.7 million, respectively, are maintained to offset tax loss carry forwards created in a foreign jurisdiction, which, if subsequently recognized, would be allocated to goodwill. In addition, in 2004 a $1.7 million valuation allowance was established for the capital loss carry forward related to the investment impairment (see Notes to Consolidated Financial Statements – No. 13). No other allowances against net deferred tax assets are maintained at January 1, 2005. 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.

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Recent Accounting Pronouncements

See Notes to Consolidated Financial Statements – No.1, Recent Accounting Pronouncements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rates

We do not believe that the interest rate risk on earnings is material given our level of investments and their short-term nature. Also, we do not believe that the interest rate risk on expenses is material given the forecast level and timing of borrowings required in 2005.

Currency

Our operations outside of the United States are maintained in their local currency. All assets and liabilities of our international subsidiaries are translated to U.S. dollars at period-end exchange rates. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income in stockholders’ equity. Gains and losses on foreign currency transactions and short-term inter-company receivables from foreign subsidiaries are included in other income (expense).

During fiscal 2004 and 2003, revenues from sales to customers outside the United States were 20.9 percent and 18.7 percent of total consolidated revenues, respectively, and international accounts receivable, inventory, cash, and accounts payable were 36.2 percent, 5.4 percent, 23.6 percent, and 15.2 percent of total consolidated accounts for each of these items as of January 1, 2005. The reported results of our foreign operations will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. The result of a uniform 10 percent strengthening in the value of the U.S. dollar in fiscal 2004 levels relative to each of the currencies in which our revenues and expenses are denominated would have resulted in a decrease in net income of approximately $2.0 million during 2004.

At January 1, 2005, our net investment in foreign subsidiaries translated into dollars using the period end exchange rate was $21.6 million and the potential loss in fair value resulting from a hypothetical 10 percent strengthening in the value of the U.S. dollar currency exchange rate amounts to $2.2 million. Actual amounts may differ.

Inflation

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

Item 8. Financial Statements and Supplementary Data

Our Consolidated Financial Statements and the reports of our independent registered public accounting firm 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.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this 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

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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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance to our management and our Board of Directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of January 1, 2005. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of January 1, 2005, our internal control over financial reporting is effective based on those criteria.

Our assessment of the effectiveness of internal control over financial reporting as of January 1, 2005, has been audited by Ernst & Young, LLP, the independent registered public accounting firm who also audited our consolidated financial statements. Ernst & Young’s attestation report on AMS management’s assessment of internal control over financial reporting appears on page F-1 of this Form 10-K.

Item 9B. Other Information

None

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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” section of our 2005 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 “Principal Shareholders and Management Beneficial Ownership” section of our 2005 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 2005 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 2005 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

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,” “Executive Compensation and Other Benefits — Compensation Committee Interlocks and Insider Participation,” and “Executive Compensation and Other Benefits — Compensation Committee Report on Executive Compensation,” sections of our 2005 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

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

The information in the “Executive Compensation and Other Benefits—Securities Authorized for Issuance Under Equity Compensation Plans” and “Principal Stockholders and Management Beneficial Ownership” sections of our 2005 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 2005 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 “Audit Committee Report—Audit and Non-Audit Fees” section of our 2005 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedule

(a) Financial Statements

Our following Consolidated Financial Statements and Reports of Independent Registered Public Accounting Firm thereon are included herein (page numbers refer to pages in this Annual Report on Form 10-K).

(b) Financial Statement

Our schedule of valuation and qualifying accounts (in thousands) should be read in conjunction with the consolidated financial statements (page numbers refer to pages in this Annual Report on Form 10-K). All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

(c) Exhibits

The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index on pages E-1 to E-3 to this Report. 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 18, 2005, 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, Inc., 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 (or incorporated by reference) to this Annual Report on Form 10-K:

	1.	Amended and Restated Employment Agreement, dated January 5, 2005, between Douglas W. Kohrs and American Medical Systems, Inc.
	2.	Employment Agreement, dated April 26, 2004, between Martin J. Emerson and American Medical Systems, Inc.
	3.	First Amendment to Employment Agreement, dated January 5, 2005, between Martin J. Emerson and American Medical Systems, Inc.
	4.	Stock Option Agreement, dated April 23, 1999, between Douglas Kohrs and American Medical Systems, Inc.
	6.	Consulting Agreement, dated September 1, 1999, between Medical Genesis and American Medical Systems, Inc.

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	7.	Employment Agreement, dated January 1, 2003, between Ross Longhini and American Medical Systems, Inc.
	8.	Employment Agreement, dated March 9, 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.	2005 Executive Variable Incentive Plan.

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FINANCIAL STATEMENTS AND NOTES THERETO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
American Medical Systems Holdings, Inc.

We have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting included in Item 9A, that American Medical Systems Holdings, Inc. maintained effective internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). American Medical Systems Holdings, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that American Medical Systems Holdings, Inc. maintained effective internal control over financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, American Medical Systems Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of American Medical Systems Holdings, Inc. as of January 1, 2005 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 1, 2005 of American Medical Systems Holdings, Inc. and our report dated March 8, 2005, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
March 8, 2005

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
American Medical Systems Holdings, Inc.

We have audited the accompanying consolidated balance sheets of American Medical Systems Holdings, Inc. and subsidiaries as of January 1, 2005 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 1, 2005. Our audits also included the financial statement schedules 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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. and subsidiaries at January 1, 2005 and January 3, 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 1, 2005, in conformity with U.S. generally accepted accounting principles. 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.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of American Medical Systems Holdings, Inc.’s internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2005 expressed in an unqualified opinion thereon.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
March 8, 2005

F-2

American Medical Systems Holdings, Inc.

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

F-3

American Medical Systems Holdings, Inc.

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

F-4

American Medical Systems Holdings, Inc.