Document:

<PAGE>   1

                             STOCK OPTION AGREEMENT
                                    UNDER THE
                         AMS 1998 EQUITY INCENTIVE PLAN

                  THIS AGREEMENT, made as of April 23, 1999 (the "Effective
Date"), by and between American Medical Systems, Inc., a Delaware corporation
(the "Company"), and Douglas W. Kohrs (the "Participant").

                              W I T N E S S E T H:

                  WHEREAS, the Company and the Participant have entered into an
employment agreement dated as of April 23, 1999 (the "Employment Agreement"),
pursuant to which the Company is required to afford the Participant the
opportunity to acquire the Company's common stock, par value $.01 per share
("Stock"), so that the Participant may have a direct proprietary interest in the
Company's success.

                  NOW, THEREFORE, in consideration of the covenants and
agreements herein contained, the parties hereto hereby agree as follows:

         1. Grant of Option. (a) Subject to the terms and conditions set forth
herein and in the AMS 1998 Equity Incentive Plan (the "Plan"), the Company
hereby grants to the Participant, during the period commencing on the date of
this Agreement and ending on April 23, 2009 (the "Expiration Date"), the right
and option (the right to purchase any one share of Stock hereunder being an
"Option") to purchase from the Company 69,375 shares of Stock. The Options shall
have an exercise price of $5.00 per share, which represents the Fair Market
Value per share of the Stock as of the date hereof. Each of the Options granted
pursuant to this Section 1(a) shall constitute Incentive Stock Options under the
Plan.

                  (b) Subject to the terms and conditions set forth herein and
in the Plan, the Company hereby also grants to the Participant, during the
period commencing on the date of this Agreement and ending on the Expiration
Date, Options to purchase from the Company 80,625 additional shares of Stock.
The Options shall have an exercise price of $5.00 per share, which represents
the Fair Market Value per share of the Stock as of the date hereof. Each of the
Options granted pursuant to this Section 1(b) shall constitute Nonqualified
Stock Options under the Plan.

         2. Limitations on Exercise of Options. (a) The Incentive Stock Options
shall vest and become exercisable, on a cumulative basis, while the Participant
is employed by the Company as set forth in Exhibit A hereto. The Board may
accelerate the vesting and exercisability of any or all of the then-unvested
Incentive Stock Options at any time; provided, however, all Incentive Stock

<PAGE>   2

Options shall vest and be immediately exercisable in the event of a "Change of
Control" (as defined in the Employment Agreement).

                  (b) Subject to the terms and conditions set forth herein and
the Plan, the Nonqualified Stock Options shall vest and become exercisable, on a
cumulative basis, while the Participant is employed by the Company as set forth
in Exhibit B hereto. The Board may accelerate the vesting and exercisability of
any or all of the then-unvested Nonqualified Stock Options at any time;
provided, however, all of the Nonqualified Stock Options shall vest and be
immediately exercisable in the event of a Change of Control.

         3. Termination of Employment. (a) If prior to the Expiration Date, the
Participant's employment shall be terminated by the Company by reason of a
disability, the Options shall remain exercisable until the earlier of the
Expiration Date or six (6) months after such date of termination (the "Date of
Termination") to the extent the Options were vested and exercisable as of the
Date of Termination.

                  (b) If the Participant shall cease to be employed by the
Company prior to the Expiration Date by reason of death, or the Participant
shall die while entitled to exercise any of the Options pursuant to paragraph
3(a) or paragraph 3(c), the executor or administrator of the estate of the
Participant or the person or persons to whom the Options shall have been validly
transferred by the executor or administrator pursuant to will or the laws of
descent and distribution shall have the right, until the earlier of the
Expiration Date or twelve (12) months after the date of death, to exercise the
Options to the extent that the Participant was entitled to exercise them on the
date of death.

                  (c) If, prior to the Expiration Date, the Participant's
employment with the Company is terminated for "Cause" (as defined in the
Employment Agreement), (i) unless otherwise provided by the Board, the Options,
to the extent not exercised as of the Date of Termination, shall lapse and be
canceled, and (ii) all shares of Stock received pursuant to an exercise of the
Options after such termination, in contravention of subsection (i) above, may be
purchased by the Company at its discretion for the exercise price of such shares
paid by the Participant.

                  (d) If, prior to the Expiration Date, the Company terminates
the Participant's employment without Cause (other than on account of a
disability), the Options, to the extent then vested and exercisable as of the
Date of Termination, shall remain exercisable until the earlier of the
Expiration Date or 90 days after the Date of Termination.

                  (e) If the Participant voluntarily terminates his employment
with the Company (i) prior to the first anniversary of

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<PAGE>   3

the Effective Date, all Options to the extent not exercised as of the Date of
Termination shall lapse and be canceled, or (ii) on or after the first
anniversary of the Effective Date, the Options shall remain exercisable until
the earlier of the Expiration Date or ninety (90) days after the Date of
Termination to the extent the Options were vested and exercisable as of the Date
of Termination.

                  (f) After the expiration of any exercise period described in
any of Sections 3(a) - (e) hereof, or otherwise upon the Expiration Date, the
Options shall terminate together with all of the Participant's rights hereunder,
to the extent not previously exercised.

         4. Non-Transferable. Except as specifically authorized by the Board,
the Participant may not transfer the Options except by will or the laws of
descent and distribution and the Options shall be exercisable during the
Participant's lifetime only by the Participant or his guardian or legal
representative. Except as so authorized, no purported assignment or transfer of
the Options, or of the rights represented thereby, whether voluntary or
involuntary, by operation of law or otherwise (except by will or the laws of
descent and distribution), shall vest in the assignee or transferee any interest
or right herein whatsoever.

         5. Adjustments and Corporate Reorganizations. In accordance with and
subject to the applicable terms of the Plan, the Options shall be subject to
adjustment or substitution, as determined by the Committee, as to the number,
price or kind of Stock or other consideration subject to such Options or as
otherwise determined by the Committee to be equitable (i) in the event of
changes in the outstanding Stock or in the capital structure of the Company by
reason of stock dividends, stock splits, reverse stock splits,
recapitalizations, reorganizations, mergers, consolidations, combinations,
exchanges, or other relevant changes in capitalization occurring after the date
hereof or (ii) in the event of any change in applicable laws or any change in
circumstances which results in or would result in any substantial dilution or
enlargement of the rights granted to, or available for, the Participant. The
Company shall give the Participant written notice of an adjustment hereunder.

         6. Exercise: Payment For and Delivery of Stock. The Options shall be
exercised by delivering written notice to the Committee stating the number of
shares of Stock to be purchased, the person or persons in whose name the shares
of Stock are to be registered and each such person's address and social security
number. Such notice shall not be effective unless accompanied by the full
purchase price for all shares to be purchased, and any applicable withholding
(as described below). The purchase price shall be payable in cash or in shares
of Stock or any combination thereof; provided, however, that the Participant may
use Stock in payment of the exercise price only if the shares so used are
considered "mature" for purposes of generally accepted accounting

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<PAGE>   4

principles (i.e., (i) been held by the Participant free and clear for at least
six (6) months prior to the use thereof to pay part of an Option exercise price,
(ii) been purchased by the Participant in other than a compensatory transaction,
or (iii) meet any other requirements for "mature" shares as may exist on the
date of the use thereof to pay part of an Option exercise price). In the event
that all or part of the purchase price is paid in shares of Stock, the shares
used in payment shall be valued at their Fair Market Value on the date of
exercise of the Options. At the time of exercise, the Participant shall pay to
the Company, in cash, or by having the Company withhold upon exercise of the
Option a sufficient number of shares of Stock otherwise deliverable to the
Participant based on the Fair Market Value of the Stock on the date of exercise,
at the election of the Participant, such minimum amount as the Company deems
necessary to satisfy its obligation to withhold Federal, state or local income
or other taxes incurred by reason of the exercise or the transfer of shares
thereupon. Payment in currency or by certified or cashier's check shall be
considered payment in cash.

         7. Rights as Stockholder. (a) The Participant or a transferee of the
Options shall have no rights as a stockholder with respect to any shares covered
by the Options until he shall have become the holder of record of such shares
(and the Company shall use its reasonable best efforts to cause the Participant
promptly to become the holder of record of such shares), and, except as provided
in Section 5 hereof, no adjustment shall be made for dividends or distributions
or other rights in respect of such shares for which the record date is prior to
the date upon which he shall become the holder or record thereof.

                  (b) The Participant acknowledges and agrees that the Stock
shall be "Shares" as such term is used in the Stockholders Agreement annexed to
the Executive's Employment Agreement as Exhibit B and, as such, will be subject
to certain restrictions, including restrictions on resale and such other
transfers.

         8. Company; Participant. (a) The term "Company" as used in this
Agreement with reference to employment shall include the Company and its
affiliates.

                  (b) Whenever the word "Participant" is used in any provision
of this Agreement under circumstances where the provision should logically be
construed to apply to the executors, the administrators, legal representatives
or the person or persons to whom the Options may be transferred by will or by
the laws of descent and distribution, the word "Participant" shall be deemed to
include such person or persons.

         9. Repurchase Rights. (a) Repurchase of Stock. At any time within the
90-day period immediately following the Date of Termination for any reason
(including by reason of death or disability), the Company shall have the right,
and not the obligation, to purchase and acquire from the Participant any or

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<PAGE>   5

all of the shares of Stock (the "Repurchased Shares"). The Company may exercise
the right granted to it under this Section 9(a) by delivering written notice to
the Participant during such 90-day period stating that the Company is exercising
the repurchase right granted to it under this Section 9(a). The delivery of such
notice by the Company to the Participant shall constitute a binding commitment
of the Company to purchase and acquire all of the Repurchased Shares. The total
purchase price for the Repurchased Shares shall be delivered to the Participant
against delivery by the Participant of certificates evidencing the Repurchased
Shares no later than 30 days after the delivery of the election notice by the
Company. The price per share of the Repurchased Shares (the "Share Repurchase
Price") shall be the Fair Market Value of each of the Repurchased Shares on the
date of the Company's delivery of its written notice to the Participant;
provided, however, that if the Participant's employment is terminated for Cause,
then the Share Repurchase Price shall be the lesser of such Fair Market Value or
the exercise price of the Option.

                  (b) Repurchase of Vested Options. At any time within the
90-day period immediately following the Date of Termination for any reason
(including by reason of death or disability), the Company shall have the right,
and not the obligation, to purchase and acquire from the Participant any or all
of the Participant's vested Options to the extent such vested Options are
exercisable (the "Repurchased Options"). The Company may exercise the right
granted to it under this Section 9(b) by delivering a written notice to the
Participant during such 90-day period stating that the Company is exercising the
repurchase right granted to it under this Section 9(b). The delivery of such
notice by the Company to the Participant shall constitute a binding commitment
of the Company to purchase and acquire all of the Repurchased Options. The total
purchase price for the Repurchased Options shall be delivered to the Participant
against delivery by the Participant of this Agreement no later than 30 days
after the delivery of the election notice by the Company. The Option repurchase
price (the "Option Repurchase Price") shall be an amount equal to the Share
Repurchase Price on the date of the Company's delivery of its written notice to
the Participant under Section 9(a), above, less the exercise price then
applicable to each Repurchased Option (such repurchase shall only be made to the
extent such Option is exercisable as set forth above).

                  (c) Limitation on Repurchase Rights. Anything in this Section
9 to the contrary, the Company shall not be obligated to purchase any Stock or
Options at any time to the extent that the purchase would result in a violation
of any law, statute, rule, regulation, order, writ, injunction, decree or
judgment promulgated or entered by any Federal, state, local or foreign court or
governmental authority applicable to the Company or any of its property.
Anything in this Section 9 to the contrary, the Company's right to purchase any
Stock or Options hereunder shall expire in the event of an IPO

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<PAGE>   6

         10. Requirements of Law. (a) By accepting the Options, the Participant
represents and agrees for himself and his transferees (whether by will or the
laws of descent and distribution) that, unless a registration statement under
the Securities Act of 1933, as amended (the "Act"), is in effect as to shares
purchased upon any exercise of the Options, (i) any and all shares so purchased
shall be acquired for his personal account and not with a view to or for sale in
connection with any distribution, and (ii) each notice of the exercise of any
portion of this Option shall be accompanied by a representation and warranty in
writing, signed by the person entitled to exercise the same, that the shares are
being so acquired in good faith for his personal account and not with a view to
or for sale in connection with any distribution.

                  (b) No certificate or certificates for shares of Stock may be
purchased, issued or transferred if the exercise hereof or the issuance or
transfer of such shares shall constitute a violation by the Company or the
Participant of any (i) provision of any Federal, state or other securities law,
(ii) requirement of any securities exchange listing agreement to which the
Company may be a party, or (iii) other requirement of law or of any regulatory
body having jurisdiction over the Company. Any reasonable determination in this
connection by the Board, upon notice given to the Participant, shall be final,
binding and conclusive.

                  (c) The certificates representing shares of Stock acquired
pursuant to the exercise of options shall carry such appropriate legend, and
such written instructions shall be given to the Company's transfer agent, as may
be deemed necessary or advisable by counsel to the Company in order to comply
with the requirements of the Act or any state securities laws.

         11. Notices. Any notice to be given to either party shall be in writing
and shall be given by hand delivery to such party or by registered or certified
mail, return receipt requested, postage prepaid, addressed to the Company in
care of its Secretary at its principal office, and to the Participant at the
address given beneath his signature hereto, or at such other address as either
party shall have furnished to the other in writing in accordance herewith.
Notice and communications shall be effective when actually received by the
addressee.

         12. Disposition of Stock. The Participant agrees to notify the Company,
in writing, within thirty (30) days of any disposition (whether by sale,
exchange, gift or otherwise) of shares of Stock purchased under this Agreement
with respect to an Incentive Stock Option, within two (2) years from the date of
the granting of such Options or within one (1) year of the transfer of such
shares of Stock to the Participant.

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<PAGE>   7

         13. Binding Effect. Subject to Section 4 hereof, this Agreement shall
be binding upon the heirs, executors, administrators, successors and permitted
assigns of the parties hereto.

         14. Plan. The terms and provisions of the Plan are incorporated herein
by reference and made a part hereof as though fully set forth herein. In the
event of any conflict or inconsistency between discretionary terms and
provisions of this Agreement, this Agreement shall govern and control. In all
other instances of conflicts or inconsistencies or omissions, the terms and
provisions of the Plan shall govern and control. All capitalized terms not
otherwise expressly defined in this Agreement shall have the meaning ascribed to
them in the Plan.

         15. Governing Law. This Agreement shall be construed and interpreted in
accordance with the laws of the State of New York, without regard to the
principles of conflicts of law thereof.

         16. Entire Agreement. This Agreement, together with the Plan, the
Employment Agreement and the Stockholders Agreement, contains the entire
agreement and understanding between the parties with respect to the subject
matter hereof and supersedes all prior agreements, written or oral, with respect
thereto.

                  IN WITNESS WHEREOF, the Company has granted this Option on the
date of grant specified above.

                  This instrument may be executed in any number of counterparts,
each of which shall be deemed to be an original, and such counterparts together
shall constitute one and the same instrument.

                           AMERICAN MEDICAL SYSTEMS, INC.

                           By: /s/ Gregory J. Melsen
                              ---------------------------------
                               Name:  Gregory J. Melsen
                               Title: Chief Financial Officer

ACCEPTED:

/s/ Douglas W. Kohrs
-------------------------
Douglas W. Kohrs
7432 Hyde Park Drive
Edina, MN 55439

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<PAGE>   8

                                                                       EXHIBIT A

                         AMS 1998 EQUITY INCENTIVE PLAN
                     INCENTIVE STOCK OPTION VESTING SCHEDULE
                              FOR DOUGLAS W. KOHRS

<TABLE>
<CAPTION>
                       ANNIVERSARY OF
       YEAR            EFFECTIVE DATE         3/31           6/30            9/30               12/31                TOTAL
       ----            --------------         ----           ----            ----               -----                -----
<S>                    <C>                 <C>             <C>             <C>                <C>                 <C>
       2000                   20,000                                                                                 20,000
       2001                                   5,000          5,000           5,000              5,000                20,000
       2002                                   5,000          5,000           5,000              5,000                20,000
       2003                                   9,375                                                                   9,375
                                                                                                                     69,375
</TABLE>

<PAGE>   9

                                                                       EXHIBIT B

                         AMS 1998 EQUITY INCENTIVE PLAN
                       NON-QUALIFIED STOCK OPTION SCHEDULE
                              FOR DOUGLAS W. KOHRS

<TABLE>
<CAPTION>
                       ANNIVERSARY OF
       YEAR            EFFECTIVE DATE         3/31           6/30            9/30               12/31                TOTAL
       ----            --------------         ----           ----            ----               -----                -----
<S>                    <C>                 <C>             <C>             <C>                <C>                 <C>
       2000                    17,500                        9,375           9,375              9,375                45,625
       2001                                   4,375          4,375           4,375              4,375                17,500
       2002                                   4,375          4,375           4,375              4,375                17,500
       2003
                                                                                                                     80,625
</TABLE><PAGE>   1

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
effective as of March 24, 1999, between American Medical Systems, Inc., a
Delaware corporation (the "Company"), and Greg Melsen (the "Executive").

R E C I T A L S:

         WHEREAS, the Company recognizes that the future growth, profitability
and success of the Company's business will be substantially and materially
enhanced by the employment of the Executive by the Company;

         WHEREAS, the Company desires to employ the Executive and the Executive
has indicated his willingness to provide his services, on the terms and
conditions set forth herein;

         NOW, THEREFORE, on the basis of the foregoing premises and in
consideration of the mutual covenants and agreements contained herein, the
parties hereto agree as follows:

         Section 1. Employment. The Company hereby agrees to employ the
Executive and the Executive hereby accepts employment with the Company, on the
terms and subject to the conditions hereinafter set forth. The Executive shall
serve as Vice President and Chief Financial Officer of the Company, and, in such
capacity, shall report directly to the Company's President or Chief Executive
Officer and shall have such duties as are typically performed by the chief
financial officer of a corporation, together with such additional duties,
commensurate with the Executive's position as the Chief Financial Officer of the
Company, as may be assigned to the Executive from time to time by the Company's
President or Chief Executive Officer. The principal location of the Executive's
employment shall be at the Company's principal executive office located in
Minnetonka, Minnesota, although the Executive understands and agrees that he may
be required to travel from time to time for Company business reasons.

         Section 2. Term. Unless terminated pursuant to Section 6 hereof, the
Executive's employment hereunder shall commence on the date hereof and shall
continue during the period ending on the second anniversary of the date hereof
(the "Initial Term"). Thereafter, the Executive's employment term shall extend
automatically for consecutive periods of one year unless either party shall
provide notice of termination not less than sixty (60) days prior to an
anniversary date of this Agreement. The Initial Term, together with any
extension pursuant to this Section 2, is referred to herein as the "Employment
Term." The Employment Term shall terminate upon any termination of the
Executive's employment pursuant to Section 6.

         Section 3. Compensation. During the Employment Term, the Executive
shall be entitled to the following compensation and benefits:

         (a) Salary. As compensation for the performance of the Executive's
services hereunder, the Company shall pay to the Executive a salary (the
"Salary") of $155,000 per year with increases, if any, as may be approved in
writing by the Company's, President, Chief Executive Officer or Board of
Directors. The Salary shall be payable in accordance with the payroll practices
of the Company as the same shall exist from time to time. In no event shall the
Salary be decreased during the Employment Term.

<PAGE>   2

         (b) Bonus. During the Employment Term, in addition to Salary, the
Executive shall be eligible to participate in such bonus plans as may be adopted
from time by the Board of Directors for other vice presidents of the Company
(the "Bonus"); provided that, unless the Board of Directors determines
otherwise, the Executive must be employed on the last day of such calendar year
in order to receive the Bonus attributable thereto. The Executive's entitlement
to the Bonus for any particular calendar year shall be based on the attainment
of performance objectives established by the Board of Directors in any such
bonus plan.

         (c) Benefits. Except as otherwise provided in this Agreement, in
addition to the Salary and Bonus, if any, the Executive shall be entitled during
the Employment Term to participate in health, insurance, pension, retirement,
disability and other benefit programs provided to other vice presidents of the
Company on terms no less favorable than those available to other vice presidents
of the Company. The Executive shall also be entitled to the same number of
vacation days, holidays, sick days and other benefits as are generally allowed
to other vice presidents of the Company in accordance with the Company's
policies in effect from time to time, except that the Executive shall be
entitled to four weeks of vacation or the amount to which the Executive would
otherwise be entitled under the Company's vacation policy, whichever is greater.

         (d) Stock Options. The Executive shall be granted, effective the date
hereof, an incentive stock option (the "Option") to purchase 50,000 shares of
common stock, $.0l par value per share, of the Company (the "Common Stock") at
an exercise price per share equal to $5.00 (which the parties hereto agree is
the fair market value of a share of Common Stock on the date of the grant). The
Option shall have a term of ten years from the date of grant and shall vest, on
a cumulative basis, with respect to 12,500 shares on December 31, 1999 and with
respect to 3,125 on the last day of each calendar quarter thereafter while the
Participant is employed by the Company. All of the terms and conditions relating
to the Option are set forth in the Incentive Stock Option Agreement executed by
the Company and the Executive and attached hereto as Exhibit A.

         Section 4. Exclusivity. During the Employment Term, the Executive shall
devote his full time to the business of the Company and its subsidiaries, shall
faithfully serve the Company and its subsidiaries, shall in all respects conform
to and comply with the lawful and reasonable directions and instructions given
to him by the President or Chief Executive Officer in accordance with the terms
of this Agreement, shall use his best efforts to promote and serve the interests
of the Company and its subsidiaries and shall not engage in any other business
activity, whether or not such activity shall be engaged in for pecuniary profit,
except that the Executive may (i) participate in the activities of professional
trade organizations related to the business of the Company and its subsidiaries,
(ii) engage in personal investing activities and (iii) serve on the Board of
Directors of Burns Engineering and non-profit organizations, provided that the
activities set forth in these clauses (i), (ii) and (iii), either singly or in
the aggregate, do not interfere in any material respect with the services to be
provided by the Executive hereunder.

         Section 5. Reimbursement for Expenses. During the Employment Term, the
Executive is authorized to incur reasonable expenses in the discharge of the
services to be performed hereunder, including expenses for travel,
entertainment, lodging and similar items in accordance with the Company's
expense reimbursement policy, as the same may be modified by the

                                       2

<PAGE>   3

Company from time to time. The Company shall reimburse the Executive for all
such proper expenses upon presentation by the Executive of itemized accounts of
such expenditures in accordance with the financial policy of the Company, as in
effect from time to time.

         Section 6. Termination and Default.

         (a) Death. The Executive's employment shall automatically terminate
upon his death and upon such event, the Executive's estate shall be entitled to
receive the amounts specified in Section 6(e) below.

         (b) Disability. If the Executive is unable to perform the duties
required of him under this Agreement because of illness, incapacity, or physical
or mental disability, the Employment Term shall continue and the Company shall
pay all compensation required to be paid to the Executive hereunder, unless the
Executive is disabled such that the Executive would be entitled to receive
disability benefits under the Company's long-term disability plan, or if no such
plan exists, the Executive is unable to perform the duties required of him under
this Agreement for an aggregate of 180 days (whether or not consecutive) during
any 12-month period during the term of this Agreement, in which event the
Executive's employment shall terminate.

         (c) Cause. The Company may terminate the Executive's employment at any
time, with or without Cause. In the event of termination pursuant to this
Section 6(c) for Cause (as defined below), the Company shall deliver to the
Executive written notice setting forth the basis for such termination, which
notice shall specifically set forth the nature of the Cause which is the reason
for such termination. Termination of the Executive's employment hereunder shall
be effective upon delivery of such notice of termination. For purposes of this
Agreement, "Cause" shall mean: (i) the Executive's failure (except where due to
a disability contemplated by subsection (b) hereof), neglect or refusal to
perform his duties hereunder which failure, neglect or refusal shall not have
been corrected by the Executive within 30 days of receipt by the Executive of
written notice from the Company of such failure, neglect or refusal, which
notice shall specifically set forth the nature of said failure, neglect or
refusal, (ii) any willful or intentional act of the Executive that has the
effect of injuring the reputation or business of the Company or its affiliates
in any material respect; (iii) any continued or repeated absence from the
Company, unless such absence is (A) approved or excused by the President or
Chief Executive Officer or (B) is the result of the Executive's illness,
disability or incapacity (in which event the provisions of Section 6(b) hereof
shall control); (iv) use of illegal drugs by the Executive or repeated
drunkenness; (v) conviction of the Executive for the commission of a felony; or
(vi) the commission by the Executive of an act of fraud or embezzlement against
the Company.

         (d) Resignation. The Executive shall have the right to terminate his
employment at any time by giving notice of his resignation.

         (e) Payments. In the event that the Executive's employment terminates
for any reason, the Company shall pay to the Executive all amounts and benefits
accrued but unpaid hereunder through the date of termination in respect of
Salary or unreimbursed expenses, including accrued and unused vacation. In
addition, in the event the Executive's employment is terminated by the Company
without Cause, whether during or upon expiration of the current term of this
Agreement, in addition to the amounts specified in the foregoing sentence, (i)
the

                                       3

<PAGE>   4

Executive shall continue to receive the Salary (less any applicable withholding
or similar taxes) at the rate in effect hereunder on the date of such
termination periodically, in accordance with the Company's prevailing payroll
practices, for a period of twelve months following the date of such termination
(the "Severance Term") and (ii) to the extent permissible under the Company's
health and welfare plans, the Executive shall continue to receive any health and
welfare benefits provided to him as of the date of such termination in
accordance with Section 3(c) hereof during the Severance Term, on the same basis
and at the same cost as during the Employment Term. Following the end of the
Severance Term, the Executive shall be entitled to elect health care
continuation coverage permitted under Section 601 through 608 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), as if his
employment had then terminated. Further, in the event the Executive's employment
is terminated without Cause by reason of the Company having notified the
Executive that this Agreement will not be extended pursuant to Section 2, the
Executive shall be entitled to receive a pro-rated amount of the Bonus in a lump
sum based on the Executive's period of employment during the calendar year in
which such termination occurs (less any applicable withholding or similar
taxes). In the event the Executive accepts other employment prior to the last
date of the Severance Term, the Executive shall forthwith notify the Company and
the Company shall be entitled to set off from amounts and benefits due the
Executive under this Section 6(e) (other than in respect of the Bonus) the
amounts paid to and benefits received by the Executive in respect of such other
employment. Amounts owed by the Company in respect of the Salary, Bonus or
reimbursement for expenses under the provisions of Section 5 hereof shall,
except as otherwise set forth in this Section 6(e), be paid promptly upon any
termination. The payments and benefits to be provided to the Executive as set
forth in this Section 6(e) in the event the Executive's employment is terminated
by the Company without Cause: (i) shall be lieu of any and all benefits
otherwise provided under any severance pay policy, plan or program maintained
from time to time by the Company for its employees, (ii) shall not be paid to
the extent that Executive's employment is terminated following a Change in
Control under circumstances entitling the Executive to the benefits described in
Section 6(f).

         (f) Change of Control Benefit. In the event that the Executive's
employment is terminated by the Company without Cause or by the Executive for
Good Reason, as defined below, during the 12-month period immediately following
a Change of Control, as defined below, whether during or upon expiration of the
current term of this Agreement: (i) the Company shall pay to the Executive all
amounts and benefits accrued but unpaid hereunder through the date of
termination in respect of Salary or unreimbursed expenses, including accrued and
unused vacation (less any applicable withholding or similar taxes), (ii) all
unvested shares that are subject to the Option shall become immediately vested
and exercisable as set forth in the Incentive Stock Option Agreement attached as
Exhibit A, (iii) the Company shall pay to Executive a lump sum payment equal to
his Salary at the rate in effect hereunder on the date of such termination, plus
his maximum target Bonus (up to a maximum of 40% of his then current annual
Salary) for the year in which the Change of Control occurs (less any applicable
withholding or similar taxes) and (iv) to the extent permissible under the
Company's health and welfare plans, the Executive shall continue to receive, at
the Company's cost, any health and welfare benefits provided to him as of the
date of such termination for the 12-month period following his termination of
employment. Any payments due under this Section 6(f) shall be made within five
(5) business days of termination of Executive's employment. Following the end of
the 12-month period described in clause (iv) of the preceding sentence, the
Executive

                                       4

<PAGE>   5

shall be entitled to elect health care continuation coverage permitted under
Sections 601 through 608 of the Employee Retirement Income Security Act of 1974,
as amended, as if his employment with the Company then terminated.

                  For the purposes of this Agreement, "Change of Control" shall
mean:

                  (i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or
more (on a fully diluted basis) of either (A) the then outstanding shares of
common stock of the Company, taking into account as outstanding for this purpose
such common stock issuable upon the exercise of options or warrants, the
conversion of convertible stock or debt, and the exercise of any similar right
to acquire such common stock (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a Change of
Control: (x) any acquisition by the Company or any "affiliate" of the Company,
within the meaning of 17 C.F.R. ss. 230.405 (an "Affiliate"), (y) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any Affiliate of the Company, (z) any acquisition
by any corporation pursuant to a transaction which complies with clauses (A),
(B) and (C) of subsection (ii) of this Section 6(f) (persons and entities
described in clauses (x), (y) and (z) being referred to herein as "Permitted
Holders"); or

                  (ii) The consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be, and (B) no Person (excluding any Permitted Holder) beneficially owns,
directly or indirectly, 50% or more (on a fully diluted basis) of, respectively,
the then outstanding shares of common stock of the corporation resulting from
such Business Combination, taking into account as outstanding for this purpose
such common stock issuable upon the exercise of options or warrants, the
conversion of convertible stock or debt, and the exercise of any similar right
to acquire such common stock, or the combined voting power of the then
outstanding voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination and (C) at least a majority
of the members of the board of directors of the corporation resulting from such
Business Combination were

                                       5

<PAGE>   6

members of the incumbent Board of Directors of the Company at the time of the
execution of the initial agreement providing for such Business Combination; or

                  (iii) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company; or

                  (iv) The sale of at least 80% of the assets of the Company to
an unrelated party, or completion of a transaction having a similar effect; or

                  (v) The individuals who on the date of this Agreement
constitute the Board of Directors thereafter cease to constitute at least a
majority thereof; provided that any person becoming a member of the Board of
Directors subsequent to the date of this Agreement and whose election or
nomination was approved by a vote of at least two-thirds of the directors who
then comprised the Board of Directors immediately prior to such vote shall be
considered a member of the Board of Directors on the date of this Agreement.

                  For purposes of this Agreement, "Good Reason" shall mean,
without the Executive's prior written consent, (i) a substantial diminution in
the Executive's authority, duties or responsibilities as in effect prior to the
Change in Control, (ii) a reduction by the Company in the Executive's base
salary, or an adverse change in the form or timing of the payment thereof, as in
effect immediately prior to the Change in Control or as thereafter increased,
(iii) the failure by the Company to cover the Executive under employee benefit
plans that, in the aggregate, provide substantially similar benefits to the
Executive and/or his or her family and dependents at a substantially similar
total cost to the Executive (e.g., premiums, deductibles, co-pays, out of pocket
maximums, required contributions, taxes and the like) relative to the benefits
and total costs under such benefit plans in which the Executive (and/or his or
her family or dependents) were participating at any time during the 90-day
period immediately preceding the Change in Control, or (iv) the Company's
requiring the Executive to be based at any office or location that is more than
fifty (50) miles further from the office or location thereof immediately
preceding a Change in Control; provided, however, Good Reason shall not include
any of the circumstances or events described herein unless the Executive has
first provided written notice of such circumstance or event and the Company has
not corrected such circumstance or event within thirty (30) days of receipt by
the Company of such written notice from the Participant.

         (g) Survival of Operative Sections. Upon any termination of the
Executive's employment, the provisions of Sections 6(e) 6(f) and 7 through 17 of
this Agreement shall survive to the extent necessary to give effect to the
provisions thereof.

         Section 7. Secrecy and Non-Competition. The Executive reaffirms his
obligations under the Secrecy and Non-Competition Agreement, dated March 11,
1999, between the Company and the Executive. The Company agrees that the
restrictions contained in Section 1(a) of the Secrecy and Non-Competition
Agreement shall not prohibit the Executive from owning up to one percent (1.0%)
of the outstanding capital stock of a publicly held entity that competes with
the Company.

         Section 8. Representations and Warranties of the Executive. The
Executive represents and warrants to the Company as follows:

                                       6

<PAGE>   7

         (a) This Agreement, upon execution and delivery by the Executive, will
be duly executed and delivered by the Executive and (assuming due execution and
delivery hereof by the Company) will be the valid and binding obligation of the
Executive enforceable against the Executive in accordance with its terms.

         (b) Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby nor the performance of this
Agreement in accordance with its terms and conditions by the Executive (i)
requires the approval or consent of any governmental body or of any other person
or (ii) conflicts with or results in any breach or violation of, or constitutes
(or with notice or lapse of time or both would constitute) a default under, any
agreement, instrument, judgment, decree, order, statute, rule, permit or
governmental regulation applicable to the Executive. Without limiting the
generality of the foregoing, the Executive is not a party to any
non-competition, non-solicitation, no hire or similar agreement that restricts
in any way the Executive's ability to engage in any business or to solicit or
hire the employees of any person.

         The representations and warranties of the Executive contained in this
Section 8 shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby.

         Section 9. Representations and Warranties of the Company. The Company
represents and warrants to the Executive as follows:

         (a) This Agreement, upon execution and delivery by the Company, will be
duly executed and delivered by the Company and (assuming due execution and
delivery hereof by the Executive) will be the valid and binding obligation of
the Company enforceable against the Company in accordance with its terms.

         (b) Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby nor the performance of this
Agreement in accordance with its terms and conditions by the Company (i)
requires the approval or consent of any governmental body or of any other person
or (ii) conflicts with or results in any breach or violation of, or constitutes
(or with notice or lapse of time or both would constitute) a default under, any
agreement, instrument, judgment, decree, order, statute, rule, permit or
governmental regulation applicable to the Company.

         The representations and warranties of the Company contained in this
Section 9 shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby.

         Section 10. Successors and Assigns; No Third-Party Beneficiaries. This
Agreement shall inure to the benefit of, and be binding upon, the successors and
assigns of each of the parties, including, but not limited to, the Executive's
heirs and the personal representatives of the Executive's estate; provided,
however, that neither party shall assign or delegate any of the obligations
created under this Agreement without the prior written consent of the other
party. Notwithstanding the foregoing, the Company shall have the unrestricted
right to assign this Agreement and to delegate all or any part of its
obligations hereunder to any of its subsidiaries or

                                       7

<PAGE>   8

affiliates, but in such event such assignee shall expressly assume all
obligations of the Company hereunder and the Company shall remain fully liable
for the performance of all of such obligations in the manner prescribed in this
Agreement. Nothing in this Agreement shall confer upon any person or entity not
a party to this Agreement, or the legal representatives of such person or
entity, any rights or remedies of any nature or kind whatsoever under or by
reason of this Agreement.

         Section 11. Waiver and Amendments. Any waiver, alteration, amendment or
modification of any of the terms of this Agreement shall be valid only if made
in writing and signed by the parties hereto. No waiver by either of the parties
hereto of their rights hereunder shall be deemed to constitute a waiver with
respect to any subsequent occurrences or transactions hereunder unless such
waiver specifically states that it is to be construed as a continuing waiver.

         Section 12. Severability and Governing Law. If any of such covenants or
such other provisions of this Agreement are found to be invalid or unenforceable
by a final determination of a court of competent jurisdiction (a) the remaining
terms and provisions hereof shall be unimpaired and (b) the invalid or
unenforceable term or provision shall be deemed replaced by a term or provision
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision. This Agreement shall be
governed by and construed in accordance with the laws of the state of Minnesota
applicable to contracts made and to be performed entirely within such state,
provided, however, that the provisions of this Agreement relating to the Option
shall be governed by and construed in accordance with the laws of the State of
New York.

         Section 13. Notices.

         (a) All communications under this Agreement shall be in writing and
shall be delivered by hand or mailed by overnight courier or by registered or
certified mail, postage prepaid:

                  (i) If to the Executive, at 9649 Wyoming Terrace, Bloomington,
Minnesota 55438, or at such other address as the Executive may have furnished
the Company in writing, and

                  (ii) If to the Company, at 10700 Bren Road West, Minnetonka,
Minnesota 55343, marked for the attention of the Chief Executive Officer, or at
such other address as it may have furnished in writing to the Executive.

         (b) Any notice so addressed shall be deemed to be given: if delivered
by hand, on the date of such delivery; if mailed by courier, on the first
business day following the date of such mailing; and if mailed by registered or
certified mail, on the third business day after the date of such mailing.

         Section 14. Section Headings. The headings of the sections and
subsections of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part thereof, affect the meaning or interpretation of
this Agreement or any term or provision hereof.

                                       8

<PAGE>   9

         Section 15. Entire Agreement. This Agreement including the exhibits
hereto, constitutes the entire understanding and agreement of the parties hereto
regarding the employment of the Executive. This Agreement supersedes all prior
negotiations, discussions, correspondence, communications, understandings and
agreements between the parties relating to the subject matter of this Agreement.

         Section 16. Severability. In the event that any part or parts of this
Agreement shall be held illegal or unenforceable by any court or administrative
body of competent jurisdiction, such determination shall not effect the
remaining provisions of this Agreement which shall remain in full force and
effect.

         Section 17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

                                       AMERICAN MEDICAL SYSTEMS, INC.

                                       By: /s/ Sam B. Humphries
                                           -------------------------------------
                                           Sam B. Humphries
                                           President and Chief Executive Officer

                                       /s/ Gregory J. Melsen
                                       -----------------------------------------
                                       Greg Melsen

                                       9

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