American Medical Systems (AMMD) 10-Q 2010 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period endedJuly 3, 2010

or

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

For the transition period from                    to                    

Commission File Number: 00030733

AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	41-1978822
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10700 Bren Road West, Minnetonka, Minnesota	55343
(Address of principal executive offices)	(Zip Code)

952-930-6000
(Registrant’s telephone number, including area code)

     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.þ Yeso No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).þ Yeso No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ	Accelerated filero	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No

     As of August 2, 2010 there were 75,997,564 shares of the registrant’s $.01 par value Common Stock outstanding.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)
	Consolidated Statements of Operations for the three and six month periods ended July 3, 2010 and July 4, 2009		3
	Consolidated Balance Sheets as of July 3, 2010 and January 2, 2010		4
	Consolidated Statements of Cash Flows for the three and six month periods ended July 3, 2010 and July 4, 2009		5
	Notes to Consolidated Financial Statements		6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		38
ITEM 4.	CONTROLS AND PROCEDURES		39
PART II.	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		40
ITEM 1A.	RISK FACTORS		40
ITEM 6.	EXHIBITS		41
SIGNATURES			42
EXHIBIT INDEX			43
EX-31.1
Ex-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American Medical Systems Holdings, Inc.

Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

	Three Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009
Net sales	$	136,368		$	126,388		$	271,294		$	250,026
Cost of sales		22,805			21,608			43,832			44,950
Gross profit		113,563			104,780			227,462			205,076
Operating expenses
Marketing and selling		46,114			42,853			94,311			86,201
Research and development		13,837			13,166			27,346			25,977
General and administrative		11,797			11,660			24,487			22,439
Amortization of intangibles		3,030			3,401			6,077			6,666
Total operating expenses		74,778			71,080			152,221			141,283
Operating income		38,785			33,700			75,241			63,793
Other (expense) income
Royalty income		47			874			355			1,807
Interest expense		(3,584	)		(4,966	)		(7,538	)		(10,376	)
Amortization of financing costs		(3,346	)		(3,974	)		(7,039	)		(7,955	)
Gain on extinguishment of debt		—			—			—			4,562
Gain on sale of non-strategic assets		—			—			7,719			—
Other (expense) income		485			767			(31	)		1,422
Total other (expense) income		(6,398	)		(7,299	)		(6,534	)		(10,540	)
Income before income taxes		32,387			26,401			68,707			53,253
Provision for income taxes		11,820			9,536			27,482			19,308
Net income	$	20,567		$	16,865		$	41,225		$	33,945
Net income per share
Basic net earnings	$	0.27		$	0.23		$	0.55		$	0.46
Diluted net earnings	$	0.26		$	0.23		$	0.53		$	0.46
Weighted average common shares used in calculation
Basic		75,612			73,919			75,364			73,778
Diluted		78,185			74,502			77,177			74,258

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

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American Medical Systems Holdings, Inc.

Consolidated Balance Sheets
(In thousands, except share and per share data)

	July 3, 2010		January 2, 2010
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	23,604	$	30,670
Short-term investments		44,466		19,868
Accounts receivable, net		89,689		102,590
Inventories, net		33,457		30,276
Deferred income taxes		13,036		14,870
Other current assets		8,474		6,067
Total current assets		212,726		204,341
Property, plant and equipment, net		42,578		44,120
Goodwill		682,684		690,899
Developed and core technology, net		45,245		51,631
Other intangibles, net		50,477		49,937
Other long-term assets, net		5,615		6,223
Total assets	$	1,039,325	$	1,047,151
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	9,790	$	9,114
Income taxes payable		3,159		4,495
Accrued compensation expenses		24,232		29,603
Accrued warranty expense		2,409		2,293
Other accrued expenses		21,899		25,760
Total current liabilities		61,489		71,265
Long-term debt		287,445		346,229
Deferred income taxes		60,173		62,347
Long-term income taxes payable		18,802		18,206
Long-term employee benefit obligations		3,745		3,745
Total liabilities		431,654		501,792
Stockholders’ equity
Common stock, par value $.01 per share; authorized 200,000,000 shares; issued and outstanding: 75,972,968 shares at July 3, 2010 and 74,715,839 shares at January 2, 2010		760		747
Additional paid-in capital		421,630		399,468
Accumulated other comprehensive income		5,293		6,381
Retained earnings		179,988		138,763
Total stockholders’ equity		607,671		545,359
Total liabilities and stockholders’ equity	$	1,039,325	$	1,047,151

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

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American Medical Systems Holdings, Inc.

Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Six Months Ended
	July 3, 2010			July 4, 2009
Cash flows from operating activities
Net income	$	41,225		$	33,945
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		4,959			4,867
Amortization of intangibles		6,077			6,666
Amortization of deferred financing costs		7,039			7,955
Excess tax benefit from stock-based compensation		(825	)		(310	)
Tax benefit from stock-based compensation		2,276			733
Settlement of derivative contracts		(1,277	)		51
Change in net deferred income taxes		(3,461	)		1,422
Gain on extinguishment of debt		—			(4,562	)
Gain on sale of non-strategic assets		(7,719	)		—
Stock-based compensation		4,130			4,476
Changes in operating assets and liabilities:
Accounts receivable		6,635			2,527
Inventories		(4,037	)		4,529
Accounts payable and accrued expenses		(7,182	)		(3,475	)
Other assets		2,041			1,024
Net cash provided by operating activities		49,881			59,848
Cash flows from investing activities
Purchase of property, plant and equipment		(3,546	)		(2,462	)
Net proceeds from settlement of derivative contracts		1,277			(51	)
Sale of non-strategic assets, net		19,070			—
Purchase of other intangibles		(1,657	)		(5,000	)
Purchase of short-term investments		(41,374	)		(18,684	)
Sale of short-term investments		16,766			30,500
Net cash (used in) provided by investing activities		(9,464	)		4,303
Cash flows from financing activities
Issuance of common stock		17,206			3,908
Excess tax benefit from exercise of stock options		825			310
Repurchase of convertible senior subordinated notes		—			(21,125	)
Payments on senior secured credit facility		(65,874	)		(29,111	)
Net cash used in financing activities		(47,843	)		(46,018	)
Effect of currency exchange rates on cash		360			(156	)
Net (decrease) increase in cash and cash equivalents		(7,066	)		17,977
Cash and cash equivalents at beginning of period		30,670			11,642
Cash and cash equivalents at end of period	$	23,604		$	29,619
Supplemental disclosure
Cash paid for interest	$	8,628		$	9,226
Cash paid for taxes	$	29,097		$	19,846

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

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

We have prepared the consolidated financial statements included in this Quarterly Report on Form 10-Q without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to these rules and regulations. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited consolidated interim financial statements should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2010. All amounts presented in tables are in thousands, except per share data.

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

We have a 52 or 53 week fiscal year ending on the Saturday nearest December 31. Accordingly, the second fiscal quarters of 2010 and 2009 are represented by the three month periods ended on July 3, 2010 and July 4, 2009, respectively.

2. Recently Issued Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13,Revenue Recognition(Topic 605):Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 will separate multiple-deliverable arrangements in more circumstances than under existing U.S. GAAP and will establish a selling price hierarchy for determining the selling price of a deliverable. In addition, it will replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify the allocation of revenue is based on entity-specific assumptions rather than assumptions of a market place participant, eliminate the use of the residual method for allocation, and expand on-going disclosure requirements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010 and can be applied prospectively or retrospectively. We plan to adopt this updated accounting guidance for multiple-deliverable revenue arrangements on a prospective basis for our fiscal year beginning on January 2, 2011, and the adoption is not expected to have a material impact on our consolidated financial position or results of operations.

3. Stock-Based Compensation

At July 3, 2010, the 2005 Stock Incentive Plan, as amended and restated (2005 Plan), is our one active stock-based employee compensation plan under which new awards may be granted. Awards under the 2005 Plan include incentive stock options, non-qualified option grants and restricted stock. Amounts recognized in our financial statements related to stock-based compensation were as follows:

	Three Months Ended				Six Months Ended
(in thousands)	July 3, 2010		July 4, 2009		July 3, 2010		July 4, 2009
Cost of sales	$	253	$	245	$	501	$	486
Marketing and selling		510		512		961		967
Research and development		300		302		585		589
General and administrative		1,238		1,201		2,083		2,434
Total stock-based compensation expense	$	2,301	$	2,260	$	4,130	$	4,476

Options granted under the 2005 Plan generally become exercisable for twenty-five percent of the shares on the first anniversary date of the grant and 6.25 percent at the end of each quarter thereafter. Options are granted with an exercise price equal to the fair market value of the common stock on the date of the grant.

Options granted under our 2005 Plan generally have a stated expiration, if not exercised or earlier terminated, seven years after the date of grant. Options that were granted under our 2000 Equity Incentive Plan (2000 Plan) generally have a stated expiration, if not exercised or earlier terminated, ten years after the date of grant.

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Stock option activity under our 2005 Plan and 2000 Plan for the six months ended July 3, 2010 was as follows:

				Weighted average		Aggregate
	Options			exercise price		Intrinsic
	outstanding			per share		Value
						(in thousands)
Balance at January 2, 2010		7,161,545		$	15.08
Granted		1,118,850			18.77
Exercised		(1,152,016	)		14.08
Cancelled or expired		(263,164	)		17.78
Balance at July 3, 2010		6,865,215		$	15.74	$	43,959
Options exercisable at July 3, 2010		4,084,516		$	15.84	$	25,783

The total intrinsic value of options exercised during the three and six months ended July 3, 2010 was $5.0 million and $7.8 million, respectively. As of July 3, 2010, we had $13.5 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options granted under our 2005 Plan. We expect that cost to be recognized over a weighted average period of 2.8 years.

Restricted stock awards are granted under the 2005 Plan. Restricted stock awards are subject to forfeiture if employment or service terminates prior to the release of the restrictions. Restricted stock generally vest over a three or four year period. During the vesting period, ownership of the shares cannot be transferred. Restricted stock is considered issued and outstanding at the grant date and has the same dividend and voting rights as other common stock. We recognize compensation expense for the fair value of the restricted stock grants issued based on the closing stock price on the date of grant. The 2005 Plan does not designate the specific number of shares available for restricted stock grants, as these are issued from the full pool of shares available under the plan. The option pool is reduced by two shares for each restricted share granted.

Restricted stock activity under our 2005 Plan for the six months ended July 3, 2010 was as follows:

	Unvested Shares			Weighted average
	outstanding			grant date fair value
Balance at January 2, 2010		233,525		$	15.79
Granted		120,480			18.83
Vested		(30,647	)		16.08
Cancelled		(13,850	)		15.89
Balance at July 3, 2010		309,508			16.94

As of July 3, 2010, we had $3.9 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock awards granted under our 2005 Plan. We expect that cost to be recognized over a weighted average period of 2.9 years.

4. Earnings per Share

The following table presents information necessary to calculate basic and diluted net income per common share and common share equivalents.

	Three Months Ended				Six Months Ended
(in thousands, except per share data)	July 3, 2010		July 4, 2009		July 3, 2010		July 4, 2009
Net income	$	20,567	$	16,865	$	41,225	$	33,945
Weighted-average shares outstanding for basic net income per share		75,612		73,919		75,364		73,778
Dilutive effect of stock options, restricted shares and convertible notes		2,573		583		1,813		480
Adjusted weighted-average shares outstanding for diluted net income per share		78,185		74,502		77,177		74,258
Net income per share
Basic net earnings	$	0.27	$	0.23	$	0.55	$	0.46
Diluted net earnings	$	0.26	$	0.23	$	0.53	$	0.46

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There were 1,293,589 and 1,463,345 weighted shares outstanding for the three and six month periods ended July 3, 2010, respectively, that were excluded from the diluted earnings per share computation because the impact would have been anti-dilutive. For the three and six month periods ended July 4, 2009, there were 5,158,598 and 6,145,702 weighted shares outstanding, respectively, that were excluded from the diluted earnings per share computation because the impact would have been anti-dilutive.

5. Inventories

Inventories consist of the following as of July 3, 2010 and January 2, 2010:

(in thousands)	July 3, 2010			January 2, 2010
Raw materials	$	9,147		$	10,117
Work in process		4,122			3,399
Finished goods		24,680			21,791
Obsolescence reserve		(4,492	)		(5,031	)
Net inventories	$	33,457		$	30,276

6. Warranties

Many of our products are sold with warranty coverage for periods ranging from one year up to the patient’s lifetime. The warranty allowance is our estimate of the expected future cost of honoring current warranty obligations. Factors influencing this estimate include historical claim rates, changes in product performance or deviations in product performance against our reliability commitments, the frequency of use of a prosthetic implant by the patient, patients’ performance expectations and changes in the terms of our policies.

Changes in the warranty balance during the three and six months ended July 3, 2010 and July 4, 2009 are presented below:

	Three Months Ended						Six Months Ended
(in thousands)	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009
Balance, beginning of period	$	2,203		$	2,865		$	2,293		$	3,287
Provisions for warranty		520			155			854			963
Claims processed		(314	)		(551	)		(738	)		(1,781	)
Balance, end of period	$	2,409		$	2,469		$	2,409		$	2,469

7. Comprehensive Income

Comprehensive income is the sum of net income as reported and other comprehensive income (loss). Other comprehensive income (loss) resulted from foreign currency translation adjustments, gains (losses) on derivative instruments qualifying as hedges, and gains (losses) on available-for-sale investments. For more information on derivatives, seeNote 11, Derivative Instruments and Hedging Activities. Comprehensive income for the three and six months ended July 3, 2010 and July 4, 2009 was:

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	Three Months Ended
(in thousands)	July 3, 2010			July 4, 2009
Net income	$	20,567		$	16,865
Foreign currency translation (loss) gain, net of taxes of $13 and ($56), respectively		(2,602	)		2,669
Fair value adjustment on derivatives designated as cash flow hedges, net of taxes of ($1,195) and $1,065, respectively		1,962			(1,828	)
Reclassification adjustments on cash flow hedges settled and included in net income, net of taxes of $185 and ($431), respectively		(304	)		634
Unrealized (loss) gain on available-for-sale securities, net of taxes of $58 and ($63), respectively		(95	)		109
Comprehensive income	$	19,528		$	18,449

	Six Months Ended
(in thousands)	July 3, 2010			July 4, 2009
Net income	$	41,225		$	33,945
Foreign currency translation (loss) gain, net of taxes of $29 and ($7), respectively		(4,033	)		1,295
Fair value adjustment on derivatives designated as cash flow hedges, net of taxes of ($1,805) and $913, respectively		2,970			(1,546	)
Reclassification adjustments on cash flow hedges settled and included in net income, net of taxes of $49 and ($562), respectively		(79	)		820
Unrealized gain on available-for-sale securities, net of taxes of ($32) and ($75), respectively		54			129
Comprehensive income	$	40,137		$	34,643

The after-tax components of accumulated other comprehensive income (loss) as of July 3, 2010 and January 2, 2010, were as follows:

	Net
	Unrealized
	(Loss) Gain								Net		Total
	on Derivative			Post-			Foreign		Unrealized		Accumulated
	Instruments			retirement			Currency		Gain on		Other
	Qualifying as			Plan Liability			Translation		Available-for-		Comprehensive
(in thousands)	Hedges			Adjustment			Adjustment		sale Investments		Income
Balance at January 2, 2010	$	(1,289	)	$	(24	)	$	7,500	$	194	$	6,381
Balance at July 3, 2010	$	1,602		$	(24	)	$	3,467	$	248	$	5,293

8. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the six month period ended July 3, 2010 were:

	Six Months Ended
(in thousands)	July 3, 2010
Goodwill, beginning of the period	$	690,899
Allocation of goodwill to sale of non-strategic assets		(6,400	)
Effect of currency translation		(1,815	)
Goodwill, end of the period	$	682,684

During the first quarter of 2010, we sold theHer Option^®Global Endometrial Ablation product line for $20.5 million and used the proceeds to pay down our debt. The final sale price after adjustment based on working capital balances at the time of sale was $19.5 million. We allocated a portion of our goodwill to the sale based on the relative fair value of theHer Option^®product line and our remaining business. The consideration, less goodwill,

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the carrying value of tangible and intangible assets and related disposal costs resulted in a pre-tax gain of $7.7 million, which is included in “gain on sale of non-strategic assets” in the Consolidated Statements of Operations. As the majority of the goodwill that was allocated to theHer Option^®product line had no tax basis, we recorded a $5.1 million tax provision against the gain resulting in an effective tax rate of 65.7 percent of the gain on sale ofHer Option^®.

The following table provides additional information concerning intangible assets:

	July 3, 2010							January 2, 2010
	Gross carrying		Accumulated			Net book		Gross carrying		Accumulated			Net book
(in thousands)	amount		amortization			value		amount		amortization			value
Developed and core technology	$	132,953	$	(87,708	)	$	45,245	$	137,553	$	(85,922	)	$	51,631
Other intangibles Amortized
Patents		11,196		(9,539	)		1,657		11,510		(9,693	)		1,817
Licenses		17,423		(9,623	)		7,800		15,913		(9,034	)		6,879
Trademarks		2,233		(2,013	)		220		2,208		(1,767	)		441
Total amortized other intangible assets		30,852		(21,175	)		9,677		29,631		(20,494	)		9,137
Unamortized Trademarks		40,800		—			40,800		40,800		—			40,800
Total other intangibles		71,652		(21,175	)		50,477		70,431		(20,494	)		49,937
Total intangible assets	$	204,605	$	(108,883	)	$	95,722	$	207,984	$	(106,416	)	$	101,568

The estimated amortization expense for currently-owned intangibles, as presented above, for the years 2010 through 2014 is $12.0 million, $11.3 million, $9.1 million, $9.0 million and $6.9 million, respectively.

During the second quarter of 2009, we purchased a license for the exclusive rights to certain patents through the year 2018 for $9.0 million, of which $7.2 million has been paid as of July 3, 2010, and the remaining $1.8 million is structured to be paid out within the next year, in quarterly intervals. All payments related to the patents are included in licenses and will be amortized over 7.7 years, which is the remaining useful life of the patents.

9. Debt

Senior Secured Credit Facility

On July 20, 2006, in conjunction with the Laserscope acquisition, our wholly-owned subsidiary, American Medical Systems, Inc. (AMS), entered into a credit and guarantee agreement (the Credit Facility) with CIT Healthcare LLC, as agent, and certain lenders from time to time party thereto. AMS and each majority-owned domestic subsidiary of AMS are parties to the Credit Facility as guarantors of all of the obligations of AMS arising under the Credit Facility. Each of the subsidiary guarantors is 100 percent owned by us and the guarantees are joint and several. The obligations of AMS and each of the guarantors arising under the Credit Facility are secured by a first priority security interest granted to the agent on substantially all of their respective assets, including a mortgage on the AMS facility in Minnetonka, Minnesota.

The six-year senior secured Credit Facility consists of (i) term loan debt and (ii) a revolving credit facility of up to $65.0 million which is available to fund ongoing working capital needs, including future capital expenditures and permitted acquisitions. As of July 3, 2010 and January 2, 2010, there were $59.4 million and $125.3 million, respectively, of term loans outstanding under the Credit Facility.

At our option, term loans under the Credit Facility (other than swing line loans) bear interest at a variable rate based on LIBOR or an alternative variable rate based on the greater of the prime rate or the federal funds effective rate plus 0.5 of 1.0 percent (Federal Funds Rate) plus an applicable margin. The applicable margin for term loans based on LIBOR is 2.25 percent per annum, while the applicable margin for term loans based on the prime rate or the Federal Funds Rate is 1.25 percent per annum. As of July 3, 2010, all debt under the Credit Facility had a variable interest rate based on the LIBOR index. The applicable margin for loans under the revolving credit facility is determined by reference to our total leverage ratio, as defined in the Credit Facility. In addition to initial Credit Facility fees and reimbursement of agent expenses, we are obligated to pay commitment fees on the revolving credit facility.

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The term loans amortize 1.0 percent of the current principal balance quarterly from December 2006 through September 2011 and the remaining 95 percent will amortize December 2011 through July 2012. In addition, mandatory prepayments are due under the Credit Facility equal to (i) 50 percent of Excess Cash Flow (defined generally as net income, plus depreciation and amortization and other non-cash charges including in-process research and development (IPR&D), plus decreases or minus increases in working capital, minus capital expenditures (to the extent not financed) and amortization payments with respect to the term loan, and any other indebtedness permitted under the loan documents), (ii) 100 percent of the net proceeds of any asset sale (subject to a limited reinvestment option and a $2.5 million exception), (iii) 100 percent of the net proceeds of any debt (including convertible securities) or preferred stock issuance, and (iv) 50 percent of the net proceeds of any other equity issuance. Amounts due under the Credit Facility may also be voluntarily prepaid without premium or penalty.

During the first quarter of 2010, we sold theHer Option^®product line for $20.5 million and used the proceeds to pay down our debt. Amortization and other prepayments of $20.1 million and $65.8 million were made during the three and six months ended July 3, 2010, respectively. Amortization and other prepayments of $20.5 million and $29.1 million were made during the three and six months ended July 4, 2009, respectively.

The Credit Facility contains affirmative and negative covenants and other limitations (subject to various carve-outs and baskets). The covenants limit: (a) the making of investments, the amount of capital expenditures, 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 acquisitions under certain conditions, (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 indebtedness, and (d) substantial changes in the nature of the companies’ business. The Credit Facility also contains financial covenants which require us to maintain predetermined ratio levels related to leverage, interest coverage, fixed charges, and a limit on capital expenditures. In addition, the Credit Facility contains customary events of default, including payment and covenant defaults and material inaccuracy of representations. The Credit Facility further permits the taking of customary remedial action upon the occurrence and continuation of an event of default, including the acceleration of obligations then outstanding under the Credit Facility.

Fees of $10.5 million are classified as debt discount and are being accreted to amortization of financing costs using the effective interest method over a six year period. Additional debt issuance costs of approximately $2.4 million are recorded as other long term assets and are being amortized over six years using the straight-line method. Upon payment of the prepayments described above, a pro rata portion of the related fees and debt issuance costs of $0.3 million and $1.0 million was immediately charged to amortization of financing costs in three and six months ended July 3, 2010, respectively, and $0.4 million and $0.5 million was immediately charged to amortization of financing costs in the three and six months ended July 4, 2009, respectively.

Amendment of Credit Facility

On August 12, 2009, we entered into a Consent and Second Amendment to our Credit Facility, which allowed us to exchange a portion of our existing convertible senior subordinated notes for new convertible senior subordinated notes as discussed below. On October 29, 2007, we entered into a First Amendment of our Credit Facility to modify certain financial covenant ratios as defined in the Credit Facility (the First Amendment). Pursuant to the terms of the First Amendment, certain of the financial tests and covenants were amended and restated, including the interest coverage ratio, the total leverage ratio, the fixed charge coverage ratio, and the prior year maximum consolidated capital expenditures.

Convertible Senior Subordinated Notes Due 2036

On June 27, 2006, we issued convertible senior subordinated notes with a stated maturity of July 1, 2036 (the 2036 Notes). The 2036 Notes bear a fixed interest rate of 3.25 percent per year, payable semiannually. The 2036 Notes are our direct, unsecured, senior subordinated obligations, rank junior to the senior secured Credit Facility and will rank junior in right of payment to all of our future senior secured debt as provided in the indenture for the 2036 Notes. The 2036 Notes have the same rank as our convertible notes that are due in 2041, which are discussed below.

11

In March 2009, we repurchased 2036 Notes with a principal amount of $27.3 million in exchange for a cash payment of $21.1 million. In connection with this transaction, we recorded a pre-tax gain on extinguishment of debt of $4.6 million.

On September 21, 2009, we exchanged $250.0 million in principal of the 2036 Notes for $250.0 million in principal of new convertible senior subordinated notes with a stated maturity of September 15, 2041 (the 2041 Notes). Further information on the 2041 Notes is provided following this section.

We separately account for the liability and equity components of our 2036 Notes in a manner that reflects our nonconvertible borrowing rate. The equity component of our 2036 Notes was $45.4 million as of July 3, 2010 and January 2, 2010, and is recorded in additional paid-in capital. As of July 3, 2010, the principal amount of the liability component, its unamortized discount, and its net carrying amount were $62.0 million, $10.1 million and $51.9 million, respectively. The unamortized discount will be amortized over a remaining period of 3.0 years and the amortization expense is included in “amortization of financing costs” on the Consolidated Statements of Operations. As of January 2, 2010, the principal amount of the liability component, its unamortized discount, and its net carrying amount were $62.0 million, $11.5 million and $50.5 million, respectively. The effective interest rate on the liability component was 9.5% for each of the three and six months ended July 3, 2010 and July 4, 2009. During the three and six months ended July 3, 2010, we recognized $0.5 million and $1.0 million, respectively, of interest expense representing the contractual interest coupon on our 2036 Notes, and $0.7 million and $1.4 million, respectively, of amortization expense related to the discount on the liability component. During the three and six months ended July 4, 2009, we recognized $2.5 million and $5.2 million, resepectively, of interest expense representing the contractual interest coupon on our 2036 Notes, and $3.3 million and $6.7 million, respectively of amortization expense related to the discount on the liability component.

In addition to regular interest on the 2036 Notes, we will also pay contingent interest beginning July 1, 2011 at 0.25% of the average trading price of the 2036 Notes, if the average trading price for the five consecutive trading days immediately before the last trading day preceding the relevant six-month period equals or exceeds 120 percent of the principal amount of the 2036 Notes.

Our 2036 Notes are convertible under the following circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2036 Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment: (1) when, during any fiscal quarter, the last reported sale price of our common stock is greater than 130% of the conversion price for at least 20 trading days in the 30 trading-day period ending on the last trading day of the preceding fiscal quarter; (2) during the five trading days immediately after any five consecutive trading-day period in which the trading price of a 2036 Note for each day of that period was less than 98% of the product of the closing price of our common stock and the applicable conversion rate; (3) if specified distributions to holders of our common stock occur; (4) if we call the 2036 Notes for redemption; (5) if an event or change occurs that results in conversion according to the Indenture; or (6) during the 60 days prior to, but excluding, any scheduled repurchase date or maturity date. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2036 Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock. If a holder elects to convert its 2036 Notes in connection with a designated event or change that occurs prior to July 1, 2013, we will pay, to the extent described in the Indenture, a make whole premium by increasing the conversion rate applicable to such 2036 Notes. Conversion of our 2036 Notes into common stock could result in dilution to our stockholders. From time to time, our 2036 Notes hold a fair value below their conversion rate. Any redemption due to the trading price discount, described in (2) above, would be subject to the restrictions imposed by the Credit Facility and would occur at the lower of market or conversion value, which would likely be substantially below the par value of the debt. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility.

We have the right to redeem for cash all or a portion of the 2036 Notes on or after July 6, 2011 at specified redemption prices as provided in the Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2036 Notes may require us to purchase all or a portion of their 2036 Notes for cash on July 1, 2013; July 1, 2016; July 1, 2021; July 1, 2026; and July 1, 2031 or in the event of a designated event or change, at a purchase price equal to 100 percent of the principal amount of the 2036 Notes to be repurchased plus accrued and unpaid interest and contingent interest.

Convertible Senior Subordinated Notes Due 2041

On September 21, 2009, we exchanged $250.0 million in principal amount of our 2036 Notes for newly issued 2041 Notes. The 2041 Notes bear a fixed interest rate of 4.0 percent per year, payable semiannually. The 2041 Notes are

12

our direct, unsecured, senior subordinated obligations, rank junior to the senior secured Credit Facility and will rank junior in right of payment to all of our future senior debt as provided in the indenture for the 2041 Notes. The 2041 Notes have the same rank as our 2036 Notes.

Similar to our 2036 Notes, we separately account for the liability and equity components of our 2041 Notes in a manner that reflects our nonconvertible borrowing rate. The excess of the principal amount of the liability component over its carrying amount is treated as debt discount and amortized using the effective interest method. In addition, debt issuance costs of approximately $7.7 million were allocated to the liability and equity components of the 2041 Notes. Approximately $5.3 million of the debt issuance costs were allocated to the liability component, recorded in other long-term assets, and are being amortized using the straight line method over seven years (representing the time period until the first put date under the 2041 Notes). Approximately $2.4 million of the debt issuance costs were allocated to the equity component and are treated as equity issuance costs and are not amortized.

The equity component of our 2041 Notes was $76.4 million as of July 3, 2010 and January 2, 2010, and is recorded in additional paid-in capital. As of July 3, 2010, the principal amount of the liability component, its unamortized discount, and its net carrying amount were $250.0 million, $72.6 million and $177.4 million, respectively. The unamortized discount will be amortized over a remaining period of 6.2 years and the amortization expense is included in “amortization of financing costs” on the Consolidated Statements of Operations. As of January 2, 2010, the principal amount of the liability component, its unamortized discount, and its net carrying amount were $250.0 million, $76.7 million and $173.3 million, respectively. The effective interest rate on the liability component was 10.2% for the three and six months ended July 3, 2010. During the three and six months ended July 3, 2010, we recognized $2.5 million and $4.9 million, respectively, of interest expense representing the contractual interest coupon on our 2041 Notes, and $2.1 million and $4.1 million of amortization expense related to the discount on the liability component.

In addition to regular interest on the 2041 Notes, we will also pay contingent interest beginning September 15, 2016 at 0.75% of the average trading price of the 2041 Notes, if the average trading price for the five trading days immediately before the first trading day preceding the relevant six-month period equals or exceeds 130 percent of the principal amount of the 2041 Notes.

Our 2041 Notes are convertible under the following circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2041 Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment: (1) when, during any fiscal quarter commencing after January 2, 2010 (and only during such fiscal quarter), the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on the applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2041 Notes for each day of that period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate; (3) if we call the 2041 Notes for redemption; (4) if specified distributions to holders of our common stock occur; (5) if an event or change occurs that results in conversion according to the Indenture; or (6) during the 60 days prior to, but excluding, any scheduled repurchase date or maturity date. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2041 Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock. If a holder elects to convert its 2041 Notes in connection with a designated event or change, we will pay, to the extent described in the Indenture, a make whole premium by increasing the conversion rate applicable to such 2041 Notes. Conversion of our 2041 Notes into common stock could result in dilution to our stockholders. Similar to our 2036 Notes, from time to time, our 2041 Notes may hold a fair value below their conversion rate. Any redemption due to the trading price discount, described in (2) above, would be subject to the restrictions imposed by the Credit Facility and would occur at the lower of market or conversion value, which would likely be substantially below the par value of the debt. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility.

If certain conditions are met, we will have the right to redeem for cash all or a portion of the 2041 Notes on or after September 15, 2016 at specified redemption prices as provided in the Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2041 Notes may require us to purchase all or a portion of their 2041 Notes for cash on September 15, 2016 or in the event of a designated event or change, at a purchase price equal to 100 percent of the principal amount of the 2041 Notes to be repurchased plus accrued and unpaid interest and contingent interest.

13

Supplemental Guarantor Information

The 2036 Notes and the 2041 Notes (Convertible Notes) are fully and unconditionally guaranteed on an unsecured senior subordinated basis by four of our significant domestic subsidiaries: American Medical Systems, Inc., AMS Sales Corporation, AMS Research Corporation and Laserscope (the Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100 percent owned by us. The guarantees are joint and several, and are subordinated in right of payment to the guaranteed obligations of our significant domestic subsidiaries under our senior Credit Facility.

The following supplemental condensed consolidating financial information presents the statements of operations for each of the three and six month periods ended July 3, 2010 and July 4, 2009, the balance sheets as of July 3, 2010 and January 2, 2010, and the statements of cash flows for each of the six month periods ended July 3, 2010 and July 4, 2009, for the Guarantor Subsidiaries as a group, and separately for our non-Guarantor Subsidiaries as a group. In the condensed consolidating financial statements, we and the Guarantor Subsidiaries account for investment in wholly-owned subsidiaries using the equity method.

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Operations
(In thousands)

	Three Months Ended July 3, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	123,309		$	31,305		$	(18,246	)	$	136,368
Cost of sales		—			22,256			18,299			(17,750	)		22,805
Gross profit		—			101,053			13,006			(496	)		113,563
Operating expenses
Marketing and selling		—			35,008			11,106			—			46,114
Research and development		—			13,604			233			—			13,837
General and administrative		—			11,797			—			—			11,797
Amortization of intangibles		—			3,030			—			—			3,030
Total operating expenses		—			63,439			11,339			—			74,778
Operating income		—			37,614			1,667			(496	)		38,785
Other (expense) income
Royalty income		—			47			—			—			47
Interest expense		(2,979	)		(605	)		(24	)		24			(3,584	)
Amortization of financing costs		(2,977	)		(369	)		—			—			(3,346	)
Gain on extinguishment of debt		—			—			—			—			—
Other income (expense)		—			671			(112	)		(74	)		485
Total other (expense) income		(5,956	)		(256	)		(136	)		(50	)		(6,398	)
(Loss) income before income taxes		(5,956	)		37,358			1,531			(546	)		32,387
Provision for income taxes		(2,245	)		13,718			553			(206	)		11,820
Equity in earnings of subsidiary		24,618			978			—			(25,596	)		—
Net income	$	20,907		$	24,618		$	978		$	(25,936	)	$	20,567

14

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Operations
(In thousands)

	Six Months Ended July 3, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	246,167		$	60,972		$	(35,845	)	$	271,294
Cost of sales		—			42,831			35,636			(34,635	)		43,832
Gross profit		—			203,336			25,336			(1,210	)		227,462
Operating expenses
Marketing and selling		—			72,668			21,643			—			94,311
Research and development		—			27,119			227			—			27,346
General and administrative		—			24,487			—			—			24,487
Amortization of intangibles		—			6,077			—			—			6,077
Total operating expenses		—			130,351			21,870			—			152,221
Operating income		—			72,985			3,466			(1,210	)		75,241
Other (expense) income
Royalty income		—			355			—			—			355
Interest expense		(5,990	)		(1,541	)		(55	)		48			(7,538	)
Amortization of financing costs		(5,855	)		(1,184	)		—			—			(7,039	)
Gain on sale of non-strategic assets		—			7,719			—			—			7,719
Gain on extinguishment of debt		—			—			—			—			—
Other income (expense)		—			409			(332	)		(108	)		(31	)
Total other (expense) income		(11,845	)		5,758			(387	)		(60	)		(6,534	)
(Loss) income before income taxes		(11,845	)		78,743			3,079			(1,270	)		68,707
Provision for income taxes		(4,466	)		31,320			1,107			(479	)		27,482
Equity in earnings of subsidiary		49,395			1,972			—			(51,367	)		—
Net income	$	42,016		$	49,395		$	1,972		$	(52,158	)	$	41,225

15

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Operations
(In thousands)

	Three Months Ended July 4, 2009
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	113,514		$	28,043		$	(15,169	)	$	126,388
Cost of sales		—			20,814			16,282			(15,488	)		21,608
Gross profit		—			92,700			11,761			319			104,780
Operating expenses
Marketing and selling		—			33,639			9,214			—			42,853
Research and development		—			13,198			(32	)		—			13,166
General and administrative		—			11,660			—			—			11,660
Amortization of intangibles		—			3,401			—			—			3,401
Total operating expenses		—			61,898			9,182			—			71,080
Operating income		—			30,802			2,579			319			33,700
Other (expense) income
Royalty income		—			874			—			—			874
Interest expense		(2,548	)		(2,414	)		(52	)		48			(4,966	)
Amortization of financing costs		(3,292	)		(682	)		—			—			(3,974	)
Gain on extinguishment of debt		—			—			—			—			—
Other income (expense)		—			468			327			(28	)		767
Total other (expense) income		(5,840	)		(1,754	)		275			20			(7,299	)
(Loss) income before income taxes		(5,840	)		29,048			2,854			339			26,401
Provision for income taxes		(2,202	)		10,617			994			127			9,536
Equity in earnings of subsidiary		20,291			1,860			—			(22,151	)		—
Net income	$	16,653		$	20,291		$	1,860		$	(21,939	)	$	16,865

16

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Operations
(In thousands)

	Six Months Ended July 4, 2009
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Net sales	$	—		$	225,065		$	55,341		$	(30,380	)	$	250,026
Cost of sales		—			44,420			31,317			(30,787	)		44,950
Gross profit		—			180,645			24,024			407			205,076
Operating expenses
Marketing and selling		—			67,537			18,664			—			86,201
Research and development		—			25,984			(7	)		—			25,977
General and administrative		—			22,439			—			—			22,439
Amortization of intangibles		—			6,666			—			—			6,666
Total operating expenses		—			122,626			18,657			—			141,283
Operating income		—			58,019			5,367			407			63,793
Other (expense) income
Royalty income		—			1,807			—			—			1,807
Interest expense		(5,249	)		(5,110	)		(115	)		98			(10,376	)
Amortization of financing costs		(6,762	)		(1,193	)		—			—			(7,955	)
Gain on extinguishment of debt		4,562			—			—			—			4,562
Other income (expense)		—			1,358			160			(96	)		1,422
Total other (expense) income		(7,449	)		(3,138	)		45			2			(10,540	)
(Loss) income before income taxes		(7,449	)		54,881			5,412			409			53,253
Provision for income taxes		(2,809	)		20,080			1,884			153			19,308
Equity in earnings of subsidiary		38,329			3,528			—			(41,857	)		—
Net income	$	33,689		$	38,329		$	3,528		$	(41,601	)	$	33,945

17

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Balance Sheet
(In thousands)

	As of July 3, 2010
	American
	Medical					Non-
	Systems			Guarantor		Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries		Subsidiaries			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	—		$	11,014	$	12,590		$	—		$	23,604
Short-term investments		23,961			20,392		113			—			44,466
Accounts receivable, net		623,858			47,417		28,879			(610,465	)		89,689
Inventories, net		—			31,484		7,283			(5,310	)		33,457
Deferred income taxes		—			12,055		981			—			13,036
Other current assets		—			6,887		1,587			—			8,474
Total current assets		647,819			129,249		51,433			(615,775	)		212,726
Property, plant and equipment, net		—			41,356		1,222			—			42,578
Goodwill		—			621,792		84,913			(24,021	)		682,684
Developed and core technology, net		—			45,245		—			—			45,245
Other intangibles, net		—			50,477		—			—			50,477
Investment in subsidiaries		244,283			42,405		—			(286,688	)		—
Other long-term assets, net		4,751			223		641			—			5,615
Total assets	$	896,853		$	930,747	$	138,209		$	(926,484	)	$	1,039,325
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	890		$	561,507	$	74,970		$	(627,577	)	$	9,790
Accrued compensation expenses		—			20,596		3,636			—			24,232
Accrued warranty expense		—			2,437		(28	)		—			2,409
Income taxes payable		(2,048	)		4,948		259			—			3,159
Other accrued expenses		3,028			15,242		3,629			—			21,899
Total current liabilities		1,870			604,730		82,466			(627,577	)		61,489
Non-current liabilities
Long-term debt		229,343			58,102		—			—			287,445
Intercompany loans payable		—			—		12,219			(12,219	)		—
Deferred income taxes		57,969			1,085		1,119			—			60,173
Long-term income taxes payable		—			18,802		—			—			18,802
Long-term employee benefit obligations		—			3,745		—			—			3,745
Total non-current liabilities		287,312			81,734		13,338			(12,219	)		370,165
											��
Total liabilities		289,182			686,464		95,804			(639,796	)		431,654
Stockholders’ equity
Common stock		760			—		128			(128	)		760
Additional paid-in capital		421,630			3,424		57,659			(61,083	)		421,630
Accumulated other comprehensive income		5,292			2,744		2,876			(5,619	)		5,293
Retained earnings (deficit)		179,989			238,115		(18,258	)		(219,858	)		179,988
Total stockholders’ equity		607,671			244,283		42,405			(286,688	)		607,671
Total liabilities and stockholders’ equity	$	896,853		$	930,747	$	138,209		$	(926,484	)	$	1,039,325

18

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Balance Sheet
(In thousands)

	As of January 2, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor						Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	—		$	16,973		$	13,697		$	—		$	30,670
Short-term investments		4,834			14,489			545			—			19,868
Accounts receivable, net		614,392			58,359			29,772			(599,933	)		102,590
Inventories, net		—			27,750			6,853			(4,327	)		30,276
Deferred income taxes		—			13,466			1,404			—			14,870
Other current assets		—			4,947			1,120			—			6,067
Total current assets		619,226			135,984			53,391			(604,260	)		204,341
Property, plant and equipment, net		—			42,661			1,459			—			44,120
Goodwill		—			628,193			86,727			(24,021	)		690,899
Developed and core technology, net		—			51,631			—			—			51,631
Other intangibles, net		—			49,937			—			—			49,937
Investment in subsidiaries		190,818			45,579			—			(236,397	)		—
Other long-term assets, net		5,133			839			251			—			6,223
Total assets	$	815,177		$	954,824		$	141,828		$	(864,678	)	$	1,047,151
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	(5,058	)	$	558,217		$	72,015		$	(616,060	)	$	9,114
Accrued compensation expenses		—			24,350			5,253			—			29,603
Accrued warranty expense		—			2,293			—			—			2,293
Income taxes payable		(13,272	)		16,371			1,396			—			4,495
Other accrued expenses		3,885			17,826			4,049			—			25,760
Total current liabilities		(14,445	)		619,057			82,713			(616,060	)		71,265
Non-current liabilities
Long-term debt		223,876			122,353			—			—			346,229
Intercompany loans payable		—			—			12,221			(12,221	)		—
Deferred income taxes		60,387			645			1,315			—			62,347
Long-term income taxes payable		—			18,206			—			—			18,206
Long-term employee benefit obligations		—			3,745			—			—			3,745
Total non-current liabilities		284,263			144,949			13,536			(12,221	)		430,527
Total liabilities		269,818			764,006			96,249			(628,281	)		501,792
Stockholders’ equity
Common stock		747			—			9			(9	)		747
Additional paid-in capital		399,468			3,424			57,540			(60,964	)		399,468
Accumulated other comprehensive income		6,381			(202	)		7,137			(6,935	)		6,381
Retained earnings (deficit)		138,763			187,596			(19,107	)		(168,489	)		138,763
Total stockholders’ equity		545,359			190,818			45,579			(236,397	)		545,359
Total liabilities and stockholders’ equity	$	815,177		$	954,824		$	141,828		$	(864,678	)	$	1,047,151

19

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Cash Flows
(In thousands)

	Six Months Ended July 3, 2010
	American
	Medical						Non-
	Systems			Guarantor			Guarantor					Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations		Total
Cash flows from operating activities
Net cash (used in) provided by operating activities	$	(18,031	)	$	69,662		$	(1,750	)	$	—	$	49,881
Cash flows from investing activities
Purchase of property, plant and equipment		—			(3,412	)		(134	)		—		(3,546	)
Purchase of other intangibles		—			(1,657	)		—			—		(1,657	)
Sale of non-strategic assets, net		—			19,070			—			—		19,070
Purchase of short-term investments		—			(41,142	)		(232	)		—		(41,374	)
Sale of short-term investments		—			16,117			649			—		16,766
Settlement of derivative contracts, net		—			1,277			—			—		1,277
Net cash provided by (used in) investing activities		—			(9,747	)		283			—		(9,464	)
Cash flows from financing activities
Intercompany notes		—			—			—			—		—
Issuance of common stock		17,206						—			—		17,206
Excess tax benefit from stock-based compensation		825			—			—			—		825
Payments on senior secured credit facility		—			(65,874	)		—			—		(65,874	)
Repurchase of convertible senior subordinated notes		—						—			—		—
Net cash provided by (used in) financing activities		18,031			(65,874	)		—			—		(47,843	)
Effect of exchange rates on cash		—			—			360			—		360
Net (decrease) in cash and cash equivalents		—			(5,959	)		(1,107	)		—		(7,066	)
Cash and cash equivalents at beginning of period		—			16,973			13,697			—		30,670
Cash and cash equivalents at end of period	$	—		$	11,014		$	12,590		$	—	$	23,604

20

American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statement of Cash Flows
(In thousands)

	Six Months Ended July 4, 2009
	American
	Medical						Non-
	Systems			Guarantor			Guarantor					Consolidated
	Holdings, Inc.			Subsidiaries			Subsidiaries			Eliminations		Total
Cash flows from operating activities
Net cash provided by operating activities	$	16,907		$	35,477		$	7,464		$	—	$	59,848
Cash flows from investing activities
Purchase of property, plant and equipment		—			(2,259	)		(203	)		—		(2,462	)
Purchase of other intangibles		—			(5,000	)		—			—		(5,000	)
Purchase of short-term investments		—			(18,134	)		(550	)		—		(18,684	)
Sale of short-term investments		—			30,500			—			—		30,500
Settlement of derivative contracts, net		—			(51	)		—			—		(51	)
Net cash provided by (used in) investing activities		—			5,056			(753	)		—		4,303
Cash flows from financing activities
Intercompany notes		—			3,089			(3,089	)		—		—
Issuance of common stock		3,908			—			—			—		3,908
Excess tax benefit from stock-based compensation		310			—			—			—		310
Payments on senior secured credit facility		—			(29,111	)		—			—		(29,111	)
Repurchase of convertible senior subordinated notes		(21,125	)		—			—			—		(21,125	)
Net cash used in financing activities		(16,907	)		(26,022	)		(3,089	)		—		(46,018	)
Effect of exchange rates on cash		—			—			(156	)		—		(156	)
Net increase in cash and cash equivalents		—			14,511			3,466			—		17,977
Cash and cash equivalents at beginning of period		—			3,143			8,499			—		11,642
Cash and cash equivalents at end of period	$	—		$	17,654		$	11,965		$	—	$	29,619

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10. Fair Value Measurements

Generally accepted accounting principles define and establish a framework for measuring fair value and providing disclosure about fair value measurements. Furthermore, U.S. GAAP specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect our own assumptions of market participant valuation (unobservable inputs). We have categorized our financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes our financial assets measured at fair value on a recurring basis as of July 3, 2010 (in thousands):

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
Description	Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets
Money market funds	$	43,646	$	—	$	—
Available-for-sale securities		707		—		—
Other short-term investments		—		113		—
Derivatives		—		2,823		—
Total	$	44,353	$	2,936	$	—
Liabilities
Derivatives	$	—	$	485	$	—

Money market funds: Our money market funds are highly liquid investments with a maturity of three months or less. These assets are classified within Level 1 of the fair value hierarchy because the money market funds are valued using quoted market prices in active markets.

Available-for-sale securities: As of July 3, 2010, our available-for-sale securities included common stock of Iridex Corporation. These securities are valued using quoted market prices multiplied by the number of shares owned.

Other short-term investments: Other short-term investments consist of short-term bonds. Investments for which quoted market prices are available are categorized as Level 1 in the fair value hierarchy. For the remaining investments, which have maturities of three months or less, the carrying amount is a reasonable estimate of fair value and these have been classified as Level 2.

Derivatives: The fair value of various foreign exchange forward contracts as of July 3, 2010 includes assets of $2.8 million, reported in other current assets, and liabilities of $0.5 million, reported in other accrued expenses. We measure our derivatives at fair value on a recurring basis using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. Refer toNote 11, Derivative Instruments and Hedging Activities, for more information regarding our derivatives.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Fair value measurements of non-financial assets and liabilities are primarily used in the impairment analysis of goodwill and other intangible assets. We review goodwill and other intangible assets for impairment annually, during the fourth quarter of each fiscal year, or as circumstances indicate the possibility of impairment. During the three and six months ended July 3, 2010, we had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

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Fair Value of Debt

The fair value of the Convertible Notes (seeNote 9, Debt)was estimated using quoted market prices. The fair value of the Credit Facility was estimated using a discounted cash flow analysis based on our current estimated incremental borrowing rate for a similar borrowing arrangement.

The following table summarizes the principal outstanding and estimated fair values of our long-term debt, including current maturities (in thousands):

	July 3, 2010				January 2, 2010
	Principal		Fair Value		Principal		Fair Value
2036 Notes	$	61,985	$	74,958	$	61,985	$	70,270
2041 Notes		250,000		329,375		250,000		304,983
Credit Facility		59,433		58,662		125,307		123,230
	$	371,418	$	462,995	$	437,292	$	498,483

11. Derivative Instruments and Hedging Activities

We are exposed to certain risks relating to our ongoing business operations. We use derivatives to mitigate a portion of our exposure to volatility in interest and foreign currency exchange rates. Interest rate swaps are used to manage interest rate risk associated with our floating rate debt. Foreign exchange forward contracts are used to manage the currency risk associated with forecasted sales to and receivables from certain subsidiaries, denominated in their local currencies. We hedge only exposures in the ordinary course of business.

We account for our derivative instruments at fair value provided we meet certain documentary and analytical requirements to qualify for hedge accounting treatment. Hedge accounting creates the potential for a Consolidated Statement of Operations match between the changes in fair values of derivatives and the changes in cost of the associated underlying transactions, in this case interest expense and translation gain or loss. Derivatives held by us are designated as hedges of specific exposures at inception, with an expectation that changes in the fair value will essentially offset the change in the underlying exposure. Discontinuance of hedge accounting is required whenever it is subsequently determined that an underlying transaction is not going to occur, with any gains or losses recognized in the Consolidated Statement of Operations at such time, with any subsequent changes in fair value recognized currently in earnings. Fair values of derivatives are determined based on quoted prices for similar contracts.

The interest rate swap contract outstanding at July 3, 2010 is designated as a cash flow hedge of the floating rate interest payments for a portion of our borrowings under the Credit Facility. The portion of borrowings subject to this swap contract is $30.0 million. This contract has a remaining term of two months. In addition, we have foreign currency exchange forward contract derivatives outstanding at July 3, 2010 which are designated as cash flow hedges of currency fluctuations for a portion of our forecasted sales to certain subsidiaries, denominated in Euros, British pounds, Canadian dollars and Australian dollars. These contracts have remaining terms between one and seventeen months. The notional amount of the foreign exchange forward contracts designated as cash flow hedges was $52.6 million and $48.4 million at July 3, 2010 and January 2, 2010, respectively. We have also entered into foreign exchange forward contracts to manage a portion of our exposure to foreign exchange rate fluctuations on certain inter-company receivables denominated in Euros, British pounds, Brazilian real, Canadian dollars and Australian dollars. These contracts are not designated as an accounting hedge, and the notional amount of these contracts at July 3, 2010 and January 2, 2010 was $26.6 million and $10.9 million, respectively. The associated underlying transactions are expected to occur within the next month.

The effective portion of the change in fair value of the interest rate swap and foreign currency exchange contracts is reported in accumulated other comprehensive income, a component of stockholders’ equity, and is being recognized as an adjustment to interest expense or other (expense) income, respectively, over the same period the related expenses are recognized in earnings. Ineffectiveness would occur when changes in the market value of the hedged transactions are not completely offset by changes in the market value of the derivatives. Gains and losses on derivatives representing hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized currently in earnings when incurred. No ineffectiveness was recognized during the three or six months ended July 3, 2010 or July 4, 2009. Amounts due from counterparties (unrealized hedge gains) or owed to counterparties (unrealized hedge losses) are included in accounts receivable, net or other accrued expenses, respectively. Cash receipts or payments related to our derivatives are generally classified in the Consolidated

23

Statements of Cash Flows as cash flows from operating activities, consistent with the related items being hedged, unless the derivative is not designated as a hedge or if hedge accounting is discontinued, in which case the receipts or payments are classified as cash flows from investing activities.

Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets is presented in the table below.

	Fair Values of Derivative Instruments
	Asset Derivatives						Liability Derivatives
	July 3, 2010			January 2, 2010			July 3, 2010			January 2, 2010
	Balance			Balance			Balance			Balance
	Sheet	Fair		Sheet	Fair		Sheet	Fair		Sheet	Fair
(in thousands)	Location	Value		Location	Value		Location	Value		Location	Value
Derivatives designated as hedging instruments
Interest rate swap contracts	Other current assets	$	—	Other current assets	$	—	Other accrued expenses	$	5	Other accrued expenses	$	299
Foreign exchange forward contracts	Other current assets		2,823	Other current assets		—	Other accrued expenses		308	Other accrued expenses		1,650
Total derivatives designated as hedging instruments		$	2,823		$	—		$	313		$	1,949
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Other current assets	$	—	Other current assets	$	10	Other accrued expenses	$	172	Other accrued expenses	$	—
Total derivatives not designated as hedging instruments		$	—		$	10		$	172		$	—
Total derivatives		$	2,823		$	10		$	485		$	1,949

At July 3, 2010, approximately $2.3 million of the existing gain on the foreign exchange forward contracts designated as a cash flow hedge that are in an asset position, and approximately $0.3 million of the existing loss on the foreign exchange forward contracts designated as a cash flow hedge that are in a liability position, all of which are included in accumulated other comprehensive income, are expected to be reclassified into earnings within the next twelve months.

We are exposed to credit losses in the event of non-performance by counterparties on these financial instruments, and although no assurances can be given, we do not expect any of the counterparties to fail to meet its obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date. To manage credit risks, we enter into derivative instruments with high quality financial institutions, which we monitor regularly and take action where possible to mitigate risk.

Information on the location and amounts of derivative gains and losses recorded in other comprehensive income (OCI) and recorded in the Consolidated Statements of Operations is presented in the table below.

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The Effect of Derivative Instruments on the Consolidated Statement of Operations

For the Three Months Ended July 3, 2010 and July 4, 2009
(in thousands)

						Location of Gain
Derivatives in	Amount of Gain (Loss)					(Loss) Reclassified	Amount of Gain (Loss) Reclassified
Cash Flow	Recognized in OCI on Derivatives					from Accumulated	from Accumulated OCI into Income
Hedging	(Effective Portion)					OCI into Income	(Effective Portion)
Relationships	July 3, 2010		July 4, 2009			(Effective Portion)	July 3, 2010			July 4, 2009
Interest rate swap contracts	$	89	$	533		Interest expense	$	(78	)	$	(877	)
Foreign exchange contracts		2,579		(2,362	)	Other income (expense)		567			(188	)
Total	$	2,668	$	(1,829	)		$	489		$	(1,065	)

Derivatives not	Location of Gain (Loss)	Amount of Gain (Loss) Recognized
Designated as	Recognized in Income	in Income on Derivatives
Hedging Instruments	on Derivatives	July 3, 2010		July 4, 2009
Foreign exchange contracts	Other income (expense)	$	454	$	(559	)

For the Six Months Ended July 3, 2010 and July 4, 2009
(in thousands)

						Location of Gain
Derivatives in	Amount of Gain (Loss)					(Loss) Reclassified	Amount of Gain (Loss) Reclassified
Cash Flow	Recognized in OCI on Derivatives					from Accumulated	from Accumulated OCI into Income
Hedging	(Effective Portion)					OCI into Income	(Effective Portion)
Relationships	July 3, 2010		July 4, 2009			(Effective Portion)	July 3, 2010			July 4, 2009
Interest rate swap contracts	$	286	$	1,162		Interest expense	$	(297	)	$	(1,911	)
Foreign exchange contracts		4,361		(2,238	)	Other income (expense)		425			529
Total	$	4,647	$	(1,076	)		$	128		$	(1,382	)

Derivatives not	Location of Gain (Loss)	Amount of Gain (Loss) Recognized
Designated as	Recognized in Income	in Income on Derivatives
Hedging Instruments	on Derivatives	July 3, 2010		July 4, 2009
Foreign exchange contracts	Other income (expense)	$	736	$	(206	)

12. Industry Segment Information and Foreign Operations

Since our inception, we have operated in the single industry segment of developing, manufacturing, selling and marketing medical devices.

We distribute products through our direct sales force and independent sales representatives in the United States, Canada, Australia, Brazil and Western Europe. Additionally, we distribute products through foreign independent distributors, primarily in Europe, Asia and South America, who then sell the products to medical institutions. No customer or distributor accounted for ten percent or more of net sales during the three and six month periods ended July 3, 2010 or July 4, 2009. Foreign subsidiary sales are predominantly to customers in Western Europe, Canada, Australia and Brazil and our foreign subsidiary assets are located in the same countries.

The following table presents net sales and long-lived assets (excluding deferred taxes) by geographical territory. No individual foreign country’s net sales or long-lived assets accounted for more than ten percent of consolidated net sales or consolidated long-lived assets.

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	Three Months Ended				Six Months Ended
(in thousands)	July 3, 2010		July 4, 2009		July 3, 2010		July 4, 2009
United States
Net sales	$	96,870	$	89,405	$	195,180	$	179,075
Long-lived assets		810,337		829,172		810,337		829,172
International
Net sales		39,498		36,983		76,114		70,951
Long-lived assets		16,262		17,550		16,262		17,550

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. Any statements not of historical fact may be considered 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 as a result of many factors, including, but not limited to, those discussed under the heading “Forward-Looking Statements” at the end of this item of the report.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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, valuation of share-based payments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The critical accounting policies that are most important in fully understanding and evaluating the financial condition and results of operations are discussed in our Form 10-K for the year ended January 2, 2010.

Overview

We are a world leader in developing and delivering innovative medical technology solutions to physicians treating men’s and women’s pelvic health conditions, thereby recognized as a technology leader in the markets we serve. Our growth is fueled by a robust pipeline of innovative products for significant, under-penetrated markets. We have a diverse product portfolio, which treats men’s incontinence, erectile dysfunction, and benign prostatic hyperplasia (BPH), and treats women’s incontinence and pelvic floor prolapse. We estimate there are as many as 1.6 billion incidences of these conditions in the global markets we serve, with many people suffering from multiple conditions. Treatment options for these conditions vary considerably depending on the severity of the condition. Approximately 350 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 addressable market is contained within this group of patients. Our product development and acquisition strategies have focused on expanding our product offering for surgical solutions, including less-invasive solutions for surgeons and their patients. Our primary physician customers include urologists, gynecologists, urogynecologists and colorectal surgeons.

Our net sales were $136.4 million and $271.3 million in the three and six month periods ended July 3, 2010, respectively, compared to $126.4 million and $250.0 million in the three and six months ended July 4, 2009, respectively. In the three and six months ended July 3, 2010, men’s health contributed $61.4 million and $125.8 million, or 45 percent and 46 percent of total net sales, respectively; BPH therapy contributed $29.2 million and $55.1 million, or 21 percent and 20 percent of total net sales, respectively; and women’s health contributed $44.5 million and $87.2 million, or 33 percent and 32 percent of total net sales, respectively.

We are making additional investments in support of long-term growth, to expand the market globally, and to strengthen our marketing, physician training, and regulatory functions outside the U.S. We also maintain our strong commitment to product innovation. Late in the second quarter of 2010 we launched the newGreenLight^™ XPS (Xcelerated Performance System) Laser Therapy System, and we also received U.S. Food and Drug Administration (FDA) 510(k) clearance for the MoXy^™ Liquid Cooled Fiber designed to be used with the newGreenLight^™ XPS. In addition, in our female continence product line, we received FDA 510(k) clearance for theMiniArc^® Precise Single-Incision Sling System for the treatment of female stress urinary incontinence (SUI).MiniArc^® Precise is the next generation of theMiniArc^® sling, the number one selling single-incision sling in the United States.

Our focus on managing our working capital, controlling costs, and driving operating leverage throughout our business continues to provide positive results. We generated net income of $20.6 million and $41.2 million in the three and six months ended July 3, 2010, compared to $16.9 million and $33.9 million in the three and six month periods ended July 4, 2009. Cash provided by operating activities totaled $49.9 million for the six months ended July 3, 2010, compared to $59.8 million in the six months ended July 4, 2009. We also retired $65.9 million and $56.4 million of debt in the six months ended July 3, 2010 and July 4, 2009, respectively.

27

Based on our areas of competitive strength, our strategy is to expand the reach of our products and address unmet needs in both established and new pelvic health markets. We determined that our Ovion female sterilization assets and technology (Ovion technology) and ourHer Option^® global endometrial cryoablation product line did not fit our long-term strategy. During the third quarter of 2009, we sold our Ovion technology for $23.6 million (see ourAnnual Report on Form 10-K for fiscal 2009,Notes to Consolidated Financial Statements — No. 5, Goodwill and Intangible Assets). In February of 2010, we sold theHer Option^® product line for $20.5 million (seeNotes to Consolidated Financial Statements — No. 8, Goodwill and Intangible Assets). We used the net proceeds from these sales to pay down our debt. The sale of these non-strategic assets will allow us to concentrate our efforts and resources on improving and expanding the global reach of our products to restore quality of life to men and women through innovative, life-changing solutions.

We maintain a website atwww.AmericanMedicalSystems.com.We are not including the information contained on our website as a part of, nor incorporating it by reference into, this Quarterly Report on Form 10-Q. We make available free of charge on our website our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, 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.

Results of Operations

The following table provides product category and geography details of our net sales for the three and six month periods ended July 3, 2010 compared to the three and six month periods ended July 4, 2009.

	Three Months Ended												Six Months Ended
(in thousands)	July 3, 2010			July 4, 2009			$ Increase			% Increase			July 3, 2010			July 4, 2009			$ Increase			% Increase
Net Sales
Men’s health	$	61,361		$	56,967		$	4,394			7.7	%	$	125,841		$	116,424		$	9,417			8.1	%
BPH therapy		29,176			28,084			1,092			3.9	%		55,087			53,473			1,614			3.0	%
Women’s health		44,491			38,467			6,024			15.7	%		87,239			74,769			12,470			16.7	%
Sub-total		135,028			123,518			11,510			9.3	%		268,167			244,666			23,501			9.6	%
Uterine health (a)		1,340			2,870			(1,530	)		-53.3	%		3,127			5,360			(2,233	)		-41.7	%
Total	$	136,368		$	126,388		$	9,980			7.9	%	$	271,294		$	250,026		$	21,268			8.5	%
Geography
United States	$	95,530		$	86,535		$	8,995			10.4	%	$	192,053		$	173,715		$	18,338			10.6	%
International		39,498			36,983			2,515			6.8	%		76,114			70,951			5,163			7.3	%
Sub-total		135,028			123,518			11,510			9.3	%		268,167			244,666			23,501			9.6	%
United States-Uterine health (a)		1,340			2,870			(1,530	)		-53.3	%		3,127			5,360			(2,233	)		-41.7	%
Total	$	136,368		$	126,388		$	9,980			7.9	%	$	271,294		$	250,026		$	21,268			8.5	%
	Three Months Ended												Six Months Ended
	July 3, 2010			July 4, 2009									July 3, 2010			July 4, 2009
Percent of net sales
Men’s health		45.0	%		45.1	%								46.4	%		46.6	%
BPH therapy		21.4	%		22.2	%								20.3	%		21.4	%
Women’s health		32.6	%		30.4	%								32.2	%		29.9	%
Sub-total		99.0	%		97.7	%								98.8	%		97.9	%
Uterine health (a)		1.0	%		2.3	%								1.2	%		2.1	%
Total		100.0	%		100.0	%								100.0	%		100.0	%
Geography
United States		71.0	%		70.7	%								71.9	%		71.6	%
International		29.0	%		29.3	%								28.1	%		28.4	%
Total		100.0	%		100.0	%								100.0	%		100.0	%

(a) The uterine health product line,Her Option^®was sold in February, 2010. Revenues in the first six months of 2010 consist of end-customer revenue earned prior to the date of sale, in addition to revenue earned as part of the product supply agreement, which was part of the divestiture agreement with CooperSurgical, Inc.

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The following table compares revenue, expense, and other income (expense) for the three and six months ended July 3, 2010 and July 4, 2009:

	Three Months Ended						$ Increase			% Increase			Six Months Ended						$ Increase			% Increase
(in thousands)	July 3, 2010			July 4, 2009			(Decrease)			(Decrease)			July 3, 2010			July 4, 2009			(Decrease)			(Decrease)
Net sales	$	136,368		$	126,388		$	9,980			7.9	%	$	271,294		$	250,026		$	21,268			8.5	%
Cost of sales	$	22,805		$	21,608			1,197			5.5	%	$	43,832		$	44,950			(1,118	)		-2.5	%
Gross profit		113,563			104,780			8,783			8.4	%		227,462			205,076			22,386			10.9	%
Operating expenses
Marketing and selling		46,114			42,853			3,261			7.6	%		94,311			86,201			8,110			9.4	%
Research and development		13,837			13,166			671			5.1	%		27,346			25,977			1,369			5.3	%
General and administrative		11,797			11,660			137			1.2	%		24,487			22,439			2,048			9.1	%
Amortization of intangibles		3,030			3,401			(371	)		-10.9	%		6,077			6,666			(589	)		-8.8	%
Total operating expenses		74,778			71,080			3,698			5.2	%		152,221			141,283			10,938			7.7	%
Operating income		38,785			33,700			5,085			15.1	%		75,241			63,793			11,448			17.9	%
Royalty income		47			874			(827	)		-94.6	%		355			1,807			(1,452	)		-80.4	%
Interest expense		(3,584	)		(4,966	)		(1,382	)		-27.8	%		(7,538	)		(10,376	)		(2,838	)		-27.4	%
Amortization of financing costs		(3,346	)		(3,974	)		(628	)		-15.8	%		(7,039	)		(7,955	)		(916	)		-11.5	%
Gain on extinguishment of debt		—			—			—			n/a			—			4,562			4,562			n/a
Gain on sale of non-strategic assets		—			—			—			n/a			7,719			—			—			n/a
Other income		485			767			(282	)		-36.8	%		(31	)		1,422			(1,453	)		-102.2	%
Income before taxes		32,387			26,401			5,986			22.7	%		68,707			53,253			15,454			29.0	%
Provision for income taxes		11,820			9,536			2,284			24.0	%		27,482			19,308			8,174			42.3	%
Net income	$	20,567		$	16,865		$	3,702			22.0	%	$	41,225		$	33,945		$	7,280			21.4	%
	Percent of Sales												Percent of Sales
	For the Three Months Ended												For the Six Months Ended
	July 3, 2010			July 4, 2009									July 3, 2010			July 4, 2009
Net sales		100.0	%		100.0	%								100.0	%		100.0	%
Cost of sales		16.7	%		17.1	%								16.2	%		18.0	%
Gross profit		83.3	%		82.9	%								83.8	%		82.0	%
Operating expenses
Marketing and selling		33.8	%		33.9	%								34.8	%		34.5	%
Research and development		10.1	%		10.4	%								10.1	%		10.4	%
General and administrative		8.7	%		9.2	%								9.0	%		9.0	%
Amortization of intangibles		2.2	%		2.7	%								2.2	%		2.7	%
Total operating expenses		54.8	%		56.2	%								56.1	%		56.5	%
Operating income		28.4	%		26.7	%								27.7	%		25.5	%
Royalty income		0.0	%		0.7	%								0.1	%		0.7	%
Interest expense		-2.6	%		-3.9	%								-2.8	%		-4.1	%
Amortization of financing costs		-2.5	%		-3.1	%								-2.6	%		-3.2	%
Gain on extinguishment of debt		0.0	%		0.0	%								0.0	%		1.8	%
Gain on sale of non-strategic assets		0.0	%		0.0	%								2.8	%		0.0	%
Other income		0.4	%		0.6	%								0.0	%		0.6	%
Income before taxes		23.7	%		20.9	%								25.3	%		21.3	%
Provision for income taxes		8.7	%		7.5	%								10.1	%		7.7	%
Net income		15.1	%		13.3	%								15.2	%		13.6	%

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Comparison of the Three Months Ended July 3, 2010 to the Three Months Ended July 4, 2009

Net sales.Net sales of $136.4 million in the second quarter of 2010 represented an increase of 7.9 percent compared to $126.4 million in the second quarter of 2009. The weakening of the U.S. dollar in the second quarter of 2010, as compared to the second quarter of 2009, increased sales approximately $0.3 million. Growth in our business continues to be driven by the success of innovative products, most recently our women’s health pelvic floor repair products, such asElevate^® anterior andElevate^® posterior, and in BPH therapy, the launch of the newGreenLight^™ XPS(Xcelerated Performance System) laser therapy system (GreenLight^™ XPS) late in the second quarter.

Men’s health products.Net sales of men’s health products increased 7.7 percent to $61.4 million in the second quarter of 2010, compared to $57.0 million in the second quarter of 2009. The increase in men’s health was driven by strong sales of theAMS 700^® MS^™ in our erectile restoration product line and theAMS 800^®Artificial Urinary Sphincter in our male continence product line.

BPH therapy products.Net sales from BPH therapy products increased 3.9 percent to $29.2 million in the second quarter of 2010, compared to $28.1 million in the same period in 2009. The increase was largely driven by strong sales of ourGreenLight^™ XPSconsole, which was launched late in the quarter, partially offset by a decrease in sales ofGreenlight^®fibers, primarily in the European market.

Women’s health products.Net sales of our women’s health products increased 15.7 percent to $44.5 million in the second quarter of 2010, compared to $38.5 million in the second quarter of 2009. We experienced strong growth in our pelvic floor repair product line driven by bothElevate^® anterior andElevate^® posterior. The female continence product line contributed modest but improving sales growth, particularly in the U.S., driven by theMiniArc^® Single-Incision Sling, which was partially offset by declines in certain international markets.

Uterine health products.We sold theHer Option^®Global Endometrial Ablation product line on February 16, 2010 (seeNotes to Consolidated Financial Statements — No. 8, Goodwill and Intangible Assets). Sales of $1.3 million in the three months ended July 3, 2010 resulted from the product supply agreement that is part of the divestiture agreement. We estimate the product supply agreement will result in approximately $0.5 to $1.0 million in sales during the second half of fiscal year 2010.

Net sales by geography and foreign exchange effects.Net sales in the United States, excluding theHer Option^®product line that was sold during the first quarter of 2010, increased 10.4 percent to $95.5 million in the second quarter of 2010 compared to $86.5 million in the second quarter of 2009. Growth in domestic sales was led by our Women’s health products. International net sales increased by 6.8 percent to $39.5 million in the second quarter of 2010 compared to $37.0 million in the second quarter of 2009. International growth was led by our male continence product line.

Gross profit.Gross profit improved to 83.3 percent of sales in the second quarter of 2010, from 82.9 percent in the second quarter of 2009. We realized higher margins primarily due to the impact of ongoing manufacturing efficiencies and cost reduction programs. Future gross profit will continue to depend upon product and geographic mix, production levels, labor costs, raw material costs and our ability to manage overhead costs.

Marketing and selling.As a percentage of sales, marketing and selling expenses were consistent at 33.8 percent in the second quarter of 2010 compared to 33.9 percent in the same period in the prior year. This is the result of improved leveraging of sales expenses, offset by investments in marketing efforts to support product launches and geographic expansion.

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. Research and development expenses as a percentage of sales were consistent at 10.1 percent in the second quarter of 2010 compared to 10.4 percent in the same period of 2009. These ratios are in line with our long-term goal for spending on research and development of approximately ten percent of sales.

General and administrative.General and administrative expenses as a percentage of sales decreased to 8.7 percent in the second quarter of 2010 from 9.2 percent in the second quarter of 2009, primarily as the second quarter of 2009 included certain incremental compensation related expenses. Our objective remains to leverage general and administrative expense as a percentage of sales.

Amortization of intangibles.Amortization of intangibles as a percentage of sales decreased to 2.2 percent in the second quarter of 2010 from 2.7 percent in the second quarter of 2009. The three month period ended July 3, 2010 reflects a decrease in amortization expense over the same period of 2009 primarily due to the sale of our Ovion technology in the third quarter of 2009 and the sale of theHer Option^® product line in the first quarter of 2010, as intangible assets were disposed of in these transactions, thereby reducing on-going amortization expense.

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Royalty income.Our royalty income is from licensing our intellectual property. We do not directly influence sales of the products on which these royalties are based and cannot give any assurance as to future income levels. Royalty income in the second quarter of 2010 was minimal, compared to approximately $0.9 million in the same period last year due to the sale of our Ovion technology in the third quarter of 2009 and the expiration of other royalty contracts.

Interest expense.Interest expense decreased by $1.4 million in the second quarter of 2010 from the comparable period in 2009 mainly due to the impact of debt prepayments made over the past year. Interest expense includes interest incurred on our 2036 Notes, which carry a fixed interest rate of 3.25 percent, the interest incurred on our 2041 Notes, which carry a fixed interest rate of 4.00 percent, and the interest incurred on our Credit Facility, which generally carries a floating interest rate of LIBOR plus 2.25 percent. We have an interest rate swap contract outstanding at July 3, 2010 that is designated as a cash flow hedge of the floating rate interest payments for a portion of our borrowings under the Credit Facility. At July 3, 2010, the portion of borrowings subject to this swap contract is $30.0 million, with a remaining term of two months. Including the impact of interest rate swaps, our weighted average interest rate on the credit facility was 3.0 percent and 4.4 percent for the three months ended July 3, 2010 and July 4, 2009, respectively. Average borrowings during the second quarter of 2010 on the Credit Facility were $68.6 million, compared to $214.1 million in the second quarter of 2009. Average borrowings on our 2036 Notes were $62.0 million and $312 million for the three months ended July 3, 2010 and July 4, 2009, respectively. Average borrowings on our 2041 Notes, which we issued in September of 2009 in exchange for 2036 Notes, were $250.0 million for the three months ended July 3, 2010.

Amortization of financing costs.Amortization of financing costs in the second quarter of 2010 and in the second quarter of 2009 was $3.3 million and $4.0 million, respectively, and was comprised of the incremental non-cash interest cost of our 2036 Notes and 2041 Notes, and amortization of the costs associated with the issuance of the Credit Facility, the 2036 Notes and the 2041 Notes. The lower amortization in the second quarter of 2010 was due to the impact of prepayments made over the past year, as we recognize a pro rata portion of the related debt discount and debt issuance costs when we retire debt.

Other income. Other income decreased by $0.3 million in the second quarter of 2010 compared to the same period in 2009. The primary cause of the change in other income relates to the impact of our foreign currency hedge transactions and fluctuations in foreign currencies against the U.S. dollar on foreign denominated inter-company receivables and payables.

Provision for income taxes.Our effective income tax rate was 36.5 percent and 36.1 percent for the second quarter of 2010 and second quarter of 2009, respectively. The increase in the current quarter effective tax rate is primarily due to the expiration of the federal research and development credit as of December 31, 2009, partially offset by our domestic manufacturing tax incentives.

Comparison of the Six Months Ended July 3, 2010 to the Six Months Ended July 4, 2009

Net sales.Net sales in the six months ended July 3, 2010 of $271.3 million represents an increase of 8.5 percent compared to the first six months ended July 4, 2009 of $250.0 million. Growth in our business continues to be driven by the success of innovative products, particularly ourElevate^® anterior andElevate^® posterior pelvic floor repair products and by the strength in our men’s health erectile restoration products, and most recently the newGreenLight^™ XPSconsole launched late in the second quarter.

Men’s health products.Net sales of men’s health products increased 8.1 percent to $125.8 million in the first six months of 2010 compared to $116.4 million in the first six months of 2009. This includes the positive impact of foreign currency exchange rates of approximately $1.5 million. Strong sales of ourAMS 700^® MS^™, in our erectile restoration product line, andAMS 800^®Artificial Urinary Sphincter, in our male continence product line, led the overall growth in the men’s health products.

BPH therapy products.Net sales from BPH therapy products increased 3.0 percent to $55.1 million in the first six months of 2010 compared to $53.5 million in the same period in 2009. This includes the positive impact of foreign currency exchange rates of approximately $0.6 million. The increase was driven by sales of ourGreenLight^® consoles and other laser therapy products, partially offset by a decrease in sales ofGreenLight^®fibers in our European markets.

Women’s health products.Net sales of our women’s health products increased 16.7 percent to $87.2 million in the first six months of 2010 compared to $74.8 million in the first six months of 2009. This includes the positive impact of foreign currency exchange rates of approximately $0.8 million. We experienced strong growth in our pelvic floor repair product line driven both byElevate^® anterior andElevate^® posterior. In addition, the female continence

31

product line contributed modest sales growth in the U.S., which was partially offset by declines in certain international markets.

Uterine health products.We sold theHer Option^®Global Endometrial Ablation product line on February 16, 2010 (seeNotes to Consolidated Financial Statements — No. 8, Goodwill and Intangible Assets), and thus the six month period ended July 3, 2010 includes approximately six weeks of end-customer net sales of $1.2 million from that product in addition to sales of approximately $1.9 million after February 16, 2010 from the product supply agreement that is part of the divestiture agreement. We estimate the product supply agreement will result in approximately $0.5 to $1.0 million in sales during the second half of fiscal year 2010.

Net sales by geography and foreign exchange effects.Net sales in the United States, excluding theHer Option^®product line that was sold during the first quarter of 2010, increased 10.6 percent to $192.1 million in the first six months of 2010 compared to $173.7 million in the first six months of 2009. Growth in domestic sales was led by our women’s health products with the highest growth coming fromElevate^® anterior in our pelvic floor repair product line. International net sales increased by 7.3 percent to $76.1 million in the first six months of 2010 compared to $71.0 million in the first six months of 2009. International growth was led by our men’s health products with the highest growth coming fromAMS 800^®Artificial Urinary Sphincter in our male continence product line.

Gross profit.Gross profit improved to 83.8 percent of sales in the first six months of 2010 from 82.0 percent in the first six months of 2009. We realized higher margins through a combination of factors, primarily due to the impact of ongoing manufacturing efficiencies and cost reduction programs. Margins also increased due to improved reliability on our laser therapy products, which resulted in lower warranty and service costs. Future gross profit will continue to depend upon product and geographic mix, production levels, labor costs, raw material costs and our ability to manage overhead costs.

Marketing and selling.Marketing and selling expenses as a percentage of sales increased to 34.8 percent in the first six months of 2010 compared to 34.5 percent in the first six months of 2009. We have made investments in this area compared to the prior year mainly as a result of additional headcount and product evaluation expenses and marketing investments to support geographic expansion.

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. Research and development expenses as a percentage of sales were consistent at 10.1 percent in the first six months of 2010 compared to 10.4 percent in the same period of 2009. These ratios are in line with our long-term goal for spending on research and development of approximately ten percent of sales.

General and administrative.General and administrative expenses as a percentage of sales of 9.0 percent were flat compared to the comparable prior period. The impact of incremental compensation related expenses in 2009 was offset by increased patent litigation costs in 2010, resulting in relatively consistent spending levels as a percent of revenue between years. Our objective remains to leverage general and administrative expense as a percentage of sales.

Amortization of intangibles.Amortization of intangibles includes amortization expense on our definite-lived intangible assets, consisting of patents, licenses and developed technology. Amortization of intangibles decreased as percentage of sales to 2.2 percent in the first six months of 2010 compared to 2.7 percent in the first six months of 2009. The six month period ended July 3, 2010 reflects a decrease in amortization expense over the same period of 2009 primarily due to the sale of our Ovion technology in the third quarter of 2009 and the sale of theHer Option^® product line in the first quarter of 2010, as intangible assets were disposed of in these transactions, thereby reducing on-going amortization expense.

Royalty income.Our royalty income is from licensing our intellectual property. We do not directly influence sales of the products on which these royalties are based and cannot give any assurance as to future income levels. Royalty income in the first six months of 2010 decreased approximately $1.5 million compared to the first six months of 2009 due to the sale of our Ovion technology in the third quarter of 2009 and the expiration of other royalty contracts.

Interest expense.Interest expense decreased by $2.8 million in the first six months of 2010 from the comparable period in 2009 mainly due to the impact of debt prepayments made over the past year. Interest expense includes interest incurred on our 2036 Notes, which carry a fixed interest rate of 3.25 percent, the interest incurred on our 2041 Notes, which carry a fixed interest rate of 4.00 percent, and the interest incurred on our Credit Facility, which generally carries a floating interest rate of LIBOR plus 2.25 percent. We have an interest rate swap contract outstanding at July 3, 2010 that is designated as a cash flow hedge of the floating rate interest payments for a portion of our borrowings under the Credit Facility. At July 3, 2010, the portion of borrowings subject to this swap contract is $30.0 million, with a remaining term of two months. Including the impact of interest rate swaps, our weighted

32

average interest rate on the credit facility was 3.2 percent and 4.5 percent for the first six months of 2010 and the first six months of 2009, respectively. Average borrowings during the first six months of 2010 on the Credit Facility were $84.9 million, compared to $221.1 million in the first six months of 2009. Average borrowings on our 2036 Notes were $62.0 million and $322.0 million for the six months ended July 3, 2010 and July 4, 2009, respectively. Average borrowings on our 2041 Notes, which we issued in September of 2009 in exchange for 2036 Notes, were $250.0 million for the six months ended July 3, 2010.

Amortization of financing costs.Amortization of financing costs in the first six months of 2010 and in the first six months of 2009 was $7.0 million and $8.0 million, respectively, and was comprised of the incremental non-cash interest cost of our 2036 Notes and 2041 Notes, and amortization of the costs associated with the issuance of the Credit Facility, the 2036 Notes and the 2041 Notes. The lower amortization in the first six months of 2010 was due to the impact of prepayments made over the past year, as we recognize a pro rata portion of the related debt discount and debt issuance costs when we retire debt.

Gain on sale of non-strategic assets. During the first quarter of 2010, we sold theHer Option^® Global Endometrial Ablation product line for $20.5 million. The final sale price after adjustment based on working capital balances at the time of sale was $19.5 million. We allocated a portion of our goodwill to the sale based on the relative fair value of theHer Option^®product line and our remaining business. The consideration, less goodwill, the carrying value of tangible and intangible assets and related disposal costs resulted in a pre-tax gain of $7.7 million.

Other income. Other income decreased by $1.5 million in the first six months of 2010 compared to the same period in 2009. The primary cause of the change in other income relates to the impact of our foreign currency hedge transactions and fluctuations in foreign currencies against the U.S. dollar on foreign denominated inter-company receivables and payables.

Provision for income taxes.Our effective income tax expense rate was 40.0 percent and 36.3 percent for the six months ended July 3, 2010 and July 4, 2009, respectively. The increase in the effective tax rate is primarily due to the sale of theHer Option^®product line in the first quarter of 2010, which had an effective tax rate of 65.7 percent on the pre-tax gain, as the majority of the goodwill allocated to the sale had no tax basis.

Liquidity and Capital Resources

Cash and cash equivalents was $23.6 million as of July 3, 2010, compared to $30.7 million as of January 2, 2010. In addition, short-term investments were $44.5 million as of July 3, 2010, compared to $19.9 million as of January 2, 2010. Short-term investments consist mostly of highly liquid money market funds that have not experienced any negative impact on liquidity or a decline in principal value. Overall, cash, cash equivalents and short-term investments increased $17.5 million in the first six months of 2010 compared to January 2, 2010.

Cash flows from operating activities.Cash provided by operating activities was $49.9 million in the first six months of 2010, versus $59.8 million provided during the comparable period of 2009, which is a decrease of $9.9 million. The main driver of the decrease is related to inventory, where $4.0 million of cash was used to build inventory during the first six months of 2010 compared to cash provided by reducing inventory of $4.5 million during the comparable period of 2009; this year over year change results in a decrease of $8.5 million in cash provided related to changes in inventory. The primary reason for the $4.0 million of cash used for inventory in the first six months of 2010 is an increase in BPH therapy inventory mainly due to the build phase for the recently launchedGreenLight^™ XPSconsole. The remaining decrease of $1.4 million of cash provided by operating activities was a result of normal operating fluctuations in accounts receivable, accounts payable, accrued expenses, and other operating assets.

Cash flows from investing activities.Cash used in investing activities was $9.5 million during the first six months of 2010, compared to cash provided by investing activities of $4.3 million in the first six months of 2009. Net cash provided by the sale of theHer Option^®product line was $19.1 million and the proceeds were used to pay down our debt. We also increased our purchases of short-term investments during the first six months of 2010 compared to the comparable period of 2009 resulting in a balance in short-term investments of $44.5 million at the end of the second quarter of 2010 compared to $19.7 million at the end of the second quarter of 2009.

Cash flows from financing activities.Cash used for financing activities was $47.8 million during the first six months of 2010, versus $46.0 million used in the same period of 2009. The majority of cash was used for repayment of long-term debt in both periods. Cash used for repayment of long-term debt under our Credit Facility was $65.9 million and $29.1 million for the first six months of 2010 and 2009, respectively. In addition, we repurchased 2036 Notes with a principal amount of $27.3 million for a cash payment of $21.1 million during the first quarter of 2009. Cash received from the issuance of common stock was $17.2 million and $3.9 million during the first six months of 2010 and 2009, respectively, which was the result of stock option exercises and employee purchases of common stock through our employee stock purchase plan.

33

2036 Notes.We issued our 2036 Notes with a stated maturity of July 1, 2036 pursuant to an Indenture dated as of June 27, 2006 as supplemented by the first supplemental indenture dated September 6, 2006 (the 2036 Notes Indenture) between us, certain of our significant domestic subsidiaries, as guarantors of the 2036 Notes, and U.S. Bank National Association, as trustee for the benefit of the holders of the 2036 Notes, which specifies the terms of the 2036 Notes. The 2036 Notes bear interest at the rate of 3.25 percent per year, payable semiannually. The 2036 Notes are our direct, unsecured, senior subordinated obligations, rank junior to our Credit Facility and will rank junior in right of payment to all of our future senior secured debt as provided in the 2036 Notes Indenture. The 2036 Notes have the same rank as our 2041 Notes.

In addition to regular interest on the 2036 Notes, we will also pay contingent interest beginning July 1, 2011 at 0.25% of the average trading price of the 2036 Notes, if the average trading price for the five consecutive trading days immediately before the last trading day preceding the relevant six-month period equals or exceeds 120 percent of the principal amount of the 2036 Notes. The 2036 Notes are convertible under certain circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2036 Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2036 Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock.

If a holder elects to convert its 2036 Note in connection with a designated event or change that occurs prior to July 1, 2013, we will pay, to the extent described in the 2036 Notes Indenture, a make whole premium by increasing the conversion rate applicable to such 2036 Notes. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility.

We may also redeem the 2036 Notes on or after July 6, 2011 at specified redemption prices as provided in the 2036 Notes Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2036 Notes may require us to purchase all or a portion of their 2036 Notes for cash on July 1, 2013, July 1, 2016, July 1, 2021, July 1, 2026, and July 1, 2031 or in the event of a designated event or change, at a purchase price equal to 100 percent of the principal amount of the 2036 Notes to be repurchased plus accrued and unpaid interest and contingent interest.

2041 Notes.We issued our 2041 Notes with a stated maturity of September 15, 2041 pursuant to an Indenture dated as of September 21, 2009 (the 2041 Notes Indenture) between us, certain of our significant domestic subsidiaries, as guarantors of the 2041 Notes, and U.S. Bank National Association, as trustee for the benefit of the holders of the 2041 Notes, which specifies the terms of the 2041 Notes. The 2041 Notes bear interest at the rate of 4.00 percent per year, payable semiannually. The 2041 Notes are our direct, unsecured, senior subordinated obligations, rank junior to our Credit Facility and will rank junior in right of payment to all of our future senior debt as provided in the 2041 Notes Indenture. The 2041 Notes have the same rank as our 2036 Notes.

In addition to regular interest on the 2041 Notes, we will also pay contingent interest beginning September 15, 2016 at 0.75% of the average trading price of the 2041 Notes, if the average trading price for the five consecutive trading days immediately before the first day of such semiannual period equals or exceeds 130 percent of the principal amount of the 2041 Notes. The 2041 Notes are convertible under certain circumstances for cash and shares of our common stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2041 Notes (which is equal to an initial conversion price of approximately $19.406 per share), subject to adjustment. Upon conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2041 Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our common stock.

If a holder elects to convert its 2041 Note in connection with a designated event or change, we will pay, to the extent described in the 2041 Notes Indenture, a make whole premium by increasing the conversion rate applicable to such 2041 Notes. All of the above conversion rights will be subject to certain limitations imposed by our Credit Facility.

We may also redeem the 2041 Notes on or after September 15, 2016 at specified redemption prices as provided in the 2041 Notes Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2041 Notes may require us to purchase all or a portion of their 2041 Notes for cash on September 15, 2016 or in the event of a designated event or change, at a purchase price equal to 100 percent of the principal amount of the 2041 Notes to be repurchased plus accrued and unpaid interest and contingent interest.

2036 Notes and 2041 Notes — Potential Dilution. Prior to conversion, our 2036 Notes and 2041 Notes (Convertible Notes) represent potentially dilutive common share equivalents that must be considered in our calculation of diluted

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earnings per share (EPS). When there is a net loss, common share equivalents are excluded from the computation because they have an anti-dilutive effect. In addition, when the conversion price of our 2036 Notes and 2041 Notes is greater than the average market price of our stock during any period, the effect would be anti-dilutive and we would exclude the 2036 Notes and 2041 Notes from the EPS computation. However, when the average market price of our stock during any period is greater than the conversion price of the 2036 Notes and 2041 Notes, the impact is dilutive and the 2036 Notes and 2041 Notes will affect the number of common share equivalents used in the diluted EPS calculation. The degree to which the 2036 Notes and 2041 Notes are dilutive increases as the market price of our stock increases.

The following table illustrates the number of common share equivalents that would potentially be included in weighted average common shares for the calculation of diluted EPS, assuming various market prices of our stock:

If the average		The number of common share equivalents potentially included in the computation of
market price		of diluted EPS would be (1):									Percent Dilution (2)
of our stock is:		2036 Notes			2041 Notes			Total			2036 Notes			2041 Notes			Total
$	19.00		—	(anti-dilutive)		—	(anti-dilutive)		—	(anti-dilutive)		0.0	%		0.0	%		0.0	%
$	20.00		0.1	million		0.4	million		0.5	million		0.1	%		0.5	%		0.6	%
$	22.50		0.4	million		1.8	million		2.2	million		0.6	%		2.3	%		2.9	%
$	25.00		0.7	million		2.9	million		3.6	million		0.9	%		3.7	%		4.6	%
$	27.50		0.9	million		3.8	million		4.7	million		1.2	%		4.8	%		6.0	%
$	30.00		1.1	million		4.5	million		5.6	million		1.5	%		5.6	%		7.1	%

(1) Common share equivalents are calculated using the treasury stock method. The formula to calculate the potentially dilutive shares related to our Convertible Notes is as follows:

(2) The percent dilution is based on 75,972,968 outstanding shares as of July 3, 2010.

For the three and six months ended July 3, 2010, our Convertible Notes had a dilutive effect on our net income per share calculation and were included in the calculation of diluted earnings per share.

Credit Facility.On July 20, 2006, our wholly-owned subsidiary, American Medical Systems, Inc. (AMS), entered into a senior secured Credit Facility. AMS and each majority-owned domestic subsidiary of AMS are parties to the Credit Facility as guarantors of all of the obligations of AMS arising under the Credit Facility. The obligations of AMS and each of the guarantors arising under the Credit Facility are secured by a first priority security interest on substantially all of their respective assets, including a mortgage on the AMS facility in Minnetonka, Minnesota.

The six-year senior secured Credit Facility consists of (i) term loan debt and (ii) a revolving credit facility of up to $65.0 million which is available to fund ongoing working capital needs, including future capital expenditures and permitted acquisitions.

Our Credit Facility contains affirmative and negative covenants and other limitations (subject to various carve-outs and baskets) regarding us, AMS, and in some cases, the subsidiaries of AMS. The covenants limit: (a) investments, capital expenditures, dividend payments, the disposition of material assets other than in the ordinary course of business, and mergers and acquisitions under certain conditions, (b) transactions with affiliates, unless such transactions are completed in the ordinary course of business and upon fair and reasonable terms, (c) liens and indebtedness, and (d) substantial changes in the nature of our business. Our Credit Facility contains customary financial covenants for secured credit facilities, consisting of maximum total and senior debt leverage ratios and minimum interest coverage and fixed charge coverage ratios. These financial covenants adjust from time to time during the term of the Credit Facility. The covenants and restrictions contained in the Credit Facility could limit our ability to fund our business, make capital expenditures, and make acquisitions or other investments in the future.

On August 12, 2009, we entered into a Consent and Second Amendment to our Credit Facility, which allowed us to exchange a portion of our existing convertible senior subordinated notes for new convertible senior subordinated notes. On October 29, 2007, we entered into a First Amendment of our Credit Facility to modify certain financial covenant ratios as defined in the Credit Facility (the First Amendment). Pursuant to the terms of the First Amendment, certain of the financial tests and covenants were amended and restated, including the interest coverage ratio, the total leverage ratio, the fixed charge coverage ratio, and the maximum consolidated capital expenditures.

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As of July 3, 2010, we were in compliance with all financial covenants as defined in our Credit Facility which are summarized as follows:

Financial Covenant	Required Covenant	Actual Result
Total Leverage Ratio (1)	3.00:1.00 (maximum)		2.02
Senior Leverage Ratio (2)	2.00:1.00 (maximum)		0.32
Interest Coverage Ratio (3)	4.00:1.00 (minimum)		10.95
Fixed Charge Coverage Ratio (4)	1.50:1.00 (minimum)		2.25
Maximum Capital Expenditures (5)	$20.0 million	$	3.5	million

(1)	Total outstanding debt to Consolidated Adjusted EBITDA for the trailing four quarters.
(2)	Total outstanding senior secured debt to Consolidated Adjusted EBITDA for the trailing four quarters.
(3)	Ratio of Consolidated Adjusted EBITDA for the trailing four quarters to cash interest expense for such period.
(4)	Ratio of Consolidated Adjusted EBITDA for the trailing four quarters to fixed charges (cash interest expense, scheduled principal payments on debt, capital expenditures, income taxes paid, earn-out and milestone payments) for such period.
(5)	Limit of capital expenditures for the full year.

The ratios are based on EBITDA, on a rolling four quarters, calculated with certain adjustments (Consolidated Adjusted EBITDA). Consolidated Adjusted EBITDA is a non-GAAP financial measure that is defined in our Credit Facility as earnings before interest, income taxes, depreciation, amortization, and other non-cash items reducing net income including IPR&D and stock compensation charges, less other non-cash items increasing net income. Consolidated Adjusted EBITDA should not be considered an alternative measure of our net income, operating performance, cash flow or liquidity. It is provided as additional information relative to compliance with our debt covenants.

Any failure to comply with any of these financial and other affirmative and negative covenants would constitute an event of default under the Credit Facility, entitling a majority of the bank lenders to, among other things, terminate future credit availability under the Credit Facility, increase the interest rate on outstanding debt, and accelerate the maturity of outstanding obligations under the Credit Facility.

Additional Information

We are currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended. As a result, we are required to file periodic reports and other information with the SEC, such as annual, quarterly, and current reports, and proxy and information statements. You are advised to read this Form 10-Q in conjunction with the other reports, proxy statements, and other documents we file with or furnish to the SEC from time to time. If you would like more information regarding our Company, you may read and copy the reports, proxy and information statements and other documents we file with or furnish to the SEC, at prescribed rates, at the SEC’s public reference room at 100 F. Street, NE, Room 1580, Washington, DC 20549. You may obtain information regarding the operation of the SEC’s public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public free of charge at the SEC’s website. The address of this website ishttp://www.sec.gov.

We also make all of our SEC filings, such as our annual, quarterly and current reports and proxy statements, available to the public free from charge on our websitewww.AmericanMedicalSystems.com. Our website is not intended to be, and is not, a part of this quarterly report on Form 10-Q. We place our SEC filings on our website on the same day as we file such material with the SEC. In addition, we will provide electronic or paper copies of our SEC filings (excluding exhibits) to any of our stockholders free of charge upon receipt of a written request for any such filing. All requests for our SEC filings should be sent to the attention of Investor Relations at American Medical Systems Holdings, Inc., 10700 Bren Road West, Minnetonka, Minnesota 55343.

Forward-Looking Statements

This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our Internet web site or otherwise. All statements other than

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statements of historical facts included in this report or expressed by us orally from time to time that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies, the outcome of contingencies such as legal proceedings, and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements in this report with words like “believe,” “may,” “could,” “would,” “might,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” or “continue” or the negative of these words or other words and terms of similar meaning. These forward-looking statements may be contained in the notes to our consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements are based on management’s beliefs, certain assumptions and current expectations and factors that affect all businesses operating in a global market as well as matters specific to us. These uncertainties and factors are difficult to predict and many of them are beyond our control.

The following are some of the uncertainties and factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements: successfully competing against competitors; physician acceptance, endorsement, and use of our products; potential product recalls or technological obsolescence; health care reform legislation in the U.S.; successfully managing increased debt leverage and related credit facility financial covenants; the impact of worldwide economic conditions on our operations; the disruption in global financial markets potential impact on the ability of our counterparties to perform their obligations and our ability to obtain future financing; factors impacting the stock market and share price and its impact on the dilution of convertible securities; ability of our manufacturing facilities to meet customer demand; reliance on single or sole-sourced suppliers; loss or impairment of a principal manufacturing facility; clinical and regulatory matters; timing and success of new product introductions; patient acceptance of our products and therapies; changes in and adoption of reimbursement rates; adequate protection of our intellectual property rights; product liability claims; and currency and other economic risks inherent in selling our products internationally.

For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition or operating results, see our annual report on Form 10-K for the fiscal year ended January 2, 2010 under the heading “Part I — Item 1A. Risk Factors”, and “Part II — Item 1A. Risk Factors” contained in our quarterly reports on Form 10-Q for our 2010 fiscal quarters.

All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. We wish to caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the uncertainties and factors described above, as well as others that we may consider immaterial or do not anticipate at this time. The risks and uncertainties described above are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We assume no obligation to update, amend or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K we file with or furnish to the SEC.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We use derivatives to mitigate our exposure to volatility in interest and foreign currency exchange rates. We hedge only exposures in the ordinary course of business.

Interest Rates

We have interest rate risk as a result of the floating LIBOR index that is used to determine the interest rates on our Credit Facility. We use derivatives to mitigate a portion of our exposure to volatility in interest rates. The interest rate swap contract outstanding at July 3, 2010 is designated as a cash flow hedge of the floating rate interest payments for a portion of our borrowings under the Credit Facility. The portion of borrowings subject to this swap contract is $30.0 million. This contract has a remaining term of two months. Based on a sensitivity analysis, as of July 3, 2010, an instantaneous and sustained 100-basis-point increase in interest rates affecting our floating rate debt obligations, and assuming that we take no counteractive measures, would result in a decrease in income before income taxes of approximately $0.5 million over the next 12 months. The estimated impact to income takes into account the mitigating effect of the interest rate swap agreement. The notional amount of the contract amortizes over its term, and the amount of floating rate debt hedged in the future will depend on prepayments and additional contracts.

Currency

Our operations outside of the United States are maintained in their local currency, with the significant currencies consisting of Euros, British pounds, Canadian dollars and Australian dollars. 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 (expense) income.

During the three and six month periods ended July 3, 2010, revenues from sales to customers outside the United States were 29.0 percent and 28.1 percent of total consolidated revenues. International accounts receivable was 43.8 percent, inventory was 5.9 percent, cash and short-term investments was 18.7 percent, and accounts payable was 28.8 percent of total consolidated accounts for each of these items as of July 3, 2010. 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 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 $0.5 million and $1.0 million during the three and six months ended July 3, 2010.

We have entered into various foreign exchange forward contracts to manage a portion of our exposure to foreign exchange rate fluctuations on our forecasted sales to and receivables from certain subsidiaries. At July 3, 2010, our net investment in foreign subsidiaries translated into dollars using the period end exchange rate was $32.6 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 $3.3 million. Actual amounts may differ.

Credit Risk

Credit risk on financial instruments arises from the potential for counterparties to default on their obligations to us. Recent economic events, including failures of financial service companies and the related liquidity crisis, have considerably disrupted the capital and credit markets. Our credit risk consists of trade receivables, cash and cash equivalents, short-term investments, derivative instruments, lending commitments and insurance relationships in the ordinary course of business.

The carrying value of accounts receivable approximates fair value due to the relatively short periods to maturity on these instruments. Accounts receivable are primarily due from hospitals and clinics located mainly in the United States and Western Europe. Although we do not require collateral from our customers, concentrations of credit risk in the United States are mitigated by a large number of geographically dispersed customers. We do not presently anticipate losses in excess of allowances provided associated with trade receivables, although collection could be impacted by the underlying economies of the countries.

We place cash, cash equivalents, short-term investments and derivative instruments with high quality financial institutions, which we monitor regularly and take action where possible to mitigate risk. We do not hold investments in auction rate securities, mortgage backed securities, collateralized debt obligations, individual corporate bonds,

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special investment vehicles or any other investments which have been directly impacted by the recent financial crisis. To date, all previous lending commitments remain available to us, and we have not incurred any charges specific to the increased volatility in credit markets and credit risk. Insurance programs are with carriers that remain highly rated and we have no significant pending claims. Further, we do not expect our current or future credit risk exposures to have a significant impact on our operations. However, there can be no assurance that our business will not have any adverse impact from credit risk in the future.

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 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act of 1934). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of July 3, 2010.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the above-referenced evaluation by management of the effectiveness of our internal control over financial reporting that occurred during the second quarter ended July 3, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In July 2010, we were advised by the Office of Inspector General (OIG) of the United States Department of Health and Human Services that the OIG had closed, without action as to the Company, the investigation in connection with which we had received a document subpoena in May 2009.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Part I — Item 1A. of our Annual Report on Form 10-K for the year ended January 2, 2010, except as disclosed in our Quarterly Report on Form 10-Q for the quarter ended April 3, 2010.

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ITEM 6. EXHIBITS

Item
No.	Item	Method of Filing
10.1	Summary of Director Compensation (Version Modified April 2010).	Incorporated by reference to Exhibit 10.11 of the Company’s Form 10-Q for the Fiscal Quarter Ended April 3, 2010 (File No. 000-30733).
10.2	Form of Restricted Stock Award for Directors under the 2005 Stock Incentive Plan.	Incorporated by reference to Exhibit 10.12 of the Company’s Form 10-Q for the Fiscal Quarter Ended April 3, 2010 (File No. 000-30733).
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
101.1	Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended July 3, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.	Filed Electronically

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		AMERICAN MEDICAL SYSTEMS
		HOLDINGS, INC.
August 10, 2010	By	/s/ Anthony P. Bihl, III
Date		Anthony P. Bihl, III
		President and Chief Executive Officer
		(Principal Executive Officer)
August 10, 2010	By	/s/ Mark A. Heggestad
Date		Mark A. Heggestad
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Fiscal Quarter Ended July 3, 2010

Item
No.	Item	Method of Filing
10.1	Summary of Director Compensation (Version Modified April 2010).	Incorporated by reference to Exhibit 10.11 of the Company’s Form 10-Q for the Fiscal Quarter Ended April 3, 2010 (File No. 000-30733).
10.2	Form of Restricted Stock Award for Directors under the 2005 Stock Incentive Plan.	Incorporated by reference to Exhibit 10.12 of the Company’s Form 10-Q for the Fiscal Quarter Ended April 3, 2010 (File No. 000-30733).
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed with this Quarterly Report on Form 10-Q.
101.1	Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended July 3, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.	Filed Electronically

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