NUTRITION MEDICAL INC, 10-Q, 1998-08-14

NUTRITION MEDICAL INC
10-Q, 1998-08-14
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________

COMMISSION FILE NUMBER 0-22247

NUTRITION MEDICAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

MINNESOTA 41-1756256
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

9850 51ST AVENUE NORTH, SUITE 110, MINNEAPOLIS, MN 55442
(Address of principal executive offices)

(612) 551-9595
(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date:

CLASS OUTSTANDING AS OF AUGUST 11, 1998
----- ---------------------------------
Common Stock, $.04 par value 1,364,001 shares

Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---

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NUTRITION MEDICAL, INC.

INDEX

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements PAGE NO.

Statements of Operations (Unaudited) For the Three
and Six Months Ended June 30, 1998 and 1997 2

Balance Sheets (Unaudited) As of June 30, 1998
and December 31, 1997 3

Statements of Cash Flows (Unaudited) For the Six
Months Ended June 30, 1998 and 1997 4

Notes to Financial Statements (Unaudited) 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7

PART II - OTHER INFORMATION

Item 1. Legal Proceedings 12

Item 2. Changes in Securities and Use of Proceeds 12

Item 5. Other Information 13

Item 6. Exhibits and Reports on Form 8-K 13

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NUTRITION MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- --------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $1,443,640 $ 683,627 $2,861,478 $1,444,410
Cost of goods sold 943,908 478,633 1,884,868 974,596
---------- ---------- ---------- ----------
Gross profit 499,732 204,994 976,610 469,814

Operating expenses:
Selling, general and administrative 522,083 537,891 953,355 1,095,689
Research and development 31,314 118,234 57,024 235,425
---------- ---------- ---------- ----------
553,397 656,125 1,010,379 1,331,114

Operating income (loss) (53,665) (451,131) (33,769) (861,300)

Other income (expense):
Interest expense (56,045) (49,737) (110,441) (91,145)
Interest income 24,141 38,449 41,857 87,118
---------- ---------- ---------- ----------
(31,904) (11,288) (68,584) (4,027)

Loss from continuing operations (85,569) (462,419) (102,353) (865,327)
---------- ---------- ---------- ----------

Discontinued operations:
Income (loss) from discontinued operations (34,908) (6,150) 31,029 (43,263)
---------- ---------- ---------- ----------

Net income (loss) $ (120,477) $ (468,569) $ (71,324) $ (908,590)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Loss per share data (basic and diluted):
Loss from continuing operations (0.06) (0.34) (0.07) (0.65)
Income (loss) from discontinued operations (0.03) (0.00) 0.02 (0.03)
Net loss per share $ (0.09) $ (0.34) $ (0.05) $ (0.68)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Weighted average number of shares
outstanding 1,364,005 1,363,209 1,364,005 1,345,538
</TABLE>

See accompanying notes to financial statements

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NUTRITION MEDICAL, INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,378,591 $ 1,647,482
Accounts receivable, less allowance of $53,986 in
1998 and $31,500 in 1997 718,217 1,140,020
Inventories 815,315 1,615,165
Prepaid expenses 31,719 51,401
------------ ------------
Total current assets 3,943,842 4,454,068

Equipment and office furniture, net 1,078,422 1,179,200
------------ ------------
Total assets $ 5,022,264 $ 5,633,268
------------ ------------
------------ ------------

Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 535,241 $ 827,007
Accrued lease costs 66,600
Accrued payroll 127,703 158,298
Accrued expenses 220,894 482,044
------------ ------------
Total current liabilities 883,838 1,533,949

Subordinated note payable, including accrued interest 1,899,374 1,788,934

Shareholders' equity:
Undesignated Preferred Stock, $.04 par value:
Authorized shares - 1,250,000
Issued and outstanding shares - none
Common Stock, $.04 par value:
Authorized shares - 5,000,000 shares
Issued and outstanding shares - 1,364,001 - 1998;
1,364,006 --1997 54,560 54,560
Paid-in capital 8,706,435 8,706,444
Accumulated deficit (6,521,943) (6,450,619)
------------ ------------
Total shareholders' equity 2,239,052 2,310,385
------------ ------------
Total liabilities and shareholders' equity $ 5,022,264 $ 5,633,268
------------ ------------
------------ ------------
</TABLE>

See accompanying notes to financial statements

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NUTRITION MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (71,324) $(908,590)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 160,758 333,641
Reserve for bad debts 22,467
Changes in operating assets and liabilities:
Accounts receivable 399,336 (547,490)
Inventories 799,850 (802,128)
Prepaid expenses 19,682 (284,330)
Accounts payable (291,766) 828,440
Accrued liabilities (247,894) 74,547
--------- ---------
Net cash provided by (used in) operating activities 791,109 (1,305,910)
--------- ---------

INVESTING ACTIVITIES
Proceeds from sale of short-term investments --- 1,671,596
Purchase of goodwill --- (58,174)
Purchase of equipment and office furniture (60,000) (89,521)
--------- ---------
Net cash provided by (used in) investing activities (60,000) 1,523,901
--------- ---------

FINANCING ACTIVITIES
Proceeds from issuance of common stock --- 7,000
--------- ---------
Net cash provided by financing activities --- 7,000
--------- ---------

INCREASE (DECREASE) IN CASH 731,109 224,991

Cash and cash equivalents at beginning of period 1,647,482 2,553,955
--------- ---------
Cash and cash equivalents at end of period $2,378,591 $2,778,946
--------- ---------
--------- ---------

Supplemental disclosure of noncash investment and
financing activities
Acquisition of a business:
Issuance of note payable $1,593,750
Issuance of stock 3,206,250
</TABLE>

See accompanying notes to financial statements

<PAGE>

NUTRITION MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The condensed financial statements as of June 30, 1998 and for the three
and six-month periods ended June 30, 1998 and 1997 included in this Form 10-QSB
have been prepared by Nutrition Medical, Inc. (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the financial statements and
related notes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997.

The condensed financial statements presented herein as of June 30, 1998 and
for the three and six-month periods ended June 30, 1998 and 1997 are unaudited,
but in the opinion of management, reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position,
results of operations and cash flows for the periods presented. The results of
operations for any interim period are not necessarily indicative of results for
the full year.

2. Discontinued Operations

The Company announced in January 1998 its intention to discontinue its
private label adult nutrition supplement business and signed an agreement (the
"Agrilink Agreement") to transfer the business to Agrilink Foods, Inc.
("Agrilink") effective May 1, 1998. Pursuant to the terms of the Agrilink
Agreement, the Company transferred its private label supplement business
customer list and unused labels to Agrilink in return for cash plus royalty
payments on adult nutrition supplement products sold to such customers for the
next two years. This segment of the Company's business, active since late 1995,
generated revenues of approximately $1.1 million in the first six months of 1997
and $919,000 for the same period of 1998.

3. Reverse Stock Split

The Board of Directors of the Company authorized a one-for-four reverse
stock split effective June 10, 1998. As a result of the reverse split, the par
value of the Company's stock increased to $.04 per share, and the total number
of authorized shares and outstanding shares were proportionately reduced.
Because cash was paid in lieu of the issuance of fractional shares that resulted
from the reverse stock split, the total number of shares of the Company's common
stock, $.04 par value ("Common Stock") outstanding decreased by five shares.
Comparative financial statements have been restated to reflect the reverse stock
split.

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4. Subsequent Event - Agreement to Sell the Pump and Disposables Product Line

On July 27, 1998, the Company entered into an agreement with ZEVEX,
Inc., a wholly-owned subsidiary of ZEVEX International, Inc., to sell its pump
and plastic disposables product line in exchange for $500,000 in cash and
115,000 shares of ZEVEX International, Inc. common stock (the "ZEVEX Shares").
The Company has entered into an agreement with Elan Pharma, Inc. and Elan
International Services Ltd. ("Elan") to retire, in full, the $3.0 million
promissory note due Elan and repurchase the 213,750 shares of Common Stock owned
by Elan in exchange for $450,000 cash , the ZEVEX Shares and a three-year
warrant to purchase 50,000 shares of Common Stock for $3.50 per share. The
Company originally issued the promissory note and the shares to Elan Pharma,
Inc. in connection with its January 1997 acquisition of the pump and disposable
product lines from Elan Pharma, Inc. Elan Pharma, Inc. subsequently transferred
the shares of Common Stock and the promissory note to Elan. The transaction is
expected to result in an increase in shareholders' equity of approximately $1.0
million.

<PAGE>

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

CAUTIONARY STATEMENT

This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. When
used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer,
the words or phrases "believes", "anticipates", "intends", "will likely
result", "estimates", "projects" or similar expressions are intended to
identify such forward-looking statements, but are not the exclusive means of
identifying such statements. These forward-looking statements involve risks
and uncertainties that may cause the Company's actual results to differ
materially from the results discussed in the forward-looking statements. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to revise any forward-looking statements in
order to reflect events or circumstances after the date of such statements.
Readers are urged to carefully review and consider the various disclosures
made by the Company in this report and in the Company's other reports filed
with the Securities and Exchange Commission that attempt to advise interested
parties of the risks and factors that may affect the Company's business.
Such forward-looking statements are qualified in their entirety by the
cautions and risk factors set forth under the "Cautionary Statement" filed as
exhibit 99.1 to this Form 10-QSB.

GENERAL

The Company develops and sells nutrition products marketed as
cost-effective alternatives to equivalent national brand products. Initial
development focused on formulas for the critical care nutrition market. These
products are sold to hospitals and other health care facilities to feed
critically ill patients who cannot consume adequate nutrients orally and
consequently require specialized feeding via tubes into the intestinal tract.
As of June 30, 1998, the Company had developed nine such products. Critical
care nutrition products are generally purchased by a relatively large
customer base, which typically places orders in relatively small quantities.

On January 13, 1997, the Company purchased a line of products from Elan
Pharma, Inc. ("Elan Pharma") consisting of intact protein formulas, enteral
pumps and the related disposable delivery hardware (the "Elan Acquired
Products"). These products appeal to the larger long-term care segment of the
clinical nutrition market, while providing a wider range of products that may be
offered to hospitals and home health care facilities.

In the fourth quarter of 1997, the Company completed a review of cash flows
expected to be derived from the Elan Acquired Products. Based upon this review
and analysis, the Company concluded that the intangible asset received in the
acquisition was impaired and, as a result, took

<PAGE>

a charge of $1.5 million to operations in 1997, thereby reducing goodwill
from the acquisition to zero. As a result, no goodwill amortization charges
were incurred during 1998.

On July 27, 1998, the Company entered into an agreement with ZEVEX, Inc., a
wholly-owned subsidiary of ZEVEX International, Inc., to sell its pump and
plastic disposables product line in exchange for $500,000 in cash and the ZEVEX
Shares. The Company has entered into an agreement with Elan Pharma and Elan to
retire, in full, the $3.0 million promissory note due Elan and repurchase the
213,750 shares of Common Stock owned by Elan in exchange for $450,000 cash, the
ZEVEX Shares and a three-year warrant to purchase 50,000 shares of Common Stock
for $3.50 per share.

The sale is subject to certain closing conditions, including approval by
the Company's shareholders. The Company expects that a shareholder meeting to
approve the sale will occur in the fourth quarter of 1998. The Company entered
into an exclusive marketing agreement with ZEVEX, Inc. for these product lines.
The marketing agreement is expected to be in effect until the acquisition is
finalized. As a result of this agreement, the Company's revenues and related
gross profits from the pump and plastic disposables product line will drop
significantly in the third and fourth quarter of 1998.

In January 1998, the Company announced that it was discontinuing its
efforts to develop and market a generic national brand equivalent infant
formula. In 1997, the Company incurred an estimated $300,000 in sales and
marketing related costs and an equivalent amount in research and development
costs related to this project. As a result, research and development costs are
lower in 1998, compared to the same period of 1997. The Company also announced,
in January 1998, its intention to discontinue its private label adult nutrition
supplement business.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 AND 1997

NET SALES. Net sales from continuing operations for the three months ended
June 30, 1998 totaled $1,443,640 compared to $683,627 for the same period of
1997, an increase of 111 percent. The growth in sales is the result of increases
in sales of both the Elan Acquired Products and Critical Care Division products
and is attributable to the addition of new customers, growth in orders from
existing customers and a greater number of products available for sale in the
1998 period.

GROSS PROFIT. Gross profit from continuing operations for the three months
ended June 30, 1998 increased to $499,732 compared to $204,994 for the same
period of 1997. As a percentage of sales, gross profit increased from 30
percent in 1997 to 35 percent in 1998. The increase in gross profit as a
percentage of sales is primarily the result of higher revenues. Also, in 1997,
margins were affected negatively by transition related costs after the
acquisition from Elan Pharma.

<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses from continuing operations for the three months ended June 30, 1998
decreased three percent to $522,083 from $537,891 for the same period of 1997.
The decrease in sales and marketing expenses is primarily the result of the
discontinuation of the development of infant formula. In addition, in 1998,
there was no amortization charges associated with goodwill resulting from the
acquisition from Elan Pharma as the entire outstanding balance of goodwill was
charged to operations in December 1997. These lower costs were offset by higher
personnel costs reflecting the expansion of sales efforts in the Critical Care
Division. Expressed as a percentage of net sales, selling, general and
administrative expenses were 36 percent and 79 percent for the three months
ended June 30, 1998 and 1997, respectively. In addition to the reasons for the
decline in costs discussed above, the percentage decrease is the result of
economies of scale arising from the relatively fixed nature of certain of the
Company's selling, general and administrative expenses, which have increased
slowly in comparison to the increase in overall sales.

RESEARCH AND DEVELOPMENT. Research and development costs from continuing
operations for the three-month period ended June 30, 1998 decreased 74 percent
to $31,314 from $118,234 incurred in same period of 1997. The decrease is
primarily the result of the discontinuation of the development of infant formula
in 1998. Research and development expenses are expected to continue at a low
level for the remaining quarters of 1998.

OTHER EXPENSES. Other expenses for the three-month period ended June 30,
1998 increased to $31,904 from $11,288 for the same period of 1997. The
Company had a higher balance invested in short term investments in 1997
resulting from proceeds received in its 1996 public stock offering. Interest
expense is expected to drop to zero upon the closing of the sale of the
Company's pump and plastic disposables business and the concurrent settlement of
the Elan promissory note.

SIX MONTHS ENDED JUNE 30, 1998 AND 1997

NET SALES. Net sales from continuing operations for the six months ended
June 30, 1998 totaled $2,861,478 compared to $1,444,410 for the same period of
1997, an increase of 98 percent. The growth in sales is the result of increases
in sales of both the Elan Acquired Products and Critical Care Division products
and is attributable to the addition of new customers, growth in orders from
existing customers and a greater number of products available for sale in the
1998 period.

GROSS PROFIT. Gross profit from continuing operations for the six months
ended June 30, 1998 increased to $976,610 compared to $469,814 for the same
period of 1997. As a percentage of sales, gross profit increased slightly to 34
percent in 1998. The increase in gross profit as a percentage of sales is
primarily the result of higher revenues.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses from continuing operations for the six months ended June 30, 1998
decreased 13 percent to $953,355 from $1,095,689 for the same period of 1997.
The decrease in sales and marketing expense is primarily the result of the
discontinuation of the development of infant formula. In addition, in 1998,
there was no amortization charges associated with goodwill resulting from the
acquisition

<PAGE>

from Elan Pharma as the entire outstanding balance of goodwill was
charged to operations in December 1997. These lower costs were offset by higher
personnel costs reflecting the expansion of sales efforts in the Critical Care
Division. Expressed as a percentage of net sales, selling, general and
administrative expenses were 33 percent and 76 percent for the six months ended
June 30, 1998 and 1997, respectively. In addition to the reasons for the
decline in costs discussed above, the percentage decrease is the result of
economies of scale arising from the relatively fixed nature of certain of the
Company's selling, general and administrative expenses, which have increased
slowly in comparison to the increase in overall sales.

RESEARCH AND DEVELOPMENT. Research and development costs from continuing
operations for the six-month period ended June 30, 1998 decreased 76 percent to
$57,024 from $235,425 incurred in same period of 1997. The decrease is
primarily the result of the discontinuation of the development of infant formula
in 1998. Research and development expenses are expected to continue at a low
level for the remaining quarters of 1998.

OTHER EXPENSES. Other expenses for the six-month period ended June 30,
1998 increased to $68,584 from $4,027 for the same period of 1997. The Company
had a higher balance invested in short term investments in 1997 resulting from
proceeds received in its 1996 public stock offering. Interest expense is
expected to drop to zero upon the closing of the sale of the Company's pump and
plastic disposables business and the concurrent settlement of the Elan
promissory note.

DISCONTINUED OPERATIONS

As discussed above, the Company transferred its private label adult
nutrition supplement business to Agrilink effective May 1, 1998. This segment of
the Company's business, active since late 1995, generated revenues of
approximately $1.1 million in the first six months of 1997 and $919,000 for the
same period of 1998. In the six-month period ended June 30, 1997 the operating
losses from the discontinued operations were approximately $43,300 compared to a
gain of $31,000 for the same period of 1998.

YEAR 2000 ISSUE

The Company has initiated an internal review to determine if any computer
programs used by the Company have time-sensitive software that recognize a date
using "00" as the year 1900 rather than the year 2000 ("Year 2000 Issue").
Since the Company utilizes current generation off-the-shelf software for its
contact management and accounting systems, the Company expects its exposure risk
to be minimal.

The Company utilizes contract manufacturers to produce its products and
relies upon various common carriers and warehouses and wholesalers to distribute
its products. The Company believes that the Year 2000 Issue, insofar as
production is concerned, can be mitigated somewhat by carrying larger than
normal quantities of inventory on-hand. The higher inventory levels are not
expected to have a significant impact on the Company's liquidity. The Company
expects to communicate with its significant manufacturers and distributors
regarding the Year 2000 Issue, as needed, to determine its exposure and steps
needed to mitigate this exposure.

<PAGE>

There can be no assurance that the systems of other companies on which the
Company relies for manufacturing and distributing its products will be
converted in a timely manner. Delays in necessary conversions by these
suppliers and distributors could have an adverse effect on the operations of
the Company and its ability to continue to service the needs of its customers.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has incurred net losses and negative cash
flows from operations. The Company raised capital used in operations through a
public offering of its Common Stock in 1996 in which the Company sold 1,437,500
shares of Common Stock at $3.50 per share. Net proceeds to the Company, after
deducting all offering costs, totaled $4.24 million. Unused funds are invested
in U.S. Treasury backed funds with maturities ranging under eight months. Prior
to the initial public offering, the Company had raised approximately $2.8
million through the private placement of its Common Stock.

The Company's net cash provided by operations for the six-month period
ended June 30, 1998, totaled $791,000, compared with cash used in operations of
$1,306,000 for the same period of 1997. Cash and cash equivalents as of June
30, 1998 totaled approximately $2,379,000. Accounts receivable decreased during
the six-month period ended June 30, 1998 by approximately $399,000 due to
improvement in collections and discontinuation of product lines. Inventories
decreased by approximately $800,000, offset by a decrease of approximately
$292,000 in accounts payable. The inventory and accounts payable decrease are
attributable to the discontinuation of the private label adult nutrition
supplement business announced in January of 1998, and the disposition, in the
ordinary course of business, of the related inventory.

The Company made additions to equipment in 1998, primarily for the
placement of leased pumps with customers who purchase tubing and accessories.
Capital expenditures over the balance of 1998 is expected to be lower as pump
placement will be discontinued once Zevex assumes responsibility for this
activity prospectively under the marketing agreement discussed earlier.

As discussed in Part II, Item 1, the Company has been named as a defendant
in two patent infringement lawsuits. It is not possible at this time to predict
the outcome of these lawsuits, including whether the Company will have to cease
selling the products in question, or to estimate the amount or range of
potential loss, if any.

The Company expects that the existing cash balances will be sufficient to
fund the operations of the Company through 1998. However, the Company's future
liquidity and capital requirements will depend on numerous factors including
competition, the extent to which the Company's products gain market acceptance
and the costs and timing of expansion of sales, marketing and product
development activities. There can be no assurance that the Company will not be
required to raise additional capital before the end of 1998, or any time
thereafter, or that such capital will be available on acceptable terms, or at
all.

<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In August 1995, the Company was named as a defendant in a patent
infringement lawsuit brought by Novartis Nutrition ("Novartis"), formerly
Sandoz Nutrition Corporation, in the United States District Court for the
District of Minnesota. The complaint asserts that one of the Company's
products, L-Emental-TM- Plus, infringes on two patents held by Novartis and
asks for relief in the form of an injunction that would prevent the Company
from selling the product as well as damages of an unspecified amount. Both
patents were issued subsequent to the Company's introduction of L-Emental
Plus. The Company responded with a counterclaim seeking a declaration of
invalidity, unenforceability, non-infringement and inventorship of the
subject patents. A court order stayed the litigation pending a reexamination
by the United States Patent and Trademark Office of both patents. On August
13, 1997, the Company received notification that the United States Patent and
Trademark Office will issue the two patents under review. The litigation,
which was stayed pending this determination, has resumed, and the Company
intends to continue to vigorously defend against the claim. Sales of
L-Emental Plus constituted $298,000, or 40 percent, $497,000, or 41 percent,
and $431,000, or 10.5 percent of the Company's net sales in 1995, 1996 and
1997, respectively. Net sales of L-Emental Plus in the first six months of
1998 were $130,000. It is not possible at this time to predict the outcome
of the lawsuit, including whether the Company will have to cease selling
L-Emental Plus, or to estimate the amount or range of potential loss, if any.
To date, no injunction has been issued.

In November 1997, the Company was named as a defendant in a patent
infringement lawsuit brought by Nestl Clinical Nutrition ("Nestl") in the
United States District Court for the Northern District of Illinois. The suit
asserts that one of the Company's products, Pro-Peptide-TM- For Kids, infringes
on a patent held by Nestle and asks for relief in the form of an injunction that
would prevent the Company from selling the product as well as damages of an
unspecified amount. Sales of Pro-Peptide For Kids, introduced in May 1997,
constituted $134,000, or three percent, of the Company's net sales in 1997. In
the first six months of 1998, sales of Pro-Peptide For Kids were $107,000. It
is not possible at this time to predict the outcome of the lawsuit, including
whether the Company will have to cease selling Pro-Peptide For Kids, or to
estimate the amount or range of potential loss, if any. To date, no injunction
has been issued.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

REPORT OF SALES OF SECURITIES AND USE OF PROCEEDS THEREFROM

The Company had an initial public offering (Securities Act Registration
number 333-9999) that commenced September 26, 1996 and terminated with the sale
of 1,437,500 shares of its common stock, par value $.01, at a price of $3.50 per
share. Total net proceeds from the offering were $4,237,000. Such proceeds are
being used as follows:

<PAGE>

USE OF PROCEEDS*

<TABLE>
<S> <C>
Purchase and installation of equipment $ 363,000
Research and Development 479,000
Sales and Marketing 1,789,000
Temporary Investments (U.S. Treasury Bills) 1,606,000
----------
Total $4,237,000
----------
</TABLE>

*None of such payments were made to the Company's directors and officers or
their respective associates, beneficial owners of ten percent or more of the
Company's common stock or affiliates of the Company

The Board of Directors of the Company authorized a one-for-four reverse
stock split effective June 10, 1998. As a result of the reverse split, the par
value of the Company's stock increased to $.04 per share and the total number of
authorized shares and outstanding shares were proportionately reduced. Because
cash was paid in lieu of the issuance of fractional shares that resulted from
the reverse stock split, the total number of common stock outstanding decreased
by five shares.

ITEM 5. OTHER INFORMATION

On April 1, 1998, the Company received notice from the Nasdaq Stock
Market (SM) that the Company's Common Stock was not in compliance with the
minimum bid price requirement of $1.00 per share, pursuant to NASD
Marketplace Rule 4310 (c) (4), which became effective February 23, 1998. The
Company completed a one-for-four reverse stock split effective June 10, 1998.
Since this date the Company's common stock has maintained a minimum bid
price of $1 and, as a result, the Company has regained compliance with the
minimum bid price requirement.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) The following exhibits are included with this quarterly report on Form
10-QSB as required by Item 601 of Regulation S-B.

<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Asset Purchase Agreement between ZEVEX, Inc. and Nutrition
Medical, Inc. dated July 27, 1998.
3.1 Second Amended and Restated Articles of Incorporation, as
amended
10.1 Marketing Agreement between ZEVEX, Inc. and Nutrition
Medical, Inc. dated July 27, 1998.
27 Financial Data Schedule
99.1 Cautionary Statement
</TABLE>

<PAGE>

b) Reports on Form 8-K.

There were no reports on Form 8-K filed during the quarter ended June
30, 1998.

<PAGE>

SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

NUTRITION MEDICAL, INC.

Dated: August 13, 1998 By: /s/ Anwar H. Bhimani
-----------------------------------
Anwar H. Bhimani
Chief Financial Officer
(both on behalf of the Registrant and as
principal financial officer)

<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Asset Purchase Agreement between ZEVEX, Inc. and Nutrition
Medical, Inc. dated July 27, 1998.
3.1 Second Amended and Restated Articles of Incorporation, as
amended
10.1 Marketing Agreement between ZEVEX, Inc. and Nutrition
Medical, Inc. dated July 27, 1998.
27 Financial Data Schedule
99.1 Cautionary Statement
</TABLE>

<PAGE>

EXHIBIT 2.1

ASSET PURCHASE AGREEMENT

BETWEEN

ZEVEX, INC.

AND

NUTRITION MEDICAL, INC.

JULY 27, 1998

<PAGE>

TABLE OF CONTENTS

1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Basic Transaction. . . . . . . . . . . . . . . . . . . . . . . . 5
(a) Purchase and Sale of Assets. . . . . . . . . . . . . . . . 5
(b) Retained Assets. . . . . . . . . . . . . . . . . . . . . . 6
(c) Assumption of Liabilities. . . . . . . . . . . . . . . . . 7
(d) Retained Liabilities . . . . . . . . . . . . . . . . . . . 7
(e) Purchase Price. . . . . . . . . . . . . . . . . . . . . . 8
(f) Payment and Holdback . . . . . . . . . . . . . . . . . . . 9
(g) Inventory Procedure and Purchase Price Adjustment. . . . . 9
(h) The Closing. . . . . . . . . . . . . . . . . . . . . . . . 10
(i) Deliveries at the Closing. . . . . . . . . . . . . . . . . 10
(j) Allocation . . . . . . . . . . . . . . . . . . . . . . . . 10

3. Representations and Warranties of the Target . . . . . . . . . . 10
(a) Organization of the Target . . . . . . . . . . . . . . . . 10
(b) Authorization of Transaction . . . . . . . . . . . . . . . 11
(c) Noncontravention . . . . . . . . . . . . . . . . . . . . . 11
(d) Brokers' Fees. . . . . . . . . . . . . . . . . . . . . . . 11
(e) Title to Acquired Assets . . . . . . . . . . . . . . . . . 11
(f) Financial Statements . . . . . . . . . . . . . . . . . . . 11
(g) Legal Compliance . . . . . . . . . . . . . . . . . . . . . 12
(h) Intellectual Property. . . . . . . . . . . . . . . . . . . 12
(i) Tangible Assets. . . . . . . . . . . . . . . . . . . . . . 14
(j) Inventory. . . . . . . . . . . . . . . . . . . . . . . . . 15
(k) Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 15
(l) Litigation . . . . . . . . . . . . . . . . . . . . . . . . 15
(m) Product Warranty . . . . . . . . . . . . . . . . . . . . . 16
(n) Customers and Suppliers. . . . . . . . . . . . . . . . . . 16
(o) Product Liability. . . . . . . . . . . . . . . . . . . . . 16
(p) Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 16
(q) Investment . . . . . . . . . . . . . . . . . . . . . . . . 16
(r) Licenses and Permits . . . . . . . . . . . . . . . . . . . 17

4. Representations and Warranties of the Buyer. . . . . . . . . . . 17
(a) Organization, Qualification, and Corporate Power
of the Buyer . . . . . . . . . . . . . . . . . . . . . . . 17
(b) Authorization of Transaction . . . . . . . . . . . . . . . 17
(c) Noncontravention . . . . . . . . . . . . . . . . . . . . . 18
(d) Brokers' Fees. . . . . . . . . . . . . . . . . . . . . . . 18

<PAGE>

5. Pre-Closing Covenants. . . . . . . . . . . . . . . . . . . . . . 18
(a) General. . . . . . . . . . . . . . . . . . . . . . . . . . 18
(b) Notices and Consents . . . . . . . . . . . . . . . . . . . 18
(c) Operation of Business. . . . . . . . . . . . . . . . . . . 18
(d) Full Access and Due Diligence. . . . . . . . . . . . . . . 20
(e) Exclusivity. . . . . . . . . . . . . . . . . . . . . . . . 20
(f) Marketing Agreement. . . . . . . . . . . . . . . . . . . . 20
(g) Nestle Product Orders. . . . . . . . . . . . . . . . . . . 20

6. Post-Closing Covenants . . . . . . . . . . . . . . . . . . . . . 20
(a) General. . . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) Litigation Support . . . . . . . . . . . . . . . . . . . . 21
(c) Transition . . . . . . . . . . . . . . . . . . . . . . . . 21
(d) Confidentiality. . . . . . . . . . . . . . . . . . . . . . 21
(e) Covenant Not to Compete. . . . . . . . . . . . . . . . . . 21
(f) Transfer of Possession of the Assets . . . . . . . . . . . 22
(g) Product Liability Insurance. . . . . . . . . . . . . . . . 22
(h) Product Liability Claims . . . . . . . . . . . . . . . . . 22
(i) Product Warranty Claims. . . . . . . . . . . . . . . . . . 22

7. Conditions to Obligation to Close. . . . . . . . . . . . . . . . 23
(a) Conditions to Obligation of the Buyer. . . . . . . . . . . 23
(b) Conditions to Obligation of the Target . . . . . . . . . . 24

8. Remedies for Breaches of This Agreement. . . . . . . . . . . . . 26
(a) Survival of Representations and Warranties . . . . . . . . 26
(b) Indemnification Provisions for Benefit of the Buyer. . . . 26
(c) Indemnification Provisions for Benefit of the Target . . . 27
(d) Matters Involving Third Parties. . . . . . . . . . . . . . 28
(e) Determination of Adverse Consequences. . . . . . . . . . . 29
(f) Charges Against Holdback . . . . . . . . . . . . . . . . . 29
(g) Indemnity Threshold and Limit. . . . . . . . . . . . . . . 29
(h) Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . 29

9. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(a) Termination of Agreement . . . . . . . . . . . . . . . . . 29
(b) Effect of Termination. . . . . . . . . . . . . . . . . . . 30

10. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . 30
(a) Press Releases and Public Announcements. . . . . . . . . . 30
(b) Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . 30
(c) Obligations under WARN . . . . . . . . . . . . . . . . . . 31
(d) No Third-Party Beneficiaries . . . . . . . . . . . . . . . 31
(e) Entire Agreement . . . . . . . . . . . . . . . . . . . . . 31

<PAGE>

(f) Succession and Assignment. . . . . . . . . . . . . . . . . 31
(g) Counterparts . . . . . . . . . . . . . . . . . . . . . . . 31
(h) Headings . . . . . . . . . . . . . . . . . . . . . . . . . 31
(i) Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 31
(j) Governing Law. . . . . . . . . . . . . . . . . . . . . . . 32
(k) Amendments and Waivers . . . . . . . . . . . . . . . . . . 32
(l) Severability . . . . . . . . . . . . . . . . . . . . . . . 32
(m) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 33
(n) Construction . . . . . . . . . . . . . . . . . . . . . . . 33
(o) Incorporation of Exhibits and Schedules. . . . . . . . . . 33
(p) Specific Performance . . . . . . . . . . . . . . . . . . . 33
(q) Dispute Resolution . . . . . . . . . . . . . . . . . . . . 33
(r) Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . 35
(s) Bulk Transfer Laws . . . . . . . . . . . . . . . . . . . . 35

LIST OF SCHEDULES AND EXHIBITS

Schedule 2(a)(i) - Fixed Assets
Schedule 2(a)(v) - Intellectual Property
Schedule 2(a)(vii)(A) - Assumed Contracts (non-lease)
Schedule 2(a)(vii)(B) - Assumed Contracts (lease)
Schedule 2(j) - Purchase Price Allocation
Schedule 3 - Disclosure Schedule
Schedule 7(a)(iv) - Third Parties Requiring an Estoppel Certificate

Exhibit 5(f) - Form of Marketing Agreement
Exhibit 7(a)(iv) - Form of Estoppel Certificate
Exhibit 7(a)(x) - Form of Opinion of Target's Counsel
Exhibit 7(a)(xi) - Form of Investment Representation Letter for Elan
International Services Ltd.
Exhibit 7(b)(viii) - Form of Opinion of Buyer's Counsel

iii

<PAGE>

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement ("Agreement") entered into as of July 27,
1998, by and between ZEVEX, Inc., a Delaware corporation (the "Buyer"), and
Nutrition Medical, Inc., a Minnesota corporation (the "Target"). The Buyer and
the Target are herein referred to individually as a "Party" and collectively as
the "Parties."

This Agreement contemplates a transaction in which the Buyer will purchase
all of the assets (and assume certain of the liabilities) of the Enteral Feeding
Device and Disposable Division of the Target in return for cash and common stock
of ZEVEX International, the parent corporation of the Buyer.

Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.

1. DEFINITIONS.

"Accredited Investor" has the meaning set forth in Regulation D promulgated
under the Securities Act.

"Acquired Assets" has the meaning set forth in Section 2(a) below.

"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and
fees, including court costs and attorneys' fees and expenses.

"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.

"Applicable Rate" means the prime rate (as published in the Money Rate
Section of the WALL STREET JOURNAL on the date of calculation), plus two percent
(2%).

"Assumed Contracts" has the meaning set forth in Section 2(a)(vii) below.

"Assumed Liabilities" has the meaning set forth in Section 2(c) below.

"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could form the basis for any
specified consequence.

"Buyer" has the meaning set forth in the preface above.

<PAGE>

"Closing" has the meaning set forth in Section 2(h) below.

"Closing Date" has the meaning set forth in Section 2(h) below.

"Code" means the Internal Revenue Code of 1986, as amended.

"Confidential Information" means any information concerning the businesses
and affairs of the Division that is not already generally available to the
public.

"Contracts" has the meaning set forth in Section 3(k) below.

"Deferred Intercompany Transaction" has the meaning set forth in Reg.
Section 1.1502-13.

"Disclosure Schedule" has the meaning set forth in Section 3 below.

"Division" means the Target with respect to its enteral feeding pump and
disposable division, which includes the production and distribution of enteral
feeding pumps, delivery sets, and enteral feeding tubes (but excludes formulas
and nutritional products).

"Division Intellectual Property" has the meaning set forth in Section 3(h)
below.

"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement, (b) qualified defined contribution retirement
plan or arrangement which is an "Employee Pension Benefit Plan" as defined in
ERISA Section 3(2), (c) qualified defined benefit retirement plan or arrangement
which is an Employee Pension Benefit Plan (including any Multiemployer Plan as
defined in ERISA Section 3(37)), or (d) Employee Welfare Benefit Plan as defined
in ERISA Section 3(1) or material fringe benefit or other retirement, bonus, or
incentive plan or program.

"Environmental, Health, and Safety Requirements" shall mean all federal,
state, local and foreign statutes, regulations, ordinances and other provisions
having the force or effect of law, all judicial and administrative orders and
determinations, all contractual obligations and all common law concerning public
health and safety, worker health and safety, and pollution or protection of the
environment, including without limitation all those relating to the presence,
use, production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge, release,
threatened release, control, or cleanup of any hazardous materials, substances
or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation, each as amended and as now or
hereafter in effect.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"Estimated Parts Inventory Amount" has the meaning set forth in Section
2(e) below.

<PAGE>

"Final Parts Inventory Amount" has the meaning set forth in Section 2(g)
below.

"Financial Statement" has the meaning set forth in Section 3(f) below.

"Fixed Assets" has the meaning set forth in Section 2(a)(i) below.

"GAAP" means United States generally accepted accounting principles as in
effect from time to time.

"General Inventory" has the meaning set forth in Section 2(a)(ii) below.

"Indemnified Party" has the meaning set forth in Section 8(d) below.

"Indemnifying Party" has the meaning set forth in Section 8(d) below.

"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, design concepts,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals), (f) all computer software
(including data and related documentation), (g) all other proprietary rights,
and (h) all copies and tangible embodiments thereof (in whatever form or
medium).

"Inventory Statement" has the meaning set forth in Section 2(g) below.

"Knowledge" with respect to the Target means the actual knowledge of the
Target after reasonable investigation.

"Liability" means any liability (whether known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due), including
any liability for Taxes.

"Licenses and Permits" has the meaning set forth in Section 2(a)(xi) below.

"Most Recent Balance Sheet" means the balance sheet contained within the
Most Recent

<PAGE>

Financial Statements.

"Most Recent Financial Statements" has the meaning set forth in Section
3(f) below.

"Most Recent Fiscal Month End" has the meaning set forth in Section 3(f)
below.

"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).

"Party" has the meaning set forth in the preface above.

"Parts Inventory" means that part of the General Inventory comprised only
of parts and materials for the repair of enteral feeding pumps, parts and
materials for the manufacture of products other than enteral feeding pumps, and
finished products other than enteral feeding pumps.

"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).

"Pump Lease Agreements" means all leases (written and oral) of enteral
feeding pumps owned by the Target.

"Purchase Price" has the meaning set forth in Section 2(e) below.

"Securities Act" means the Securities Act of 1933, as amended.

"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable, (c) purchase money
liens and liens securing rental payments under capital lease arrangements, and
(d) other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.

"Shares" has the meaning set forth in Section 2(e) below.

"Target" has the meaning set forth in the preface above.

"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Section 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.

<PAGE>

"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.

"Third Party Claim" has the meaning set forth in Section 8(d) below.

2. BASIC TRANSACTION.

(a) PURCHASE AND SALE OF ASSETS. On and subject to the terms and
conditions of this Agreement, the Buyer agrees to purchase and acquire from the
Target, and the Target agrees to sell, transfer, convey, and deliver to the
Buyer, for the consideration specified below in this Section 2, all of the
Target's right, title and interest in and to all of the assets constituting the
Division, with such changes, deletions or additions thereto as may occur from
the date hereof to the Closing in the ordinary course of business and consistent
with the terms and conditions of this Agreement (the "Acquired Assets"). The
Acquired Assets shall include, subject to the foregoing, without limitation, all
of the Target's right, title and interest in and to the following items to the
extent such items are used in or related to the businesses of the Division:

(i) tangible personal property such as machinery, tooling, tools,
molds, jigs, and dies, as identified in Schedule 2(a)(i) (the "Fixed
Assets");

(ii) inventories of raw materials and supplies, enteral feeding
pumps (including enteral feeding pumps subject to Pump Lease Agreements),
delivery sets, and feeding tubes, manufactured and purchased parts in
connection therewith, goods in process and finished goods (collectively,
the "General Inventory");

(iii) supplies, containers, labels, packaging materials, and similar
items;

(iv) all documents or other tangible materials embodying technology
used in connection with the manufacture, promotion or distribution of
products;

(v) all Intellectual Property, licenses and sublicenses granted
and obtained with respect thereto, and rights thereunder, remedies against
infringements thereof, and rights to protection of interests therein under
the laws of all jurisdictions as described on Schedule 2(a)(v);

(vi) goodwill and going concern value;

(vii) agreements, contracts, purchase orders, sales orders,
indentures, mortgages, instruments, Security Interests, guaranties,
commitments, other similar arrangements and rights thereunder (other than
the Pump Lease Agreements) as listed Schedule 2(a)(vii)(B), and Pump Lease
Agreements as described in Schedule 2(a)(vii)(B) (collectively, the
"Assumed Contracts");

<PAGE>

(viii) warranties provided by VR Industries, Inc. to the Target in
connection with the manufacture of enteral feeding pumps;

(ix) claims, deposits, prepayments, refunds and the like;

(x) causes of action, choses in action, rights of recovery, rights
of set off, and rights of recoupment or refund (including any such item
relating to the payment of Taxes);

(xi) franchises, approvals, permits, licenses, orders,
registrations, certificates, variances, and similar rights obtained from
governments and governmental agencies (the "Licenses and Permits") to the
extent they are assignable under law;

(xii) original regulatory documentation, including Device Master
Records, Device History Records, original 510(k) applications in their
entirety, and 510(k) notification letters from the United States Food and
Drug Administration; and

(xiii) printed copies (and computerized copies where available) of
books, records, ledgers, files, documents, customer lists, pump tracking
information, prospect lists, dealer and distributor lists, purchase orders
and invoices, product data, price lists, quotes and bids, correspondence,
lists, drawings, and specifications, creative materials, advertising and
promotional materials, stock photographs, artwork, dyes, studies, reports,
training and operating manuals, and other printed or written materials.

(b) RETAINED ASSETS. Notwithstanding the foregoing, the Target is not
selling, transferring, assigning or conveying to the Buyer the following:

(i) real property, leaseholds and subleaseholds therein,
improvements, fixtures, and fittings thereon, and easements, rights-of-way,
and other appurtenants thereto relating to the Division or the Target;

(ii) any formulas or nutritional products of Target and associated
Intellectual Property;

(iii) rights in and with respect to the assets associated with the
Target's Employee Benefit Plans;

(iv) cash, cash equivalents, accounts, notes, and other receivables
of the Division or the Target;

(v) the Target's corporate charter, qualifications to conduct
business as a foreign corporation, arrangements with registered agents
relating to foreign qualifications, taxpayer and other identification
numbers, seals, minute books, stock

<PAGE>

transfer books, blank stock certificates, and other documents relating to
the organization, maintenance, and existence of the Target as a
corporation;

(vi) the original books and records of the Target and the
accounting or other software used by the Target to maintain such books and
records; and

(vii) any of the rights of the Target under this Agreement (or under
any side agreement between the Target on the one hand and the Buyer on the
other hand entered into on or after the date of this Agreement).

(c) ASSUMPTION OF LIABILITIES. On and subject to the terms and conditions
of this Agreement, at Closing the Buyer agrees to assume, pay, perform or
otherwise satisfy, to the extent not paid, performed or discharged at Closing,
only the following liabilities of the Target (the "Assumed Liabilities"):

(i) the Assumed Contracts identified on Schedule 2(a)(vii), but
only to the extent accruing from and after Closing.

(d) RETAINED LIABILITIES. Except to the extent expressly assumed in
Section 2(c), the Buyer shall not assume or otherwise become responsible for any
liability or obligation of any kind of the Target, whether or not relating to
the operations of the Division, asserted or unasserted, known or unknown,
contingent or fixed, arising or accruing prior to or following the Closing,
including but not limited to the following, all of which liabilities and
obligations shall be retained by the Target:

(i) any Liabilities of the Target set forth on the face of the
Most Recent Balance Sheet;

(ii) all Liabilities of the Target which have arisen after the Most
Recent Fiscal Month End in the Ordinary Course of Business;

(iii) any Liability resulting from, arising out of, relating to, in
the nature of, or caused by any breach of contract, breach of warranty,
tort, infringement, product liability, violation of law, or environmental
matter, including without limitation those arising under Environmental,
Health, and Safety Requirements or incidents or reports of equipment
malfunction for a Division's product sold prior to Closing;

(iv) all Liabilities and obligations of the Target with respect to
employees of Target or arising under Target's Employee Benefit Plans;

(v) any Liability of the Target for unpaid Taxes (with respect to
the Division or otherwise) for periods prior to the Closing,;

(vi) any Liability of the Target for income, transfer, sales, use,
and other Taxes

<PAGE>

arising in connection with the consummation of the transactions
contemplated hereby (including any income Taxes arising because the Target
is transferring the Acquired Assets or because the Target has deferred gain
on any Deferred Intercompany Transaction);

(vii) any Liability of the Target for the unpaid Taxes of any Person
other than the Target under Reg. Section 1.1502-6 (or any similar provision
of state, local, or foreign law), as a transferee or successor, by contract
or otherwise;

(viii) any obligation of the Target to indemnify any Person by reason
of the fact that such Person was a director, officer, employee, or agent of
the Target or was serving at the request of the Target as a partner,
trustee, director, officer, employee, or agent of another entity (whether
such indemnification is for judgments, damages, penalties, fines, costs,
amounts paid in settlement, losses, expenses, or otherwise and whether such
indemnification is pursuant to any statute, charter document, bylaw,
agreement, or otherwise);

(ix) all liabilities arising from the operation of any successor
liability statutes, to the extent that non-compliance therewith or the
failure to obtain necessary clearances would subject either the Buyer or
the Acquired Assets to the claims of any creditors of the Target or would
subject any of the Acquired Assets to liens or other restrictions.

(x) any Liability (including any warranty claim) arising out of or
connection with any products sold by the Target;

(xi) any Liability of the Target for costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby;
and

(xii) any Liability or obligation of the Target under this Agreement
(or under any side agreement between the Target on the one hand and the
Buyer on the other hand entered into on or after the date of this
Agreement).

(e) PURCHASE PRICE. Subject to the provisions of this Agreement, the
purchase price for the Acquired Assets shall be equal to the aggregate of the
following (the "Purchase Price"):

(i) Five Hundred Thousand Dollars ($500,000.00); plus

(ii) 115,000 shares of common stock of ZEVEX International, Inc.
(the "Shares"); plus

(iii) an amount equal to the estimated actual cost of the Parts
Inventory on the Closing Date (the "Estimated Parts Inventory Amount"),
subject to adjustment as set forth in Section 2(g) below.

<PAGE>

The value of the Shares for purposes of calculating the amount of the Purchase
Price shall be determined based upon the average closing price as quoted on the
American Stock Exchange for the 90-day period ending one day prior to the
Closing Date.

(f) PAYMENT AND HOLDBACK. On the Closing Date, the Buyer shall pay to the
Target all amounts required by Section 2(e) (subject to the holdback described
below) by physical delivery of certificates for the Shares to the Target and by
wire transfer of immediately available funds to such account as the Target shall
designate. The Buyer acknowledges that the Target intends to immediately
transfer the Shares to Elan International Services Ltd. as payment of certain
indebtedness of the Target. The Buyer shall reserve a portion of the Purchase
Price to be delivered at the Closing to cover any decrease to the Purchase Price
as provided in Section 2(g) below and any payments due the Buyer under Section
6(i) or Section 8(b). The Parties agree that the Buyer shall withhold ten
Percent (10%) of the Estimated Parts Inventory Amount from the cash portion of
the Purchase Price to be delivered at the Closing and that this amount, less
deductions required to cover such Purchase Price decrease, will be delivered to
the Target on a deferred basis within 10 days following the determination of the
Final Parts Inventory Amount. The Parties further agree that the Buyer shall
withhold an additional Fifty Thousand Dollars ($50,000) from the cash portion of
the Purchase Price to be delivered at the Closing and that this amount, less
deductions pursuant to Section 6(i) or Section 8(b) will be delivered to the
Target on a deferred basis no later than 180 days following Closing. Such
reserved funds shall be delivered instead to a mutually agreeable third party
escrow agent, to hold in an interest bearing account, and released to the
respective Parties in accordance with the terms of this Agreement and a mutually
agreed upon escrow agreement to be executed on or prior to Closing.

(g) INVENTORY PROCEDURE AND PURCHASE PRICE ADJUSTMENT. Promptly following
the Closing Date, the Target shall take a physical inventory of all Parts
Inventory in accordance with procedures to be established by mutual agreement of
Buyer and the Target prior to Closing. The Buyer shall have the right to have
representatives present during such inventory. Within thirty (30) days after
the completion of such inventory, the Target shall prepare and deliver to the
Buyer a statement (the "Inventory Statement"), which has been reviewed and
reported on by Buyer's independent auditors in accordance with procedures to be
established by Buyer and the Target, without exception or qualification, setting
forth the actual cost of the Parts Inventory (the "Final Parts Inventory
Amount"). The Purchase Price shall be increased by the amount, if any, by which
the Final Parts Inventory Amount exceeds the Estimated Parts Inventory Amount.
Conversely, the Purchase Price shall be decreased by the amount, if any, by
which the Final Parts Inventory Amount is less than the Estimated Parts
Inventory Amount. The Buyer shall pay to the Target any such increase in the
Purchase Price and the Target shall repay to the Buyer any such decrease in the
Purchase Price within thirty (30) days following the determination of the
adjustment pursuant to this Section 2(g).

(h) THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of the Buyer at 4314
ZEVEX Park Lane, Salt Lake City, Utah, commencing at 12:00 p.m. local time on
the second business day following the satisfaction or waiver of all conditions
to the obligations of the Parties to consummate the transactions

<PAGE>

contemplated hereby (other than conditions with respect to actions the
respective Parties will take at the Closing itself) or such other date as the
Parties may mutually determine (the "Closing Date"); provided, however, that
the Buyer shall have no obligation to close this Agreement prior to the
expiration of the due diligence period allowed the Buyer under Section
9(a)(ii).

(i) DELIVERIES AT THE CLOSING. At the Closing, (i) the Target will
deliver to the Buyer the various certificates, instruments, and documents
referred to in Section 7(a) below; (ii) the Buyer will deliver to the Target the
various certificates, instruments, and documents referred to in Section 7(b)
below; (iii) the Target will execute, acknowledge (if appropriate), and deliver
to the Buyer such instruments of sale, transfer, conveyance, and assignment as
the Buyer and its counsel reasonably may request; (iv) the Buyer will execute,
acknowledge (if appropriate), and deliver to the Target such instruments of
assumption as the Target and its counsel reasonably may request; and (v) the
Buyer will deliver to the Target the consideration specified in Section 2(e)
above.

(j) ALLOCATION. The Parties agree to allocate the Purchase Price (and all
other capitalizable costs) among the Acquired Assets for all purposes (including
financial accounting and tax purposes) in accordance with the allocation
schedule attached hereto as Schedule 2(j).

3. REPRESENTATIONS AND WARRANTIES OF THE TARGET. The Target represents
and warrants to the Buyer that the statements contained in this Section 3 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 3),
except as set forth in Schedule 3 accompanying this Agreement and initialed by
the Parties (the "Disclosure Schedule"). The Target's portion of the Disclosure
Schedule will be arranged in paragraphs corresponding to the lettered and
numbered paragraphs contained in this Section 3.

(a) ORGANIZATION OF THE TARGET. The Target is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation.

(b) AUTHORIZATION OF TRANSACTION. The Target has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder. Without limiting the
generality of the foregoing, the board of directors of the Target has duly
authorized the execution, delivery, and performance of this Agreement by the
Target, subject to the approval of the Target Stockholders. This Agreement
constitutes a valid and legally binding obligation of the Target, enforceable in
accordance with their respective terms and conditions. Upon Closing, the Target
Shareholders will have duly authorized the transactions contemplated by this
Agreement to the extent required under applicable law.

<PAGE>

or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which the Target is a party or
by which it is bound or to which any of its assets is subject (or result in
the imposition of any Security Interest upon any of its assets); (iii) or
adversely affect the Acquired Assets. The Target does not need to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement.

(d) BROKERS' FEES. The Target has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Buyer could become
liable or obligated.

(e) TITLE TO ACQUIRED ASSETS. As of the date hereof, the Target has, and
on the Closing Date will have and will convey to Buyer, good and marketable
title to all of the Acquired Assets, free and clear of all Security Interests,
other than statutory liens arising from trade payables and Taxes not yet due and
payable. There are no leasehold interests, licenses or other agreements
granting any party any possessory rights with respect to the Acquired Assets.
Schedule 3(e) is a true and complete list of the location of any Acquired Assets
held by a third party. The Acquired Assets are or will be sufficient to permit
Buyer to operate the business of the Division in a manner substantially the same
as the current operations of the Target, except for assets related to
administrative support services, such as computer services for accounting and
manufacturing support, which are not being transferred.

(f) FINANCIAL STATEMENTS. Attached hereto as Schedule 3(f) are the
following financial statements (collectively the "Financial Statements"): (i)
audited balance sheet and statements of income, changes in control account, and
cash flow as of and for the fiscal year ended December 31, 1997 for the Target
(the "Fiscal Year End Statements"); and (ii) unaudited balance sheet and
statements of income, changes in control account, and cash flow (the "Most
Recent Financial Statements") as of and for the three months ended March 31,
1998 (the "Most Recent Fiscal Month End") for the Target. The Financial
Statements (including the notes thereto) have been prepared in accordance with
GAAP applied on a consistent basis throughout the periods covered thereby,
present fairly in all material respects the financial condition of the Target as
of such dates and the results of operations of the Target for such periods, are
correct and complete, and are consistent with the books and records of the
Target (which books and records are correct and complete); provided, however,
that the Most Recent Financial Statements are subject to normal year-end
adjustments (which will not be material individually or in the aggregate) and
lack footnotes and other presentation items. By August 12, 1998, the Target
will deliver unaudited balance sheet and statements of income, changes in
control account, and cash flow as of and for the six months ended June 30, 1998,
which statements shall thereafter be included in the definition of Financial
Statements and Most Recent Fiscal Month End.

(g) LEGAL COMPLIANCE. The Target is not in violation of or in default
under any applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof), the
effect of which individually or in the aggregate of all such violations and

<PAGE>

defaults could reasonably be expected to have a material adverse effect on the
Division, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply.

(h) INTELLECTUAL PROPERTY.

(i) To the Knowledge of the Target, it owns or has the right to
use pursuant to license, sublicense, agreement, or other permission all
Intellectual Property necessary for the operation of the business of the
Division as presently conducted and as presently proposed to be conducted
("Division Intellectual Property"). To the Knowledge of the Target, each
item of Division Intellectual Property owned or used by the Target
immediately prior to the Closing hereunder will be owned or available for
use by the Buyer on identical terms and conditions immediately subsequent
to the Closing hereunder. To the Knowledge of the Target, it has taken all
necessary action to maintain and protect each item of Division Intellectual
Property.

(ii) To the Knowledge of the Target, it has not interfered with,
infringed upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of third parties, and the Target has never
received any charge, complaint, claim, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any
claim that the Target must license or refrain from using any Intellectual
Property rights of any third party). To the Knowledge of the Target, no
third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any rights of the Target in the Division
Intellectual Property.

(iii) Section 3(h)(iii) of the Disclosure Schedule identifies each
patent or registration which has been issued to the Target with respect to
any of the Division Intellectual Property, identifies each pending patent
application or application for registration which the Target has made with
respect to any of the Division Intellectual Property, and identifies each
license, agreement, or other permission which the Target has granted to any
third party with respect to any of the Division Intellectual Property
(together with any exceptions). The Target has delivered to the Buyer
correct and complete copies of all such patents, registrations,
applications, licenses, agreements, and permissions (as amended to date)
and has made available to the Buyer correct and complete copies of all
other written documentation evidencing ownership and prosecution (if
applicable) of each such item. Section 3(h)(iii) of the Disclosure
Schedule also identifies each trade name, unregistered trademark, service
mark, and product name used by the Target in connection with the business
of the Division. With respect to each item of Intellectual Property
required to be identified in Section 3(h)(iii) of the Disclosure Schedule:

(A) the Target possesses all right, title, and interest in
and to the item, free and clear of any Security Interest, license, or other
restriction;

(B) the item is not subject to any outstanding injunction,
judgment,

<PAGE>

order, decree, ruling, or charge;

(C) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or is threatened which challenges
the legality, validity, enforceability, use, or ownership of the item; and

(D) the Target has never agreed to indemnify any Person for
or against any interference, infringement, misappropriation, or other conflict
with respect to the item.

(iv) Section 3(h)(iv) of the Disclosure Schedule identifies each
item of Division Intellectual Property that any third party owns and that
the Target uses pursuant to license, sublicense, agreement, or permission.
The Target has delivered to the Buyer correct and complete copies of all
such licenses, sublicenses, agreements, and permissions (as amended to
date). With respect to each item of Division Intellectual Property
required to be identified in Section 3(h)(iv) of the Disclosure Schedule:

(A) To the Knowledge of the Target, the license,
sublicense, agreement, or permission covering the item is legal, valid, binding,
enforceable, and in full force and effect;

(B) To the Knowledge of the Target, the license,
sublicense, agreement, or permission will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms following the
consummation of the transactions contemplated hereby;

(C) To the Knowledge of the Target, no party to the
license, sublicense, agreement, or permission is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default or permit termination, modification, or acceleration thereunder;

(D) no party to the license, sublicense, agreement, or
permission has repudiated any provision thereof;

(E) with respect to each sublicense, to the Knowledge of
the Target the representations and warranties set forth in subsections (A)
through (D) above are true and correct with respect to the underlying license;

(F) To the Knowledge of the Target, the underlying item of
Intellectual Property is not subject to any outstanding injunction, judgment,
order, decree, ruling, or charge;

(G) To the Knowledge of the Target, no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand is
pending or is

<PAGE>

threatened which challenges the legality, validity, or enforceability of the
underlying item of Intellectual Property; and

(H) the Target has not granted any sublicense or similar
right with respect to the license, sublicense, agreement, or permission.

(v) To the Knowledge of the Target, the Division Intellectual
Property will not interfere with, infringe upon, misappropriate, or
otherwise come into conflict with, any Intellectual Property rights of
third parties as a result of the continued operation of the Division's
businesses as presently conducted and as presently proposed to be
conducted.

(vi) The Target has no Knowledge of any new products, inventions,
procedures, or methods of manufacturing or processing that any competitors
or other third parties have developed which reasonably could be expected to
supersede or make obsolete any product or process of the Division.

(i) TANGIBLE ASSETS. Schedule 2(a)(i) is a true and correct list of the
Fixed Assets which are material to the operation of the Business. The Target
owns or leases all Fixed Assets and other tangible assets necessary for the
conduct of the businesses of the Division as presently conducted and as
presently proposed to be conducted. The tangible assets are suitable for the
purposes for which they presently are used and proposed to be used. The parties
acknowledge that the Fixed Assets are being sold by the Target "as is" without
representation or warranty as to defects, condition, maintenance or repair.

(j) INVENTORY. The General Inventory is merchantable, in good condition,
without material defects, meets all applicable specifications and standards, and
fit for the purpose for which it was procured or manufactured, and none of which
is slow-moving, obsolete or damaged, subject only to the reserve for inventory
writedown set forth on the face of the Most Recent Balance Sheet (rather than in
any notes thereto) as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of the Target. The Target's
finished goods are salable in the Ordinary Course of Business at prices the
Target has charged during the past sixty (60) days. The Target has on hand or
has ordered and expects timely delivery of such quantities of raw materials and
has on hand such quantities of work in process and finished goods as are
reasonably required to timely fill orders on hand which require delivery with
ninety (90) days. None of the inventory items necessary to manufacture the
products currently sold by the Division is in short supply or otherwise
difficult to obtain.

(k) CONTRACTS. Section 3(k) of the Disclosure Schedule is a true, correct
and complete list of all the material contracts relating to the Division, and
all amendments and modifications thereto (collectively, the "Contracts"), and
there are no oral or other amendments or modifications to the Contracts. With
respect to each Contract: (A) the agreement is legal, valid, binding,
enforceable, and in full force and effect; (B) the agreement will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the

<PAGE>

consummation of the transactions contemplated hereby; (C) no party is in
breach or default, and no event has occurred which with notice or lapse of
time would constitute a breach or default, or permit termination,
modification, or acceleration, under the agreement; and (D) no party has
repudiated any provision of the agreement. The Assumed Contracts are or will
be sufficient to permit Buyer to operate the Business in a manner
substantially the same as the current operations of the Target. The
assignment of the Assumed Contracts to Buyer at Closing pursuant to the terms
of this Agreement will effectively transfer the Target's interests in the
Assumed Contracts to Buyer. Nothing in the assignment of the Assumed
Contracts to Buyer in accordance with the terms of this Agreement shall
render the Assumed Contracts non-binding, invalid or ineffective, subject to
the receipt of any required consents to such assignment. The Target has
delivered to the Buyer a correct and complete copy of each written agreement
listed in Section 3(k) of the Disclosure Schedule (as amended to date) and a
written summary setting forth the terms and conditions of each oral agreement
referred to in Section 3(k) of the Disclosure Schedule.

(l) LITIGATION. Section 3(l) of the Disclosure Schedule sets forth each
instance in which the Target (i) is subject to any outstanding injunction,
judgment, order, decree, ruling, or charge or (ii) is a party or is threatened
to be made a party to any action, suit, proceeding, hearing, or investigation
of, in, or before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator. None
of the actions, suits, proceedings, hearings, and investigations set forth in
Section 3(l) of the Disclosure Schedule could result in any adverse change in
the business, financial condition, operations, results of operations, or future
prospects of the Target or the Division. The Target has no Knowledge and no
reason to believe that any such action, suit, proceeding, hearing, or
investigation may be brought or threatened against the Target.

(m) PRODUCT WARRANTY. To the Knowledge of the Target, each product
manufactured, sold, leased, or delivered by the Target with respect to the
business of the Division has been in conformity with all applicable contractual
commitments and all express and implied warranties, and the Target does not have
any Liability (and there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
any of them giving rise to any Liability) for replacement or repair thereof or
other damages in connection therewith, subject only to the reserve for product
warranty claims set forth on the face of the Most Recent Balance Sheet (rather
than in any notes thereto) as adjusted for the passage of time through the
Closing Date in accordance with the past custom and practice of the Target. No
product manufactured, sold, leased, or delivered by the Division is subject to
any guaranty, warranty, or other indemnity beyond the applicable standard terms
and conditions of sale or lease. Section 3(m) of the Disclosure Schedule
includes copies of the standard terms and conditions of sale or lease for each
of the products of the Division, including Pump Lease Agreements (containing
applicable guaranty, warranty, and indemnity provisions).

(n) CUSTOMERS AND SUPPLIERS. Section 3(n) of the Disclosure Schedule
lists the 10 largest customers and suppliers of the Division for the fiscal year
ended December 31, 1997, and the six-month period ended June 30, 1998, and
described for each such customer or supplier the approximate percentage of net
sales or purchases by the Division for each such period. Since

<PAGE>

June 30, 1998, no customer listed in accordance with the foregoing has
indicated that it will stop or decrease the rate of business done with the
Division except for changes in the Ordinary Course of Business.

(o) PRODUCT LIABILITY. To the Knowledge of the Target, it does not have
any Liability (and there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
any of them giving rise to any Liability) arising out of any injury to
individuals or property as a result of the ownership, possession, or use of any
product manufactured, sold, leased, or delivered by the Division.

(p) DISCLOSURE. The representations and warranties contained in this
Section 3 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 3 not misleading.

(q) INVESTMENT. The Target (i) understands that the Shares have not been,
and will not be, registered under the Securities Act, or under any state
securities laws, and are being offered and sold in reliance upon federal and
state exemptions for transactions not involving any public offering, (ii) is
acquiring the Shares with the intent to immediately transfer the Shares to Elan
International Services Ltd. and only to Elan International Services Ltd. for the
purposes of eliminating a prior debt, (iii) is a sophisticated investor with
knowledge and experience in business and financial matters, (iv) has received
certain information concerning the Buyer and has had the opportunity to obtain
additional information as desired in order to evaluate the merits and the risks
inherent in holding the Shares, (v) is able to bear the economic risk and lack
of liquidity inherent in holding the Shares, (vi) is an Accredited Investor as
that term is defined in Regulation 501 promulgated under the Securities Act,
(vii) the certificates representing the Shares will bear a legend indicating the
Shares may not be transferred unless in compliance with applicable law as
determined by counsel for the Buyer (which the Buyer may enforce by issuing
stop-transfer instructions to its transfer agent).

(r) LICENSES AND PERMITS. Except as set forth in Section 3(r) of the
Disclosure Schedule, to the Target's Knowledge, the Licenses and Permits
constitute all of the necessary or required permits or licenses or other
governmental authorizations pertaining to or required for the operation of the
Acquired Assets. To the Knowledge of the Target, the Licenses and Permits are
valid and in full force and effect and, to its Knowledge, the Target has timely
taken all necessary actions to preserve such Licenses and Permits and have not
engaged in any activity or act and will not engage in any activity or act that
has or may jeopardize the validity of or prevent the effective transfer (to the
extent permitted by law) of the Licenses and Permits to Buyer.

4. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents and
warrants to the Target that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 4),
except as set forth in the Disclosure Schedule. The Buyer's portion of the
Disclosure Schedule will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs

<PAGE>

contained in this Section 4.

(a) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER OF THE BUYER. The
Buyer is a corporation duly organized, validly existing, and in good standing
under the laws of the jurisdiction of its incorporation. Buyer is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties requires such qualification. Buyer has full corporate power and
authority to carry on the business in which it is engaged and to own and use the
properties owned and used by it. Buyer is not in default under or in violation
of any provision of its articles of incorporation or bylaws.

(b) AUTHORIZATION OF TRANSACTION. The Buyer has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement and the consummation of the transactions contemplated thereby,
including the issuance of the shares of Buyer, will have been approved by the
board of directors of Buyer as of the Closing Date. This Agreement constitutes
the valid and legally binding obligation of the Buyer, enforceable in accordance
with its terms and conditions.

(c) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Buyer is subject or any provision of
its charter or bylaws or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
the Buyer is a party or by which it is bound or to which any of its assets is
subject. The Buyer does not need to give any notice to, make any filing with,
or obtain any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.

(d) BROKERS' FEES. The Buyer has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Target could become
liable or obligated.

5. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to
the period between the execution of this Agreement and the Closing.

(a) GENERAL. Each of the Parties will use its best efforts to take all
action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the Closing conditions set forth in
Section 7 below).

(b) NOTICES AND CONSENTS. The Target will give any notices to third
parties, and the

<PAGE>

Target will use its reasonable best efforts to obtain any third party
consents, that the Buyer may request in connection with the transfer of the
Acquired Assets and assumption of the Assumed Contracts. Each of the Parties
will give any notices to, make any filings with, and use its reasonable best
efforts to obtain any authorizations, consents, and approvals of governments
and governmental agencies in connection with the matters referred to in
Section 3(c) and Section 4(c) above, and to obtain the estoppel certificates
referred to in Section 7(a)(iv) from the parties identified in Schedule
7(a)(iv). To the extent that such transfer or assignment shall require such
consent of any other party in order to permit such transfer, or to avoid any
indebtedness secured by the Acquired Assets coming due by reason of such
transfer, this Agreement shall not constitute a contract to transfer the same
unless and until such consent is obtained.

(c) OPERATION OF BUSINESS. The Target agrees that in connection with the
operation of the Division from the date hereof until the earlier of the Closing
Date or the termination of this Agreement, except as otherwise consented to or
approved by Buyer in writing:

(i) The Target shall use best efforts to continue to operate the
Division in the Ordinary Course of Business, consistent with past
practices, except for taking such steps as may be necessary or proper to
carry out and consummate the transactions contemplated by this Agreement.
Without limiting the foregoing obligation, and by way of example, the
Target agrees to use best efforts to: (A) to maintain a level of
advertising reasonably comparable to that existing during the ninety (90)
day period immediately preceding the date of this Agreement; (B) to perform
customary maintenance on the Acquired Assets; (C) not to agree to any
amendment to any of the Assumed Contracts, or make any agreement affecting
the Target's use of or interest in the Acquired Assets (except purchase
orders in the Ordinary Course of Business and subject to the other
provisions of this Agreement); (D) not to sell, mortgage, pledge, encumber
or otherwise dispose of any of the Acquired Assets, except General
Inventory in the Ordinary Course of Business; (E) to maintain all insurance
coverage currently maintained by the Target in accordance with its present
business practices; (F) to use reasonable efforts to maintain the goodwill
associated with the Division; and (G) keep its business and properties
substantially intact, including its present operations, physical
facilities, working conditions, and relationships with lessors, licensors,
suppliers, customers, and employees.

(ii) The Target shall promptly notify Buyer of any (A) notice from
any governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement (except for Tax notices which
the Target must only advise Buyer of if the same would result in a lien on
the Assets); or (B) damage to or claim against the Acquired Assets.

(iii) The Target shall use best efforts to duly observe and perform
in all material respects all terms, conditions and requirements under the
Contracts. The Target shall not do any act or omit to do any act, or
permit any act or omission which would, upon such act or omission or with
the passage of time, cause a breach or default under any of the Contracts
or adversely affect Buyer's anticipated operation or ownership of the

<PAGE>

Acquired Assets.

(iv) Up to and including August 12, 1998, the Target shall have the
right and obligation to amend the Disclosure Schedule to include any fact
or circumstance which would make any representation or warranty set forth
herein untrue or inaccurate as of such day or as of the date of this
Agreement. After August 12, 1998, the Target shall not be entitled to make
any further amendments and the Disclosure Schedule shall be deemed to be
final and binding, provided the Target may amend or modify the Disclosure
Schedule for the sole purpose of disclosing events occurring after such day
and prior to Closing. After such day, the Target agrees to promptly notify
the Buyer of any fact or circumstance of which the Target has Knowledge
which would make any representation or warranty set forth herein untrue or
inaccurate as of such day and as of the Closing Date. No disclosure by the
Target after such day shall be deemed to amend or supplement the Disclosure
Schedule or to prevent or cure any misrepresentation, breach of warranty,
or breach of covenant.

(d) FULL ACCESS AND DUE DILIGENCE. Buyer shall be allowed to conduct such
investigations of the Division and Acquired Assets as Buyer in its sole
discretion deems necessary or desirable, including but not limited to
operational results, condition of the Acquired Assets, legal, marketing and Tax
matters, the Contracts, and the Target's relationship with customers and vendors
generally. The Target will permit representatives of the Buyer to have full
access at all reasonable times, and in a manner so as not to interfere with the
normal business operations of the Target or the Division to all premises,
properties, personnel, books, records (including Tax records), contracts, and
documents of or pertaining to the Division.

(e) EXCLUSIVITY. Unless the Target's Board of Directors determines that
there would be a material risk of liability on the part of the members of the
Target's Board of Directors to the Target's shareholders, the Target will not
(and the Target will not cause or permit the Division to) (i) solicit, initiate,
or encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities, or any
substantial portion of the assets, of the Division or the Target (including any
acquisition structured as a merger, consolidation, or share exchange), or (ii)
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing, provided, however, limitations of this Section 5(e) shall not apply
to any of the foregoing actions to the extent such actions have no adverse
effect on the consummation of the transactions contemplated by this Agreement or
on the business of the Division as conducted and presently proposed to be
conducted. The Target will notify the Buyer immediately if any Person makes any
proposal, offer, inquiry, or contact with respect to any of the foregoing.

(f) MARKETING AGREEMENT. The Parties agree upon execution of this
Agreement to enter into that certain Marketing Agreement in the form attached
hereto as Exhibit 5(f). Such agreement will govern the Parties mutual efforts
to market and sell products produced by the Division and will expire upon the
Closing Date or upon the earlier termination of this

<PAGE>

Agreement.

(g) NESTLE PRODUCT ORDERS. The Target shall use best efforts to have
manufactured and delivered to Nestle Clinical Nutrition, Inc. prior to Closing
all enteral feeding pumps currently on order by Nestle.

6. POST-CLOSING COVENANTS. The Parties agree as follows with respect to
the period following the Closing.

(a) GENERAL. In case at any time after the Closing any further action is
necessary to carry out the purposes of this Agreement, each of the Parties will
take such further action (including the execution and delivery of such further
instruments and documents) as the other Party reasonably may request, at the
sole cost and expense of the requesting Party (unless the requesting Party is
entitled to indemnification therefor under Section 8 below). The Target
acknowledges and agrees that from and after the Closing the Buyer will be
entitled to copies (but not original versions) of all documents, books, records
(including Tax records), agreements, and financial data of any sort relating to
the Division.

(b) LITIGATION SUPPORT. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Division, the other Party will use reasonable
best efforts to cooperate with the contesting or defending Party and its counsel
in the contest or defense, make available its personnel, and provide such
testimony and access to its books and records as shall be necessary in
connection with the contest or defense, all at the sole cost and expense of the
contesting or defending Party (unless the contesting or defending Party is
entitled to indemnification therefor under Section 8 below).

(c) TRANSITION. The Target will not take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier, or other business associated with the Division from maintaining the
same business relationships with the Buyer after the Closing as it maintained
with Target and the Division prior to the Closing. The Target will refer all
customer inquiries relating to the business of the Division to the Buyer from
and after the Closing.

(d) CONFIDENTIALITY. The Target will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential Information
except in connection with this Agreement, and deliver promptly to the Buyer or
destroy, at the request and option of the Buyer, all tangible embodiments (and
all copies) of the Confidential Information which are in its possession. In the
event that the Target is requested or required (by oral question or request for
information or documents in any legal proceeding, interrogatory, subpoena, civil
investigative demand, or similar process) to disclose any Confidential
Information, the Target will notify the Buyer promptly of the request or
requirement so that the Buyer may seek an appropriate

<PAGE>

protective order or waive compliance with the provisions of this Section
6(d). If, in the absence of a protective order or the receipt of a waiver
hereunder, the Target is, on the advice of counsel, compelled to disclose any
Confidential Information to any tribunal or else stand liable for contempt,
the Target may disclose the Confidential Information to the tribunal;
provided, however, that the Target shall use its best efforts to obtain, at
the request and expense of the Buyer, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as the Buyer shall designate.

(e) COVENANT NOT TO COMPETE. For a period of five (5) years from and
after the Closing Date, the Target will not engage directly or indirectly in any
business that the Division conducts as of the Closing Date; provided, however,
that ownership of less than 1% of the outstanding stock of any publicly traded
corporation shall not be deemed solely by reason thereof to be the engagement in
such corporation's businesses. If the final judgment of a court of competent
jurisdiction declares that any term or provision of this Section 6(e) is invalid
or unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with 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, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.

(f) TRANSFER OF POSSESSION OF THE ASSETS. Except for those Acquired
Assets held by a third party as identified on Schedule 3(f), all tangible forms
of the Acquired Assets shall be available for possession by the Buyer
immediately upon Closing at the Target's location at 9850 51st Ave N.,
Minneapolis, MN. Such Acquired Assets shall be packaged by the Target in a form
reasonably necessary for safe and insurable shipment by common carrier. Buyer
shall remove at its expense such Acquired Assets within thirty (30) days of the
Closing Date. Transfer of the Acquired Assets held by third parties shall be
determined by the Buyer and such third parties.

(g) PRODUCT LIABILITY INSURANCE. For a period of not less than three (3)
years following Closing, the target shall maintain product liability insurance
against product liability claims in policy amounts and with deductibles
identical to that maintained in the ninety (90) day period prior to the date of
this Agreement in such a manner as to provide coverage after Closing (i.e.
"tail" coverage) for any and all claims arising out of products sold by the
Division prior to the Closing Date; provided that such insurance shall not be
less than $1,000,000 per occurrence and $3,000,000 annual aggregate.

(h) PRODUCT LIABILITY CLAIMS. The Parties acknowledge that, upon
execution of this Agreement, they will simultaneously execute the Marketing
Agreement attached hereto as Exhibit 5(f). Pursuant to that agreement, Buyer
will immediately begin to act as the exclusive representative of the Target with
respect to the marketing, sales, distribution, and service of the products
relating to the business of the Division as defined in the Marketing Agreement.
Each Party shall be responsible for its own product liability, if any,
associated with the marketing,

<PAGE>

sales, distribution, and service of the products, whether such activity
occurs prior to or after the Closing; provided, however, that the Target
shall indemnify Buyer for all of Buyer's costs and expenses (including legal
fees) relating to any claims made against Buyer with respect to the purchase
order between the Target and Nestle Clinical Nutrition, Inc., which order was
for approximately 750 enteral feeding pumps as of July 24, 1998. Buyer shall
give written notice of any product liability claim in accordance with Section
8(d).

(i) PRODUCT WARRANTY CLAIMS. The Target covenants and agrees that it will
be liable for all expenses associated with any warranty claims and product
returns associated with products sold by the Division prior to the Closing Date
to the extent the Target would bear such expenses under the applicable warranty
and return policies offered by the Target for such products. The Target hereby
authorizes the Buyer, on behalf of the Target, to handle and process all such
claims. The Target shall reimburse the Buyer for such expenses to the extent
actually incurred by the Buyer and approved in advance by William Rush, Anwar
Bhimani or their successors in office. The Buyer will provide the Target with a
monthly report and invoice, which shall be payable by the Target within thirty
(30) days, for all claims relating to product returns and ordinary warranty
claims.

7. CONDITIONS TO OBLIGATION TO CLOSE.

(a) CONDITIONS TO OBLIGATION OF THE BUYER.
The obligation of the Buyer to consummate the transactions to be performed by
Buyer at Closing is subject to Buyer's satisfaction (compliance with which or
the occurrence of which may be waived in writing in whole or in part by Buyer)
on or before the Closing Date, of the following conditions; provided, the
satisfaction or waiver of any of the conditions set forth in this Section shall
in no way affect Buyer's rights to indemnification pursuant to Section 8 hereof
or the satisfaction or waiver of any other condition precedent:

(i) the representations and warranties set forth in Section 3
above shall be true and correct in all material respects at and as of the
Closing Date;

(ii) the Target shall have performed and complied with all of its
covenants hereunder in all material respects which are to be performed or
complied with by it prior to or on the Closing Date;

(iii) the Target shall have procured all of the third party consents
specified in Section 5(b) above;

(iv) each third party identified on Schedule 7(a)(iv) shall have
entered into an Estoppel Certificate and Agreement regarding Acquired
Assets in the possession of such third parties (as described in such
Schedule), substantially in the form attached hereto as Exhibit 7(a)(iv).

(v) the board of directors of Target and the Target Stockholders
shall have

<PAGE>

approved this Agreement in all material respects;

(vi) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
(A) prevent consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by this Agreement
to be rescinded following consummation, or (c) affect adversely the right
of the Buyer to own the Acquired Assets or to operate the business of the
Division.

(vii) the Target shall have delivered to the Buyer a certificate to
the effect that each of the conditions specified above in Section
7(a)(i)-(vi) is satisfied in all respects;

(viii) the Target shall have delivered to the Buyer a certified copy
of the resolutions of the Board of Directors and the shareholders of the
Target, authorizing and approving the execution, delivery and performance
of this Agreement (and any other agreement to be delivered by the Target in
connection herewith) and the consummation of the transactions contemplated
hereby;

(ix) the Buyer shall have received from counsel to the Target an
opinion in form and substance as set forth in Exhibit 7(a)(x) attached
hereto, addressed to the Buyer, and dated as of the Closing Date;

(x) the Target shall have delivered to the Buyer a fully executed
Investment Representation Letter from Elan International Services Ltd., in
the form attached hereto as Exhibit 7(a)(xi);

(xi) the Target and Buyer shall have entered into a mutually
agreeable escrow agreement with a third party for the escrow of the held
back portion of the Purchase Price;

(xii) all actions to be taken by the Target in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to the Buyer; and

(xiii) no material adverse change in the financial condition or
results of operation of the Division, or in the condition or value of the
Acquired Assets, taken as a whole, shall have occurred between the date of
this Agreement and the Closing Date (other than economic or market
conditions affecting the enteral feeding device market generally).

(b) CONDITIONS TO OBLIGATION OF THE TARGET. The obligation of the Target
to consummate the transactions to be performed by Target at Closing is subject
to the Target's

<PAGE>

satisfaction (compliance with which or the occurrence of which may be waived
in writing in whole or in part by the Target) on or before the Closing Date,
of the following conditions; provided, the satisfaction or waiver of any of
the conditions set forth in this Section shall in no way affect Target's
right to indemnification pursuant to Section 8 hereof or the satisfaction or
waiver of any other condition precedent:

(i) the representations and warranties set forth in Section 4
above shall be true and correct in all material respects at and as of the
Closing Date;

(ii) the Buyer shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;

(iii) the Board of Directors of Buyer shall have approved this
Agreement in all material respects;

(iv) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
(A) prevent consummation of any of the transactions contemplated by this
Agreement or (B) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation (and no such injunction,
judgment, order, decree, ruling, or charge shall be in effect);

(v) the Buyer shall have delivered to the Target a certificate to
the effect that each of the conditions specified above in Section
7(b)(i)-(iii) is satisfied in all respects;

(vi) the Buyer shall have delivered to the Target a certified copy
of the resolutions of the Board of Directors of the Buyer, authorizing and
approving the execution, delivery and performance of this Agreement (and
any other agreement to be delivered by the Target in connection herewith),
issuance of the Shares to the Target and the consummation of the
transactions contemplated hereby.

(vii) the Target shall have received from counsel to the Buyer an
opinion in form and substance as set forth in Exhibit 7(b)(viii) attached
hereto, addressed to the Target, and dated as of the Closing Date;

(viii) the Target and Buyer shall have entered into a mutually
agreeable escrow agreement with a third party for the escrow of the held
back portion of the Purchase Price; and

(ix) all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to the Target.

<PAGE>

(x) the Target shall have executed a settlement agreement with
Elan Pharma, Inc. and Elan International Services Ltd. with respect to
satisfaction of the Target's obligations to Elan Pharma, Inc. and Elan
International Services Ltd. pursuant to a certain Asset Purchase Agreement,
dated January 13, 1997.

8. REMEDIES FOR BREACHES OF THIS AGREEMENT.

(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except for Section 3(e)
and Section 3(h), all of the representations and warranties of the Target
contained in this Agreement shall survive the Closing (even if Buyer had reason
to know of any misrepresentation or breach of warranty at the time of Closing)
and continue in full force and effect for a period of one (1) year thereafter.
The representations and warranties in Section 3(e) and Section 3(h) shall
survive Closing (even if Buyer had reason to know of any misrepresentation or
breach of warranty at the time of Closing) and continue in full force and effect
forever thereafter (subject to applicable statutes of limitation).
Notwithstanding the foregoing, Buyer shall bring no claim against the Target
following Closing for any inaccuracy or breach of a representation or warranty
contained in this Agreement where Buyer has actual knowledge at the time of
Closing of such inaccuracy or breach as evidenced by specific documentation of
such inaccuracy or breach in the possession of Buyer at the time of Closing.

(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE BUYER.

(i) The Target agrees to indemnify the Buyer and its officers,
directors, representatives and agents from and against the entirety of any
Adverse Consequences the Buyer or its officers, directors, representatives
and agents may suffer resulting from, arising out of, relating to, in the
nature of, or caused by:

(A) any breach or inaccuracy of any of the Target's
representations or warranties contained in this Agreement, or in any document
furnished or required to be furnished pursuant to this Agreement to Buyer or any
of its representatives, provided that the claim for indemnification under this
subsection (A) arises prior to or during the applicable survival period
described in Section 8(a) above and the Buyer makes a written demand for
indemnification against the Target pursuant to Section 8(d) below within 30 days
after the end of such survival period.

(B) any breach of any of the Target's covenants or other
commitments contained in this Agreement,

(C) any Liability of the Division for unpaid Taxes with
respect to any Tax year or portion thereof ending on or before the Closing Date
(or for any Tax year beginning before and ending after the Closing Date to the
extent allocable to the portion of such period beginning before and ending on
the Closing Date);

<PAGE>

(D) any action, suit, proceeding, compromise, assignment or
judgment arising out of or incidental to any of the matters indemnified against
in this Section 8(b);

(E) any Liability of the Target which is not an Assumed
Liability, including:

(1) any Liability of the Target that becomes a Liability of
the Buyer under any bulk transfer law of any jurisdiction, under any common law
doctrine of de facto merger or successor liability, under Environmental, Health,
and Safety Requirements, or otherwise by operation of law;

(2) any Liability of the Target arising out of the use,
ownership and possession of the Acquired Assets prior to the Closing; and

(3) those obligations under the Assumed Contracts which
have accrued with respect to periods prior to the Closing Date.

(i) The Buyer agrees to indemnify the Target and its officers,
directors, representatives and agents from and against the entirety of any
Adverse Consequences the Target or its officers, directors, representatives
and agents may suffer resulting from, arising out of, relating to, in the
nature of, or caused by:

(A) any breach or inaccuracy of any of the Buyer's
representations or warranties, and covenants contained in this Agreement, or in
any document furnished or required to be furnished pursuant to this Agreement to
Target or any of its representatives, provided that the claim for
indemnification under this subsection (A) arises prior to or during the
applicable survival period described in Section 8(a) above and the Target makes
a written demand for indemnification against the Buyer pursuant to Section 8(d)
below within 30 days after the end of such survival period.

(B) any breach of any of the Buyer's covenants or other
commitments contained in this Agreement;

(D) any action, suit, proceeding, compromise, assignment or
judgment arising out of or incidental to any of the matters indemnified against
in this Section 8(c);

<PAGE>

(d) MATTERS INVOLVING THIRD PARTIES.

(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") which may give
rise to a claim for indemnification against the other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party
shall promptly notify the Indemnifying Party thereof in writing; provided,
however, that no delay on the part of the Indemnified Party in notifying
the Indemnifying Party shall relieve the Indemnifying Party from any
obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.

(ii) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as (A) the
Indemnifying Party notifies the Indemnified Party in writing within 15 days
after the Indemnified Party has given notice of the Third Party Claim that
the Indemnifying Party will indemnify the Indemnified Party from and
against the entirety of any Adverse Consequences the Indemnified Party may
suffer resulting from, arising out of, relating to, in the nature of, or
caused by the Third Party Claim, (B) the Indemnifying Party provides the
Indemnified Party with evidence reasonably acceptable to the Indemnified
Party that the Indemnifying Party will have the financial resources to
defend against the Third Party Claim and fulfill its indemnification
obligations hereunder, (C) the Third Party Claim involves only money
damages and does not seek an injunction or other equitable relief, (D)
settlement of, or an adverse judgment with respect to, the Third Party
Claim is not, in the good faith judgment of the Indemnified Party, likely
to establish a precedential custom or practice materially adverse to the
continuing business interests of the Indemnified Party, and (E) the
Indemnifying Party conducts the defense of the Third Party Claim actively
and diligently.

(iii) So long as the Indemnifying Party is conducting the defense of
the Third Party Claim in accordance with Section 8(d)(ii) above, (A) the
Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (B) the
Indemnified Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnifying Party (not to be withheld
unreasonably), and (C) the Indemnifying Party will not consent to the entry
of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior written consent of the Indemnified Party (not
to be withheld unreasonably).

(iv) In the event any of the conditions in Section 8(d)(ii) above
is or becomes unsatisfied, however, (A) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any
settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not consult
with, or obtain any consent from, the Indemnifying Party in connection
therewith), (B) the Indemnifying Party will reimburse the Indemnified Party
promptly and periodically for the reasonable costs of defending against the
Third Party Claim

<PAGE>

(including reasonable attorneys' fees and expenses), and (C) the
Indemnifying Party will remain responsible for any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating to,
in the nature of, or caused by the Third Party Claim to the fullest extent
provided in this Section 8.

(e) DETERMINATION OF ADVERSE CONSEQUENCES. The Parties shall take into
account the time cost of money (using the Applicable Rate as the discount rate)
in determining Adverse Consequences for purposes of this Section 8. All
indemnification payments under this Section 8 shall be deemed adjustments to the
Purchase Price.

(f) CHARGES AGAINST HOLDBACK. The Buyer shall have the option of
recovering all or any part of any Adverse Consequences it may suffer (in lieu of
seeking any indemnification to which it is entitled under this Section 8) by
notifying the Target that the Buyer is drawing against the amount held in escrow
from the Purchase Price under Section 2(f).

(g) INDEMNITY THRESHOLD AND LIMIT. No Party shall be entitled to
indemnification under this Section 8 unless and until the aggregate amount of
valid claims against the other Party pursuant to the provisions of Section 8(b)
or 8(c) exceed ten thousand dollars ($10,000.00) (the "Indemnity Threshold").
If the Indemnity Threshold is exceeded, the Indemnified Party shall be entitled
to the entire amount of such claims from the other Party, including the amount
up to the Indemnity Threshold as well as the amount exceeding the Indemnity
Threshold. In no event shall either Party be liable to the other for a claim or
claims for indemnification arising under Section 8(b)(i)(A) or Section
8(c)(i)(A) (including related claims arising under of Section 8(b)(i)(D) or
Section 8(c)(i)(D)) which in the aggregate exceeds Eight Hundred Thousand
Dollars ($800,000).

(h) EXCLUSIVE REMEDY. After the Closing, the rights set forth in this
Section 8 shall be each Party's sole and exclusive remedies against the other
Party for misrepresentations or breaches of covenants contained in this
Agreement. Nothing herein shall prevent any Party from demanding arbitration or
bringing an action in accordance with the terms of this Agreement based upon
allegations of fraud or intentional breach of an obligation of or with respect
to either Party in connection with this Agreement.

9. TERMINATION.

(a) TERMINATION OF AGREEMENT. Certain of the Parties may terminate this
Agreement as provided below:

(i) the Buyer and the Target may terminate this Agreement by
mutual written consent at any time prior to the Closing;

(ii) the Buyer may terminate this Agreement by giving written
notice to the Target on or before August 14, 1998, if the Buyer is not
reasonably satisfied with the results of its continuing business, legal,
environmental, and accounting due diligence regarding the Target and the
Division;

<PAGE>

(iii) the Buyer may terminate this Agreement by giving written
notice to the Target at any time prior to the Closing (A) in the event the
Target has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, the Buyer has notified
the Target of the breach, and the breach has continued without cure for a
period of 30 days after the notice of breach or (B) if the Closing shall
not have occurred on or before December 31, 1998, by reason of the failure
of any condition precedent under Section 7(a) hereof (unless the failure
results primarily from the Buyer itself breaching any representation,
warranty, or covenant contained in this Agreement); and

(iv) the Target may terminate this Agreement by giving written
notice to the Buyer at any time prior to the Closing (A) in the event the
Buyer has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, the Target has
notified the Buyer of the breach, and the breach has continued without cure
for a period of 30 days after the notice of breach or (B) if the Closing
shall not have occurred on or before December 31, 1998, by reason of the
failure of any condition precedent under Section 7(b) hereof (unless the
failure results primarily from the Target itself breaching any
representation, warranty, or covenant contained in this Agreement).

(b) EFFECT OF TERMINATION. If any Party terminates this Agreement
pursuant to Section 9(a) above, all rights and obligations of the Parties
hereunder shall terminate without any Liability of any Party to the other Party
(except for any Liability of any Party then in breach).

10. MISCELLANEOUS.

(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the other Party; provided,
however, that any Party may make any public disclosure it believes in good faith
is required by applicable law or any listing or trading agreement concerning its
publicly-traded securities (in which case the disclosing Party will use its best
efforts to advise the other Party prior to making the disclosure).

(b) RISK OF LOSS. The risk of loss or damage by fire or other casualty
(including loss or damage due to condemnation) to the Acquired Assets (to the
extent they exist in tangible form) shall be upon the Target until Closing. In
the event of a material loss or damage (including loss or damage due to
condemnation) that occurs prior to the Closing Date, Buyer shall have the option
of terminating this Agreement. In the event of a non-material loss or damage
occurs prior to the Closing Date, Buyer shall have the option of: (i) taking
such damaged assets and receiving at Closing all insurance proceeds to which the
Target would be entitled as a result of such loss or damage; or (ii) rejecting
such damaged assets entirely and the Purchase Price shall be reduced to reflect
the non-transference of same.

<PAGE>

(c) OBLIGATIONS UNDER WARN. The Target will be responsible to satisfy any
and all obligations arising under the Federal Worker Adjustment and Retraining
Notification Act that may arise in connection with the sale of the Acquired
Assets hereunder and the Target hereby agrees to indemnify Buyer against and
hold Buyer harmless from any and all Adverse Consequences relating to or
resulting from any failure to comply with such obligations.

(d) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person (including Elan Pharma, Inc. and Elan
International Services Ltd.) other than the Parties and their respective
successors and permitted assigns.

(e) ENTIRE AGREEMENT. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the Parties and supersedes any
prior understandings, agreements, or representations by or between the Parties,
written or oral, to the extent they have related in any way to the subject
matter hereof.

(f) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party; provided however, that the Buyer may (i) assign any or all
of its rights and interests hereunder to one or more of its Affiliates and (ii)
designate one or more of its Affiliates to perform its obligations hereunder (in
any or all of which cases the Buyer nonetheless shall remain responsible for the
performance of all of its obligations hereunder).

(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.

(h) HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.

(i) NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given five (5) days
after it is sent by registered or certified mail, return receipt requested,
postage prepaid, and addressed to the intended recipient as set forth below:

IF TO THE TARGET: COPY TO:

Nutrition Medical, Inc. Dorsey & Whitney LLP
9850 51st Ave N. 220 South Sixth Street
Minneapolis, MN 55442 Minneapolis, MN 55402
Attention: William L. Rush Attention: Kenneth L. Cutler

<PAGE>

IF TO THE BUYER: COPY TO:

ZEVEX, Inc. Jones, Waldo, Holbrook & McDonough
4314 ZEVEX Park Lane 1500 Wells Fargo Plaza
Salt Lake City, UT 84123 170 South Main
Attention: Dean G. Constantine Salt Lake City, UT 84101-1644
Attention: Ronald S. Poelman, Esq.

Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.

(j) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Utah without giving effect to
any choice or conflict of law provision or rule.

(k) AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyer and the Target. The Target may consent to any such amendment at any time
prior to the Closing with the prior authorization of its board of directors;
provided, however, that any amendment effected after the Target Stockholders
have approved this Agreement will be subject to the restrictions, if any,
contained in the Minnesota Business Corporation Act. No waiver by any Party of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.

(l) SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.

(m) EXPENSES. The Buyer and the Target will each bear their own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby.

(n) CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of

<PAGE>

proof shall arise favoring or disfavoring any Party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to any
federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. The word "including" shall mean including without
limitation. Nothing in the Disclosure Schedule shall be deemed adequate to
disclose an exception to a representation or warranty made herein unless the
Disclosure Schedule identifies the exception with reasonable particularity
and describes the relevant facts in reasonable detail. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.

(o) INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.

(p) SPECIFIC PERFORMANCE. Each of the Parties acknowledges and agrees
that the other Party would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other Party shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
Parties and the matter (subject to the provisions set forth in Section 10(q)
below).

(q) DISPUTE RESOLUTION.

(i) The Parties desire to resolve disputes arising out of this
Agreement without litigation. Accordingly, except for actions to seek
temporary restraining orders or injunctions related to the purposes of this
Agreement, a dispute involving the adjudication of the rights of a third
party that does not agree to arbitration, or a suit to compel compliance
with the dispute resolution provision, the Parties agree to use the
following alternative dispute procedure as their sole remedy with respect
to any controversy or claim arising out of or relating to this Agreement or
its breach.

(ii) At the written request of a Party, each Party will appoint a
knowledgeable, responsible representative to meet and negotiate in good
faith to resolve any dispute arising under this Agreement. The Parties
intend that these negotiations be conducted by non lawyer, business
representatives. The location, format, frequency, duration and conclusion
of these discussions shall be left to the discretion of the
representatives. Upon agreement between the Parties, the representatives
may utilize other alternative dispute resolution procedures such as
mediation to assist in the negotiations. Discussions and correspondence
among the representatives for the purposes of these negotiations shall be

<PAGE>

treated as confidential information developed for the purposes of
settlement, exempt from discovery and production, which shall not be
admissible in the arbitration described below or in any lawsuit without the
concurrence of both Parties. Documents identified in or provided with such
communications, which are not prepared for purposes of the negotiations,
are not so exempted and may, if otherwise admissible, be admitted in
evidence in the arbitration or lawsuit.

(iii) If the negotiations do not resolve the dispute within thirty
(30) days after the initial written request, the disputes shall be
submitted to binding arbitration by a panel of three arbitrators pursuant
to the Commercial Arbitration Rules of the American Arbitration
Association. A Party may demand such arbitration in accordance with
procedures set out in those rules. Each party shall designate, as its
appointed arbitrator, an impartial individual who is experienced in the
manufacturer of products similar to the products of the Division. Within
20 days of appointment, the two designated arbitrators shall then designate
by mutual agreement an impartial attorney licensed in the state of the
arbitration, which attorney shall serve as the panel's administrative head.
The majority decision of the panel shall final and conclusive upon both
Parties. The location of the arbitration shall be in the state and county
of the Party not instituting the demand for arbitration. Discovery shall
be controlled by the arbitrators and shall be permitted to the extent set
out in this paragraph. Each Party may submit in writing to a Party, and
that Party shall respond, to a maximum of any combination of thirty-five
(35) (none of which may have subplots) of the following: interrogatories,
demands to produce documents, and requests for admission. Each Party is
also entitled to take the oral deposition of five individuals of the other
Party. Additional discovery may be permitted upon mutual agreement of the
Parties. The Parties shall contract with the arbitrators to commence the
arbitration hearing within sixty (60) days of the demand for arbitration.
The arbitrators shall control the scheduling so as to process the matter
expeditiously. The Parties may submit written briefs. The Parties shall
require the arbitrators to rule on the dispute by issuing a written opinion
within thirty (30) days after the close of the hearings. The times
specified in this paragraph may be extended upon a showing of good cause.
Judgment upon the award rendered by the arbitrators may be entered in any
court having jurisdiction.

(iv) Each Party shall bear its own cost of these procedures. A
Party seeking discovery shall reimburse to the responding Party the costs
of production of documents (to including search time and reproduction
costs). The Parties shall equally split the fees of any mediation, but in
any arbitration or permissible legal proceedings, the prevailing Party
shall be entitled to reasonable attorneys' fees, costs and other
disbursements in addition to any other relief to which such Party may be
entitled.

(r) TAX MATTERS.

(i) The Target will be responsible for the preparation and filing
of all Tax Returns for the Target for all periods as to which Tax Returns
are due after the Closing

<PAGE>

Date (including the consolidated, unitary, and combined Tax Returns for the
Target which include the operations of the Division for any period ending
on or before the Closing Date). The Target will make all payments required
with respect to any such Tax Return.

(ii) The Buyer will be responsible for the preparation and filing
of all Tax Returns for the Division for all periods as to which Tax Returns
are due after the Closing Date (other than for Taxes with respect to
periods for which the consolidated, unitary, and combined Tax Returns of
the Target will include the operations of the Division). The Buyer will
make all payments required with respect to any such Tax Return; provided,
however, that the Target will reimburse the Buyer concurrently therewith to
the extent any payment of Taxes the Buyer is making relates to the
operations of the Division for any period ending on or before the Closing
Date.

(s) BULK TRANSFER LAWS. The Buyer acknowledges that the Target will not
comply with the provisions of any bulk transfer laws of any jurisdiction in
connection with the transactions contemplated by this Agreement.

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

"BUYER"

ZEVEX, INC.

/S/ DEAN G. CONSTANTINE
-----------------------
Dean G. Constantine
President and Chief Executive Officer

"TARGET"

NUTRITION MEDICAL, INC.

/S/ WILLIAM L. RUSH
-------------------
William L. Rush
President and Chief Executive Officer

<PAGE>

EXHIBIT 3.1

ARTICLES OF AMENDMENT
OF
SECOND RESTATED ARTICLES OF INCORPORATION
OF
NUTRITION MEDICAL, INC.

1. The name of this corporation is Nutrition Medical, Inc., a
Minnesota corporation (the "Company").

2. The following amendment to the Second Restated Articles of
Incorporation of the Company was adopted by the Board of Directors of the
Company on May 27, 1998, pursuant to Section 302A.402, Subdivision 3 of the
Minnesota Business Corporation Act:

RESOLVED, that Article 3 of the currently existing Articles of
Incorporation is hereby amended in its entirety to read as follows:

"Article 3. AUTHORIZED SHARES. The aggregate number of authorized
shares of the corporation is 6,250,000 shares, par value of $.04 per share,
of which 1,250,000 are undesignated preferred stock. The remaining shares
shall be divisible into classes and series, have the designations, voting
rights, and other rights and preferences, and be subject to the
restrictions, that the board of directors may from time to time establish,
fix, and determine, consistent with these articles of incorporation.
Unless otherwise designated by the board of directors, all issued shares
shall be deemed common stock with equal rights and preferences."

3. The amendment will not adversely affect the rights or
preferences of the holders of outstanding shares of any class or series and
will not result in the percentage of authorized shares of any class or series
that remain unissued after such amendment exceeding the percentage of
authorized shares that were unissued before such amendment.

4. The document attached hereto as Exhibit A sets forth
resolutions duly adopted by the Board of Directors of the Company at a
meeting thereof duly called and held on May 27,

<PAGE>

1998, at which a quorum was present and acted throughout, which resolutions
state the manner in which the Company's share combination will be effected.

5. The amendment has been adopted pursuant to Chapter 302A of the
Minnesota Business Corporation Act.

<PAGE>

IN WITNESS WHEREOF, the undersigned, the Chief Financial Officer
and Secretary of Nutrition Medical, Inc., being duly authorized on behalf of
Nutrition Medical, Inc., has executed this document on this 8th day of June,
1998.

/S/ANWAR H. BHIMANI
------------------------------
Anwar H. Bhimani
Chief Financial Officer and Secretary

A-3

<PAGE>

ARTICLES OF AMENDMENT
OF
SECOND RESTATED ARTICLES OF INCORPORATION
OF
NUTRITION MEDICAL, INC.

The undersigned, Richard J. Hegstrand, Chief Financial Officer of
Nutrition Medical, Inc., a Minnesota Corporation, hereby certifies that the
following resolution was duly adopted by the board of directors of the
corporation pursuant to Chapter 302A of the Minnesota Business Corporation
Act on December 2, 1996, and that such resolution has not been subsequently
modified or rescinded:

REGISTERED ADDRESS CHANGE

RESOLVED, that Article 2 of the Second Restated Articles of
Incorporation of the corporation is hereby amended in its entirety to read as
follows:

ARTICLE 2. REGISTERED OFFICE

The address of the registered office of the corporation in Minnesota is
9850 51st Avenue North, Suite 110, Minneapolis, Minnesota 55442.

IN WITNESS WHEREOF, the undersigned, the Chief Financial Officer of
Nutrition Medical, Inc., being duly authorized on behalf of Nutrition
Medical, Inc., has executed this document as of February 28, 1997.

/S/ RICHARD J. HEGSTRAND
------------------------------
Richard J. Hegstrand
Chief Financial Officer

A-4

<PAGE>
SECOND RESTATED
ARTICLES OF INCORPORATION
OF
NUTRITION MEDICAL, INC.

Under and pursuant to the Minnesota Business Corporation Act, the board
of directors and shareholders of Nutrition Medical, Inc., have resolved to
amend the restated articles of incorporation of the corporation, which are
restated as follows:

ARTICLE 1. NAME

The name of the corporation is Nutrition Medical, Inc.

ARTICLE 2. REGISTERED OFFICE AND REGISTERED AGENT

The address of the registered office of the corporation is 308 12th
Street South, Buffalo, MN 55313.

ARTICLE 3. AUTHORIZED SHARES

The aggregate number of authorized shares of the corporation is
25,000,000, par value of $.01 per share, of which 5,000,000 are undesignated
preferred stock. The remaining shares shall be divisible into classes and
series, have the designations, voting rights, and other rights and
preferences, and be subject to the restrictions, that the board of directors
may from time to time establish, fix, and determine, consistent with these
articles of incorporation. Unless otherwise designated by the board of
directors, all issued shares shall be deemed common stock with equal rights
and preferences.

ARTICLE 4. NO CUMULATIVE VOTING

There shall be no cumulative voting by the shareholders of the corporation.

ARTICLE 5. NO PREEMPTIVE RIGHTS

The shareholders of the corporation shall not have any preemptive rights
to subscribe for or acquire securities or rights to purchase securities of
any class, kind or series of the corporation.

A-5

<PAGE>

ARTICLE 6. ISSUANCE OF SHARES TO
HOLDERS OF ANOTHER CLASS OR SERIES

Shares of any class or series of the corporation, including shares of
any class or series which are then outstanding, may be issued to the holders
of shares of another class or series of the corporation, whether to effect a
share dividend or split, including a reserve share split, or otherwise,
without authorization, approval or vote of the holders of shares of any class
or series of the corporation.

ARTICLE 7. WRITTEN ACTION BY DIRECTORS

An action required or permitted to be taken at a meeting of the board of
directors of the corporation may be taken by a written action signed, or
counterparts of a written action signed in the aggregate, by all of the
directors unless the action need not be approved by the shareholders of the
corporation, in which case the action may be taken by a written action
signed, or counterparts of a written action signed in the aggregate, by the
number of directors that would be required to take the same action at a
meeting of the board of directors of the corporation at which all of the
directors were present.

ARTICLE 8. DIRECTOR LIABILITY

A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under sections 302A.559 or 80A.23 of the
Minnesota Statutes; (iv) for any transaction from which the director derived
an improper personal benefit; or (v) for any act or omission occurring prior
to the date when this article 8 became effective.

If the Minnesota Business Corporation Act is hereafter amended to
authorize any further limitation of the liability of a director, then the
liability of a director of the corporation shall be eliminated or limited to
the fullest extent permitted by the Minnesota Business Corporation Act, as
amended.

Any repeal or modification of the foregoing provisions of this article 8
by the stockholders of the corporation shall not adversely affect any right
or protection of a director of the corporation existing at the time of such
repeal or modification.

A-6

<PAGE>

EXHIBIT 10.1

MARKETING AGREEMENT

This Marketing Agreement (this "Agreement") is made and entered into as
of this 27th day of July, 1998 by and between Nutrition Medical, Inc., a
Minnesota corporation ("NMI") and ZEVEX, Inc., a Delaware corporation
("ZEVEX"), collectively referred to hereinafter as the "Parties" or
individually as a "Party."

1. PURPOSE OF AGREEMENT

The purpose of this Agreement is to set forth the relationship of NMI
and ZEVEX in the marketing and sale of enteral feeding pumps, delivery sets,
and enteral feeding tubes that are currently being marketed and sold by the
enteral feeding pump and disposable division of NMI (the "Division"). The
products of NMI that are subject to this Agreement are all of the products of
the Division listed on the Inventory Schedule that is attached hereto as
Exhibit "A" (the "Products"), which excludes enteral feeding pump replacement
parts. This Inventory Schedule is a list of NMI's inventory of enteral
feeding pumps, delivery sets, and feeding tubes as of June 28, 1998. The
Parties acknowledge that this Agreement is entered into in contemplation of
the acquisition by ZEVEX of all of the assets of the Division pursuant to an
Asset Purchase Agreement, of even date herewith, between the Parties ("Asset
Purchase Agreement"). The transactions contemplated by the Asset Purchase
Agreement are hereafter collectively referred to as the "Acquisition."

2. TERM

The term of this Agreement shall be from the effective date hereof until
December 31, 1998, unless sooner terminated upon the closing of the
Acquisition, or pursuant to Section 10 herein (the "Term").

3. GRANT OF DISTRIBUTION RIGHTS AND ASSIGNMENT OF CONTRACTS

NMI hereby grants to ZEVEX an exclusive, worldwide license during the
Term of this Agreement to market, sell, distribute, and service the Products
subject to the terms and conditions set forth in this Agreement. For
purposes of this Agreement, "exclusive" shall mean (i) that NMI shall not
engage any third party with respect to the marketing, sale, distribution, or
service of the Products and (ii) NMI, its employees, and agents, shall not
directly or indirectly market, sell, distribute, or service any of the
Products other than through ZEVEX as set forth in this Agreement. NMI
represents that it does not currently have any agreement with any third party
with respect to the marketing, sales, distribution, or service of the
Products. In connection with this license grant, NMI hereby assigns to ZEVEX
all outstanding purchase orders or other contracts relating to the Products,
including the contract to sell pumps to Nestle Clinical Nutrition, Inc.
("Nestle"), which order is approximately

<PAGE>

750 pumps as of July 24, 1998.

4. LICENSE TO USE TRADEMARK

NMI hereby grants to ZEVEX a royalty-free, exclusive, worldwide license
to use any trademark, trade names, or identifying slogans of NMI affixed to
the Products or any accompanying labels, containers, cartons, or technical or
promotional literature, whether or not registered, in connection with the
marketing, sale, distribution, or service of the Products pursuant to this
Agreement.

5. PURCHASE PRICE; MANNER OF PAYMENT

For each Product sold by ZEVEX pursuant to this Agreement, ZEVEX agrees
to pay to NMI the cost of each Product as shown in the third column on
Exhibit A; provided that, with respect to 750 pumps (model no. CL2200) that
are to be sold to Nestle, ZEVEX will pay to NMI any amounts that it receives
from Nestle. Payment shall be made within forty-five (45) days of ZEVEX's
receipt of notice from NMI of actual shipment to the end purchaser of the
Product. Such payment shall include ZEVEX's reimbursement to NMI for the
shipping and related charges described in Section 6.1 below.

6. SHIPMENT AND DELIVERY

6.1 CUSTOMER ORDERS. ZEVEX shall promptly notify NMI of all orders of
Products. NMI shall promptly deliver all Products ordered by a customer
directly to the end purchaser of such Products ("drop ship") or to ZEVEX
after receipt of an order, as specified by ZEVEX. Delivery of the Products
shall be F.O.B. the destination specified in the related Product order.
ZEVEX shall reimburse NMI for all shipping charges, insurance charges, custom
duties, and all applicable sales taxes as may be applicable in the delivery
and sale of the Products, including 12% of the cost of the Products, which is
intended to cover NMI's overhead expenses relating to the shipment and
handling of the Products.

6.2 INVOICING. NMI shall inform ZEVEX promptly of all shipments of
Products. All invoices in connection with sales of the Products by ZEVEX
shall be rendered by ZEVEX direct to purchasers, it being expressly
understood that full responsibility for all collection of invoices rests with
ZEVEX which shall exercise complete control over the approval of all
purchaser credits, orders, change orders, and contracts.

6.3 VOLUME AND INVENTORY. ZEVEX shall not be required to purchase any
minimum amount or quantity of the Products. NMI agrees to use its reasonable
efforts to maintain sufficient inventory to permit it to fill orders
generated by ZEVEX (including those assigned by NMI to ZEVEX hereunder) on a
timely basis.

<PAGE>

7. WARRANTY CLAIMS AND SERVICE.

Warranty Claims and Service shall be handled in accordance with Section
6(i) of the Asset Purchase Agreement.

8. PRODUCT LIABILITY.

All product liability claims shall be handled as set forth in Section
6(h) of the Asset Purchase Agreement.

9. OBLIGATIONS OF THE PARTIES.

9.1 OBLIGATIONS OF ZEVEX. ZEVEX shall:

(a) use reasonable efforts to promote the sale of the Products and
to solicit and obtain orders for the same;

(b) keep accurate books and records relating to the sale of the
Products; and

(c) promote the sale of the Products in a manner consistent with
the specifications, features or capabilities of the Products as
described in the technical and marketing literature provided by NMI and
make no false or misleading representations with regard to the Products.

9.2 OBLIGATIONS OF NMI. NMI shall:

(a) upon signing this Agreement, immediately deliver to ZEVEX all
Product samples, technical specifications, Product lists, price lists,
Product inventory and availability information, sales literature,
customer lists, customer order history, and all other information useful
or necessary to ZEVEX to carry out its obligations under this Agreement;

(b) provide ZEVEX with the time and cooperation of NMI's personnel
as may be reasonably useful or necessary for ZEVEX to carry out its
obligations under this Agreement;

(c) use reasonable efforts to promptly deliver the Products when
requested by ZEVEX and to promptly deliver to ZEVEX such related
shipment information; and

(d) keep accurate books and records relating to the sale of the
Products.

<PAGE>

10. EXPIRATION AND TERMINATION OF AGREEMENT

10.1 AUTOMATIC TERMINATION. This Agreement shall automatically
terminate on December 31, 1998 or upon the earlier consummation of the
Acquisition or the termination of the purchase agreement relating to the
Acquisition, whichever is the first to occur.

10.2 OPTION TO TERMINATE. This Agreement may be sooner terminated in
accordance with any of the following:

(a) by a written agreement signed by the Parties hereto;

(b) by either Party at any time if the other Party defaults in the
performance of any material term or condition of this Agreement, and if
such default shall continue unremedied for a period of ten (10) days
after written notice thereof is given to the defaulting Party by the
other Party;

(c) immediately, by either Party upon the liquidation,
dissolution, reorganization, merger, the closing of sale of
substantially all the assets or change in the voting control or
corporate form of the other Party; or

(d) immediately, by either Party:

(i) if a receiver is appointed for the other Party or its
property;

(ii) if the other Party becomes insolvent or unable to pay
its debts as they mature or ceases to pay its debts as they mature
in the ordinary course of business or makes an assignment for the
benefit of its creditors; or

(iii) if any proceedings are commenced by or for the other
Party under any bankruptcy, insolvency, or debtor's relief law.

10.3 EFFECT OF TERMINATION. In the event of expiration or termination
of this Agreement:

(a) neither NMI nor ZEVEX shall be liable to the other because of
such expiration or termination for compensation, reimbursement or
damages for the loss of prospective profits or anticipated sales, on
account of any expenditures, investments, leases or commitments made by
either NMI or ZEVEX in connection with the business or goodwill of NMI
or ZEVEX or for any other reason whatsoever based upon or growing out of
such expiration or termination. Notwithstanding the foregoing, in the
event of the termination of this Agreement, NMI shall not delay any
shipment with respect to Product orders already placed with NMI.

(b) adjustment and payment of all claims (excluding any warranty
or product

<PAGE>

liability claims) between ZEVEX and NMI arising from orders accepted and
shipped by NMI under this Agreement shall occur no later than sixty (60)
days after the effective date of expiration or termination of the
Agreement;

10.4 SURVIVAL. Upon the termination of this Agreement, all privileges,
rights and obligations herein shall expire, except that each Party's
obligations under Sections 11 through 18 shall survive the termination or
expiration of this Agreement and shall continue in full force and effect.

11. RELATIONSHIP OF PARTIES

Neither Party shall have the power to act for, bind, or otherwise create
or assume any obligation on behalf of the other Party, express or implied,
for any purpose whatsoever.

12. NOTICES

Any notice required hereunder to be given by either Party shall be in
writing and shall be delivered personally or sent by certified or registered
mail, postage prepaid, or by private courier, with written verification of
delivery, or by facsimile transmission to the other Party to the address or
telephone number set forth below or to such other address or telephone number
as either Party may designate from time to time according to this provision.
A notice delivered personally shall be effective upon receipt. A notice sent
by facsimile transmission shall be effective twenty-four hours after the
dispatch thereof. A notice delivered by mail or by private courier shall be
effective on the third day after the day of mailing.

If to NMI: with a copy to:

Nutrition Medical, Inc. Dorsey & Whitney LLP
9850 51st Ave N. 220 South Sixth Street
Minneapolis, MN 55442 Minneapolis, MN 55402
Attention: William L. Rush Attention: Kenneth L. Cutler

If to ZEVEX: with a copy to:

ZEVEX, Inc. Jones, Waldo, Holbrook & McDonough
4314 ZEVEX Park Lane 170 South Main, Suite 1500
Salt Lake City, Utah 84123 Salt Lake City, Utah 84101-1644
Attention: Dean G. Constantine Attention: Ronald S. Poelman, Esq.

<PAGE>

13. SEVERABILITY

If any provision of this Agreement is found to be unenforceable by a
court of competent jurisdiction, the remaining provisions shall nevertheless
remain in full force and effect.

14. WAIVER OR MODIFICATION

Any waiver, modification, or amendment of any provision of this
Agreement shall be effective only if in writing in a document that
specifically refers to this Agreement and such document is signed by the
Parties hereto.

15. ENTIRE AGREEMENT

This Agreement constitutes the full and complete understanding and
agreement of the Parties hereto with respect to the subject matter covered
herein and supersedes all prior oral or written understandings and agreements
with respect thereto.

16. PROPRIETARY INFORMATION

The Parties recognize that certain technical information which may be
disclosed pursuant to this Agreement represents confidential and valuable
proprietary information and, therefore, each Party will not, without the
written consent of the other Party, disclose or use such information to any
other person other than those of its employees who have a need to know such
information in order to utilize it for the purposes of this Agreement.

17. SUCCESSORS

The rights and liabilities of the Parties hereto shall bind and inure to
the benefit of their respective successors, heirs, executors, and
administrators, as the case may be, except that neither this Agreement nor
the rights or obligations hereunder shall be assignable or transferable by
either Party, either in whole or in part, without the prior written consent
of the other Party.

18. GOVERNING LAW; VENUE

This Agreement shall be governed by and construed in accordance with the
laws of the State of Utah without regard to the conflict of laws. Should NMI
institute any action or proceeding against ZEVEX in connection with this
Agreement, the Parties agree that proper venue and jurisdiction for such
action or proceeding shall be the courts in the State of Utah. Should ZEVEX
institute any action or proceeding against NMI in connection with this
Agreement, the Parties agree that proper venue and jurisdiction for such
action or proceeding shall be the courts in the State of Minnesota.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives to be effective as of the
date first given above.

<PAGE>

NUTRITION MEDICAL, INC. ZEVEX, INC.

/S/ WILLIAM L. RUSH /S/ DEAN G. CONSTANTINE
- ------------------------------------- ---------------------------------
William L. Rush Dean G. Constantine
President and Chief Executive Officer President and Chief Executive Officer

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,378,591
<SECURITIES> 0
<RECEIVABLES> 772,203
<ALLOWANCES> (53,986)
<INVENTORY> 0
<CURRENT-ASSETS> 3,943,842
<PP&E> 1,621,565
<DEPRECIATION> (543,143)
<TOTAL-ASSETS> 5,022,264
<CURRENT-LIABILITIES> 883,838
<BONDS> 0
0
0
<COMMON> 54,560
<OTHER-SE> 2,184,492
<TOTAL-LIABILITY-AND-EQUITY> 5,022,264
<SALES> 2,861,478
<TOTAL-REVENUES> 0
<CGS> 1,884,868
<TOTAL-COSTS> 1,010,379
<OTHER-EXPENSES> 68,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,441
<INCOME-PRETAX> (102,353)
<INCOME-TAX> 0
<INCOME-CONTINUING> (102,353)
<DISCONTINUED> 31,029
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,324)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)

</TABLE>

<PAGE>

EXHIBIT 99.1

CAUTIONARY STATEMENT

Nutrition Medical, Inc. (the "Company"), or persons acting on behalf of
the Company, or outside reviewers retained by the Company making statements
on behalf of the Company, or underwriters, from time to time may make, in
writing or orally, "forward-looking statements" as defined under the Private
Securities Litigation Reform Act of 1996 (the "Act"). This Cautionary
Statement is for the purpose of qualifying for the "safe harbor" provisions
of the Act and is intended to be a readily available written document that
contains factors, any one of which may cause actual results to differ from
those which might be projected, forecast, estimated or budgeted in such
forward-looking statement. The factors set forth below are in addition to any
other cautionary statements, written or oral, which may be made or referred
to in connection with any such forward-looking statement.

The following matters, among others, may have a material adverse effect
on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company:

LACK OF OPERATING PROFITS; LIMITED OPERATING HISTORY

The Company, which was incorporated in July 1993, is subject to all of
the risks inherent in the establishment of a new business. The likelihood of
the success of the Company must be considered in light of the difficulties,
expenses and delays frequently encountered in connection with the development
and marketing of new products and the competitive environment in which the
Company is operating.

Although the Company began generating revenues from product sales in May
1994, the Company has accumulated substantial losses to date. No assurance
can be given that the Company will be able to achieve profitability. Further,
there can be no assurance that the Company will be able to successfully
develop or market additional products or that the Company will have
sufficient funds available to successfully market its current products or any
new products that it may develop in the future.

PRODUCT ACCEPTANCE AND PRICING

The Company's products are designed to be substantially equivalent to
existing branded competitive products. Although the Company believes that the
quality and efficacy of its products is comparable to branded competitive
products, no independent comparison between the Company's products and
competitive products has been completed and there can be no assurance that
the efficacy or quality of the Company's products is or will be comparable to
branded competitive products.

Furthermore, the Company's name and its products are relatively unknown
to large segments of the Company's target markets, and there can be no
assurance that the Company's marketing efforts will achieve sufficient name
recognition of the Company and its products to significantly enhance
revenues.

<PAGE>

The principal advantage of the Company's products is, and is expected to
be, lower price. The Company is aware of one competitor in the critical care
nutrition products market that has historically lowered prices to various
customers of its branded products to levels that offset all or part of the
price advantage of the Company's competitive products. The Company believes
that these selective price reductions have resulted in indeterminable lost
sales of the Company's competing products, and other competitors may adopt
the same strategy. The market for the clinical nutrition products acquired
from Elan Pharma, Inc. ("Elan") in January 1997 is expected to be extremely
price competitive and often involves the need to offer package pricing of
products. Because the Company's marketing strategy is focused on the price
advantage of its products, if a competitor selling competitive products
reduces or eliminates the price advantage of the Company's products, there
can be no assurance that the Company can compete successfully with such a
competitor or operate profitably under such conditions.

DEPENDENCE ON CONTRACT MANUFACTURERS

The Company engages contract manufacturers to produce its products
according to the Company's specifications. The Company relies on these
manufacturers to comply with all applicable government regulations and
manufacturing guidelines. There can be no assurance that contract
manufacturers will consistently supply adequate quantities of the Company's
products on a timely basis, that such manufacturers will consistently comply
with government regulations or that the quality of such products will be
consistently maintained. In the event of a sale of a defective product, the
Company would be exposed to product liability claims and could lose customer
confidence. In addition, minimum quantity order requirements imposed by
manufacturers may result in excess inventory levels, requiring additional
working capital and increasing exposure to losses from inventory
obsolescence. Although the Company believes it could find alternative
manufacturers for its products, any interruption in supply of any of the
Company's products could adversely affect the Company's ability to market its
products and, therefore, the Company's business, financial condition and
results of operations.

POSSIBLE FLUCTUATIONS IN OPERATING RESULTS

The Company believes that its future operating results may be subject to
substantial quarterly fluctuations because its large OEM pump customer may
order large quantities at irregular intervals. In addition, the gross profit
as a percentage of sales on the sale of products acquired from Elan is less
than the gross profit percentage on the Company's critical care products,
and therefore the Company's overall gross profit percentage could vary widely
based on the product mix in a given period. To the extent that quarterly
revenues and operating results fluctuate substantially, the market price of
the Company's common stock may be affected.

CUSTOMER CONCENTRATION

Although the Company's experience with its customer base is limited, the
Company may incur concentration issues with large distributors and OEM
customers for its clinical nutrition products, including the products
acquired from Elan. There can be no assurance

<PAGE>

that orders from such customers will continue or that its future orders will
not significantly decline.

FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE

Although the Company's existing cash balances are expected to be
sufficient to fund the Company's operations through 1998, under certain
circumstances the Company may require substantial additional funds before the
end of 1998 to meet its working capital requirements in connection with the
introduction of new products. In order to meet this possible need, and to
meet possible needs after 1998, the Company may be required to raise
additional funds through public or private financings, including equity
financings. Any additional equity financings may be dilutive to existing
shareholders, and debt financing, if available, may involve restrictive
covenants. Adequate funds for the Company's operations, regardless of the
source, may not be available when needed or on terms attractive to the
Company. Insufficient funds may require the Company to delay, scale back or
eliminate the introduction of new products and the failure to obtain funding
when needed could have a material adverse effect on the Company's business,
financial condition and results of operations.

KEY PERSONNEL

The Company is particularly dependent on the services of its President,
Mr. William Rush. If the services of Mr. Rush were to become unavailable to
the Company for any reason, there can be no assurance that the Company could
adequately replace him. The loss of Mr. Rush's services could have a material
adverse effect on the Company. The Company has an employment agreement with
Mr. Rush that expires September 30, 1999. The Company currently maintains a
life insurance policy with a face value of $1 million on Mr. Rush.

LITIGATION INVOLVING COMPETITORS

It is not uncommon for companies in the generic and private label
industry to be the subject of claims and lawsuits brought by brand name
competitors alleging that the generic or private label products have
formulas, labelings or packagings similar to competing brand name products.
The Company is currently subject to two suits alleging patent infringement.
Since the Company's business strategy is to develop and market products that
are equivalent to competitors' branded products, similar claims may be made
by competitors in the future. Competitors may also respond to the Company's
strategy by more aggressively seeking patents on their products to limit the
Company's future product development efforts.

If similar allegations are made against the Company in the future, some
of the Company's current and future products may need to be reformulated or
repackaged in order for the Company to continue to market products that are
comparable to competitors' patented products. While the Company believes that
reformulation of its products is generally possible, the Company may be
unable to effectively reformulate certain of its products, and there can be
no assurance that a reformulated product would be deemed by customers to be
essentially equivalent to the patented product. Moreover, there can be no
assurance that any future lawsuits could be satisfactorily settled by
reformulating, relabeling

<PAGE>

or repackaging a product, that such litigation will not require the
commitment of substantial management time and legal fees, or that such
litigation would not have a material adverse effect on the Company's future
revenues, financial condition and results of operations.

COMPETITION

Competition in the clinical nutrition products market consists of
established companies that sell branded products which have achieved a high
level of customer awareness. Although the Company believes it is the only
company currently offering low cost, generic alternatives to the established
brands, other companies may enter this market.

If a larger company with significant financial resources were to compete
directly with the Company in particular market segments, there can be no
assurance that the Company will be able to compete successfully with such a
competitor or operate profitably.

PRODUCT LIABILITY AND INSURANCE RISKS

The Company's business involves exposure to potential product liability
risks that are inherent in the production, manufacture and distribution of
food and medical device products. The Company maintains a general insurance
policy that includes coverage for product liability claims up to an aggregate
amount of $5 million. There can be no assurance, however, that the Company
will be able to maintain such insurance on acceptable terms, that the Company
will be able to secure increased coverage as the commercialization of its
products increases or that any insurance will provide adequate protection
against potential liabilities.

GOVERNMENT REGULATION

The Company's products and potential products are or will be subject to
government regulation. The Company's current products are regulated as food
and medical food by the Food and Drug Administration (the "FDA") and are
subject to labeling requirements, current good manufacturing practice
("CGMP") regulations and certain other regulations designed to ensure the
safety of the products.

Claims made by the Company in labeling and advertising its products are
subject to regulation by the FDA, the Federal Trade Commission and various
state agencies under their general authority to prevent false, misleading and
deceptive trade practices. With the addition of the products acquired from
Elan, the Company will be subject to FDA regulations regarding Class 2
medical devices. These regulations involve more stringent tracking, testing
and documentation standards. Failure to comply with such requirements can
result in adverse regulatory action, including injunctions, civil or criminal
penalties, product recalls or the relabeling, reformulation or possible
termination of certain products.

The Company's current and potential products may become subject to
further regulation in the future. The burden of such regulation could add
materially to the costs and risks of the Company's development and marketing
efforts. There can be no assurance that the Company could obtain the required
approvals or comply with new regulations if the Company's products are
subject to additional governmental regulation in the future. Failure

<PAGE>

to obtain necessary approvals or otherwise comply with government regulations
could have a material adverse effect on the Company's future revenues,
financial condition and results of operations.

CONTROL BY PRINCIPAL SHAREHOLDERS

Directors, officers and principal shareholders of the Company own
beneficially approximately 44% of the Company's outstanding common stock. As
a result, such shareholders may have the ability to effectively control the
election of the Company's entire Board of Directors and the affairs of the
Company, including all fundamental corporate transactions such as mergers,
consolidations and the sale of substantially all of the Company's assets.

TRADEMARKS

The Company has not registered its existing trademarks, but instead
relies on its common law trademark rights. The lack of such registration may
impair the ability of the Company to prosecute successfully an infringement
action against other users of these trademarks. There can be no assurance
that the Company's marks do not or will not violate the proprietary rights of
others, that the Company's proprietary rights in the marks would be upheld if
challenged, or that the Company would not be prevented from using its marks,
any of which could have an adverse effect on the Company. In addition, there
can be no assurance that the Company will have the financial resources
necessary to enforce or defend its trademarks.

UNDESIGNATED STOCK

The Company's authorized capital consists of 6,250,000 shares of capital
stock, of which 5,000,000 shares are designated as Common Stock and 1,250,000
are preferred shares undesignated as to series. The Company has no
outstanding shares of preferred stock, and there are no current plans to
designate or issue any shares of preferred stock. Nevertheless, the Company's
Board of Directors has the power to issue any or all of these shares of
unissued stock, including the authority to establish the rights and
preferences of the unissued shares, without shareholder approval.
Furthermore, as a Minnesota corporation, the Company is subject to certain
"anti-takeover" provisions of the Minnesota Business Corporation Act. These
provisions and the power to issue additional shares and to establish separate
classes or series of common or preferred stock may, in certain circumstances,
deter or discourage take-over attempts and other changes in control of the
Company not approved by the Board.

LIMITATIONS ON BROKER-DEALER SALES OF COMPANY COMMON STOCK; APPLICABILITY OF
"PENNY STOCK" RULES; NO ASSURANCE OF CONTINUED QUOTATION ON THE NASDAQ STOCK
MARKET.

Federal regulations promulgated under the Exchange Act regulate the
trading of so-called "penny stocks" (the "Penny Stock Rules"), which are
generally defined as any security not listed on a national securities
exchange or The Nasdaq Stock Market ("Nasdaq"), priced at less than $5.00 per
share and offered by an issuer with limited net

<PAGE>

tangible assets and revenues. In addition, equity securities listed on Nasdaq
which are priced at less than $5.00 per share are deemed penny stocks for the
limited purpose of Section 15(b)(6) of the Exchange Act. Therefore, if,
during the time in which the common stock is quoted on the Nasdaq Small Cap
Market, the common stock is priced below $5.00 per share, trading of the
common stock will be subject to the provisions of Section 15(b)(6) of the
Exchange Act, which make it unlawful for any broker-dealer to participate in
a distribution of any penny stock without the consent of the Securities and
ExchangeCommission (the "SEC") if, in the exercise of reasonable care, the
broker-dealer is aware of or should have been aware of the participation of a
previously sanctioned person. In such event, it may be more difficult for
broker-dealers to sell the common stock and purchasers of shares of common
stock may experience difficulty in selling such shares in the future in
secondary trading markets.

The Company's common stock is currently listed on the Nasdaq Small Cap
Market. On August 22, 1997, the SEC approved a number of proposed changes to
the Nasdaq listing requirements to be effective February 22, 1998. common and
preferred stock must have a minimum bid price of $1. All companies listed on
the Nasdaq Small Cap Market must meet specific corporate governance
requirements, including distributing annual and interim reports, maintaining
a minimum of two independent directors, holding an annual shareholder
meeting, meeting quorum requirements, soliciting proxies, reviewing conflicts
of interest, obtaining shareholder approval for certain corporate actions and
having certain shareholder voting rights. A company listed on the Nasdaq
SmallCap Market must also have (i) either net tangible assets of over $2
million, a market capitalization of $35 million or net income of $500,000,
(ii) a public float of 500,000 shares and (iii) the market value of such
public float must be over $4 million. The Company must have a minimum of 300
round lot shareholders and there must be at least two market makers in the
Company's common stock.. As of December 31, 1997, the Company's net tangible
assets were above $2 million. The Company's common stock has had a bid price
of $1 or more after its one-for-four reverse split in June 1998. However,
should the Company's common stock fall below $1 or should the Company incur
losses in excess of $310,000 in 1998, the Company would no longer be in
compliance with Nasdaq requirements. Failure by the Company to be in
compliance with the requirements or to file a plan acceptable to Nasdaq for
meeting such requirements may result in the delisting of the Company's common
stock from the Nasdaq Small Cap Market. Should the common stock be suspended
from trading privileges as a result of the Company's failure to comply with
applicable requirements, the Company, prior to re-inclusion, must comply with
the requirements prior to continued listing. However, should the common stock
be terminated from trading privileges on the Nasdaq Small Cap Market, the
Company, prior to re-inclusion, must comply with the applicable requirements
for initial inclusion on the Nasdaq Small Cap Market, which are more
stringent than the requirements for continued listing. There can be no
assurance that the common stock will continue to be listed on the Nasdaq
Small Cap Market.

In the event that the common stock is delisted from the Nasdaq Small Cap
Market and the Company fails other relevant criteria, trading, if any, in
shares of common stock would be subject to the full range of the Penny Stock
Rules. Under Exchange Act Rule 15g-8, broker-dealers must take certain steps
prior to selling a penny stock, which steps include: (i) obtaining financial
and investment information from the investor; (ii)

<PAGE>

obtaining a written suitability questionnaire and purchase agreement signed
by the investor; (iii) providing the investor a written identification of the
shares being offered and in what quantity; and (iv) deliver to the investor a
written statement setting forth the basis on which the broker or dealer
approved the investor's account for the transaction. If the Penny Stock Rules
are not followed by a broker-dealer, the investor has no obligation to
purchase the shares. Accordingly, delisting from the Nasdaq Small Cap Market
and the application of the comprehensive Penny Stock Rules may make it more
difficult for broker-dealers to sell the common stock, purchasers of shares
of common stock may have difficulty in selling such shares in the future in
secondary trading markets and the per share price of such stock would likely
be greatly reduced.