<PAGE>   1


                         AMERICAN MEDICAL SYSTEMS, INC.
                     MANAGEMENT INCENTIVE COMPENSATION PLAN
                                    FOR 2001


I.    PURPOSE

AMERICAN MEDICAL SYSTEMS, INC. (AMS) IS DEDICATED TO EXCELLENCE IN PERFORMANCE
AND IN CREATING A STRONG LINK BETWEEN PERFORMANCE AND COMPENSATION. THIS PLAN IS
DESIGNED TO REWARD DESIGNATED MANAGEMENT TEAM MEMBERS OF AMS WITH
PERFORMANCE-BASED COMPENSATION FOR ACHIEVING AND SURPASSING SPECIFIED COMPANY
GOALS. THESE GOALS WILL REINFORCE CONTRIBUTING ELEMENTS TO THE GROWTH AND
FINANCIAL VIABILITY OF AMS. THE PLAN IS DESIGNED TO REWARD OVERALL RESULTS,
REQUIRING A HIGH LEVEL OF INDIVIDUAL CONTRIBUTION AND CROSS-FUNCTIONAL
EFFECTIVENESS ACROSS THE SENIOR LEVELS OF COMPANY MANAGEMENT.

II.   BONUS POTENTIAL

THE PARTICIPANT IS ELIGIBLE TO RECEIVE A PERCENT OF HIS/HER BASE SALARY BASED ON
THE SCHEDULES SET FORTH IN ATTACHMENTS I AND II. NEW ENTRANTS TO THE PLAN MAY
HAVE THEIR TOTAL COMPENSATION BASE/BONUS MIX RECONFIGURED TO POSITION THEM FOR
THEIR BONUS SCHEDULE.

III.  PERFORMANCE MEASURES - COMPANY RESULTS

PERFORMANCE MEASURES MAY VARY SOMEWHAT FROM YEAR TO YEAR; HOWEVER, THEY WILL
TYPICALLY BE ESTABLISHED TO ACHIEVE THE END GOAL OF INCREASED GLOBAL SALES AND
PROFITABILITY. COMPANY RESULTS WILL RECEIVE THE HIGHEST WEIGHT VERSUS INDIVIDUAL
PERFORMANCE.

PERFORMANCE MEASURES WILL BE AS OBJECTIVE AS POSSIBLE AND INCLUDE SPECIFIC TIME
FRAMES AND NUMERICAL MEASURES.

COMPANY RESULTS MEASURES WILL GENERALLY BE CONSISTENT FOR PLAN PARTICIPANTS IN
ANY GIVEN YEAR TO ENSURE COMMON GOALS, ALIGNMENT AND INTERDEPENDENCE AMONG
SENIOR-LEVEL MANAGERS AND THE ORGANIZATION.

SALES RESULTS WILL BE BASED ON GLOBAL SHIPPED SALES FOR THE YEAR PER THE
FORECAST UNLESS OTHERWISE NOTED FOR THE INDIVIDUAL. COMPANY PROFITABILITY WILL
BE BASED ON OPERATING INCOME.

ATTACHMENT I INDICATES THE CURRENT WEIGHTING BY POSITION.


INDIVIDUAL OBJECTIVES WILL BE CUSTOMIZED BY INDIVIDUAL TO EVALUATE STRATEGIC AND
MANAGERIAL INITIATIVES. GENERALLY THEY ARE DEPARTMENT-SPECIFIC OR ARE DEDICATED
TO A CROSS-FUNCTION INITIATIVE FOR WHICH THE INDIVIDUAL IS THE LEADER. THESE
AREAS OF INDIVIDUAL CONTRIBUTION WILL BE EVALUATED AND REWARDED THROUGH THE BASE
SALARY MERIT INCREASE PROCESS.


<PAGE>   2



IV.   PARTICIPATION

PARTICIPANTS IN THIS PLAN EFFECTIVE JANUARY 1, 2001 WILL BE THE VICE PRESIDENTS,
DIRECTORS, AND SELECTED INDIVIDUALS OF THE COMPANY. ANY ADDITIONAL PARTICIPANTS
WILL REQUIRE THE APPROVAL OF THE PRESIDENT AND CEO AND THE BOARD OF DIRECTORS.
EXCEPTIONS OUTSIDE OF THE VICE PRESIDENT LEVEL WOULD NEED TO BE JUSTIFIED
ACCORDING TO RESPONSIBILITY IN THE COMPANY AND DEGREE OF INFLUENCE ON COMPANY
PERFORMANCE.

NEW HIRES AFTER THE FIRST OF THE YEAR MAY BE ABLE TO PARTICIPATE FOR 2001 ON A
PRO-RATED BASIS, PARTICULARLY IF THE START DATE IS BEFORE 10/1/01. IF EMPLOYMENT
OF A PARTICIPANT IS TERMINATED DUE TO HIS/HER PERFORMANCE OR THE INDIVIDUAL
VOLUNTARILY LEAVES THE COMPANY, THE INCENTIVE AWARD IS FORFEITED FOR THAT PLAN
YEAR.

V.    APPROVAL, AUTHORIZATION, AND TERMS

THE MANAGEMENT INCENTIVE PLAN, ITS TERMS, POLICIES, REVISIONS AND MEASURES ARE
UNDER THE FULL APPROVAL OF THE PRESIDENT AND CEO AND THE BOARD OF DIRECTORS. ANY
MODIFICATIONS OR ADJUSTMENTS TO THE PLAN AND PERFORMANCE MEASURES OR
CONSIDERATION OF UNUSUAL TRANSACTIONS MUST BE APPROVED BY THE BOARD OF
DIRECTORS.

PARTICIPATION IN THE PLAN IS NOT AN EMPLOYMENT CONTRACT OR ANY IMPLIED ASSURANCE
OF CONTINUED EMPLOYMENT.

VI.   BONUS PAYMENT

BONUS PAYMENT WILL BE ISSUED AS SOON AS FEASIBLE AFTER THE CLOSE OF THE YEARS'
FINANCIAL STATEMENTS (FIRST QUARTER FOLLOWING THE PLAN YEAR). PAYMENT WILL BE IN
LUMP SUM.

FINANCIAL RESULTS WILL BE ADJUSTED FOR CONSIDERATION OF BOTH POSITIVE AND
NEGATIVE FOREIGN CURRENCY EXCHANGE.

IF AN INDIVIDUAL'S BASE SALARY CHANGES DURING THE YEAR, THE AWARD WOULD BE
PRORATED BASED ON THE NUMBER OF MONTHS IN EACH POSITION.




<PAGE>   3




                                                                    ATTACHMENT 1

MANAGEMENT INCENTIVE COMPENSATION PLAN 2001
COMPANY VS. INDIVIDUAL PERFORMANCE MEASURES

<TABLE>
<CAPTION>
                                              COMPANY PERFORMANCE                                    PERFORMANCE PER KEY/
PARTICIPANTS                                  (SALES/OPERATING INCOME)                              INDIVIDUAL OBJECTIVES
------------                                  ------------------------                              ---------------------
<S>                                           <C>                                                   <C>
PRESIDENT & CEO                               100%                                                            0%
                                              o       70% SALES
                                              o       30% OPERATING INCOME


VP SALES & MARKETING*                         100%                                                            0%
GM & VP INTERNATIONAL*                        o       90% SALES
VP INTERNATIONAL                              o       10% OPERATING INCOME


OTHER VP'S                                    100%                                                            0%
CFO                                           o       60% SALES
Clinical/Regulatory                           o       40% OPERATING INCOME
Human Resources
Manufacturing
Research & Development
CIO

DIRECTORS                                     100%                                                            0%
                                              o       60% SALES
                                              o       40% OPERATING INCOME
</TABLE>


*SALES AND OPERATING INCOME FOR THE VP OF INTERNATIONAL WILL BE PAID BASED ON
100% (INTERNATIONAL SALES AND INTERNATIONAL OPERATING INCOME), WHEREAS VP OF
INTERNATIONAL WILL BE BASED ON SALES AND OPERATING INCOME FOR EUROPE ONLY.
DOMESTIC SALES AND MARKETING VP WILL BE 80% DOMESTIC WEIGHT AND 20%
INTERNATIONAL WEIGHT. ALL OTHERS WILL BE PAID BASED ON COMBINED GLOBAL RESULTS.

NOTE: OPERATING INCOME IS DEFINED AS A % OF SALES. THE TARGET FOR 2001 IS 20% OF
SALES.







<PAGE>   4

                                                                    ATTACHMENT 2



                            MANAGEMENT INCENTIVE PLAN
                                SCHEDULE -- 2001
                         (EXPRESSED AS % OF BASE SALARY)

                                PLAN ACHIEVEMENT

<TABLE>
<CAPTION>
                  BELOW
                   95%          95%          100%         105%          115%         125%         135%         140%         150+%
                  -----         ---          ----         ----          ----         ----         ----         ----         -----
<S>               <C>           <C>          <C>          <C>           <C>          <C>          <C>          <C>          <C>

   PRESIDENT
   % OF BASE        0%          20%           40%         47.5%        62.5%       70% MAX.        --           --            --


     VP'S
   % OF BASE        0%          15%           30%          35%          40%           45%          50%          55%          60%


   DIRECTORS
   % OF BASE        0%          15%           25%          30%          35%           40%          45%          50%          55%
</TABLE>